Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q 
(Mark One) 
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019  
or
 [  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________________ to _________________________________
 
Commission File Number:  0-17196
https://cdn.kscope.io/4c1b5b8b0d5a77cb63daa9f3f2006190-mgplogo4ca04.jpg 
MGP INGREDIENTS, INC.
(Exact name of registrant as specified in its charter) 
KANSAS
45-4082531
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
100 Commercial Street, Atchison, Kansas
66002
(Address of principal executive offices)
(Zip Code)
 
(913) 367-1480
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [X] Yes [  ] No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X ] Yes [  ] No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an "emerging growth company."  See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
[X] Large accelerated filer                                                         [ ] Accelerated filer
[  ]  Non-accelerated filer (Do not check if smaller reporting company   [ ] Smaller Reporting Company
[ ] Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ]Yes [X] No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common
MGPI
NASDAQ
 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 
17,014,882 shares of Common Stock, no par value as of April 25, 2019



INDEX
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

METHOD OF PRESENTATION

Throughout this Report, when we refer to "the Company," "MGP," "we," "us," "our," and words of similar import, we are referring to the combined business of MGP Ingredients, Inc. and its consolidated subsidiaries, except to the extent that the context otherwise indicates. In this document, for any references to Note 1 through Note 10, refer to the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1.
 
All amounts in this report, except for share, par values, bushels, gallons, pounds, mmbtu, proof gallons, per share, per bushel, per gallon, per proof gallon and percentage amounts, are shown in thousands unless otherwise noted.


2


PART I. FINANCIAL INFORMATION 

ITEM 1. FINANCIAL STATEMENTS

MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
 
 
Quarter Ended March 31,
 
 
2019
 
2018
Sales
 
$
89,096

 
$
87,956

Cost of sales
 
72,436

 
69,005

Gross profit
 
16,660

 
18,951

Selling, general and administrative expenses
 
8,147

 
8,562

Operating income
 
8,513

 
10,389

Interest expense, net
 
(252
)
 
(207
)
Income before income taxes
 
8,261

 
10,182

Income tax expense (benefit) (Note 4)
 
(1,459
)
 
1,255

Net income
 
$
9,720

 
$
8,927

 
 
 
 
 
Income attributable to participating securities
 
66

 
175

Net income attributable to common shareholders and used in earnings per share calculation (Note 5)
 
$
9,654

 
$
8,752

 
 
 
 
 
Share information:
 
 
 
 
Basic and diluted weighted average common shares
 
16,967,631

 
16,843,255

 
 
 
 
 
Basic and diluted earnings per common share
 
$
0.57

 
$
0.52

 


























See accompanying notes to unaudited condensed consolidated financial statements

3



MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)

 
Quarter Ended March 31,
 
2019
 
2018
Net income
$
9,720

 
$
8,927

Other comprehensive income (loss), net of tax:
 
 
 
Change in Company-sponsored post-employment benefit plan
14

 
(13
)
Comprehensive income
$
9,734

 
$
8,914













































See accompanying notes to unaudited condensed consolidated financial statements

4



       MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
 
 
March 31,
2019
 
December 31,
2018
Current Assets
 
 
 
 
Cash and cash equivalents
 
$

 
$
5,025

Receivables (less allowance for doubtful accounts at March 31, 2019, and December 31, 2018 - $24)
 
43,885

 
38,797

Inventory
 
111,330

 
108,769

Prepaid expenses
 
2,263

 
1,320

Refundable income taxes
 
2,361

 
712

Total current assets
 
159,839

 
154,623

 
 
 
 
 
Property, plant, and equipment
 
297,420

 
295,893

Less accumulated depreciation and amortization
 
(177,478
)
 
(175,105
)
Property, plant, and equipment, net
 
119,942

 
120,788

Operating lease right-of-use asset, net
 
6,686

 

Other assets
 
3,633

 
2,481

Total assets
 
$
290,100

 
$
277,892

 
 
 
 
 
Current Liabilities
 
 

 
 

Current maturities of long-term debt
 
$
390

 
$
386

Accounts payable
 
19,398

 
25,363

Accrued expenses
 
10,629

 
11,714

Total current liabilities
 
30,417

 
37,463

 
 
 
 
 
Long-term debt, less current maturities
 
20,946

 
21,040

Credit agreement - revolver
 
21,641

 
10,588

Operating lease liability
 
4,631

 

Deferred credits
 
1,482

 
1,565

Accrued retirement, health, and life insurance benefits
 
2,526

 
2,595

Other noncurrent liabilities
 
1,516

 
1,523

Deferred income taxes
 
1,822

 
1,677

Total liabilities
 
84,981

 
76,451

 
 
 
 
 
Commitments and Contingencies (Note 7)
 


 


Stockholders’ Equity
 
 

 
 

Capital stock
 
 

 
 

Preferred, 5% non-cumulative; $10 par value; authorized 1,000 shares; issued and outstanding 437 shares
 
4

 
4

Common stock
 
 

 
 

No par value; authorized 40,000,000 shares; issued 18,115,965 shares at March 31, 2019, and December 31, 2018, and 17,014,882 and 16,856,414 shares outstanding at March 31, 2019, and  December 31, 2018, respectively
 
6,715

 
6,715

Additional paid-in capital
 
12,636

 
15,375

Retained earnings
 
206,851

 
198,914

Accumulated other comprehensive loss
 
(81
)
 
(164
)
Treasury stock, at cost
 
 

 
 

Shares of 1,101,083 at March 31, 2019, and 1,259,551 at December 31, 2018
 
(21,006
)
 
(19,403
)
Total stockholders’ equity
 
205,119

 
201,441

Total liabilities and stockholders’ equity
 
$
290,100

 
$
277,892


See accompanying notes to unaudited condensed consolidated financial statements

5



MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
 
Quarter Ended March 31,
 
 
2019
 
2018
Cash Flows from Operating Activities
 
 
 
 
Net income
 
$
9,720

 
$
8,927

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
2,810

 
2,929

Gain on sale of assets
 
(138
)
 

Share-based compensation
 
1,125

 
1,191

Deferred income taxes, including change in valuation allowance
 
145

 
279

Changes in operating assets and liabilities:
 
 

 
 

Receivables, net
 
(5,088
)
 
(185
)
Inventory
 
(2,561
)
 
(5,727
)
Prepaid expenses
 
(943
)
 
(1,005
)
Refundable income taxes
 
(1,649
)
 
1,048

Accounts payable
 
(3,976
)
 
(2,238
)
Accrued expenses
 
(3,140
)
 
(4,009
)
Deferred credits
 
(83
)
 
(217
)
Accrued retirement health, and life insurance benefits
 
(11
)
 
(114
)
Net cash provided by (used in) operating activities
 
(3,789
)
 
879

Cash Flows from Investing Activities
 
 

 
 

Additions to property, plant, and equipment
 
(3,741
)
 
(6,978
)
Deferred compensation plan investments
 
(1,166
)
 

Other
 

 
(62
)
Net cash used in investing activities
 
(4,907
)
 
(7,040
)
Cash Flows from Financing Activities
 
 

 
 

Payment of dividends and dividend equivalents
 
(1,714
)
 
