MGP INGREDIENTS INC annual report, FY2015

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MGP Ingredients, Inc. — FY2015 Form 10-K

Business context and reporting period. Annual report for the year ended December 31, 2015, filed March 10, 2016. MGP produces distilled spirits and industrial alcohol, plus specialty and commodity wheat proteins and starches. Its reportable segments are Distillery Products and Ingredient Solutions. Amounts below are in USD millions unless noted.

Financial performance and position

  • Revenue: Net sales were $327.6, up 4.5% from $313.4 in 2014. Distillery Products sales rose 5.3% to $270.2, led by food-grade alcohol; Ingredient Solutions sales increased 0.9% to $57.4.
  • Profit and margins: Gross profit was $58.5 versus $28.4, with gross margin increasing to 17.9% from 9.1%. Operating income was $32.9 versus $16.6; operating margin was 10.0% versus 5.3%. Net income was $26.2 versus $23.7, and diluted EPS was $1.48 versus $1.32.
  • Cash flow: Cash from operations was $18.7, up from $15.8. Investing used $30.5, primarily for capital spending; financing provided $7.0. Cash declined to $0.7 from $5.6.
  • Liquidity and debt: Working capital was $53.5. Total debt was $33.5 versus $9.9 a year earlier; $33.1 remained available under the $80 million revolving credit facility. The company reported compliance with its credit covenants at year-end.
  • Balance sheet: Total assets were $194.3, including inventory of $58.7, up from $34.4. Stockholders’ equity was $116.2.
  • Fourth quarter: Net sales were $81.5, operating income $10.1, net income $6.5, and diluted EPS $0.38. In Q4 2014, the corresponding figures were $76.3, $8.2, $7.6, and $0.42.

Material changes versus prior year

  • Higher-value product mix, higher selling prices, lower raw-material and energy costs, and improved plant efficiencies drove the sharp gross-margin improvement. Food-grade alcohol sales rose 10.5%; specialty wheat starch sales rose 6.3%.
  • Barreled bourbon and whiskey inventory increased $17.2 as MGP built stocks for anticipated future wholesale demand and its own brands. Total inventory increased $24.3.
  • Equity-method earnings declined to $6.1 from $10.1, mainly reflecting lower ICP sales volume and average selling prices. The 2015 amount included MGP’s $1.23 share of ICP business-interruption insurance proceeds.
  • 2014 included $8.29 of net property insurance recoveries; 2015 had no property-damage recovery. 2015 did include $0.46 of business-interruption recovery.
  • Income tax expense increased to $12.2 from $2.3; effective tax rate rose to 31.8% from 8.7%. Valuation-allowance releases reduced tax expense by $2.4 in 2015 and $7.6 in 2014.

Outlook, commentary, risks and unusual items

  • Management expects approximately $24 million of capital expenditures in 2016. A Lawrenceburg warehouse expansion has approved investment of $20.2 million; completion was expected by year-end 2016. The company spent $12.0 million on the project in 2015.
  • Strategy emphasizes premium spirits, aging inventory, specialty ingredients, operational improvements, and developing MGP-owned brands. Metze’s Select bourbon entered retail distribution in September 2015. No quantified earnings or revenue guidance was provided.
  • Key risks include volatility in grain, wheat flour and energy costs; reliance on a limited number of key suppliers; competition and customer demand; and the time, cost and demand uncertainty associated with aging whiskey and brand development.
  • MGP owns 30% of ICP and does not control its operations or distributions. Management cautioned that ICP’s recent profitability may not be sustained. ICP distributed $3.3 million to MGP in February 2016; future distributions are not assured.
  • A TTB excise-tax audit identified clerical and storage-loss documentation matters. The company said a penalty was probable but could not estimate its amount; management did not expect proceedings to materially affect consolidated results or financial position.
  • The pension plans for union employees were terminated in 2015, with $0.741 million in termination funding. The DMI joint venture dissolved effective June 30, 2015 and entered a one-year wind-down.
  • The company repurchased 950,000 shares from an affiliate of ICP’s majority owner for $14.5 million in September 2015. The filing also reports a subsequent $0.08-per-share dividend declared in March 2016.

Most important facts for investors to verify

  • Whether premium spirits growth, pricing and improved margins persist as market conditions and input costs change.
  • Whether planned warehouse spending is completed on schedule and within the approved budget, and whether aged-inventory growth converts to profitable sales.
  • ICP’s future earnings, supply availability to MGP, and capacity to make distributions.
  • The outcome and potential financial exposure from the TTB audit, which the company could not quantify.
  • Liquidity and covenant headroom after increased borrowing, capital spending, inventory investment and share repurchases.
  • The impact of tax-asset realization assumptions and the higher 2015 effective tax rate on future reported earnings.