Mgp Ingredients Inc 10-Q for FY2021 Q3
Mgp Ingredients Inc (CASK)
10-Q
2021-11-03
For: 2021-09-30
View Original
Added on
April 07, 2026
About this 10-Q
Mgp Ingredients Inc filed this 10-Q on November 3, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $176.61M
- up 71.5% from $102.96M a year earlier
- Net income
- $23.88M
- up 130.0% from net income of $10.38M a year earlier
- Diluted EPS
- $1.08
- up 77.0% from $0.61 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2021
or
For the transition period from _________________________ to _________________________________
Commission File Number: 0-17196
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(913 ) 367-1480
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
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 (§232.405 of this chapter) 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 ☐ Smaller Reporting 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:
INDEX
| Page | |||||||||||
METHOD OF PRESENTATION
Throughout this Report, when we refer to “the Company,” “MGP,” “we,” “us,” “our,” and words of similar import, we are referring to the combined business of MGP Ingredients, Inc. and its consolidated subsidiaries, except to the extent that the context otherwise indicates. In this document, for any references to Note 1 through Note 11, 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, per 9-liter case and percentage amounts, are shown in thousands unless otherwise noted.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except share and per share amounts)
| Quarter Ended September 30, | Year to Date Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Other income (loss), net | ( | ( | |||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | |||||||||||||||||||||||
| Net income attributable to MGP Ingredients, Inc. | |||||||||||||||||||||||
| Income attributable to participating securities | ( | ( | ( | ( | |||||||||||||||||||
| Net income used in Earnings Per Share calculation | $ | $ | $ | $ | |||||||||||||||||||
| Basic and diluted weighted average common shares | |||||||||||||||||||||||
| Basic and diluted Earnings Per Share | $ | $ | $ | $ | |||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
3
MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
| Quarter Ended September 30, | Year to Date Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income attributable to MGP Ingredients, Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income, net of tax: | |||||||||||||||||||||||
| Unrealized loss on foreign currency translation adjustment | ( | ( | |||||||||||||||||||||
| Change in Company-sponsored post-employment benefit plan | ( | ( | |||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Comprehensive income attributable to MGP Ingredients, Inc. | |||||||||||||||||||||||
| Comprehensive loss attributable to noncontrolling interest | |||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
4
MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Dollars in thousands)
| September 30, 2021 | December 31, 2020 | |||||||||||||
| Current Assets | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
Receivables (less allowance for credit losses, $ | ||||||||||||||
| Inventory | ||||||||||||||
| Prepaid expenses | ||||||||||||||
| Refundable income taxes | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant, and equipment | ||||||||||||||
| Less accumulated depreciation and amortization | ( | ( | ||||||||||||
| Property, plant, and equipment, net | ||||||||||||||
| Operating lease right-of-use assets, net | ||||||||||||||
| Investment in joint ventures | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Current Liabilities | ||||||||||||||
| Current maturities of long-term debt | $ | $ | ||||||||||||
| Accounts payable | ||||||||||||||
| Federal and state liquor taxes payable | ||||||||||||||
| Income taxes payable | ||||||||||||||
| Accrued expenses and other | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt, less current maturities | ||||||||||||||
| Credit agreement - revolver | ||||||||||||||
| Long-term operating lease liabilities | ||||||||||||||
| Other noncurrent liabilities | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Total liabilities | ||||||||||||||
Commitments and Contingencies (Note 8) | ||||||||||||||
| Stockholders’ Equity | ||||||||||||||
| Capital stock | ||||||||||||||
Preferred, | ||||||||||||||
| Common stock | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
| Accumulated other comprehensive income | ||||||||||||||
Treasury stock, at cost, | ( | ( | ||||||||||||
| Total MGP Ingredients, Inc. stockholders’ equity | ||||||||||||||
| Noncontrolling interest | ( | |||||||||||||
| Total equity | ||||||||||||||
| Total liabilities and equity | $ | $ | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
5
MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
| Year to Date Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Gain on sale of assets | |||||||||||
| Share-based compensation | |||||||||||
| Deferred income taxes, including change in valuation allowance | |||||||||||
| Other, net | ( | ||||||||||
| Changes in operating assets and liabilities, net of effects of acquisition: | |||||||||||
| Receivables, net | ( | ( | |||||||||
| Inventory | ( | ( | |||||||||
| Prepaid expenses | ( | ||||||||||
| Income taxes payable | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses and other | |||||||||||
| Federal and state liquor taxes payable | ( | ||||||||||
| Other, net | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash Flows from Investing Activities | |||||||||||
| Additions to property, plant, and equipment | ( | ( | |||||||||
| Purchase of business, net of cash acquired | ( | ( | |||||||||
| Contributions to equity method investment | ( | ||||||||||
| Proceeds from sale of property | |||||||||||
| Other, net | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash Flows from Financing Activities | |||||||||||
| Payment of dividends and dividend equivalents | ( | ( | |||||||||
| Purchase of treasury stock | ( | ( | |||||||||
| Loan fees paid related to borrowings | ( | ( | |||||||||
| Principal payments on long-term debt | ( | ( | |||||||||
| Proceeds from credit agreement - revolver | |||||||||||
| Payments on credit agreement - revolver | ( | ( | |||||||||
| Payment on assumed debt as part of the Merger | ( | ||||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements
6
MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For Year to Date Ended September 30, 2021
(Unaudited) (Dollars in thousands)
| Capital Stock Preferred | Issued Common | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive income | Treasury Stock | Non-controlling Interest | Total | |||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2020 | $ | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Dividends and dividend equivalents of $ | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock shares awarded, forfeited or vested | — | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock shares repurchased | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2021 | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Dividends and dividend equivalents of $ | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock shares awarded, forfeited or vested | — | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock shares repurchased | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Equity consideration for Merger | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2021 | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||
Dividends and dividend equivalents of $ | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock shares awarded, forfeited, or vested | — | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock shares repurchased | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Equity consideration for Merger | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2021 | $ | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
7
MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For Year to Date Ended September 30, 2020
(Unaudited) (Dollars in thousands)
| Capital Stock Preferred | Issued Common | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2019 | $ | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
Dividends and dividend equivalents of $ | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock shares awarded, forfeited or vested | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock shares repurchased | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||
Balance, March 31, 2020 | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Dividends and dividend equivalents of $ | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2020 | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Dividends and dividend equivalents of $ | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock shares awarded, forfeited, or vested | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2020 | $ | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
8
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. (“the Company,” and “MGP”) is a Kansas corporation headquartered in Atchison, Kansas and is a leading producer and supplier of premium distilled spirits, branded spirits and food ingredients. Distilled spirits include premium bourbon and rye whiskeys and grain neutral spirits, including vodka and gin. Our distilled spirits are either packaged and sold under our own brands to distributors, sold, directly or indirectly, to manufacturers of other branded spirits, or direct to consumer. MGP is also a top producer of high quality industrial alcohol for use in both food and non-food applications. The Company’s protein and starch food ingredients provide a host of functional, nutritional, and sensory benefits for a wide range of food products to serve the packaged goods industry. Our industrial alcohol and ingredients products are sold directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries. The Company’s distillery products are derived from corn and other grains (including rye, barley, wheat, barley malt, and milo), and its ingredient products are derived, primarily, from wheat flour.
On April 1, 2021, the Company acquired Luxco, Inc. and its affiliated companies (“Luxco”, or “Luxco Companies”) which is a leading branded beverage alcohol company across various categories, with a more than 60-year business heritage. Luxco’s operations predominately involve the producing, importing, bottling and rectifying of distilled spirits. See Note 3, Business Combination, for further details.
As a result of the merger with Luxco, during the second quarter 2021, the Company established a new reportable segment structure that separates Branded Spirits from the Distillery Products segment. The Ingredient Solutions segment remains unchanged. The new segment presentation reflects how management is now operating the business and making resource allocations. The Company now reports three operating segments: Distillery Products, Branded Spirits and Ingredient Solutions. Certain amounts in the 2020 consolidated financial statements have been reclassified to conform to the 2021 presentation and prior periods have been revised to reflect the new operating segment structure.
Basis of Presentation and Principles of Consolidation. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements as of and for the quarter and year to date ended September 30, 2021, 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, 2020, 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.
The Company holds 60 percent interest in Dos Primos Tequila, LLC (“Dos Primos”). The Company consolidated Dos Primos activity on the financial statements and backs out the 40 percent non-controlling interest portion on a separate line.
