UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________________ to _________________________________
Commission File Number: 0-17196
MGP INGREDIENTS, INC.
(Exact name of registrant as specified in its charter)
|
| |
KANSAS | 45-4082531 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
100 Commercial Street, Atchison, Kansas | 66002 |
(Address of principal executive offices) | (Zip Code) |
(913) 367-1480
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X ] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an "emerging growth company." See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
[ ] Large accelerated filer [X] Accelerated filer
[ ] Non-accelerated filer (Do not check if smaller reporting company [ ] Smaller Reporting Company
[ ] Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ]Yes [X] No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
16,724,736 shares of Common Stock, no par value as of October 26, 2017
INDEX
METHOD OF PRESENTATION
Throughout this Report, when we refer to "the Company," "MGP," "we," "us," "our," and words of similar import, we are referring to the combined business of MGP Ingredients, Inc. and its consolidated subsidiaries, except to the extent that the context otherwise indicates. In this document, for any references to Note 1 through Note 9, refer to the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1.
All amounts in this report, except for share, par values, bushels, gallons, pounds, mmbtu, proof gallons, per share, per bushel, per gallon, per proof gallon and percentage amounts, are shown in thousands unless otherwise noted.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts) |
| | | | | | | | | | | | | | | | |
| | Quarter Ended | | Year to Date Ended |
| | September 30,
2017 | | September 30,
2016 | | September 30,
2017 | | September 30,
2016 |
Sales | | $ | 87,852 |
| | $ | 83,711 |
| | $ | 267,089 |
| | $ | 243,076 |
|
Less: excise taxes | | 1,519 |
| | 3,820 |
| | 7,834 |
| | 5,958 |
|
Net sales | | 86,333 |
| | 79,891 |
| | 259,255 |
| | 237,118 |
|
Cost of sales (a) | | 67,708 |
| | 64,770 |
| | 202,764 |
| | 189,420 |
|
Gross profit | | 18,625 |
| | 15,121 |
| | 56,491 |
| | 47,698 |
|
Selling, general and administrative expenses | | 8,154 |
| | 6,981 |
| | 24,114 |
| | 19,706 |
|
Other operating income, net | | — |
| | (3,385 | ) | | — |
| | (3,385 | ) |
Operating income | | 10,471 |
| | 11,525 |
| | 32,377 |
| | 31,377 |
|
Gain on sale of equity method investment (Note 2) | | 11,381 |
| | — |
| | 11,381 |
| | — |
|
Equity method investment earnings (loss) (Note 2) | | — |
| | 664 |
| | (348 | ) | | 2,260 |
|
Interest expense, net | | (224 | ) | | (341 | ) | | (934 | ) | | (980 | ) |
Income before income taxes | | 21,628 |
| | 11,848 |
| | 42,476 |
| | 32,657 |
|
Income tax expense (Note 4) | | 7,491 |
| | 2,316 |
| | 13,292 |
| | 9,758 |
|
Net income | | $ | 14,137 |
| | $ | 9,532 |
| | $ | 29,184 |
| | $ | 22,899 |
|
| | | | | | | | |
Income attributable to participating securities | | 414 |
| | 294 |
| | 806 |
| | 711 |
|
Net income attributable to common shareholders and used in EPS calculation (Note 5) | | $ | 13,723 |
| | $ | 9,238 |
| | $ | 28,378 |
| | $ | 22,188 |
|
| | | | | | | | |
Share information: | | | | | | | | |
Diluted weighted average common shares | | 16,751,346 |
| | 16,653,717 |
| | 16,735,378 |
| | 16,626,024 |
|
| | | | | | | | |
Basic and diluted earnings per common share | | $ | 0.82 |
| | $ | 0.55 |
| | $ | 1.70 |
| | $ | 1.33 |
|
Dividends and dividend equivalents per common share | | $ | 0.89 |
| | $ | 0.02 |
| | $ | 0.97 |
| | $ | 0.10 |
|
| |
(a) | Includes related party purchases of $0 and $6,700 for the quarters ended September 30, 2017 and 2016, respectively. Includes related party purchases of $18,425 and $19,639 for the year to date periods ended September 30, 2017 and 2016, respectively. |
See accompanying notes to unaudited condensed consolidated financial statements
MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Year to Date Ended |
| September 30,
2017 | | September 30,
2016 | | September 30,
2017 | | September 30,
2016 |
Net income | $ | 14,137 |
| | $ | 9,532 |
| | $ | 29,184 |
| | $ | 22,899 |
|
Other comprehensive loss, net of tax: | | | | | | | |
Change in post-employment benefits | (39 | ) | | (17 | ) | | (120 | ) | | (52 | ) |
Change in equity method investments | — |
| | — |
| | — |
| | (4 | ) |
Other comprehensive loss | (39 | ) | | (17 | ) | | (120 | ) | | (56 | ) |
Comprehensive income | $ | 14,098 |
| | $ | 9,515 |
| | $ | 29,064 |
| | $ | 22,843 |
|
See accompanying notes to unaudited condensed consolidated financial statements
MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
|
| | | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
Current Assets | | | | |
Cash and cash equivalents | | $ | 7,113 |
| | $ | 1,569 |
|
Receivables (less allowance for doubtful accounts: September 30, 2017 - $24; December 31, 2016 - $24) | | 37,451 |
| | 26,085 |
|
Inventory | | 89,652 |
| | 78,858 |
|
Prepaid expenses | | 2,508 |
| | 1,684 |
|
Refundable income taxes | | 233 |
| | 2,705 |
|
Total current assets | | 136,957 |
| | 110,901 |
|
Property and equipment | | 255,974 |
| | 246,219 |
|
Less accumulated depreciation and amortization | | (161,540 | ) | | (153,428 | ) |
Property and equipment, net | | 94,434 |
| | 92,791 |
|
Equity method investments (Note 2) | | — |
| | 18,934 |
|
Other assets | | 2,626 |
| | 2,710 |
|
Total assets | | $ | 234,017 |
| | $ | 225,336 |
|
Current Liabilities | | |
| | |
|
Current maturities of long-term debt | | $ | 368 |
| | $ | 4,359 |
|
Accounts payable | | 20,710 |
| | 20,342 |
|
Accounts payable to affiliate, net | | — |
| | 3,349 |
|
Accrued expenses | | 9,715 |
| | 8,945 |
|
Total current liabilities | | 30,793 |
| | 36,995 |
|
Long-term debt, less current maturities | | 21,496 |
| | 16,218 |
|
Revolving credit facility | | 12,296 |
| | 15,424 |
|
Deferred credits | | 2,361 |
| | 2,978 |
|
Accrued retirement, health and life insurance benefits | | 3,381 |
| | 3,604 |
|
Deferred income taxes | | 3,788 |
| | 3,432 |
|
Other noncurrent liabilities | | 465 |
| | 393 |
|
Total liabilities | | 74,580 |
| | 79,044 |
|
Commitments and Contingencies (Note 6) | |
|
| |
|
|
Stockholders’ Equity | | |
| | |
|
Capital stock | | |
| | |
|
Preferred, 5% non-cumulative; $10 par value; authorized 1,000 shares; issued and outstanding 437 shares | | 4 |
| | 4 |
|
Common stock | | |
| | |
|
No par value; authorized 40,000,000 shares; issued 18,115,965 shares at September 30, 2017 and December 31, 2016, and 16,723,696 and 16,658,765 shares outstanding at September 30, 2017 and December 31, 2016, respectively | | 6,715 |
| | 6,715 |
|
Additional paid-in capital | | 14,961 |
| | 14,279 |
|
Retained earnings | | 155,175 |
| | 142,652 |
|
Accumulated other comprehensive loss, net of tax | | (493 | ) | | (373 | ) |
Treasury stock, at cost | | |
| | |
|
Shares of 1,392,269 at September 30, 2017 and 1,457,200 at December 31, 2016 | | (16,925 | ) | | (16,985 | ) |
Total stockholders’ equity | | 159,437 |
| | 146,292 |
|
Total liabilities and stockholders’ equity | | $ | 234,017 |
| | $ | 225,336 |
|
See accompanying notes to unaudited condensed consolidated financial statements
MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
|
| | | | | | | | |
| | Year to Date Ended |
| | September 30,
2017 | | September 30,
2016 |
Cash Flows from Operating Activities | | | | |
Net income | | $ | 29,184 |
| | $ | 22,899 |
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | | |
| | |
|
Depreciation and amortization | | 8,441 |
| | 8,610 |
|
Distributions received from equity method investee | | 7,131 |
| | 3,300 |
|
Gain on property insurance recoveries | | — |
| | (230 | ) |
Gain on sale of assets | | — |
| | (871 | ) |
Deferred income taxes, including change in valuation allowance | | 356 |
| | (1,216 | ) |
Share-based compensation | | 2,130 |
| | 1,538 |
|
Gain on sale of equity method investment | | (11,381 | ) | | — |
|
Equity method investment (earnings) loss | | 348 |
| | (2,260 | ) |
Changes in Operating Assets and Liabilities: | | |
| | |
|
Receivables, net | | (11,366 | ) | | (6,504 | ) |
Inventory | | (10,794 | ) | | (16,910 | ) |
Prepaid expenses | | (824 | ) | | 283 |
|
Accounts payable | | 4,193 |
| | (3,340 | ) |
Accounts payable to affiliate, net | | (3,349 | ) | | 193 |
|
Accrued expenses | | 790 |
| | (2,241 | ) |
Income taxes payable | | 2,472 |
| | (642 | ) |
Deferred credit | | (617 | ) | | (223 | ) |
Accrued retirement health and life insurance benefits | | (267 | ) | | (542 | ) |
Net cash provided by operating activities | | 16,447 |
| | 1,844 |
|
Cash Flows from Investing Activities | | |
| | |
|
Additions to plant, property and equipment | | (13,630 | ) | | (12,666 | ) |
