SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
|☒||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended December 31, 2019
|☐||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
MGP Ingredients, Inc.
(Exact Name of Registrant as Specified in Its Charter)
|(State or Other Jurisdiction||(I.R.S. Employer|
|of Incorporation or Organization)||Identification No.)|
|100 Commercial Street, Box 130|
|(Address of Principal Executive Offices)||(Zip Code)|
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
|Title of Each Class||Trading Symbol||Name of Each Exchange on Which Registered|
|Common Stock, no par value||MGPI||NASDAQ Global Select Market|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 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 the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||☒ ||Accelerated filer ||☐|
|Non-accelerated filer||☐||Smaller reporting company||☐|
|(do not check if 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 ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as reported by NASDAQ on June 30, 2019, was $857,685,274.
The number of shares of the registrant’s common stock, no par value ("Common Stock") outstanding as of February 21, 2020 was 17,051,538.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference:
(1)Portions of the MGP Ingredients, Inc. Proxy Statement for the Annual Meeting of Stockholders to be held on May 21, 2020 are incorporated by reference into Part III of this report to the extent set forth herein.
The calculation of the aggregate market value of the Common Stock held by non-affiliates is based on the assumption that affiliates include directors and executive officers. Such assumption does not constitute an admission by the Company or any director or executive officer that any director or executive officer is an affiliate of the Company.
ITEM 1. BUSINESS
MGP Ingredients, Inc. was incorporated in 2011 in Kansas, continuing a business originally founded by Cloud L. Cray, Sr. in Atchison, Kansas in 1941. As used herein, the term "MGP," "Company," "we," "our," or "us" refers to MGP Ingredients, Inc. and its subsidiaries unless the context indicates otherwise. In this document, for any references to Note 1 through Note 15 refer to the Notes to Consolidated Financial Statements in Item 8.
We make available through our website (www.mgpingredients.com) under "For Investors," free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, special reports and other information, and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such material with the Securities and Exchange Commission ("SEC").
The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company. The address of the SEC site is http://www.sec.gov.
METHOD OF PRESENTATION
All amounts in this report, except for shares, 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.
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. MGP is 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. Our distillery products are derived from corn and other grains, and our ingredient products are derived from wheat flour. The majority of our distillery and ingredient product sales are made directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries.
INFORMATION ABOUT SEGMENTS
As of December 31, 2019, we had two reportable segments: Distillery Products and Ingredient Solutions.
Distillery Products Segment. We process corn and other grains (including rye, barley, wheat, barley malt, and milo) into food grade alcohol and distillery co-products, such as distillers feed (commonly called dried distillers grain in the industry), fuel grade alcohol, and corn oil. We also provide warehouse services, including barrel put away, barrel storage, and barrel retrieval services, as well as blending services. We have certain contracts with customers to supply distilled products (or "distillate"), as well as certain contracts with customers to provide barreling and warehousing services. Contracts with customers may be monthly, annual, and multi-year with periodic reviews of pricing. Sales of fuel grade alcohol are made on the spot market. Since 2015, our Distillery Products segment includes production and sales of our own branded alcohol products, including sales under the following brands: TILL® American Wheat Vodka, George Remus® Straight Bourbon Whiskey, Remus Repeal Reserve® Straight Bourbon Whiskey, Remus Volstead Reserve Bottled-in-Bond Straight Bourbon Whiskey, Tanner’s Creek® Blended Bourbon Whiskey, Rossville Union® Master Crafted Straight Rye Whiskey, Rossville Union Barrel Proof Straight Rye Whiskey, Rossville Union Barrel Select Straight Rye Whiskey, and Eight & Sand Blended Bourbon Whiskey brands. During 2019, our five largest Distillery Products customers, combined, accounted for 22.6 percent of our consolidated sales.
Food Grade Alcohol - The majority of our distillery capacities are dedicated to the production of high quality, high purity food grade alcohol for beverage and industrial applications.
Food grade alcohol sold for beverage applications, premium beverage alcohol, consists primarily of premium bourbon and rye whiskeys ("brown goods") and GNS, including vodka and gin ("white goods"). Our premium bourbon is created by distilling grains, primarily corn. Our whiskey is made from fermented grain mash, including rye and corn. Our whiskeys are primarily sold as unaged new distillate, which are then aged by our customers and are sold at various proof concentrations. Our GNS is sold in bulk quantities at various proof concentrations. Our gin is created by redistilling GNS together with proprietary formulations of botanicals or botanical oils.
Food grade industrial alcohol is used as an ingredient in foods (e.g., vinegar and food flavorings), personal care products (e.g., hair sprays and hand sanitizers), cleaning solutions, pharmaceuticals, and a variety of other products. We sell food grade industrial alcohol in tank truck or rail car quantities direct to a number of industrial processors.
Fuel grade alcohol - Fuel grade alcohol is sold primarily for blending with gasoline to increase the octane and oxygen levels of the gasoline. As an octane enhancer, fuel grade alcohol can serve as a substitute for lead and petroleum-based octane enhancers. As an oxygenate, fuel grade alcohol has been used in gasoline to meet certain environmental regulations and laws relating to air quality by reducing carbon monoxide, hydrocarbon particulates, and other toxic emissions generated from the burning of gasoline. We produce fuel grade alcohol as a co-product of our food grade alcohol business at our Atchison facility.
Distillers Feed and related Co-Products - The bulk alcohol co-products sales include distillers feed and corn oil. Distillers feed is principally derived from the mash from alcohol processing operations. The mash is dried and sold primarily to processors of animal feeds as a high protein additive. In addition, we produce corn oil as a value added co-product through a corn oil extraction process at our Atchison facility.
Warehouse Services - Customers who purchase barreled distillate may, and in most cases do, also enter into separate warehouse service agreements with us for the storage of product for aging. Services under warehouse agreements include barrel put away, barrel storage, and barrel retrieval, as well as blending services.
Ingredient Solutions Segment. Our Ingredient Solutions segment consists primarily of specialty wheat starches, specialty wheat proteins, commodity wheat starches, and commodity wheat proteins. Contracts with Ingredient Solutions customers are generally price, volume, and term agreements, which are fixed-term contracts, with very few agreements longer than 12 months in duration. During 2019, our five largest Ingredient Solutions customers, combined, accounted for 11.6 percent of our consolidated sales.
Specialty Wheat Starches - Wheat starch is derived from the carbohydrate-bearing portion of wheat flour. We produce a premium wheat starch powder by extracting the starch from the starch slurry, substantially free of all impurities and then dry the starch in spray, flash, or drum dryers.
A substantial portion of our premium wheat starch is altered during processing to produce certain unique specialty wheat starches designed for special applications. We sell our specialty wheat starches on a global basis, primarily to food processors and distributors.
We market our specialty wheat starches under the trademarks Fibersym® Resistant Starch series, FiberRite® RW Resistant Starch, Pregel® Instant Starch series, and Midsol® Cook-up Starch series. They are used primarily for food applications as an ingredient in a variety of food products to affect their nutritional profile, appearance, texture, tenderness, taste, palatability, cooking temperature, stability, viscosity, binding, and freeze-thaw characteristics. Important physical properties contributed by wheat starch include whiteness, clean flavor, viscosity, and texture. For example, our starches are used to improve the taste and texture of cream puffs, éclairs, puddings, pie fillings, breading, and batters; to improve the size, symmetry, and taste of angel food cakes; to alter the viscosity of soups, sauces, and gravies; to improve the freeze-thaw stability and shelf life of fruit pies and other frozen foods; to improve moisture retention in microwavable foods; and to add stability and to improve texture in frostings, mixes, glazes, and sugar coatings.
Our wheat starches, as a whole, generally compete primarily with corn starch, which dominates the United States starch market. Additionally, our wheat starches compete with potato and tapioca. However, the unique characteristics of our specialty wheat starches provide a number of advantages over other starches for certain functionality in baking and pasta end uses.
Specialty Wheat Proteins - We have developed a number of specialty wheat proteins for food applications. Specialty wheat proteins are derived from vital wheat gluten through a variety of proprietary processes which change its molecular structure. Specialty wheat proteins for food applications include the products Arise® and Trutex®.
We produce clean label ingredients under our Arise® line of wheat protein isolates. Along with Arise® 8000, this series includes Arise® 8100 and Arise® 8200. Each of these ingredients is also Non-Genetically Modified Organism ("Non-GMO") Project Verified. We also offer a Non-GMO Project Verified food ingredients portfolio of TruTex® 751, TruTex® 1501, TruTex® 2240, and TruTex® Redishred 65 textured specialty wheat proteins.
Our specialty wheat proteins generally compete with other ingredients and modified proteins having similar characteristics, primarily soy proteins and other wheat proteins, with differentiation being based on factors such as functionality, price, and, in the case of food applications, flavor.
Commodity Wheat Starches - As is the case with value added wheat starches, our commodity wheat starches have both food and non-food applications, but such applications are more limited than those of value added wheat starches and typically sell for a lower price in the marketplace. Commodity wheat starches compete primarily with corn starches, which dominate the marketplace and prices generally track the fluctuations in the corn starch market.
Commodity Wheat Proteins - Commodity wheat protein, or vital wheat gluten, is a free-flowing light tan powder which contains approximately 70 to 80 percent protein. When we process wheat flour to derive starch, we also derive vital wheat gluten. Vital wheat gluten is added by bakeries and food processors to baked goods, such as breads, and to pet foods, cereals, processed meats, and fish and poultry to improve the nutritional content, texture, strength, shape, and volume of the product. The neutral flavor and color of vital wheat gluten also enhances the flavor and color of certain foods. The cohesiveness and elasticity of the gluten enables the dough in wheat and other high protein breads to rise and to support added ingredients, such as whole cracked grains, raisins and fibers. This allows bakers to make an array of different breads by varying the gluten content of the dough. Vital wheat gluten is also added to white breads, hot dog buns, and hamburger buns to improve the strength and cohesiveness of the product. Additionally, our wheat gluten is being used in more vegan and vegetarian food options than in years past. This is a new application and is generating additional volume opportunities in this segment.
While we believe that the overall market environment offers considerable growth opportunities for us in 2020 and beyond, the markets in which our products are sold are competitive. Our products compete against similar products of many large and small companies. In our Distillery Products segment, competition is based primarily on product innovation, product characteristics, functionality, price, service, and quality factors, such as flavor. In our Ingredient Solutions segment, competition is based primarily on product innovation, product characteristics, price, name, color, flavor, or other properties that affect how the ingredient is being used.
PATENTS, TRADEMARKS, AND LICENSES
We are involved in a number of patent-related activities, primarily within our Ingredient Solutions segment. We have filed patent applications to protect a range of inventions made in our research and development efforts, including inventions relating to applications for our products. Some of these patents or licenses cover significant product formulation and processes used to manufacture our products.
Our sales are generally not seasonal.
Historically, our output has been transported to customers by truck and rail, most of which is provided by common carriers. We use third party transportation companies to help us manage truck and rail carriers who deliver our products to our North American customers as well as overseas shipments to our international customers.
RAW MATERIALS, PACKAGING MATERIALS, AND FOOD GRADE ALCOHOL
Our principal Distillery Products segment raw materials, or input costs, are corn and other grains (including rye, barley, wheat, barley malt, and milo), which are processed into food grade alcohol and distillery co-products consisting of distillers feed, fuel grade alcohol, and corn oil. Our principal Ingredient Solutions segment raw material is wheat flour, which is processed into starches and proteins. The cost of grain and wheat flour has, at times, been subject to substantial fluctuation.
