MGP Ingredients, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with the three months ended March 31, 2019. MGP produces distilled spirits and industrial alcohol, plus specialty and commodity wheat proteins and starches. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Sales | $99.1 | $89.1 | +11.2% |
| Gross profit / margin | $23.2 / 23.4% | $16.7 / 18.7% | +39.3%; margin +4.7 percentage points |
| Operating income / margin | $13.7 / 13.8% | $8.5 / 9.6% | +61.0%; margin +4.2 percentage points |
| Income before taxes | $13.1 | $8.3 | +58.2% |
| Income tax expense (benefit) | $3.2 | $(1.5) | Effective rate 24.7% vs. (17.7)% |
| Net income | $9.8 | $9.7 | +1.3% |
| Diluted EPS | $0.57 | $0.57 | Unchanged |
| Operating cash flow | $0.5 | $(3.8) | Improved $4.3 |
Sales grew in both segments. Distillery Products revenue rose 7.3% to $80.0 million, with higher brown goods, industrial alcohol and warehouse services sales. Ingredient Solutions revenue rose 31.4% to $19.1 million, led by specialty wheat starches and proteins. Segment gross margins were 22.8% and 26.0%, respectively; Ingredient Solutions’ margin improved from 9.8%, partly reflecting lower production costs and the absence of prior-year flood costs.
Gross profit growth drove higher operating income, partly offset by SG&A growth of 16.6% to $9.5 million, primarily from higher incentive compensation and CEO-transition costs. Net income increased only modestly despite operating gains, as Q1 2020 recorded tax expense versus a tax benefit in Q1 2019. Management attributed the tax-rate change mainly to share-based award tax effects and higher pretax income. Interest expense, net and other was $0.6 million, versus $0.3 million.
Cash, debt and liquidity
- Cash was $42.7 million at March 31, 2020, up from $3.3 million at year-end. Operating cash flow was $0.5 million; investing used $8.2 million and financing provided $47.0 million, including net borrowing proceeds.
- Operating cash was constrained by increases in receivables ($11.5 million), inventory ($5.6 million, primarily barreled distillate) and prepaid expenses ($2.3 million).
- Debt outstanding was $96.1 million gross, or $94.6 million net of unamortized loan fees, versus $41.5 million gross at year-end. This included $55.0 million drawn on the new revolver. The company reported $245.0 million of revolver availability and compliance with debt covenants.
- Current assets exceeded current liabilities by $201.0 million; inventory was $142.8 million. Capital spending was $5.6 million in the quarter. Management expected approximately $19.6 million of 2020 capital expenditures and estimated the warehouse expansion investment at $49.8 million, with completion expected by year-end 2020.
Outlook, risks and unusual items
- No quantified earnings or sales guidance was provided. Management said operations, supply chain and customer demand had not been significantly affected by COVID-19 as of the report date, but could not estimate the pandemic’s future impact. Risks cited include facility closures, supply interruptions, weaker customer demand, labor constraints and restricted access to capital.
- The company described itself as an essential business and reported a continuity team addressing workplace safety, supply chain monitoring and operational challenges.
- Two putative securities class actions filed in 2020 allege misleading statements about aged-whiskey sales forecasts; damages sought were not specified, and the company intends to defend the cases. Separately, the company agreed to plead guilty to a misdemeanor negligent Clean Air Act violation related to a 2016 chemical release and pay a $1.0 million fine, accrued in accounts payable. Private claims related to the release may follow; their potential amount was not reasonably estimable.
- The board declared a $0.12-per-share dividend in April, payable June 5, 2020. Management also noted potential benefits under the CARES Act but had not yet quantified them.
Important facts for investors to verify
- Confirm the reported share repurchase activity: the filing describes 159,104 shares repurchased for approximately $4.1 million in Q1, while the issuer-purchase table separately reports 10,044 shares for employee tax withholding and lists the program’s dollar usage without a share count.
- Monitor COVID-19 effects on customer demand, operations, supply chains and liquidity; management could not estimate the 2020 impact.
- Track aged-whiskey inventory, sales forecasts and warehouse-expansion spending, including whether the project remains on schedule and within its estimated cost.
- Assess developments in the securities litigation and private claims arising from the Atchison chemical release, including potential costs not quantified in the filing.
- Review revolver borrowings, covenant compliance and cash conversion, given the increase in debt and low quarterly operating cash flow.