Return of equity method investment | | 22,832 |
| | — |
|
Proceeds from property insurance recoveries | | 14 |
| | 230 |
|
Proceeds from sale of property and other | | — |
| | 1,208 |
|
Net cash provided by (used in) investing activities | | 9,216 |
| | (11,228 | ) |
Cash Flows from Financing Activities | | |
| | |
|
Stock shares repurchased | | (1,377 | ) | | (1,518 | ) |
Payment of dividends | | (16,692 | ) | | (1,722 | ) |
Proceeds on long-term debt | | 20,000 |
| | — |
|
Principal payments on long-term debt | | (268 | ) | | (2,259 | ) |
Proceeds from credit facility | | 20,580 |
| | 23,408 |
|
Payments on credit facility | | (41,985 | ) | | (9,158 | ) |
Loan fees incurred with borrowings | | (377 | ) | | (114 | ) |
Net cash provided by (used in) financing activities | | (20,119 | ) | | 8,637 |
|
Increase (Decrease) in cash and cash equivalents | | 5,544 |
| | (747 | ) |
Cash and cash equivalents, beginning of year | | 1,569 |
| | 747 |
|
Cash and cash equivalents, end of period | | $ | 7,113 |
| | $ | — |
|
See accompanying notes to unaudited condensed consolidated financial statements
MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Capital Stock Preferred | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total |
Balance, December 31, 2016 | | $ | 4 |
| | $ | 6,715 |
| | $ | 14,279 |
| | $ | 142,652 |
| | $ | (373 | ) | | $ | (16,985 | ) | | $ | 146,292 |
|
Comprehensive income: | | | | | | | | | | | | | | |
Net income | | — |
| | — |
| | — |
| | 29,184 |
| | — |
| | — |
| | 29,184 |
|
Other Comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (120 | ) | | — |
| | (120 | ) |
Dividends and dividend equivalents, net of estimated forfeitures | | — |
| | — |
| | — |
| | (16,661 | ) | | — |
| | — |
| | (16,661 | ) |
Share-based compensation | | — |
| | — |
| | 1,686 |
| | — |
| | — |
| | — |
| | 1,686 |
|
Stock shares awarded, forfeited, and/or vested | | — |
| | — |
| | (1,004 | ) | | — |
| | — |
| | 1,437 |
| | 433 |
|
Stock shares repurchased | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,377 | ) | | (1,377 | ) |
Balance, September 30, 2017 | | $ | 4 |
| | $ | 6,715 |
| | $ | 14,961 |
| | $ | 155,175 |
| | $ | (493 | ) | | $ | (16,925 | ) | | $ | 159,437 |
|
See accompanying notes to unaudited condensed consolidated financial statements
MGP INGREDIENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise noted)
Note 1. Accounting Policies and Basis of Presentation.
The Company. MGP Ingredients, Inc. ("Company") is a Kansas corporation headquartered in Atchison, Kansas. It was incorporated in 2011 and is a holding company with no operations of its own. Its principal directly-owned operating subsidiaries are MGPI Processing, Inc. ("Processing") and MGPI of Indiana, LLC ("MGPI-I"). Processing was incorporated in Kansas in 1957 and is the successor to a business founded in 1941 by Cloud L. Cray, Sr. On January 3, 2012, MGP Ingredients, Inc. reorganized into a holding company structure (the "Reorganization") through a series of steps involving various legal entities. Prior to the Reorganization, Processing was named MGP Ingredients, Inc.
Basis of Presentation and Principles of Consolidation. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements as of and for the quarter ended September 30, 2017 should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission ("SEC"). The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal and recurring adjustments) necessary to fairly present the results for interim periods in accordance with U.S. generally accepted accounting principles (“GAAP”). Pursuant to the rules and regulations of the SEC, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted.
Use of Estimates. The financial reporting policies of the Company conform to GAAP. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The application of certain of these policies places significant demands on management’s judgment, with financial reporting results relying on estimation about the effects of matters that are inherently uncertain. For all of these policies, management cautions that future events rarely develop as forecast, and estimates routinely require adjustment and may require material adjustment.
Inventory. Inventory includes finished goods, raw materials in the form of agricultural commodities used in the production process and certain maintenance and repair items. Bourbon and whiskeys are normally aged in barrels for several years, following industry practice; all barreled bourbon and whiskey is classified as a current asset. The Company includes warehousing, insurance, and other carrying charges applicable to barreled whiskey in inventory costs.
Inventories are stated at lower of cost or net realizable value on the first-in, first-out, or FIFO, method. Inventory valuations are impacted by constantly changing prices paid for key materials, primarily corn. Inventory consists of the following:
|
| | | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
Finished goods | | $ | 16,236 |
| | $ | 14,002 |
|
Barreled distillate (bourbon and whiskey) | | 58,582 |
| | 50,941 |
|
Work in process | | 2,006 |
| | 1,933 |
|
Raw materials | | 4,245 |
| | 4,274 |
|
Maintenance materials | | 7,033 |
| | 6,231 |
|
Other | | 1,550 |
| | 1,477 |
|
Total | | $ | 89,652 |
| | $ | 78,858 |
|
Equity Method Investments. The Company accounted for its investments in non-consolidated subsidiaries under the equity method of accounting when the Company had significant influence, but did not have more than 50 percent voting control, and was not considered the primary beneficiary. Under the equity method of accounting, the Company reflected its investment in non-consolidated subsidiaries within the Company’s Condensed Consolidated Balance Sheets as Equity method investments; the Company’s share of the earnings or losses of the non-consolidated subsidiaries were reflected as Equity method investment earnings in the Condensed Consolidated Statements of Income.
The Company reviewed its investments in non-consolidated subsidiaries for impairment whenever events or changes in business circumstances indicated that the carrying amount of the investments may not be fully recoverable. Evidence of a loss in value that is other than temporary include, but are not limited to, the absence of an ability to recover the carrying amount of the investment, the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment, or, where applicable, estimated sales proceeds which are insufficient to recover the carrying amount of the investment. If the fair value of the investment is determined to be less than the carrying value and the decline in value is considered to be other than temporary, an appropriate write-down is recorded based on the excess of the carrying value over the best estimate of fair value of the investment.
As of July 3, 2017, the Company has no equity method investments (see Note 2).
Revenue Recognition. Except as discussed below, revenue from the sale of the Company’s products is recognized as products are delivered to customers according to shipping terms and when title and risk of loss have transferred. Income from various government incentive grant programs is recognized as it is earned.
The Company’s Distillery segment routinely produces unaged distillate, and this product is frequently barreled and warehoused at a Company location for an extended period of time in accordance with directions received from the Company’s customers. This product must meet customer acceptance specifications, the risks of ownership and title to the goods must be passed to the customer, and requirements for bill and hold revenue recognition must be met prior to the Company recognizing revenue from the sale of the product. Separate warehousing agreements are maintained for customers who store their product with the Company and warehouse services revenues are recognized as the services are provided.
Sales include customer paid freight costs billed to customers for the quarters ended September 30, 2017 and 2016 of $3,858 and $3,599, respectively and $10,936 and $10,272 for the year to date periods ended September 30, 2017 and 2016, respectively.
Income Taxes. The Company accounts for income taxes using an asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.
Evaluating the need for, and amount of a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence on a jurisdiction-by-jurisdiction basis. Such judgments require the Company to interpret existing tax law and other published guidance as applied to the Company's circumstances. As part of this assessment, the Company considers both positive and negative evidence about its profitability and tax situation. A valuation allowance is recognized if it is more likely than not that at least some portion of the deferred tax asset will not be realized.
