MGP Ingredients, Inc. — Q1 2024 Form 10-Q
Reporting period: Quarter ended March 31, 2024. MGP produces distilled and branded spirits and food ingredients, reported in Distilling Solutions, Branded Spirits, and Ingredient Solutions. Amounts below are in millions of dollars unless stated otherwise; financial statements are unaudited.
Financial results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Sales | $170.6 | $201.0 | Down 15% |
| Gross profit / margin | $62.8 / 36.8% | $69.8 / 34.7% | Profit down 10%; margin up 2.1 percentage points |
| Operating income / margin | $28.9 / 17.0% | $41.6 / 20.7% | Down 30% |
| Net income attributable to MGP | $20.6 | $31.1 | Down 34% |
| Basic / diluted EPS | $0.92 / $0.92 | $1.40 / $1.39 | Down from prior year |
| Operating cash flow | $24.6 | $5.0 | Up $19.6 |
Interest expense, net, was $2.0 million versus $1.0 million. The effective tax rate was 23.3%, compared with 23.7%.
Segments and material year-over-year changes
- Distilling Solutions: Sales fell 25% to $84.9 million, mainly as white goods and co-product sales declined following the December 2023 closure of the Atchison distillery. Gross profit rose 3% to $34.1 million and gross margin increased to 40.2% from 29.2%, partly reflecting the closure’s favorable effect on co-product profitability and higher warehouse-service sales. Brown-goods sales were affected by lower price/mix and a temporary Lux Row distillery shutdown for expansion work.
- Branded Spirits: Sales declined 12% to $50.1 million, with lower mid- and value-tier sales partly offset by premium-plus growth, including Penelope. Gross profit decreased 8% to $22.5 million; gross margin improved to 44.9% from 43.2% amid portfolio premiumization.
- Ingredient Solutions: Sales increased 15% to $35.6 million, driven by specialty wheat starch volume. Gross profit fell 49% to $6.2 million and margin declined to 17.4% from 39.5%, reflecting higher input costs, including costs related to the Atchison closure and preparation of waste starch for commercial sale, and costs at the new extrusion facility.
- Consolidated gross margin improved even as gross profit fell, while operating income was pressured by weaker Ingredient Solutions and Branded Spirits gross profit and a $4.1 million increase in the fair value of Penelope contingent consideration, recorded as expense.
Cash, debt, and liquidity
- Cash was $19.5 million at March 31, 2024, versus $18.4 million at December 31, 2023. Operating cash flow of $24.6 million was more than offset by $27.3 million of investing outflows, mainly capital spending, with financing providing $3.8 million.
- Cash capital expenditures were $27.0 million in the quarter. Management expects approximately $85.8 million of capital expenditures for 2024.
- Reported debt, net of unamortized fees, was $300.8 million, up from $287.2 million at year-end. Gross indebtedness before fees was $307.3 million. Debt included $78.0 million drawn on the variable-rate revolver and $201.3 million principal on 1.88% convertible notes due 2041.
- Available borrowing capacity was $322.0 million under the credit agreement and $222.0 million under the Note Purchase Agreement. The company reported compliance with debt covenants. Current assets exceeded current liabilities by $426.7 million, but current assets included $348.9 million of inventory.
- Financing activity included $30.0 million of new long-term borrowings and $16.6 million of principal repayments. The company paid $2.7 million in dividends and dividend equivalents and repurchased $7.0 million of stock, including approximately $5.0 million under its new repurchase program.
Outlook, risks, and notable items
- Management said it expects available cash sources to support operating needs, planned capital expenditures, and potential acquisitions for the next 12 months and beyond. No earnings or revenue guidance was provided in the filing.
- Management identified commodity-cost and interest-rate exposure. A 100-basis-point increase in rates, based on quarter-end variable-rate borrowings, would increase annual interest expense by approximately $0.8 million.
- The company’s $100.0 million share repurchase authorization has no expiration date; approximately $95.0 million remained at quarter-end. A quarterly dividend of $0.12 per share was announced after quarter-end, payable May 31, 2024.
- Penelope acquisition earn-out consideration is measured using significant unobservable assumptions. Its quarter-end liability was $73.3 million, following a $4.1 million fair-value expense in Q1; potential payments range from zero to a maximum of $110.8 million based on sales targets through December 31, 2025.
- The company stated that ordinary-course legal and regulatory proceedings may arise; the filing does not provide a quantified material contingency. Management reported disclosure controls as effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether Ingredient Solutions can recover margins after the sharp increase in input and facility-related costs.
- How the Atchison closure and Lux Row expansion affect Distilling Solutions sales, costs, and production in subsequent quarters.
- Branded Spirits demand by price tier, including whether mid- and value-tier volumes stabilize and Penelope meets earn-out sales targets.
- Execution and funding of the approximately $85.8 million 2024 capital plan alongside dividends, repurchases, and debt obligations.
- Current borrowing availability, variable-rate exposure, and the assumptions underpinning the contingent consideration liability.