MGP Ingredients, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Financial statements are unaudited. Unless stated otherwise, dollar amounts below are in millions; the filing presents most amounts in thousands.
Business context
MGP produces premium distilled spirits and industrial alcohol, as well as specialty and commodity wheat starches and proteins. It reports two segments: Distillery Products and Ingredient Solutions.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $92.6 | $90.5 | $191.6 | $179.6 |
| Gross profit / margin | $20.7 / 22.4% | $19.5 / 21.6% | $43.9 / 22.9% | $36.2 / 20.1% |
| Operating income / margin | $11.3 / 12.2% | $10.9 / 12.0% | $25.0 / 13.1% | $19.4 / 10.8% |
| Net income | $8.5 | $7.9 | $18.3 | $17.6 |
| Basic and diluted EPS | $0.50 | $0.46 | $1.07 | $1.03 |
- Q2 sales increased 2.3%; gross profit rose 6.0% and net income rose 7.3%. Ingredient Solutions drove gross-profit growth, while Distillery Products gross profit declined 3.0%.
- Six-month sales increased 6.7% and operating income rose 29.2%. Ingredient Solutions sales grew 17.6% and gross profit more than doubled to $9.7 million; Distillery Products sales grew 4.4% and gross profit rose 7.9%.
- Six-month net income increased only 4.0%, as the effective tax rate rose to 24.0% from 6.3% in the prior-year period. Management attributed the increase primarily to tax impacts of vested share-based awards. Q2 effective tax rate was 23.1%, versus 25.0%.
Cash flow, debt and liquidity
- Six-month operating cash flow was $6.0 million, compared with $3.1 million a year earlier. Receivables and inventory used $13.2 million and $10.0 million, respectively; the filing cites customer-payment timing, higher sales, and increased barreled distillate inventory. Tax-payment deferrals under the CARES Act contributed $5.8 million of cash.
- Investing cash outflow was $12.4 million, including $10.2 million of property and equipment additions and a $2.8 million business acquisition. Financing cash inflow was $14.9 million. Cash ended the period at $11.7 million, up from $3.3 million at year-end 2019.
- Debt, net of unamortized loan fees, was $64.5 million, versus $41.1 million at December 31, 2019. This included $25.0 million drawn on the revolving facility. The new $300 million revolving credit agreement matures in 2025, with $275 million available at June 30; the company reported compliance with its debt covenants.
- Current assets exceeded current liabilities by $177.8 million, including $147.1 million of inventory. Management said operating cash generation and borrowing capacity were expected to support planned capital spending and operating needs.
Material developments, outlook and risks
- COVID-19: MGP reported no significant pandemic-related impact on operations, supply chain, or customer demand as of the filing date, but said the duration and financial effects remained uncertain. Incremental pandemic-related costs were immaterial through June 30.
- Cyberattack: A May ransomware attack temporarily disrupted Atchison production. MGP estimated a $1.7 million gross-profit impact, reported no evidence of sensitive data being accessed or extracted, and was seeking insurance recovery. No recovery was recorded because collection was not yet probable.
- Investment: Management expected approximately $19.6 million of 2020 capital expenditures. The warehouse expansion was substantially complete; approximately $49.8 million had been incurred, with only immaterial final spending expected in Q3.
- Guidance: The filing provides no specific full-year revenue or earnings guidance. Management said it could not reasonably estimate the pandemic’s 2020 financial impact.
- Legal matters: Securities class-action and shareholder derivative suits allege, among other things, misleading statements concerning aged-whiskey sales forecasts; the company said it intended to defend the securities action. A separate $1.0 million Clean Air Act fine related to the 2016 Atchison chemical release was paid and the matter terminated. Potential private claims concerning that release remained, with damages not reasonably estimable.
- Other: The board declared a $0.12-per-share quarterly dividend payable September 4, 2020. The filing identifies commodity input costs, variable interest rates, cybersecurity incidents, and COVID-19-related demand, supply, and operating disruption as risks.
Important facts for investors to verify
- Whether Ingredient Solutions’ strong growth and margins are sustained, and how commodity-product declines affect the segment mix.
- The extent of insurance recovery for the cyberattack and whether production or cybersecurity costs recur.
- Changes in aged-whiskey inventory, customer demand, and the cash tied up in receivables and inventory.
- Progress on planned capital expenditures, debt usage, and compliance with credit-agreement covenants.
- Developments in the securities and derivative litigation and any potential liability from private claims related to the chemical release.
- The effect of subsequent COVID-19 developments on customer demand, facility operations, supply chains, and liquidity.