MGP Ingredients, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unless stated otherwise, dollar amounts are in thousands. MGP produces distillery products and ingredient solutions and holds equity-method interests in Illinois Corn Processing (ICP) and D.M. Ingredients (DMI).
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Sales before excise taxes | $84,582 | $88,718 |
| Net sales | $78,996 | $86,404 |
| Gross profit / gross margin | $6,801 / 8.6% | $7,229 / 8.4% |
| Operating income | $1,729 | $1,296 |
| Equity-method investment earnings (loss) | $3,334 | $(942) |
| Net income | $4,785 | $1,477 |
| Diluted earnings per share | $0.26 | $0.08 |
| Operating cash flow | $(642) | $2,554 |
| Capital expenditures | $2,182 | $798 |
Net sales fell 8.6%. Net income rose primarily because equity-method earnings improved by $4,276, led by ICP; Q1 2013 also included a $1,406 after-tax gain from the sale of the bioplastics business. Gross margin edged higher as lower corn and flour costs offset lower selling prices and other cost pressures. SG&A declined 13.7% to $5,072, mainly due to lower personnel costs.
Segments and material changes
- Distillery products: Sales fell 8.3% to $64,932; pretax income rose to $5,452 from $4,318. Food-grade alcohol sales were pressured by a 19.1% decrease in average price, partly offset by 12.5% higher volume. Segment return on sales improved to 8.4% from 6.1%, with lower corn costs.
- Ingredient solutions: Sales fell 8.7% to $14,064 and pretax income fell to $299 from $1,572. Return on sales declined to 2.1% from 10.2%, reflecting sales mix and lower average pricing.
- ICP and DMI: MGP recognized $3,246 of ICP earnings, versus a $969 loss, and $88 of DMI earnings, versus $27. Management attributed ICP’s improvement to stronger fuel-alcohol margins and higher volume.
Cash, debt, and liquidity
Cash was zero at March 31, versus $2,857 at year-end. Working capital was $39,276, up from $37,736. Operating cash flow was negative despite reported net income, largely reflecting timing-related increases in receivables and decreases in accounts payable and accrued expenses; inventory reductions partly offset these uses. Total reported debt was $23,239, including $18,455 drawn on the revolving facility. Additional borrowing availability was $20,936 after a $2,000 vendor letter of credit. The company reported compliance with credit covenants.
Management expects available cash sources to cover budgeted capital spending and anticipated operating needs. Routine capital expenditures are estimated at $4,000–$6,000 for the 12 months through March 31, 2015; repair or replacement costs from the Indiana plant fire are additional, with insurance coverage still being assessed. A $0.05-per-share dividend was declared; $910 was paid after quarter-end on April 9.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance is provided. Management’s liquidity expectation is not a guarantee of future results.
- A January fire at the Indiana plant temporarily disrupted production. The plant returned to pre-fire capacity by late February; the company was pursuing insurance coverage for equipment damage and business interruption.
- ICP’s earnings materially benefited Q1 results. The filing identifies ICP operations and financing viability as risks; the company withdrew its prior shutdown election for ICP’s Pekin plant on March 31, 2014.
- Key risks include grain and energy availability and cost, commodity-price management, passing input-cost increases to customers, operational or transportation disruptions, competition, regulatory requirements, and loan covenant compliance.
- Proxy-contest and governance matters, including executive departures, resulted in prior-period professional and severance costs. The company paid $2,213 of related accruals during Q1; $293 remained payable. The credit agreement was amended to permit specified pre-2014 governance expenses, capped at $5,500, as an EBITDA add-back.
- The effective income tax rate was 1.7%; management continued to record a full valuation allowance on net deferred tax assets because realization was not considered more likely than not.
Investor verification priorities
- Assess whether ICP’s unusually strong Q1 earnings and fuel-alcohol margins can be sustained.
- Track segment pricing, volume, product mix, and recovery in ingredient-solutions profitability.
- Monitor operating cash conversion, receivables and payable timing, revolver usage, and covenant headroom.
- Verify insurance recoveries and remaining costs associated with the Indiana fire, and compare actual capital spending with management’s estimate.
- Review the status and cash cost of remaining proxy-related and severance obligations, as well as realization assumptions for deferred tax assets.