(1,375
)
Purchase of treasury stock for tax withholding on equity-based compensation
 
(5,467
)
 
(2,073
)
Principal payments on long-term debt
 
(95
)
 
(93
)
Proceeds from credit agreement - revolver
 
11,025

 
7,741

Other
 
(78
)
 

Net cash provided by financing activities
 
3,671

 
4,200

Decrease in cash and cash equivalents
 
(5,025
)
 
(1,961
)
Cash and cash equivalents, beginning of period
 
5,025

 
3,084

Cash and cash equivalents, end of period
 
$

 
$
1,123











See accompanying notes to unaudited condensed consolidated financial statements

6



MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands)

 
 
Capital
Stock
Preferred
 
Issued Common
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
Balance, December 31, 2018
 
$
4

 
$
6,715

 
$
15,375

 
$
198,914

 
$
(164
)
 
$
(19,403
)
 
$
201,441

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
9,720

 

 

 
9,720

Other comprehensive income
 

 

 

 

 
14

 

 
14

Dividends and dividend equivalents of $.10 per common share and per restricted stock unit, net of estimated forfeitures
 

 

 

 
(1,714
)
 

 

 
(1,714
)
Share-based compensation
 

 

 
1,031

 

 

 

 
1,031

Stock shares awarded, forfeited, or vested
 

 

 
(3,770
)
 

 

 
3,864

 
94

Purchase of treasury stock for tax withholding on share-based compensation
 

 

 

 

 

 
(5,467
)
 
(5,467
)
Adjustment related to Accounting Standards Update 2018-02 adoption
 

 

 

 
(69
)
 
69

 

 

Balance, March 31, 2019
 
$
4

 
$
6,715

 
$
12,636

 
$
206,851

 
$
(81
)
 
$
(21,006
)
 
$
205,119

 


 
 
Capital
Stock
Preferred
 
Issued Common
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
Balance, December 31, 2017
 
$
4

 
$
6,715

 
$
13,912

 
$
167,129

 
$
(311
)
 
$
(18,719
)
 
$
168,730

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
8,927

 

 

 
8,927

Other comprehensive loss
 

 

 

 

 
(13
)
 

 
(13
)
Dividends and dividend equivalents of $.08 per common share and per restricted stock unit, net of estimated forfeitures
 

 

 

 
(1,374
)
 

 

 
(1,374
)
Share-based compensation
 

 

 
1,052

 

 

 

 
1,052

Stock shares awarded, forfeited, or vested
 

 

 
(981
)
 

 

 
1,120

 
139

Purchase of treasury stock for tax withholding on share-based compensation
 

 

 

 

 

 
(2,073
)
 
(2,073
)
Balance, March 31, 2018
 
$
4

 
$
6,715

 
$
13,983

 
$
174,682

 
$
(324
)
 
$
(19,672
)
 
$
175,388





See accompanying notes to unaudited condensed consolidated financial statements

7



MGP INGREDIENTS, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise noted)

Note 1.  Accounting Policies and Basis of Presentation

The Company. MGP Ingredients, Inc. ("Company") is a Kansas corporation headquartered in Atchison, Kansas and is a leading producer and supplier of premium distilled spirits and specialty wheat protein and starch food ingredients. Distilled spirits include premium bourbon and rye whiskeys and grain neutral spirits, including vodka and gin. MGP is also a top producer of high quality industrial alcohol for use in both food and non-food applications. The Company’s protein and starch food ingredients provide a host of functional, nutritional, and sensory benefits for a wide range of food products to serve the packaged goods industry. The Company's distillery products are derived from corn and other grains (including rye, barley, wheat, barley malt, and milo), and its ingredient products are derived from wheat flour.  The majority of the Company's sales are made directly or through distributors to manufacturers and processors of finished packaged goods or to bakeries.

Basis of Presentation and Principles of Consolidation. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements as of and for the quarter ended March 31, 2019, should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission ("SEC").  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal and recurring adjustments) necessary to fairly present the results for interim periods in accordance with United States ("U.S.") generally accepted accounting principles (“GAAP”).  Pursuant to the rules and regulations of the SEC, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted.

Use of Estimates.  The financial reporting policies of the Company conform to GAAP.  The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  The application of certain of these policies places demands on management’s judgment, with financial reporting results relying on estimation about the effects of matters that are inherently uncertain.  For all of these policies, management cautions that future events rarely develop as forecast, and estimates routinely require adjustment and may require material adjustment.

Inventory.  Inventory includes finished goods, raw materials in the form of agricultural commodities used in the production process and certain maintenance and repair items.  Bourbon and whiskeys are normally aged in barrels for several years, following industry practice; all barreled bourbon and whiskey is classified as a current asset. The Company includes warehousing, insurance, and other carrying charges applicable to barreled whiskey in inventory costs.

Inventories are stated at lower of cost or net realizable value on the first-in, first-out, or FIFO, method.  Inventory valuations are impacted by constantly changing prices paid for key materials, primarily corn. Inventory consists of the following:
 
 
March 31,
2019
 
December 31,
2018
Finished goods
 
$
16,681

 
$
17,296

Barreled distillate (bourbons and whiskeys)
 
79,461

 
76,374

Raw materials
 
4,736

 
4,906

Work in process
 
1,508

 
1,550

Maintenance materials
 
7,623

 
7,541

Other
 
1,321

 
1,102

Total
 
$
111,330

 
$
108,769



8



Revenue Recognition. Revenue is recognized when control of the promised goods or services, through performance obligations by the Company, is transferred to the customer in an amount that reflects the consideration it expects to be entitled to in exchange for the performance obligations. The term between invoicing and when payment is due is not significant and the period between when the entity transfers the promised good or service to the customer and when the customer pays for that good or service is one year or less.

Excise taxes that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer are excluded from revenue. Revenue is recognized for the sale of products at the point in time finished products are delivered to the customer in accordance with shipping terms. This is a faithful depiction of the satisfaction of the performance obligation because, at that point control passes to the customer, the customer has legal title and the risk and rewards of ownership have transferred, and the customer has present obligation to pay.

The Company’s distillery products segment routinely enters into bill and hold arrangements, whereby the Company produces and sells unaged distillate to customers, and the product is subsequently barreled at the customer’s request and warehoused at a Company location for an extended period of time in accordance with directions received from the Company’s customers. Even though the unaged distillate remains in the Company's possession, a sale is recognized at the point in time when the customer obtains control of the product. Control is transferred to the customer in bill and hold transactions when: customer acceptance specifications have been met, legal title has transferred, the customer has a present obligation to pay for the product, the risk and rewards of ownership have transferred to the customer, and all the following additional bill and hold criteria have been met: the customer has requested the product be warehoused, the product has been identified as separately belonging to the customer, the product is currently ready for physical transfer to the customer, and the Company does not have the ability to use the product or direct it to another customer.

Warehouse services revenue is recognized over the time that warehouse services are rendered and as they are rendered. This is a faithful depiction of the satisfaction of the performance obligation because control of the aging products has already passed to the customer and there are no additional performance activities required by the Company, except as requested by the customer. The performance of the service activities, as requested, is invoiced as satisfied and revenue is concurrently recognized.