Accounting for uncertainty in income tax positions requires management judgment and the use of estimates in determining whether the impact of a tax position is "more likely than not" of being sustained. The Company considers many factors when evaluating and estimating its tax positions, which may require periodic adjustment and which may not accurately anticipate actual outcomes. It is possible that amounts reserved for potential exposure could change as a result of the conclusion of tax examinations and, accordingly, materially affect the Company’s reported net income after tax.
Earnings per Share. Basic and diluted earnings per share are computed using the two-class method, which is an earnings allocation formula that determines net income per share for each class of Common Stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income attributable to common shareholders by the weighted average shares outstanding during the period.
Long-Lived Assets and Loss on Impairment of Assets. Management reviews long-lived assets, mainly property and equipment assets, whenever events or circumstances indicate that usage may be limited and carrying values may not be fully recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are determined to be impaired, the impairment is measured by the amount by which the asset carrying value exceeds the estimated fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. No events or conditions occurred during the quarter ended September 30, 2017 that required the Company to test its long-lived assets for impairment.
Fair Value of Financial Instruments. The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy is broken down into three levels based upon the observability of inputs. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability.
The Company’s short term financial instruments include cash and cash equivalents, accounts receivable and accounts payable. The carrying value of the short term financial instruments approximates the fair value due to their short term nature. These financial instruments have no stated maturities or the financial instruments have short term maturities that approximate market.
The fair value of the Company’s debt is estimated based on current market interest rates for debt with similar maturities and credit quality. The fair value of the Company’s debt was $35,753 and $37,412 at September 30, 2017 and December 31, 2016, respectively. The financial statement carrying value of total debt was $34,160 (including unamortized loan fees of $745) and $36,001 (including unamortized loan fees of $576) at September 30, 2017 and December 31, 2016, respectively. These fair values are considered Level 2 under the fair value hierarchy.
Recent Accounting Pronouncements.
In May 2017, the FASB issued Accounting Standards Update ("ASU") 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies what constitutes a modification of a share-based payment award. This ASU is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company is evaluating the effect that ASU 2017-09 will have on its consolidated financial statements and related disclosures.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires companies to present the service cost component of net benefit cost in the same line items in which they report compensation cost. Companies will present all other components of net benefit cost outside operating income, if this subtotal is presented. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company is evaluating the effect that ASU 2017-07 will have on its consolidated financial statements and related disclosures.
ASU Transition Updates.
In February 2016, the FASB issued ASU 2016-02, Leases, which aims to make leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. This ASU is effective for all interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements and related disclosures. At September 30, 2017, the Company had various machinery and equipment operating leases, as well as operating leases for 208 rail cars and one office space.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will replace numerous requirements in GAAP, including industry specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. Since May 2014, the FASB has issued updates to ASU No. 2014-09. Update ASU No. 2015-14 was issued in August 2015, Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date; update ASU No. 2016-08, Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting Gross versus Net) was issued in March 2016; update ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing was issued in April 2016; update ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients was issued in May 2016; update ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers was issued in December 2016; and ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments was issued in September 2017. The core principle of the new standard, as well as the updates, is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. In July 2015, the FASB approved the deferral of the new standard's effective date by one year. The new standard is effective for annual reporting periods beginning after December 15, 2017. The FASB will permit companies to adopt the new standard early, but not before the original effective date of annual reporting periods beginning after December 15, 2016.
In 2016, the Company established an implementation team consisting of internal and external representatives. The implementation team is in the process of assessing the impact the new standard will have on the consolidated financial statements, as well as gathering data and information for the expanded revenue disclosure required under the new standard. The scoping for the assessment is complete and the testing of individual contracts is also complete. Assessment findings have been compiled and are in the review process. In addition, the implementation team is in the process of identifying, and will then implement, appropriate changes to business processes, systems and/or controls to support recognition and disclosure under the new standard. The implementation team will report findings and progress of the project to management and the Audit Committee on a frequent basis through the effective date. The Company will adopt the requirements of the new standard in the first quarter of 2018 and anticipates using the modified retrospective transition method. While we have not identified any material differences in the amount and timing of revenue recognition related to ASU 2014-09, our evaluation is not complete and, accordingly, we have not yet reached a conclusion on the overall impacts of adopting ASU 2014-09.
Note 2. Equity Method Investments.
As of September 30, 2017, the Company had no investments accounted for using the equity method of accounting. Until July 3, 2017, the Company had a 30 percent interest in Illinois Corn Processing ("ICP"), which manufactured alcohol for fuel, industrial and beverage applications.
On July 3, 2017, the Company completed the sale of its 30 percent equity ownership interest in ICP to Pacific Ethanol Central, LLC ("Pacific Ethanol"), consistent with an Agreement and Plan of Merger ("Merger Agreement") entered into on June 26, 2017.
The Company received total cash proceeds of $9,000 (before transaction expenses and taxes), as well as a secured promissory note ("Note") with a principal amount of $14,008. On September 15, 2017, the Note was paid off and the Company received a total of $14,263, including principal, interest, and a final working capital adjustment. As a result of the ICP sale transaction, for the quarter and year to date period ended September 30, 2017, the Company reported a gain on sale of equity method investment of $11,381 (before tax), on its Condensed Consolidated Statements of Income.
The Merger Agreement also contemplated a special distribution of all of ICP’s cash and cash equivalents to equity owners prior to the closing. On June 28, 2017, the Company received $6,600 representing its 30 percent share of a dividend in the amount of $22,000 approved on June 26, 2017. The Company also received a smaller distribution of $830 on June 30, 2017 representing its 30 percent share of an additional distribution in the amount of $2,765.
Summary Financial Information (unaudited). Condensed financial information related to the Company’s non-consolidated equity method investment in ICP is shown below.
|
| | | | | | | | | | | | | | | | |
| | Quarter Ended | | Year to Date Ended |
| | September 30,
2017 | | September 30,
2016 | | September 30,
2017 | | September 30,
2016 |
ICP’s Operating results: | | | | | | | | |
Net sales (a) | | $ | — |
| | $ | 44,019 |
| | $ | 78,062 |
| | $ | 134,204 |
|
Cost of sales and expenses (b) | | — |
| | 41,805 |
| | 79,224 |
| | 126,671 |
|
Net income (loss) | | $ | — |
| (c) | $ | 2,214 |
| | $ | (1,162 | ) | (c) | $ | 7,533 |
|
| |
(a) | Includes related party sales to MGPI of $0 and $6,700 for the quarters ended September 30, 2017 and 2016, respectively. Includes related party sales to MGPI of $17,672 and $19,639 for the year to date periods ended September 30, 2017 and 2016, respectively. |
| |
(b) | Includes depreciation and amortization of $0 and $738 for the quarters ended September 30, 2017 and 2016, respectively. Includes depreciation and amortization of $1,720 and $2,221 for the year to date periods ended September 30, 2017 and 2016, respectively. |
| |
(c) | The Company's equity method investment in ICP ended on July 3, 2017, when it completed the sale of its 30 percent equity ownership interest. |
The Company’s equity method investment earnings (loss) and gain on sale of equity method investment, based on unaudited financial statements, was as follows:
|
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | Year to Date Ended | |
| | September 30,
2017 | | September 30,
2016 | | September 30,
2017 | | September 30,
2016 | |
Gain on sale of equity method investment | | $ | 11,381 |
| (a) | $ | — |
| | $ | 11,381 |
| (a) | $ | — |
| |
ICP (30% interest) | | — |
| | 664 |
| | (348 | ) | | 2,260 |
| |
| | $ | 11,381 |
| | $ | 664 |
| | $ | 11,033 |
| | $ | 2,260 |
| |
| |
(a) | The Company's equity method investment in ICP ended on July 3, 2017, when it completed the sale of its 30 percent equity ownership interest. |
The Company’s equity method investment was as follows: |
| | | | | | | | | |
|
| September 30,
2017 |
| December 31,
2016 | |
ICP (30% interest)(a) |
| $ | — |
|
| $ | 18,934 |
| |
(a) The Company's equity method investment in ICP ended on July 3, 2017, when it completed the sale of its 30 percent equity ownership interest.
Note 3. Corporate Borrowings.
Indebtedness Outstanding:
|
| | | | | | | |
Description(a) | September 30, 2017 | | December 31, 2016 |
Credit Agreement - Revolver, 2.841% (variable rate) due 2022 | $ | 12,848 |
| | $ | 16,000 |
|
Credit Agreement - Fixed Asset Sub-Line term loan (closed August 23, 2017 - see below) | — |
| | 5,253 |
|
Credit Agreement - Term Loan (closed August 23, 2017 - see below) | — |
| | 13,000 |
|
Secured Promissory Note, 3.71% (variable rate) due 2022 | 2,057 |
| | 2,324 |
|
Prudential Term Loan, 3.53% (fixed rate) due 2017 | 20,000 |
| | — |
|
Unamortized loan fees(b) | (745 | ) | | (576 | ) |
Total | $ | 34,160 |
| | $ | 36,001 |
|
Less current maturities of long term debt | (368 | ) | | (4,359 | ) |
Long-term debt | $ | 33,792 |
| | $ | 31,642 |
|
(a) Interest rates are as of September 30, 2017.
