MGP Ingredients, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Unless noted otherwise, dollar amounts are in thousands. MGP is a holding company whose operating businesses produce distillery products and specialty starches and proteins; its bioplastics business was sold in February 2013.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $80,171 | $76,107 | $245,970 | $247,985 |
| Gross profit | $815 | $6,060 | $13,325 | $17,603 |
| Gross margin | 1.0% | 8.0% | 5.4% | 7.1% |
| Operating income (loss) | $(5,946) | $874 | $(4,139) | $(1,914) |
| Net income (loss) | $(6,325) | $418 | $(4,568) | $1,444 |
| EPS, basic and diluted | $(0.37) | $0.02 | $(0.27) | $0.08 |
| Operating cash flow | Not separately presented for the quarter | $4,004 | $(7,453) |
Quarterly drivers: Sales rose 5.3%, principally on improved distillery pricing, but cost of sales increased 13.3%. Management attributed the margin decline to higher product costs, lower distillers-feed pricing, and the prior-year quarter’s hedging gain; SG&A also rose 12.0%, partly due to proxy-contest professional fees. Distillery segment pre-tax results shifted to a $1,647 loss from $3,513 income; ingredient solutions earned $1,279 versus $2,184.
Nine-month drivers: Sales decreased 0.8%, while gross margin fell to 5.4%. Management cited higher corn, flour and natural-gas costs, product mix, operating disruptions, and the absence of prior-year asset-sale and joint-venture-sale gains. Distillery segment pre-tax income declined to $5,836 from $9,960; ingredient-solutions pre-tax income was $3,944 versus $4,760. The $1,406 after-tax bioplastics-sale gain was reported in discontinued operations, partially offsetting the continuing-operations loss.
Cash, debt and liquidity
- Cash and cash equivalents were zero at September 30, 2013. Working capital was $47,501, down from $48,320 at year-end 2012.
- Total debt carrying value was $30,430: $24,867 under the revolving facility and $5,563 in current and long-term debt. Revolver availability was $19,463 after a $2,000 vendor letter of credit. The company reported compliance with credit-agreement covenants.
- Nine-month operating cash flow was $4,004, compared with a $7,453 use of cash in 2012. Investing activities used $774 and financing activities used $3,230. Capital expenditures were $3,571 cash-paid; total capital investments were $4,909, including amounts payable.
- Management expected $8,000–$10,000 of routine capital expenditures over the 12 months ending September 30, 2014, and stated that anticipated cash sources should cover budgeted capital spending and operating requirements.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management’s liquidity statement is an expectation, not a guarantee.
- ICP, in which MGP owns 30%, reported a $3,472 nine-month net loss; MGP recorded $1,042 of its share of ICP’s loss. MGP’s supply/marketing agreement with ICP expired January 1, 2013, and sourcing from ICP was minimal after April. MGP gave notice to shut down the ICP plant after a quarterly EBITDA-loss threshold was exceeded; the majority partner rejected the notice, and MGP had not withdrawn its election at filing. MGP reported no further funding requirement to ICP.
- Commodity exposure remains significant: corn purchase commitments were $31,687 through December 2014, natural-gas commitments $3,498 through March 2014, and flour purchase commitments $11,986 through March 2014. MGP also identifies supplier availability, energy costs, pricing pass-through, operating interruptions and hedging effectiveness as risks. It had no derivative contracts designated as cash-flow hedges at quarter-end.
- Management cited incoming power interruptions at the Atchison facility on three days during the nine-month period as reducing manufacturing output. The company also cited lower industrial-alcohol supply from ICP as affecting distillery volumes.
- A dissident-shareholder proxy contest and related litigation created expense and management distraction; several proceedings and requests for legal fees remained unresolved. The company said other legal proceedings were not expected to materially affect its financial position or operating trends.
- MGP continued a full valuation allowance on net deferred tax assets because management could not conclude realization was more likely than not. The 2013 nine-month results also include the discontinued-operation gain from the bioplastics sale.
Most important facts for investors to verify
- Whether margins and profitability recover as input costs, product mix, distillers-feed pricing and production reliability change.
- Whether available revolver capacity and operating cash generation remain sufficient given zero cash, planned capital spending and commodity commitments.
- The outcome and financial consequences of the ICP shutdown dispute, ICP’s financing and operating position, and MGP’s remaining exposure to the investment.
- The duration, cost and governance impact of the proxy contest and related litigation, including any developments after the filing date.
- Whether the deferred-tax valuation allowance, legal contingencies and reported segment economics change in subsequent filings.