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
March 31, 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 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:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Finished goods
|
|
$
|
13,461
|
|
|
$
|
14,002
|
|
Barreled distillate (bourbon and whiskey)
|
|
53,231
|
|
|
50,941
|
|
Work in process
|
|
2,065
|
|
|
1,933
|
|
Raw materials
|
|
3,570
|
|
|
4,274
|
|
Maintenance materials
|
|
6,492
|
|
|
6,231
|
|
Other
|
|
1,169
|
|
|
1,477
|
|
Total
|
|
$
|
79,988
|
|
|
$
|
78,858
|
|
Equity Method Investments.
The Company accounts for its investment in non-consolidated subsidiaries under the equity method of accounting when the Company has significant influence, but does not have more than 50 percent voting control, and is not considered the primary beneficiary. Under the equity method of accounting, the Company reflects 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 is reflected as Equity method investment earnings in the
Condensed
Consolidated Statements of Income.
The Company reviews its investments in non-consolidated subsidiaries for impairment whenever events or changes in business circumstances indicate 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.
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
March 31, 2017
and
2016
of
$3,614
and
$4,137
, 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
March 31, 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
$44,887
and
$37,412
at
March 31, 2017
and
December 31, 2016
, respectively. The financial statement carrying value of total debt was
$43,693
(including unamortized loan fees of
$530
) and
$36,001
(including unamortized loan fees of
$576
) at
March 31, 2017
and
December 31, 2016
, respectively. These fair values are considered Level 2 under the fair value hierarchy.
Recent Accounting Pronouncements.
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.
In February 2017, the FASB issued ASU 2017-05,
Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
, which clarifies the guidance in Subtopic 610-20 on accounting for derecognition of a nonfinancial asset. The ASU also defines in-substance nonfinancial assets and includes guidance on partial sales of nonfinancial assets.
An entity is required to apply the amendments in this ASU at the same time that it applies ASU 2014-09 (see below). The Company is evaluating the effect that ASU 2017-05 will have on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. The changes are effective for public business entities that are SEC filers, for annual and interim periods in fiscal years beginning after December 15, 2019. All entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. The Company is evaluating the effect that ASU 2017-04 will have on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-03,
Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update)
, which incorporates into the FASB
Accounting Standards Codification
®
recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The SEC staff had previously announced that registrants should include the disclosures starting with their December 2017 financial statements. The Company is evaluating the effect that ASU 2017-03 will have on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business,
which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Entities may early adopt the ASU and apply it to transactions that have not been reported in financial statements that have been issued or made available for issuance. The Company is evaluating the effect that ASU 2017-01 will have on its consolidated financial statements and related disclosures.
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
March 31, 2017
the Company had various machinery and equipment operating leases, as well as operating leases for
218
rail cars and
one
office space.
In January 2016 the FASB issued ASU 2016-01,
Financial Instruments—Overall (Subtopic 825-10)
, which enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted following the early application guidance set forth in the pronouncement. The Company is evaluating the effect that ASU 2016-01 will have on its consolidated financial statements and related disclosures.
In July 2015 the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory (Topic 330)
, which is part of the FASB's simplification initiative to identify, evaluate, and improve areas of generally accepted accounting principles. The amendments in the update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The ASU is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this new guidance in the quarter ended
March 31, 2017
, and there was
no
impact on its consolidated financial statements and related disclosures.
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. The core principle of the new standard 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, but the Company is not planning to early adopt the new standard.
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 and assessing the impact on individual contracts in the Company's revenue streams. In addition, the implementation team is in the process of identifying, and will then implement, appropriate changes to business processes, systems and 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. The Company has not yet determined the quantitative impact on its consolidated financial statements.
Note 2. Equity Method Investments.
As of
March 31, 2017
, the Company’s investment accounted for using the equity method of accounting was a
30 percent
interest in ICP, which manufactures alcohol for fuel, industrial and beverage applications. Until December 23, 2016, the Company also had a
50 percent
interest in D.M. Ingredients, GmbH, ("DMI"), which produced certain specialty starch and protein ingredients.
On December 29, 2014, the Company gave notice to DMI and to the Company's partner in DMI, Crespel and Dieters GmbH & Co. KG ("C&D"), to terminate the joint venture effective June 30, 2015. On June 22, 2015, a termination agreement was executed by and between the Company, DMI, and C&D to dissolve DMI effective June 30, 2015. Additionally, on June 22, 2015 a termination agreement was executed by and between the Company and DMI to terminate their distribution agreement effective June 29, 2015. On December 23, 2016, the Company received its portion of the remaining DMI liquidation proceeds, which totaled
$351
, as a return of its investment.
Summary Financial Information (unaudited).