In 2019, we purchased most of our grain requirements from two suppliers, Bunge Milling, Inc. ("Bunge") and Consolidated Grain and Barge Co. ("CGB"). Our current grain supply contracts with Bunge and CGB expire on December 31, 2021 and December 31, 2020, respectively. Through these contracts, we purchase grain for delivery into the future at negotiated prices based on several factors. We also order wheat flour for delivery into the future at negotiated prices based on several factors. We purchase most of our wheat flour through a supply contract with Ardent Mills, which expires August 20, 2023. We typically enter contracts for future delivery only to protect margins on contracted alcohol sales, expected ingredient sales, and general usage.
Our principal packaging material for our Distillery Products segment is oak barrels. Both new and used barrels are utilized for the aging of premium bourbon and rye whiskeys. We purchase oak barrels from multiple suppliers and some customers supply their own barrels.
We also source food grade alcohol from Pacific Ethanol Central, LLC ("Pacific Ethanol"), formerly Illinois Corn Processing, LLC ("ICP"), which was our 30 percent-owned joint venture until July 3, 2017 when it was divested and sold to Pacific Ethanol (see Note 4 and Note 11 for additional information).
Natural gas is an input cost used to operate boilers to make steam heat. We procure natural gas for our facilities in the open market from various suppliers. We have a risk management program whereby we may purchase contracts for the delivery of natural gas for delivery into the future at negotiated prices based on several factors, or we can purchase futures contracts on the exchange. Historically, prices of natural gas have been higher in the late fall and winter months than during other periods.
All of our electricity needs for both our Atchison and Lawrenceburg facilities is sourced from renewable wind power. Through an agreement with a supplier, we purchase renewable energy credits. The wind energy, equal in value to the credits, will then be sourced from wind farms in Kansas and added to the overall energy grid system.
As of December 31, 2019, we had a total of 341 employees. A collective bargaining agreement, covering 105 employees at the Atchison facility, that was due to expire on August 31, 2019 was renewed until August 31, 2024. A collective bargaining agreement, covering 61 employees at the Lawrenceburg facility, expires on December 31, 2022. We consider our relations with our personnel generally to be good.
We are subject to a broad range of federal, state, local, and foreign laws and regulations intended to protect public health and the environment. Our operations are also subject to regulation by various federal agencies, including the Alcohol and Tobacco Tax Trade Bureau ("TTB"), the Occupational Safety and Health Administration ("OSHA"), the Food and Drug Administration ("FDA"), the United States Environmental Protection Agency ("EPA"), and by various state and local authorities. Such laws and regulations cover virtually every aspect of our operations, including production and storage facilities, distillation and maturation requirements, importing ingredients, distribution of beverage alcohol products, marketing, pricing, labeling, packaging, advertising, water usage, waste water discharge, disposal of hazardous wastes and emissions, and other matters. In addition, beverage alcohol products are subject to customs, duties or excise taxation in many countries, including taxation at the federal, state, and local level in the United States.
EQUITY METHOD INVESTMENTS
Illinois Corn Processing, LLC. ICP is a producer of high quality food grade alcohol, chemical intermediates and fuel. In 2017, we completed the sale of our 30 percent equity ownership interest in ICP, to Pacific Ethanol pursuant to an Agreement and Plan of Merger ("Merger Agreement"). Illinois Corn Processing Holdings, Inc., an affiliate of SEACOR Holdings, Inc., held the remaining equity in ICP that was also sold pursuant to the Merger Agreement (see Note 4 for additional information).
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Our officers as of December 31, 2019 and their ages as of February 26, 2020:
|Name||Age||Principal Occupation and Business Experience|
|Augustus C. Griffin||60 || ||President and Chief Executive Officer for the Company since July 2014 and member of the Board of Directors for the Company since August 2014. Executive Vice President of Marketing for Next Level Spirits from April 2013 to January 2014. Brand and Business Consultant for Nelson’s Green Brier Distillery from November 2011 to March 2013. Senior Vice President, Global Managing Director for Brown Forman Corporation's flagship Jack Daniels business from January 2008 to April 2011.|
|Brandon M. Gall||38 || ||Vice President, Finance and Chief Financial Officer for the Company since April 2019. Corporate Controller for the Company from June 2018 to March 2019. Director of Supply Chain and New Business Development Finance for the Company from May 2014 to May 2018. Director of Financial Planning and Analysis for the Company from January 2012 to April 2014.|
|Stephen J. Glaser||59 || ||Vice President, Production and Engineering for the Company since October 2015. Corporate Director of Operations for the Company from January 2014 to October 2015. Plant Manager for the Company of the Atchison facility from May 2011 to December 2013.|
|David E. Dykstra||56 || ||Vice President, Alcohol Sales and Marketing for the Company since 2009.|
|Michael R. Buttshaw||57 || ||Vice President, Ingredient Sales and Marketing for the Company since December 2014. Vice President of Sales for the ingredient group at Southeastern Mills, Inc. from October 2010 to November 2014.|
|David E. Rindom||64 || ||Vice President and Chief Administrative Officer for the Company since December 2015. Vice President, Human Resources for the Company from June 2000 to December 2015.|
|Andrew P. Mansinne||60 || ||Vice President, Brands for the Company since November 2016. Managing director at Intercontinental Beverage Capital and President of Tattico Strategies from March 2015 to October 2016. President of Aveniu Brands from May 2010 to April 2014.|
ITEM 1A. RISK FACTORS
Our business is subject to certain risks and uncertainties that could cause actual results and events to differ materially from forward looking statements. The following discussion identifies those which we consider to be most important. The following discussion of risks is not all inclusive. Additional risks not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, or results of operations.
RISKS THAT AFFECT OUR BUSINESS AS A WHOLE
An interruption of operations, a catastrophic event at our facilities, or a disruption of transportation services could negatively affect our business.
Although we maintain insurance coverage for various property damage and loss events, an interruption in or loss of operations at either of our production facilities could reduce or postpone production of our products, which could have a material adverse effect on our business, results of operations, or financial condition. To the extent that our value added products rely on unique or proprietary processes or techniques, replacing lost production by purchasing from outside suppliers would be difficult.
Our customers store a substantial amount of barreled inventory of aged premium bourbon and rye whiskeys at our Lawrenceburg facility and our nearby warehouses in Williamstown, Kentucky and Sunman, Indiana. If a catastrophic event were to occur at our Lawrenceburg facility or our warehouses, our customers' business could be adversely affected. The loss of a significant amount of aged inventory through fire, natural disaster, or otherwise could result in a significant reduction in supply of the affected product or products and could result in customer claims against us and a reduction of warehouse services revenue.
We also store a substantial amount of our own inventory of aged premium bourbon and rye whiskeys at our Lawrenceburg facility and our nearby warehouses. If a catastrophic event were to occur at our Lawrenceburg facility or our warehouses, our business, financial condition, or results of operations could be adversely affected. The loss of a significant amount of our aged inventory through fire, natural disaster, or otherwise, could result in a reduction in supply of the affected product or products and could affect our long-term growth.
A disruption in transportation services could result in difficulties supplying materials to our facilities and impact our ability to deliver products to our customers in a timely manner, and our business, financial condition, or results of operations could be adversely affected.
Our profitability is affected by the costs of grain, wheat flour, and natural gas, or input costs, that we use in our business, the availability and costs of which are subject to weather and other factors beyond our control. We may not be able to recover the costs of commodities and energy by increasing our selling prices.
Grain and wheat flour costs are a significant portion of our costs of goods sold. Historically, the cost of such raw materials has, at times, been subject to substantial fluctuation, depending upon a number of factors which affect commodity prices in general and over which we have no control. These include crop conditions, weather, disease, plantings, government programs and policies, competition for acquisition of inputs such as agricultural commodities, purchases by foreign governments, and changes in demand resulting from population growth and customer preferences. The price of natural gas also fluctuates based on anticipated changes in supply and demand, weather, and the prices of alternative fuels. Fluctuations in the price of commodities and natural gas can be sudden and volatile at times and have had, from time to time, significant adverse effects on the results of our operations. Higher energy costs could result in higher transportation costs and other operating costs.
We do not enter into futures and options contracts ourselves because we can purchase grain and wheat flour for delivery into the future under our grain and wheat flour supply agreements. We intend to contract for the future delivery of grain and wheat flour only to protect margins on expected sales. On the portion of volume not contracted, we attempt to recover higher commodity costs through higher selling prices, but market considerations may not always permit this result. Even where prices can be adjusted, there is likely a lag between when we experience higher commodity or natural gas costs and when we might be able to increase prices. To the extent we are unable to timely pass increases in the cost of raw materials to our customers under sales contracts, market fluctuations in the cost of grain, natural gas, and ethanol may have a material adverse effect on our business, financial condition, or results of operations.
We have a high concentration of certain raw material and finished goods purchases from a limited number of suppliers which exposes us to risk.
We have signed supply agreements with Bunge and CGB for our grain supply (primarily corn) and with Ardent Mills for our wheat flour. The Company also procures some textured wheat proteins through a third-party toll manufacturer in the United States. If any of these companies encounters an operational or financial issue, or otherwise cannot meet our supply demands, it could lead to an interruption in supply to us and/or higher prices than those we have negotiated or than are available in the market at the time, and in turn, have a material adverse effect on our business, financial condition, or results of operations.
The markets for our products are very competitive, and our business could be negatively affected if we do not compete effectively.
The markets for products in which we participate are very competitive. Our principal competitors in these markets have substantial financial, marketing, and other resources, and several are much larger enterprises than us. In recent years, the global beverage alcohol industry has continued to experience consolidation. Industry consolidation can have varying degrees of impact, including the creation of new and larger competitors.
We are dependent on being able to generate sales and other operating income in excess of the costs of products sold in order to obtain margins, profits, and cash flows to meet or exceed our targeted financial performance measures. Competition is based on such factors as product innovation, product characteristics, product quality, pricing, color, and name. Pricing of our products is partly dependent upon industry capacity, which is impacted by competitor actions to bring online idled capacity or to build new production capacity. If market conditions make our products too expensive for use in consumer goods, our revenues could be affected. If our principal competitors were to decrease their pricing, we could choose to do the same, which could adversely affect our margins and profitability. If we did not do the same, our revenues could be adversely affected due to the potential loss of sales or market share. Our revenue growth could also be adversely affected if we are not successful in developing new products for our customers or as a result of new product introductions by our competitors. In addition, more stringent new customer demands may require us to make internal investments to achieve or sustain competitive advantage and meet customer expectations.
Work disruptions or stoppages by our unionized workforce could cause interruptions in our operations.
As of December 31, 2019, approximately 166 of our 341 employees were members of a union. Although our relations with our two unions are stable, there is no assurance that we will not experience work disruptions or stoppages in the future, which could have a material adverse effect on our business, financial condition, or results of operations and could adversely affect our relationships with our customers.
If we were to lose any of our key management personnel, we may not be able to fully implement our strategic plan, our system of internal controls could be impacted.