(b) Loan fees are being amortized over the life of the Credit Agreements.
Credit Agreements. On August 23, 2017, the Company entered into a new credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association. The new credit agreement replaces the Company’s existing Third Amended and Restated Credit Agreement, which included a revolver, a fixed asset sub-line term loan, and a term loan. The Credit Agreement provides for a $150,000 revolving credit facility. The Company may increase the facility from time to time by an aggregate principal amount of up to $25,000 provided certain conditions are satisfied and at the discretion of the lender. The Credit Agreement matures on August 23, 2022.
The Credit Agreement includes certain requirements and covenants, which the Company was in compliance with at September 30, 2017. The Company incurred $183 of new loan fees related to the Credit Agreement during the quarter ended September 30, 2017. The unamortized balance of total loan fees related to the Credit Agreement was $552 at September 30, 2017 and is included in the carrying value of total debt on the Condensed Consolidated Balance Sheets as described above in the Fair Value of Financial Instruments section. The loan fees are being amortized over the life of the Credit Agreement.
As of September 30, 2017, the Company's total outstanding borrowings under the Credit Agreement were $12,848 leaving $137,152 available. The interest rate for the borrowings of the Credit Agreement at September 30, 2017 was 2.84 percent.
On August 23, 2017, the Company also entered into a Note Purchase and Private Shelf Agreement (the “Note Purchase Agreement”) with PGIM, Inc., an affiliate of Prudential Financial, Inc., and certain affiliates of PGIM, Inc. The Note Purchase Agreement provides for the issuance of up to $75,000 of Senior Secured Notes, and the Company issued $20,000 of Senior Secured Notes with a maturity date of August 23, 2027. The Senior Secured Notes bear interest at a rate of 3.53 percent per year. The Note Purchase Agreement includes certain requirements and covenants, which the Company was in compliance with at September 30, 2017. The Company incurred $194 of new loan fees related to the Note Purchase Agreement during the quarter ended September 30, 2017. The unamortized balance of total loan fees related to the Note Purchase Agreement was $192 at September 30, 2017 and is included in the carrying value of total debt on the Condensed Consolidated Balance Sheets as described above in the Fair Value of Financial Instruments section. The loan fees are being amortized over the life of the Note Purchase Agreement.
Note 4. Income Taxes.
Income tax expense for the quarter and year to date period ended September 30, 2017 was $7,491 and $13,292, respectively, for an effective tax rate for the quarter of 34.6 percent and for the year to date period of 31.3 percent. The increase in tax expense compared to prior quarters in 2017, largely relates to the Company’s sale of its interest in ICP (see Note 2), and the corresponding tax gain being recognized in the annual effective tax rate calculation.
The effective tax rate differs from the 35 percent federal statutory rate on pretax income, primarily due to to state income taxes, the impact of income tax benefits related to share-based compensation as accounted for in ASU 2016-09, Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, the domestic production activities deduction, and state tax planning, including state income tax credits in Indiana and Kansas, and changes to the Company's valuation allowance. The Company released its valuation allowance related to its capital loss carryforward deferred tax asset into the annual effective tax rate calculation in the quarter ended June 30, 2017. This release was based upon the anticipated capital gain related to the Company's sale of its 30 percent equity ownership interest in ICP (see Note 2). As of September 30, 2017, the Company has a remaining valuation allowance of $106 related to state net operating loss carry forwards in states in which the Company no longer files tax returns.
Income tax expense for the quarter and year to date period ended September 30, 2016, was $2,316 and $9,758, respectively, for an effective tax rate of 19.5 percent for the quarter and 29.9 percent for the year to date period. The primary reasons for the increase in the effective tax rate from the prior year quarter and year to date period are a decrease in the amount of discrete excess tax benefits resulting from the implementation of ASU 2016-09, Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, relative to a higher amount of pretax earnings, and the dilutive effect of the gain on sale of ICP sale (see Note 2) on certain tax attributes including the domestic production activities deduction.
Note 5. Dividends and Earnings per Share.
Dividend and dividend equivalent information for year to date periods ended September 30, 2017 and 2016 is detailed below:
|
| | | | | | | | | | | | | | | |
Dividend and Dividend Equivalent Information (per Share and Unit) | |
Declaration date | | Payment date | | Declared | | Paid | | Total payment | |
2017 | | | | | | | | | |
February 15, 2017 | | March 24, 2017 | | $ | 0.04 |
| | $ | 0.04 |
| | $ | 688 |
| |
May 2, 2017 | | June 9, 2017 | | 0.04 |
| | 0.04 |
| | 688 |
| |
August 1, 2017 | | September 8, 2017 | | 0.85 |
| | 0.85 |
| | 14,628 |
| (a) |
August 1, 2017 | | September 11, 2017 | | 0.04 |
| | 0.04 |
| | 688 |
| |
| | | | $ | 0.97 |
| | $ | 0.97 |
| | $ | 16,692 |
| |
2016 | | | | | | | | | |
March 7, 2016 | | April 14, 2016 | | $ | 0.08 |
| | $ | 0.08 |
| | $ | 1,378 |
| |
August 1, 2016 | | September 8, 2016 | | 0.02 |
| | 0.02 |
| | 344 |
| |
| | | | $ | 0.10 |
| | $ | 0.10 |
| | $ | 1,722 |
| |
| |
(a) | On August 1, 2017, the Company's board of directors declared a special dividend of $0.85 per share of common stock payable on September 8, 2017 to stockholders of record as of August 18, 2017. On June 27, 2017, the Company announced that it had entered into a merger agreement with an affiliate of SEACOR Holdings, Inc. and Pacific Ethanol Central, LLC that would result in a sale of its 30 percent equity ownership interest in ICP to Pacific Ethanol. The Company said at that time that it expected the board to approve a special dividend on completion of the transaction. The transaction was completed on July 3, 2017. |
The computations of basic and diluted earnings per share for the quarter and year to date periods ended September 30, 2017 and 2016 are as follows:
|
| | | | | | | | | | | | | | | | |
| | Quarter Ended | | Year to Date Ended |
| | September 30,
2017 | | September 30,
2016 | | September 30,
2017 | | September 30,
2016 |
Operations: | | | | | | | | |
Net income(a) | | $ | 14,137 |
| | $ | 9,532 |
| | $ | 29,184 |
| | 22,899 |
|
Income attributable to participating securities(b) | | 414 |
| | 294 |
| | 806 |
| | 711 |
|
Net income attributable to common shareholders | | $ | 13,723 |
| | 9,238 |
| | $ | 28,378 |
| | 22,188 |
|
| | | | | | | | |
Share information: | | | | | | | | |
Basic and diluted weighted average common shares(c) | | 16,751,346 |
| | 16,653,717 |
| | 16,735,378 |
| | 16,626,024 |
|
| | | | | | | | |
Basic and diluted earnings per share | | $ | 0.82 |
| | $ | 0.55 |
| | $ | 1.70 |
| | $ | 1.33 |
|
| | | | | | | | |
| |
(a) | Net income attributable to all shareholders. |
| |
(b) | At September 30, 2017 and 2016, participating securities included 485,491 and 525,986 nonvested restricted stock units, respectively. |
| |
(c) | Under the two-class method, weighted average common shares at September 30, 2017 and 2016, exclude nonvested, participating securities of 485,491 and 525,986, respectively. |
Note 6. Commitments and Contingencies.
Commitments. Open purchase order commitments at September 30, 2017 related to raw materials and packaging used in the ordinary course of business were $51,539 extending out to December 2018. Open purchase order commitments at September 30, 2017 related to the purchase of capital assets were $6,116.
Certain commodities the Company uses in its production process are exposed to market price risk due to volatility in the prices for those commodities. The Company's grain supply contract for its Lawrenceburg and Atchison facilities permits the Company to purchase grain for delivery up to 12 months into the future at negotiated prices. The pricing for these contracts is based on a formula using several factors. The Company has determined that the firm commitments to purchase grain under the terms of these contracts meet the normal purchases and sales exception as defined under ASC 815, Derivatives and Hedging, and has excluded the fair value of these commitments from recognition within its consolidated financial statements until the actual contracts are physically settled.
The Company’s production process also involves the use of wheat flour and natural gas. The contracts for wheat flour and natural gas range from monthly contracts to multi-year supply arrangements; however, because the quantities involved have always been for amounts to be consumed within the normal expected production process, the Company has determined that these contracts meet the criteria for the normal purchases and sales exception and have excluded the fair value of these commitments from recognition within its consolidated financial statements until the actual contracts are physically settled.