Income Taxes. The Company accounts for income taxes using an asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. A valuation allowance is recognized if it is "more likely than not" that at least some portion of the deferred tax asset will not be realized.

Earnings Per Share ("EPS").  Basic and diluted EPS are computed using the two-class method, which is an earnings allocation formula that determines net income per share for each class of Common Stock and participating security according to dividends declared and participation rights in undistributed earnings.  Per share amounts are computed by dividing net income attributable to common shareholders by the weighted average shares outstanding during the period.

Fair Value of Financial Instruments.  The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy is broken down into three levels based upon the observability of inputs. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability.
 
The Company’s short term financial instruments include cash and cash equivalents, accounts receivable and accounts payable.  The carrying value of the short term financial instruments approximates the fair value due to their short term nature. These financial instruments have no stated maturities or the financial instruments have short term maturities that approximate market.
 

9



The fair value of the Company’s debt is estimated based on current market interest rates for debt with similar maturities and credit quality. The fair value of the Company’s debt was $42,204 and $32,018 at March 31, 2019, and December 31, 2018, respectively. The financial statement carrying value of total debt was $42,977 (including unamortized loan fees) and $32,014 (including unamortized loan fees) at March 31, 2019, and December 31, 2018, respectively.  These fair values are considered Level 2 under the fair value hierarchy (also see Note 9).

Recently Adopted Accounting Standard Updates. The Company adopted Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), as of January 1, 2019, using the modified retrospective approach (Note 6). The modified retrospective approach provides a method for recording existing leases at adoption and using the effective date as the date of application (the "effective date method"). Under the effective date method, the comparative period reporting is unchanged. Comparative reporting periods are presented in accordance with Topic 840 (previous lease guidance), while periods subsequent to the effective date are presented in accordance with Topic 842. In addition, the Company elected the available practical expedients and implemented internal controls to enable the preparation of financial information on adoption. Adoption of the new standard resulted in the recording by the Company of right-of-use assets and lease liabilities in its Condensed Consolidated Balance Sheet of $6,598 and $6,952, respectively, as of January 1, 2019. The standard did not impact the Company's consolidated net earnings and also had no impact on its cash flows.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act"). This ASU was effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2018, and was adopted by the Company during the quarter ended March 31, 2019, and had an immaterial effect on its financial results and disclosures.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which more closely aligns the accounting for employee and nonemployee share-based payments. This ASU was effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2018, and was adopted by the Company during the quarter ended March 31, 2019, and had no impact on its financial results and disclosures.
    

10



Note 2.  Revenue

Disaggregation of Revenue.

The following table presents the Company's revenues by segment and major products and services:
 
SALES
 
Quarter Ended March 31,
 
2019
 
2018
Distillery Products
 
 
 
Brown Goods
$
24,827

 
$
28,201

White Goods
17,182

 
15,870

Premium beverage alcohol
42,009

 
44,071

Industrial alcohol
20,443

 
19,344

Food grade alcohol
62,452

 
63,415

Fuel grade alcohol
1,501

 
1,863

Distillers feed and related co-products
7,095

 
6,224

Warehouse services
3,529

 
2,875

Total distillery products
$
74,577

 
$
74,377

 
 
 
 
Ingredient Solutions
 
 
 
Specialty wheat starches
$
6,881

 
$
6,801

Specialty wheat proteins
4,442

 
4,736

Commodity wheat starches
2,262

 
2,042

Commodity wheat proteins
934

 

Total ingredient solutions
$
14,519

 
$
13,579

 
 
 
 
Total sales
$
89,096

 
$
87,956


The Company generates revenues from the distillery products segment by the sale of products and by providing warehouse services related to the storage and aging of customer products. The Company generates revenues from the ingredient solutions segment by the sale of products. Contracts with customers in both segments include a single performance obligation (either the sale of products or the provision of warehouse services).

Note 3.  Corporate Borrowings

Indebtedness Outstanding.
Description(a)
March 31,
2019
 
December 31,
2018
Credit Agreement - Revolver, 3.87% (variable rate) due 2022
$
22,025

 
$
11,000

Secured Promissory Note, 3.71% (fixed rate) due 2022
1,499

 
1,594

Prudential Note Purchase Agreement, 3.53% (fixed rate) due 2027
20,000

 
20,000

Total indebtedness outstanding
43,524

 
32,594

Less unamortized loan fees(b)
(547
)
 
(580
)
Total indebtedness outstanding, net
$
42,977

 
$
32,014

Less current maturities of long-term debt
(390
)
 
(386
)
Long-term debt
$
42,587

 
$
31,628


(a) Interest rates are as of March 31, 2019.
(b) Loan fees are being amortized over the life of the Credit Agreement and Note Purchase Agreement.

11




Credit and Note Purchase Agreements. The Company's Credit Agreement with Wells Fargo Bank, National Association, provides for a $150,000 revolving credit facility. The Company may increase the facility from time to time by an aggregate principal amount of up to $25,000 provided certain conditions are satisfied and at the discretion of the lender. The Credit Agreement matures on August 23, 2022. The Credit Agreement includes certain requirements and covenants, which the Company was in compliance with at March 31, 2019. As of March 31, 2019, the Company's total outstanding borrowings under the Credit Agreement were $22,025 leaving $127,975 available.
 
The Company's Note Purchase and Private Shelf Agreement (the “Note Purchase Agreement”) with PGIM, Inc., an affiliate of Prudential Financial, Inc., and certain affiliates of PGIM, Inc. The Note Purchase Agreement provides for the issuance of up to $75,000 of Senior Secured Notes, and the Company issued $20,000 of Senior Secured Notes with a maturity date of August 23, 2027. The Note Purchase Agreement includes certain requirements and covenants, which the Company was in compliance with at March 31, 2019.

Note 4. Income Taxes
The Company's tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the estimated annual effective tax rate is updated and a year-to-date adjustment is made to the provision. The Company's quarterly effective tax rate is subject to significant change due to the effect of discrete items arising in a given quarter. There was an income tax benefit for the quarter ended March 31, 2019, of $1,459, for an effective tax rate of (17.7) percent. The effective tax rate differed from the 21 percent federal statutory rate on pretax income, primarily due to the tax impact of vested share-based awards, the tax impact of state and federal tax credits, partially offset by state taxes and certain compensation being subject to the compensation deduction limitations applicable for public companies.

Income tax expense for the quarter ended March 31, 2018, was $1,255, for an effective tax rate for the quarter of 12.3 percent. The effective tax rate differed from the 21 percent federal statutory rate on pretax income, primarily due to the tax impact of vested share-based awards, income tax credits including state income tax credits in Indiana and Kansas, partially offset by state taxes.

