MGP Ingredients, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Dollar amounts are in thousands, except per-share data and percentages. MGP produces distillery products and ingredient solutions through its operating subsidiaries.
Financial performance and condition
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Sales before excise taxes | $84,864 | $84,582 |
| Net sales | $80,413 | $78,996 |
| Gross profit / margin | $13,388 / 16.6% | $6,801 / 8.6% |
| Operating income | $6,908 | $1,729 |
| Equity-method investment earnings | $1,352 | $3,334 |
| Net income | $5,070 | $4,785 |
| Basic and diluted EPS | $0.28 | $0.26 |
| Operating cash flow | $6,121 | $(642) |
| Capital expenditures, cash basis | $5,030 | $2,182 |
- Margins and segments: Distillery-products sales were $65,862, with gross profit of $11,487 and a 17.4% margin, versus $6,012 and 9.3%. Ingredient-solutions sales were $14,551, with gross profit of $1,901 and a 13.1% margin, versus $789 and 5.6%.
- Cash, working capital and debt: Cash was $6,391 at quarter-end; working capital was $52,907. Total liabilities were $58,105 and stockholders’ equity $108,482. The filing reports $10,233 of credit-facility borrowings, notes payable and long-term debt in its liquidity table. Separately, it reports $7,018 outstanding under the restated credit facility, with $47,820 available; average facility borrowing rate was 2.43%.
- Cash flow drivers: Operating cash flow improved year over year, aided by higher earnings and favorable changes in payables and taxes, partly offset by a $3,213 inventory build. Inventory reached $37,654.
Changes versus the prior-year quarter
- Net sales rose 1.8%, while cost of sales fell 7.2%; gross profit nearly doubled. Management attributed the improvement primarily to lower corn and flour costs and better product mix and pricing.
- Distillery alcohol average selling prices increased 8.6%; overall alcohol volume declined 1.9%. Ingredient-solutions volume increased 4.3%, with average prices down 0.8%.
- SG&A increased $1,408, or 27.8%, mainly from higher incentive compensation accruals and personnel costs.
- Equity-method earnings declined $1,982. ICP’s net income fell to $4,429 from $10,822, reflecting lower alcohol sales volume and prices.
- Income-tax expense increased to $3,059 from $81; the effective tax rate was 37.6% versus 1.7%. The prior-year rate reflected use of deferred tax assets.
Outlook, risks and unusual items
- Capital spending: Management expected approximately $13,000 of capital expenditures over the 12 months ending March 31, 2016, in addition to dryer replacement costs. The Indiana dryer replacement was expected to cost approximately $10,000 including installation. Management expected available cash sources to cover budgeted capital spending and operating needs.
- Credit facility: A new five-year, $80,000 revolving facility was entered into on February 27, 2015, maturing February 27, 2020. The company reported covenant compliance at quarter-end.
- ICP exposure: Management cautioned that ICP’s recent profitability may not continue and expected its earnings contribution could decline. An ICP business-interruption and property-insurance claim remained unsettled; timing or amount differences could cause earnings volatility.
- DMI supply risk: The DMI joint venture was scheduled to terminate June 30, 2015, followed by a one-year wind-down. DMI had been the sole source of Trutex/Wheatex for two years; the company was only beginning to seek alternative U.S. suppliers.
- Other items: The company recorded $460 of insurance recovery related to the October 2014 Atchison fire as a reduction of cost of sales. In April 2015, it received approval to terminate certain union pension plans, with approximately $758 of projected funding expected to be recognized when settlement is completed. A $3,500 share-repurchase authorization was approved, but no shares were repurchased during the quarter.
- Key risks: Disruptions at operating facilities or ICP; grain, flour, barrel and energy costs; ability to pass through raw-material cost increases; commodity-price volatility; dependence on ICP and limited influence over its decisions; sourcing replacement products; loan covenant compliance; and the timing of insurance recoveries. Management reported no material changes to the risk factors in its 2014 Form 10-K.
Investor facts to verify
- Whether improved segment margins and favorable input costs persist, and how pricing and product mix evolve.
- ICP’s operating performance, future earnings distributions and resolution of its insurance claims.
- Progress securing alternative supply for Trutex/Wheatex as DMI winds down.
- Actual capital spending and total installed cost and timing of the Indiana dryer replacement.
- Completion and accounting impact of the pension-plan termination, and compliance with credit-facility covenants.