MGP Ingredients Inc: Form 10-Q for the period ended Mar 31, 2024

(Dollar amounts in thousands, unless otherwise noted)

CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS

This Report may contain forward looking statements as well as historical information. All statements, other than statements of historical facts, regarding the prospects of our industry and our prospects, plans, financial position, and strategic plan may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation statements about our sources of cash being adequate; our capital expenditures; our ability to support our liquidity and operating needs through cash generated from operations; and our ability to obtain credit funding. Forward looking statements are usually identified by or are associated with such words as “intend,” “plan,” “believe,” “estimate,” “expect,” “anticipate,” “project,” “forecast,” “hopeful,” “should,” “may,” “will,” “could,” “encouraged,” “opportunities,” “potential,” and similar terminology. These forward-looking statements reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, our performance, our financial results, and our financial condition and are not guarantees of future performance.

All forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially. For information on these risks and uncertainties and other factors that could affect the Company’s business, see the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our Annual Report on Form 10-K for the year ended December 31, 2023, this Report, and our other filings with the Securities and Exchange Commission (the “SEC”). Forward looking statements in this Report are made as of the date of this Report, and we undertake no obligation to update any forward-looking statements or information made in this Report, except as required by law.

OVERVIEW

MGP is a leading producer of branded and distilled spirits as well as food ingredient solutions. Distilled spirits include premium bourbon, rye, and other whiskeys (“brown goods”) and GNS, including vodka and gin (“white goods and other co-products”). Our distilled spirits are either sold directly or indirectly to manufacturers of other branded spirits. We have a portfolio of our own high quality branded spirits, which we produce through our distilleries and bottling facilities and sell to distributors. Our branded spirits products account for a range of price points from value products through premium plus brands. Our protein and starch food ingredients serve a host of functional, nutritional, and sensory benefits for a wide range of food products to serve the consumer packaged goods industry. Our ingredients products are sold directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this Report, as well as our audited consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - General,” set forth in our Annual Report on Form 10-K for the year ended December 31, 2023.

RESULTS OF OPERATIONS

Consolidated Results

The table below details the consolidated results for the quarters ended March 31, 2024 and 2023:

(a) Percentage points (“pp”).

Sales - Sales for the quarter ended March 31, 2024 were $170,563, a decrease of 15 percent compared to the year-ago quarter, which was the result of decreased sales in the Distilling Solutions and Branded Spirits segments, partially offset by increased sales in the Ingredient Solutions segment. Within the Distilling Solutions segment, sales were down 25 percent, primarily due to decreased sales of white goods and other co-products in connection with the December 2023 closure of our distillery located in Atchison, Kansas (the “Atchison Distillery”). Within the Branded Spirits segment, sales were down 12 percent, primarily due to decreased sales of brands in the mid and value price tiers. Within the Ingredient Solutions segment, sales were up 15 percent, primarily due to increased sales of specialty wheat starches (see “Segment Results”).

Gross profit - Gross profit for the quarter ended March 31, 2024 was $62,795, a decrease of 10 percent compared to the year-ago quarter. The decrease was driven by a decrease in gross profit in the Ingredient Solutions and Branded Spirits segments, partially offset by an increase in gross profit in the Distilling Solutions segment. Within the Ingredient Solutions segment, gross profit decreased by $6,023, or 49 percent. Within the Branded Spirits segment, gross profit decreased $2,061, or 8 percent. Within the Distilling Solutions segment, gross profit increased by $1,055, or 3 percent (see “Segment Results”).

Advertising and promotion expenses - Advertising and promotion expenses for the quarter ended March 31, 2024 were $8,683, an increase of 12 percent compared to the year-ago quarter, primarily driven by increased advertising and promotion investment in the Branded Spirits segment, specifically in the premium plus price tier.

SG&A expenses - SG&A expenses for the quarter ended March 31, 2024 were $20,979, a slight increase of 2 percent compared to the year-ago quarter.

Operating income - Operating income for the quarter ended March 31, 2024 decreased to $28,917 from $41,559 for the quarter ended March 31, 2023, primarily due to the decrease in gross profit in the Ingredient Solutions segment, the change in fair value of the contingent consideration of $4,100 related to the acquisition of Penelope, and the decrease in gross profit in the Branded Spirits segment. These decreases were partially offset by an increase in gross profit in the Distilling Solutions segment.

(a) See “Segment Results.”

(b) Percentage points (“pp”).

Income tax expense - Income tax expense for the quarter ended March 31, 2024 was $6,262, for an effective tax rate of 23.3 percent. Income tax expense for the quarter ended March 31, 2023 was $9,655, for an effective tax rate of 23.7 percent. The decrease in income tax expense, quarter versus quarter, was due to lower income before income taxes. The decrease in effective tax rate, quarter versus quarter, was primarily due to larger tax credits than in the prior year quarter.

