MGP Ingredients, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Dollar amounts are in thousands, except per-share data. MGP operates in Distillery Products and Ingredient Solutions and also reports earnings from its equity-method investment in ICP.
Financial performance and liquidity
- Q3 revenue: Net sales were $80.3 million, up 3.6% year over year. Gross profit was $11.9 million; gross margin was 14.8%, versus 9.4%. Operating income was $6.4 million, compared with $3.6 million.
- Q3 earnings: Net income was $6.8 million, versus $6.2 million; diluted EPS was $0.38, versus $0.34. Equity-method earnings were $1.6 million.
- Nine-month results: Net sales were $246.1 million, up 3.8%; gross profit was $42.8 million and gross margin was 17.4%, versus 9.5%. Operating income was $22.8 million, versus $8.4 million. Net income was $19.7 million, versus $16.1 million; diluted EPS was $1.10, versus $0.89.
- Segments: Q3 Distillery Products sales rose 4.7% to $66.7 million and gross margin expanded to 15.5% from 9.0%. Ingredient Solutions sales fell 1.4% to $13.6 million and gross margin was 10.9%, versus 11.3%. For the nine months, segment sales increased 3.9% and 3.5%, respectively; margins improved in both segments.
- Cash flow and investment: Nine-month operating cash flow was $12.8 million, up from $8.8 million. Capital expenditures were $20.0 million, versus $4.9 million, and inventory growth used $17.8 million of cash, largely for aging whiskey and finished-goods safety stock. Cash declined to $126,000 from $5.6 million.
- Debt and liquidity: Total debt and credit-facility borrowings were $28.8 million, versus $10.3 million at year-end 2014. Working capital was $54.9 million. The $80 million revolving facility had $33.6 million available at September 30; outstanding facility borrowings were $26.4 million and the average rate was 3.04%. The company reported compliance with covenants.
Material changes and notable items
- Improved product mix and pricing, lower corn, flour and natural-gas costs, and production efficiencies drove higher gross profit. Distillery results benefited from premium spirits, higher food-grade alcohol sales and whiskey warehousing demand.
- Q3 tax expense was $1.0 million, compared with a $1.2 million tax benefit in Q3 2014. For the nine months, tax expense was $8.7 million, versus a $1.0 million benefit. The 2015 results included a $1.9 million release of valuation allowance; the effective tax rates were 13.3% for Q3 and 30.6% year to date.
- SG&A rose $0.5 million in Q3 and $4.8 million year to date. The year-to-date increase included higher incentive compensation, severance and personnel costs.
- On September 1, the company repurchased 950,000 shares from an affiliate of SEACOR, ICP’s 70% owner, for $14.5 million ($15.25 per share). Treasury-stock purchases totaled $15.4 million year to date.
- The company entered a five-year credit agreement maturing February 27, 2020, with an $80 million facility and lower specified interest rates than the prior agreement.
- The DMI joint venture ceased normal operations on June 30, 2015 and entered a one-year wind-down. MGP reported a $384,000 investment balance and arranged an alternative supplier for its Trutex/Wheatex products.
- A $16.4 million Lawrenceburg warehouse expansion was announced after quarter-end. Management expected approximately $22 million of capital expenditures over the following 12 months and stated that cash sources and the credit agreement should cover planned spending and operating needs.
Outlook, risks and contingencies
Management cited continued whiskey-category growth and strategic investment in warehousing, but provided no quantified earnings or revenue guidance. Results remain exposed to grain, flour and energy costs; the ability to pass cost increases to customers; facility disruptions; competitive and demand conditions; and volatility in ICP’s results and distributions. The filing also identifies dependence on key personnel, borrowing-base and covenant requirements, and timing differences between business interruptions and insurance recoveries as risks. The company reported various legal proceedings but did not expect them to have a material adverse effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the improved margins persist as commodity prices, product mix and production costs change.
- Whether whiskey warehousing demand and the Lawrenceburg expansion support expected growth, and the project’s final cost and timing.
- How inventory accumulation and low cash on hand affect operating liquidity and reliance on the credit facility.
- Whether ICP earnings remain sustainable given lower sales volume and pricing, and the impact of its business-interruption insurance proceeds.
- Whether the tax benefit from releasing valuation allowance is repeatable; the filing retains a $1.9 million valuation allowance.
- The financial and supply effects of DMI’s wind-down and the replacement sourcing arrangements for Trutex/Wheatex.
- The effects of the share repurchase on outstanding shares, capital allocation and related-party considerations.