MGP Ingredients, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Comparisons are with Q1 2020.
Business context and financial performance
MGP produces distilled spirits and industrial alcohol, as well as specialty and commodity wheat proteins and starches. It reported two segments in Q1: Distillery Products and Ingredient Solutions.
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Sales | $108.3 | $99.1 | +9.3% |
| Gross profit / margin | $32.3 / 29.8% | $23.2 / 23.4% | +39.2%; +6.4 pp |
| Operating income / margin | $20.5 / 18.9% | $13.7 / 13.8% | +49.6%; +5.1 pp |
| Net income | $15.4 | $9.8 | +56.7% |
| EPS, basic and diluted | $0.90 | $0.57 | +57.9% |
| Operating cash flow | $17.0 | $0.5 | +$16.4 |
| Capital expenditures paid | $12.1 | $5.6 | Higher investment |
Distillery Products sales rose 11.5% to $89.2 million; segment gross profit increased 55.2% to $28.3 million, with margin improving to 31.8% from 22.8%. Brown-goods sales were up 49.3%, driving much of the growth. Ingredient Solutions sales were nearly flat at $19.1 million, while gross profit fell 20.0% to $4.0 million and margin declined to 20.7% from 26.0%.
Management attributed the consolidated gross-profit improvement primarily to Distillery Products, especially higher brown-goods volume and higher industrial-alcohol selling prices. Ingredient Solutions profitability was hurt by temporary curtailment of natural-gas usage during extreme weather, which shut Atchison facilities for several days. SG&A rose 24.2% to $11.8 million, primarily due to Luxco transaction costs.
Liquidity, debt and balance sheet
At March 31, 2021, cash was $22.6 million, current assets were $229.5 million and current liabilities were $55.0 million; the company reported working capital of $174.5 million. Inventory was $136.1 million, including $98.7 million of barreled distillate.
Total debt was $40.0 million gross ($39.9 million net of unamortized loan fees), including $2.4 million of current maturities. There were no revolver borrowings at quarter-end and $300.0 million remained available under the credit facility; MGP reported compliance with its debt covenants. Operating cash flow was $17.0 million, investing cash use was $13.3 million, and financing cash use was $2.7 million. Cash increased $0.9 million during the quarter.
Material developments, outlook and risks
- Luxco acquisition: MGP completed the acquisition on April 1, 2021, after signing an agreement in January. Consideration was $237.5 million in cash, less assumed indebtedness, plus 5,007,833 MGP shares valued at $296.2 million. The cash consideration, assumed-debt repayment and transaction expenses were financed with a $242.3 million revolver borrowing on April 1. Purchase accounting was incomplete; the company expected a preliminary allocation by the end of Q2 2021. Beginning in Q2, MGP planned to report a new Branded Spirits segment. The issued shares represented approximately 22.8% of outstanding stock immediately after closing.
- Capital spending: MGP expected approximately $43.3 million of 2021 capital expenditures, excluding insurance recoveries; $29.4 million was allocated to replacing the feed dryer damaged in a November 2020 fire. Management said operating cash flows and credit facilities should support anticipated needs, including after the acquisition.
- Fire and insurance: The company recorded a $3.6 million partial insurance settlement as a reduction of cost of sales. It also recorded an $8.7 million legally binding insurance commitment, including $5.1 million in accrued liabilities pending resolution of claim contingencies. Replacement-system construction was underway; the amount and timing of further recoveries were not assured.
- COVID-19: Operations, supply chain and customer demand had not been significantly affected as of the report date, but the company could not estimate the pandemic’s duration, severity or full-year financial impact.
- Legal and other risks: The filing describes securities and derivative shareholder litigation, a books-and-records action, and potential claims relating to a 2016 chemical release. Loss amounts for these matters were not clearly quantified. Disclosed risks also include commodity and energy costs, supply concentration, operational disruptions, cybersecurity, regulation, and acquisition integration and financing risks. A 2020 ransomware incident temporarily disrupted production, with no evidence of improper data access or extraction reported.
No full-year earnings or revenue guidance is provided in the supplied filing text. The board declared a $0.12 per-share dividend payable June 4, 2021.
Important facts for investors to verify
- How the Luxco acquisition performs, integrates, and affects leverage, cash flows, margins and dilution; verify final purchase-price allocation and subsequent debt balances.
- Whether the $43.3 million capital-spending plan, including the $29.4 million dryer replacement, remains on schedule and within budget, and what insurance proceeds are ultimately recovered.
- Whether Distillery Products’ brown-goods growth and margins are sustainable, and whether Ingredient Solutions’ margin weakness reverses.
- The status and potential financial exposure of the shareholder litigation and other contingencies, which are not quantified clearly in the filing.
- Changes in commodity, natural-gas and supply costs, and any continuing effects from COVID-19 or operational disruptions.