9
| September 30, 2021 | December 31, 2020 | |||||||||||||
| Finished goods | $ | $ | ||||||||||||
| Barreled distillate (bourbons and whiskeys) | ||||||||||||||
| Raw materials | ||||||||||||||
| Work in process | ||||||||||||||
| Maintenance materials | ||||||||||||||
| Other | ||||||||||||||
| Total | $ | $ | ||||||||||||
Revenue Recognition. Revenue is recognized when control of the promised goods or services, through performance obligations by the Company, is transferred to the customer in an amount that reflects the consideration it expects to be entitled to receive in exchange for the performance obligations. The term between invoicing and when payment is due is not significant and the period between when the entity transfers the promised good or service to the customer and when the customer pays for that good or service is one year or less.
Revenue is recognized for the sale of products at the point in time finished products are delivered to the customer in accordance with shipping terms. This is a faithful depiction of the satisfaction of the performance obligation because, at the point control passes to the customer, the customer has legal title and the risk and rewards of ownership have transferred, and the customer has present obligation to pay. For certain international customers, deposits are required in advance of shipment. These deposits are reported as contract liabilities until control passes to the customer and revenue is recognized.
The Company’s Distillery Products segment routinely enters into bill and hold arrangements, whereby the Company produces and sells aged and unaged distillate to customers, and the product is barreled at the customer’s request and warehoused at a Company location for an extended period of time in accordance with directions received from the Company’s customers. Even though the aged and unaged distillate remains in the Company’s possession, a sale is recognized at the point in time when the customer obtains control of the product. Control is transferred to the customer in bill and hold transactions when: customer acceptance specifications have been met, legal title has transferred, the customer has a present obligation to pay for the product, and the risk and rewards of ownership have transferred to the customer. Additionally, all of the following bill and hold criteria have to be met in order for control to be transferred to the customer: the reason for the bill and hold arrangement is substantive - the customer has requested the product be warehoused, the product has been identified as separately belonging to the customer, the product is currently ready for physical transfer to the customer, and the Company does not have the ability to use the product or direct it to another customer.
Warehouse services revenue is recognized over the time that warehouse services are rendered and as they are rendered. This is a faithful depiction of the satisfaction of the performance obligation because control of the aging products has already passed to the customer and there are no additional performance activities required by the Company, except as requested by the customer. The performance of the service activities, as requested, is invoiced as satisfied and revenue is concurrently recognized.
10
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 receivables 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.
11
Note 2. Revenue
The Company generates revenues from the Distillery Products segment by the sale of products and by providing warehouse services related to the storage and aging of customer products. The Company generates revenues from the Branded Spirits and Ingredient Solutions segments by the sale of products. Revenue related to sales of products is recognized at a point in time whereas revenue generated from warehouse services is recognized over time. Contracts with customers include a single performance obligation (either the sale of products or the provision of warehouse services).
The following table presents the Company’s sales by segment and major products and services:
| Quarter Ended September 30, | Year to Date Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Distillery Products | |||||||||||||||||||||||
| Brown goods | $ | $ | $ | $ | |||||||||||||||||||
| White goods | |||||||||||||||||||||||
| Premium beverage alcohol | |||||||||||||||||||||||
| Industrial alcohol | |||||||||||||||||||||||
| Food grade alcohol | |||||||||||||||||||||||
| Fuel grade alcohol | |||||||||||||||||||||||
| Distillers feed and related co-products | |||||||||||||||||||||||
| Warehouse services | |||||||||||||||||||||||
| Total Distillery Products | |||||||||||||||||||||||
| Branded Spirits | |||||||||||||||||||||||
| Ultra premium | |||||||||||||||||||||||
| Premium | |||||||||||||||||||||||
| Mid | |||||||||||||||||||||||
| Value | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total Branded Spirits | |||||||||||||||||||||||
| Ingredient Solutions | |||||||||||||||||||||||
| Specialty wheat starches | |||||||||||||||||||||||
| Specialty wheat proteins | |||||||||||||||||||||||
| Commodity wheat starches | |||||||||||||||||||||||
| Commodity wheat proteins | |||||||||||||||||||||||
| Total Ingredient Solutions | |||||||||||||||||||||||
| Total sales | $ | $ | $ | $ | |||||||||||||||||||
12
Note 3. Business Combination
Description of the transaction. On January 22, 2021, the Company entered into a definitive agreement to acquire Luxco, and subsequently completed the merger on April 1, 2021 (the “Merger”). Luxco is a leading branded beverage alcohol company across various categories, with a more than 60-year business heritage. As a result of the Merger, MGP increased its scale and market position in the branded-spirits sector and believes it strengthened its platform for future growth of higher valued-added products.
Following the Merger, the Luxco Companies became wholly-owned subsidiaries of MGP and are included within the Branded Spirits segment. The aggregate consideration paid by the Company in connection with the Merger was $237,500 in cash (less assumed indebtedness) and 5,007,833 shares of common stock of the Company, subject to adjustment for fractional shares (the “Company Shares,” and together with the cash portion, the “Merger Consideration”). The Company Shares were valued at $296,213 and represented approximately 22.8 percent of the Company’s outstanding common stock immediately following the closing of the Merger. The Merger Consideration was subject to customary purchase price adjustments related to, among other things, net working capital, acquired cash and assumed debt. The consideration paid at the Closing included a preliminary estimated purchase price adjustment. In September 2021, the parties finalized the purchase price adjustment, which decreased the cash consideration paid by approximately $608 and increased stock consideration by an additional 1,373 shares from the preliminary amounts that were paid at closing.
The cash portion of the Merger Consideration, the repayment of assumed debt, and transaction-related expenses were financed with borrowings under the Company’s existing Credit Agreement which was drawn down on April 1, 2021. See Note 5, Corporate Borrowings, for further details.
For tax purposes, the transaction was structured partially as a tax-free reorganization and partially as a taxable acquisition, as defined in the Internal Revenue Code. The Company anticipates the amount transferred in a tax deferred manner, under the tax-free reorganization rules, will not create additional tax basis for the Company. The taxable component of the transaction will create additional tax basis and a corresponding future tax deduction for the Company.
The Merger was accounted for as a business combination in accordance with Financial Accounting Standards Board Accounting Standard Codification 805, Business Combinations (“ASC 805”), and as such, assets acquired, liabilities assumed, and consideration transferred were recorded at their estimated fair values on the acquisition date. The fair value of the assets acquired and liabilities assumed are based upon a preliminary assessment of fair value and may change as valuations for certain tangible assets, intangible assets and contingent liabilities are finalized and the associated income tax impacts are determined. The Company expects to finalize the purchase price allocation as soon as practicable, but no longer than one year from the acquisition date.
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Purchase Price Allocation. The following table summarizes the preliminary allocation of the consideration paid for Luxco to the preliminary estimated fair value of the assets acquired and liabilities assumed at the acquisition date, with the excess recorded to goodwill.
| Consideration: | |||||
| Cash, net of assumed debt | $ | ||||
Value of MGP Common Stock issued at close (a) | |||||
| Fair value of total consideration transferred | $ | ||||
| Recognized amounts of identifiable assets acquired and liabilities assumed: | |||||
| Cash | $ | ||||
| Receivables | |||||
| Inventory | |||||
| Prepaid expenses | |||||
| Property, plant and equipment, net | |||||
| Investments in joint ventures | |||||
Intangible assets (b) | |||||
| Other assets | |||||
| Total assets | |||||
Current maturities of long-term debt (c) | |||||
| Accounts payable | |||||
| Federal and state liquor taxes payable | |||||
| Accrued expenses and other | |||||
| Other noncurrent liabilities | |||||
| Deferred income taxes | |||||
| Total liabilities | |||||
| Goodwill | |||||
| Total | $ | ||||
(a) The Company issued 5,007,833 shares of MGP Common Stock which was valued at $59.15 per share on April 1, 2021. In September 2021, the parties finalized the purchase price adjustments which increased stock consideration by an additional 1,373 shares from the preliminary amounts that were paid at closing.
(b) Intangible assets acquired includes trade names with an estimated fair value of $178,100 and distributor relationships with an estimated fair value of $41,400 .
