MGP Ingredients, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 27, 2019. The filing reports annual results and unaudited quarterly data. Unless noted, dollar amounts below are in millions; the filing presents most financial statements in thousands.
Business context
MGP produces distilled spirits and industrial alcohol, distillery co-products and warehouse services, plus specialty and commodity wheat proteins and starches. Its two reportable segments are Distillery Products and Ingredient Solutions. Distillery Products generated 83.5% of 2018 net sales.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $376.1 | $347.4 | +8.2% |
| Gross profit / margin | $83.6 / 22.2% | $76.0 / 21.9% | +10.0%; +0.3 pp |
| Operating income / margin | $50.1 / 13.3% | $42.9 / 12.3% | +16.9%; +1.0 pp |
| Income before taxes | $49.0 | $52.8 | -7.2% |
| Net income | $37.3 | $41.8 | -10.9% |
| Diluted EPS | $2.17 | $2.44 | -11.1% |
| Operating cash flow | $33.5 | $33.5 | Essentially unchanged |
| Capital expenditures, cash basis | $31.0 | $21.1 | +$10.0 |
Segment trends: Distillery Products sales rose 7.9% to $314.1 million; segment gross profit increased 7.4% to $71.8 million, while gross margin was nearly flat at 22.9%. Premium beverage alcohol sales grew 5.9%, including brown goods growth of 11.0%; warehouse services rose 21.1%. Ingredient Solutions sales grew 9.9% to $62.0 million and gross profit increased 28.3% to $11.8 million, with margin rising to 19.0%. Specialty wheat protein sales increased 8.4%.
Fourth quarter: Sales were $104.9 million, operating income $16.6 million, net income $11.8 million and diluted EPS $0.69. Compared with Q4 2017, sales rose from $88.2 million and operating income from $10.5 million, while net income declined from $12.6 million.
Cash, debt and liquidity: Year-end cash was $5.0 million. Current assets exceeded current liabilities by $117.2 million; inventory was $108.8 million, including $76.4 million of barreled whiskey. Debt outstanding was $32.6 million gross ($32.0 million net of loan fees), up from $25.3 million gross in 2017. The $150 million revolver had $139 million available; the company reported compliance with debt covenants. Total assets were $277.9 million, up from $240.3 million.
Material changes and notable items
- Operating performance improved, but annual net income and EPS fell because 2017 included an $11.4 million pretax gain from selling the ICP investment. The sale generated $22.8 million in proceeds in 2017; no equity-method investments remained at year-end 2018.
- 2018 income tax expense was $11.7 million, with a 23.9% effective rate, versus 20.7% in 2017. The 2017 comparison included a finalized $3.3 million discrete tax benefit from the Tax Act. In 2018, the company increased its deferred-tax valuation allowance by $1.3 million.
- Inventory increased $15.6 million year over year; barreled bourbon and whiskey inventory rose $10.6 million at cost. Investing cash outflow was $31.0 million, mainly reflecting higher capital spending and the absence of 2017 ICP-sale proceeds.
- Quarterly dividends were $0.08 per share in 2018. After year-end, the board declared a $0.10 quarterly dividend and authorized a $25 million share-repurchase program beginning February 27, 2019.
Outlook, risks and contingencies
- Management cited favorable demand trends in American whiskey, plant-based proteins and specialty ingredients, while warning that competition was intensifying. It expects to use operating cash and available borrowing capacity to fund operations and growth.
- Management estimated 2019 capital expenditures of approximately $23 million. The warehouse expansion program was increased to approximately $51.8 million; about $44 million had been incurred by year-end 2018, with completion expected by the end of 2020.
- Key exposures include volatile grain, wheat flour and natural gas costs; dependence on concentrated suppliers; competition and customer demand shifts; and risks from aging-inventory decisions, warehouse expansion, operational interruptions, transportation, regulation, product liability, cybersecurity and labor relations.
- The 2016 Atchison chemical release remains a contingency. OSHA’s assessment was settled for $75,000 in 2017. EPA had indicated it intended to seek approximately $250,000 in civil penalties, but negotiations were paused pending its criminal investigation. The company had not accrued the proposed EPA amount, considered immaterial, and could not reasonably estimate potential private-plaintiff damages; insurance coverage is subject to a $250,000 deductible.
- The FDA had not confirmed Fibersym and FiberRite resistant starches as dietary fiber under new labeling rules; the company said their existing accepted status remained in place while its petition was under review.
- On adoption of the new lease standard in 2019, the company estimated approximately $7 million of operating-lease right-of-use assets and liabilities would be recognized.
Most important facts for investors to verify
- Whether growth in premium spirits and ingredient products continues to translate into sustainable margins and cash generation.
- Whether the planned warehouse expansion meets its budget and end-2020 completion target, and whether growing aged-whiskey inventory converts to profitable sales.
- How commodity and energy costs, supplier concentration and pricing pass-through affect results.
- The outcome and potential financial exposure from the EPA investigation and related private claims, including available insurance coverage.
- Whether the FDA confirms the resistant-starch dietary-fiber status and whether the new share-repurchase authorization and dividend are implemented as planned.