Contingencies. There are various legal and regulatory proceedings involving the Company and its subsidiaries. The Company accrues estimated costs for a contingency when management believes that a loss is probable and can be reasonably estimated.
| |
• | On December 21, 2016, the U.S. Environmental Protection Agency (“EPA”) issued a Notice of Violation to the Company alleging the Company commenced construction of new aging warehouses for whiskey at its facility in Lawrenceburg, Indiana, without first applying for or obtaining a Clean Air Act permit and without adequately demonstrating to the EPA that emissions control equipment did not need to be installed to meet applicable air quality standards. The Company notes that neither EPA nor the State of Indiana have required emission control equipment for aging whiskey warehouses and, to our knowledge, no other whiskey distillers in the U.S. have been required to install emissions control equipment in their aging whiskey warehouses. No demand for a penalty has been made in connection with the Notice of Violation, but the Company believes it is probable that a penalty will be assessed. Although it is not possible to reasonably estimate a loss or range of loss at the date of this filing, the Company currently does not expect that the amount of any such penalty or related remedies would have a material adverse effect on the Company’s business, financial condition or results of operations. |
| |
• | A chemical release occurred at the Company's Atchison facility on October 21, 2016, which resulted in emissions venting into the air. The Company reported the event to the EPA, the Occupational, Safety, and Health Administration ("OSHA"), and to Kansas and local authorities on that date, and is cooperating fully to investigate and ensure that all appropriate response actions are taken. The Company has also engaged outside experts to assist the investigation and response. The Company believes it is probable that a fine or penalty may be imposed by regulatory authorities, but it is currently unable to reasonably estimate the amount thereof for Kansas and local authorities since some investigations are not complete and could take several months up to a few years to complete. Private plaintiffs have initiated, and additional private plaintiffs may initiate, legal proceedings for damages resulting from the emission, but the Company is currently unable to reasonably estimate the amount of any such damages that might result. The Company's insurance is expected to provide coverage of any damages to private plaintiffs, subject to a deductible of $250, but certain regulatory fines or penalties may not be covered and there can be no assurance to the amount or timing of possible insurance recoveries if ultimately claimed by the Company. There was no significant damage to the Company's Atchison plant as a result of this incident. No other MGP facilities, including the distillery in Lawrenceburg, Indiana, were affected by this incident. |
OSHA completed its investigation and, on April 19, 2017, issued its penalty to the Company in the amount of $138. Management settled this assessment with OSHA in full for $75, which was paid on May 16, 2017. A portion, or all, of the penalty amount may be covered by insurance.
The EPA informed the Company on August 1, 2017, that it intends to seek civil penalties of approximately $250 in connection with its investigation, while offering the Company the opportunity to settle the matter prior to the EPA proceeding with a formal enforcement action. The Company is seeking a negotiated settlement with the EPA. Since negotiations are ongoing and EPA-proposed penalties are not material to the quarter ended September 30, 2017, the Company has not included an accrual in its results. A portion, or all, of the settled penalty amount may be covered by insurance.
| |
• | The Alcohol and Tobacco Tax and Trade Bureau ("TTB") performed a federal excise tax audit of the Company’s subsidiaries, MGPI of Indiana, LLC and MGPI Processing, Inc., for the periods January 1, 2012 through July 31, 2015 and January 1, 2013 through July 31, 2015, respectively. TTB informed the Company that it would be assessing a penalty as a result of the audit, and the Company offered a settlement for the penalty. The settlement has been accepted in principle by the TTB and the amount expensed in the prior year was insignificant to the Company’s 2016 financial results. |
Note 7. Employee and Non-Employee Benefit Plans.
Equity-Based Compensation Plans. The Company’s equity-based compensation plans provide for the awarding of stock options, stock appreciation rights, shares of restricted stock ("Restricted Stock"), and restricted stock units ("RSUs") for senior executives and salaried employees, as well as non-employee directors. The Company has two active equity-based compensation plans: the Employee Equity Incentive Plan of 2014 (the "2014 Plan") and the Non-Employee Director Equity Incentive Plan (the "Directors' Plan"). The 2014 Plan replaced the inactive Stock Incentive Plan of 2004.
As of September 30, 2017, 280,074 RSUs had been granted under the 2014 Plan, with 14,616 of those forfeited for termination of employment. 62,995 shares had been granted related to the Directors' Plan as of September 30, 2017 and 485,491 shares of unvested RSUs were outstanding under the Company’s long-term incentive plans.
As of September 30, 2017, the estimated unaccrued amount of liability-classified awards yet to be granted in 2018, net of estimated forfeitures, was $1,177.
Note 8. Operating Segments.
The Company has two reportable segments: distillery products and ingredient solutions. The distillery products segment consists of food grade alcohol, including premium beverage alcohol and industrial alcohol, and distillery co-products, such as distillers feed (commonly called dried distillers grain in the industry), fuel grade alcohol, and corn oil. The distillery products segment also includes warehouse services, including barrel put away, barrel storage, and barrel retrieval services. Ingredient solutions consists of specialty starches and proteins, commodity starches and commodity proteins.
Operating profit for each segment is based on net sales less identifiable operating expenses. Non-direct selling, general and administrative expenses, interest expense, earnings (losses) from our equity method investments (including gain on sale of equity method investment), other special charges and other general miscellaneous expenses have been excluded from segment operations and classified as Corporate. Receivables, inventories and equipment have been identified with the segments to which they relate. All other assets are considered as Corporate.
|
| | | | | | | | | | | | | | | | |
| | Quarter Ended | | Year to Date Ended |
| | September 30,
2017 | | September 30,
2016 | | September 30,
2017 | | September 30,
2016 |
Net Sales to Customers | | | | | | | | |
Distillery products | | $ | 72,335 |
| | $ | 66,664 |
| | $ | 216,984 |
| | $ | 197,245 |
|
Ingredient solutions | | 13,998 |
| | 13,227 |
| | 42,271 |
| | 39,873 |
|
Total | | 86,333 |
| | 79,891 |
| | 259,255 |
| | 237,118 |
|
Gross Profit | | | | | | | | |
Distillery products | | 16,501 |
| | 12,364 |
| | 49,069 |
| | 40,879 |
|
Ingredient solutions | | 2,124 |
| | 2,757 |
| | 7,422 |
| | 6,819 |
|
Total | | 18,625 |
| | 15,121 |
| | 56,491 |
| | 47,698 |
|
Depreciation and Amortization | | | | | |
|
| | |
Distillery products | | 2,128 |
| | 1,939 |
| | 6,300 |
| | 6,415 |
|
Ingredient solutions | | 419 |
| | 399 |
| | 1,242 |
| | 1,253 |
|
Corporate | | 340 |
| | 290 |
| | 899 |
| | 942 |
|
Total | | 2,887 |
| | 2,628 |
| | 8,441 |
| | 8,610 |
|
Income (loss) before Income Taxes | | | | | | | | |
Distillery products | | 14,836 |
| | 11,215 |
| | 44,485 |
| | 38,497 |
|
Ingredient solutions | | 1,518 |
| | 2,016 |
| | 5,592 |
| | 4,767 |
|
Corporate | | 5,274 |
| | (1,383 | ) | | (7,601 | ) | | (10,607 | ) |
Total | | $ | 21,628 |
| | $ | 11,848 |
| | $ | 42,476 |
| | $ | 32,657 |
|
The following table allocates assets to each segment:
|
| | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
Identifiable Assets | | | | |
Distillery products | | $ | 183,943 |
| | $ | 161,059 |
|
Ingredient solutions | | 27,587 |
| | 27,109 |
|
Corporate | | 22,487 |
| | 37,168 |
|
Total | | $ | 234,017 |
| | $ | 225,336 |
|
Note 9. Subsequent Events.
On October 31, 2017, the Board of Directors declared a quarterly dividend payable to stockholders of record as of November 14, 2017, of the Company's Common Stock, and a dividend equivalent payable to holders of RSUs as of November 14, 2017, of $.04 per share and per unit, payable on December 8, 2017.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(Dollar amounts in thousands, unless otherwise noted)
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report on Form 10-Q contains forward looking statements as well as historical information. All statements, other than statements of historical facts, regarding the prospects of our industry and our prospects, plans, financial position, and strategic plan may constitute forward looking statements. In addition, forward looking statements are usually identified by or are associated with such words as "intend," "plan," "believe," "estimate," "expect," "anticipate," "hopeful," "should," "may," "will," "could," "encouraged," "opportunities," "potential," and/or the negatives or variations of these terms or similar terminology. Forward looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from those expressed or implied in the forward looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward looking statements is included in the section below titled "Risk Factors" (Item 1A). Forward looking statements are made as of the date of this report, and we undertake no obligation to update or revise publicly any forward looking statements, whether because of new information, future events or otherwise.