Note 5.  EPS

The computations of basic and diluted EPS:
 
 
Quarter Ended March 31,
 
 
2019
 
2018
Operations:
 
 
 
 
Net income(a)
 
$
9,720

 
$
8,927

Less: Income attributable to participating securities(b)
 
66

 
175

Net income attributable to common shareholders
 
$
9,654

 
$
8,752

 
 
 
 
 
Share information:
 
 
 
 
Basic and diluted weighted average common shares(c)
 
16,967,631

 
16,843,255

 
 
 
 
 
Basic and diluted EPS
 
$
0.57

 
$
0.52


(a)
Net income attributable to all shareholders.
(b)
Participating securities included 112,865 and 338,375 unvested restricted stock units ("RSUs"), at March 31, 2019 and 2018, respectively.
(c)
Under the two-class method, basic and diluted weighted average common shares at March 31, 2019 and 2018, exclude unvested participating securities.

Note 6.  Leases

The Company has operating leases for railcars, computer equipment, an office space, and certain equipment. The Company has no finance leases. Leases with terms of twelve months or less are not recorded on the Company's Condensed Consolidated Balance Sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. For leases beginning in 2019 and later, lease components are accounted for separately from non-lease components, such as common-area maintenance, based on the relative, observable standalone prices of the components.

12




The Company's leases have remaining lease terms of one year to five years, some of which may include options to extend the lease. Options to renew the Company's leases were not considered when assessing the value of the right-of-use assets because the Company was not reasonably certain that it will assert the options to renew the leases. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

Leases
 
March 31, 2019
 
Assets
 
 
 
Operating
 
$
6,686

 
Total leased assets(a)
 
$
6,686

(b) 
 
 
 
 
Liabilities
 
 
 
Current Operating
 
$
2,434

(c) 
Noncurrent Operating
 
4,631

(d) 
Total operating lease liability(a)
 
$
7,065

 

(a) The Company has no finance lease assets or liabilities.
(b) Recorded in Operating lease right-of-use-asset, net, on the Company's Condensed Consolidated Balance Sheet.
(c) Recorded as a component of Accrued expenses on the Company's Condensed Consolidated Balance Sheet.
(d) Recorded in Operating lease liability on the Company's Condensed Consolidated Balance Sheet.

Lease Costs
 
Quarter Ended March 31,
 
2019
Operating lease costs
 
$
589

Short-term lease costs
 
303

Sublease income
 
(24
)
Net lease costs(a)(b)
 
$
868


(a) The Company has no finance lease costs.
(b) Recorded as a component of Operating income on the Company's Condensed Consolidated Statement of Income.

Other Information(a)
 
Quarter Ended March 31,
 
2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
 
$
565

 
 
 
Right-of-use assets obtained in exchange for lease obligations
 
 
Operating leases
 
$
576

 
 
 
Weighted average discount rate
 
 
Operating leases
 
5.88
%
 
 
 
Weighted average remaining lease term
 
 
Operating leases
 
3.3 years


(a) The Company has no finance leases.


13



Maturity of Operating Lease Liabilities(a)
 
March 31, 2019
2019
 
$
2,168

2020
 
2,278

2021
 
1,684

2022
 
1,079

2023
 
496

After 2023
 
57

Total lease payments
 
$
7,762

Less interest
 
(697
)
Total operating lease liability
 
$
7,065


(a) The Company has no finance leases.


At December 31, 2018, under ASC 840, Leases, the Company’s lease disclosures were:
Operating Leases. The Company leases railcars and other assets under various operating leases. For railcar leases, which are the majority, the Company is generally required to pay all service costs associated with the railcars. Rental payments include minimum rentals, and rental expenses with terms longer than one month were $2,081, $2,372, and $2,561 for 2018, 2017, and 2016, respectively. Annual commitments under non-cancelable operating leases totaled $6,897 for the five years ending December 31, 2023, and an additional $55 thereafter.

The Company's future minimum rental payments were $2,224, $1,858, $1,357, $977, and $481 for the years ending December 31, 2019, 2020, 2021, 2022, and 2023, respectively.

Maturity of Operating Lease Liabilities
 
December 31, 2018
2019
 
$
2,224

2020
 
1,858

2021
 
1,357

2022
 
977

2023
 
481

After 2023
 
55

Total lease commitments
 
$
6,952


Note 7.  Commitments and Contingencies

There are various legal and regulatory proceedings involving the Company and its subsidiaries.  The Company accrues estimated costs for a contingency when management believes that a loss is probable and can be reasonably estimated.

A chemical release occurred at the Company's Atchison facility on October 21, 2016, which resulted in emissions venting into the air ("the Atchison Chemical Release"). The Company reported the event to the Environmental Protection Agency ("EPA"), the Occupational Safety and Health Administration ("OSHA"), and to Kansas and local authorities on that date, and has cooperated fully to investigate and ensure that all appropriate response actions were taken.

OSHA completed its investigation of the Atchison Chemical Release and, on April 19, 2017, issued its penalty to the Company in the amount of $138. Management settled this assessment with OSHA in full for $75, which was paid on May 16, 2017. A portion, or all, of the penalty amount may be covered by insurance.

The EPA informed the Company on August 1, 2017, that it intends to seek civil penalties of approximately $250 in connection with its investigation of the Atchison Chemical Release. Since the Company expects a negotiated resolution of the EPA civil case and EPA-proposed civil penalties are not material to the quarter ended March 31, 2019, the Company has not included an accrual in its results. A portion, or all, of the settled penalty amount may be covered by insurance.


14



On March 6, 2019, federal charges for alleged violations of the Clean Air Act related to the Atchison Chemical Release were filed against a company named Midwest Grain Products, Inc., along with another unaffiliated company. The indicted entity Midwest Grain Products, Inc., has not existed since 2002, but it was part of the corporate lineage of the Company. The Company or one of its subsidiaries may face these charges in the future. If convicted, the statutory maximum penalty could result in a fine of up to $1,500. If so charged, the Company intends to offer a vigorous defense against the charges. Due to the inherent uncertainty of the matter and because the potential penalties are not material to the quarter ended March 31, 2019, the Company has not included an accrual in its results.

Private plaintiffs have also initiated, and additional private plaintiffs may initiate, legal proceedings for damages resulting from the Atchison Chemical Release, but the Company is currently unable to reasonably estimate the amount of any such damages that might result. The Company's insurance is expected to provide coverage of any damages to private plaintiffs, subject to a deductible of $250, but certain regulatory fines or penalties may not be covered and there can be no assurance to the amount or timing of possible insurance recoveries if ultimately claimed by the Company.
 
Note 8.  Employee and Non-Employee Benefit Plans

Equity-Based Compensation Plans.  The Company’s equity-based compensation plans provide for the awarding of stock options, stock appreciation rights, shares of restricted stock ("Restricted Stock"), and RSUs for senior executives and salaried employees, as well as non-employee directors. The Company has two active equity-based compensation plans: the Employee Equity Incentive Plan of 2014 (the "2014 Plan") and the Non-Employee Director Equity Incentive Plan (the "Directors' Plan").

As of March 31, 2019, 344,562 RSUs had been granted of the 1,500,000 shares approved under the 2014 Plan, and 71,523 shares had been granted of the 300,000 shares approved under the Directors' Plan. As of March 31, 2019, there were 118,795 unvested RSUs under the Company’s long-term incentive plans and 112,865 were participating securities (Note 5).

