MGP Ingredients, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Amounts are in thousands of dollars except per-share data and percentages. MGP produces distilled spirits and alcohol, specialty wheat proteins and starches, and related products and services.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $76,835 | $80,413 | -4.4% |
| Gross profit / margin | $17,046 / 22.2% | $13,388 / 16.6% | +27.3%; +5.6 pp |
| Operating income / margin | $10,725 / 14.0% | $6,908 / 8.6% | +55.3%; +5.4 pp |
| Equity-method investment earnings | $517 | $1,352 | -61.8% |
| Interest expense, net | $311 | $131 | Higher by $180 |
| Net income / margin | $7,059 / 9.2% | $5,070 / 6.3% | +39.2% |
| Basic and diluted EPS | $0.41 | $0.28 | +$0.13 |
| Operating cash flow | $(1,641) | $6,121 | Declined $7,762 |
Gross-margin improvement reflected a product mix shift toward higher-value products, higher average selling prices, and lower input costs. Lower sales chiefly reflected reduced sales of lower-margin products. Operating expenses were $6,321, versus $6,480 a year earlier. The effective tax rate fell to 35.4% from 37.6%.
Segments: Distillery products sales were $63,842, down 3.1%, while gross profit rose 29.3% to $14,850 and gross margin expanded to 23.3% from 17.4%. Premium beverage alcohol demand and higher-value mix supported profitability; lower-margin alcohol and co-product sales declined, while warehouse revenue increased. Ingredient solutions sales fell 10.7% to $12,993, but gross profit increased 15.5% to $2,196 and gross margin rose to 16.9% from 13.1%. Specialty wheat protein sales grew; specialty starch and commodity product sales declined.
Balance sheet and funding: At March 31, cash was zero; current assets were $100,938, current liabilities $37,171, and working capital $63,767, including $68,383 of inventory. Total debt was reported as $37,444 net of unamortized loan fees. The company reported $53,352 of additional borrowing availability under its credit agreement and was in covenant compliance. The filing separately lists $33,878 of outstanding borrowings under the amended facility; investors should reconcile this figure with balance-sheet debt.
Operating cash use reflected inventory growth of $9,682, alongside reductions in accounts payable and accrued expenses; inventory investment included aging barreled distillate and finished-goods safety stock. Cash used for property and equipment was $3,053. Capital expenditures, including amounts unpaid at quarter-end, were $4,872. The company paid $438 of long-term debt principal and had net credit-agreement borrowings of $4,453.
Material changes and management commentary
- Net sales decreased, but gross profit, operating income, and net income increased substantially as the company continued shifting toward premium spirits and higher-value ingredients.
- ICP equity-method earnings declined, primarily due to lower average selling prices, partly offset by higher volume. MGP received a $3,300 distribution from ICP during the quarter.
- On March 21, MGP amended and restated its credit agreement, adding a $15,000 term loan to the existing $80,000 revolver for a $95,000 total facility. Monthly $250 term-loan installments were to begin May 1. The agreement raised the acquisition aggregate limit to $35,000 and includes a higher 1.25x minimum fixed-charge coverage ratio under specified conditions.
- Management expects approximately $24,000 in 2016 capital expenditures. The approved Lawrenceburg warehouse expansion totals $20,200; $14,040 had been spent by March 31. Management expects operating cash and available credit to support budgeted capital spending and operating needs, and intends to invest in growth, particularly in distillery products.
Risks, contingencies, and unusual items
- A TTB excise-tax audit identified clerical and storage-loss matters. The company believes a penalty is probable but cannot estimate its amount or determine whether additional excise tax and penalties will be owed; management does not expect aggregate liabilities from proceedings to materially affect results or financial position.
- Commodity prices, particularly grain, wheat flour, and natural gas, can affect costs. A 100-basis-point increase in market interest rates would increase annualized interest expense by an estimated $353 based on quarter-end borrowings.
- Open purchase commitments were $66,893 for raw materials and packaging and $2,978 for capital assets. These are commitments, not reported debt.
- MGP reported no material change in its previously disclosed risk factors, no material effect from changes in internal controls, and no material adverse effect expected from other ordinary-course legal proceedings.
- The company’s DMI joint venture was winding down; remaining liquidation proceeds were expected to be distributed on or after October 29, 2016. No DMI earnings were recorded in Q1 2016.
Investor verification priorities
- Reconcile the $37,444 balance-sheet total debt with the $33,878 facility-borrowing figure and confirm facility availability and covenant headroom.
- Assess whether inventory accumulation—especially barreled distillate and finished-goods safety stock—converts into sales and cash, given negative operating cash flow and zero quarter-end cash.
- Track whether premium-product mix and margin gains persist despite lower consolidated and segment sales.
- Monitor the TTB audit outcome, including any excise-tax assessment or penalty, and the timing and amount of DMI liquidation proceeds.
- Verify progress, spending, and expected returns for the $20,200 warehouse expansion and the broader 2016 capital plan.