MGP Ingredients, Inc. — Q1 2013 Form 10-Q
Business context and period. Unaudited results cover the quarter ended March 31, 2013, compared with Q1 2012. MGP operates distillery products and ingredient solutions businesses; it also held equity-method investments in ICP and D.M. Ingredients (DMI). Dollar amounts below are in thousands unless noted.
Financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $86,404 | $86,344 |
| Gross profit / gross margin | $7,229 / 8.4% | $5,579 / 6.5% |
| Income (loss) from operations | $1,296 | $(2,243) |
| Continuing income before tax | $71 | $1,996 |
| Net income | $1,477 | $1,876 |
| Basic and diluted EPS | $0.08 | $0.10 |
| Operating cash flow | $2,554 | $(10,971) |
| Capital expenditures (cash paid) | $798 | $484 |
Reported Q1 2013 net income included a $1,406 after-tax discontinued-operations gain on the bioplastics business sale; continuing-operations income was $71. Q1 2012 included a $4,055 gain on selling an additional ICP interest. Accordingly, headline net income comparisons reflect significant one-time gains in different periods.
Segments: Distillery sales were $70,804 (down 2.3%) and pre-tax segment income was $4,318 (up from $2,686). Ingredient solutions sales were $15,402 (up 13.4%), while pre-tax segment income declined to $1,572 from $1,638. Other-segment sales were $198 versus $281.
Margins and costs: Cost of sales fell 2.0% to $79,175, supporting gross-margin expansion. Management cited lower distillery volumes and no open commodity derivatives, which avoided the $827 unfavorable mark-to-market impact reported in Q1 2012. Corn, flour and natural-gas costs averaged 19.7%, 19.0% and 3.7% higher, respectively, year over year. Ingredient-solutions return on sales declined to 10.2% from 12.1%; distillery return on sales increased to 6.1% from 3.7%, with the derivative comparison a significant factor.
Balance sheet, liquidity and cash flow
- At March 31, 2013, working capital was $48,001, down from $48,320 at year-end 2012. Cash and cash equivalents were zero.
- Total debt carrying value was $28,191, down from $32,744 at December 31, 2012; this included $21,766 drawn on the revolving facility. An additional $25,583 was available after a $2,000 letter of credit.
- Total assets were $161,214 and stockholders’ equity was $87,577. The company reported compliance with its credit agreement covenants at quarter-end.
- Operating cash flow improved year over year, principally reflecting receivables and accounts-payable timing; financing cash flow was $(4,553), primarily from net revolver repayments and long-term debt payments. Investing cash flow was $1,999, including $2,797 of bioplastics-sale proceeds.
Material changes, outlook and risks
- ICP: The marketing agreement expired effective January 1, 2013, and MGP no longer planned to source ICP products after March. ICP reported a $3,230 Q1 loss; MGP recorded $969 of equity-method loss. ICP’s credit agreement expired at year-end 2012 and was not renewed; MGP stated it had no further funding requirement. After ICP exceeded the contractual quarterly EBITDA-loss threshold, MGP gave shutdown notice on April 18, which ICP Holdings rejected. MGP expected its share of ICP’s Q2 profit or loss to be 12% rather than 30%, subject to the agreement’s terms and future results.
- Bioplastics sale: MGP sold the business assets on February 8 for $2,800, recognizing a $1,406 after-tax gain. The assets’ net book value was $1,344.
- Outlook and spending: No specific revenue or earnings guidance was provided. Management expected available cash sources to cover budgeted capital spending and anticipated operating requirements. It budgeted $8,000 of routine capital expenditures for the 12 months ending March 31, 2014; $607 of capital-asset purchase contracts were outstanding at quarter-end.
- Key exposures: Risks include grain and energy availability and cost, ability to pass input increases to customers, hedging effectiveness, operating disruptions, competition, loan-covenant compliance, and ICP’s viability and financing. Commitments included $39,826 for corn, $9,935 for flour and $2,967 for natural gas through December 2013. The company used no derivatives designated as cash-flow hedges at quarter-end. Management said ordinary-course legal proceedings were not expected to have a material adverse effect; it reported no material changes to the risk factors in its 2012 Form 10-K.
- Taxes: MGP continued a full valuation allowance on net deferred tax assets because realization was not considered more likely than not. Management said a future reversal could benefit income if the company generates positive earnings.
Important facts for investors to verify
- Whether ICP can obtain financing, improve operating performance, and resolve the shutdown-notice and profit-allocation matters; verify the effect on MGP’s future equity-method results.
- How much of operating improvement and margin expansion is sustainable versus timing effects and the absence of the prior-year derivative loss.
- Whether MGP can recover higher grain, flour and energy costs through pricing and product mix, particularly in ingredient solutions.
- Revolver availability, covenant headroom, cash generation and planned capital expenditures, given zero cash on the balance sheet.
- The continuing impact of the deferred-tax valuation allowance and whether any future release is supported by improved earnings.