MGP Ingredients, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter ended June 30, 2012, with year-to-date results for the six months ended June 30, 2012. Unless stated otherwise, amounts are in thousands of dollars. Comparisons are to the corresponding 2011 periods.
Business context and notable transactions
MGP produces distillery products, ingredient solutions, and other products. Results include the Indiana distillery operations acquired from Lawrenceburg Distillers Indiana (LDI) on December 27, 2011. In February 2012, the Company sold a 20% interest in Illinois Corn Processing (ICP) for approximately $9.1 million, recognizing a $4.1 million gain; it retained a 30% interest. The Company changed its fiscal year-end to December 31, so year-to-date results are six-month comparisons.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $85,534 | $68,798 | $171,878 | $132,986 |
| Gross profit (loss) | $5,916 | $(2,788) | $11,495 | $3,731 |
| Gross margin | 6.9% | (4.1)% | 6.7% | 2.8% |
| Operating loss | $(545) | $(8,093) | $(2,788) | $(7,264) |
| Net income (loss) | $(850) | $(10,258) | $1,026 | $(9,557) |
| Basic and diluted EPS | $(0.05) | $(0.61) | $0.06 | $(0.57) |
| Operating cash flow | Not separately presented for the quarter | $(7,468) | $4,123 |
- Quarterly net sales rose 24.3%; six-month net sales rose 29.2%. The principal driver was increased distillery-product volume and pricing, including the newly acquired Indiana operations. Ingredient-solutions sales declined.
- Quarterly results improved sharply from Q2 2011, when derivative mark-to-market losses, high input costs, production interruptions, and weak ingredient margins weighed on results. Q2 2012 still recorded a net loss, reflecting higher SG&A and a one-week Atchison maintenance and upgrade shutdown.
- Six-month net income included the $4,055 ICP sale gain. It also reflected improved joint-venture results and a more favorable derivative impact; higher SG&A partially offset these improvements.
- Q2 2012 segment pretax income was $3,762 for distillery products and $987 for ingredient solutions; other segment loss was $150. Six-month segment pretax income was $6,448 and $2,624, respectively, with other segment loss of $246.
Liquidity, debt, and balance sheet
- At June 30, 2012, cash and cash equivalents were zero; restricted cash was $2,757. Working capital was $22,493, compared with $18,887 at December 31, 2011.
- Revolving-credit borrowings were $23,380, with $21,120 available under the facility. Current and long-term debt totaled $7,693; total credit facility, notes payable, and long-term debt were reported as $31,073. Total liabilities were $82,450 and stockholders’ equity was $85,062.
- Six-month operating cash use of $7,468 contrasted with cash provided of $4,123 in 2011. Receivables increased $7,560 and inventory increased $5,443, while accounts payable and affiliate payables declined. Investing cash provided $6,590, including $9,103 from the ICP sale; financing cash provided $495. Cash declined by $383 to zero.
- Capital expenditures were $4,245 cash-paid year to date ($4,982 incurred, including $737 payable). Management budgeted $7,000 of routine capital expenditures for the twelve months through June 30, 2013.
Management commentary, outlook, risks, and unusual items
- Management said it expected available cash sources to be adequate for budgeted capital spending and anticipated operating needs. No specific revenue or earnings guidance was provided.
- Management cautioned that covenant compliance in future periods will require improved operating results. The amended credit agreement sets minimum adjusted-net-income thresholds of $(1,000) for Q2 2012, $(500) for Q3, and approximately break-even for Q4; thereafter, the requirement is positive adjusted net income. The Company reported compliance at June 30, 2012. A minimum 2.00-to-1 fixed-charge coverage ratio begins with the twelve months ending March 31, 2013.
- Commodity supply was tight amid U.S. drought conditions, with corn prices near historic highs in June. The Company entered fixed-price, formula-based corn supply agreements for both Indiana and Atchison, reducing its reliance on corn futures and cash-flow hedge accounting. At June 30 it had no corn futures designated as cash-flow hedges, but held 10.498 million gallons of non-designated ethanol derivative contracts maturing through December 2012.
- Key disclosed risks include operational disruptions, grain and energy availability and cost, hedging effectiveness, passing input-cost increases to customers, integrating LDI, ICP profitability, competition, covenant compliance, and changes in consumer preferences. Management cited no material change to the risk factors in its prior transition-year 10-K.
- The Atchison plant shutdown and LDI-related expenses affected the quarter. The Company sold an unused grain elevator for net proceeds of $2,232, recording a $48 loss. It de-designated corn cash-flow hedges in February; the filing reports a $27 loss reclassified to earnings and $200 of hedge-ineffectiveness losses recognized in cost of sales.
- Management maintained a full valuation allowance against net deferred tax assets because realization was not considered more likely than not. Ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were reported effective, with no material internal-control change during the quarter.
Important facts for investors to verify
- Whether operating cash flow improves as receivables and inventory levels change, given zero unrestricted cash at quarter-end.
- Progress toward the amended adjusted-income requirements and the upcoming fixed-charge coverage test, including available borrowing capacity and lender borrowing-base discretion.
- Whether corn and energy costs, drought-related supply conditions, and the shift to supply contracts support margins and reduce derivative volatility.
- Whether Indiana distillery integration, SAP implementation, and planned capital spending deliver expected operational benefits without further pressuring costs.
- How sustainable reported earnings are after separating the ICP sale gain, derivative effects, and the newly acquired distillery’s contribution; also monitor ingredient-solutions volume trends and ICP performance.