OVERVIEW
MGP is a leading producer and supplier of premium distilled spirits and specialty wheat proteins and starches. Distilled spirits include premium bourbon and rye whiskeys, and grain neutral spirits, 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 proteins and starches 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.
MGP was incorporated in 2011 in Kansas, continuing a business originally founded by Cloud L. Cray, Sr. in Atchison, Kansas. The Company’s ticker symbol is MGPI.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this Form 10-Q, as well as our audited consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations - General, set forth in our Annual Report on Form 10-K for the year ended December 31, 2016.
RESULTS OF OPERATIONS
Consolidated results
The table below details the consolidated results for the quarters ended September 30, 2017 and 2016: |
| | | | | | | | | | | |
| Quarter Ended September 30, | |
| 2017 | | 2016 | | 2017 v. 2016 | |
Net sales | $ | 86,333 |
| | $ | 79,891 |
| | 8.1 | % | |
Cost of sales | 67,708 |
| | 64,770 |
| | 4.5 |
| |
Gross profit | 18,625 |
| | 15,121 |
| | 23.2 |
| |
Gross margin % | 21.6 | % | | 18.9 | % | | 2.7 |
| pp(a) |
SG&A expenses | 8,154 |
| | 6,981 |
| | 16.8 |
| |
Other operating income, net | — |
| | (3,385 | ) | | (100.0 | ) | |
Operating income | 10,471 |
| | 11,525 |
| | (9.1 | ) | |
Operating margin % | 12.1 | % | | 14.4 | % | | (2.3 | ) | pp |
Gain on sale of equity method investment | 11,381 |
| | — |
| | 100.0 |
| |
Equity method investment earnings | — |
| | 664 |
| | (100.0 | ) | |
Interest expense | (224 | ) | | (341 | ) | | (34.3 | ) | |
Income before income taxes | 21,628 |
| | 11,848 |
| | 82.5 |
| |
Income tax expense | 7,491 |
| | 2,316 |
| | 223.4 |
| |
Effective tax expense rate % | 34.6 | % | | 19.5 | % | | 15.1 |
| pp |
Net income | $ | 14,137 |
| | $ | 9,532 |
| | 48.3 | % | |
Net income margin % | 16.4 | % | | 11.9 | % | | 4.5 |
| pp |
(a) Percentage points ("pp").
Net sales - Net sales for the quarter ended September 30, 2017 were $86,333, an increase of 8.1 percent compared to the year ago quarter, which was the result of increased net sales in both segments. Within the distillery segment, net sales were up 8.5 percent. Driven by strong demand, net sales of higher margin premium beverage alcohol products increased 16.1 percent and industrial alcohol net sales increased 1.0 percent, which resulted in an increase in total food grade alcohol net sales of 11.1 percent. Warehouse services revenue related to the storage of barreled whiskey increased, while lower margin distillers feed and related co-products net sales declined. Within the ingredient solutions segment, net sales were up 5.8 percent. Net sales of specialty wheat proteins and commodity wheat starch increased, while net sales of commodity wheat protein and specialty wheat starches declined (see Segment Results below).
Gross profit - Gross profit for the quarter ended September 30, 2017 was $18,625, an increase of 23.2 percent compared to the quarter ended September 30, 2016. The increase was driven by an increase in gross profit in the distillery products segment, partially offset by a decrease in gross profit in the ingredient solutions segment. In the distillery products segment, gross profit grew by $4,137, or 33.5 percent. In the ingredient solutions segment, gross profit declined by $633, or 23.0 percent (see Segment Results below).
SG&A expenses - SG&A expenses for the quarter ended September 30, 2017 were $8,154, an increase of 16.8 percent compared to the quarter ended September 30, 2016. The increase in SG&A was primarily due to an increase in personnel costs, professional fees, and advertising and promotion.
Operating income - Operating income for the quarter ended September 30, 2017 decreased to $10,471 from $11,525 for the quarter ended September 30, 2016, due to gross profit growth in our distillery products segment that was more than offset by a decrease in other operating income, net (primarily income recorded related to a legal settlement agreement and a gain on sale of long-lived assets recorded in the prior year), an increase in SG&A expenses, and a decline in gross profit in our ingredient solutions segment.
|
| | | | | | | | |
Operating income quarter-versus-quarter | | Operating Income | | Change | |
Operating income for the quarter ended September 30, 2016 | | $ | 11,525 |
| | | |
Increase in gross profit - distillery products segment(a) | | 4,137 |
| | 35.9 |
| pp(b) |
Decrease in gross profit - ingredient solutions segment(a) | | (633 | ) | | (5.5 | ) | pp |
Decrease in other operating income, net | | (3,385 | ) | | (29.3 | ) | pp |
Increase in SG&A expenses | | (1,173 | ) | | (10.2 | ) | pp |
Operating income for the quarter ended September 30, 2017 | | $ | 10,471 |
| | (9.1 | )% | |
(a) See segment discussion.
(b) Percentage points ("pp").
Equity method investment - Our equity method investment earnings decreased to $0 for the quarter ended September 30, 2017, from $664 for the quarter ended September 30, 2016. The decrease in earnings was due to the sale of our ICP equity method investment during the quarter, resulting in a gain on sale of equity method investment of $11,381 (before tax) (see Note 2).
Income tax expense - Income tax expense for the quarter ended September 30, 2017 was $7,491, for an effective tax rate for the quarter of 34.6 percent. Income tax expense for the quarter ended September 30, 2016 was $2,316, for an effective tax rate for the quarter of 19.5 percent. The primary reasons for the 15.1 percentage point increase in our effective tax rate quarter-versus-quarter are the effect of adopting ASU 2016-09, Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting that allowed the Company to receive a tax-effected excess tax benefit windfall in the prior year quarter, and the dilutive effect of the gain on sale of equity method investment in the current quarter (see Note 2) on certain tax attributes including the domestic production activities deduction (see Note 4).
Earnings per share - Earnings per share was $0.82 for the quarter ended September 30, 2017 compared to $0.55 for the quarter ended September 30, 2016. Earnings per share increased, primarily due to the gain on sale of our equity method investment (see Note 2) and improved performance from operations, partially offset by a decrease in other operating income, net. |
| | | | | | | | |
Change in basic and diluted earnings per share quarter-versus-quarter | | Basic and Diluted EPS | | Change | |
Basic and diluted earnings per share for the quarter ended September 30, 2016 | | $ | 0.55 |
| | | |
Change in operations(a) | | 0.09 |
| | 16.4 |
| pp(b) |
Change in other operating income, net(a) | | (0.14 | ) | | (25.5 | ) | pp |
Change in gain on sale of equity method investment | | 0.44 |
| | 80.0 |
| pp |
Change in equity method investment earnings (loss)(a) | | (0.03 | ) | | (5.5 | ) | pp |
Tax: Net effect of ASU 2016-09 | | (0.08 | ) | | (14.5 | ) | pp |
Change in income attributable to participating securities(c) | | (0.01 | ) | | (1.8 | ) | pp |
Basic and diluted earnings per share for the quarter ended September 30, 2017 | | $ | 0.82 |
| | 49.1 | % | |
| |
(a) | Changes are net of tax based on the effective tax rate for the base year (2016), excluding the effect of the ASU 2016-09 adoption on the 2016 rate. |
| |
(b) | Percentage points ("pp"). |
The table below details the consolidated results for the year to date periods ended September 30, 2017 and 2016: |
| | | | | | | | | | | |
| Year to date ended September 30, | |
| 2017 | | 2016 | | 2017 v. 2016 | |
Net sales | $ | 259,255 |
| | $ | 237,118 |
| | 9.3 | % | |
Cost of sales | 202,764 |
| | 189,420 |
| | 7.0 |
| |
Gross profit | 56,491 |
| | 47,698 |
| | 18.4 |
| |
Gross margin % | 21.8 | % | | 20.1 | % | | 1.7 |
| pp(a) |
SG&A expenses | 24,114 |
| | 19,706 |
| | 22.4 |
| |
Other operating income, net | — |
| | (3,385 | ) | | (100.0 | ) | |
Operating income | 32,377 |
| | 31,377 |
| | 3.2 |
| |
Operating margin % | 12.5 | % | | 13.2 | % | | (0.7 | ) | pp |
Gain on sale of equity method investment | 11,381 |
| | — |
| | 100.0 |
| |
Equity method investment earnings (loss) | (348 | ) | | 2,260 |
| | (115.4 | ) | |
Interest expense | (934 | ) | | (980 | ) | | (4.7 | ) | |
Income before income taxes | 42,476 |
| | 32,657 |
| | 30.1 |
| |
Income tax expense | 13,292 |
| | 9,758 |
| | 36.2 |
| |
Effective tax expense rate % | 31.3 | % | | 29.9 | % | | 1.4 |
| pp |
Net income | $ | 29,184 |
| | $ | 22,899 |
| | 27.4 | % | |
Net income margin % | 11.3 | % | | 9.7 | % | | 1.6 |
| pp |
(a) Percentage points ("pp").