Deferred Compensation Plan. The Company established an unfunded Executive Deferred Compensation Plan ("EDC Plan") effective as of June 30, 2018, with a purpose to attract and retain highly-compensated key employees by providing participants with an opportunity to defer receipt of a portion of their salary, bonus, and other specified compensation. The Company's obligations under this plan will change in conjunction with the performance of the participants' investments, along with contributions to and withdrawals from the plan. Realized and unrealized gains (losses) on deferred compensation plan investments were insignificant and were included as a component of operating income in the Company’s consolidated statement of income at March 31, 2019, because the Company’s deferred compensation investments consist of mutual funds that are considered trading securities.

Plan investments are classified as Level 1 in the fair value hierarchy since the investments trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis. From plan inception through December 31, 2018, participants were able to direct the deferral of a portion of their 2018 Short-term incentive plan ("STI Plan") amounts that were paid during first quarter 2019. At the time of payment, the amounts elected for deferral were deposited into the EDC Plan by the Company and allocated by participants among Company-determined investment options.

For 2019, participants are able to direct the deferral of a portion of their 2019 base salary and a portion of their estimated, accrued 2019 STI Plan amount. Base salary amounts elected for deferral are deposited into the EDC Plan by the Company on a weekly basis and allocated by participants among Company-determined investment options. At March 31, 2019, the EDC Plan investments were $1,193 and were recorded in Other assets on the Company's Condensed Consolidated Balance Sheet. The EDC Plan liability for base pay and the 2019 STI Plan was $1,421. The current portion of the liability is comprised of estimated amounts to be paid to participants within one year. At March 31, 2019, $179 of the EDC Plan liability was considered current and was included in Accrued expenses in the Company's Condensed Consolidated Balance Sheet, and $1,242 was considered non-current and was included in Other noncurrent liabilities on the Company's Condensed Consolidated Balance Sheet.

Note 9.  Operating Segments

At March 31, 2019 and 2018, the Company had two segments: distillery products and ingredient solutions. The distillery products segment consists of food grade alcohol and distillery co-products, such as distillers feed (commonly called dried distillers grain in the industry) and fuel grade alcohol. The distillery products segment also includes warehouse services, including barrel put away, storage, retrieval, and blending services. Ingredient solutions consists of specialty starches and proteins and commodity starches and proteins.


15



Operating profit for each segment is based on sales less identifiable operating expenses.  Non-direct SG&A, interest expense, other special charges, and other general miscellaneous expenses are excluded from segment operations and are classified as Corporate.  Receivables, inventories, and equipment have been identified with the segments to which they relate.  All other assets are considered as Corporate.
 
 
Quarter Ended March 31,
 
 
2019
 
2018
Sales to Customers
 
 
 
 
Distillery products
 
$
74,577

 
$
74,377

Ingredient solutions
 
14,519

 
13,579

Total
 
89,096

 
87,956

Gross Profit
 
 
 
 
Distillery products
 
15,239

 
15,870

Ingredient solutions
 
1,421

 
3,081

Total
 
16,660

 
18,951

Depreciation and Amortization
 
 
 
 
Distillery products
 
2,169

 
2,241

Ingredient solutions
 
372

 
434

Corporate
 
269

 
254

Total
 
2,810

 
2,929

Income (loss) before Income Taxes 
 
 
 
 
Distillery products
 
13,435

 
14,177

Ingredient solutions
 
775

 
2,424

Corporate
 
(5,949
)
 
(6,419
)
Total
 
$
8,261

 
$
10,182


The following table allocates assets to each segment as of:
 
 
March 31, 2019
 
December 31, 2018
Identifiable Assets
 
 
 
 
Distillery products
 
$
235,306

 
$
223,890

Ingredient solutions
 
36,003

 
35,147

Corporate
 
18,791

 
18,855

Total
 
$
290,100

 
$
277,892


Note 10.  Subsequent Events

On April 29, 2019, the Board of Directors declared a quarterly dividend payable to stockholders of record as of May 15, 2019, of the Company's Common Stock, and a dividend equivalent payable to holders of certain RSUs as of May 15, 2019, of $.10 per share and per unit, payable on May 31, 2019.


16


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands, unless otherwise noted)

CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS

This Report on Form 10-Q contains 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.  In addition, forward looking statements are usually identified by or are associated with such words as "intend," "plan," "believe," "estimate," "expect," "anticipate," "hopeful," "should," "may," "will," "could," "encouraged," "opportunities," "potential," and/or the negatives or variations of these terms or similar terminology.  Forward looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from those expressed or implied in the forward looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward looking statements is included in the section titled "Risk Factors" (Item 1A) of our Annual Report on Form 10-K for the year ended December 31, 2018. Forward looking statements are made as of the date of this report, and we undertake no obligation to update or revise publicly any forward looking statements, whether because of new information, future events or otherwise.

OVERVIEW

MGP is a leading producer and supplier of premium distilled spirits and specialty wheat protein and starch food ingredients. Distilled spirits include premium bourbon and rye whiskeys and grain neutral spirits ("GNS"), including vodka and gin. We are also a top producer of high quality industrial alcohol for use in both food and non-food applications. Our protein and starch food ingredients provide a host of functional, nutritional and sensory benefits for a wide range of food products to serve the packaged goods industry. We have two reportable segments: our distillery products segment and our ingredient solutions segment.

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 Form 10-Q, 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, 2018.


17



RESULTS OF OPERATIONS

Consolidated results
 
March 31,
 
 
 
2019
 
2018
 
2019 v. 2018
 
Sales
$
89,096

 
$
87,956

 
1.3
 %
 
Cost of sales
72,436

 
69,005

 
5.0

 
Gross profit
16,660

 
18,951

 
(12.1
)
 
   Gross margin %
18.7
 %
 
21.5
%
 
(2.8
)
pp(a)
Selling, general, and administrative ("SG&A") expenses
8,147

 
8,562

 
(4.8
)
 
Operating income
8,513

 
10,389

 
(18.1
)
 
   Operating margin %
9.6
 %
 
11.8
%
 
(2.2
)
pp
Interest expense, net
(252
)
 
(207
)
 
21.7

 
Income before income taxes
8,261

 
10,182

 
(18.9
)
 
Income tax expense (benefit)
(1,459
)
 
1,255

 
(216.3
)
 
   Effective tax expense rate %
(17.7
)%
 
12.3
%
 
(30.0
)
pp
Net income
$
9,720

 
$
8,927

 
8.9
 %
 
   Net income margin %
10.9
 %
 
10.1
%
 
0.8

pp

(a) Percentage points ("pp").

Sales - Sales for quarter ended March 31, 2019, were $89,096, an increase of 1.3 percent compared to the year-ago quarter, which was the result of increased sales in both segments. Within the distillery products segment, sales were up 0.3 percent, primarily due to increases in the sales of white goods within premium beverage alcohol, industrial alcohol, distillers feed and related co-products, and warehouse services, partially offset by a decline in the sales of brown goods within premium beverage alcohol. Within the ingredient solutions segment, sales were up 6.9 percent. Sales of commodity wheat proteins and starches and specialty wheat starches were higher, partially offset by a decrease in sales of specialty wheat proteins (see Segment Results).