Earnings per common share (“EPS”) - Basic EPS was $0.92 for the quarter ended March 31, 2024, compared to $1.40 for the quarter ended March 31, 2023. The change in basic EPS, quarter versus quarter, was primarily due to a decrease in operating income. Diluted EPS was $0.92 for the quarter ended March 31, 2024, compared to $1.39 for the quarter ended March 31, 2023. The change in diluted EPS, quarter versus quarter, was primarily due to the same change as basic EPS as well as the impact of dilutive shares outstanding related to the conversion feature of the Convertible Senior Notes.

(a) Net of tax based on the effective tax rate for the base year (2023).

(b) Percentage points (“pp”).

SEGMENT RESULTS

Distilling Solutions

The following tables show selected financial information for the Distilling Solutions segment for the quarters ended March 31, 2024 and 2023.

(a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars.

(b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars.

(c) Net Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. The product is then divided by prior period sales dollars.

(d) Percentage points (“pp”).

Total sales of the Distilling Solutions segment for the quarter ended March 31, 2024 decreased by $28,371, or 25 percent, compared to the prior year quarter. The decrease in sales of the Distilling Solutions segment is primarily related to the decrease in sales volume of white goods and other co-products, which was primarily due to the closure of the Atchison Distillery during December 2023. Additionally, the decrease in sales of brown goods was primarily driven by decreased Net Price/Mix (as defined in table above), and the temporary shut-down of the Lux Row Distillery in Bardstown, Kentucky during the quarter to complete the distillation expansion. These decreases were partially offset by increased sales volume of brown goods and increased sales of warehouse services.

Gross profit increased quarter versus quarter by $1,055, or 3 percent. Gross margin for the quarter ended March 31, 2024 increased to 40.2 percent from 29.2 percent for the prior year quarter. The increase in gross profit was primarily due to the positive impact the closure of the Atchison Distillery had on white goods and other co-products’ gross profit. The increase was also due to an increase in warehouse service sales.

Branded Spirits

The following tables show selected financial information for the Branded Spirits segment for the quarters ended March 31, 2024 and 2023.

(a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars.

(b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars.

(c) Net Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. The product is then divided by prior period sales dollars.

(d) Percentage points (“pp”).

Total sales of the Branded Spirits segment for the quarter ended March 31, 2024 decreased by $6,737, or 12 percent compared to the prior year quarter. The decrease was driven by sales of brands within the mid and value price tiers, partially offset by an increase in sales of brands within the premium plus price tier. The decreased sales of brands within the mid and value price tiers was due to a decrease in sales volume primarily as a result of the distributor realignment in 2023 which resulted in increased sales volume in these price tiers during the prior year quarter. The increase in sales of brands within the premium plus price tier was primarily due to the acquisition of Penelope, partially offset by a planned decrease in allocated single barrel premium plus offerings.

Gross profit decreased quarter versus quarter by $2,061, or 8 percent. Gross margin for the quarter ended March 31, 2024 increased to 44.9 percent from 43.2 percent for the prior year quarter due primarily to continued portfolio premiumization. The decrease in gross profit was primarily driven by a decrease in sales volume in the mid and value price tiers as well as an increase in costs incurred in connection with the completion of the Lux Row distillery expansion. These decreases were partially offset by increased gross profit due to additional brands acquired as part of the acquisition of Penelope.

Ingredient Solutions

The following tables show selected financial information for the Ingredient Solutions segment for the quarters ended March 31, 2024 and 2023.

(a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars.

(b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars.

(c) Net Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. The product is then divided by prior period sales dollars.

(d) Percentage points (“pp”).

Total sales of the Ingredient Solutions segment for the quarter ended March 31, 2024 increased by $4,661, or 15 percent, compared to the prior year quarter. The increase was primarily driven by higher sales volume of specialty wheat starches. This increase was partially offset by a decrease in sales volume of specialty and commodity wheat proteins and a decrease in average selling price of commodity wheat starches.

Gross profit decreased quarter versus quarter by $6,023, or 49 percent. Gross margin for the quarter ended March 31, 2024 decreased to 17.4 percent from 39.5 percent for the prior year quarter. The decrease in gross profit was primarily driven by higher input costs across all product categories. The increase in input costs is driven primarily by the removal of the intercompany credit for the waste starch slurry by-product since the closure of the Atchison Distillery, as well as other costs incurred to ready the waste starch for commercial sale. Additionally, we incurred incremental costs for the new extrusion manufacturing facility during the quarter.

