MGP Ingredients, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context
MGP produces distilled spirits, branded spirits and food ingredients. It reports three segments: Distillery Products, Branded Spirits and Ingredient Solutions. Luxco was acquired on April 1, 2021; its results are included from that date, so reported year-to-date comparisons with 2020 are materially affected by the acquisition.
Financial performance
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Sales | $176.6m | $103.0m | $459.9m | $294.6m |
| Gross profit | $57.1m | $23.2m | $146.2m | $67.1m |
| Gross margin | 32.3% | 22.5% | 31.8% | 22.8% |
| Operating income | $32.9m | $13.7m | $81.0m | $38.7m |
| Operating margin | 18.6% | 13.3% | 17.6% | 13.1% |
| Net income | $23.7m | $10.4m | $59.2m | $28.7m |
| Basic and diluted EPS | $1.08 | $0.61 | $2.91 | $1.68 |
Q3 sales rose 71.5% and nine-month sales rose 56.1%; net income increased 128.0% and 106.0%, respectively. Reported growth reflects Luxco, as well as improved results in the legacy businesses. Q3 SG&A rose 154.5% to $24.2m, primarily due to Luxco. Nine-month SG&A increased 129.6%, reflecting Luxco expenses, acquisition costs and higher incentive compensation. The effective tax rate was 24.5% in Q3 and 24.0% for nine months.
For additional context, unaudited pro forma results assuming Luxco had been acquired at the start of 2020 show nine-month 2021 sales of $504.2m and net income of $68.9m, compared with $442.0m and $30.5m in 2020. These figures include transaction-related adjustments and are not a forecast.
Segment performance
- Distillery Products: Q3 sales increased 15.0% to $91.0m; gross profit rose 69.5% to $27.0m, with gross margin increasing to 29.6%. Premium beverage alcohol sales grew, while industrial alcohol and distillers feed/co-products declined.
- Branded Spirits: Q3 sales were $61.6m and gross profit $23.2m, mainly reflecting acquired Luxco brands. Gross margin was 37.7%, down from 56.7% in the prior-year quarter, largely due to a broader product mix versus the pre-acquisition, ultra-premium-heavy mix.
- Ingredient Solutions: Q3 sales increased 12.5% to $24.0m and gross profit increased 17.6% to $6.9m. Nine-month gross margin declined to 25.7% from 26.8%, with higher input costs partly offsetting volume and pricing gains.
Cash flow, debt and liquidity
- Nine-month cash from operations was $70.8m, versus $29.5m in 2020. Investing used $189.2m, including $149.6m for the Luxco acquisition and $37.3m in property and equipment additions. Financing provided $112.9m.
- Cash and cash equivalents were $16.2m at September 30, 2021, down from $21.7m at year-end 2020. Current assets exceeded current liabilities by $265.4m; inventory was $239.3m.
- Gross debt outstanding was $249.4m; reported debt net of unamortized fees was $247.7m. Revolver borrowings were $210.0m at a 1.34% variable rate, with $190.0m available under the facility. The company reported compliance with its debt covenants.
- Capital expenditures were $37.3m year to date. Management expected approximately $51.5m for full-year 2021, including $31.4m for the feed-dryer replacement.
- Dividends paid during the first nine months totaled $0.36 per share. A further $0.12 quarterly dividend was declared for payment on December 3, 2021.
Material changes, outlook and risks
- The Luxco transaction involved $237.5m in cash consideration (less assumed indebtedness) and approximately 5.0m shares valued at about $296.2m. The purchase-price allocation remained preliminary; acquired goodwill was $224.9m and acquired intangible assets were $219.5m.
- Q3 gross profit included a $6.4m insurance recovery related to the November 2020 feed-dryer fire; the nine-month recovery recorded as a reduction of cost of sales was $16.2m. The company was constructing a replacement system. It noted that the amount and timing of further insurance recoveries were uncertain.
- Nine-month acquisition-related costs were $8.9m. A $2.5m purchase-accounting inventory step-up charge was recognized in the first half and is not expected to recur.
- The filing provides no specific sales or EPS guidance. Management said COVID-19 had not significantly affected operations, supply chain or customer demand as of the report date, but continued to monitor potential disruptions. The company also identified commodity-cost and interest-rate exposure; a 100-basis-point rise in rates was estimated to increase annual interest expense by $2.2m based on variable-rate borrowings at quarter-end.
- A securities class action was dismissed with prejudice, and the plaintiff did not appeal. Related derivative matters and claims concerning a 2016 chemical release remained disclosed; potential damages from the chemical release could not be reasonably estimated. The company also disclosed a 2020 ransomware incident, with no evidence of sensitive data being accessed or extracted.
Important facts for investors to verify
- How much of future growth and margin performance reflects underlying demand versus Luxco consolidation, product mix and acquisition-related accounting.
- Whether the anticipated $51.5m of 2021 capital spending, particularly the dryer replacement, is completed on schedule and within budget, and whether further insurance proceeds are received.
- Whether inventory growth, working-capital needs and the $210.0m revolver balance remain manageable while preserving covenant compliance and liquidity.
- How acquired brand performance, input-cost inflation and variable-rate debt affect margins and earnings in subsequent quarters.
- Developments in the remaining derivative and chemical-release matters, and continued integration of Luxco, including the internal-control assessment that excluded the acquired business at this filing date.