MGP Ingredients, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in thousands of dollars, except per-share data and where noted. MGP produces distilled spirits and industrial alcohol, as well as specialty wheat proteins and starches. Its two segments are Distillery Products and Ingredient Solutions.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $102,964 | $90,685 | $294,606 | $270,282 |
| Gross profit / margin | $23,162 / 22.5% | $18,790 / 20.7% | $67,075 / 22.8% | $54,972 / 20.3% |
| Operating income / margin | $13,652 / 13.3% | $11,604 / 12.8% | $38,698 / 13.1% | $30,991 / 11.5% |
| Net income | $10,381 | $8,215 | $28,713 | $25,846 |
| Diluted EPS | $0.61 | $0.48 | $1.68 | $1.51 |
Q3 sales rose 13.5% and net income rose 26.4% year over year. Nine-month sales increased 9.0%, operating income 24.9%, and net income 11.1%. Nine-month EPS growth was partly offset by a higher effective tax rate: 23.1% versus 14.0% in 2019; the prior-year rate benefited from tax effects of vested share-based awards. Q3 tax rate was 21.6%, down from 26.9%, primarily reflecting release of part of a valuation allowance.
Segment trends
- Distillery Products: Q3 sales increased 11.4% to $81,622; gross profit rose 8.8% to $17,307, while gross margin declined to 21.2% from 21.7%. Premium beverage alcohol growth was led by brown goods volume. Nine-month sales rose 6.7% to $236,813 and gross profit rose 8.2% to $51,559.
- Ingredient Solutions: Q3 sales increased 22.7% to $21,342; gross profit more than doubled to $5,855 and margin rose to 27.4% from 16.6%. Specialty wheat starch and protein growth, favorable product mix, and focus on higher-margin products supported results. Nine-month sales rose 19.4% to $57,793 and gross profit rose 111.8% to $15,516.
Consolidated Q3 SG&A increased 32.3% to $9,510, mainly due to incentive compensation and professional fees. Nine-month SG&A increased 18.3%, including higher personnel and incentive costs and costs related to the CEO transition.
Cash, debt and liquidity
- Nine-month operating cash flow was $29,457, versus $12,413 in 2019. The increase reflected stronger earnings and less cash consumed by working capital; receivables and inventory still used $11,683 and $5,673, respectively.
- Investing cash outflow was $15,513, including $13,507 of property and equipment additions and a $2,750 business acquisition. Financing provided $2,713. Cash increased $16,657 to $19,966.
- At September 30, 2020, total debt was $55,909 before $1,401 of unamortized fees ($54,508 net), compared with $41,508 gross at year-end 2019. The balance included $15,000 drawn on the new revolving facility. The company reported $285,000 of revolver availability and compliance with debt covenants.
- Current assets were $221,084 and current liabilities $44,405, a $176,679 excess; inventory was $142,798. Stockholders’ equity was $252,001.
- Nine-month dividends and equivalents totaled $6,144; the company repurchased 159,104 shares for $4,053 under its authorization. The board declared a further $0.12-per-share dividend for payment in December 2020.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects approximately $19,600 of 2020 capital expenditures for expansion, maintenance, and safety projects, and says operating cash flow and available borrowing capacity should support anticipated needs. The current warehouse expansion project, with approximately $49,900 incurred, was described as complete.
- Management said COVID-19 had not significantly affected operations, supply chain, or customer demand as of the report date; related incremental costs were immaterial through September 30. The duration and financial impact remain uncertain, with potential effects on demand, facilities, labor, inputs, supply chains, and credit markets.
- A May 2020 ransomware attack temporarily disrupted Atchison production. MGP estimates a $1,728 gross-profit impact and is pursuing insurance recovery; no sensitive data access or extraction was identified. Recovery is not recorded until probable of collection.
- Two consolidated securities class-action claims and three shareholder derivative actions remain pending, including allegations concerning aged-whiskey sales forecasts and share repurchases. Damages are unspecified; motions to dismiss or stay were pending. MGP says it intends to defend the securities action.
- The Clean Air Act matter related to the 2016 Atchison chemical release was resolved with a $1,000 fine, paid in May 2020. Private claims may continue; potential damages cannot currently be reasonably estimated, and insurance coverage is subject to a deductible and uncertainty.
- Key operating exposures include commodity input prices, variable interest rates, cybersecurity, and the continuing pandemic. A 100-basis-point increase in rates on variable-rate borrowings outstanding at quarter-end would increase annualized interest expense by an estimated $213.
Important facts for investors to verify
- Whether Ingredient Solutions’ higher specialty-product margins and Distillery Products’ whiskey volume and pricing trends persist.
- The timing and amount of any insurance recovery for the ransomware-related interruption, and whether further disruption occurs.
- Developments in the securities and derivative lawsuits and any private claims related to the chemical release.
- Capital spending, aged-whiskey inventory and working-capital needs, and the company’s use of revolving credit as investment and growth plans continue.
- Effects of COVID-19 on customer demand, production, supply availability, and liquidity after the filing date.