CASH FLOW, FINANCIAL CONDITION, AND LIQUIDITY

We believe our financial condition continues to be of high quality, as evidenced by our ability to generate adequate cash from operations while having ready access to capital at competitive rates.

Operating cash flow and borrowings through our Credit Agreement, Convertible Senior Notes, and Note Purchase Agreement (see Note 5, Corporate Borrowings) provide the primary sources of cash to fund operating needs and capital expenditures. These same sources of cash are used to fund stockholder dividends and other discretionary uses. Our overall liquidity reflects our strong business results and an effective cash management strategy that takes into account liquidity management, economic factors, and tax considerations. We expect our sources of cash to be adequate to provide for budgeted capital expenditures, potential mergers or acquisitions, and anticipated operating requirements for the next 12 months and beyond.

Cash Flow Summary

Cash increased $1,109 for the quarter ended March 31, 2024, compared to a decrease of $16,161 for the quarter ended March 31, 2023, for a net increase in cash of $17,270, period versus period.

Operating Activities. Cash provided by operating activities for the quarter ended March 31, 2024 was $24,623. The cash provided by operating activities resulted primarily from net income of $20,584, adjustments for non-cash or non-operating charges of $11,603, including depreciation and amortization, the change in fair value of contingent consideration, and share-based compensation, partially offset by cash used in operating assets and liabilities of $7,564. The primary drivers of the changes in operating assets and liabilities were $10,380 use of cash related to accrued expenses and other, which related to the incentive compensation payout during the quarter, and $10,207 use of cash related to a decrease in accounts payable due to timing of payments. These uses of cash were offset by $11,257 of cash provided by a decrease in accounts receivables net, due to the timing of sales and customer payments during the quarter.

Cash provided by operating activities for the quarter ended March 31, 2023 was $5,021. The cash provided by operating activities resulted primarily from net income of $31,032, adjustments for non-cash or non-operating charges of $7,318, including depreciation and amortization, and share-based compensation, partially offset by cash used in operating assets and liabilities of $33,329. The primary drivers of the changes in operating assets and liabilities were $19,227 use of cash related to increased accounts receivables, net, due to timing of sales and customer payments during the quarter, $18,707 use of cash related to an increase in inventories, primarily due to an increase in finished goods inventory and barreled distillate, and $10,208 use of cash related to a decrease in accrued expenses and other, primarily due to the incentive compensation payout during the quarter. These uses of cash were partially offset, primarily by $9,043 cash provided by income taxes payable, and $6,498 cash provided by an increase in accounts payable.

Investing Activities. Cash used in investing activities for the quarter ended March 31, 2024 was $27,266, which primarily resulted from additions to property, plant, and equipment of $27,026 (see “Capital Spending”). Cash used in investing activities for the quarter ended March 31, 2023 was $16,945, which primarily resulted from additions to property, plant, and equipment of $16,237 (see “Capital Spending”).

Capital Spending. We manage capital spending to support our business growth plans. We have incurred $13,134 and $9,824 of capital expenditures and have paid $27,026 and $16,237 for capital expenditures for the quarters ended March 31, 2024 and 2023, respectively. The difference between the amount of capital expenditures incurred and amount paid is due to the change in capital expenditures in accounts payable. We expect approximately $85,800 in capital expenditures in 2024, which includes capital expenditures for facility improvement and expansion, facility sustaining projects, and environmental health and safety projects.

Financing Activities. Cash provided by financing activities for the quarter ended March 31, 2024 was $3,767, due to net proceeds on debt of $13,400 (see “Long-Term and Short-Term Debt”), partially offset by repurchases of Common Stock of $6,961 (see “Treasury Purchases” and “Share Repurchase”), and payments of dividends and dividend equivalents of $2,672 (see “Dividends and Dividend Equivalents”).

Cash used in financing activities for the quarter ended March 31, 2023 was $4,270, due to payments of dividends and dividend equivalents of $2,669 (see “Dividends and Dividend Equivalents”), repurchase of Common Stock of $801 (see “Treasury Purchases”), and net payments on debt of $800 (see “Long-Term and Short-Term Debt”).

Treasury Purchases. 73,230 RSUs vested and converted to shares of Common Stock for employees during the quarter ended March 31, 2024, of which we withheld and purchased for treasury 22,885 shares valued at $1,961 to cover payment of associated withholding taxes.

22,592 RSUs vested and converted to shares of Common Stock for employees during the quarter ended March 31, 2023, of which we withheld and purchased for treasury 8,437 shares valued at $801 to cover payment of associated withholding taxes.

