MGP Ingredients(MGPI) - 2019 Q4 - Annual Report

Part I Business MGP Ingredients produces distilled spirits and specialty food ingredients through its Distillery Products and Ingredient Solutions segments, relying on key grain suppliers and employing 341 staff as of December 31, 2019 - MGP operates through two reportable segments: Distillery Products and Ingredient Solutions[16] - The Distillery Products segment processes grains into alcohol and co-products, offering warehousing and blending services, and selling branded spirits[17] - The Ingredient Solutions segment produces specialty and commodity wheat starches and proteins for diverse food applications[24][27][29] - Principal raw materials include corn, other grains, and wheat flour, sourced through major supply contracts with Bunge, CGB, and Ardent Mills[38][39] - As of December 31, 2019, MGP employed 341 individuals, with a significant portion covered by collective bargaining agreements at its Atchison and Lawrenceburg facilities[44] Risk Factors The company faces operational, commodity cost, supply chain, competitive, labor, regulatory, and cybersecurity risks, alongside segment-specific challenges like co-product price volatility and shifting consumer preferences - Operational risks include potential interruptions at production facilities and transportation disruptions impacting output and delivery[51][54] - Profitability is highly sensitive to volatile costs of grain, wheat flour, and natural gas, which may not be fully passed on to customers[55][56] - Reliance on a limited number of key raw material suppliers like Bunge, CGB, and Ardent Mills poses significant supply chain concentration risk[57] - The Distillery Products segment faces risks from volatile grain and co-product prices, alongside inherent challenges in forecasting demand for aging whiskey inventory[79][80] - The Ingredient Solutions segment's focus on specialty ingredients increases reliance on fewer customer relationships and vulnerability to shifts in consumer preferences, such as gluten-related trends[85][86] - Common stockholders have limited voting rights, as Preferred Stockholders elect five of the nine directors[87] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[91] Properties MGP owns four primary facilities in Kansas, Indiana, and Kentucky, housing distillery, warehousing, research, and administrative operations, all subject to mortgages - The company operates four primary facilities in Atchison, KS; Lawrenceburg/Greendale, IN; Williamstown, KY; and Sunman, IN, covering grain processing, distilling, warehousing, R&D, and offices[92] - All owned production facilities, the executive office, and the technical innovation center are subject to mortgages[93] Legal Proceedings The company is involved in ordinary course legal proceedings, accruing for probable and estimable losses, with further details in Note 9 of the financial statements - The company is involved in ordinary course legal and regulatory proceedings, with further details in Note 9 of the Consolidated Financial Statements[94] Mine Safety Disclosures This item is not applicable to the company - Not applicable[96] Part II Market for Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities MGP's common stock trades on NASDAQ under MGPI, with 356 record holders as of February 21, 2020; a $25 million share repurchase plan was approved in 2019, though no shares were repurchased under it that year - The company's Common Stock trades on the NASDAQ Global Select Market under the ticker symbol MGPI[98] - A $25 million share repurchase plan was approved on February 25, 2019, but no shares were repurchased under this program in 2019[103] Issuer Purchases of Equity Securities (Q4 2019) | Period | Total Number of Shares Purchased | Average Price Paid per Share ($) | Total Number of Shares Purchased as Part of Publicly Announced Plans | Maximum Dollar Value that May Yet Be Purchased Under the Plans ($) | | :--- | :--- | :--- | :--- | :--- | | October 2019 | — | $ — | — | $25,000,000 | | November 2019 | 456 | $44.89 (a) | — | $25,000,000 | | December 2019 | 11 | $46.09 | — | $25,000,000 | | Total | 467 | | — | | Selected Financial Data This section provides a five-year financial summary, highlighting 2019 sales of $362.7 million, net income of $38.8 million, diluted EPS of $2.27, and total assets of $322.6 million Selected Financial Data (2015-2019) | (In thousands of dollars, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Income Statement Data: | | | | | | | Sales (thousands of dollars) | $362,745 | $376,089 | $347,448 | $318,263 | $327,604 | | Income before income taxes (thousands of