MGP Ingredients, Inc. — Q1 2023 Form 10-Q
Reporting period: Quarter ended March 31, 2023; comparisons are with the quarter ended March 31, 2022 unless stated otherwise. Amounts below are in U.S. dollars.
Business context
MGP produces distilled spirits and alcohol, branded spirits, and specialty and commodity wheat ingredients. It reports three segments: Distilling Solutions, Branded Spirits, and Ingredient Solutions.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sales | $201.0 million | $195.2 million | +3% |
| Gross profit / margin | $69.8 million / 34.7% | $71.8 million / 36.8% | Profit −3%; margin −2.1 percentage points |
| Operating income / margin | $41.6 million / 20.7% | $50.1 million / 25.7% | Income −17%; margin −5.0 percentage points |
| Net income | $31.0 million | $37.4 million | −17% |
| Basic / diluted EPS | $1.40 / $1.39 | $1.69 / $1.69 | Down from prior year |
| Operating cash flow | $5.0 million | $22.2 million | −$17.2 million |
| Capital expenditures paid | $16.2 million | $10.6 million | Higher investment |
Sales rose across all three segments. Ingredient Solutions sales increased 10% to $30.9 million and gross profit increased 51% to $12.2 million, with margin up to 39.5% from 29.0%. Distilling Solutions sales rose 2% to $113.2 million, but gross profit fell 15% to $33.0 million and margin declined to 29.2% from 34.9%. Branded Spirits sales rose 2% to $56.9 million; gross profit was nearly flat at $24.6 million, with margin down to 43.2% from 44.5%.
Liquidity, debt, and balance sheet
- Cash was $31.7 million at March 31, 2023, down from $47.9 million at year-end 2022. Cash and cash equivalents declined $16.2 million during the quarter.
- Current assets were $475.4 million and current liabilities $102.3 million; the company reported working capital of $373.1 million. Inventory was $308.6 million, including $210.6 million of barreled distillate.
- Total debt was $235.7 million gross, or $229.6 million net of unamortized loan fees. Debt net of fees was down from $230.3 million at December 31, 2022. The company had no revolver borrowings and reported $400 million available under its credit agreement and up to $120 million under its note purchase facility.
- Management said the company was in compliance with debt covenants and expected cash sources to support operating and short-term liquidity needs.
Material changes, outlook, and risks
- Profitability weakened despite sales growth. Management attributed the decline primarily to higher input costs and lower brown-goods volume in Distilling Solutions, plus increased advertising and promotion and higher SG&A. Ingredient Solutions’ improved pricing and margins partly offset these pressures.
- Operating cash flow fell largely because of working-capital uses: receivables increased by $19.2 million, inventory by $18.7 million, and accrued expenses and other decreased by $10.2 million, primarily reflecting incentive compensation payments.
- Management expects approximately $58 million of capital expenditures in 2023 for facility improvement and expansion, sustaining projects, and environmental, health, and safety projects. No earnings or revenue guidance is provided in the supplied filing text.
- Management cited exposure to commodity-price and interest-rate risks. Supply contracts cover grain, wheat flour, and natural gas purchases one to 24 months ahead. A 100-basis-point market-rate increase was expected to have minimal interest-expense impact based on variable-rate borrowings at quarter-end; fixed-rate debt fair value is also sensitive to rate changes.
- The filing reports various legal and regulatory proceedings but provides no clear quantified exposure in the supplied text. It states there were no material changes to the risk factors in the 2022 Form 10-K. Goodwill and indefinite-lived intangible assets were not impaired at March 31, 2023.
Important facts for investors to verify
- Whether Distilling Solutions’ margin pressure from input costs and volume persists, and whether Ingredient Solutions’ pricing and margin gains are sustainable.
- How inventory and receivables convert to cash, given the substantial working-capital outflow and inventory balance.
- Progress and funding for the approximately $58 million 2023 capital-spending plan, and any effect on cash balances or borrowing.
- Debt-facility availability, covenant compliance, and any material updates to legal or regulatory contingencies.
- The filing’s Q1 results are interim and management cautions they are not necessarily indicative of full-year results; the filing provides no specific earnings or revenue forecast.