Condensed financial information related to the Company’s non-consolidated equity method investment in ICP is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
March 31,
2017
|
|
March 31,
2016
|
ICP’s Operating results:
|
|
|
|
|
Net sales
(a)
|
|
$
|
38,385
|
|
|
$
|
49,609
|
|
Cost of sales and expenses
(b)
|
|
36,814
|
|
|
47,886
|
|
Net income
|
|
$
|
1,571
|
|
|
$
|
1,723
|
|
|
|
(a)
|
Includes related party sales to MGPI of
$8,657
and
$6,241
for the quarters ended
March 31, 2017
and
2016
, respectively.
|
|
|
(b)
|
Includes depreciation and amortization of
$858
and
$735
for the quarters ended
March 31, 2017
and
2016
, respectively.
|
The Company’s equity method investment earnings from joint ventures, based on unaudited financial statements, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
March 31,
2017
|
|
March 31,
2016
|
ICP (30% interest)
|
|
$
|
471
|
|
|
$
|
517
|
|
DMI (50% interest)
(a)
|
|
—
|
|
|
—
|
|
|
|
$
|
471
|
|
|
$
|
517
|
|
|
|
(a)
|
The Company's equity method investment in DMI ended on December 23, 2016, when it received a return of its investment.
|
The Company’s investment in joint ventures is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
ICP (30% interest)
|
|
$
|
19,403
|
|
|
$
|
18,934
|
|
DMI (50% interest)
(a)
|
|
—
|
|
|
—
|
|
|
|
$
|
19,403
|
|
|
$
|
18,934
|
|
(a)
The Company's equity method investment in DMI ended on December 23, 2016, when it received a return of its investment.
Note 3. Corporate Borrowings.
Indebtedness Outstanding
. Debt consists of the following:
|
|
|
|
|
|
|
|
|
Description
(a)
|
March 31, 2017
|
|
December 31, 2016
|
Credit Agreement - Revolver, 2.768% (variable rate) due 2020
|
$
|
24,735
|
|
|
$
|
16,000
|
|
Credit Agreement - Fixed Asset Sub-Line term loan, 3.034% (variable rate) due 2020
|
5,002
|
|
|
5,253
|
|
Credit Agreement - Term Loan, 3.034% (variable rate) due 2020
|
12,250
|
|
|
13,000
|
|
Secured Promissory Note, 3.71% (variable rate) due 2022
|
2,236
|
|
|
2,324
|
|
Unamortized loan fees
(b)
|
(530
|
)
|
|
(576
|
)
|
Total
|
$
|
43,693
|
|
|
$
|
36,001
|
|
Less current maturities of long term debt
|
(4,362
|
)
|
|
(4,359
|
)
|
Long-term debt
|
$
|
39,331
|
|
|
$
|
31,642
|
|
(a)
Interest rates are as of
March 31, 2017
.
(b)
Loan fees are being amortized over the life of the Credit Agreement.
Credit Agreement.
On March 21, 2016, the Company entered into a Third Amended and Restated Credit Agreement (the "Credit Agreement") with Wells Fargo Bank, National Association. The Credit Agreement contains customary terms and conditions substantially similar to the Second Amended and Restated Credit Agreement (the "Previous Credit Agreement") and associated schedules with Wells Fargo Bank, National Association. The Credit Agreement is a
$15,000
term loan and
$80,000
revolving facility resulting in a
$95,000
facility. The principal of the term loan can be prepaid at any time without penalty or otherwise will be repaid by the Company in installments of
$250
each month.
The Company was in compliance with the Credit Agreement covenants at
March 31, 2017
. The Company incurred
no
new loan fees related to the Credit Agreement during the quarter ended
March 31, 2017
. The unamortized balance of total loan fees related to the Credit Agreement was
$530
at
March 31, 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.
The amount of borrowings which the Company may make is subject to borrowing base limitations adjusted for the Fixed Asset Sub-Line collateral as described in the Credit Agreement. As of
March 31, 2017
, the Company's total outstanding borrowings under the Credit Agreement were
$41,987
, comprised of
$24,735
of revolver borrowing (including unamortized loan fees),
$5,002
of fixed asset sub-line term loan borrowing, and
$12,250
of term loan borrowing, leaving
$50,262
available. The average interest rate for total borrowings of the Credit Agreement at
March 31, 2017
was
2.88 percent
.
Note 4. Income Taxes
Income tax expense for the quarter ended
March 31, 2017
was
$2,854
, for an effective tax rate for the quarter of
24.7 percent
. The effective tax rate differs from the
35 percent
federal statutory rate on pretax income, primarily due to 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,
which was
adopted by the Company during the quarter ended September 30, 2016
,
the domestic production activities deduction, and state taxes, including state income tax credits in Indiana and Kansas.
Income tax expense for the quarter ended
March 31, 2016
, was
$3,872
, for an effective tax rate of
35.4 percent
. The principal reason for the reduction in effective tax rate of
10.7
percentage points in the quarter ended
March 31, 2017
, is the impact of ASU 2016-09, which required the February 2017 share-based compensation release event to be treated as a discrete item.
As of
March 31, 2017
, the Company had a remaining valuation allowance of
$726
, largely related to capital loss carryforwards that, in our estimate, are not more likely than not to be realized prior to their respective carryforward periods. The Company continues to evaluate all available positive and negative evidence to determine the likelihood of realization of the deferred tax assets.
Note 5. Equity and Earnings per Share.
