MGP Ingredients, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unless noted, dollar figures below are in millions; the filing reports amounts in thousands.
Business context
MGP produces distilled spirits, branded spirits and food ingredients. On April 1, 2021, it acquired Luxco, adding its branded-spirits business and creating a separate Branded Spirits segment. Luxco’s results are included from the acquisition date, so reported comparisons with 2020 are not fully like-for-like.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Sales | $174.9 | $92.6 | $283.3 | $191.6 |
| Gross profit | $56.8 | $20.7 | $89.1 | $43.9 |
| Gross margin | 32.5% | 22.4% | 31.5% | 22.9% |
| Operating income | $27.7 | $11.3 | $48.2 | $25.0 |
| Operating margin | 15.8% | 12.2% | 17.0% | 13.1% |
| Net income | $20.1 | $8.5 | $35.5 | $18.3 |
| EPS, basic and diluted | $0.91 | $0.50 | $1.81 | $1.07 |
Q2 sales increased 89.0%; management attributed growth to Luxco and higher sales across Distillery Products and Ingredient Solutions. SG&A rose to $29.2 million from $9.4 million, reflecting Luxco’s expenses and acquisition costs. MGP recorded $6.7 million of merger-related costs in Q2 and $8.6 million year to date. The effective tax rate was 24.2% for Q2 and 23.7% year to date.
Segment highlights, Q2: Distillery Products sales were $90.3 million, up 20.8%, with gross margin of 35.4% versus 21.2%. Branded Spirits contributed $60.4 million in sales and $18.4 million in gross profit, primarily reflecting Luxco. Ingredient Solutions sales rose 39.1% to $24.2 million; gross margin was 26.5%, down from 27.1% as higher input costs partly offset volume growth.
Material comparison item: Branded Spirits gross profit included a $3.1 million purchase-accounting step-up charge; $2.5 million related to acquired finished-goods inventory and flowed through in the quarter, with management saying that portion is not expected to recur. Branded Spirits margin was 30.5%, versus 38.5% in the prior-year quarter.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $47.5 million, versus $6.0 million. It included cash benefits from receivables and accrued items, in part reflecting insurance-related amounts; accounts payable used $13.0 million.
- Investing cash outflow was $170.2 million, including $149.6 million for the Luxco acquisition and $18.3 million of property and equipment additions. Financing provided $138.4 million, principally from revolver borrowing.
- Cash was $37.2 million at June 30, 2021. Current assets exceeded current liabilities by $270.2 million; inventory was $232.3 million.
- Total debt outstanding was $272.2 million before $1.8 million of unamortized loan fees; reported debt net of those fees was $270.4 million. Revolver borrowings were $232.0 million, with $168.0 million available under the facility. The company reported compliance with its debt covenants.
- The board declared a $0.12-per-share quarterly dividend after quarter-end, payable September 3, 2021. The existing share-repurchase authorization had $20.9 million remaining; no program repurchases were made in the first half.
Outlook, risks and unusual items
- MGP forecast approximately $51.5 million of 2021 capital expenditures, excluding insurance recoveries; $31.4 million was allocated to replacing the feed dryer system. No revenue, earnings or EPS guidance was provided in the filing.
- The November 2020 Atchison dryer fire disrupted production. MGP recorded $9.8 million of insurance settlements year to date as a reduction of cost of sales, and disclosed an $11.3 million committed recovery receivable and $11.4 million of legally committed recovery amounts in accrued liabilities. Recovery amounts and timing remain subject to contingencies.
- Management said COVID-19 had not significantly affected operations, supply chain or customer demand as of the filing date, but continued monitoring possible disruptions. Commodity input prices and variable-rate borrowings are market risks; a 100-basis-point increase in rates was estimated to increase annualized interest expense by $2.4 million based on June 30 variable-rate borrowings.
- Pending matters include securities and derivative shareholder litigation; the securities case’s motion to dismiss remained pending. Potential damages were unspecified. The filing also says damages from a 2016 chemical release cannot currently be reasonably estimated.
- Management reported effective disclosure controls, but the June 30 internal-control assessment excluded Luxco while integration was underway. The Luxco purchase-price allocation remained preliminary and could change during the measurement period.
- Subsequent to quarter-end, on July 29, the lender authorized increasing the uncommitted shelf-note capacity from $105 million to $140 million; this is authorization, not reported borrowing.
Key facts for investors to verify
- Separate acquisition-driven growth from underlying performance; Luxco was consolidated only from April 1. The filing also presents unaudited pro forma results assuming the merger occurred January 1, 2020.
- Track post-acquisition leverage, revolver availability, covenant headroom and integration costs, alongside the still-preliminary Luxco valuation.
- Assess durability of segment margins, particularly the impact of input costs and the nonrecurring inventory fair-value step-up.
- Confirm timing and final amounts of insurance recoveries and dryer replacement spending; review litigation developments and any eventual loss estimates.
- Monitor the effect of variable interest rates, inventory requirements and the planned capital program on cash generation and liquidity.