MGP Ingredients, Inc. — FY2022 Form 10-K
Business and period: Fiscal year ended December 31, 2022. MGP produces distilled spirits and alcohol, owns branded spirits, and supplies wheat starch and protein ingredients. It reports Distilling Solutions, Branded Spirits, and Ingredient Solutions. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Sales | $782.4 | $626.7 | +25% |
| Gross profit / margin | $253.3 / 32.4% | $199.0 / 31.7% | +27%; +0.7 pp |
| Operating income / margin | $149.0 / 19.0% | $126.4 / 20.2% | +18%; −1.2 pp |
| Net income | $108.9 | $90.8 | +20% |
| Basic / diluted EPS | $4.94 / $4.92 | $4.37 / $4.37 | +13% |
| Cash from operations | $88.9 | $88.3 | +$0.7 |
| Cash and cash equivalents, year-end | $47.9 | $21.6 | +$26.3 |
| Debt, net of unamortized fees | $230.3 | $233.4 | −$3.1 |
Year-end current assets were $454.2 million and current liabilities $105.4 million, a $348.8 million excess; inventory was $289.7 million, including $199.0 million of barreled distillate. The company reported $400 million available under its revolver and up to $120 million under its note shelf facility. It was in compliance with debt covenants. 2022 capital expenditures paid were $45.3 million; dividends were $0.48 per share for the year.
Segments
- Distilling Solutions: sales $428.5 million (+22%); gross profit $126.3 million (+11%); gross margin 29.5%, down 2.9 percentage points. Brown-goods sales rose 42%; industrial-alcohol sales fell 25%.
- Branded Spirits: sales $237.9 million (+30%); gross profit $95.5 million (+52%); gross margin 40.1%, up 6.0 percentage points. Growth reflected volume, price/mix, and American whiskey sales.
- Ingredient Solutions: sales $115.9 million (+28%); gross profit $31.5 million (+42%); gross margin 27.2%, up 2.7 percentage points. Specialty wheat starch and protein sales were key contributors.
Material changes and quarterly results
All three segments grew year over year. Consolidated gross margin improved, but operating margin declined as advertising and promotion expense increased 85% to $29.7 million, including greater investment in premium-plus brands. Distilling Solutions margin was pressured by higher input costs. FY2021 included a $16.3 million insurance recovery related to the 2020 Atchison dryer fire; there was no comparable recovery in 2022.
Fourth-quarter 2022 sales were $191.0 million versus $166.8 million in Q4 2021. Operating income was $29.7 million versus $45.3 million, and net income was $22.5 million versus $31.7 million. The prior-year quarter included the $16.3 million insurance recovery; Q4 2022 advertising and promotion expense was $10.9 million versus $6.2 million.
Operating cash flow was broadly flat despite higher net income, principally because inventory absorbed $44.4 million of cash, largely from barreled distillate, and receivables absorbed $16.8 million. Investing cash outflow was $47.8 million; financing cash outflow was $14.8 million. Gross debt outstanding was $236.5 million, including $201.3 million of 1.88% convertible notes due 2041.
Outlook, risks, and unusual items
- Management said it saw growth opportunities in 2023 and beyond and expected liquidity sources to support operating needs, budgeted capital spending, and potential acquisitions. No specific revenue or earnings guidance was provided.
- Management expected approximately $58 million of 2023 capital expenditures for facility improvements and expansion, maintenance, and environmental, health, and safety projects.
- Key exposures include grain, wheat, energy, packaging, and labor costs; supply-chain constraints; interest-rate and credit-agreement risks; consumer and alcohol-market shifts; competition; distributor dependence; regulatory and excise-tax changes; facility or warehouse disruptions; and cybersecurity risks. The company also flagged climate-related agricultural and water risks.
- Customer and company-owned aged whiskey inventories at company and third-party facilities create exposure to catastrophic loss. Maturing inventory also entails demand, pricing, and write-down risk.
- The company disclosed an immaterial prior-period correction: FY2021 diluted EPS was corrected to $4.37 from $4.34. It stated the correction was immaterial; it did not affect other FY2021 financial statement amounts. Goodwill and indefinite-lived intangibles were reported as not impaired at year-end.
- Auditor KPMG identified bill-and-hold revenue recognition as a critical audit matter. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether growth in premium spirits and branded products continues, and whether higher input costs can be recovered through pricing and mix.
- Inventory composition, aging, and cash conversion, particularly the $199.0 million in barreled distillate and the 2022 inventory-related operating cash outflow.
- Debt terms, covenant headroom, the 2025 revolver maturity, and the conversion conditions and dilution potential of the 2041 notes.
- Execution and returns on the planned $58 million of 2023 capital expenditures, alongside management’s qualitative outlook, which contains no formal earnings or sales guidance.
- Bill-and-hold revenue criteria and the company’s controls over customer-owned barrels stored at its facilities.