Net sales - Net sales for the year to date period ended September 30, 2017 were $259,255, an increase of 9.3 percent compared to the year ago period, which was the result of increased net sales in both segments. Within the distillery segment, net sales were up 10.0 percent. Driven by strong demand, net sales of higher margin premium beverage alcohol products increased 20.4 percent, partially offset by a decline in industrial alcohol product net sales, which resulted in a net increase in total food grade alcohol net sales of 12.4 percent. Warehouse services revenue related to the storage of barreled whiskey also increased, while lower margin distillers feed and related co-products net sales declined. Within the ingredient solutions segment, net sales were up 6.0 percent. Commodity wheat starch, specialty wheat starches, and specialty wheat proteins increased, while net sales of commodity wheat protein declined (see Segment Results below).
Gross profit - Gross profit for the year to date period ended September 30, 2017 was $56,491, an increase of 18.4 percent compared to the year to date period ended September 30, 2016. The increase was driven by an increase in gross profit in both segments. In the distillery products segment, gross profit grew by $8,190, or 20.0 percent. In the ingredient solutions segment, gross profit grew by $603, or 8.8 percent (see Segment Results below).
SG&A expenses - SG&A expenses for the year to date period ended September 30, 2017 were $24,114, an increase of 22.4 percent compared to the year to date period ended September 30, 2016. The increase in SG&A was primarily due to an increase in personnel costs and advertising and promotion.
Operating income - Operating income for the year to date period ended September 30, 2017 increased to $32,377 from $31,377 for the year to date period ended September 30, 2016 due to gross profit growth in both our distillery products and ingredient solutions segments, partially offset by an increase in SG&A expenses and a decrease in other operating income, net (primarily income recorded related to a legal settlement agreement and a gain on sale of long-lived assets recorded in the prior year).
|
| | | | | | | | |
Operating income year to date-versus-year to date | | Operating Income | | Change | |
Operating income for the year to date period ended September 30, 2016 | | $ | 31,377 |
| | | |
Increase in gross profit - distillery products segment(a) | | 8,190 |
| | 26.1 |
| pp(b) |
Increase in gross profit - ingredient solutions segment(a) | | 603 |
| | 1.9 |
| pp |
Decrease in other operating income, net | | (3,385 | ) | | (10.8 | ) | pp |
Increase in SG&A expenses | | (4,408 | ) | | (14.0 | ) | pp |
Operating income for the year to date period ended September 30, 2017 | | $ | 32,377 |
| | 3.2 | % | |
(a) See segment discussion.
(b) Percentage points ("pp").
Equity method investment - Our equity method investment earnings decreased to a loss of $348 for the year to date period ended September 30, 2017, from earnings of $2,260 for the year to date period ended September 30, 2016. The decrease was due to the sale of our ICP equity method investment during the current period, resulting in a gain on sale of equity method investment of $11,381 (before tax), as well as lower operating results (see Note 2).
Income tax expense - Income tax expense for the year to date period ended September 30, 2017 was $13,292, for an effective tax rate for the year to date period of 31.3 percent. Income tax expense for the year to date period ended September 30, 2016 was $9,758, for an effective tax rate for the year to date period of 29.9 percent. The primary reasons for the 1.4 percentage point increase in our effective tax rate period-versus-period are the impact of share based compensation as accounted for in ASU 2016-09, Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, that allowed the Company to receive a tax-effected excess tax benefit windfall during the year ago period, and the dilutive effect of the gain on sale of equity method investment during the current year to date period (see Note 2) on certain tax attributes including the domestic production activities deduction (see Note 4).
Earnings per share - Earnings per share increased to $1.70 in the year to date period ended September 30, 2017 from $1.33 in the year to date period ended September 30, 2016, primarily due to the gain on sale of our equity method investment (see Note 2), improved performance from operations, partially offset by a decrease in other operating income, net, and a decline in equity method investment earnings.
|
| | | | | | | | |
Change in basic and diluted earnings per share year to date period-versus-year to date period | | Basic and Diluted EPS | | Change | |
Basic and diluted earnings per share for the year to date period ended September 30, 2016 | | $ | 1.33 |
| | | |
Change in operations(a) | | 0.18 |
| | 13.5 |
| pp(b) |
Change in other operating income, net(a) | | (0.13 | ) | | (9.7 | ) | pp |
Change in gain on sale of equity method investment | | 0.44 |
| | 33.1 |
| pp |
Change in equity method investment earnings (loss)(a) | | (0.10 | ) | | (7.5 | ) | pp |
Change in weighted average shares outstanding | | (0.01 | ) | | (0.8 | ) | pp |
Change in income attributable to participating securities(c) | | (0.01 | ) | | (0.8 | ) | pp |
Basic and diluted earnings per share for the year to date period ended September 30, 2017 | | $ | 1.70 |
| | 27.8 | % | |
| |
(a) | Changes are net of tax based on the effective tax rate for the base year (2016), excluding the effect of the ASU 2016-09 adoption on the 2016 rate. |
| |
(b) | Percentage points ("pp"). |
SEGMENT RESULTS
Distillery Products
The following table shows selected financial information for our distillery products segment for the quarters ended September 30, 2017 and 2016. |
| | | | | | | | | | | | | | | | | | |
| PRODUCT GROUP NET SALES | |
| Quarter Ended September 30, | | Quarter-versus-Quarter Net Sales Change Increase / (Decrease) | | Quarter-versus-Quarter Volume Increase / (Decrease) | |
| 2017 | | 2016 | | $ Change | | % Change | | % Change | |
| Amount | | Amount | | | | |
Premium beverage alcohol | $ | 43,941 |
| | $ | 37,843 |
| | $ | 6,098 |
| | 16.1 | % | | | |
Industrial alcohol | 19,310 |
| | 19,114 |
| | 196 |
| | 1.0 |
| | | |
Food grade alcohol(a) | $ | 63,251 |
| | $ | 56,957 |
| | $ | 6,294 |
| | 11.1 |
| | | |
Fuel grade alcohol(a) | 1,458 |
| | 1,778 |
| | (320 | ) | | (18.0 | ) | | | |
Distillers feed and related co-products | 4,860 |
| | 5,805 |
| | (945 | ) | | (16.3 | ) | | | |
Warehouse services | 2,766 |
| | 2,124 |
| | 642 |
| | 30.2 |
| | | |
Total distillery products | $ | 72,335 |
| | $ | 66,664 |
| | $ | 5,671 |
| | 8.5 | % | | 6.9 | % | (a) |
| | | | | | | | | | |
| | | | | | | | | |
| Other Financial Information | | | |
| Quarter Ended September 30, | | Quarter-versus-Quarter Increase / (Decrease) | | | |
| 2017 | | 2016 | | $ Change | | % Change | | | |
| | | | | | |
Gross profit | $ | 16,501 |
| | $ | 12,364 |
| | $ | 4,137 |
| | 33.5 | % | | | |
Gross margin % | 22.8 | % | | 18.5 | % | |
|
| | 4.3 |
| pp(b) | | |
(a) Volume change for alcohol products.
(b) Percentage points ("pp").
Driven by strong demand, net sales of higher margin premium beverage alcohol products within food grade alcohol increased 16.1 percent over the year-ago quarter, while lower margin industrial alcohol product net sales increased 1.0 percent, resulting in an overall food grade alcohol net sales increase of $6,294, or 11.1 percent. Declines in net sales of fuel grade alcohol products and distillers feed and related co-products were partially offset by an increase in warehouse services revenue, generated by increased storage of customer barrels of whiskey.
Gross profit increased quarter-versus-quarter by $4,137, or 33.5 percent. Gross margin for the quarter ended September 30, 2017 increased to 22.8 percent from 18.5 percent for the prior year quarter. The improvement in gross profit was primarily due to a decline in input costs, increased sales of higher margin premium beverage alcohol products, and an increase in warehouse services revenue. These gains were partially offset primarily by lower gross profit on distillers feed and related co-products.
