MGP Ingredients, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Unless stated otherwise, amounts below are in U.S. dollars; financial-statement figures are converted from thousands to millions. MGP produces premium distilled spirits and industrial alcohol, as well as specialty and commodity wheat proteins and starches. Its reportable segments are Distillery Products and Ingredient Solutions.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Sales | $362.7 million | $376.1 million | Down 3.5% |
| Gross profit / margin | $76.5 million / 21.1% | $83.6 million / 22.2% | Down 8.5%; margin down 1.1 percentage points |
| Operating income / margin | $47.2 million / 13.0% | $50.1 million / 13.3% | Down 5.8% |
| Income before taxes | $45.9 million | $49.0 million | Down 6.2% |
| Net income | $38.8 million | $37.3 million | Up 4.0% |
| Diluted EPS | $2.27 | $2.17 | Up 4.6% |
| Cash from operations | $19.7 million | $33.5 million | Down $13.8 million |
The lower effective tax rate—15.6% versus 23.9%—helped lift net income and EPS despite weaker operating results. Management attributed the rate reduction chiefly to tax benefits from vested share-based awards, a valuation-allowance change, and higher tax credits; some benefits may not recur.
Segment results and operating trends
- Distillery Products: Sales were $297.2 million, down 5.4%; gross profit was $66.0 million, down 8.1%, and gross margin fell to 22.2% from 22.9%. Brown-goods sales declined 14.8%, mainly on lower volume. Lower brown-goods volume and challenged industrial- and white-goods markets weighed on profit; warehouse services and co-product sales partially offset the declines.
- Ingredient Solutions: Sales increased 5.6% to $65.5 million, but gross profit fell 10.4% to $10.6 million and gross margin declined to 16.2% from 19.0%. Growth in specialty wheat starches and proteins was offset in profitability by the loss of a large specialty wheat protein customer and higher input costs.
- Fourth quarter: Sales were $92.5 million versus $104.9 million in Q4 2018; operating income was $16.3 million versus $16.6 million, and net income was $12.9 million versus $11.8 million. Q4 2019 EPS was $0.76 versus $0.69.
Financial position and liquidity
- At December 31, 2019, cash was $3.3 million, current assets were $184.2 million, and current liabilities were $39.3 million. Working capital was $144.9 million; inventory of $136.9 million was a substantial component.
- Total debt, net of unamortized fees, was $41.1 million, compared with $32.0 million a year earlier. The company had $149.7 million available under its $150 million revolving facility and reported compliance with its debt covenants.
- Inventory increased $28.2 million, principally because barreled distillate rose $27.9 million. Operating cash flow fell to $19.7 million, with inventory growth the largest cash use. Capital expenditures were $16.7 million in cash-flow reporting; adjusted for capital expenditures in accounts payable, total spending was $18.8 million.
- Dividends and equivalents paid were $6.9 million. The company had a $25 million share-repurchase authorization but made no purchases under that program in 2019.
Material changes, outlook, and notable items
- Management said it saw favorable growth opportunities in its markets, including American whiskey and specialty food ingredients, while acknowledging intensifying competition. The filing provides no quantified sales or earnings guidance.
- Management expected approximately $19.6 million of 2020 capital expenditures. The warehouse expansion was estimated at $49.8 million in total, with approximately $48.4 million incurred through 2019 and completion expected by year-end 2020.
- On February 14, 2020, MGP replaced its revolving credit agreement with a $300 million facility maturing in 2025, with potential increases subject to conditions and lender discretion. This was a subsequent event, not the year-end facility balance.
- In connection with the 2016 Atchison chemical release, MGP agreed in 2019 to a $1.0 million federal fine and a $251,000 EPA administrative penalty, recorded in accounts payable at year-end. Private plaintiffs have brought, and may bring, claims; the company said potential damages could not be reasonably estimated. Insurance coverage and recoveries are uncertain.
- Key risks include commodity and energy cost volatility and inability to pass costs through, dependence on a concentrated supplier base, competition and changing consumer demand, execution and inventory risks from aging whiskey and warehouse expansion, operational disruption or catastrophic loss at facilities, regulation and litigation, and debt-covenant constraints.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Its critical audit matter was revenue recognition for bill-and-hold arrangements; $107.2 million of 2019 brown-goods revenue involved such arrangements.
Most important facts for investors to verify
- Whether Distillery Products sales and margins stabilize, particularly brown goods and industrial and white goods, and whether Ingredient Solutions recovers margin after the customer loss.
- Whether rising aged-whiskey inventory converts into future sales and cash without excess supply or impairment; inventory reached $136.9 million.
- Whether operating cash generation improves after the $28.2 million inventory-related cash use, and how planned investment and dividends affect borrowing.
- Progress, cost, and completion of the warehouse expansion, alongside the stated 2020 capital-spending plan.
- Resolution and potential insurance recovery for private claims tied to the Atchison chemical release, and the continuing effect of related legal matters.
- Compliance with covenants and terms under the new $300 million credit facility, and the durability of the tax benefits that supported 2019 earnings.