MGP Ingredients, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. Dollar amounts are in thousands except per-share amounts. MGP operates distillery products, ingredient solutions and other businesses; the bioplastics business was sold in February 2013.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $79,395 | $85,534 | $165,799 | $171,878 |
| Gross profit | $5,281 | $5,916 | $12,510 | $11,495 |
| Operating income (loss) | $511 | $(545) | $1,807 | $(2,788) |
| Net income (loss) | $280 | $(850) | $1,757 | $1,026 |
| EPS | $0.02 | $(0.05) | $0.10 | $0.06 |
| Cash from operations | — | $1,961 | $(7,468) |
- Q2 net sales declined 7.2%. Gross margin was 6.7%, versus 6.9% a year earlier; lower SG&A helped lift operating results into positive territory.
- Six-month net income includes a $1,406 after-tax gain on the bioplastics sale. Continuing-operations income was $351, versus $1,026 in the prior-year period, which included a $4,055 gain on sale of an ICP interest.
- Six-month gross margin improved to 7.5% from 6.7%. Management cited improved plant performance and lower personnel costs, partly offset by higher commodity costs and weaker equity-method investment results.
- Segment sales in Q2: distillery products $63,912, down from $71,196; ingredient solutions $15,483, up from $14,090; other sales were nil after the bioplastics sale. Distillery segment pretax income fell to $3,136 from $3,762; ingredient solutions pretax income was $875 versus $987.
Balance sheet, liquidity and cash flow
- At June 30, 2013, working capital was $52,213, compared with $48,320 at year-end 2012. Cash was zero; management used the revolving facility for liquidity.
- Debt totaled $30,659, down from $32,744 at December 31, 2012. Revolver borrowings were $24,663, with $19,066 available after a $2,000 letter of credit. The company reported compliance with credit-facility covenants.
- Six-month operating cash flow was $1,961, versus cash used of $7,468 in 2012. Investing cash flow was $1,040, including $2,797 of bioplastics-sale proceeds and $1,757 of capital spending. Financing cash flow was $(3,001), including dividends and net debt repayments.
- Inventory was $41,034, up from $36,532 at year-end. Total assets were $158,520 and stockholders’ equity was $87,691.
Changes, outlook and risks
- Distillery sales were pressured by reduced high-quality food-grade alcohol volume, principally reflecting a sharp reduction in industrial alcohol supplied by ICP. Higher selling prices partly offset the volume decline. Ingredient-solutions sales increased in Q2, but flour costs rose 23.5% per pound year over year.
- Corn costs averaged 14.4% higher in Q2 and 17.0% higher for the first half year over year. Power-supply interruptions at the Atchison facility on three days reduced manufacturing output.
- The ICP marketing agreement expired January 1, 2013, and MGP had not sourced product from ICP since April. ICP’s credit agreement expired without renewal; MGP said it had no further funding requirement. After ICP rejected MGP’s shutdown notice, MGP’s share of ICP’s Q2 profit or loss was allocated at 12%, rather than its 30% ownership percentage. MGP recorded a $907 equity-method loss from ICP for the first half.
- Management expected cash sources to cover anticipated operating needs and budgeted $8,000 of routine capital expenditures for the 12 months ending June 30, 2014. No earnings or revenue guidance was provided.
- The company disclosed a Board-authorized review of strategic alternatives and an active proxy contest, alongside litigation concerning the voting trust and annual meeting. These matters may entail costs, distract management and create uncertainty; the filing describes them as potential business and share-price risks.
- Other risks include grain availability and cost, energy prices, the ability to pass input-cost increases to customers, operating disruptions, hedging effectiveness, and ICP’s viability and financing. Grain purchase commitments totaled $35,165 through June 2014; fixed-price natural gas commitments were $6,805 and flour commitments were $9,322 through December 2013.
Investor verification priorities
- Track distillery volumes and the effect of reduced ICP supply, including whether alternative sourcing or production can offset the shortfall.
- Assess whether selling prices and operational improvements can keep pace with corn and flour costs and facility disruptions.
- Verify revolver availability, covenant compliance and liquidity needs, given the zero cash balance and seasonal working-capital requirements.
- Monitor ICP’s financial condition, plant operations, allocation formula and any changes to MGP’s investment carrying value.
- Follow the strategic-alternatives review, proxy contest and related litigation, including any resulting expenses or governance changes.
- Separate recurring earnings from the $1,406 bioplastics-sale gain and compare continuing-operations results across periods.