dollars) | $45,937 | $48,980 | $52,758 | $44,717 | $38,418 | | Net income (thousands of dollars) | $38,793 | $37,284 | $41,823 | $31,184 | $26,191 | | Basic and Diluted EPS ($) | $2.27 | $2.17 | $2.44 | $1.82 | $1.48 | | Balance Sheet Data: | | | | | | | Total assets (thousands of dollars) | $322,597 | $277,892 | $240,328 | $225,336 | $194,310 | | Long-term debt, less current maturities (thousands of dollars) | $40,659 | $31,628 | $24,182 | $31,642 | $30,115 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, consolidated sales decreased 3.5% to $362.7 million, gross profit fell 8.5% to $76.5 million, yet net income rose 4.0% to $38.8 million and EPS increased to $2.27, primarily due to a lower effective tax rate of 15.6% Results of Operations Consolidated sales decreased 3.5% to $362.7 million in 2019, with gross profit down 8.5% to $76.5 million, but net income increased 4.0% to $38.8 million and EPS rose 4.6% to $2.27 due to a lower effective tax rate of 15.6% Consolidated Results of Operations (2019 vs. 2018) | Metric | 2019 (thousands of dollars) | 2018 (thousands of dollars) | % Change | | :--- | :--- | :--- | :--- | | Sales | $362,745 | $376,089 | (3.5)% | | Gross Profit | $76,532 | $83,599 | (8.5)% | | Gross Margin % | 21.1% | 22.2% | (1.1) pp | | Operating Income | $47,242 | $50,148 | (5.8)% | | Net Income | $38,793 | $37,284 | 4.0% | | Basic and Diluted EPS | $2.27 | $2.17 | 4.6% | | Effective Tax Rate % | 15.6% | 23.9% | (8.3) pp | - The sales decrease was primarily driven by the Distillery Products segment, partially offset by growth in the Ingredient Solutions segment[131] - SG&A expenses decreased 12.4% primarily due to lower incentive compensation expense[135] - The effective tax rate significantly decreased from 23.9% in 2018 to 15.6% in 2019, driven by larger tax benefits from share-based awards and higher tax credits[141] Distillery Products Segment The Distillery Products segment sales decreased 5.4% to $297.2 million in 2019, primarily due to a 14.8% decline in brown goods sales, leading to an 8.1% fall in gross profit to $66.0 million Distillery Products Sales Breakdown (2019 vs. 2018) | Product Line | 2019 Sales (thousands of dollars) | 2018 Sales (thousands of dollars) | % Change | | :--- | :--- | :--- | :--- | | Brown Goods | $107,190 | $125,857 | (14.8)% | | White Goods | $62,862 | $62,574 | 0.5% | | Premium beverage alcohol | $170,052 | $188,431 | (9.8)% | | Industrial alcohol | $79,833 | $80,650 | (1.0)% | | Warehouse services | $14,656 | $12,929 | 13.4% | | Total Distillery Products | $297,233 | $314,055 | (5.4)% | - The decline in gross profit was primarily due to lower brown goods sales volume, with industrial alcohol and white goods also impacted by market oversupply[150] Ingredient Solutions Segment The Ingredient Solutions segment sales increased 5.6% to $65.5 million in 2019, driven by specialty wheat products, but gross profit decreased 10.4% to $10.6 million due to customer loss and higher costs Ingredient Solutions Sales Breakdown (2019 vs. 2018) | Product Line | 2019 Sales (thousands of dollars) | 2018 Sales (thousands of dollars) | % Change | | :--- | :--- | :--- | :--- | | Specialty wheat starches | $30,816 | $28,594 | 7.8% | | Specialty wheat proteins | $22,359 | $21,098 | 6.0% | | Commodity wheat starches | $9,628 | $9,223 | 4.4% | | Commodity wheat proteins | $2,709 | $3,119 | (13.1)% | | Total Ingredient Solutions | $65,512 | $62,034 | 5.6% | - Gross profit decreased by 10.4% and gross margin fell by 2.8 percentage points, primarily due to the loss of a large specialty wheat protein customer and higher input costs[161] Cash Flow, Financial Condition and Liquidity In 2019, operating cash flow decreased to $19.7 million due to increased inventory, investing cash flow was $17.9 million for capital expenditures, total debt rose to $41.1 million, and liquidity remained strong with $149.7 million available Cash Flow Summary (2019 vs. 2018) | (In thousands of dollars) | 2019 (thousands of dollars) | 2018 (thousands of dollars) | | :--- | :--- | :--- | | Cash provided by operating activities | $19,722 | $33,481 | | Cash used in investing activities | ($17,931) | ($31,046) | | Cash used in financing activities | ($3,507) | ($494) | - The decrease in operating cash flow was primarily driven by a $28.2 million use of cash for increased inventory, mainly barreled distillate[171] - Capital expenditures totaled $16.7 million in 2019, with a significant portion allocated to the warehouse expansion project, anticipated for completion by the end of 2020[174][176][177] - Total debt increased to $41.1 million at year-end 2019, up from $32.0 million at year-end 