MGP Ingredients, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts below are in millions of dollars unless stated otherwise. MGP produces distilled spirits, branded spirits and food ingredients. Penelope Bourbon, acquired June 1, is included in Branded Spirits results from that date.
Financial performance
| Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 |
|---|---|---|---|---|
| Sales | $211.6 | $201.1 | $621.6 | $591.4 |
| Gross profit / margin | $73.4 / 34.7% | $59.0 / 29.4% | $219.6 / 35.3% | $190.1 / 32.1% |
| Operating income / margin | $19.8 / 9.4% | $33.9 / 16.8% | $105.5 / 17.0% | $119.3 / 20.2% |
| Net income | $13.1 | $23.6 | $76.1 | $86.4 |
| Diluted EPS | $0.58 | $1.06 | $3.41 | $3.91 |
| Operating cash flow | Not reported by quarter in the provided cash-flow statement | $48.6 | $72.3 |
Q3 sales grew 5%, while gross profit rose 24%; reported operating income fell 41% and diluted EPS fell 45%. Results included $18.3 million of Atchison closure-related impairment and other charges and a $4.2 million increase in the fair value of Penelope contingent consideration. Higher gross profit across all three segments partly offset those items, along with increased advertising and SG&A. For the first nine months, sales rose 5%, gross profit increased 16%, operating income declined 11%, and diluted EPS declined 13%.
Segment results
- Distilling Solutions: Q3 sales $111.9 million, up 3%; gross profit $33.3 million, up 28%. Higher brown-goods pricing helped, while several other product categories had lower sales volumes.
- Branded Spirits: Q3 sales $66.8 million, up 6%; gross profit $29.0 million, up 16%. Growth in premium-plus and ultra-premium brands, including Penelope, was partly offset by declines in mid- and value-tier sales.
- Ingredient Solutions: Q3 sales $33.0 million, up 11%; gross profit $11.1 million, up 38%. Higher average selling prices drove growth, partly offset by higher input costs and lower volume.
Cash, debt and liquidity
- Cash was $28.0 million at September 30, down from $47.9 million at December 31, 2022. YTD operating cash flow was $48.6 million; investing cash outflow was $146.7 million, including $103.7 million for Penelope and $42.1 million in capital spending. Financing provided $78.2 million, including $105 million of revolving-credit borrowings and $18 million of debt repayments.
- Inventory increased to $342.4 million from $289.7 million at year-end, including $239.1 million of barreled distillate. Inventory growth was a major use of operating cash.
- Debt carrying value, net of unamortized fees, was $316.7 million, versus $230.3 million at year-end. This included $91.0 million outstanding on the variable-rate revolver; $309.0 million remained available under the credit agreement. A further $218.8 million was available under the Note Purchase Agreement.
- Current assets exceeded current liabilities by $413.8 million, substantially reflecting inventory. The company reported compliance with debt covenants at quarter-end.
Outlook, material developments and risks
- Management expects approximately $63 million of capital expenditures in 2023 and stated that cash generation and available borrowing capacity should support operating needs and planned spending. No specific revenue or earnings guidance is provided in the filing.
- The Atchison, Kansas distillery is expected to close in January 2024 to address profitability challenges in grain neutral spirits and industrial alcohol. The company recorded $17.1 million of asset impairment and $1.2 million of severance, contract termination and consulting costs in Q3.
- Penelope was acquired for $104.6 million in cash after purchase-price adjustments. Additional earnout payments range from zero to a maximum $110.8 million, dependent on sales targets through December 31, 2025. The purchase-price allocation remains preliminary; contingent consideration’s recorded fair value was $66.3 million at September 30.
- Interest-rate exposure is material: a 100-basis-point increase applied to quarter-end variable-rate borrowings would increase annual interest expense by an estimated $1.0 million. Commodity input prices, especially grain, and inventory requirements are also risks.
- Subsequent events include a declared $0.12-per-share dividend payable December 1, 2023, and approval of a related-party purchase of St. Louis facilities for $9 million, expected to close in Q1 2024.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting. The filing refers to ordinary-course legal and regulatory proceedings but provides no clear quantified exposure.
Investor verification priorities
- Track the Atchison closure timetable, additional closure costs, and whether the planned action improves Distilling Solutions profitability.
- Review Penelope’s finalized purchase accounting, sales performance, and potential earnout exposure.
- Monitor inventory levels, operating cash conversion, and capital spending against the approximately $63 million 2023 estimate.
- Assess variable-rate borrowing costs, liquidity availability, and compliance with debt covenants.
- Evaluate whether price-led segment growth can persist amid lower volumes in some product lines and higher input costs.