Share Repurchase. On February 29, 2024, we announced that our Board of Directors approved a $100,000 share repurchase program. Under the share repurchase program, we can repurchase Common Stock from time to time for cash in open market purchases, privately negotiated transactions, or by other means, in accordance with applicable securities laws and other legal requirements. The repurchase program has no expiration date and may be modified, suspended, or discontinued at any time by the Company without prior notice. During the quarter ended March 31, 2024, we repurchased 59,084 shares of Common Stock for approximately $5,000, resulting in approximately $95,000 remaining under the share repurchase program.

Dividends and Dividend Equivalents

Dividend and Dividend Equivalent Information (per Share and Unit)

(a) Dividend equivalent payments on unvested participating securities.

(b) Includes estimated forfeitures.

(c) Per share amount.

On May 2, 2024, we announced a dividend payable to stockholders of record of our Common Stock, resulting in dividend equivalents payable to RSU holders, of $0.12 per share and per RSU. The dividend and dividend equivalent are payable on May 31, 2024 to stockholders of record and RSU holders on May 17, 2024.

Long-Term and Short-Term Debt. We maintain debt levels we consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment and financing plans (including brand development, merger and acquisition, and share repurchase activities), and the overall cost of capital. Total debt was $300,823 (net of unamortized loan fees of $6,427) at March 31, 2024, and $287,249 (net of unamortized loan fees of $6,601) at December 31, 2023.

Financial Condition and Liquidity. Our principal uses of cash in the ordinary course of business are for input costs used in our production processes, salaries, capital expenditures, and investments supporting our strategic plan, such as the aging of barreled distillate and potential mergers and acquisitions. Generally, during periods when commodities prices are rising, our operations require increased use of cash to support inventory levels.

Our principal sources of cash are product sales and borrowing on our various debt agreements. Under our debt agreements, we must meet certain financial covenants and restrictions, and at March 31, 2024, we met those covenants and restrictions.

At March 31, 2024, our current assets exceeded our current liabilities by $426,661, largely due to our inventories, at cost, of $348,934. At March 31, 2024, our cash balance was $19,497 and we have used our various debt agreements for liquidity purposes, with $322,000 available under our Credit Agreement for additional borrowings and $222,000 available under the Note Purchase Agreement (see Note 5, Corporate Borrowings). We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We regularly assess our cash needs and the available sources to fund these needs. We utilize short-term and long-term debt to fund discretionary items, such as capital investments, dividend payments, and potential mergers and acquisitions. Subject to market conditions, we could also fund future mergers and acquisitions through the issuance of additional shares of Common Stock. In addition, we have strong operating results such that we believe financial institutions should provide sufficient credit funding to meet short-term financing requirements, if needed.

We are exposed to commodity price and interest rate market risks. We monitor and manage these exposures as part of our overall risk management program. Our risk management program focuses on the unpredictability of financial markets with the goal to reduce the potentially adverse effects that the volatility of these markets may have on our operating results and financial condition.

Commodity Costs. Certain commodities we use in our production process, or input costs, expose us to market price risk due to volatility in the prices for those commodities. Through our grain supply contracts for our Lawrenceburg facility, our wheat flour supply contract for our Atchison facility, and our natural gas contracts for both facilities, we purchase grain, wheat flour, and natural gas, respectively, for delivery from one to 24 months into the future at negotiated prices. We have determined that the firm commitments to purchase grain, wheat flour, and natural gas under the terms of our supply contracts meet the normal purchases and sales exception as defined under Accounting Standards Codification 815, Derivatives and Hedging, because the quantities involved are for amounts to be consumed within the normal expected production process.

Interest Rate Exposures. Our various debt agreements (see Note 5, Corporate Borrowings) expose us to market risks arising from adverse changes in interest rates. Established procedures and internal processes govern the management of this market risk.

Increases in market interest rates would cause interest expense under our variable interest rate debt to increase and earnings before income taxes to decrease. The change in interest expense and earnings before income taxes would be dependent upon the weighted average outstanding borrowings under variable interest rate debt during the reporting period following an increase in market interest rates. Based on weighted average outstanding variable-rate borrowings at March 31, 2024, a 100 basis point increase over the current rates actually in effect at such date would increase our interest expense on an annual basis by $780. Based on weighted average outstanding fixed-rate borrowings at March 31, 2024, a 100 basis point increase in market rates would result in a decrease in the fair value of our outstanding fixed-rate debt of $18,826, and a 100 basis point decrease in market rates would result in an increase in the fair value of our outstanding fixed-rate debt of $11,336.

Evaluation of Disclosure Controls and Procedures. As of March 31, 2024, our Chief Executive Officer and Chief Financial Officer have each reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (as amended, the “Exchange Act”)). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have each concluded that our current disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control. There were no changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Risk factors are described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023.