2018[184] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to commodity price risk (grain, natural gas) managed via fixed-price contracts, and interest rate risk from variable-rate debt, with a 100 basis point rate increase having minimal impact on annual interest expense - The company faces market risk from commodity prices, including corn, wheat flour, and natural gas, as well as interest rates[193] - Commodity price risk is managed through firm commitment supply contracts for future delivery at negotiated prices, accounted for under the normal purchases and sales exception[194] - A 100 basis point increase in interest rates would increase annualized interest expense by only $3 thousand based on outstanding variable-rate debt at December 31, 2019[196] Financial Statements and Supplementary Data This section presents management's assertion of effective internal control over financial reporting and KPMG LLP's unqualified opinion, along with full consolidated financial statements for the three years ended December 31, 2019 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[199] - KPMG LLP, the independent auditor, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting[204] Consolidated Statement of Income Highlights (in thousands of dollars) | | 2019 (thousands of dollars) | 2018 (thousands of dollars) | 2017 (thousands of dollars) | | :--- | :--- | :--- | :--- | | Sales (thousands of dollars) | $362,745 | $376,089 | $347,448 | | Gross profit (thousands of dollars) | $76,532 | $83,599 | $76,016 | | Operating income (thousands of dollars) | $47,242 | $50,148 | $42,909 | | Net income (thousands of dollars) | $38,793 | $37,284 | $41,823 | | Basic and diluted EPS ($) | $2.27 | $2.17 | $2.44 | Consolidated Balance Sheet Highlights (in thousands of dollars) | | Dec 31, 2019 (thousands of dollars) | Dec 31, 2018 (thousands of dollars) | | :--- | :--- | :--- | | Total current assets (thousands of dollars) | $184,206 | $154,623 | | Total assets (thousands of dollars) | $322,597 | $277,892 | | Total current liabilities (thousands of dollars) | $39,295 | $37,463 | | Total liabilities (thousands of dollars) | $91,553 | $76,451 | | Total stockholders' equity (thousands of dollars) | $231,044 | $201,441 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[337] Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during 2019 - The CEO and CFO concluded that the company's disclosure controls and procedures are effective for timely and accurate SEC reporting[338] - No material changes occurred in internal control over financial reporting during 2019[340] Other Information The company reports no other information for this item - None[341] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement; the company maintains a code of conduct available on its website - Information for this item is incorporated by reference from the company's Proxy Statement[343] - The company has adopted a code of conduct available on its website, with required disclosures for changes or waivers[344] Executive Compensation Information on executive compensation is incorporated by reference from the company's 2020 Proxy Statement - Information for this item is incorporated by reference from the company's Proxy Statement[345] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the Proxy Statement; as of December 31, 2019, 1,372,127 securities remained available for issuance under approved equity compensation plans - Information on security ownership is incorporated by reference from the company's Proxy Statement[346] Equity Compensation Plan Information as of December 31, 2019 | Plan Category | Number of shares to be issued upon exercise of outstanding options, warrants, and rights | Weighted average exercise price of outstanding options, warrants, and rights ($) | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 116,855 | $65.73 | 1,372,127 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 116,855 | $65.73 | 1,372,127 | Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the company's 2020 Proxy Statement - Information for this item is incorporated by reference from the company's Proxy Statement[348] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the company's 2020 Proxy Statement - Information for this item is incorporated by reference from the company's Proxy Statement[349] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including consolidated statements of income, balance sheets, cash flows, and various governance and material contracts - This section lists all financial statements and exhibits filed with the Form 10-K[352][353] Form 10-K Summary No Form 10-K summary is provided - None[357]