In accordance with ASC 805 assets acquired, liabilities assumed, and consideration transferred were recorded at their estimated fair values on the acquisition date. The fair value measurements of tangible and intangible assets and liabilities were based on significant inputs not observable in the market and represent Level 3 measurements within the fair value hierarchy. Level 3 inputs include discount rates that would be used by a market participant in valuing these assets and liabilities, projections of revenues and cash flows, distributor attrition rates, royalty rates and market comparable, among others. The fair value of work-in-process and finished goods inventory was determined using the comparative sales method and raw materials was determined using the replacement cost method.
Goodwill of $224,850 represents the excess of the consideration transferred over the estimated fair value of assets acquired net of liabilities assumed. No Goodwill is expected to be deductible for tax purposes. The Intangible assets acquired includes indefinite-lived intangible assets, trade names, with an estimated fair value of $178,100 and definite-lived intangible assets, distributor relationships, with an estimated fair value of $41,400 and a useful life of 20 years. The trade names and distributor relationships acquired by the Company have been adjusted to the estimated fair values using the relief from royalty method and multi-period earnings method, respectively. Management and a third party valuation team performed a preliminarily valuation analysis to determine the fair value of each trade name and distributor relationship.
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Operating Results. The operating results of Luxco were consolidated with the Company’s operating results subsequent to the merger date. During the quarter and year to date ended September 30, 2021, the Company recorded $59,057 and $118,355 , respectively, of Sales and $6,038 and $12,559 , respectively, of Income before income taxes, attributable to Luxco on it’s Condensed Consolidated Statement of Income. During the quarter and year to date ended September 30, 2021, the Company has incurred $294 and $8,922 , respectively, of transaction related costs, which are included in Selling, general and administrative expenses on the Condensed Consolidated Statements of Income.
Pro Forma Information. The following table summarizes the unaudited pro forma financial results for the quarter and year to date ended September 30, 2021 and 2020, as if the Merger had occurred on January 1, 2020:
| Pro Forma Financial Information | |||||||||||||||||||||||
| Quarter Ended September 30, | Year to Date Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Sales | $ | $ | $ | $ | |||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Basic and diluted earnings per share | |||||||||||||||||||||||
The pro forma results are adjusted for items that are non-recurring in nature and directly attributable to the Merger, including the income tax effect of the adjustments. Merger related costs incurred by the Company of $294 and $8,922 for the quarter and year to date ended June 30, 2021, respectively, were excluded and $7,032 is assumed to have been incurred on January 1, 2020. Merger related costs incurred by Luxco of $3,132 were excluded from the year to date ended September 30, 2021 pro forma results. A non-recurring expense of $2,529 for the year to date ended September 30, 2021 related to the fair value adjustment of finished goods inventory estimated to have been sold was removed and included in the results for the year to date ended September 30, 2020. Other acquired tangible and intangible assets are assumed to be recorded at estimated fair value on January 1, 2020 and are amortized or depreciated over their estimated useful lives.
The summary pro forma financial information is for informational purposes only, is based on estimates and assumptions, and does not purport to represent what the Company’s consolidated results of operations actually would have been if the Merger had occurred at an earlier date, and such data does not purport to project the Company’s results of operations for any future period. The basic and diluted shares outstanding used to calculate the pro forma net income per share amounts presented above have been adjusted to assume shares issued at the closing of the Merger were outstanding since January 1, 2020.
Note 4. Goodwill and Intangible Assets
Definite-Lived Intangible Assets
The Company has a definite-lived intangible asset which was acquired as a result of the Merger. The distributor relationships have a carrying value of $40,365 , net of accumulated amortization of $1,035 . The distributor relationships have a useful life of 20 years. The amortization expense for the quarter and year to date ended September 30, 2021 was $517 and $1,035 , respectively.
As of September 30, 2021, the expected future amortization expense related to definite-lived intangibles assets are as follows:
| Remainder of 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total | $ | ||||
Goodwill and Indefinite-Lived Intangible Assets
The Company records goodwill and indefinite-lived intangible assets in connection with various acquisitions of businesses and allocates the goodwill and indefinite-lived intangible assets to its respective reporting units.
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Changes in carrying amount of goodwill by business segment were as follows:
| Distillery Products | Branded Spirits | Ingredient Solutions | Total | ||||||||||||||||||||
Balance, December 31, 2020 | $ | $ | $ | $ | |||||||||||||||||||
| Acquisitions | |||||||||||||||||||||||
Balance, September 30, 2021 | $ | $ | $ | $ | |||||||||||||||||||
Changes in carrying amount of trade name intangible assets by business segment were as follows:
| Distillery Products | Branded Spirits | Ingredient Solutions | Total | ||||||||||||||||||||
Balance, December 31, 2020 | $ | $ | $ | $ | |||||||||||||||||||
| Acquisitions | |||||||||||||||||||||||
Balance, September 30, 2021 | $ | $ | $ | $ | |||||||||||||||||||
Note 5. Corporate Borrowings
The following table presents the Company’s outstanding indebtedness:
Description(a) | September 30, 2021 | December 31, 2020 | ||||||||||||
Credit Agreement - Revolver, | $ | $ | ||||||||||||
Prudential Note Purchase Agreement, | ||||||||||||||
Prudential Note Purchase Agreement, | ||||||||||||||
| Other long-term borrowings | ||||||||||||||
| Total indebtedness outstanding | ||||||||||||||
Less unamortized loan fees(b) | ( | ( | ||||||||||||
| Total indebtedness outstanding, net | ||||||||||||||
| Less current maturities of long-term debt | ( | ( | ||||||||||||
| Long-term debt and Credit Agreement - Revolver | $ | $ | ||||||||||||
(a) Interest rates are as of September 30, 2021.
(b) Loan fees are being amortized over the life of the Credit Agreement and Note Purchase Agreement.
Credit Agreement. On February 14, 2020, the Company entered into a credit agreement (the “Credit Agreement”) with multiple participants led by Wells Fargo Bank, National Association (“Wells Fargo Bank”) that matures on February 14, 2025. The Credit Agreement provided for a $300,000 revolving credit facility. On May 14, 2021, the Credit Agreement was amended to increase the principal amount to $400,000 and to increase the amount of the revolving credit facility by up to an additional $100,000 . The Company incurred $666 new loan fees related to the Credit Agreement during 2021. The Credit Agreement includes certain requirements and covenants, which the Company was in compliance with at September 30, 2021. As of September 30, 2021, the Company had $210,000 outstanding borrowings under the Credit Agreement leaving $190,000 available. The cash portion of the Merger Consideration, the repayment of assumed debt, and transaction-related expenses were financed with $242,300 borrowings under the Credit Agreement which was drawn down on April 1, 2021.
Note Purchase Agreements. The Company’s Note Purchase and Private Shelf Agreement (the “Note Purchase Agreement”), as amended by the First Amendment to Private Shelf Agreement as of February 14, 2020, the Second Amendment to Private Shelf Agreement as of September 30, 2020, the Third Amendment to Private Shelf Agreement as of January 25, 2021, and the Fourth Amendment to Private Shelf Agreement as of May 14, 2021, with PGIM, Inc., an affiliate of Prudential Financial, Inc., and certain affiliates of PGIM, Inc., provides for the issuance of up to $105,000 of Senior Secured Notes (or any higher amount solely to the extent PGIM, Inc. has provided written notice to the Company of its authorization of such a higher amount) and issuance of $20,000 of Senior Secured Notes.
On July 29, 2021, PGIM, Inc. (“Prudential”) provided the Company notice pursuant to Section 1.2 of the Note Agreement that Prudential has authorized an increase in the amount of the senior promissory notes that may be issued under the uncommitted shelf facility under the Note Agreement from $105,000 to $140,000 , effective as of July 29, 2021. The deadline for issuing the notes under the shelf facility is August 23, 2023.
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Note 6. Income Taxes
The Company’s tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the estimated annual effective tax rate is updated and a year to date adjustment is made to the provision. The Company’s quarterly effective tax rate can be subject to significant change due to the effect of discrete items arising in a given quarter. Beginning in the second quarter of 2021, the estimated annual effective tax rate includes both domestic and foreign entities acquired in the Merger. See Note 3, Business Combination, for further details.
