MGP Ingredients, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 1, 2018. The filing reports annual results and unaudited quarterly data, including fourth-quarter results. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context and financial results
MGP produces distilled spirits and industrial alcohol, including premium bourbon and rye whiskey, and specialty and commodity wheat proteins and starches. Its two reportable segments are Distillery Products and Ingredient Solutions.
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $347.4 | $318.3 |
| Gross profit / margin | $76.0 / 21.9% | $65.3 / 20.5% |
| Operating income / margin | $42.9 / 12.3% | $42.0 / 13.2% |
| Net income | $41.8 | $31.2 |
| Diluted EPS | $2.44 | $1.82 |
| Cash from operations | $33.5 | $19.7 |
- Sales rose 9.2%; gross profit increased 16.4%. Operating income grew only 2.2%, as SG&A increased 24.0% to $33.1 million, mainly from investment in the company’s brands and higher incentive compensation.
- Distillery Products sales increased 9.7% to $291.0 million; segment gross profit rose 17.6% to $66.8 million. Premium beverage alcohol sales grew 18.4%, while lower-margin distillers feed and related co-products fell 11.2%.
- Ingredient Solutions sales rose 6.5% to $56.4 million and gross profit increased 8.9% to $9.2 million. Commodity wheat protein sales declined 40.0%.
- Fourth-quarter 2017 net sales were $88.2 million, operating income $10.5 million, net income $12.6 million and diluted EPS $0.74. Fourth-quarter 2016 net sales were $81.1 million, net income $8.3 million and EPS $0.48.
Liquidity, debt and capital allocation
- At year-end, cash was $3.1 million; current assets were $134.7 million and current liabilities $41.6 million, including inventory of $93.1 million. Working capital was $93.2 million.
- Debt outstanding was $25.3 million before $0.7 million of unamortized loan fees ($24.6 million net), versus $36.6 million gross at year-end 2016. The company had $146.7 million available under its $150 million revolving facility and reported compliance with debt covenants.
- Operating cash flow was $33.5 million. Investing activities provided $1.8 million, including $22.8 million of proceeds from the sale of the ICP investment; capital expenditures were $21.1 million. Financing activities used $33.7 million, including $17.4 million of dividends.
- The company paid a special dividend of $0.85 per share in September; total 2017 dividends and equivalents were $1.01 per share. It expected approximately $22 million of 2018 capital expenditures. Warehouse expansion was budgeted at approximately $33.8 million, of which about $26 million had been incurred by year-end.
Material changes, outlook and risks
- In July 2017, MGP sold its 30% interest in Illinois Corn Processing (ICP), receiving $22.8 million in transaction proceeds and recording an $11.4 million pretax gain. This gain and a provisional $3.3 million tax benefit from the Tax Cuts and Jobs Act materially boosted reported 2017 earnings; the effective tax rate was 20.7%, versus 30.3% in 2016. The tax accounting was provisional and could change.
- Management said favorable market trends and execution of its strategy were expected to support strong operating income growth in 2018 and beyond. Its strategy emphasizes premium spirits, higher-value ingredients, branded products, aged whiskey inventories and expanded warehousing. This is management’s outlook, not quantified earnings guidance.
- Key exposures include volatility in grain, wheat flour and natural gas costs; concentrated suppliers; competition and customer demand shifts; and the risk that whiskey aging investments may not match future demand. The company also identified risks from a potential loss of Fibersym patent protection and pending FDA consideration of resistant starch’s dietary-fiber status.
- A 2016 chemical release at the Atchison facility led to an OSHA penalty settled for $75,000. The EPA indicated it intended to seek approximately $250,000 in civil penalties; negotiations were paused pending the EPA criminal investigation. The company had not accrued the proposed civil penalty, considered immaterial, and could not estimate potential private-plaintiff damages.
- Other notable risks include catastrophic damage to facilities or aged whiskey inventories, alcohol-industry regulation and litigation, water availability, and labor disruptions. The filing reports no legal proceedings under Item 3, while separately disclosing the chemical-release contingency.
Most important facts for investors to verify
- How much of 2017 earnings growth was recurring operating performance versus the ICP sale gain and provisional tax benefit.
- Whether premium spirits demand, segment margins and the build-up of aged whiskey inventory translate into future sales and cash returns.
- Final tax accounting under the Tax Act and the outcome, penalties, insurance coverage and potential claims related to the Atchison release.
- Execution and cost of warehouse expansion, planned 2018 capital expenditures, and continued covenant compliance and revolver availability.
- FDA treatment of Fibersym and FiberRite as dietary fiber, and the competitive and pricing effects following Fibersym’s patent expiration.