MGP Ingredients, Inc. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012. Amounts below are in millions of dollars unless noted. The company changed its fiscal year-end to December 31; full-year 2011 comparison figures are unaudited. The comparison is affected by the Indiana Distillery acquisition, which contributed only five days of results in 2011 versus a full year in 2012.
Business context
MGP produces food-grade alcohol and distillery co-products, specialty wheat starches and proteins, and other products. For 2012, distillery products generated 82.8% of net sales and ingredient solutions 16.9%. The company reorganized as a holding company in January 2012. It sold substantially all assets of its bioplastics “other” segment on February 8, 2013.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $334.335 | $279.463 |
| Gross profit | $25.023 | $6.677 |
| Gross margin | 7.5% | 2.4% |
| Operating income (loss) | $(0.944) | $(4.102) |
| Income before taxes | $1.942 | $(7.194) |
| Net income | $1.624 | $1.078 |
| Diluted EPS | $0.09 | $0.06 |
| Cash from operations | $(5.026) | $(5.480) |
Net sales increased 19.6%, primarily from higher distillery sales, including the full-year contribution of the Indiana Distillery. Distillery segment sales rose 24.8% to $276.690 million; ingredient solutions sales declined 0.5% to $56.488 million. Segment pre-tax income was $14.874 million for distillery products and $5.217 million for ingredient solutions. The other segment recorded a $0.429 million pre-tax loss.
Gross margin improved as alcohol pricing outpaced higher corn costs, natural gas prices declined, and derivative mark-to-market results improved. Open commodity contracts had a $2.164 million favorable impact on cost of sales in 2012 versus a $3.993 million unfavorable impact in 2011. FY 2012 net income included a $4.055 million pre-tax gain on the sale of an additional 20% interest in ICP; the prior-year result included a $13.048 million after-tax bargain-purchase gain from the Indiana Distillery acquisition. SG&A rose 20.7% to $26.536 million, partly reflecting a full year of Indiana Distillery costs and higher incentives.
Fourth quarter 2012: Net sales were $86.350 million, gross profit $7.420 million, net income $0.180 million and diluted EPS $0.01.
Cash, liquidity and debt
- Cash and cash equivalents were zero at December 31, 2012, compared with $0.383 million a year earlier. Working capital was $48.320 million.
- Operating activities used $5.026 million of cash. Investing activities provided $3.205 million, including $9.103 million of ICP sale proceeds; financing activities provided $1.438 million.
- Total debt was $32.744 million, including $25.893 million drawn on the revolving facility. Reported additional borrowing availability was $18.381 million after a $2.000 million letter of credit.
- The Wells Fargo revolver has a $55 million maximum commitment, subject to borrowing-base limits, and matures November 2, 2017. The company reported compliance with its financial covenants at year-end; it had obtained waivers for earlier covenant defaults under prior agreement terms.
- Capital expenditures were $9.229 million of cash outflow ($9.707 million including amounts payable). Management budgeted approximately $8 million of routine capital expenditures for the following 12 months.
Outlook, risks and notable developments
- No specific revenue or earnings guidance was provided. Management expected cash sources to cover budgeted capital expenditures and anticipated operating needs, while noting volatile commodity costs and working-capital demands.
- Management’s strategy emphasizes higher-margin specialty ingredients and high-quality food-grade alcohol, operational improvements, research and development, and growth opportunities. Indiana Distillery production approached full capacity by year-end; Atchison operated at full capacity for much of 2012.
- ICP reported a $1.539 million net loss for 2012. Its revolving credit facility expired without renewal, the company reduced its interest to 30%, and its marketing agreement with ICP expired January 1, 2013. MGP did not plan to source ICP products after March 2013. Management found the carrying value of its ICP investment, $6.898 million, recoverable at year-end, but anticipated continued quarterly impairment assessments.
- The February 2013 sale of substantially all other-segment assets brought $2.800 million and was expected to produce an approximately $1.400 million pre-tax gain in first-quarter 2013. The board declared a $0.05-per-share dividend in February 2013, payable in April.
- Key risks include grain, flour and energy price volatility; limited ability to pass cost increases through to customers; reliance on single-source corn and flour suppliers; facility, transportation and aged-inventory disruptions; competition; and credit-facility covenant and borrowing-base restrictions. The company also faces regulatory and environmental requirements. It reported no emissions-cap penalties in 2012.
- Research and development spending was $2.344 million. Management reported effective internal control over financial reporting; the independent auditor gave an unqualified opinion on the financial statements.
Investor facts to verify
- How recurring operating results perform without the ICP sale gain and commodity-derivative valuation benefit.
- Whether operating cash flow turns positive, given zero year-end cash and continued inventory and receivables investment.
- Availability under the borrowing base and compliance with the revolver’s liquidity and fixed-charge covenants.
- The impact of ending ICP sourcing on alcohol sales, margins, and the recoverability of the remaining investment.
- Whether elevated grain costs can be passed through, and whether customer and supplier concentration remains manageable.
- The realized proceeds and gain from the 2013 sale of the bioplastics business, and execution of planned capital spending.