MGP Ingredients, Inc. — FY2023 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2023; it does not provide standalone fourth-quarter results. MGP produces distilled spirits, owns branded spirits, and sells food ingredients through Distilling Solutions, Branded Spirits, and Ingredient Solutions. Unless otherwise indicated, financial amounts below are in millions of dollars.
Financial performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Sales | $836.5 | $782.4 | +7% |
| Gross profit / margin | $304.7 / 36.4% | $253.3 / 32.4% | +20%; +4.0 percentage points |
| Operating income / margin | $148.6 / 17.8% | $149.0 / 19.0% | Approximately flat; margin down 1.2 points |
| Net income | $107.1 | $108.9 | -2% |
| Diluted EPS | $4.80 | $4.92 | -2% |
| Operating cash flow | $83.8 | $88.9 | Down $5.2 |
| Capital expenditures paid | $55.3 | $45.3 | Up $9.9 |
Interest expense, net, rose to $6.6 million from $5.5 million. The effective tax rate increased to 24.4% from 22.3%. Gross margin improved across all three segments, while closure-related charges, higher SG&A and advertising, and a contingent-consideration fair-value charge weighed on operating income and EPS.
Segment results
- Distilling Solutions: Sales of $450.9 million, up 5%; gross profit of $145.0 million, up 15%, with margin rising to 32.2% from 29.5%. Brown-goods sales grew 26%, while white goods, industrial alcohol, fuel alcohol, and co-products declined. Warehouse-services sales increased 21%.
- Branded Spirits: Sales of $253.9 million, up 7%; gross profit of $112.8 million, up 18%, with margin rising to 44.4% from 40.1%. Premium Plus sales rose 24%, supported in part by Penelope; total segment volume fell 6% while price/mix rose 13%.
- Ingredient Solutions: Sales of $131.7 million, up 14%; gross profit of $47.0 million, up 49%, with margin rising to 35.7% from 27.2%. Sales growth reflected higher prices/mix, despite a 6% decline in total volume.
Balance sheet, debt, and liquidity
- At year-end, cash was $18.4 million, inventory $346.9 million (including $250.2 million of barreled distillate), and current assets exceeded current liabilities by $400.2 million.
- Debt outstanding was $293.9 million gross, or $287.2 million net of unamortized fees, compared with $236.5 million gross at year-end 2022. This included $63.0 million of variable-rate revolver borrowings, $201.3 million of 1.88% convertible notes due 2041, and $29.6 million of fixed-rate senior notes.
- Available borrowing capacity was $337.0 million under the revolving credit facility and $220.4 million under the Note Purchase Agreement. The company reported compliance with its debt covenants.
- Operating cash flow was reduced by working-capital needs, including a $46.9 million use of cash from higher inventory and $32.4 million from higher receivables. Investing cash use was $159.2 million, including $103.7 million for Penelope and $55.3 million of capital expenditures.
- Cash dividends paid were $10.7 million; the 2023 annual dividend was $0.48 per share. A $0.12 quarterly dividend was declared in February 2024.
Material changes, outlook, and unusual items
- Penelope acquisition: Acquired on June 1, 2023 for $104.6 million cash at closing, plus contingent consideration of up to $110.8 million tied to sales targets through 2025. The contingent-consideration liability was $69.2 million at year-end, after a $7.1 million fair-value expense in 2023.
- Atchison distillery closure: Operations ceased in December 2023 as part of a shift away from less profitable GNS and industrial alcohol products. MGP recorded $17.1 million of asset impairment and $2.3 million of related severance, inventory write-offs, termination fees, consulting, and other costs. Management cautions that expected benefits and ultimate disposal impacts remain subject to estimates and uncertainty.
- 2024 spending and outlook: MGP expects approximately $85.8 million in 2024 capital expenditures for facility improvements and expansion, sustaining projects, and environmental, health, and safety work. Management expects available cash sources to cover budgeted capital expenditures, potential acquisitions, and operating needs over the next 12 months and beyond. No quantified sales, earnings, or margin guidance is provided. Management sees industry growth opportunities but also notes competition, inflation, commodity costs, and changing consumer demand.
- Other unusual and governance items: SG&A included $2.1 million of Penelope acquisition costs; the 2023 CEO transition also contributed to higher expenses. One customer represented approximately 11% of consolidated sales. Preferred shareholders elect five of nine directors, and common shareholders have limited voting rights on certain major corporate actions.
Principal risks and contingencies
Key exposures include shifting spirits and food-ingredient preferences; competition and distributor dependence; grain, wheat, agave, packaging, energy, labor, and water costs or availability; the uncertain demand and value of aging whiskey inventory; facility disruptions and warehouse capacity; variable-rate debt and refinancing costs; acquisition integration and earn-out assumptions; regulation, excise taxes and tariffs; and cybersecurity threats. MGP notes that no material cybersecurity impact occurred during the last three fiscal years. It is party to ordinary-course legal and regulatory proceedings; the filing does not identify a specific material accrued litigation loss.
Most important facts for investors to verify
- Whether improved segment gross margins and higher pricing/mix can persist, particularly as volume declined in Branded Spirits and Ingredient Solutions.
- Whether the Atchison closure delivers expected savings and how the company will manage the resulting reduction in white-goods, industrial-alcohol, fuel-alcohol, and co-product output.
- Penelope’s sales performance against earn-out targets, the ultimate contingent payment, and the assumptions behind its fair-value measurement.
- Whether inventory and receivables growth convert to cash, and whether planned 2024 capital spending leaves adequate liquidity after dividends and other strategic investments.
- Debt levels, variable-rate exposure, covenant headroom, and the funding plan for upcoming maturities or acquisitions.
- Customer and supplier concentration, including the customer representing approximately 11% of sales, and MGP’s limited common-stockholder voting rights.