Income tax expense for the quarter and year to date ended September 30, 2021, was $7,674 and $18,701 , respectively, for an effective tax rate of 24.5 percent and 24.0 percent, respectively. The effective tax rate for quarter and year to date ended September 30, 2021, differed from the 21
Note 7. Equity and EPS
The computations of basic and diluted EPS:
| Quarter Ended September 30, | Year to Date Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Operations: | ||||||||||||||||||||||||||
Net income(a) | $ | $ | $ | $ | ||||||||||||||||||||||
| Less: net loss attributable to noncontrolling interest | ||||||||||||||||||||||||||
Less: Income attributable to participating securities(b) | ( | ( | ( | ( | ||||||||||||||||||||||
| Net income used in EPS calculation | $ | $ | $ | $ | ||||||||||||||||||||||
| Share information: | ||||||||||||||||||||||||||
Basic and diluted weighted average common shares(c) | ||||||||||||||||||||||||||
| Basic and diluted EPS | $ | $ | $ | $ | ||||||||||||||||||||||
(a)Net income attributable to all shareholders.
(b)Participating securities included 163,024 and 115,399 unvested restricted stock units (“RSUs”), at September 30, 2021 and 2020, respectively.
(c)Under the two-class method, basic and diluted weighted average common shares at September 30, 2021 and 2020 exclude unvested participating securities.
Share Issuance. On April 1, 2021, as part of the consideration for the Merger, the Company issued 5,007,833 shares of common stock. The shares issued represented approximately 22.8 percent of the Company’s outstanding stock immediately
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following the closing of the Merger. In September 2021, the parties finalized the purchase price adjustments, which increased stock consideration by an additional 1,373 shares from the preliminary amounts that were paid at closing.
Share Repurchase. On February 25, 2019, MGP’s Board of Directors approved a $25,000 share repurchase authorization commencing February 27, 2019, through February 27, 2022. Under the share repurchase program, the Company can repurchase stock from time to time for cash in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws. This share repurchase program may be modified, suspended, or terminated by the Company at any time without prior notice. The Company did no t repurchase any shares during the year to date ended September 30, 2021 and has $20,947 remaining under the share repurchase plan.
During the year to date ended September 30, 2020, the Company repurchased approximately 159,104 shares of MGP Common Stock for $4,053 .
The Common Stock share activity:
| Shares Outstanding | |||||||||||
| Capital Stock Preferred | Common Stock | ||||||||||
| Balance, December 31, 2021 | |||||||||||
| Issuance of Common Stock | |||||||||||
Repurchase of Common Stock (a) | ( | ||||||||||
| Balance, March 31, 2021 | |||||||||||
| Issuance of Common Stock | |||||||||||
Repurchase of Common Stock(a) | ( | ||||||||||
| Balance, June 30, 2021 | |||||||||||
| Issuance of Common Stock | |||||||||||
Repurchase of Common Stock(a) | ( | ||||||||||
| Balance, September 30, 2021 | |||||||||||
| Shares Outstanding | |||||||||||
| Capital Stock Preferred | Common Stock | ||||||||||
| Balance, December 31, 2020 | |||||||||||
| Issuance of Common Stock | |||||||||||
Repurchase of Common Stock(b) | ( | ||||||||||
| Balance, March 31, 2020 | |||||||||||
| Issuance of Common Stock | |||||||||||
Repurchase of Common Stock(a) | |||||||||||
| Balance, June 30, 2020 | |||||||||||
| Issuance of Common Stock | |||||||||||
Repurchase of Common Stock(a) | ( | ||||||||||
| Balance, September 30, 2020 | |||||||||||
(a)The Common Stock repurchases were for tax withholding on equity based compensation
(b)159,104 shares that were repurchased during the quarter ended March 31, 2020 related to the share repurchase program. The remaining shares repurchased were related to tax withholding on equity based compensation
Note 8. Commitments and Contingencies
There are various legal and regulatory proceedings involving the Company and its subsidiaries. The Company accrues estimated costs for a contingency when management believes that a loss is probable and can be reasonably estimated.
Dryer Fire Incident. During November 2020, the Company experienced a fire at the Atchison facility. The fire damaged certain equipment in the facility’s feed drying operations and caused temporary loss of production time. At September 30, 2021, the Company received a legally binding commitment from their insurance carrier of $11,500 that was recorded as Receivables on the Condensed Consolidated Balance Sheet. During the quarter and year to date ended September 30, 2021, the Company recorded $6,404 and $16,244 , respectively, of partial settlement from its insurance carrier as a reduction of Cost of
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sales. The Company recorded $16,500 related to legally committed insurance recovery amounts obtained prior to contingencies related to the insurance claim being resolved, in Accrued expenses and other on the Consolidated Balance Sheet at September 30, 2021. The Company is working to construct a replacement drying system. The Company’s insurance is expected to provide coverage for business interruption and other losses from damage to property, plant and equipment, but there can be no assurance to the amount or timing of possible insurance recoveries.
Ransomware Cyber-Attack. In May 2020, the Company was affected by a ransomware cyber-attack that temporarily disrupted production at its Atchison facilities. The Company’s financial information was not affected and there is no evidence that any sensitive or confidential company, supplier, customer or employee data was improperly accessed or extracted from our network. The Company has insurance related to this event and is currently evaluating if it will seek further recovery. Following the attack, MGP implemented a variety of measures to further enhance our cybersecurity protections and minimize the impact of any future attack. The Company’s insurance may cover additional losses from this incident, but there can be no assurance as to the amount or timing of any possible insurance recoveries.
Shareholder matters. In 2020, two putative class action lawsuits were filed in the United States District Court for District of Kansas, naming the Company and certain of its current and former executive officers as defendants, asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs sought to pursue claims on behalf of a class consisting of purchasers or acquirers of the Company’s Common Stock during certain specified periods (the “Class Periods”). On May 28, 2020, the two lawsuits were consolidated and the Court appointed City of Miami Fire Fighters’ and Police Officers’ Retirement Trust as lead plaintiff. The consolidated action is captioned In re MGP Ingredients, Inc. Securities Litigation and the file is maintained under Master File No. 2:20-cv-2090-DDCJPO. On July 22, 2020, the Retirement Trust filed a consolidated Amended Complaint. The Consolidated Complaint alleged that the defendants made false and/or misleading statements regarding the Company’s forecasts of sales of aged whiskey, and that, as a result the Company’s Common Stock traded at artificially inflated prices throughout the Class Periods. The plaintiffs sought compensatory damages, interest, attorneys’ fees, costs, and unspecified equitable relief, but have not specified the amount of damages being sought. On September 8, 2020, defendants filed a Motion to Dismiss the Consolidated Amended Complaint. On August 31, 2021, the court issued a Memorandum and Order granting the Motion to Dismiss dismissing plaintiff’s claims with prejudice. The Plaintiff had until September 30, 2021 to file a notice of appeal and the Plaintiff did not appeal.
On May 11, 2020, Mitchell Dorfman, a shareholder in MGP, filed an action in the United States District Court for the District of Kansas, under the caption Dorfman, derivatively on behalf of MGP Ingredients v. Griffin, et al., Case 2:20-cv-02239. On June 4, 2020, Justin Carter, a shareholder in MGP, filed an action in the United States District Court for the District of Kansas, under the caption Carter, derivatively on behalf of MGP Ingredients v. Griffin, et al., Case 2:20-cv-02281. On June 18, 2020, Alexandra Kearns, a shareholder in MGP, filed an action in the District Court of Atchison County, Kansas, under the caption Kearns, derivatively on behalf of MGP Ingredients v. Griffin, et al., Case 2020-CV-000042. The defendants are certain of the Company’s current and former officers and directors. The Company is a nominal defendant in each action. Plaintiffs allege that the Company was damaged as a result of the conduct of the individual defendants alleged in the MGP Ingredients, Inc. Securities Litigation, the repurchase of company stock at artificially inflated prices, and compensation paid to the individual defendants. The Complaint in Dorfman asserts claims for violations of Sections 14(a), 10(b), and 20(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, waste of corporate assets, and unjust enrichment. The Complaint in Carter asserts claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, waste of corporate assets, and unjust enrichment. The Petition in Kearns asserts claims for breach of fiduciary duties, waste of corporate assets, and unjust enrichment. The pleadings pray for an award of compensatory damages, including interest, in favor of the Company, for equitable relief related to the Company’s corporate governance, for disgorgement of compensation, and for an award of attorneys’ fees and costs. On July 13, 2020, defendants filed a Motion to Dismiss in Dorfman. On August 13, 2020, defendants filed a Motion to Stay the Kearns action pending the resolution of Dorfman. On November 3, 2020, the court entered an order providing that Defendants’ response to the Carter Complaint shall be due 14 days after a ruling on the Motion to Dismiss filed in Dorfman.
