MGP Ingredients, Inc. — FY2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020; amounts below are USD millions unless otherwise noted. MGP produces distilled spirits and industrial alcohol, and specialty wheat proteins and starches. Its reportable segments are Distillery Products and Ingredient Solutions. The company reported continued operations during the COVID-19 pandemic, with no significant pandemic-related effect on operations, supply chain, or demand as of the report date.
Financial results and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Sales | $395.5 | $362.7 | +9.0% |
| Gross profit / margin | $98.8 / 25.0% | $76.5 / 21.1% | +29.1%; +3.9 percentage points |
| Operating income / margin | $54.2 / 13.7% | $47.2 / 13.0% | +14.8%; +0.7 percentage points |
| Net income | $40.3 | $38.8 | +4.0% |
| Diluted EPS | $2.37 | $2.27 | +4.4% |
| Cash from operations | $53.3 | $19.7 | +$33.5 |
| Capital expenditures | $19.7 | $16.7 | +$3.0 |
Distillery Products sales rose 6.8% to $317.5 million; segment gross profit increased 18.2% to $78.0 million. Brown goods sales grew 16.7%, and premium beverage alcohol sales rose 11.4%. Ingredient Solutions sales grew 19.2% to $78.1 million, while segment gross profit nearly doubled to $20.8 million. Specialty wheat starch sales increased 35.1% and specialty wheat protein sales increased 20.6%; commodity starch and protein sales declined.
At year-end, cash was $21.7 million, total assets were $366.6 million, and total liabilities were $104.0 million. Working capital was $169.0 million, with inventory of $141.0 million, including $105.4 million of barreled distillate. Debt was $40.0 million gross, or $39.9 million net of unamortized loan fees. The company had no revolver borrowings and reported $300 million of revolving capacity available; it was in compliance with credit covenants. Dividends paid were $8.2 million. The board declared a subsequent quarterly dividend of $0.12 per share.
Quarterly data show fourth-quarter 2020 sales of $100.9 million, operating income of $15.5 million, net income of $11.6 million, and EPS of $0.69. Fourth-quarter 2019 figures were $92.5 million, $16.3 million, $12.9 million, and $0.76, respectively.
Material changes and unusual items
- Revenue growth and margin expansion reflected gains in both segments, particularly specialty ingredients and premium brown goods. Ingredient Solutions’ gross margin increased to 26.7% from 16.2%.
- SG&A increased 52.2% to $44.6 million, including higher personnel and incentive compensation, CEO transition costs, and acquisition-related advisory and transaction costs. The filing identifies $1.932 million of CEO transition costs and $0.919 million of Luxco acquisition costs.
- 2020 net income included insurance recoveries of $3.780 million related to the Atchison feed-dryer fire and $0.633 million related to the ransomware disruption. The fire and related interruption adversely affected gross profit by an estimated $4.461 million; the ransomware incident by an estimated $1.728 million. The company was still seeking further insurance recovery for the cyber incident.
- Operating cash flow increased substantially from 2019, when cash use was elevated by inventory investment, particularly barreled distillate. In 2020, increases in receivables and inventory partly offset cash generation; higher accrued expenses were a significant source of cash.
- In March 2020, MGP acquired New Columbia Distillers for $2.750 million, adding the Green Hat Gin business. The company completed its current warehouse expansion program during 2020, with approximately $49.9 million invested since the project began.
Outlook, risks, and contingencies
The filing provides no specific 2021 revenue or earnings guidance. Management described market opportunities in American whiskey, high-protein and high-fiber foods, plant-based proteins, and specialty ingredients, while noting intensifying competition. MGP expected approximately $43.3 million of 2021 capital expenditures, including $29.4 million for replacement of the fire-damaged feed-dryer system.
On January 22, 2021, MGP agreed to acquire Luxco, a branded beverage-alcohol company. Consideration includes $237.5 million in cash, less assumed indebtedness, and 5,007,833 MGP shares, subject to customary adjustments. Closing was anticipated in the first half of 2021, subject to approvals and other conditions. MGP expected to fund the cash consideration and transaction expenses with borrowings under its revolving credit facility. Risks include increased leverage, integration costs, failure to realize expected benefits, and the possibility the transaction does not close.
Other principal risks include commodity and energy cost volatility; concentration among grain and flour suppliers; facility, transportation, and cybersecurity disruptions; dependence on successful aging-stock and brand strategies; COVID-19 uncertainty; regulatory and product-liability exposure; and potential dilution from share issuance. The filing reports securities and derivative shareholder litigation relating to alleged statements about aged-whiskey sales forecasts; motions to dismiss remained pending and damages were unspecified. Claims relating to a 2016 Atchison chemical release also remained possible, and the company could not reasonably estimate potential damages.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor reported effective internal controls as of December 31, 2020. Revenue recognition for bill-and-hold distillate sales was identified as a critical audit matter.
Important facts for investors to verify
- Whether and when the Luxco acquisition closed, its final purchase price and financing, and the resulting debt, share dilution, and integration performance.
- Insurance recoveries actually received for the feed-dryer fire and ransomware incident, and the timing and cost of restoring dryer capacity.
- Whether the planned $43.3 million 2021 capital program, including $29.4 million for the dryer, was completed within budget.
- Whether 2020 segment growth and margin gains persist, particularly specialty ingredient demand, premium whiskey pricing, and inventory requirements for aging spirits.
- Developments in shareholder litigation and any claims arising from the 2016 chemical release, including potential financial exposure.
- Cash conversion, inventory levels, borrowing capacity, and compliance with debt covenants as the company funds the acquisition and planned investments.