Gross profit - Gross profit for quarter ended March 31, 2019, was $16,660, a decrease of 12.1 percent compared to the year-ago quarter. The decrease was driven by a decrease in gross profit in both the ingredient solutions and distillery products segments. In the ingredient solutions segment, gross profit decreased by $1,660, or 53.9 percent. In the distillery products segment, gross profit declined by $631, or 4.0 percent (see Segment Results).

SG&A expenses - SG&A expenses for quarter ended March 31, 2019, were $8,147, a decrease of 4.8 percent compared to the year-ago quarter. The decrease in SG&A was primarily due to lower professional fees, partially offset by an increase in personnel costs.

Operating income - Operating income for quarter ended March 31, 2019, decreased to $8,513 from $10,389 for quarter ended March 31, 2018, primarily due to a decrease in gross profit in both our ingredient solutions and distillery products segments, partially offset by a decrease in the above-described SG&A expenses.
Operating income, quarter versus quarter
 
Operating Income
 
 Change
 
Operating income for quarter ended March 31, 2018
 
$
10,389

 
 
 
Decrease in gross profit - ingredient solutions segment(a)
 
(1,660
)
 
(16.0
)
pp(b)
Decrease in gross profit - distillery products segment(a)
 
(631
)
 
(6.1
)
pp
Decrease in SG&A expenses
 
415

 
4.0

pp
Operating income for quarter ended March 31, 2019
 
$
8,513

 
(18.1
)%
 

(a) See segment discussion.
(b) Percentage points ("pp").

18




Income tax expense - There was an income tax benefit for quarter ended March 31, 2019, of $1,459, for an effective tax rate of (17.7) percent. Income tax expense for the quarter ended March 31, 2018, was $1,255, for an effective tax rate of 12.3 percent. The significant decrease in income tax expense, quarter versus quarter, was primarily due to the tax impact of vested share-based awards.

Earnings per share ("EPS") - EPS was $0.57 for quarter ended March 31, 2019, compared to $0.52 for quarter ended March 31, 2018. EPS increased, quarter versus quarter, primarily due to the tax impact of vested share-based awards, partially offset by a decrease in operations (see above).
Change in basic and diluted EPS, quarter versus quarter
 
Basic and Diluted EPS
 
Change
 
Basic and diluted EPS for quarter ended March 31, 2018
 
$
0.52

 
 
 
Decrease in operations(a)
 
(0.10
)
 
(19.2
)
pp(b)
Tax: Change in share-based compensation
 
0.11

 
21.1

pp
Tax: Change in effective tax rate (excluding above tax item)
 
0.04

 
7.7

pp
Basic and diluted EPS for quarter ended March 31, 2019
 
$
0.57

 
9.6
 %
 

(a)
Item is net of tax based on the effective tax rate for the base year (2018).
(b)
Percentage points ("pp").

















19



SEGMENT RESULTS

Distillery Products
 
 
DISTILLERY PRODUCTS SALES
 
 
 
Quarter Ended March 31,
 
Quarter versus Quarter Sales Change Increase / (Decrease)
 
 
 
2019
 
2018
 
$ Change
 
% Change
 
 
 
Brown Goods
$
24,827

 
$
28,201

 
$
(3,374
)
 
(12.0
)%
 
 
White Goods
17,182

 
15,870

 
1,312

 
8.3

 
 
Premium beverage alcohol
42,009

 
44,071

 
(2,062
)
 
(4.7
)
 
 
Industrial alcohol
20,443

 
19,344

 
1,099

 
5.7

 
 
Food grade alcohol
62,452

 
63,415

 
(963
)
 
(1.5
)
 
 
Fuel grade alcohol
1,501

 
1,863

 
(362
)
 
(19.4
)
 
 
Distillers feed and related co-products
7,095

 
6,224

 
871

 
14.0

 
 
Warehouse services
3,529

 
2,875

 
654

 
22.7

 
 
Total distillery products
$
74,577

 
$
74,377

 
$
200

 
0.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in Quarter-versus-Quarter Sales Attributed to:
 
 
 
 
 
Total
 
Volume
 
Net Price/Mix
 
 
 
 
Premium beverage alcohol
(4.7)%
 
0.5%
 
(5.2)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Financial Information
 
 
 
Quarter Ended March 31,
 
Quarter versus Quarter Increase / (Decrease)
 
 
 
2019
 
2018
 
$ Change
 
% Change
 
 
 
Gross profit
$
15,239

 
$
15,870

 
$
(631
)
 
(4.0
)%
 
 
Gross margin %
20.4
%
 
21.3
%
 


 
(0.9
)
pp(a)

(a) Percentage points ("pp").

Total sales of distillery products increased $200, or 0.3 percent. Sales of white goods within premium beverage alcohol, industrial alcohol, distillers feed and related co-products, and warehouse services increased, while sales of brown goods within premium beverage alcohol and fuel grade alcohol decreased compared to the prior-year quarter. The increase in sales of white goods was driven by higher sales volume and a higher average selling price. The decline in sales of brown goods was driven by lower sales volume, partially offset by a higher average selling price. Industrial alcohol sales growth was driven by higher sales volume and a higher average selling price. The increase in sales of distillers feed and related co-products was primarily due to a higher average selling price and higher sales volume reflecting improved market conditions during the quarter.
Gross profit decreased quarter versus quarter by $631, or 4.0 percent. Gross margin for the quarter ended March 31, 2019, decreased to 20.4 percent from 21.3 percent for the prior-year quarter. The decline in gross profit was primarily due to lower gross margins and profits on white goods within premium beverage alcohol, lower sales volume of brown goods within premium beverage alcohol, and lower gross margins and profits on industrial alcohol, partially offset by higher gross profits on distillers feed and related co-products and warehouse services. Both white goods within premium beverage alcohol and industrial alcohol saw slightly-improved pricing, but not enough to cover increased input costs, as oversupply in the market prevented fully passing through changes in input costs.



20



Ingredient Solutions
 
 
INGREDIENT SOLUTIONS SALES
 
 
Quarter Ended March 31,
 
Quarter versus Quarter Sales Change Increase / (Decrease)
 
 
 
2019
 
2018
 
$ Change
 
% Change
 
 
 
Specialty wheat starches
$
6,881

 
$
6,801

 
$
80

 
1.2
 %
 
 
Specialty wheat proteins
4,442

 
4,736

 
(294
)
 
(6.2
)
 
 
Commodity wheat starches
2,262

 
2,042

 
220

 
10.8

 
 
Commodity wheat proteins
934

 

 
934

 
N/A

 
 
Total ingredient solutions
$
14,519

 
$
13,579

 
$
940

 
6.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in Quarter-versus-Quarter Sales Attributed to:
 
 
 
 
 
Total
 
Volume
 
Net Price/Mix
 
 
 
 
Total ingredient solutions
6.9%
 
9.2%
 
(2.3)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Financial Information
 
 
 
Quarter Ended March 31,
 
Quarter versus Quarter Increase / (Decrease)
 
 
 
2019
 
2018
 
$ Change
 
% Change
 
 
 
Gross profit
1,421

 
$
3,081

 
$
(1,660
)
 
(53.9
)%
 
 
Gross margin %
9.8
%
 
22.7
%
 


 
(12.9
)
pp(a)

(a) Percentage points ("pp").