On March 31, 2021, the Dorfman court issued a Memorandum and Order in which it granted defendants’ Motion to Dismiss plaintiff’s federal claims, dismissed those claims without prejudice, denied without prejudice defendants’ Motion to Dismiss plaintiff’s state claims, and stayed the case pending the Kansas Supreme Court’s decision in Herington v. City of Wichita. Herington involves the issue of whether a federal decision that determines federal claims and dismisses pendent state law claims for lack of supplemental jurisdiction precludes the reassertion of the state law claims in state court. The Kearns court has not yet taken any action in response to the court’s Memorandum and Order in Dorfman. On April 14, 2021, defendants in Carter filed a Motion to dismiss plaintiff’s federal claims and to stay plaintiff’s state claims until fourteen days after the Court rules on the state claims in Dorfman.
On November 25, 2020, Kenneth Laury filed an action in the District Court of Shawnee County, Kansas under the caption Laury v. MGP Ingredients, Inc., Case Number: 2020-CV-000609. The Petition alleges that plaintiff commenced the action
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under K.S.A. 17-6510 to enforce his alleged right to inspect books and records of the Company, in order to enable him to evaluate possible misconduct by the Company’s Board of Directors and management. On January 8, 2021, the Company filed an answer to the Petition, denying that plaintiff has satisfied the statutory requirements for his demand. On May 13, 2021, the parties stipulated to the voluntary dismissal, with prejudice, of the action.
2016 Atchison Chemical Release. A chemical release occurred at the Company’s Atchison facility on October 21, 2016, which resulted in emissions venting into the air (“the Atchison Chemical Release”). Private plaintiffs have initiated, and additional private plaintiffs may initiate, legal proceedings for damages resulting from the Atchison Chemical Release, but the Company is currently unable to reasonably estimate the amount of any such damages that might result. The Company’s insurance is expected to provide coverage of any damages to private plaintiffs, subject to a deductible, but there can be no assurance to the amount or timing of possible insurance recoveries if ultimately claimed by the Company.
Note 9. Employee and Non-Employee Benefit Plans
Equity-Based Compensation Plans. The Company’s equity-based compensation plans provide for the awarding of stock options, stock appreciation rights, shares of restricted stock (“Restricted Stock”), and RSUs for senior executives and salaried employees, as well as non-employee directors. The Company has two active equity-based compensation plans: the Employee Equity Incentive Plan of 2014 (the “2014 Plan”) and the Non-Employee Director Equity Incentive Plan (the “Directors’ Plan”).
As of September 30, 2021, 516,861 RSUs had been granted of the 1,500,000 shares approved under the 2014 Plan, and 121,557 shares had been granted of the 300,000 shares approved under the Directors’ Plan. As of September 30, 2021, there were 168,074 unvested RSUs under the Company’s long-term incentive plans and 163,024 were participating securities (Note 7).
Deferred Compensation Plan. The Company established an unfunded Executive Deferred Compensation Plan (“EDC Plan”) effective as of June 30, 2018, with a purpose to attract and retain highly-compensated key employees by providing participants with an opportunity to defer receipt of a portion of their salary, bonus, and other specified compensation. The Company’s obligations under this plan will change in conjunction with the performance of the participants’ investments, along with contributions to and withdrawals from the plan. Realized and unrealized gains (losses) on deferred compensation plan investments were included as a component of Other income (loss), net on the Company’s Condensed Consolidated Statements of Income for the quarter and year to date ended September 30, 2021. For quarter ended September 30, 2021, the Company had a loss on deferred compensation plan investments of $15 and for year to date ended September 30, 2021, the Company had a gain on deferred compensation plan investments of $261 . For quarter and year to date ended September 30, 2020, the Company had a gain on deferred compensation plan investments of $185 and $352 , respectively.
Plan investments are classified as Level 1 in the fair value hierarchy since the investments trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis. Participants were able to direct the deferral of a portion of their base salary and a portion of their estimated accrued Short-term incentive plan (“STI Plan”) amounts that were paid during first quarter of the following year. Base salary amounts elected for deferral are deposited into the EDC Plan by the Company on a weekly basis and allocated by participants among Company-determined investment options. STI plan deferral were deposited, at the time of payment, into the EDC Plan by the Company and allocated by participants among Company-determined investment options.
At September 30, 2021 and December 31, 2020, the EDC Plan investments were $3,555 and $2,007 , respectively, which were recorded in Other assets on the Company’s Condensed Consolidated Balance Sheets. The EDC Plan current liabilities were $897 at September 30, 2021 and were included in Accrued expenses and other on the Company’s Condensed Consolidated Balance Sheet. The EDC Plan non-current liabilities were $3,155 and $3,140 at September 30, 2021 and December 31, 2020, respectively, and were included in Other noncurrent liabilities on the Company’s Condensed Consolidated Balance Sheets.
Note 10. Operating Segments
As discussed in Note 1, the Company established a new reportable segment structure as a result of the Merger and prior periods have been revised to reflect the new operating segments. At September 30, 2021, the Company had three segments: Distillery Products, Branded Spirits, and Ingredient Solutions. The Distillery Products segment consists of food grade alcohol and distillery co-products, such as distillers feed (commonly called dried distillers grain in the industry) and fuel grade alcohol. The Distillery Products segment also includes warehouse services, including barrel put away, storage, retrieval, and blending services. The Branded Spirits segment consists of producing, importing, bottling and rectifying of distilled spirits. Ingredient Solutions segment consists of specialty starches and proteins and commodity starches and proteins.
Operating profit for each segment is based on sales less identifiable operating expenses. Non-direct selling, general and
20
administrative expenses, interest expense, other special charges, and other general miscellaneous expenses are excluded from segment operations and are classified as Corporate. Receivables, inventories, property, plant and equipment, leases, goodwill and intangible assets have been identified with the segments to which they relate. All other assets are considered as Corporate.
| Quarter Ended September 30, | Year to Date Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Sales to Customers | ||||||||||||||||||||||||||
| Distillery Products | $ | $ | $ | $ | ||||||||||||||||||||||
| Branded Spirits | ||||||||||||||||||||||||||
| Ingredient Solutions | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||||||||
| Distillery Products | $ | $ | $ | $ | ||||||||||||||||||||||
| Branded Spirits | ||||||||||||||||||||||||||
| Ingredient Solutions | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
| Depreciation and Amortization | ||||||||||||||||||||||||||
| Distillery Products | $ | $ | $ | $ | ||||||||||||||||||||||
| Branded Spirits | ||||||||||||||||||||||||||
| Ingredient Solutions | ||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
Income (loss) before Income Taxes | ||||||||||||||||||||||||||
| Distillery Products | $ | $ | $ | $ | ||||||||||||||||||||||
| Branded Spirits | $ | ( | ||||||||||||||||||||||||
| Ingredient Solutions | ||||||||||||||||||||||||||
| Corporate | ( | ( | ( | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
| September 30, 2021 | December 31, 2020 | |||||||||||||
| Identifiable Assets | ||||||||||||||
| Distillery Products | $ | $ | ||||||||||||
| Branded Spirits | ||||||||||||||
| Ingredient Solutions | ||||||||||||||
| Corporate | ||||||||||||||
| Total | $ | $ | ||||||||||||
Note 11. Subsequent Events
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands, unless otherwise noted)
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report on Form 10-Q contains forward looking statements as well as historical information. All statements, other than statements of historical facts, regarding the prospects of our industry and our prospects, plans, financial position, and strategic plan may constitute forward looking statements. In addition, forward looking statements are usually identified by or are associated with such words as “intend,” “plan,” “believe,” “estimate,” “expect,” “anticipate,” “hopeful,” “should,” “may,” “will,” “could,” “encouraged,” “opportunities,” “potential,” and/or the negatives or variations of these terms or similar terminology. Forward looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from those expressed or implied in the forward looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward looking statements is included in the section titled “Risk Factors” (Item 1A) of our Annual Report on Form 10-K for the year ended December 31, 2020 and Part II, Item 1A of the Form 10-Q for the quarter ended March 31, 2021. 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.