We rely on the continued services of key personnel involved in management, finance, product development, sales, manufacturing and distribution, and, in particular, upon the efforts and abilities of our executive management team. The loss of service of any of our key personnel could have a material adverse effect on our business, financial condition, results of operations, and on our system of internal controls.
If we cannot attract and retain key management personnel, or if our search for qualified personnel is prolonged, our system of internal controls may be affected, which could lead to an adverse effect on our business, financial condition, or results of operations. In addition, it could be difficult, time consuming, and expensive to replace any key management member or other critical personnel, and no guarantee exists that we will be able to recruit suitable replacements or assimilate new key management personnel into our organization.
Covenants and other provisions in our credit arrangements could hinder our ability to operate. Our failure to comply with covenants in our credit arrangements could result in the acceleration of the debt extended under such agreements, limit our liquidity, and trigger other rights of our lenders.
Our credit arrangements (Note 5) contain a number of financial and other covenants that include provisions which require us, in certain circumstances, to meet certain financial tests. These covenants could hinder our ability to operate and could reduce our profitability. The lender may also terminate or accelerate our obligations under our credit arrangements upon the occurrence of various events in addition to payment defaults and other breaches. Any acceleration of our debt or termination of our credit arrangements would negatively impact our overall liquidity and might require us to take other actions to preserve any remaining liquidity. Although we anticipate that we will be able to meet the covenants in our credit arrangements, there can be no assurance that we will do so, as there are a number of external factors that affect our operations over which we have little or no control, that could have a material adverse effect on our business, financial condition, or results of operations.
Product recalls or other product liability claims could materially and negatively affect our business.
Selling products for human consumption involves inherent legal and other risks, including product contamination, spoilage, product tampering, allergens, or other adulteration. We could decide to, or be required to, recall products due to suspected or confirmed product contamination, adulteration, misbranding, tampering, or other deficiencies. Although we maintain product recall insurance, product recalls or market withdrawals could result in significant losses due to their costs, the destruction of product inventory, and lost sales due to the unavailability of the product for a period of time. We could be adversely affected if our customers lose confidence in the safety and quality of certain of our products, or if consumers lose confidence in the food and beverage safety system generally. Negative attention about these types of concerns, whether or not valid, may damage our reputation, discourage consumers from buying our products, or cause production and delivery disruptions.
We may also suffer losses if our products or operations cause injury, illness, or death. In addition, we could face claims of false or deceptive advertising or other criticism. A significant product liability or other legal judgment or a related regulatory enforcement action against us, or a significant product recall, may materially and adversely affect our reputation and profitability. Moreover, even if a product liability or other legal or regulatory claim is unsuccessful, has no merit, or is not pursued, the negative publicity surrounding assertions against our products or processes could have a material adverse effect on our business, financial condition, or results of operations.
We are subject to extensive regulation and taxation, as well as compliance with existing or future laws and regulations, which may require us to incur substantial expenditures.
We are subject to a broad range of federal, state, local, and foreign laws and regulations intended to protect public health and the environment. Our operations are also subject to regulation by various federal agencies, including the TTB, OSHA, the FDA, the EPA, and by various state and local authorities. Such laws and regulations cover virtually every aspect of our operations, including production and storage facilities, distillation and maturation requirements, importing ingredients, distribution of beverage alcohol products, marketing, pricing, labeling, packaging, advertising, water usage, waste water discharge, disposal of hazardous wastes and emissions, and other matters. In addition, beverage alcohol products are subject to customs, duties, or excise taxation in many countries, including taxation at the federal, state, and local level in the United States.
Violations of any of these laws and regulations may result in administrative, civil, or criminal fines or penalties being levied against us, including temporary or prolonged cessation of production, revocation or modification of permits, performance of environmental investigatory or remedial activities, voluntary or involuntary product recalls, or a cease and desist order against operations that are not in compliance with applicable laws. These laws and regulations may change in the future and we may incur material costs in our efforts to comply with current or future laws and regulations. These matters may have a material adverse effect on our business, financial condition, or results of operations.
Tariffs imposed by the U.S. and those imposed in response by other countries, as well as rapidly changing trade relations, could negatively impact our customers and have a material adverse effect on our business and results of operations.
Changes in U.S. and foreign governments' trade policies have resulted in, and may continue to result in, tariffs on imports into and exports from the U.S. The U.S. has imposed tariffs on imports from several countries, including those in the European Union. In response, the European Union has proposed or implemented their own tariffs on certain products including ours and our customers. Such retaliatory tariffs continue to remain in place and other countries may implement similar tariffs in the future. Any further deterioration of economic relations between the U.S. and other countries or any increase in existing tariffs or the imposition of additional tariffs could result in an increase in the price of our and our customer's products in those countries and could prompt consumers in those countries to seek alternative products. Any resulting impact on the continued growth on our or of our customer's business could potentially impact our financial performance and results of operations.
A failure of one or more of our key information technology ("IT") systems, networks, processes, associated sites, or service providers could have a negative impact on our business.
We rely on IT systems, networks, and services, including internet sites, data hosting and processing facilities and tools, hardware (including laptops and mobile devices), software and technical applications and platforms, some of which are managed and hosted by third party vendors to assist us in the management of our business. The various uses of these IT systems, networks, and services include, but are not limited to: hosting our internal network and communication systems; enterprise resource planning; processing transactions; summarizing and reporting results of operations; business plans, and financial information; complying with regulatory, legal, or tax requirements; providing data security; and handling other processes necessary to manage our business. Any failure of our information systems could adversely impact our ability to operate. Routine maintenance or development of new information systems may result in systems failures, which may have a material adverse effect on our business, financial condition, or results of operations.
Increased IT security threats and more sophisticated cyber crime pose a potential risk to the security of our IT systems, networks, and services, as well as the confidentiality, availability, and integrity of our data. This could lead to outside parties having access to our privileged data or strategic information, our employees, or our customers. Any breach of our data security systems or failure of our information systems may have a material adverse impact on our business operations and financial results. If the IT systems, networks, or service providers we rely upon fail to function properly, or if we suffer a loss or disclosure of business or other sensitive information due to any number of causes, ranging from catastrophic events to power outages to security breaches, and our disaster recovery plans do not effectively address these failures on a timely basis, we may
suffer interruptions in our ability to manage operations and reputational, competitive, or business harm, which may have a material adverse effect on our business, financial condition, or results of operations. In addition, such events could result in unauthorized disclosure of material confidential information, and we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us or to our partners, our employees, customers, and suppliers. Although we maintain insurance coverage for various cybersecurity risks, in any of these events, we could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and IT systems.
Damage to our reputation, or that of any of our key customers or their brands, could affect our business performance.
The success of our products depends in part upon the positive image that consumers have of the third party brands that use our products. Contamination, whether arising accidentally or through deliberate third party action, or other events that harm the integrity or consumer support for our and/or our customers’ products could affect the demand for our and/or our customers’ products. Unfavorable media, whether accurate or not, related to our industry, to us, our products, or to the brands that use our products, marketing, personnel, operations, business performance, or prospects could negatively affect our corporate reputation, stock price, ability to attract high quality talent, or the performance of our business. Negative publicity or commentary on social media outlets could cause consumers to react rapidly by avoiding our brands or by choosing brands offered by our competitors, which could have a material adverse effect on our business, financial condition, or results of operations.
We may not be able to adequately protect our intellectual property rights or may be accused of infringing intellectual property rights of third parties.
We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and patent law, trade secret protection, and confidentiality and/or license agreements with our employees, customers, and others to protect our proprietary rights. We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. Third parties that license our proprietary rights also may take actions that diminish the value of our proprietary rights or reputation. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights.
Our intellectual property rights may not be upheld if challenged. Such claims, if they are proved, could materially and adversely affect our business. If we are unable to maintain the proprietary nature of our technologies, we may lose any competitive advantage provided by our intellectual property. We and our customers and other users of our products may be subject to allegations that we or they or certain uses of our products infringe the intellectual property rights of third parties. The outcome of any litigation is inherently uncertain. Any intellectual property claims, with or without merit, could be time-consuming and expensive to resolve, could divert management attention from executing our business plan, and could require us or our customers or other users of our products to change business practices, pay monetary damages, or enter into licensing or similar arrangements. Any adverse determination related to intellectual property claims or litigation could be material to our business, financial condition, or results of operations.
Climate change, or legal, regulatory or market measures to address climate change, may negatively affect our business or operations, and water scarcity or quality could negatively impact our production costs and capacity.
Increasing concentrations of carbon dioxide and other greenhouse gases in the atmosphere may have an adverse effect on global temperatures, weather patterns, and the frequency and severity of extreme weather events and natural disasters. In the event that climate change, or legal, regulatory, or market measures enacted to address climate change, has a negative effect on agricultural productivity in the regions from which we procure agricultural products such as corn and wheat, we could be subject to decreased availability or increased prices for a such agricultural products, which could have a material adverse effect on our business, financial condition, or results of operations.
Water is the main ingredient in substantially all of our distillery products and is necessary for the production of our food ingredients. It is also a limited resource, facing unprecedented changes from climate change, increasing pollution, and poor management. As demand for water continues to increase, water becomes more scarce and the quality of available water deteriorates, we may be affected by increasing production costs or capacity constraints, which could have a material adverse effect on our business, financial condition, or results of operations.
Our business may suffer from risks related to acquisitions and potential future acquisitions.
Part of our strategic business plan is to grow our business through acquisitions, and we continue to evaluate and engage in discussions concerning potential acquisition opportunities, some of which could be material. Failure to successfully integrate or otherwise realize the anticipated benefits of these acquisitions could adversely impact our long-term competitiveness and profitability. The integration of any future acquisitions will involve a number of risks that could harm our financial condition, results of operations and competitive position. In particular:
•the integration plans for our acquisitions are based on benefits that involve assumptions as to future events, including our ability to successfully achieve anticipated synergies, leveraging our existing relationships, as well as general business and industry conditions, many of which are beyond our control and may not materialize. Unforeseen factors may offset components of our integration plans in whole or in part. As a result, our actual results may vary considerably, or be considerably delayed, compared to our estimates;
•the integration process could disrupt the activities of the businesses that are being combined. The combination of companies requires, among other things, coordination of administrative and other functions. In addition, the loss of key employees, customers or vendors of acquired businesses could materially and adversely impact the integration of the acquired businesses;
•the execution of our integration plans may divert the attention of our management from other key responsibilities;
•we may assume unanticipated liabilities and contingencies; or
•our acquisition targets could fail to perform in accordance with our expectations at the time of purchase.
Future acquisitions may be effected through the issuance of our Common Stock or securities convertible into our Common Stock, which could substantially dilute the ownership percentage of our current stockholders. In addition, shares issued in connection with future acquisitions could be publicly tradable, which could result in a material decrease in the market price of our Common Stock.
RISKS SPECIFIC TO OUR DISTILLERY PRODUCTS SEGMENT
The relationship between the price we pay for grain and the sales prices of our distillery co-products can fluctuate significantly and negatively impact our business.
Distillers feed, fuel grade alcohol, and corn oil are the principal co-products of our alcohol production process and can contribute in varying degrees to the profitability of our Distillery Products segment. Distillers feed and corn oil are sold for prices which historically have tracked the price of corn, but are also susceptible to other factors. In the case of distillers feed, other factors could include weather, other available feedstock, and global trade relations. In the case of corn oil, other factors could include soy oil and the overall level of ethanol production. We sell fuel grade alcohol, the prices for which typically, but not always, have tracked price fluctuations in gasoline prices. As a result, the profitability of these products could be adversely affected, which could be material to our business, financial condition, or results of operations.
