MGP Ingredients, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in thousands of dollars, except per-share data and percentages. The company produces distillery products and specialty starch and protein ingredients.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $77,515 | $80,171 | $237,078 | $245,970 |
| Gross profit | $7,311 | $815 | $22,420 | $13,325 |
| Gross margin | 9.4% | 1.0% | 9.5% | 5.4% |
| Operating income (loss) | $3,637 | $(5,946) | $8,438 | $(4,139) |
| Net income (loss) | $6,228 | $(6,325) | $16,112 | $(4,568) |
| Diluted EPS | $0.34 | $(0.37) | $0.89 | $(0.27) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $8,755 | $4,004 |
Q3 sales fell 3.3%; nine-month sales fell 3.6%. Profit improved substantially despite lower sales, reflecting lower corn and flour costs, improved distillery performance, lower SG&A, ICP joint-venture earnings, insurance recoveries, and a tax valuation-allowance release. Q3 and nine-month equity-method earnings were $1,621 and $7,287, respectively; nine-month earnings include a $1,882 reduction from a change in the estimate of ICP earnings allocations.
Segments and key changes
- Distillery products: Q3 sales were $63,700 versus $66,059; pretax income was $6,547 versus a $1,647 loss. Nine-month sales were $194,035 versus $200,775; pretax income rose to $17,963 from $5,836. Alcohol volumes and premium food-grade mix improved, while lower distillers-feed sales and prices weighed on revenue.
- Ingredient solutions: Q3 sales were $13,815 versus $14,112 and pretax income was $1,082 versus $1,279. Nine-month sales were $43,043 versus $44,997 and pretax income was $2,828 versus $3,944. Specialty starch volumes grew, but protein and commodity product volumes weakened.
- Q3 cost of sales declined 11.5% and nine-month cost of sales declined 7.7%. Corn costs were down 35.2% in Q3 and 36.8% year to date; flour costs were down 9.1% and 11.3%. Natural gas costs rose 8.8% and 9.5%, respectively.
Financial position and liquidity
- At September 30, cash was $0, working capital was $39,097, total assets were $149,109, and stockholders’ equity was $96,997.
- Total debt carrying value was $16,663, down from $23,168 at year-end 2013. Credit-facility borrowings were $12,656, including $5,736 revolving borrowings and $6,920 under the fixed-asset sub-line. The company reported $36,929 available to borrow and a 2.57% average facility rate; it was in covenant compliance.
- Nine-month investing cash use was $3,533, including $4,920 of cash capital expenditures and $1,383 of insurance proceeds. Financing cash use was $8,079, including net credit-facility repayments of $5,343 and $907 in dividends.
- Management expected routine capital spending of $8,000–$10,000 over the 12 months ending September 30, 2015, excluding replacement of Indiana fire-damaged equipment. The amount for that replacement had not been determined.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management cautioned that ICP’s recent profitability may not continue and its contribution to MGP’s earnings may decline.
- A January 2014 fire at the Indiana plant led to $2,308 of insurance recoveries through September, including $1,293 recorded as property-recovery income in Q3. Equipment replacement was expected by the end of 2015; related work could cause further disruption and earnings volatility.
- A subsequent October 2014 fire at the Atchison plant caused a seven-day production interruption and damaged equipment with a $617 net book value. Insurance coverage and business-interruption recoveries were still being evaluated.
- The company released part of its deferred-tax valuation allowance, recognizing a $1,215 benefit for expected future realization. The assessment depends on future taxable-income projections and will be revisited.
- Key exposures include commodity and energy costs, the ability to pass cost changes to customers, plant interruptions, ICP’s operating and financing risks, and compliance with credit covenants. Purchase commitments at September 30 included $27,506 for corn, $9,422 for natural gas, and $5,305 for flour.
- The company appointed Augustus Griffin as CEO effective July 28, 2014. It expected to transition from smaller-reporting-company status to accelerated-filer requirements and auditor attestation of internal controls for 2014.
Investor verification points
- Separate recurring operating improvement from the $1,293 Q3 property insurance recovery and the $1,215 tax benefit.
- Track ICP profitability, cash distributions, and the effect of the revised earnings-allocation estimate.
- Assess the operational and insurance consequences of both plant fires, including the timing and cost of Indiana equipment replacement.
- Monitor distillers-feed demand and pricing, premium-alcohol volumes and margins, ingredient-segment trends, and changes in corn, flour, and natural-gas costs.
- Confirm ongoing liquidity, borrowing-base availability, debt covenant compliance, and capital spending needs.