Business Context and Reporting Period
Company: MGP Ingredients, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2009 (Second Quarter of Fiscal Year 2010)
Business Overview: MGP Ingredients produces ingredient solutions (specialty starches and proteins) and distillery products (food-grade and fuel-grade alcohol). The company has recently refocused its strategy on value-added products, exiting low-margin commodity lines and restructuring operations at its Atchison and Pekin facilities.
Key Financial Metrics
| Metric | Q2 2010 (Ended Dec 31, 2009) | Q2 2009 (Ended Dec 31, 2008) | YTD 2010 (Ended Dec 31, 2009) | YTD 2009 (Ended Dec 31, 2008) |
|---|---|---|---|---|
| Net Sales | $44,672 | $73,242 | $91,756 | $172,262 |
| Gross Profit | $8,510 | $(23,648) | $18,347 | $(40,335) |
| Gross Margin % | 19.0% | (32.3%) | 20.0% | (23.4%) |
| Net Income (Loss) | $4,778 | $(42,716) | $8,516 | $(59,959) |
| Diluted EPS | $0.28 | $(2.58) | $0.50 | $(3.62) |
| Operating Cash Flow (YTD) | $16,062 | $(15,933) | $16,062 | $(15,933) |
| Working Capital | $21,847 | $31,242 (as of June 30, 2009) | $21,847 | $31,242 (as of June 30, 2009) |
| Total Debt (Current + Long Term) | $10,965 | $33,337 (as of June 30, 2009) | $10,965 | $33,337 (as of June 30, 2009) |
Note: All dollar amounts in thousands, except per-share data.
Material Changes vs. Prior Period
- Profitability Turnaround: The company returned to profitability, reporting net income of $4.8 million for the quarter compared to a loss of $42.7 million in the prior year. This was driven by a shift to higher-margin products, lower raw material costs (corn, flour, natural gas), and the absence of significant impairment charges seen in the prior year.
- Revenue Decline: Net sales decreased 39.0% quarter-over-quarter and 46.7% year-to-date. This decline is strategic, resulting from the exit of low-margin commodity protein/starch lines and a reduction in fuel-grade alcohol production.
- Joint Venture Formation: In November 2009, the company contributed its Pekin plant to a new joint venture, Illinois Corn Processing, LLC (ICP), selling a 50% interest to an affiliate of SEACOR Energy Inc. for $15 million. This resulted in a one-time "Loss on joint venture formation" of $3.0 million.
- Asset Sales: The company sold its Kansas City, Kansas facility (pet products) for $3.6 million and certain flour mill assets for $0.5 million, recording a total gain on sale of assets of $0.7 million YTD.
- Debt Reduction: Total debt decreased significantly from $33.3 million (June 30, 2009) to $11.0 million (Dec 31, 2009) due to the payoff of several notes (CILCO, Exchange National Bank, Cray Trust, Union Pacific) and reduced revolver usage.
Guidance, Outlook, and Risks
- Outlook: Management expects the newly formed ICP joint venture to reactivate distillery operations at the Pekin facility by the end of the third quarter of fiscal 2010. The company will market food-grade alcohol from ICP while SEACOR markets ethanol.
- Capital Expenditures: Budgeted at $4.0 million for fiscal 2010, limited to $4.5 million by the credit facility.
- Financial Covenants: The company must meet specific net income requirements ($3.5 million for fiscal 2010) and a minimum debt service coverage ratio of 1.15 to 1.0. Management states compliance was maintained through December 31, 2009.
- Risks and Contingencies:
- Commodity Prices: Exposure to volatility in corn, flour, and natural gas prices, though hedging programs are in place.
- Joint Venture Performance: Success depends on ICP's ability to start up and operate effectively; the company retains exposure to ethanol market volatility through its 50% interest.
- Indemnification: The company indemnifies ICP against certain liabilities related to the Pekin plant, capped at $30 million (excluding taxes and environmental matters).
- Out-of-Period Adjustment: A $1.35 million adjustment was made in Q2 2010 to correct prior period account payables, favorably impacting pretax income.
Investor Verification Checklist
- Joint Venture Viability: Verify the timeline for ICP's production restart and the stability of the partnership with SEACOR Energy Inc.
- Covenant Compliance: Monitor future quarterly results to ensure the company meets the $3.5 million net income requirement for fiscal 2010 and the 1.15 debt service coverage ratio.
- Raw Material Costs: Track corn, flour, and natural gas prices, as these are primary drivers of the company's cost of sales and margins.
- Working Capital Trends: Observe the trend in working capital, which decreased by $10 million from June 2009 to December 2009, primarily due to the removal of assets held for sale.
- Tax Refunds: Confirm the receipt of the $4.7 million tax refund related to the net operating loss carryback claim filed under the Worker, Homeownership, and Business Assistance Act of 2009.