Our strategic plan involves significant investment in the aging of barreled distillate. Decisions concerning the quantity of maturing stock of our aged distillate could materially affect our future profitability.
There is an inherent risk in determining the quantity of maturing stock of aged distillate to lay down in a given year for future sales as a result of changes in consumer demand, pricing, new brand launches, changes in product cycles, increase in competitive supply, and other factors. Demand for products could change significantly between the time of production and the date of sale. It may be more difficult to make accurate predictions regarding new products and brands. Inaccurate decisions and/or estimations could lead to an inability to supply future demand or lead to a future surplus of inventory and consequent write-down in the value of maturing stocks of aged distillate. As a result, our business, financial condition, or results of operations could be materially adversely affected.
If the brands we develop or acquire do not achieve consumer acceptance, our growth may be limited, which could have a material adverse impact on our business, financial condition, or results of operations.
A component of our strategic plan is to develop or acquire our own portfolio of brands, particularly whiskeys. Risks related to this strategy include:
•Because our brands, internally developed and acquired, are early in their growth cycle or have not yet been developed, they have not achieved extensive brand recognition. Accordingly, if consumers do not accept our brands, we will not be able to penetrate our markets and our growth may be limited.
•We depend, in part, on the marketing initiatives and efforts of our independent distributors in promoting our products and creating consumer demand, and we have limited, or no, control regarding their promotional initiatives or the success of their efforts.
•We depend on our independent distributors to distribute our products. The failure or inability of even a few of our independent distributors to adequately distribute our products within their territories could harm our sales and result in a decline in our results of operations.
•We compete for shelf space in retail stores and for marketing focus by our independent distributors, most of whom carry extensive product portfolios.
•The laws and regulations of several states prohibit changes of independent distributors, except under certain limited circumstances, making it difficult to terminate an independent distributor for poor performance without reasonable cause, as defined by applicable statutes. Any difficulty or inability to replace independent distributors, poor performance of our major independent distributors or our inability to collect accounts receivable from our major independent distributors could harm our business. There can be no assurance that the independent distributors and retailers we use will continue to purchase our products or provide our products with adequate levels of promotional support.
•Our brands compete with the brands of our bulk alcohol customers.
Warehouse expansion issues could negatively impact our operations and our business.
In 2015, we announced a major expansion in warehousing capacity. The program includes both the refurbishment of existing warehouse buildings and the construction of new warehouses. The final phases of the program are expected to be completed by the end of calendar year 2020. There is the potential risk of completion delays, including risk of delay associated with required permits and cost overruns, which could have a material adverse effect our business, financial condition, or results of operations.
We may be subject to litigation directed at the beverage alcohol industry.
Companies in the beverage alcohol industry are, from time to time, exposed to class action or other litigation relating to alcohol advertising, product liability, alcohol abuse problems or health consequences from the misuse of alcohol. Such litigation may result in damages, penalties or fines as well as damage to our reputation, which could have a material adverse effect on our business, financial condition, or results of operations.
A change in public opinion about alcohol could reduce demand for our products.
For many years, there has been a high level of social and political attention directed at the beverage alcohol industry. The attention has focused largely on public health concerns related to alcohol abuse, including drunk driving, underage drinking, and the negative health impacts of the abuse and misuse of beverage alcohol. Anti-alcohol groups have, in the past, advocated successfully for more stringent labeling requirements, higher taxes, and other regulations designed to discourage alcohol consumption. More restrictive regulations, higher taxes, negative publicity regarding alcohol consumption and/or changes in consumer perceptions of the relative healthfulness or safety of beverage alcohol could decrease sales and consumption of alcohol, and thus, the demand for our products. This could, in turn, significantly decrease both our revenues and our revenue growth and have a material adverse effect on our business, financial condition, or results of operations.
Changes in consumer preferences and purchases, and our ability to anticipate or react to them, could negatively affect our business results.
We compete in highly competitive markets, and our success depends on our continued ability to offer our customers and consumers appealing, high-quality products. In recent years there has been increased demand for the products we produce, including, in particular, increased demand for bourbons and rye whiskeys. Customer and consumer preferences and purchases may shift due to a host of factors, many of which are difficult to predict, including:
•demographic and social trends;
•public health policies and initiatives;
•changes in government regulation and taxation of beverage alcohol products;
•the potential expansion, of legalization of, and increased acceptance or use of, marijuana; and
•changes in travel, leisure, dining, entertaining, and beverage consumption trends.
If our customers and consumers shift away from spirits (particularly brown spirits, such as our premium bourbon and rye whiskeys), our business, financial condition, or results of operations could be adversely affected.
RISKS SPECIFIC TO OUR INGREDIENT SOLUTIONS SEGMENT
Our focus on higher margin specialty ingredients may make us more reliant on fewer, more profitable customer relationships.
Our strategic plan for our Ingredient Solutions segment includes focusing our efforts on the sale of specialty proteins and starches to targeted domestic consumer packaged goods customers. Our major focus is directed at food ingredients, which are primarily used in foods that are developed to address consumers’ desire for healthier and more convenient products; these consist of dietary fiber, wheat protein isolates and concentrates, and textured wheat proteins. The bulk of our applications technology and research and development efforts are dedicated to providing customers with specialty ingredient solutions that deliver nutritional benefits, as well as desired functional and sensory qualities to their products. Our business, financial condition, and results of operations could be materially adversely affected if our customers were to reduce their new product development ("NPD") activities or cease using our unique dietary fibers, starches, and proteins in their NPD efforts.
Adverse public opinion about any of our specialty ingredients could reduce demand for our products.
Consumer preferences with respect to our specialty ingredients might change. In fact, in recent years, we have noticed shifting consumer preferences and media attention directed to gluten, gluten intolerance, and "clean label" products. Shifting consumer preferences could decrease demand for our specialty ingredients. This could, in turn, significantly decrease our revenues and revenue growth, which could have a material adverse affect on our business, financial condition, and results of operations.
RISKS RELATED TO OUR COMMON STOCK
Common Stockholders have limited rights under our Articles of Incorporation.
Under our Articles of Incorporation, holders of our Preferred Stock are entitled to elect five of our nine directors and only holders of our Preferred Stock are entitled to vote with respect to a merger, dissolution, lease, exchange or sale of substantially all of our assets, or on an amendment to the Articles of Incorporation, unless such action would increase or decrease the authorized shares or par value of the Common or Preferred Stock, or change the powers, preferences or special rights of the Common or Preferred Stock so as to affect the holders of Common Stock adversely. Generally, the Common Stock and Preferred Stock vote as separate classes on all other matters requiring stockholder approval.
The majority of the outstanding shares of our Preferred Stock is beneficially owned by one individual, who is effectively in control of the election of five of our nine directors under our Articles of Incorporation.
We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate our stockholders' ability to sell their shares for a premium in a change of control transaction.
Various provisions of our Articles of Incorporation and bylaws and of Kansas corporate law may discourage, delay or prevent a change in control or takeover attempt of our Company by a third party which our management and Board of Directors opposes.
Public stockholders who might desire to participate in such a transaction may not have the opportunity to do so. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change of control or change in our management and Board of Directors. These provisions include:
•Preferred Stock that could be issued by our Board of Directors to make it more difficult for a third party to acquire, or to discourage a third party from acquiring, a majority of our outstanding voting stock;
•non-cumulative voting directors;
•limitations on the ability of stockholders to call special meetings of stockholders; and
•advance notice requirements for nominations of candidates for election to our Board of Directors or for proposing matters that can be acted upon by our stockholders at stockholder meetings.
We are authorized to issue up to a total of 40,000,000 shares of Common Stock, potentially diluting equity ownership of current holders and the share price of our Common Stock
We believe that it is necessary to maintain a sufficient number of available authorized shares of our Common Stock in order to provide us with the flexibility to issue Common Stock for business purposes that may arise as deemed advisable by our Board. These purposes could include, among other things, (i) to declare future stock dividends or stock splits, which may increase the liquidity of our shares; (ii) the sale of stock to obtain additional capital or to acquire other companies or businesses, which could enhance our growth strategy or allow us to reduce debt if needed; (iii) use in additional stock incentive programs and (iv) other bona fide purposes. Our Board of Directors may issue the available authorized shares of Common Stock without notice to, or further action by, our stockholders, unless stockholder approval is required by law or the rules of the NASDAQ Global Select Market. The issuance of additional shares of Common Stock may significantly dilute the equity ownership of the current holders of our Common Stock. Further, over the course of time, all of the issued shares have the potential to be publicly traded, perhaps in large blocks. This may result in dilution of the market price of the Common Stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
MGP has four primary locations, one in Kansas, two in Indiana, and one in Kentucky. Grain processing, distillery, warehousing, research and quality control laboratories, principal executive offices, and a technical innovation center are located in Atchison, Kansas on a 28.5 acre campus which are utilized by both the Distillery Product and Ingredient Solutions segments. A distillery, warehousing, tank farm, quality control laboratory, and research and development facility are located on a 78 acre campus that spans portions of both Lawrenceburg and Greendale, Indiana which are utilized by the Distillery Products segment. A warehousing facility is located on 33 acres in Williamstown, Kentucky, and a warehousing facility is located on 36.5 acres in Sunman, Indiana which are utilized by the Distillery Products segment.
These facilities are generally in good operating condition and are generally suitable for the business activity conducted therein. All of our production facilities, executive office building, and technical innovation center are owned, and all of our owned properties are subject to mortgages in favor of one or more of our lenders. We also own or lease transportation equipment and facilities and a gas pipeline.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to legal or regulatory proceedings arising in the ordinary course of its business. The discussion regarding litigation in Note 9 to the Consolidated Financial Statements included elsewhere in this report is incorporated herein by reference.
In accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), we recorded a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These liabilities are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case or proceeding.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERS MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Equity compensation plan information is incorporated by reference from Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," of this document, should be considered an integral part of Item 5. Our Common Stock is traded on the NASDAQ Global Select Market under the ticker symbol MGPI. As of February 21, 2020, there were approximately 356 holders of record of our Common Stock. According to reports received from NASDAQ, the average daily trading volume of our Common Stock (excluding block trades) ranged from 37,900 to 2,998,200 shares during the year ended December 31, 2019.
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total return of our Common Stock for the five year period ended December 31, 2019, against the cumulative total return of the S&P 500 Stock Index (broad market comparison), Russell 3000 - Beverage and Distillers (line of business comparison), and Russell 2000 - Consumer Staples (line of business comparison). The graph assumes $100 (one hundred dollars) was invested on December 31, 2014, and that all dividends were reinvested.
PURCHASES OF EQUITY SECURITIES BY ISSUER
We did not sell equity securities during the quarter ended December 31, 2019.
Issuer Purchases of Equity Securities
|(a) Total Number of|
|(b) Average Price Paid per Share (or Unit)||(c) Total Number of Shares (or|
Units) Purchased as Part of Publicly Announced Plans or Programs
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (b)
|October 1, 2019 through October 31, 2019||— || ||$||— || ||— || ||$||25,000,000 || |
|November 1, 2019 through November 30, 2019||456 || ||(a)||44.89 || ||— || ||25,000,000 || |
|December 1, 2019 through December 31, 2019||11 || ||46.09 || ||— || ||25,000,000 || |
|Total||467 || ||— || |
(a)Vested RSU awards under the 2014 Plan that were purchased to cover employee withholding taxes.
