MGP Ingredients, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2011, compared with the quarter ended September 30, 2010. Amounts are in thousands of dollars except per-share data. The company changed its fiscal year-end from June 30 to December 31, effective in calendar 2012; the current period is the first quarter of a transition period ending December 31, 2011.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Change |
|---|---|---|---|
| Net sales | $76,138 | $56,978 | Up 33.6% |
| Gross profit | $2,791 | $10,354 | Down $7,563 |
| Gross margin | 3.7% | 18.2% | Down 14.5 percentage points |
| Operating income (loss) | $(2,577) | $3,565 | Down $6,142 |
| Equity in joint venture earnings (loss) | $(2,830) | $1,589 | Down $4,419 |
| Net income (loss) | $(5,509) | $5,002 | Down $10,511 |
| Basic and diluted EPS | $(0.31) | $0.28 | Turned to loss |
| Operating cash flow | $(13,948) | $(6,594) | More cash used |
| Capital expenditures, cash basis | $384 | $961 | Down $577 |
Sales growth was led by distillery products, up 42.4% to $60,537, and ingredient solutions, up 9.6% to $15,414. Distillery segment pre-tax income fell to $379 from $8,082; ingredient solutions pre-tax income rose to $1,592 from $1,420. Other segment sales were $187, with a $112 pre-tax loss.
Management attributed the sharp margin and earnings decline principally to higher corn and flour costs, which averaged 81.7% and 40.8% above the prior-year quarter, respectively. Pricing gains did not keep pace with raw-material inflation. Unhedged commodity derivatives negatively affected cost of sales by $2,586, versus a favorable $989 impact in the prior-year quarter. Lower natural gas costs and lower SG&A partly offset these pressures.
Financial position and liquidity
- At September 30, 2011, cash and cash equivalents were $986, down from $7,603 at June 30; restricted cash was $8,168, compared with $1,028. The increase in restricted cash primarily reflected additional broker collateral for commodity positions.
- Working capital was $14,985, down from $22,381. Current assets were $63,771 and current liabilities $48,786.
- Revolving-credit borrowings were $12,870; long-term debt, including current maturities, totaled $8,933. The company reported total credit facility, notes payable and long-term debt of $21,803. Stockholders’ equity was $65,355, down from $75,198.
- Quarterly financing cash flow was $7,654, primarily reflecting net revolving-credit borrowings of $8,212. Cash declined by $6,617 over the quarter.
- Before a $5,000 availability-maintenance requirement, $12,130 remained available under the pre-amendment facility; after that requirement, availability was $7,130.
Material developments, outlook and risks
- ICP joint venture: The 50%-owned ICP reported a $5,735 quarterly net loss; MGP recorded its $2,867 share. ICP had exceeded loss thresholds that can trigger plant-shutdown rights and loan defaults. SEACOR Energy and ICP’s lender waived covenant violations through September 30, 2011. MGP’s stated maximum exposure was $10,366, including its $9,366 investment and a $1,000 capital-improvement commitment.
- LDI acquisition: On October 20, 2011, after quarter-end, a wholly owned subsidiary agreed to acquire substantially all assets of Lawrenceburg Distillers Indiana’s beverage-alcohol distillery business. The cash payment was estimated at approximately $15,000, subject to closing-date working capital and customary conditions, including a simultaneous sale of LDI’s bottling and packaging business to a third party. Closing was anticipated in Q4 2011 or Q1 2012 and was not assured. MGP expects to use bank financing and estimated $3,000–$5,000 or more in additional capital expenditures over three years. Management expects added capacity and entry into premium whiskey production; integration, financing, regulatory and execution risks remain.
- Credit amendment: Also on October 20, the Wells Fargo revolving facility was amended, increasing the maximum line from $25,000 to $45,000 and extending maturity to October 20, 2014. The amendment introduced quarterly leverage, adjusted-net-income and fixed-charge-coverage covenants; it also imposed inventory-input hedging requirements and other restrictions. The filing states the company complied with its covenants at September 30 under the then-existing agreement; post-amendment compliance is not established in this quarter’s results.
- Hedges and unusual items: Beginning July 1, 2011, qualifying new commodity contracts were again eligible for cash-flow hedge accounting. This placed $3,613 of unrealized hedge losses in other comprehensive loss rather than current earnings; management said the losses were expected to be largely offset by underlying corn costs. Earlier contracts remained marked through earnings. Market volatility on September 30 led the company to use the next business day’s prices to estimate derivative fair values.
- Operations and commitments: Production interruptions at the Atchison plant in September and flood-related transportation cost increases affected results. The approximately $10,000 Atchison water-cooling project was completed in July 2011. The company had fixed-price commitments for natural gas and flour, and its Wheatex facility lease expires in August 2012; relocation costs and financing had not been determined.
- Other: The company declared a $0.05-per-share dividend, paid October 13, 2011. Management provided no specific earnings guidance. It cited raw-material and energy prices, operating disruptions, hedging effectiveness, customer pricing, ICP performance, covenant compliance, and the proposed acquisition among key uncertainties. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the LDI transaction closes, its final working-capital-adjusted price and financing terms, and actual integration and capital costs.
- ICP’s operating performance, liquidity and covenant status; the extent and duration of lender and partner waivers; and MGP’s exposure if shutdown or default provisions are exercised.
- Cash availability and compliance with the amended credit facility’s leverage, fixed-charge-coverage, adjusted-income and hedging requirements.
- Whether selling prices and product mix can recover margins amid elevated corn and flour costs, and whether operational interruptions recur.
- Realized outcomes from commodity positions, including the distinction between losses recorded in earnings and those deferred in other comprehensive income.
- The cost and funding plan for any Wheatex facility relocation and the company’s ability to fund operations, dividends and investment needs from available liquidity.