MGP Ingredients, Inc. — Q2 2016 Form 10-Q
Business and period: The filing covers the quarter and six months ended June 30, 2016. MGP produces distilled spirits and other distillery products, as well as specialty and commodity wheat starches and proteins. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $80.392 | $85.354 | $157.227 | $165.767 |
| Gross profit / margin | $15.531 / 19.3% | $17.528 / 20.5% | $32.577 / 20.7% | $30.916 / 18.7% |
| Operating income / margin | $9.127 / 11.4% | $9.503 / 11.1% | $19.852 / 12.6% | $16.411 / 9.9% |
| Net income | $6.308 | $7.871 | $13.367 | $12.941 |
| Diluted EPS | $0.37 | $0.44 | $0.77 | $0.72 |
| Operating cash flow | — | $0.218 | $9.103 |
- Q2: Net sales fell 5.8% and net income fell 19.9%. Lower ingredient-solutions sales and gross profit, plus equity-method investment earnings down to $1.079 million from $3.096 million, outweighed lower SG&A. Interest expense increased to $0.328 million from $0.129 million.
- Six months: Net sales declined 5.2%, but gross profit rose 5.4% and operating income rose 21.0%. Improved distillery product mix, higher average selling prices, lower input costs, and lower SG&A drove the gains; weaker equity-method earnings partly offset them. Net income increased 3.3%.
- Segments: Q2 distillery sales decreased 3.2% to $66.740 million, while gross profit was essentially flat at $13.663 million. Ingredient-solutions sales declined 16.7% to $13.652 million and gross profit fell 51.9% to $1.868 million, reflecting lower prices and volume. For the six months, distillery gross profit rose 13.5% to $28.515 million; ingredient-solutions gross profit fell 29.7% to $4.062 million.
Cash, debt and liquidity
- Cash was $1.554 million at June 30, 2016, versus $0.747 million at year-end. Operating cash flow was only $0.218 million for the six months, primarily due to inventory growth of $12.894 million and cash outflows from payables and accrued expenses.
- Capital expenditures were $10.020 million, including $6.088 million paid and $3.932 million remaining payable. Cash used in investing activities was $5.858 million; financing activities provided $6.447 million.
- Total debt was $41.369 million, net of unamortized loan fees, compared with $33.460 million at December 31, 2015. The company reported $47.385 million of remaining borrowing availability under its $95 million credit facility and was covenant-compliant at quarter-end. Average facility borrowing interest rate was 2.52%.
- Current assets exceeded current liabilities by $72.275 million, substantially reflecting $71.595 million of inventory. Inventory increased from $58.701 million at year-end, including a $12.012 million increase in barreled distillate for aging.
Outlook, risks and notable items
- Management said available cash sources, including the credit facility, were expected to support budgeted capital spending and operating needs. It anticipated approximately $24 million of 2016 capital expenditures and continued investment in growth, particularly distillery products. The approved whiskey-warehouse expansion totaled $20.2 million; $16.75 million had been spent by June 30. No specific earnings or revenue guidance was provided.
- Management cited strong demand for premium bourbon and rye, while ingredient solutions faced a challenging pricing environment. The company is exposed to agricultural commodity prices and variable interest rates; a 100-basis-point rate increase was estimated to add $0.371 million to annualized interest expense based on quarter-end borrowings.
- A TTB excise-tax audit identified clerical and storage-loss support matters. Management believed a penalty was probable but could not estimate its amount or determine whether additional tax and penalties would be owed; it did not expect proceedings to have a material adverse effect.
- On July 11, 2016, the company settled a lawsuit for $2.550 million: $1.750 million was received in July, with the remaining $0.800 million payable in eight quarterly installments. The board also shifted to quarterly dividends and declared $0.02 per share/unit for payment in September 2016.
Important facts for investors to verify
- Whether ingredient-solutions pricing and volume pressure continues, and whether distillery premium-product growth and warehouse revenue can offset it.
- How inventory aging, working-capital needs, and low operating cash generation develop in subsequent periods.
- Debt and borrowing availability under the credit agreement, covenant compliance, and the effect of interest-rate changes.
- Final outcome and potential cost of the TTB audit, and collection of the remaining lawsuit settlement installments.
- Execution, timing, and cash requirements of the planned capital program and whiskey-warehouse expansion.