MGP Ingredients, Inc. — FY2014 Form 10-K
Business context and reporting period. Fiscal year ended December 31, 2014; comparisons are with FY2013. MGP produces beverage and industrial alcohol, distillery co-products, and wheat starch and protein ingredients. Its two continuing segments are Distillery Products and Ingredient Solutions. Dollar amounts below are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $313.4 | $323.3 |
| Gross profit / margin | $28.4 / 9.1% | $21.2 / 6.6% |
| Operating income (loss) | $16.6 | $(5.2) |
| Net income (loss) | $23.7 | $(4.9) |
| Basic and diluted EPS | $1.32 | $(0.29) |
| Cash from operations | $15.8 | $17.3 |
| Cash and cash equivalents, year-end | $5.6 | $2.9 |
| Working capital, year-end | $51.5 | $37.7 |
| Credit facility, notes and long-term debt, year-end | $10.3 | $23.2 |
| Available borrowing capacity, year-end | $42.7 | $23.9 |
Net sales declined 3.1%, while cost of sales fell 5.6%, increasing gross margin. The reported net income included an $8.3 million net property-insurance recovery and a $7.6 million reduction in the deferred-tax valuation allowance. The filing’s non-GAAP adjusted net income was $17.4 million, or adjusted EPS of $1.01, versus adjusted net loss of $0.1 million, or $(0.01) per share, in 2013.
Distillery Products sales were $256.6 million, down 2.9%; segment pretax income rose to $28.7 million from $12.0 million. Ingredient Solutions sales were $56.8 million, down 3.6%, and segment pretax income declined to $3.9 million from $4.5 million. Cash from operations decreased despite the return to profitability, with receivables and accounts payable timing among the reported factors. Cash capital expenditures were $7.0 million.
Material changes, outlook and risks
- Drivers and one-time effects: Distillery segment improvement reflected higher alcohol volumes, a shift toward premium spirits, lower corn costs and insurance recoveries. Total alcohol volume increased 18.5%. The Indiana facility’s January fire generated a $9.4 million insurance settlement; net insurance recoveries recognized were $8.3 million, and the filing reports a total favorable 2014 earnings impact of $8.6 million from the two facility fire claims. A separate October fire at Atchison caused a seven-day production interruption; its insurance coverage was still being determined.
- Equity-method investment: MGP’s 30% share of ICP earnings was $10.1 million, compared with a $0.3 million loss in 2013. ICP’s results benefited from improved margins and higher volumes; management cautioned those profitability levels may not continue. MGP received its first ICP cash distribution, $4.8 million, in December.
- Strategy and spending: A five-year plan announced in February 2015 targets higher-value production, premium spirits, specialty ingredients and operational reliability. Management expects the plan to support operating-income growth, but provided no quantified earnings guidance. Planned 2015 capital expenditures were approximately $13 million, in addition to dryer replacement costs; a $5.4 million replacement commitment was made after year-end, with total repair and installation costs estimated at about $9.6 million.
- Funding and capital allocation: The company was in compliance with credit covenants at year-end. In February 2015, it entered a new five-year, $80 million revolving credit agreement, replacing the prior facility and extending maturity to 2020. The board also authorized up to $3.5 million of common-stock repurchases and declared a $0.06-per-share dividend payable in April 2015.
- Supply, operations and regulatory exposure: MGP relies on a limited number of suppliers for grain and flour, and commodity, energy and barrel costs can pressure margins. The DMI joint venture was scheduled to terminate normal operations on June 30, 2015; it had been the sole source of Trutex/Wheatex textured wheat protein for two years, creating a replacement-supply risk. A TTB audit covering December 2011 through November 2014 was ongoing, with outcome unknown. The filing also identifies operating-disruption, ICP, customer concentration, environmental, labor, and covenant risks. Management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of FY2014 earnings and margins depended on the $8.3 million net insurance recovery and the $7.6 million valuation-allowance reduction, and what are the likely future repair and interruption costs?
- Whether ICP’s earnings and distributions are sustainable, and how much future earnings depend on this non-controlled investment.
- Progress in securing and qualifying an alternative source for Trutex/Wheatex before DMI winds down.
- Actual 2015 capital spending and dryer replacement costs, compared with the stated estimates and commitments.
- Results of the TTB audit and any material developments in the Atchison environmental permit and wastewater matters.