Total ingredient solutions sales for quarter ended March 31, 2019, increased by $940, or 6.9 percent, compared to the prior-year quarter. Quarter versus quarter, this increase was driven by higher sales of commodity wheat proteins and starches and specialty wheat starches, partially offset by a decrease in sales of specialty wheat proteins, primarily due to the loss of a large customer.
Gross profit decreased quarter versus quarter by $1,660, or 53.9 percent. Gross margin for the quarter ended March 31, 2019, decreased to 9.8 percent from 22.7 percent for the prior-year quarter. The decrease in gross profit was primarily due to increased production costs resulting from higher input costs and flood-related costs, and the loss of the above-mentioned specialty wheat protein customer, partially offset by increased sales of commodity wheat proteins.









21



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 debt through our Credit Agreement and Note Purchase Agreement (Note 3) provide the primary sources of cash to fund operating needs and capital expenditures. These same sources of cash are used to fund shareholder dividends and other discretionary uses. Going forward, we expect to use cash to implement our invest to grow strategy, particularly in the distillery products segment. 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, including our Credit Agreement and Note Purchase Agreement, to be adequate to provide for budgeted capital expenditures and anticipated operating requirements for the foreseeable future.

Cash Flow Summary


 
Quarter Ended March 31,
 
 
 
 
2019
 
2018
 
Changes, Quarter vs. Quarter
Cash provided by (used in) operating activities:
 
 
 
.
 
 
Net income, after giving effect to adjustments to reconcile net income to net cash provided by operating activities
 
$
13,662

 
$
13,326

 
$
336

Receivables, net
 
(5,088
)
 
(185
)
 
(4,903
)
Inventory
 
(2,561
)
 
(5,727
)
 
3,166

Refundable income taxes
 
(1,649
)
 
1,048

 
(2,697
)
Accounts payable
 
(3,976
)
 
(2,238
)
 
(1,738
)
Other, net
 
(4,177
)
 
(5,345
)
 
1,168

Total
 
$
(3,789
)
 
$
879

 
$
(4,668
)
Cash used in investing activities:
 
 
 
 
 
 
Additions to property, plant, and equipment
 
(3,741
)
 
(6,978
)
 
3,237

Deferred compensation plan investments
 
(1,166
)
 

 
(1,166
)
Other
 

 
(62
)
 
62

Total
 
$
(4,907
)
 
$
(7,040
)
 
$
2,133

Cash provided by financing activities:
 
 
 
 
 
 
Purchase of treasury stock for tax withholding on equity-based compensation
 
(5,467
)
 
(2,073
)
 
(3,394
)
Proceeds on debt, net
 
10,930

 
7,648

 
3,282

Other
 
(1,792
)
 
(1,375
)
 
(417
)
Total
 
$
3,671

 
$
4,200

 
$
(529
)
Decrease in cash and cash equivalents
 
$
(5,025
)
 
$
(1,961
)
 
$
(3,064
)

Changes, quarter versus quarter. Cash decreased $5,025 in quarter ended March 31, 2019, compared to a decrease of $1,961 in quarter ended March 31, 2018, for a net decrease in cash of $3,064, quarter versus quarter.

Cash used in operating activities for quarter ended March 31, 2019, was $3,789, compared to cash provided by operating activities of $879 for quarter ended March 31, 2018, resulting in lower cash from operations quarter versus quarter, of $4,668. Decreased cash flows were primarily due to an increase in receivables, net, of $4,903, reflecting increased sales in quarter ended March 31, 2019, compared to quarter ended March 31, 2018, and the timing of customer payments, an increase in refundable income taxes of $2,697, due to the tax effect of discrete items, and a decline in accounts payable of $1,738, related to the timing of cash disbursements compared to quarter ended March 31, 2018. Cash flow decreases were partially offset by cash flow increases, primarily related to a decrease in inventory of $3,166, primarily due to a decrease in the build up of finished goods and raw materials inventories.


22



Cash used in investing activities for quarter ended March 31, 2019, was $4,907, compared to cash used in investing activities of $7,040 for quarter ended March 31, 2018, resulting in decreased cash used in investing activities, quarter versus quarter, of $2,133. The change in cash outflows was primarily due to a decrease in additions to property, plant, and equipment of $3,237 (see Capital Spending), partially offset by an increase in the deferred compensation plan balance of $1,166.

Cash provided by financing activities for quarter ended March 31, 2019, was $3,671, compared to cash provided by financing activities of $4,200 for year to date ended March 31, 2018, reflecting a net decrease, quarter versus quarter, in cash provided by financing activities of $529. Net changes in cash flows from financing activities reflected an increase in the purchase of treasury stock for tax withholding on equity-based compensation of $3,394, partially offset by an increase in proceeds on debt, net, of $3,282.

Capital Spending. We manage capital spending to support our business growth plans. Investments in plant, property and equipment were $3,741 and $6,978, respectively, for quarters ended March 31, 2019 and 2018. Adjusted for the change in capital expenditures in accounts payable for quarters ended March 31, 2019 and 2018, of $(1,989) and $(3,169), respectively, total capital expenditures were $1,752 and $3,809, respectively. We expect approximately $23,000 in capital expenditures in 2019 for facility improvement and expansion (including warehouse expansion), facility sustenance projects, and environmental health and safety projects.

As part of our strategic plan to support the growth of the American Whiskey category, we previously announced a $33,800 warehouse expansion project.  Based on the continued strong growth in the American Whiskey category and demand for our products, and as announced in 2018, we expanded the scope of the project and added an incremental investment of approximately $18,000, bringing our total warehouse expansion project investment to approximately $51,800. As of March 31, 2019, we had incurred approximately $45,000 of the total investment. The estimated project completion date is by the end of calendar year 2020.
Treasury Purchases. 233,841 RSUs vested and converted to common shares for employees during quarter ended March 31, 2019, of which we withheld and purchased for treasury 76,996 shares valued at $5,467 to cover payment of associated withholding taxes.
69,363 RSUs vested and converted to common shares for employees during quarter ended March 31, 2018, of which we withheld and purchased for treasury 23,925 shares valued at $2,073 to cover payment of associated withholding taxes.

Share Repurchases. On February 25, 2019, the Board of Directors approved a $25,000 share repurchase authorization commencing February 27, 2019, through February 27, 2022. Under the share repurchase program, we can repurchase stock from time to time for cash in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws. This share repurchase program may be modified, suspended, or terminated by us at any time without prior notice. From the commencement date of the authorization period through the end of the quarter ended March 31, 2019, no shares were repurchased under the program.