Dividend and dividend equivalent information for the quarters ended
March 31, 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
|
|
2016
|
|
|
|
|
|
|
|
|
March 7, 2016
|
|
April 14, 2016
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
1,378
|
|
The computations of basic and diluted earnings per share for the quarters ended
March 31, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
March 31,
2017
|
|
March 31,
2016
|
Operations:
|
|
|
|
|
Net income
(a)
|
|
$
|
8,678
|
|
|
$
|
7,059
|
|
Income attributable to participating securities
(b)
|
|
250
|
|
|
270
|
|
Net income attributable to common shareholders
|
|
$
|
8,428
|
|
|
$
|
6,789
|
|
|
|
|
|
|
Share information:
|
|
|
|
|
Basic and diluted weighted average common shares
(c)
|
|
16,712,578
|
|
|
16,607,074
|
|
|
|
|
|
|
Basic and diluted earnings per share
|
|
$
|
0.50
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
(a)
|
Net income attributable to all shareholders.
|
|
|
(b)
|
At
March 31, 2017
and
2016
, participating securities included
497,491
and
537,337
nonvested restricted stock units, respectively, and
0
and
128,500
nonvested shares of restricted stock, respectively.
|
|
|
(c)
|
Under the two-class method, weighted average common shares at
March 31, 2017
and
2016
, exclude nonvested, participating securities of
497,491
and
665,837
, respectively.
|
Note 6. Commitments and Contingencies.
Commitments.
Open purchase order commitments at
March 31, 2017
related to raw materials and packaging used in the ordinary course of business were
$68,090
extending out to
February 2018
. Open purchase order commitments at
March 31, 2017
related to the purchase of capital assets were
$2,523
.
In 2015, our Board of Directors approved a
$20,200
major expansion in warehousing capacity on a
20
-acre campus adjoining our current Lawrenceburg facility as part of the implementation of our
five
-year strategic plan to grow the whiskey category. In September 2016 an additional
$8,800
was approved related to the next phases of this project. The total approved warehouse expansion investment at September 30, 2016, is
$29,000
. As of
March 31, 2017
, we had incurred
$22,231
of this approved investment amount.
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 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, OSHA and 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 the EPA and Kansas and local authorities since their 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 has completed its investigation and, on April 19, 2017, issued its penalty to the Company in the amount of
$138
, some of which may be covered by insurance. Management is reviewing the citation and is considering its response.
|
|
•
|
The 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
March 31, 2017
,
280,074
RSUs had been granted under the 2014 Plan, with
14,616
of those forfeited for termination of employment.
56,964
shares had been granted related to the Directors' Plan as of
March 31, 2017
and
497,491
shares of unvested RSUs were outstanding under the Company’s active and inactive long-term incentive plans.
As of
March 31, 2017
, the estimated unaccrued amount of liability-classified awards yet to be granted in 2018, net of estimated forfeitures, was
$1,359
.
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 from our equity method investments, 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
|
|
|
March 31,
2017
|
|
March 31,
2016
|
Net Sales to Customers
|
|
|
|
|
Distillery products
|
|
$
|
73,950
|
|
|
$
|
63,842
|
|
Ingredient solutions
|
|
13,219
|
|
|
12,993
|
|
Total
|
|
87,169
|
|
|
76,835
|
|
Gross Profit
|
|
|
|
|
Distillery products
|
|
16,615
|
|
|
14,850
|
|
Ingredient solutions
|
|
2,426
|
|
|
2,196
|
|
Total
|
|
19,041
|
|
|
17,046
|
|
Depreciation and Amortization
|
|
|
|
|
Distillery products
|
|
2,046
|
|
|
2,518
|
|
Ingredient solutions
|
|
408
|
|
|
444
|
|
Corporate
|
|
284
|
|
|
342
|
|
Total
|
|
2,738
|
|
|
3,304
|
|
Income before Income Taxes
|
|
|
|
|
Distillery products
|
|
15,518
|
|
|
14,380
|
|
Ingredient solutions
|
|
1,804
|
|
|
1,602
|
|
Corporate
|
|
(5,790
|
)
|
|
(5,051
|
)
|
Total
|
|
$
|
11,532
|
|
|
$
|
10,931
|
|
The following table allocates assets to each segment:
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
As of December 31, 2016
|
Identifiable Assets
|
|
|
|
|
Distillery products
|
|
$
|
172,712
|
|
|
$
|
161,059
|
|
Ingredient solutions
|
|
27,145
|
|
|
27,109
|
|
Corporate
|
|
34,716
|
|
|
37,168
|
|
Total
|
|
$
|
234,573
|
|
|
$
|
225,336
|
|
Note 9. Derivative Instruments.
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.
Note 10. Subsequent Events.
On May 2, 2017, the Board of Directors declared a quarterly dividend payable to stockholders of record as of May 15, 2017, of the Company's Common Stock, and a dividend equivalent payable to holders of RSUs as of May 15, 2017, of
$0.04
per share and per unit, payable on June 9, 2017.
Refer to Note 6. for events occurring subsequent to the financial statement date related to the October 21, 2016, chemical release at the Company's Atchison facility.