MGP Ingredients, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. MGP produces distilled and branded spirits, industrial alcohol, and food ingredients. Unless stated otherwise, dollar amounts below are in millions.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $201.1 | $176.6 | $591.4 | $459.9 |
| Gross profit / margin | $59.0 / 29.4% | $57.1 / 32.3% | $190.1 / 32.1% | $146.2 / 31.8% |
| Operating income / margin | $33.9 / 16.8% | $32.9 / 18.6% | $119.3 / 20.2% | $81.0 / 17.6% |
| Net income | $23.6 | $23.7 | $86.4 | $59.2 |
| Basic / diluted EPS | $1.07 / $1.06 | $1.08 / $1.08 | $3.91 / $3.91 | $2.91 / $2.91 |
| Operating cash flow | Not separately provided for the quarter | $72.3 | $70.8 |
- Q3 sales grew 14%, but gross profit rose only 3%; gross margin contracted 2.9 percentage points. Operating income increased 3%, while net income was essentially unchanged and diluted EPS declined to $1.06.
- Nine-month sales increased 29%, operating income 47%, and net income 46%. Branded Spirits’ 44% sales growth benefited in part from the Luxco acquisition; the comparison period included Luxco only from April 1, 2021, so year-to-date growth is not fully like-for-like.
- Q3 segment sales were $108.6 million for Distilling Solutions, $62.8 million for Branded Spirits, and $29.7 million for Ingredient Solutions. Distilling Solutions gross profit fell 4% amid higher input costs; Branded Spirits gross profit rose 8%; Ingredient Solutions gross profit rose 17%.
Cash, debt and liquidity
- Cash was $50.7 million at September 30, 2022, versus $21.6 million at year-end 2021. Nine-month operating cash flow of $72.3 million was offset by $31.8 million of investing outflows and $11.3 million of financing outflows.
- Inventory was $275.5 million, up from $245.9 million at year-end; the increase in inventory used $30.6 million of operating cash. Receivables also used $15.6 million, partly offset by a $12.6 million source from higher accounts payable.
- Debt carrying value, net of unamortized fees, was $231.1 million, versus $233.4 million at year-end. The company had no revolver borrowings and reported $400 million available under its credit agreement, plus up to $120 million potentially available under its note facility. It reported compliance with debt covenants.
- Current assets were $440.6 million and current liabilities $100.8 million; management noted that inventory made up most of current assets.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided. Management expected approximately $47.2 million of capital expenditures in 2022 for facility expansion and improvements, sustaining projects, and environmental, health and safety work.
- Management cited higher commodity and other input costs as pressures on margins. In Q3, higher input costs for white goods and industrial alcohol reduced Distilling Solutions profitability; ingredient input-cost inflation also weighed on that segment’s margin.
- Distillers feed and related co-product sales continued to be affected by the 2020 Atchison dryer fire. The filing attributes lower volumes and higher average selling prices in part to that disruption.
- The company identifies commodity-price and interest-rate exposure. Supply contracts cover grain, wheat flour, and natural gas for delivery one to 24 months ahead. Management said a 100-basis-point rate rise would have minimal impact on interest expense based on variable-rate borrowings at period-end.
- Previously disclosed shareholder derivative proceedings and litigation concerning the 2016 Atchison chemical release were dismissed. The filing reports no material change to risk factors from the prior quarter. Management concluded disclosure controls were effective and reported no material change in internal controls.
- On November 3, 2022, the board declared a $0.12-per-share quarterly dividend, payable December 2, 2022.
Key facts for investors to verify
- Whether Q3 margin pressure from input costs persists and how effectively pricing offsets it.
- Inventory growth, particularly barreled distillate and finished goods, and its effect on cash conversion.
- Underlying branded-sales growth excluding the Luxco acquisition comparison effect, and progress in premium price tiers.
- Delivery against the 2022 capital-spending expectation and the availability and cost of financing under credit facilities.
- Potential ongoing effects of the Atchison dryer fire on co-product volumes and economics.