RECENT DEVELOPMENTS
Merger with Luxco. On January 22, 2021, we entered into a definitive agreement to acquire Luxco, Inc. and its affiliated companies (“Luxco”, or “Luxco Companies”), and subsequently completed the merger on April 1, 2021. Luxco is a leading branded beverage alcohol company across various categories, with a more than 60-year business heritage. Following the merger, the Luxco Companies became wholly-owned subsidiaries of MGP and are included in the Branded Spirits segment.(Note 3, Business Combination for additional information).
Dryer Fire Incident. During November 2020, we experienced a fire at the Atchison facility. The fire damaged certain equipment in the facility’s feed drying operations and caused temporary loss of production time. During the quarter and year to date ended September 30, 2021, we recorded a $6,404 and $16,244, respectively, partial settlement from our insurance carrier as a reduction of Cost of sales. We are working to construct a replacement drying system. Our insurance is expected to provide coverage for business interruption and other losses from damage to property, plant and equipment, less deductibles, but there can be no assurance to the amount or timing of possible insurance recoveries.
COVID-19. As the COVID-19 pandemic continues, we are monitoring the guidance from federal, state and local public health authorities and will take the necessary actions to comply with the updated guidelines. The Company’s business is part of the United States’ critical infrastructure and thus is deemed to be an “essential business.” As such, we continue to take the necessary and appropriate actions designed to protect our workforce as it continues its critical operations. We have continued to operate without any significant negative impacts; however this could be effected by voluntary or mandatory temporary closures of our facilities, interruptions to our supply chain or additional efforts to protect the health and safety of our employees. As of the date of this report, the Company’s operations, supply chain and customer demand have not been significantly affected by COVID-19; however, we are monitoring the situation closely.
OVERVIEW
MGP is a leading producer and supplier of premium distilled spirits, branded spirits and food ingredients. Distilled spirits include premium bourbon and rye whiskeys and grain neutral spirits (“GNS”), including vodka and gin. We are also a top producer of high quality industrial alcohol for use in both food and non-food applications. Our distilled spirits are either packaged and sold under our own brands to distributors, sold, directly or indirectly, to manufacturers of other branded spirits, or direct to consumer. The Company’s protein and starch food ingredients provide a host of functional, nutritional, and sensory benefits for a wide range of food products to serve the packaged goods industry.
The 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, 2020.
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RESULTS OF OPERATIONS
Consolidated results
The table below details the consolidated results for the quarters ended September 30, 2021 and 2020:
| Quarter Ended September 30, | ||||||||||||||||||||||||||
| 2021 | 2020 | 2021 v. 2020 | ||||||||||||||||||||||||
| Sales | $ | 176,611 | $ | 102,964 | 71.5 | % | ||||||||||||||||||||
| Cost of sales | 119,525 | 79,802 | 49.8 | |||||||||||||||||||||||
| Gross profit | 57,086 | 23,162 | 146.5 | |||||||||||||||||||||||
| Gross margin % | 32.3 | % | 22.5 | % | 9.8 | pp(a) | ||||||||||||||||||||
| Selling, general, and administrative (“SG&A”) expenses | 24,202 | 9,510 | 154.5 | |||||||||||||||||||||||
| Operating income | 32,884 | 13,652 | 140.9 | |||||||||||||||||||||||
| Operating margin % | 18.6 | % | 13.3 | % | 5.3 | pp | ||||||||||||||||||||
| Interest expense, net | (1,116) | (594) | (87.9) | |||||||||||||||||||||||
| Other income (loss), net | (421) | 185 | (327.6) | |||||||||||||||||||||||
| Income before income taxes | 31,347 | 13,243 | 136.7 | |||||||||||||||||||||||
| Income tax expense | 7,674 | 2,862 | 168.1 | |||||||||||||||||||||||
| Effective tax expense rate % | 24.5 | % | 21.6 | % | 2.9 | pp | ||||||||||||||||||||
| Net income | $ | 23,673 | $ | 10,381 | 128.0 | % | ||||||||||||||||||||
| Net income margin % | 13.4 | % | 10.1 | % | 3.3 | pp | ||||||||||||||||||||
(a) Percentage points (“pp”).
Sales - Sales for quarter ended September 30, 2021 were $176,611, an increase of 71.5 percent compared to the year-ago quarter, which was the result of increased sales in the Branded Spirits, Distillery Products, and Ingredient Solutions segments. Within the Branded Spirits segment, sales were up 2,413.7 percent, due to the additional brands acquired as part of the Merger. Within the Distillery Products segment, sales were up 15.0 percent, primarily due to an increase in the sales of brown goods within premium beverage alcohol. Within the Ingredient Solutions segment, sales were up 12.5 percent, primarily due to increased sales of commodity wheat starches and specialty wheat proteins (see Segment Results).
Gross profit - Gross profit for quarter ended September 30, 2021 was $57,086, an increase of 146.5 percent compared to the year-ago quarter. The increase was driven by an increase in gross profit in Branded Spirits, Distillery Products and Ingredient Solutions segments. In the Branded Spirits segment, gross profit increased by $21,828 or 1,571.5 percent. In the Distillery Products segment, gross profit increased by $11,063, or 69.5 percent. In the Ingredient Solutions segment, gross profit increased by $1,033, or 17.6 percent (see Segment Results).
SG&A expenses - SG&A expenses for quarter ended September 30, 2021 were $24,202, an increase of 154.5 percent compared to the year-ago quarter. The increase in SG&A expenses was primarily driven by the assumption of Luxco’s SG&A expenses.
Operating income - Operating income for quarter ended September 30, 2021 increased to $32,884 from $13,652 for quarter ended September 30, 2020, primarily due to an increase in gross profit in the Branded Spirits, Distillery Products and Ingredient Solutions segments, partially offset by the increase in the previously described SG&A expenses.
| Operating income, quarter versus quarter | Operating Income | Change | |||||||||||||||
Operating income for quarter ended September 30, 2020 | $ | 13,652 | |||||||||||||||
Increase in gross profit - Branded Spirits segment(a) | 21,828 | 159.9 | pp(b) | ||||||||||||||
Increase in gross profit - Distillery Products segment(a) | 11,063 | 81.0 | pp | ||||||||||||||
Increase in gross profit - Ingredient Solutions segment(a) | 1,033 | 7.6 | pp | ||||||||||||||
Increase in SG&A expenses | (14,692) | (107.6) | pp | ||||||||||||||
Operating income for quarter ended September 30, 2021 | $ | 32,884 | 140.9 | % | |||||||||||||
(a) See segment discussion.
(b) Percentage points (“pp”).
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Income tax expense - Income tax expense for quarter ended September 30, 2021 was $7,674, for an effective tax rate of 24.5 percent. Income tax expense for the quarter ended September 30, 2020, was $2,862, for an effective tax rate of 21.6 percent. The increase in Income tax expense, quarter versus quarter, was primarily due to higher Income before income taxes, which lessened the effects of tax credits received.
Earnings per share (“EPS”) - EPS was $1.08 for quarter ended September 30, 2021, compared to $0.61 for quarter ended September 30, 2020. The change in EPS, quarter versus quarter, was primarily due to an increase in Operating income, partially offset by an increase in shares outstanding.
| Change in basic and diluted EPS, quarter versus quarter | Basic and Diluted EPS | Change | |||||||||||||||||||||||||||
Basic and diluted EPS for quarter ended September 30, 2020 | $ | 0.61 | |||||||||||||||||||||||||||
Increase in operations(a) | 0.88 | 144.3 | pp(b) | ||||||||||||||||||||||||||
Increase in other income (expense), net(a) | (0.03) | (4.9) | pp | ||||||||||||||||||||||||||
Change in interest expense, net(a) | (0.02) | (3.3) | pp | ||||||||||||||||||||||||||
| Tax: Change in effective tax rate | (0.06) | (9.8) | pp | ||||||||||||||||||||||||||
| Increase in shares outstanding resulting from the Merger | (0.30) | (49.2) | pp | ||||||||||||||||||||||||||
Basic and diluted EPS for quarter ended September 30, 2021 | $ | 1.08 | 77.1 | % | |||||||||||||||||||||||||
(a) Item is net of tax based on the effective tax rate for the base year (2020).
(b) Percentage points (“pp”).
