MGP Ingredients, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter ended September 30, 2017; year-to-date figures cover the nine months ended September 30, 2017. Dollar amounts below are in millions unless stated otherwise.
Business context
MGP produces distilled spirits and alcohol products, including premium beverage alcohol, and specialty wheat proteins and starches. Its reportable segments are Distillery Products and Ingredient Solutions.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $86.3 | $79.9 | $259.3 | $237.1 |
| Gross profit | $18.6 | $15.1 | $56.5 | $47.7 |
| Gross margin | 21.6% | 18.9% | 21.8% | 20.1% |
| Operating income | $10.5 | $11.5 | $32.4 | $31.4 |
| Net income | $14.1 | $9.5 | $29.2 | $22.9 |
| Basic and diluted EPS | $0.82 | $0.55 | $1.70 | $1.33 |
Q3 net sales rose 8.1% and gross profit rose 23.2%. Operating income fell 9.1%, as the prior-year quarter included $3.4 million of other operating income and current SG&A increased 16.8%. Q3 net income and EPS benefited substantially from an $11.4 million pretax gain on the sale of the ICP investment. The effective tax rate was 34.6%, versus 19.5% a year earlier. For the nine months, net sales increased 9.3%, operating income 3.2%, and net income 27.4%.
Segment trends: Q3 Distillery Products sales increased 8.5% to $72.3 million and gross profit increased 33.5% to $16.5 million; premium beverage alcohol sales rose 16.1%, while warehouse services revenue rose 30.2%. Ingredient Solutions sales increased 5.8% to $14.0 million, but gross profit declined 23.0% to $2.1 million, with lower plant efficiencies and average selling prices cited. Nine-month sales and gross profit increased in both segments.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $16.4 million, versus $1.8 million in 2016. Investing activities provided $9.2 million, including $22.8 million of proceeds related to the ICP investment; capital expenditures were $13.6 million.
- Cash was $7.1 million at September 30, 2017. Current assets were $137.0 million and current liabilities $30.8 million, for working capital of $106.2 million; inventory was $89.7 million.
- Total debt, net of unamortized loan fees, was $34.2 million, versus $36.0 million at December 31, 2016. The company reported $12.8 million outstanding under its revolving facility, with $137.2 million available under the $150 million facility. It reported compliance with debt covenants.
- Stockholders’ equity was $159.4 million. Cash dividends paid in the first nine months totaled $16.7 million, including a special $0.85-per-share dividend; the regular quarterly dividend was $0.04 per share.
Outlook, risks and unusual items
- Management expects approximately $22 million of 2017 capital expenditures for facility improvements and expansion, maintenance, and environmental, health and safety projects. It expects cash and available credit to support anticipated operating needs and budgeted capital spending. No earnings or revenue guidance is provided.
- The company completed the sale of its 30% ICP interest on July 3, 2017, receiving $9.0 million in cash and a note subsequently repaid for $14.3 million including interest and a working-capital adjustment. It also received $7.4 million in ICP distributions. The sale generated the $11.4 million pretax gain and funded the special dividend.
- Key exposures include volatility in grain, wheat flour and energy costs; the ability to pass input-cost increases through to customers; competition and demand for premium spirits and specialty ingredients; aged-whiskey inventory and warehouse expansion execution; and variable interest rates.
- Contingencies include an EPA notice concerning Lawrenceburg whiskey warehouses, for which a penalty is considered probable but the loss cannot be reasonably estimated, and proceedings following an October 2016 chemical release at Atchison. The EPA indicated it intended to seek approximately $0.25 million in penalties; negotiations were ongoing and no accrual was recorded. OSHA’s assessment related to the release was settled for $0.075 million.
- The company plans to adopt the new revenue recognition standard in Q1 2018 using the modified retrospective method. It had not identified material differences in revenue amount or timing, but its evaluation was not complete. The board declared a $0.04-per-share quarterly dividend after quarter-end, payable December 8, 2017.
Important facts for investors to verify
- How much of reported earnings growth reflects continuing operations versus the one-time ICP sale gain, and the related tax effects.
- Whether the Ingredient Solutions segment can restore Q3 margins after lower efficiencies and selling prices.
- Progress, spending and completion timing for the whiskey warehouse expansion and the company’s 2017 capital plan.
- Final outcomes and any insurance recoveries related to the EPA and Atchison chemical-release matters.
- Working-capital and cash-flow trends, particularly receivables and inventory, and ongoing compliance with credit-agreement covenants.