(b)On February 25, 2019, our Board of Directors approved a $25,000 share repurchase plan commencing February 27, 2019 through February 27, 2022. Under the share repurchase program, we can repurchase stock from time to time for cash in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws. This share repurchase program may be modified, suspended, or terminated by us at any time without prior notice.
ITEM 6. SELECTED FINANCIAL DATA
|Year Ended December 31,|
|Consolidated Statements of Income Data:|
|Sales||$||362,745 || ||$||376,089 || ||$||347,448 || ||$||318,263 || ||$||327,604 || |
|Income before income taxes||45,937 || ||48,980 || ||52,758 || ||44,717 || ||38,418 || |
|Net income||38,793 || ||37,284 || ||41,823 || ||31,184 || ||26,191 || |
|Basic and Diluted Earnings Per Share ("EPS")||2.27 || ||2.17 || ||2.44 || ||1.82 || ||1.48 || |
|Dividends and Dividend Equivalents Per Common Share||0.40 || ||0.32 || ||1.01 || ||0.12 || ||0.06 || |
|Consolidated Balance Sheet Data:|
|Total assets||322,597 || ||277,892 || ||240,328 || ||225,336 || ||194,310 || |
|Long-term debt, less current maturities||40,659 || ||31,628 || ||24,182 || ||31,642 || ||30,115 || |
(a)During 2019, we determined that we would "more likely than not" realize a potion of our deferred tax asset and reduced our valuation allowance by $168. During 2018, we determined that we would not "more likely than not" realize a portion of our deferred tax asset and increased our valuation allowance by $1,304. During 2017, 2016, and 2015, we determined that we would "more likely than not" realize a portion of our deferred tax asset and reduced our valuation allowance by $578, $718, and $2,385, respectively. (see Note 6 for additional information)
(b)Net income for 2019 included the Company's agreement to pay a $1,000 fine and an administrative penalty of $251 in connection with the chemical release incident in Atchison, Kansas in October 2016. (see Note 9 for additional information)
(c)In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting. For 2019, 2018, 2017, and 2016, respectively, we received a combined federal and state tax effected excess tax benefit of $3,336, $1,437, $4,625, and $1,571 from windfalls related to employee share-based compensation recognized as a reduction to income tax expense. Retrospective application to 2015 was not required.
(d)Net income for 2016 included a legal settlement agreement and a gain on sale of long-lived assets of $3,385 before tax.
(e)In 2017, we completed the sale of our equity ownership interest in ICP to Pacific Ethanol, consistent with a Merger Agreement, and, as a result, recorded a gain on sale of equity method investment of $11,381 before tax, which is included in Net income for 2017 (see Note 4 for additional information).
(f)On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the "Tax Act"), resulting in significant modifications to existing law. We recorded a provisional discrete net tax benefit in our Consolidated Statements of Income through Net income of $3,343 in 2017 (see Note 6 for additional information).
Selected Financial Information. Selected quarterly financial information (unaudited) is detailed in Note 14.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report on Form 10-K 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 this Form 10-K). 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.
Management’s Discussion and Analysis ("MD&A") of Financial Condition and Results of Operations is designed to provide a reader of MGP’s consolidated financial statements with a narrative from the perspective of management. MGP’s MD&A is presented in seven sections:
•Results of Operations
•Distillery Products Segment
•Ingredient Solutions Segment
•Cash Flow, Financial Condition and Liquidity
•Off Balance Sheet Obligations
•New Accounting Pronouncements
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 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.
Secure our future by consistently delivering superior financial results by more fully participating in all levels of the alcohol and food ingredients segments for the betterment of our shareholders, employees, partners, consumers, and communities.
Our Strategic Plan
Our strategic plan is designed to leverage our history and strengths. We have a long history in the distilling industry. Our Lawrenceburg facility, which we purchased in 2011, was founded in 1847 and our Atchison facility was opened in 1941. Through these two distilleries, we are involved in producing some of the finest whiskeys, vodkas, and gins in the world. Likewise, our history in the food ingredient business stretches back more than 65 years.
Our strategic plan seeks to leverage the positive macro trends we see in the industries where we compete while providing better insulation from outside factors, including swings in commodity pricing. We believe the successful execution of our strategy will continue to deliver strong operating income growth. Specifically, our strategic plan is built on five key growth strategies: Maximize Value, Capture Value Share, Invest for Growth, Operational Excellence, and Build the MGP Brand. Each of these strategies, along with related 2019 accomplishments, are discussed below.
Maximize Value. We focus on maximizing the value of our current production volumes, particularly taking advantage of favorable macro trends in our Distillery Products segment, such as the growth of the American whiskey category that has continued to expand over the past several years. This includes shifting sales mix to higher margin products, such as premium
bourbon and rye whiskeys, as well as extending the product range of our GNS, including vodkas and gins. In our Ingredient Solutions segment, the macro trends include growth in high fiber, high protein, plant-based proteins, and non-GMO products.
Although these macro trends are currently favorable, we have seen competition intensify as industry participants in both of our segments seek to capitalize on consumers' interest in these categories. While we believe we are well-positioned to benefit from these favorable trends, we may also be negatively affected by the increase in competition in one or both of our segments. We intend to continue to focus on opportunities that will allow us to achieve the highest value from our production facilities.
•In our Distillery Products segment, our focus on attracting and developing customers for our premium beverage alcohol continued in 2019. Some efforts included increases in sales force, including adding an additional sales manager to the international beverage alcohol team, and providing more tailored product offerings to our craft customers. As a result, we were able to add new customers throughout the year.
•In our Ingredient Solutions segment, we continue to provide outstanding customer solutions, taking advantage of our positioning within growing consumer trends. We further developed our pipeline of wheat-based protein products to support strong customer growth. Our sales of specialty wheat proteins grew 6.0 percent in 2019, and we continued to grow our specialty wheat starch sales in 2019. The FDA approved our Fibersym® RW and FiberRite® RW specialty wheat starches as dietary fiber, which removed a major barrier to the growth for this product line. Ingredient Solutions segment sales for 2019 increased 5.6 percent over the prior year.
See the "Distillery Products Segment" and "Ingredient Solutions Segment" discussions.
Capture Value Share. We work to develop partnerships to support brand creation, long-term growth, and to combine our innovation capabilities and industry expertise to provide unique solutions and offerings to the marketplace. In that way, we believe we are able to realize full value for our operational capacity, quality, and commitment.
•During 2019, we announced our distribution partnership in Texas for the introduction of TILL American Wheat Vodka®, George Remus® Straight Bourbon Whiskey, Remus Repeal Reserve® Straight Bourbon Whiskey, Rossville Union® Straight Rye Whiskey and Eight & Sand Blended Bourbon Whiskey. Additionally in October 2019, we announced partnerships with distributors in Connecticut, Maryland and the District of Columbia for the introduction of some of our brands, as we continue to expand into new markets.
•In February 2019, we launched Eight & Sand Blended Bourbon Whiskey. Eight & Sand Blended Bourbon Whiskey celebrates the timeless journey of the American railway with a classic tribute whiskey crafted by our team in Lawrenceburg.
•In August 2019, we launched Rossville Union Barrel Select. The Rossville Union Barrel Select program allows retail customers to custom blend their own Rossville Union Rye offering. Rossville Union Barrel Select Rye comes with individually numbered bottles, each account's logo included on a specialty side label, a custom pewter label, and is bottled at 100-proof (50% ABV).
•In November 2019, we released the Remus Repeal Reserve Series III Straight Bourbon Whiskey. Produced to commemorate Prohibition Repeal Day, Series III is a limited bottling showcasing a medley of two mash bills from 2007 and 2008.
•In November 2019, we released the Remus Volstead Reserve Straight Bourbon Whiskey, a one-time rare, 14 year-old bottled-in-bond reserve Bourbon. The release coincides with the 100th anniversary of the start of Prohibition, under the Volstead Act.
Invest for Growth. We are committed to investing to support our growth. Components of this growth strategy include:
•Capital Expenditures: Capital expenditures focus largely on supporting innovation and product development, improving operational reliability, and strengthening our ability to support all aspects of growth in the American whiskey category.
•Select Inventories: 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. This initiative helps us build strong partnerships and open new relationships with potential customers, in addition to supporting the development of our own brands.
•Selling, General, and Administrative Expenses ("SG&A"): As needed to support our long-term growth objectives, resources and capabilities are being added, particularly in sales and marketing.
•Regarding our Capital Expenditures growth strategy:
In 2019, we continued our warehouse expansion program as part of the implementation of our strategic plan to support the growth of the American whiskey category. The program includes both the refurbishment of existing warehouse buildings and the construction of new warehouses. We invested over $4,600 in this program in capital expenditures during 2019 and approximately $48,400 since the program’s inception.
•Regarding our Select Inventories growth strategy:
We produce, and will continue to produce barrels of premium bourbon and rye whiskeys for sale in future periods. Product is barreled and included in our inventory. Our goal is to maintain inventory levels of premium bourbon and rye whiskeys sufficient to support our own brands, engage in partnerships, and support industry growth. We increased our premium bourbon and rye whiskey inventory by $27,875, at cost, during 2019.
•Regarding our SG&A growth strategy:
We continued to invest in people and programs to support the development of our brands initiative and our long-term growth objectives.
Operational Excellence. We continue a solid commitment to operational excellence across the Company by strengthening our emphasis on excellence in all stages of operations, from sourcing through processing and, ultimately, delivering the finest quality products. This also means striving to de-risk all aspects of our business.
•During 2019, we continued our implementation of the Safety Up program, including the launch of Safety Up at our Lawrenceburg facility. Safety Up is supported by the motto, It starts with us, and focuses on employee engagement, awareness, and standardization to consistently keep on-the-job safety top of mind across all areas of the Company. It is intended to move safety assurance into deeper and broader dimensions, giving each employee and teams of employees greater ability to act more swiftly on safety-related matters.
•In August 2019, attorney and environmental health and safety leader, Randy Simmons, joined the Company in the new role of corporate director of Environmental Health and Safety. He will represent the Company with regulatory agencies and champion the employee-driven Safety Up program.
•In 2019, we completed a British Retail Consortium ("BRC") audit with outstanding results, again achieving a Grade AA rating for both our Atchison and Lawrenceburg facilities. Per the BRC standard, a Grade AA is awarded if five or fewer non-conformances are cited out of 256 total audit items. Each year since undergoing its initial BRC audit in 2013, the Atchison facility’s distillery has achieved BRC’s highest grade. The same is true with results of annual BRC audits that have been conducted at our Lawrenceburg facility since 2014. For the Atchison facility’s protein and starch plant, 2019 marked the ninth time in as many years that it had scored the BRC’s highest rating.
•In 2019, we awarded our Master Distiller designation to four internal candidates and named two new Master Blenders. Individuals are awarded the master designation after a robust certification process that includes education, experience, specialized training, and concludes with oral examinations by other masters and the completion of a dissertation. The art and science of fermentation, distillation and blending are the foundation of the Company's distilled spirits business, and the addition of these individuals into the Masters rank ensures that MGP has the necessary talent to continue to create exceptional products.