Distillery Products
The following table shows selected financial information for our distillery products segment for the year to date periods ended September 30, 2017 and 2016. |
| | | | | | | | | | | | | | | | | | |
| PRODUCT GROUP NET SALES | |
| Year to date ended September 30, | | Period-versus-Period Net Sales Change Increase / (Decrease) | | Period-versus-Period Volume Increase / (Decrease) | |
| 2017 | | 2016 | | $ Change | | % Change | | % Change | |
| Amount | | Amount | | | | |
Premium beverage alcohol | $ | 131,868 |
| | $ | 109,546 |
| | $ | 22,322 |
| | 20.4 | % | | | |
Industrial alcohol | 57,775 |
| | 59,223 |
| | (1,448 | ) | | (2.4 | ) | | | |
Food grade alcohol(a) | $ | 189,643 |
| | $ | 168,769 |
| | $ | 20,874 |
| | 12.4 |
| | | |
Fuel grade alcohol(a) | 4,867 |
| | 5,345 |
| | (478 | ) | | (8.9 | ) | | | |
Distillers feed and related co-products | 14,514 |
| | 17,000 |
| | (2,486 | ) | | (14.6 | ) | | | |
Warehouse services | 7,960 |
| | 6,131 |
| | 1,829 |
| | 29.8 |
| | | |
Total distillery products | $ | 216,984 |
| | $ | 197,245 |
| | $ | 19,739 |
| | 10.0 | % | | 9.5 | % | (a) |
| | | | | | | | | | |
| | | | | | | | | |
| Other Financial Information | | | |
| Year to date ended September 30, | | Period-versus-Period Increase / (Decrease) | | | |
| 2017 | | 2016 | | $ Change | | % Change | | | |
| | | | | | |
Gross profit | $ | 49,069 |
| | $ | 40,879 |
| | $ | 8,190 |
| | 20.0 | % | | | |
Gross margin % | 22.6 | % | | 20.7 | % | | | | 1.9 |
| pp(b) | | |
(a) Volume change for alcohol products.
(b) Percentage points ("pp").
Driven by strong demand, net sales of higher margin premium beverage alcohol products within food grade alcohol increased 20.4 percent over the year-ago period, while lower margin industrial alcohol product net sales decreased 2.4 percent, resulting in an overall food grade alcohol net sales increase of $20,874, or 12.4 percent. Declines in net sales of distillers feed and related co-products and fuel grade alcohol products were partially offset by an increase in warehouse services revenue, generated by increased storage of customer barrels of whiskey.
Gross profit increased period-versus-period by $8,190, or 20.0 percent. Gross margin for the year to date period ended September 30, 2017 increased to 22.6 percent from 20.7 percent for the prior year period. The improvement in gross profit was primarily due to increased sales of higher margin premium beverage alcohol products, a decline in input costs, and an increase in warehouse services revenue. These gains were partially offset primarily by lower gross profit on distillers feed and related co-products.
Ingredient Solutions
The following table shows selected financial information for our ingredient solutions segment for the quarters ended September 30, 2017 and 2016. |
| | | | | | | | | | | | | | | | | |
| PRODUCT GROUP NET SALES |
| Quarter Ended September 30, | | Quarter-versus-Quarter Net Sales Change Increase / (Decrease) | | Quarter-versus-Quarter Volume Increase / (Decrease) |
| 2017 | | 2016 | | $ Change | | % Change | | % Change |
| Amount | | Amount | | | |
Specialty wheat starches | $ | 7,008 |
| | $ | 7,080 |
| | $ | (72 | ) | | (1.0 | )% | |
|
|
Specialty wheat proteins | 4,939 |
| | 4,188 |
| | 751 |
| | 17.9 |
| |
|
|
Commodity wheat starch | 1,948 |
| | 1,725 |
| | 223 |
| | 12.9 |
| | |
Commodity wheat protein | 103 |
| | 234 |
| | (131 | ) | | (56.0 | ) | | |
Total ingredient solutions | $ | 13,998 |
| | $ | 13,227 |
| | $ | 771 |
| | 5.8 | % | | 7.3 | % |
| | | | | | | | | |
| Other Financial Information | | |
| Quarter Ended September 30, | | Quarter-versus-Quarter Increase / (Decrease) | | |
| 2017 | | 2016 | | $ Change | | % Change | | |
| | | | | |
Gross profit | $ | 2,124 |
| | $ | 2,757 |
| | $ | (633 | ) | | (23.0 | )% | | |
Gross margin % | 15.2 | % | | 20.8 | % | |
|
| | (5.6 | ) | pp(a) | |
(a) Percentage points ("pp").
Total ingredient solutions net sales for the quarter ended September 30, 2017 increased by $771, or 5.8 percent, compared to the prior year quarter. This increase was primarily driven by increased net sales of specialty wheat proteins and commodity wheat starch, partially offset by decreased net sales of commodity wheat protein and specialty wheat starches, quarter-versus-quarter.
Gross profit decreased quarter-versus-quarter by $633, or 23.0 percent. Gross margin for the quarter ended September 30, 2017 decreased to 15.2 percent from 20.8 percent for the prior year quarter. The decline in gross profit was primarily due to decreased plant efficiencies and a lower average selling price, partially offset by a decline in input costs.
Ingredient Solutions
The following table shows selected financial information for our ingredient solutions segment for the year to date periods ended September 30, 2017 and 2016. |
| | | | | | | | | | | | | | | | | |
| PRODUCT GROUP NET SALES |
| Year to date ended September 30, | | Period-versus-Period Net Sales Change Increase / (Decrease) | | Period-versus-Period Volume Increase / (Decrease) |
| 2017 | | 2016 | | $ Change | | % Change | | % Change |
| Amount | | Amount | | | |
Specialty wheat starches | $ | 20,826 |
| | $ | 20,007 |
| | $ | 819 |
| | 4.1 | % | |
|
|
Specialty wheat proteins | 14,541 |
| | 13,960 |
| | 581 |
| | 4.2 |
| |
|
|
Commodity wheat starch | 6,302 |
| | 5,252 |
| | 1,050 |
| | 20.0 |
| | |
Commodity wheat protein | 602 |
| | 654 |
| | (52 | ) | | (8.0 | ) | | |
Total ingredient solutions | $ | 42,271 |
| | $ | 39,873 |
| | $ | 2,398 |
| | 6.0 |
| | 11.8 | % |
| | | | | | | | | |
| Other Financial Information | | |
| Year to date ended September 30, | | Period-versus-Period Increase / (Decrease) | | |
| 2017 | | 2016 | | $ Change | | % Change | | |
| | | | | |
Gross profit | $ | 7,422 |
| | $ | 6,819 |
| | $ | 603 |
| | 8.8 | % | | |
Gross margin % | 17.6 | % | | 17.1 | % | | | | 0.5 |
| pp(a) | |
(a) Percentage points ("pp").
Total ingredient solutions net sales for the year to date period ended September 30, 2017 increased by $2,398, or 6.0 percent, compared to the prior year period. This increase was primarily driven by increased net sales of commodity wheat starch, specialty wheat starches, and specialty wheat proteins, partially offset by decreased net sales of commodity wheat protein, period-versus-period.
Gross profit increased period-versus-period by $603, or 8.8 percent. Gross margin for the period ended September 30, 2017 increased to 17.6 percent from 17.1 percent for the prior year period. The improvement in gross profit was primarily due to decreased input costs, partially offset by a lower average selling price.
CASH FLOW, FINANCIAL CONDITION AND LIQUIDITY
We believe our financial condition continues to be of high quality, as evidenced by our ability to generate cash from operations while having ready access to capital at competitive rates. In periods when operating cash flow deficits, debt through our Credit Agreements (see Note 3) provides the primary source of cash to fund operating needs and capital expenditures. The same source of cash is 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. The overall liquidity of the Company 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 facility, to be adequate to provide for budgeted capital expenditures and anticipated operating requirements.
Operating Cash Flow
Cash provided by operations increased $14,603 to $16,447 for the year to date period ended September 30, 2017, from $1,844 for the year to date period ended September 30, 2016. This improvement in operating cash flow was primarily the result of net cash inflows related to net income, after giving effect to adjustments to reconcile net income to net cash provided by operating activities (depreciation and amortization, distribution received from equity method investee, gain on property insurance recoveries, deferred income taxes, including change in valuation allowance, gain on sale of assets, share-based compensation, gain on sale of equity method investment, and equity method investment earnings(loss)), the changes in accounts payable, inventory, income taxes, and accrued expenses, partially offset by cash outflows related to the changes in receivables, net, accounts payable to affiliate, net, and prepaid expenses.
Increases to Operating Cash Flow. Net income, after giving effect to adjustments to reconcile net income to net cash provided by operating activities, increased by $4,439, to $36,209 for the year to date period ended September 30, 2017 from $31,770 for the year to date period ended September 30, 2016. This increase over the prior year to date period was primarily due to a net income increase of $6,285, an increase in distribution received from equity method investee of $3,831, a decrease in equity method investment earnings of $2,608, an increase in deferred income taxes, including change in valuation allowance of $1,572, a decrease in gain on sale of assets of $871, an increase in share-based compensation of $592, partially offset by an increase in gain on sale of equity method investment of 11,381. Accounts payable increased $4,193 for the year to date period ended September 30, 2017, compared to a decrease of $3,340 for the year to date period ended September 30, 2016
