MGP Ingredients, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. Unless otherwise noted, amounts are in thousands of dollars. The company’s main businesses are distillery products and ingredient solutions; its bioplastics business was sold in 2013.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $80,567 | $79,395 | $159,563 | $165,799 |
| Gross profit | $8,398 | $5,281 | $15,199 | $12,510 |
| Gross margin | 10.4% | 6.7% | 9.5% | 7.5% |
| Operating income | $3,072 | $511 | $4,801 | $1,807 |
| Net income | $5,099 | $280 | $9,884 | $1,757 |
| EPS | $0.28 | $0.02 | $0.55 | $0.10 |
| Operating cash flow | Not presented by quarter | $2,877 | $1,961 |
Q2 net sales rose 1.5%; six-month sales fell 3.8%. The company attributed stronger gross margins mainly to lower corn and flour costs. Q2 corn and flour costs averaged 35.7% and 13.5% below the prior-year quarter; for the six months, they were 37.6% and 12.2% lower. Natural gas costs were flat in Q2 but 9.9% higher year to date.
Distillery segment Q2 sales were $65,403 and pretax income was $5,964, versus $63,912 and $3,136. Ingredient solutions sales were $15,164 and pretax income was $1,447, versus $15,483 and $875. For the six months, distillery pretax income increased to $11,416 from $7,483, while ingredient solutions pretax income declined to $1,746 from $2,665.
Equity-method investment earnings were $2,331 in Q2 and $5,666 for the six months, compared with $71 and a loss of $871, respectively. The increase primarily reflected improved results at ICP, which reported net income of $13,993 for Q2 and $24,900 for the six months. Management cautioned that ICP’s recent profitability may not continue.
Liquidity, debt and capital
- At June 30, cash was $883, working capital was $42,636, and current assets and liabilities were $73,143 and $30,507, respectively.
- Total reported debt was $23,406, including $19,009 outstanding on the revolving credit facility. Additional borrowing availability was $22,004; the company reported compliance with credit-agreement covenants.
- Six-month operating cash flow was $2,877; capital expenditures were $3,594 cash-paid ($4,004 incurred), and financing cash outflow was $1,257. Cash declined $1,974 from year-end.
- Stockholders’ equity was $90,639, up from $81,603 at December 31, 2013. The company paid $907 in dividends during the period.
Material changes, outlook and risks
- ICP accounting estimate: After reassessing the likely recovery of its ICP investment, the company reduced cumulative equity-method earnings and the investment carrying value by $1,882. The filing reports a related EPS reduction of $0.11 for Q2 and $0.10 year to date. Allocation mechanics differ by period; the filing reports attributed interests of 17% for Q2 and 22% year to date, and an investment interest of 26% at June 30, versus a stated 30% membership interest. Cash distributions are not assured and are not controlled by MGP.
- Fire: A January fire at the Indiana plant temporarily disrupted production; the plant returned to pre-fire production by the end of February. The company recorded $160 of damaged-asset write-offs and received a $250 partial reimbursement; insurance coverage for equipment damage and business interruption remained under review.
- Outlook: Management expected routine capital expenditures of $4,000–$6,000 over the 12 months ending June 30, 2015, with fire-related repair costs additional and not yet determined. Management expected cash sources to cover budgeted capital spending and anticipated operating requirements. No earnings guidance was provided.
- Key risks: Volatile grain and energy costs and the ability to pass costs through; reliance on ICP or other third parties for industrial alcohol; ICP’s earnings, liquidity, lender arrangements and MGP’s limited control; operational or transportation disruptions; and uncertain insurance recovery. Purchase commitments at June 30 included $33,171 for corn, $7,347 for natural gas and $9,323 for flour.
- Taxes and other developments: The company continued a full valuation allowance on net deferred tax assets, citing uncertainty about realization; favorable profit trends could lead to a future non-cash tax benefit, but no release was assured. A new CEO took office July 28, 2014. An August 5 credit amendment added a subsidiary as a loan party and pledged its equity and assets. The company expected accelerated-filer requirements and auditor attestation of internal controls for 2014.
Important facts for investors to verify
- Whether ICP’s strong earnings persist and whether it makes cash distributions to MGP.
- The impact and accounting basis of the $1,882 ICP estimate adjustment and the differing reported ownership/allocation percentages.
- Progress on fire insurance recovery and final repair costs.
- Commodity-cost trends, customer pricing and segment profitability as input costs change.
- Deferred-tax-asset realizability, credit availability and covenant compliance, including the collateral added in the August amendment.