Build the MGP Brand. We continue to build our brand across all stakeholders, including shareholders, employees, partners, consumers, and communities. We are achieving this by producing consistent growth through an understandable business model, proactively engaging with the investment community, creating a desirable organization for our employees, strengthening our relationship with our customers and vendors, increasing awareness and understanding of MGP with consumers, and supporting the communities in which we operate.
•In February 2019, MGP Ingredients family lost our longtime leader and former Chairman Cloud "Bud" Cray, Jr. Mr. Cray helped envision and implement the Company's transformation from industrial alcohol production to the distillation of more profitable beverage alcohol, specifically vodka and gin. Additionally, he was instrumental in the Company's successful entrance into the food ingredients business, producing specialty wheat proteins and starches. Mr. Cray was a generous resident of our headquarters community of Atchison, Kansas, where he provided countless resources to help make Atchison a better place. We continue our unbroken commitment to support our communities to honor his legacy.
•In 2019, we continued our unbroken commitment to support our communities by providing strong financial support and donating time and leadership talent.
◦During 2019, MGP collaborated with Farm Rescue, a nonprofit organization that provides practical assistance to help farmers and ranchers navigate crises such as natural disasters. MGP donated dried distillers grain to the farming community, who were affected by devastating Midwest floods.
◦In December 2019, we participated in our sixth year of the Boxes of Blessing program which was created by our longtime distributor partner, Ben C. Williams. MGP and other local organizations distributed 1,000 boxes of food to our community in Atchison. Each box contained nearly 45 pounds of non-perishable items, enough to feed a family of four for a week.
•During 2019, MGP elected two new Board of Directors, Lynn Jenkins and Kerry Walsh Skelly.
◦Lynn Jenkins, former U.S. Representative from Kansas, has 20 years experience in elected office assisting Kansas residents. She represented Kansas' 2nd Congressional District in the U.S. House of Representatives from 2009 until her retirement. Jenkins, a Certified Public Accountant, contributed her financial expertise as a member of the House Financial Services Committee for two years and on the House Ways and Means Committee for eight years. Prior to that, she held offices in the Kansas Senate and Kansas House of Representatives.
◦Kerry Walsh Skelly held officer-level positions with Brown-Forman for more than 25 years until her retirement in 2018. Her last role with the Brown-Forman was as a senior vice president of Corporate Affairs-EMEA (Europe-Middle East-Africa), beginning in 2011. Her Brown-Forman career spanned countries and corporate functions including Corporate Administration, Human Resources, Marketing and Strategy. In addition to founding the Brown-Forman's Government Relations function, she was responsible for corporate affairs across more than 50 markets.
RESULTS OF OPERATIONS
The table below details the consolidated results for 2019, 2018 and 2017:
|Year Ended December 31,||% Increase (Decrease)|
|2019||2018||2017||2019 v. 2018||2018 v. 2017|
|Sales||$||362,745 || ||$||376,089 || ||$||347,448 || ||(3.5)||%||8.2 ||%|
|Cost of sales||286,213 || ||292,490 || ||271,432 || ||(2.1)|| ||7.8 || |
|Gross profit||76,532 || ||83,599 || ||76,016 || ||(8.5)|| ||10.0 || |
| Gross margin %||21.1 ||%||22.2 ||%||21.9 ||%||(1.1)|| |
|0.3 || |
|SG&A expenses||29,290 || ||33,451 || ||33,107 || ||(12.4)|| ||1.0 || |
|Operating income||47,242 || ||50,148 || ||42,909 || ||(5.8)|| ||16.9 || |
| Operating margin %||13.0 ||%||13.3 ||%||12.3 ||%||(0.3)|| ||pp||1.0 || ||pp|
|Gain on sale of equity method investment||— || ||— || ||11,381 || ||N/A || ||(100.0)|| |
|Equity method investment loss||— || ||— || ||(348)|| ||N/A || ||100.0 || |
|Interest expense, net||(1,305)|| ||(1,168)|| ||(1,184)|| ||11.7 || ||(1.4)|| |
|Income before income taxes||45,937 || ||48,980 || ||52,758 || ||(6.2)|| ||(7.2)|| |
|Income tax expense||7,144 || ||11,696 || ||10,935 || ||(38.9)|| ||7.0 || |
| Effective tax expense rate %||15.6 ||%||23.9 ||%||20.7 ||%||(8.3)|| ||pp||3.2 || ||pp|
|Net income ||$||38,793 || ||$||37,284 || ||$||41,823 || ||4.0 ||%||(10.9)||%|
| Net income margin %||10.7 ||%||9.9 ||%||12.0 ||%||0.8 || ||pp||(2.1)|| ||pp|
|Basic and diluted Earnings Per Share||$||2.27 || ||$||2.17 || ||$||2.44 || ||4.6 ||%||(11.1)||%|
(a) Percentage points ("pp").
2019 to 2018 - Sales for 2019 were $362,745, a decrease of 3.5 percent compared to 2018, which was the result of decreased sales in the Distillery Products segment, partially offset by increased sales in the Ingredient Solutions segment. Within the Distillery Products segment, sales were down 5.4 percent primarily due to a decrease in sales of brown goods within premium beverage alcohol, industrial alcohol and fuel grade alcohol, partially offset by an increase in sales of warehouse services, distillers feed and related co-products and white goods within premium beverage alcohol. Total Ingredient Solutions segment sales increased 5.6 percent due to increased sales of specialty wheat starches and proteins, and commodity wheat starches, partially offset by decreased sales of commodity wheat proteins.
2018 to 2017 - Sales for 2018 were $376,089, an increase of 8.2 percent compared to 2017, which was the result of increased sales in both segments. Within the Distillery Solutions segment, sales were up 7.9 percent. Driven by continued strong demand, sales of premium beverage alcohol products increased 5.9 percent. Industrial alcohol product sales increased 5.2 percent, contributing to an overall food grade alcohol sales increase of 5.7 percent. Sales of distillers feed and related co-products and warehouse services revenue both increased and the gains were partially offset by a small decline in the sales of fuel grade alcohol products. Total Ingredient Solutions sales increased 9.9 percent. This increase was driven by higher sales across all Ingredient Solutions product categories, with the largest increases in commodity wheat proteins and specialty wheat proteins.
2019 to 2018 - Gross profit for 2019 was $76,532, a decrease of 8.5 percent compared to 2018. The decrease was driven by a decrease in gross profit in both segments. The Distillery Products segment gross profit decreased by $5,841, or 8.1 percent and the Ingredient Solutions segment gross profit decreased by $1,226, or 10.4 percent.
2018 to 2017 - Gross profit for 2018 was $83,599, an increase of 10.0 percent percent compared to 2017. The increase was driven by an increase in gross profit in both segments. In the Distillery Products segment, gross profit grew by $4,976, or 7.4 percent. In the Ingredient Solutions segment, gross profit grew by $2,607, or 28.3 percent.
2019 to 2018 - SG&A expenses for 2019 were $29,290, a decrease of 12.4 percent compared to 2018. The decrease in SG&A was primarily due to lower incentive compensation expense, partially offset by increased costs related to legal matters discussed in Note 9 and investments to support our brands initiative (personnel costs).
2018 to 2017 - SG&A expenses for 2018 were $33,451, an increase of 1.0 percent compared to 2017. The increase in SG&A was primarily due to investments to support our brands initiative (personnel costs and advertising and promotion).
|Operating income||% Increase (Decrease)|
|Operating income for 2017||$||42,909 || |
Increase in gross profit - Distillery Products segment(a)
|4,976 || ||11.6 || |
Increase in gross profit - Ingredient Solutions segment(a)
|2,607 || ||6.1 || ||pp || |
|Increase in SG&A expenses||(344)|| ||(0.8)|| ||pp || |
|Operating income for 2018||50,148 || ||16.9 ||%|
Decrease in gross profit - Distillery Products segment(a)
|(5,841)|| ||(11.6)|| |
Decrease in gross profit - Ingredient Solutions segment(a)
|(1,226)|| ||(2.5)|| ||pp || |
|Decrease in SG&A expenses||4,161 || ||8.3 || ||pp || |
|Operating income for 2019||$||47,242 || ||(5.8)||%|
(a) See segment discussion.
(b) Percentage points ("pp").
2019 to 2018 - Operating income for 2019 decreased to $47,242 from $50,148 for 2018, due to gross profit declines in both our Distillery Products and Ingredient Solutions segments. These decreases were partially offset by a decrease in SG&A expenses.
2018 to 2017 - Operating income for 2018 increased to $50,148 from $42,909 for 2017, due to gross profit growth in both our Distillery Products and Ingredient Solutions segments, partially offset by an increase in SG&A expenses.
Equity method investment
We had no equity method investment transactions for the years ended December 31, 2019 and 2018 (see Note 4 for additional information).
In 2017, we completed the sale of our 30 percent equity ownership interest in ICP to Pacific Ethanol, consistent with a Merger Agreement. Our total transaction proceeds from the ICP sale transaction represented a return of our investment in ICP of $22,832 (net of fees and including additional dividends), which included a gain on sale of equity method investment of $11,381 (before tax) (see Note 4 for additional information). Additionally, we recognized an equity method investment loss of $348 during 2017.
Income tax expense
2019 to 2018 - Income tax expense for 2019 was $7,144, for an effective tax rate for the year of 15.6 percent. Income tax expense for 2018 was $11,696, for an effective tax rate for the year of 23.9 percent. The principal reasons for the 8.3 percentage point decrease in the effective tax rate, year versus year, were an increase in the favorable tax impact of vested share-based awards (which may not continue in future years), a favorable tax impact related to the change in the Company's valuation allowance, higher tax credits, and a change in estimate in 2018 related to the 2017 sale of the Company's equity method investment that did not reoccur in 2019, partially offset by the tax impact of legal matters discussed in Note 9, and certain compensation being subject to the deduction limit applicable to public companies.
2018 to 2017 - Income tax expense for 2018 was $11,696, for an effective tax rate for the year of 23.9 percent. Income tax expense for 2017 was $10,935, for an effective tax rate for the year of 20.7 percent. The principal reasons for the 3.2 percentage point increase in the effective tax rate, year versus year, are the tax impact caused by the re-measurement of our deferred tax assets and liabilities directly into income tax expense from continuing operations at December 31, 2017, the reduction in the tax impact of vested share-based awards, the loss of the Domestic Production Activities Deduction as required by the Tax Act, a change in estimate related to the sale of the Company’s equity ownership interest in ICP during 2017, an increase in the Company’s valuation allowance, and lower state income tax credits. These effects were partially offset by the 14 percent rate reduction enacted by the Tax Act, and by the Company not being subject to certain compensation deduction limits as updated by the Tax Act and subsequent guidance issued by the Internal Revenue Service in 2018.
