MGP Ingredients, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts below are in millions of dollars unless noted. MGP produces distilled spirits, branded spirits, and food ingredients. The Luxco acquisition closed April 1, 2021, so year-to-date comparisons include Luxco for only part of the prior-year period.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $195.0 | $174.9 | $390.2 | $283.3 |
| Gross profit / margin | $59.2 / 30.4% | $56.8 / 32.5% | $131.0 / 33.6% | $89.1 / 31.5% |
| Operating income / margin | $35.3 / 18.1% | $27.7 / 15.8% | $85.4 / 21.9% | $48.2 / 17.0% |
| Net income | $25.4 | $20.1 | $62.7 | $35.5 |
| Diluted EPS | $1.15 | $0.91 | $2.84 | $1.81 |
| Operating cash flow | Not presented quarterly | $43.0 | $47.5 |
- Q2: Sales rose 11%; operating income rose 28% and EPS rose 26%. Gross margin fell 2.1 percentage points as Distilling Solutions faced input-cost pressure, while stronger Branded Spirits and Ingredient Solutions results and lower SG&A lifted operating income. SG&A declined primarily because 2021 included one-time Luxco acquisition costs that did not recur.
- Six months: Sales increased 38%, operating income 77%, and EPS 57%. Growth reflected all three segments; Branded Spirits sales rose 87%, mainly from the Luxco brands, and comparisons also benefited from prior-year purchase-accounting inventory costs. Higher share count following merger consideration partly offset earnings growth in EPS.
- Q2 segment trends: Distilling Solutions sales increased 19%, but gross profit declined 7% and margin dropped to 27.8% from 35.4%, largely due to higher input costs. Branded Spirits sales declined 3% while gross profit rose 14%, partly because a prior-year inventory fair-value step-up did not recur. Ingredient Solutions sales rose 21% and gross profit 32%, supported by pricing and specialty product demand.
- Q2 interest expense was $1.5 million versus $1.1 million; other expense was $1.1 million versus $0.1 million. The filing attributes the other-income line’s year-to-date deterioration in part to losses on deferred compensation plan investments.
Cash, debt and liquidity
- At June 30, cash was $37.4 million; current assets were $422.5 million and current liabilities $93.3 million, for reported working capital of $329.3 million. Inventory was $272.9 million, including $184.9 million of barreled distillate.
- Six-month operating cash flow was $43.0 million, down from $47.5 million. Inventory growth used $27.5 million and receivables growth used $13.1 million, partly offset by a $11.4 million increase in accounts payable.
- Capital expenditures paid were $18.1 million in the first half. Management expects approximately $47.2 million of 2022 capital expenditures for facility expansion and improvements, sustaining projects, and environmental, health and safety work.
- Total debt, net of unamortized loan fees, was $232.0 million, compared with $233.4 million at year-end 2021. The balance included $195.1 million carrying value of convertible notes. No revolver borrowings were outstanding; $400 million remained available under the credit agreement and up to $120 million under the note purchase agreement. The company reported compliance with debt covenants.
Outlook, risks and notable items
- The filing provides no earnings or revenue guidance. Management said operating cash flow and available borrowing capacity should support expected operating needs, budgeted capital expenditures, and potential acquisitions for the foreseeable future.
- Management identifies inflation and availability of grain, other raw materials, energy, packaging, labor, and transportation as risks to costs, supply continuity, and margins. The filing cites commodity and energy price pressures associated with the Russia-Ukraine conflict and pandemic-related supply-chain challenges, and cautions that pricing actions may not fully offset cost increases.
- Interest-rate increases could raise variable-rate borrowing costs and affect future refinancing. Management estimated a 100-basis-point increase would have minimal impact on interest expense based on variable-rate borrowings outstanding at quarter-end; a fully drawn revolver would add $4.0 million of annual interest expense for each 1% rate increase.
- Shareholder derivative actions and litigation related to the 2016 Atchison chemical release were dismissed or settled, as applicable, with the release-related proceedings dismissed with prejudice in January 2022. The filing identifies other legal and regulatory proceedings but does not provide a clear quantified exposure.
- The company corrected equal and offsetting gross PP&E and accumulated depreciation balances in the December 2021 balance sheet; it determined the correction was immaterial and net PP&E was unchanged. Goodwill and indefinite-lived intangibles were not considered impaired at June 30, 2022.
- A quarterly dividend of $0.12 per share was declared August 4, 2022, payable September 2, 2022. Disclosure controls were deemed effective, with no material change in internal controls reported for the quarter.
Important facts for investors to verify
- How much of reported growth reflects underlying volume and pricing versus the Luxco acquisition and the prior-year comparison base.
- Whether selling prices can continue to offset input, labor, freight, and energy inflation, particularly in Distilling Solutions.
- Inventory growth, cash conversion, and the funding requirements of the planned $47.2 million 2022 capital program.
- Debt availability and covenant headroom, including the terms and potential dilution or cash implications of the convertible notes.
- Future branded-spirits sales and marketing returns, and the status and potential exposure of disclosed legal and regulatory matters.