Dividends and Dividend Equivalents
Dividend and Dividend Equivalent Information (per Share and Unit)
Declaration date
 
Record date
 
Payment date
 
Declared
 
Paid
 
Dividend payment
 
Dividend equivalent payment(a)(b)
 
Total payment(b)
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
February 25, 2019
 
March 13, 2019
 
March 29, 2019
 
$
0.10

 
$
0.10

 
$
1,701

 
$
13

 
$
1,714

 
 
 
 
 
 
$
0.10

 
$
0.10

 
$
1,701

 
$
13

 
$
1,714

2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
February 21, 2018
 
March 9, 2018
 
March 23, 2018
 
$
0.08

 
$
0.08

 
$
1,348

 
$
27

 
$
1,375

 
 
 
 
 
 
$
0.08

 
$
0.08

 
$
1,348

 
$
27

 
$
1,375


(a) Dividend equivalent payments on unvested participating securities.
(b) Includes estimated forfeitures.

On April 29, 2019, the Board of Directors declared a quarterly dividend payable to stockholders of record as of May 15, 2019, of the Company's Common Stock, and a dividend equivalent payable to holders of certain RSUs as of May 15, 2019, of $.10 per share and per unit, payable on May 31, 2019.


23



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 and share repurchase activities) and the overall cost of capital. Total debt was $42,977 (net of unamortized loan fees of $547) at March 31, 2019, and $32,014 (net of unamortized loan fees of $580) at December 31, 2018.

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. As part of our strategy, as demand grows for American whiskeys, in both the United States and global markets, we are building our inventories of aged premium whiskeys to fully participate in this growth (see "Barreled distillate (bourbons and whiskeys)" in Note 1).  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 Credit Agreement and Note Purchase Agreement.  Under our Credit Agreement and Note Purchase Agreement, we must meet certain financial covenants and restrictions, and at March 31, 2019, we met those covenants and restrictions.
At March 31, 2019, our current assets exceeded our current liabilities by $129,422, largely due to our inventories, at cost, of $111,330. At March 31, 2019, our cash balance was $0 and we have used our Credit Agreement and Note Purchase Agreement for liquidity purposes, with $127,975 remaining for additional borrowings. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We regularly assesses 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 and dividend payments. In addition, we have strong operating results such that financial institutions should provide sufficient credit funding to meet short-term financing requirements, if needed.


24



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results.

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 Atchison and Lawrenceburg facilities, 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 ("ASC") 815,  Derivatives and Hedging, because the quantities involved are for amounts to be consumed within the normal expected production process.

Interest Rate Exposures. Our Credit Agreement and Note Purchase Agreement (Note 3) 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 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 during the reporting period following an increase in market interest rates. Based on weighted average outstanding variable-rate borrowings at March 31, 2019, a 100 basis point increase over the non-default rates actually in effect at such date would increase our interest expense on an annualized basis by $143. Based on weighted average outstanding fixed-rate borrowings at March 31, 2019, a 100 basis point increase in market rates would result in a decrease in the fair value of our outstanding fixed-rate debt of $957, 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 $1,017.

ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures. As of the quarter ended March 31, 2019, 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 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 the Securities and Exchange Commission 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 the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
  
Changes in Internal Controls. On January 1, 2019, we adopted Topic 842 (see Note 6).  We implemented internal controls to ensure we adequately evaluated our contracts for leases and properly assessed the impact of the new accounting standard on our financial statements.  The adoption of the new lease standard had no impact on January 1, 2019, retained earnings. We implemented changes to our business processes related to lease recognition and the control activities within them.  The changes included training within business operations management, ongoing contract review and monitoring, and gathering of information for disclosures.

There were no other changes in the Company’s internal controls over financial reporting during the fiscal quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.




25



PART II – OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

Reference is made to Part I, Item 3, Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2018, and Note 7 to this Report on Form 10-Q for information on certain proceedings to which we are subject.
We are a party to various other legal proceedings in the ordinary course of business, none of which is expected to have a material adverse effect on us. On March 6, 2019, Midwest Grain Products, Inc. was indicted in the U.S. District Court for the District of Kansas for alleged violations of the Clean Air Act related to a chemical release at the Company’s Atchison, Kansas facility on October 21, 2016. The indicted entity, Midwest Grain Products, Inc., has not existed since 2002, but it was part of the corporate lineage of the Company. The Company or one of its subsidiaries may face these charges in the future. If convicted, the statutory maximum penalty could result in a fine of up to $1,500. If so charged, the Company intends to offer a vigorous defense against the charges.

ITEM 1A.    RISK FACTORS

Risk factors are described in "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes thereto during the quarter or year to date ended March 31, 2019.
ITEM 2.      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There was no unregistered sale of equity securities during the quarter ended March 31, 2019.


ISSUER PURCHASES OF EQUITY SECURITIES
 
 
(1) Total
Number of
Shares (or
Units)
Purchased
 
(2) Average
Price Paid
per Share (or
Unit)
 
(3) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
 
(4) Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs
January 1, 2019, through January 31, 2019
 
45,235

(a) 
$
67.32

 

 
 
February 1, 2019, through February 28, 2019
 
31,761

(a) 
$
76.25

 

 
 
March 1, 2019, through March 31, 2019
 
 
 
 
 

 
1,382,411

Total
 
76,996

 
 
 

 
 

(a) Vested RSUs awarded under the 2014 Plan purchased to cover employee withholding taxes.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

None.


26



ITEM 6.   EXHIBITS

Exhibit Number
Description of Exhibit
*31.1
*31.2
*32.1
*32.2
*101
 
 
*Filed herewith
 

27



SIGNATURES

Pursuant to the requirements on the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MGP INGREDIENTS, INC.

Date:
May 1, 2019
By
/s/ Augustus C. Griffin
 
 
 
Augustus C. Griffin, President and Chief Executive Officer
 
 
 
 
Date:
May 1, 2019
By
/s/ Brandon M. Gall
 
 
 
Brandon M. Gall, Vice President, Finance and Chief Financial Officer

28
Exhibit
Exhibit 31.1

CERTIFICATION
I, Augustus C. Griffin, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of MGP Ingredients, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
May 1, 2019
 
 
 
 
 
/s/ Augustus C. Griffin
 
 
 
Augustus C. Griffin, President  and Chief Executive Officer


Exhibit
Exhibit 31.2

CERTIFICATION

I, Brandon M. Gall, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of MGP Ingredients, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
May 1, 2019
 
 
 
 
 
/s/ Brandon M. Gall
 
 
 
Brandon M. Gall, Vice President, Finance and Chief Financial Officer


Exhibit
Exhibit 32.1

CERTIFICATION

OF

PERIODIC REPORT

I, Augustus C. Griffin, President and Chief Executive Officer of MGP Ingredients, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1)  the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:
May 1, 2019
 
 
 
 
 
/s/ Augustus C. Griffin
 
 
 
Augustus C. Griffin
 
 
 
President and Chief Executive Officer

[A signed original of this written statement required by Section 906 has been provided to MGP Ingredients, Inc. and will be retained by MGP Ingredients, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.]


Exhibit
Exhibit 32.2

CERTIFICATION

OF

PERIODIC REPORT

I, Brandon M. Gall, Vice President and Chief Financial Officer of MGP Ingredients, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1)  the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:
May 1, 2019
 
 
 
 
 
/s/ Brandon M. Gall
 
 
 
Brandon M. Gall
 
 
 
Vice President, Finance and Chief Financial Officer

[A signed original of this written statement required by Section 906 has been provided to MGP Ingredients, Inc. and will be retained by MGP Ingredients, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.]