Basic and diluted EPS
|Basic and Diluted EPS||% Increase (Decrease)|
|Basic and diluted EPS for 2017||$||2.44 || |
Change in operating income(a)
|0.27 || ||11.1 || |
Gain on sale of equity method investment (Note 4)(c)
|(0.44)|| ||(18.0)|| ||pp || |
Change in equity method investment earnings(a)
|0.01 || ||0.4 || ||pp || |
Change in income attributable to participating securities(d)
|0.02 || ||0.8 || ||pp || |
Change in weighted average shares outstanding(d)
|(0.01)|| ||(0.4)|| ||pp || |
|Tax: Change in share-based compensation||(0.18)|| ||(7.4)|| ||pp || |
Tax: Effect of Tax Act on deferred tax attributes(e)
|(0.19)|| ||(7.8)|| ||pp || |
|Tax: Change in discrete items (excluding effect of Tax Act)||(0.12)|| ||(4.9)|| ||pp || |
|Tax: Change in effective tax rate (excluding tax items above)||0.37 || ||15.1 || ||pp || |
Basic and diluted EPS for 2018
|$||2.17 || ||(11.1)||%|
Change in operating income(a)
|(0.15)|| ||(6.9)|| |
Change in income attributable to participating securities(d)
|0.02 || ||0.9 || ||pp || |
Change in weighted average shares outstanding(d)
|(0.03)|| ||(1.3)|| ||pp || |
|Tax: Change in share-based compensation||0.12 || ||5.5 || ||pp || |
|Tax: Change in discrete items||0.12 || ||5.5 || ||pp || |
|Tax: Change in effective tax rate||0.02 || ||0.9 || ||pp || |
Basic and diluted EPS for 2019
|$||2.27 || ||4.6 ||%|
(a)Items are net of tax based on the effective tax rate for each base year, excluding the effect of the Tax Act and other discrete tax items on the 2017 rate.
(b)Percentage points ("pp").
(c)Item is net of tax based on the effective tax rate for the transaction.
(d)Income attributable to participating securities changes primarily due to the awarding and vesting of the employee RSUs that receive dividend equivalent payments. Weighted average shares outstanding change primarily due to the vesting of employee RSUs, the granting of Common Stock to directors, our purchase of vested RSUs from employees to pay withholding taxes, and our repurchases of Common Stock.
(e)On December 22, 2017, the United States enacted tax reform legislation, the Tax Act, that resulted in significant modifications to existing law. We recorded a discrete net tax benefit resulting from the revaluation of our deferred income taxes in 2017 (see Note 6 for additional information).
2019 to 2018 - EPS increased to $2.27 in 2019 from $2.17 in 2018, primarily due to the tax impacts of vested share-based awards and higher state tax credits in the effective tax rate. Partially offsetting these increases was a decrease in operations.
2018 to 2017 - EPS decreased to $2.17 in 2018 from $2.44 in 2017, primarily due to the gain on sale of equity method investment in 2017 (see Note 4 for additional information), partially offset by improved performance from operations.
DISTILLERY PRODUCTS SEGMENT
|DISTILLERY PRODUCTS SALES|
|Year Ended December 31, ||Year-versus-Year Sales Change Increase/ (Decrease)|
|2019||2018||$ Change||% Change|
|Brown Goods||$||107,190 || ||$||125,857 || ||$||(18,667)|| ||(14.8)||%|
|White Goods||62,862 || ||62,574 || ||288 || ||0.5 || |
|Premium beverage alcohol||170,052 || ||188,431 || ||(18,379)|| ||(9.8)|| |
|Industrial alcohol||79,833 || ||80,650 || ||(817)|| ||(1.0)|| |
|Food grade alcohol||249,885 || ||269,081 || ||(19,196)|| ||(7.1)|| |
|Fuel grade alcohol||5,949 || ||6,347 || ||(398)|| ||(6.3)|| |
|Distillers feed and related co-products||26,743 || ||25,698 || ||1,045 || ||4.1 || |
|Warehouse services||14,656 || ||12,929 || ||1,727 || ||13.4 || |
|Total Distillery Products||$||297,233 || ||$||314,055 || ||$||(16,822)|| ||(5.4)||%|
|Change in Year-versus-Year Sales Attributed to:|
|Total||Volume || ||Net Price/Mix || |
|Premium beverage alcohol||(9.8)%|| ||(4.2)%|| ||(5.6)%|| |
|Other Financial Information|
|Year Ended December 31, ||Year-versus-Year Increase/(Decrease)|
|Gross profit||$||65,952 || ||$||71,793 || ||$||(5,841)|| ||(8.1)||%|
|Gross margin %||22.2 ||%||22.9 ||%||(0.7)|| |
(a) Percentage points ("pp")
2019 compared to 2018
Total sales of Distillery Products decreased year versus year by $16,822, or 5.4 percent. Sales of premium beverage alcohol were down due to lower volumes, predominantly in brown goods within premium beverage alcohol (mix), partially offset by better pricing in both brown goods and white goods within premium beverage alcohol. Sales of brown goods, industrial alcohol and fuel grade alcohol decreased, while sales of warehouse services, distillers feed and related co-products and white goods increased. Sales of brown goods decreased 14.8 percent, due to lower sales volume, partially offset by higher average selling price. Industrial alcohol product sales decreased primarily driven by lower sales volume, partially offset by slightly favorable pricing. These decreases were partially offset by an increase in warehouse services sales of 13.4 percent and an increase in sales of distillers feed and related co-product of 4.1 percent, primarily due to an increase in sales volume.
Gross profit decreased year versus year by $5,841, or 8.1 percent. Gross margin for 2019 decreased to 22.2 percent from 22.9 percent for 2018. The decline in gross profit was primarily due to lower sales volume on brown goods. Industrial alcohol and white goods gross profits declined as the market remains challenged due to oversupply. This decline was partially offset by favorable average selling price on brown goods as well as increased gross profits on distillers feed and related co-products and warehouse services.
|DISTILLERY PRODUCTS SALES|
|Year Ended December 31, ||Year-versus-Year Sales Change Increase/ (Decrease)|
|2018||2017||$ Change||% Change|
|Brown Goods||$||125,857 || ||$||113,413 || ||$||12,444 || ||11.0 ||%|
|White Goods||62,574 || ||64,585 || ||(2,011)|| ||(3.1)|| |
|Premium beverage alcohol||188,431 || ||177,998 || ||10,433 || ||5.9 || |
|Industrial alcohol||80,650 || ||76,636 || ||4,014 || ||5.2 || |
|Food grade alcohol||269,081 || ||254,634 || ||14,447 || ||5.7 || |
|Fuel grade alcohol||6,347 || ||6,368 || ||(21)|| ||(0.3)|| |
|Distillers feed and related co-products||25,698 || ||19,332 || ||6,366 || ||32.9 || |
|Warehouse services||12,929 || ||10,674 || ||2,255 || ||21.1 || |
|Total Distillery Products||$||314,055 || ||$||291,008 || ||$||23,047 || ||7.9 ||%|
|Change in Year-versus-Year Sales Attributed to:|
|Total||Volume || ||Net Price/Mix || |
|Premium beverage alcohol||5.9% || ||(0.9)%|| ||6.8% || |
|Other Financial Information|
|Year Ended December 31, ||Year-versus-Year Increase/(Decrease)|
|Gross profit||$||71,793 || ||$||66,817 || ||$||4,976 || ||7.4 ||%|
|Gross margin %||22.9 ||%||23.0 ||%||(0.1)|| |
(a) Percentage points ("pp")
2018 compared to 2017
Total sales of Distillery Products increased year versus year by $23,047, or 7.9 percent. Driven by continued strong demand, sales of premium beverage alcohol products increased 5.9 percent over 2017, primarily due to an 11.0 percent increase in brown goods sales. Industrial alcohol product sales increased 5.2 percent, contributing to an overall food grade alcohol sales increase of 5.7 percent. Industrial alcohol sales growth was driven by volume as the average selling price was down due to more difficult market conditions. Sales of distillers feed and related co-products increased due to a higher average selling price reflecting improved market conditions during the year. An increase in warehouse services revenue was partially offset by a small decline in the sales of fuel grade alcohol products.
Gross profit increased year versus year by $4,976, or 7.4 percent. Gross margin for 2018 remained consistent at 22.9 percent compared to 23.0 percent for 2017. The improvement in gross profit was primarily due to increased sales of brown goods products, higher gross profit on sales of distillers feed and related co-products, and an increase in warehouse services revenue. These gains were partially offset primarily by increased input costs and lower gross profit on sales of white goods, industrial, and fuel grade alcohol products.
INGREDIENT SOLUTIONS SEGMENT
|INGREDIENT SOLUTIONS SALES|
|Year Ended December 31, ||Year-versus-Year Sales Change Increase/ (Decrease)|
|2019||2018||$ Change||% Change|
|Specialty wheat starches||$||30,816 || ||$||28,594 || ||$||2,222 || ||7.8 ||%|
|Specialty wheat proteins||22,359 || ||21,098 || ||1,261 || ||6.0 || |
|Commodity wheat starches||9,628 || ||9,223 || ||405 || ||4.4 || |
|Commodity wheat proteins||2,709 || ||3,119 || ||(410)|| ||(13.1)|| |
|Total Ingredient Solutions||$||65,512 || ||$||62,034 || ||$||3,478 || ||5.6 ||%|
|Change in Year-versus-Year Sales Attributed to:|
|Total||Volume || ||Net Price/Mix || |
|Total Ingredient Solutions||5.6% || ||2.3% || ||3.3% || |
|Other Financial Information|
|Year Ended December 31, ||Year-versus-year Increase/(Decrease)|
|Gross profit||$||10,580 || ||$||11,806 || ||$||(1,226)|| ||(10.4)||%|
|Gross margin %||16.2 ||%||19.0 ||%||(2.8)|| |
(a) Percentage points ("pp")
2019 compared to 2018
Total Ingredient Solutions sales for 2019 increased by $3,478, or 5.6 percent, compared to 2018. This increase was driven by higher sales of specialty wheat starches and proteins, and commodity wheat starches, partially offset by a decrease in sales of commodity wheat proteins. The increase in specialty wheat starches was driven by an increase in sales volume and favorable average selling pricing. The increase in commodity wheat starches was primarily due to favorable pricing, partially offset by a decrease in sales volume. The increase in specialty wheat proteins was due to an increase in sales volume, partially offset by lower average selling price driven by the loss of a large specialty wheat protein customer. These increases were partially offset by decreased sales of commodity wheat proteins which was driven by lower sales volume.
Gross profit decreased year versus year by $1,226, or 10.4 percent. Gross margin for 2019 decreased to 16.2 percent from 19.0 percent for 2018. The decrease in gross profit was primarily due to the above mentioned specialty wheat protein customer loss, increased production costs resulting from higher input costs, partially offset by increased gross profit of commodity wheat starches and proteins.
|INGREDIENT SOLUTIONS SALES|
|Year Ended December 31, ||Year-versus-Year Sales Change Increase/ (Decrease)|
|2018||2017||$ Change||% Change|
|Specialty wheat starches||$||28,594 || ||$||28,092 || ||$||502 || ||1.8 ||%|
|Specialty wheat proteins||21,098 || ||19,458 || ||1,640 || ||8.4 || |
|Commodity wheat starches||9,223 || ||8,288 || ||935 || ||11.3 || |
|Commodity wheat proteins||3,119 || ||602 || ||2,517 || ||418.1 || |
|Total Ingredient Solutions||$||62,034 || ||$||56,440 || ||$||5,594 || ||9.9 ||%|
|Change in Year-versus-Year Sales Attributed to:|
|Total||Volume || ||Net Price/Mix || |
|Total Ingredient Solutions||9.9% || ||1.7% || ||8.2% || |
|Other Financial Information|
|Year Ended December 31, ||Year-versus-year Increase/(Decrease)|
|Gross profit||$||11,806 || ||$||9,199 || ||$||2,607 || ||28.3 ||%|
|Gross margin %||19.0 ||%||16.3 ||%||2.7 || |
(a) Percentage points ("pp")
2018 compared to 2017
Total Ingredient Solutions sales for 2018 increased by $5,594, or 9.9 percent, compared to 2017. This increase was driven by higher sales across all product categories, with the largest increases in commodity wheat proteins and specialty wheat proteins, year versus year. The increase in sales of wheat proteins was driven by strong demand for the Company’s plant-based protein products.