The table below details the consolidated results for year to date ended September 30, 2021 and 2020:
| Year to Date Ended September 30, | ||||||||||||||||||||||||||
| 2021 | 2020 | 2021 v. 2020 | ||||||||||||||||||||||||
| Sales | $ | 459,873 | $ | 294,606 | 56.1 | % | ||||||||||||||||||||
| Cost of sales | 313,661 | 227,531 | 37.9 | |||||||||||||||||||||||
| Gross profit | 146,212 | 67,075 | 118.0 | |||||||||||||||||||||||
| Gross margin % | 31.8 | % | 22.8 | % | 9.0 | pp(a) | ||||||||||||||||||||
| SG&A expenses | 65,165 | 28,377 | 129.6 | |||||||||||||||||||||||
| Operating income | 81,047 | 38,698 | 109.4 | |||||||||||||||||||||||
| Operating margin % | 17.6 | % | 13.1 | % | 4.5 | pp | ||||||||||||||||||||
| Interest expense, net | (2,708) | (1,701) | (59.2) | |||||||||||||||||||||||
| Other income (loss), net | (479) | 352 | (236.1) | |||||||||||||||||||||||
| Income before income taxes | 77,860 | 37,349 | 108.5 | |||||||||||||||||||||||
| Income tax expense | 18,701 | 8,636 | 116.5 | |||||||||||||||||||||||
| Effective tax expense rate % | 24.0 | % | 23.1 | % | 0.9 | pp | ||||||||||||||||||||
| Net income | $ | 59,159 | $ | 28,713 | 106.0 | % | ||||||||||||||||||||
| Net income margin % | 12.9 | % | 9.7 | % | 3.2 | pp | ||||||||||||||||||||
(a) Percentage points (“pp”).
Sales - Sales for year to date ended September 30, 2021 were $459,873, an increase of 56.1 percent compared to the year-ago period, which was the result of increased sales in the Branded Spirits, Distillery Products, and Ingredient Solutions segments. Within the Branded Spirits segment, sales were up 3,590.4 percent, due to the additional brands acquired as part of the Merger. Within the Distillery Products segment, sales were up 15.6 percent, primarily due to an increase in the sales of brown goods within premium beverage alcohol. Within the Ingredient Solutions segment, sales were up 16.5 percent, primarily due to increased sales of specialty wheat starches and proteins, and commodity wheat starches (see Segment Results).
Gross profit - Gross profit for year to date ended September 30, 2021 was $146,212, an increase of 118.0 percent compared to the year-ago period. The increase was driven by an increase in gross profit in the Branded Spirits, Distillery Products, and Ingredient Solutions segments. In the Branded Spirits segment, gross profit increased by $40,010 or 2,316.7 percent. In the Distillery Products segment, gross profit increased by $37,379, or 75.0 percent. In the Ingredient Solutions segment, gross profit increased by $1,748, or 11.3 percent (see Segment Results).
SG&A expenses - SG&A expenses for year to date ended September 30, 2021 were $65,165, an increase of 129.6 percent
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compared to the year-ago period. The increase in SG&A expenses was driven by the assumption of Luxco’s SG&A, one-time acquisition related costs, and higher incentive compensation expense.
Operating income - Operating income for year to date ended September 30, 2021 increased to $81,047 from $38,698 for year to date period ended September 30, 2020, primarily due to an increase in gross profit in the Branded Spirits, Distillery Products, and Ingredient Solutions segments. These increases were partially offset by an increase in the above-described SG&A expenses.
| Operating income, year to date versus year to date | Operating Income | Change | |||||||||||||||
Operating income for year to date ended September 30, 2020 | $ | 38,698 | |||||||||||||||
Increase in gross profit - Branded Spirits segment(a) | 40,010 | 103.4 | pp(b) | ||||||||||||||
Increase in gross profit - Distillery Products segment(a) | 37,379 | 96.6 | pp | ||||||||||||||
Increase in gross profit - Ingredient Solutions segment(a) | 1,748 | 4.5 | pp | ||||||||||||||
Increase in SG&A expenses | (36,788) | (95.1) | pp | ||||||||||||||
Operating income for year to date ended September 30, 2021 | $ | 81,047 | 109.4 | % | |||||||||||||
(a) See segment discussion.
(b) Percentage points (“pp”).
Income tax expense - Income tax expense for year to date ended September 30, 2021 was $18,701, for an effective tax rate of 24.0 percent. Income tax expense for the year to date ended September 30, 2020, was $8,636, for an effective tax rate of 23.1 percent. The increase in Income tax expense, year to date versus year to date, was primarily due to higher Income before income taxes, which lessened the effects of tax credits received.
Earnings per share - EPS was $2.91 for year to date ended September 30, 2021, compared to $1.68 for year to date ended September 30, 2020. EPS increased, year to date versus year to date, primarily due to an increase in operations, partially offset by an increase in shares outstanding as a result of shares issued as part of the consideration paid for the Merger.
| Change in basic and diluted EPS, year to date versus year to date | Basic and Diluted EPS | Change | |||||||||||||||
Basic and diluted EPS for year to date ended September 30, 2020 | $ | 1.68 | |||||||||||||||
Increase in operations(a) | 1.92 | 114.3 | pp(b) | ||||||||||||||
Decrease in weighted average shares outstanding, excluding the Merger impacts | 0.01 | 0.6 | pp | ||||||||||||||
Change in interest expense, net(a) | (0.04) | (2.4) | pp | ||||||||||||||
Increase in other income (expense), net(a) | (0.03) | (1.8) | pp | ||||||||||||||
| Tax: Change in effective tax rate | (0.04) | (2.4) | pp | ||||||||||||||
| Increase in shares outstanding resulting from the Merger | (0.59) | (35.1) | pp | ||||||||||||||
Basic and diluted EPS for year to date ended September 30, 2021 | $ | 2.91 | 73.2 | % | |||||||||||||
(a) Item is net of tax based on the effective tax rate for the base year (2020).
(b) Percentage points (“pp”).
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SEGMENT RESULTS
Distillery Products
The following tables show selected financial information for the Distillery Products segment for the quarters ended September 30, 2021 and 2020.
| DISTILLERY PRODUCTS SALES | ||||||||||||||||||||||||||
| Quarter Ended September 30, | Quarter versus Quarter Sales Change Increase/(Decrease) | |||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||||||||||||
| Brown goods | $ | 42,793 | $ | 32,068 | $ | 10,725 | 33.4 | % | ||||||||||||||||||
| White goods | 21,187 | 16,210 | 4,977 | 30.7 | ||||||||||||||||||||||
| Premium beverage alcohol | 63,980 | 48,278 | 15,702 | 32.5 | ||||||||||||||||||||||
| Industrial alcohol | 14,790 | 19,461 | (4,671) | (24.0) | ||||||||||||||||||||||
| Food grade alcohol | 78,770 | 67,739 | 11,031 | 16.3 | ||||||||||||||||||||||
| Fuel grade alcohol | 3,592 | 1,274 | 2,318 | 181.9 | ||||||||||||||||||||||
| Distillers feed and related co-products | 4,016 | 6,119 | (2,103) | (34.4) | ||||||||||||||||||||||
| Warehouse services | 4,666 | 4,041 | 625 | 15.5 | ||||||||||||||||||||||
| Total Distillery Products | $ | 91,044 | $ | 79,173 | $ | 11,871 | 15.0 | % | ||||||||||||||||||
| Change in Quarter versus Quarter Sales Attributed to: | ||||||||||||||||||||||||||
Total (a) | Volume(b) | Net Price/Mix(c) | ||||||||||||||||||||||||
| Premium beverage alcohol | 32.5% | 19.9% | 12.6% | |||||||||||||||||||||||
| Other Financial Information | ||||||||||||||||||||||||||
| Quarter Ended September 30, | Quarter versus Quarter Increase / (Decrease) | |||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||||||||||||
| Gross profit | $ | 26,981 | $ | 15,918 | $ | 11,063 | 69.5 | % | ||||||||||||||||||
| Gross margin % | 29.6 | % | 20.1 | % | 9.5 | pp(d) | ||||||||||||||||||||
(a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars.
(b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit.
(c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume.
(d) Percentage points (“pp”).
Total sales of Distillery Products for the quarter ended September 30, 2021 increased by $11,871, or 15.0 percent, compared to the prior year quarter. Sales of brown goods and white goods within premium beverage alcohol, fuel grade alcohol, and warehouse services increased while industrial alcohol, and distillers feed and related co-products decreased compared to the prior year quarter. The increase in sales of brown goods, white goods and fuel grade alcohol was driven by higher sales volume and higher average selling price. These increases were offset by a decrease in sales of industrial alcohol which was driven by lower sales volume due to the discontinuing of the ICP third party sales and marketing services. The decrease in sales of distillers feed and related co-products was due to lower average selling price, partially offset by higher sales volume, both of which are results of the Dryer Fire Incident (see Note 8, Commitments and Contingencies for further details).
