MGP Ingredients, Inc. — Q1 2012 Form 10-Q
Reporting period: Quarter ended March 31, 2012; comparative figures are for the quarter ended March 31, 2011. Dollar amounts are in thousands except per-share data. The company changed its fiscal year-end, so the comparison is by calendar quarter, not the same fiscal quarter. The January 2012 reorganization placed the operating business under a holding company; consolidated assets and liabilities were unchanged.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $86,344 | $64,188 |
| Gross profit / margin | $5,579 / 6.5% | $6,519 / 10.2% |
| Operating income (loss) | $(2,243) | $829 |
| Income before taxes | $1,996 | $864 |
| Net income | $1,876 | $701 |
| Diluted earnings per share | $0.10 | $0.04 |
| Cash from operating activities | $(10,971) | $(549) |
Sales increased 34.5%, principally from distillery products, including the acquired Lawrenceburg Distillers Indiana (LDI) business. Cost of sales rose faster than sales, increasing 40.0%; management cited higher production, higher corn and flour costs, and unfavorable commodity-derivative accounting, partly offset by lower natural gas prices. SG&A rose 36.2% to $7,748, partly reflecting acquisition and reorganization costs. Net income included a $4,055 pre-tax gain from selling a 20% interest in Illinois Corn Processing (ICP); excluding that gain, reported operating performance was weak.
Segment sales and pre-tax income were: distillery products $72,485 and $2,686 (prior year $50,327 and $5,475); ingredient solutions $13,578 and $1,638 (prior year $13,574 and $100); and other $281 and $(96) (prior year $287 and $(175)). Distillery return on sales fell to 3.7% from 10.9%, while ingredient-solutions return on sales improved to 12.1% from 0.7%.
Cash, liquidity and debt
- Cash and cash equivalents were zero at March 31; restricted cash was $6,151. Working capital was $26,633, up from $18,887 at December 31, 2011.
- Operating cash outflow was $10,971, driven in part by a $7,984 increase in receivables, a $3,236 increase in inventory, and reductions in accounts payable and affiliate payables. Investing provided $10,351, mainly from the $9,103 ICP sale and $2,232 net proceeds from a property sale.
- Total debt was $29,901, including $21,792 outstanding on the revolving facility and $8,109 of other debt. Revolver availability, after letters of credit, was $22,708.
- The company reported compliance with its financial covenants at quarter-end. Management expected available cash sources to cover budgeted capital expenditures and anticipated operating needs.
Material changes, outlook and risks
- LDI acquisition: Acquired substantially all assets used in LDI’s beverage-alcohol distillery and warehousing operations in December 2011. The addition contributed significantly to distillery sales. Working-capital true-ups were completed after quarter-end and were not material. Management planned to implement SAP at the Indiana facility in the second half of 2012.
- ICP ownership: Sold 20% of ICP for $9,103 on February 1, recognizing a $4,055 pre-tax gain; the company retained 30%. ICP’s Q1 net income was $1,128. The company’s stated maximum exposure to loss related to ICP was $8,204, including its investment and remaining capital-improvement commitment.
- Commodities and hedging: Open commodity contracts had an $827 unfavorable effect on cost of sales in Q1 2012, versus a $1,550 favorable effect in Q1 2011. The company de-designated its corn cash-flow hedges in February after entering grain supply arrangements; it expected reduced use of corn futures and hedge accounting. Open ethanol contracts remained, and derivative liabilities totaled $3,165.
- Capital and distributions: Management budgeted $7,000 in routine capital expenditures for the 12 months ending December 31, 2012; $2,239 of capital-asset contracts were outstanding at quarter-end. A $0.05-per-share dividend, totaling $914, was declared in March and paid April 19.
- Other exposures: The company had purchase commitments of $32,611 for corn, $7,285 for natural gas, and $3,673 for flour. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. Key risks include commodity and energy prices, ability to pass costs through, operations at its facilities, integration of LDI, ICP profitability, competition, and covenant compliance.
No specific earnings or revenue guidance was provided. The filing’s forward-looking statements are subject to risks and are not guarantees of future results. The effective tax rate was 6.0%; management continued a full valuation allowance against net deferred tax assets because realization was not considered more likely than not.
Investor verification points
- Assess underlying earnings excluding the $4,055 ICP-sale gain and the quarter’s unfavorable derivative impact.
- Track operating cash conversion, receivables and inventory, given the $10,971 operating cash outflow and zero unrestricted cash at quarter-end.
- Verify whether LDI integration improves distillery profitability and whether planned SAP implementation proceeds as expected.
- Monitor commodity-contract exposure, ICP performance and the company’s remaining investment-related commitments.
- Confirm revolver availability, borrowing-base changes and continued covenant compliance.