Gross profit increased year versus year by $2,607, or 28.3 percent. Gross margin for 2018 increased to 19.0 percent from 16.3 percent for 2017. The increase in gross profit was primarily due to higher gross profits on specialty wheat proteins and starches and commodity wheat proteins, partially offset by lower gross profits on commodity wheat starches. Overall gross profit growth was aided by improved plant efficiencies relative to the prior year.
CASH FLOW, FINANCIAL CONDITION AND LIQUIDITY
We believe our financial condition continues to be of high quality, as evidenced by our ability to generate adequate cash from operations while having ready access to capital at competitive rates.
Operating cash flow and debt through our Credit Agreement and Note Purchase Agreement (Note 5) provide the primary sources of cash to fund operating needs and capital expenditures. These same sources of cash are used to fund shareholder dividends and other discretionary uses. Going forward, we expect to use cash to implement our invest to grow strategy, particularly in the Distillery Products segment. Our overall liquidity reflects our strong business results and an effective cash management strategy that takes into account liquidity management, economic factors, and tax considerations. We expect our sources of cash, including our Credit Agreement and Note Purchase Agreement, to be adequate to provide for budgeted capital expenditures and anticipated operating requirements for the foreseeable future.
|Cash Flow Summary||Year Ended December 31,||Changes, Year versus Year-Increase / (Decrease)|
|2019||2018||2017||2019 vs. 2018||2018 vs. 2017|
|Cash provided by operating activities:||$||19,722 || ||$||33,481 || ||$||33,471 || ||(13,759)|| ||10 || |
|Cash provided by (used in) investing activities:||(17,931)|| ||(31,046)|| ||1,777 || ||13,115 || ||(32,823)|| |
|Cash used in financing activities:||(3,507)|| ||(494)|| ||(33,733)|| ||(3,013)|| ||33,239 || |
|Increase (decrease) in cash and cash equivalents||$||(1,716)|| ||$||1,941 || ||$||1,515 || ||$||(3,657)|| ||$||426 || |
Operating Activities. Cash provided by operating activities were $19,722 during the year ended December 31, 2019. The cash provided by operating activities during 2019 resulted primarily from net income of $38,793, adjustments for non-cash or non-operating charges of $15,012 including depreciation and amortization, share-based compensation, and deferred income taxes, partially offset by uses of cash due to changes in operating assets and liabilities of $34,083. The primary drivers of the changes in operating assets and liabilities were $28,162 use of cash related to an increase in inventories driven primarily by barreled distillate, $4,547 use of cash related to a decrease in accrued expenses primarily due to lower incentive compensation expense, and $2,134 use of cash related to an increase in receivables, net primarily related to the timing of sales and cash collections. Additionally, there was $2,107 provided by cash related to an increase in accounts payable related to the timing of cash disbursements.
Cash provided by operating activities were $33,481 during the year ended December 31, 2018. The cash provided by operating activities during 2018 resulted primarily from net income of $37,284, adjustments for non-cash or non-operating charges of $16,126 including depreciation and amortization, share-based compensation and deferred income taxes, partially offset by uses of cash due to change in operating assets and liabilities of $19,929. The primary drivers of the changes in operating assets and liabilities were $15,620 use of cash related to an increase in inventories driven primarily by barreled distillate and $4,450 use of cash related to an increase in receivables, net. The change in receivables, net is primarily related to the timing of sales and cash collections.
Cash provided by operating activities were $33,471 during the year ended December 31, 2017. The cash provided by operating activities during 2017 resulted primarily from net income of $41,823, adjusted for non-cash or non-operating charges of $6,621 including depreciation and amortization, distributions received from equity method investees and gain on sale of equity method investment, partially offset by uses of cash due to changes in assets and liabilities of $14,973. The primary drivers of the changes in operating assets and liabilities were $14,291 use of cash related to an increase in inventories driven primarily by barreled distillate, $8,262 use of cash related to an increase in receivables, net and $9,540 cash provided by an increase in accounts payable. The change in receivables, net is primarily related to increased sales during the year. The change in accounts payable is primarily due to the timing of cash disbursements related to operating expenses associated with increased sales (the accounts payable to affiliate, net, decreased to zero when we sold our equity ownership interest in ICP on July 3, 2017 as detailed in Note 4).
Investing Activities. Cash used in investing activities for year ended December 31, 2019 was $17,931, which primarily resulted from an increase in additions to property, plant and equipment of $16,730 (see capital spending).
Cash used in investing activities for year ended December 31, 2018 was $31,046, which resulted from an increase in additions to property, plant and equipment of $31,046 (see capital spending).
Cash provided by investing activities for year ended December 31, 2017 was $1,777. Cash provided by investing activities was due to cash provided from the divestiture of our equity method investment during 2017 of $22,832 (see Note 4 for additional information), offset by cash used for property, plant, and equipment of $21,055 (see Capital Spending).
Capital Spending. We manage capital spending to support our business growth plans. Investments in plant, property and equipment were $16,730, $31,046, and $21,055 for years ended December 31, 2019, 2018, and 2017, respectively. Adjusted for the change in capital expenditures in accounts payable for years ended December 31, 2019, 2018, and 2017 of $2,041, $(2,133), and $158, respectively, and total capital expenditures were $18,771, $28,913, and $21,213, respectively. We expect approximately $19,600 in capital expenditures in 2020 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 warehouse expansion project. As of December 31, 2019, we had incurred approximately $48,400 of the total investment and expect our total warehouse expansion project investment to be approximately $49,800. The estimated project completion date is by the end of calendar year 2020.
Financing Activities. Cash used in financing activities for year ended December 31, 2019 was $3,507, primarily due to payments of dividends and dividend equivalents of $6,856 (see Note 7 for additional information), purchases of treasury stock for tax withholding on share-based compensation of $5,489 (see Treasury Purchases), offset by net proceeds from debt of $8,914 (see Long-Term and Short-Term Debt).
Cash used in financing activities for year ended December 31, 2018 was $494, primarily due to payments of dividends and dividend equivalents of $5,500 (see Note 7 for additional information), purchases of treasury stock for tax withholding on share-based compensation of $2,324 (see Treasury Purchases), offset by net proceeds from debt of $7,330 (see Long-Term and Short-Term Debt).
Cash used in financing activities for year ended December 31, 2017 was $33,733, primarily due to payments on our credit agreement - revolver of $30,955 (see Long-Term and Short-Term Debt), payment of dividends and dividend equivalents of $17,380 (see Note 7 for additional information) and purchases of treasury stock for tax withholding on share-based compensation of $4,663 (see Treasury Purchases), partially offset by net proceeds in long-term debt $19,642 (see Long-Term and Short-Term Debt).
Treasury Purchases. 235,409 RSUs vested and converted to common shares during year ended December 31, 2019, of which we withheld and purchased for treasury 77,481 shares valued at $5,489 to cover payment of associated withholding taxes.
80,343 RSUs vested and converted to common shares during year ended December 31, 2018, of which we withheld and purchased for treasury 27,214 shares valued at $2,324 to cover payment of associated withholding taxes.
203,000 RSUs vested and converted to common shares during year ended December 31, 2017, of which we withheld and purchased for treasury 74,132 shares valued at $4,663 to cover payment of associated withholding taxes.
Share Repurchase. 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, the company 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 the company at any time without prior notice. From the commencement date of the authorization period through the year ended December 31, 2019, no shares were repurchased under the program.
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, share repurchases, and Board-approved dividends) and the overall cost of capital. Total debt was $41,060 (net of unamortized loan fees of $448) at December 31, 2019 and $32,014 (net of unamortized loan fees of $580) at December 31, 2018. During 2019, 2018, and 2017, we had net borrowings / (payments) on our Credit Agreement of $(10,700), $7,702, and $(30,955), and net borrowings / (payments) on our long-term debt of $19,614, $(372), and $19,642, respectively. Net borrowings / (payments) on all debt for 2019, 2018, and 2017 were $8,914, $7,330, and $(11,313), respectively (see Note 5 for additional information).
Dividends and Dividend Equivalents. See Note 7 for further discussion.
On February 24, 2020, the Board of Directors declared a quarterly dividend payable to stockholders of record as of March 13, 2020, of our Common Stock and a dividend equivalent payable to holders of certain RSUs as of March 13, 2020, of $0.12 per share and per unit. The dividend payment and dividend equivalent payment will occur on March 27, 2020.
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 (bourbon and whiskey)" in Note 2). 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 December 31, 2019, we met those covenants and restrictions.
At December 31, 2019, our current assets exceeded our current liabilities by $144,911, largely due to our inventories, at cost, of $136,931. At December 31, 2019, our cash balance was $3,309 and we have used our Credit Agreement and Note Purchase Agreement for liquidity purposes, with $149,700 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 assess our cash needs and the available sources to fund these needs. We utilize short-term and long-term debt to fund discretionary items, such as capital investments 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.
OFF BALANCE SHEET OBLIGATIONS
Industrial Revenue Bonds. On October 24, 2018, we closed an industrial revenue bond transaction with the City of Williamstown, Kentucky (the "City") in order to receive a 30-year real property tax abatement on our renovated and newly-constructed warehouse buildings near the City. Pursuant to this transaction, the City issued a principal amount of $10,000 of its industrial revenue bonds to us and then used the proceeds to purchase the land and warehouse from us. The City then leased the facilities back to us under a capital lease, the terms of which provide for the payment of basic rent in an amount sufficient to pay principal and interest on the bonds. Our obligation to pay rent under the lease is in the same amount and due on the same date as the City’s obligation to pay debt service on the bonds which we hold. The lease permits us to present the bonds at any time for cancellation, upon which our obligation to pay basic rent would be canceled. The bonds’ maturity date is 2047, at which time the facilities will revert to us without costs. If we were to present the bonds for cancellation prior to maturity, a nominal fee would be incurred.
We recorded the land and buildings as assets in property, plant, and equipment, net, on our Consolidated Balance Sheets. Because we own all outstanding bonds, have a legal right to set-off, and intend to set-off the corresponding lease and interest payment, we have netted the capital lease obligation with the bond asset. No amount for our obligation under the capital lease is reflected on our Consolidated Balance Sheet, nor do we reflect an amount for the corresponding industrial revenue bond asset (see Note 9 for additional information).
The following table provides information on the amounts and payments of our contractual obligations at December 31, 2019:
|Payments due by period|
|Long-term debt||$||41,508 || ||$||401 || ||$||5,907 || ||$||12,000 || ||$||23,200 || |
|Interest on long-term debt||8,362 || ||1,504 || ||2,856 || ||2,236 || ||1,766 || |
|Operating leases||7,132 || ||2,546 || ||3,440 || ||1,146 || |