Gross profit increased quarter versus quarter by $11,063, or 69.5 percent. Gross margin for the quarter ended September 30, 2021 increased to 29.6 percent from 20.1 percent for the prior year quarter. The increase in gross profit was primarily due to higher sales volume and higher average selling price on brown goods. Additionally, the increase in gross profit was also due to higher average selling price on industrial alcohol, white goods and fuel grade alcohol, partially offset by higher input costs of industrial alcohol and white goods.
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The following tables show selected financial information for the Distillery Products segment for the year to date ended September 30, 2021 and 2020.
| DISTILLERY PRODUCTS SALES | ||||||||||||||||||||||||||
| Year to Date Ended September 30, | Year to Date versus Year to Date Sales Change Increase/(Decrease) | |||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||||||||||||
| Brown Goods | $ | 129,600 | $ | 86,038 | $ | 43,562 | 50.6 | % | ||||||||||||||||||
| White Goods | 56,049 | 47,922 | 8,127 | 17.0 | ||||||||||||||||||||||
| Premium beverage alcohol | 185,649 | 133,960 | 51,689 | 38.6 | ||||||||||||||||||||||
| Industrial alcohol | 46,896 | 64,032 | (17,136) | (26.8) | ||||||||||||||||||||||
| Food grade alcohol | 232,545 | 197,992 | 34,553 | 17.5 | ||||||||||||||||||||||
| Fuel grade alcohol | 10,862 | 3,970 | 6,892 | 173.6 | ||||||||||||||||||||||
| Distillers feed and related co-products | 13,660 | 19,889 | (6,229) | (31.3) | ||||||||||||||||||||||
| Warehouse services | 12,949 | 11,641 | 1,308 | 11.2 | ||||||||||||||||||||||
| Total Distillery Products | $ | 270,016 | $ | 233,492 | $ | 36,524 | 15.6 | % | ||||||||||||||||||
| Change in Year to Date versus Year to Date Sales Attributed to: | ||||||||||||||||||||||||||
Total(a) | Volume(b) | Net Price/Mix(c) | ||||||||||||||||||||||||
| Premium beverage alcohol | 38.6% | 31.1% | 7.5% | |||||||||||||||||||||||
| Other Financial Information | ||||||||||||||||||||||||||
| Year to Date Ended September 30, | Year to Date versus Year to Date Increase / (Decrease) | |||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||||||||||||
| Gross profit | $ | 87,211 | $ | 49,832 | $ | 37,379 | 75.0 | % | ||||||||||||||||||
| Gross margin % | 32.3 | % | 21.3 | % | 11.0 | pp(d) | ||||||||||||||||||||
(a) Total sales changes is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars.
(b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit.
(c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume.
(d) Percentage points (“pp”).
Total sales of Distillery Products for year to date ended September 30, 2021 increased by $36,524, or 15.6 percent compared to the year-ago period. Sales of brown goods and white goods within premium beverage alcohol, fuel grade alcohol, and warehouse services increased while industrial alcohol, and distillers feed and related co-products decreased compared to the year-ago period. The increase in sales of brown goods, white goods and fuel grade alcohol was driven by higher sales volume and higher average selling price. These increases were partially offset by a decrease in sales of industrial alcohol which was driven by lower sales volume due to the discontinuing of the ICP third party sales and marketing services, partially offset by higher average selling price. The decrease in sales of distillers feed and related co-products was due to lower average selling price, partially offset by higher sales volume, both of which are results of the Dryer Fire Incident (see Note 8, Commitments and Contingencies for further details).
Gross profit for year to date ended September 30, 2021 increased by $37,379, or 75.0 percent compared to the year-ago period. Gross margin for year to date ended September 30, 2021 increased to 32.3 percent from 21.3 percent for the prior year period. The increase in gross profit was primarily due to higher sales volume on brown goods as well as higher average selling price on industrial alcohol, white goods and fuel grade alcohol. The increase in gross profit was partially offset by higher input costs of industrial alcohol, white goods and brown goods as well as lower average selling price on distillers feed and related co-products.
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Branded Spirits
The following tables show selected financial information for the Branded Spirits segment for the quarters ended September 30, 2021 and 2020.
| BRANDED SPIRITS SALES | ||||||||||||||||||||||||||
| Quarter Ended September 30, | Quarter versus Quarter Sales Change Increase/(Decrease) | |||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||||||||||||
| Ultra premium | $ | 13,118 | $ | 2,365 | $ | 10,753 | 454.7 | % | ||||||||||||||||||
| Premium | 6,310 | 72 | 6,238 | 8,663.9 | ||||||||||||||||||||||
| Mid | 17,107 | — | 17,107 | n/a | ||||||||||||||||||||||
| Value | 19,057 | — | 19,057 | n/a | ||||||||||||||||||||||
| Other | 5,969 | 12 | 5,957 | 49,641.7 | ||||||||||||||||||||||
| Total Branded Spirits | $ | 61,561 | $ | 2,449 | $ | 59,112 | 2,413.7 | % | ||||||||||||||||||
| Change in Quarter versus Quarter Sales Attributed to: | ||||||||||||||||||||||||||
Total (a) | Volume(b) | Net Price/Mix(c) | ||||||||||||||||||||||||
| Total Branded Spirits | 2,413.7% | 16,253.1% | (13,839.4)% | |||||||||||||||||||||||
| Other Financial Information | ||||||||||||||||||||||||||
| Quarter Ended September 30, | Quarter versus Quarter Increase / (Decrease) | |||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||||||||||||
| Gross profit | $ | 23,217 | $ | 1,389 | $ | 21,828 | 1,571.5 | % | ||||||||||||||||||
| Gross margin % | 37.7 | % | 56.7 | % | (19.0) | pp(d) | ||||||||||||||||||||
(a) Total sales changes is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars.
(b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit.
(c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume.
(d) Percentage points (“pp”).
Total sales of Branded Spirits for the quarter ended September 30, 2021 increased by $59,112, or 2,413.7 percent compared to the prior year quarter. Sales of value, mid, ultra premium, premium, and other increased compared to the prior year quarter, primarily due to the additional brands acquired as part of the Merger.
Gross profit increased quarter versus quarter by $21,828, or 1,571.5 percent. Gross margin for the quarter ended September 30, 2021 decreased 19.0 percent to 37.7 percent from 56.7 percent for the prior year quarter. The increase in gross profit was primarily due to the additional brands acquired as part of the Merger. The decrease in gross margin was due to sales price mix, as the vast majority of the Company’s branded spirits sales pre-merger were in the ultra premium category.
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The following tables show selected financial information for the Branded Spirits segment for year to date ended September 30, 2021 and 2020.
| BRANDED SPIRITS SALES | ||||||||||||||||||||||||||
| Year to Date Ended September 30, | Year to Date versus Year to Date Sales Change Increase/(Decrease) | |||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||||||||||||
| Ultra Premium | $ | 23,692 | $ | 3,049 | $ | 20,643 | 677.0 | % | ||||||||||||||||||
| Premium | 12,692 | 243 | 12,449 | 5,123.1 | % | |||||||||||||||||||||
| Mid | 34,894 | — | 34,894 | n/a | ||||||||||||||||||||||
| Value | 40,001 | — | 40,001 | n/a | ||||||||||||||||||||||
| Other | 11,278 | 29 | 11,249 | 38,789.7 | % | |||||||||||||||||||||
| Total Branded Spirits | $ | 122,557 | $ | 3,321 | $ | 119,236 | 3,590.4 | % | ||||||||||||||||||
| Change in Year to Date versus Year to Date Sales Attributed to: | ||||||||||||||||||||||||||
Total (a) | Volume(b) | Net Price/Mix(c) | ||||||||||||||||||||||||
| Total Branded Spirits | 3,590.4% | 22,743.4% | (19,153.0)% | |||||||||||||||||||||||
| Other Financial Information | ||||||||||||||||||||||||||
| Year to Date Ended June 30, | Year to Date versus Year to Date Increase / (Decrease) | |||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||||||||||||
| Gross profit | $ | 41,737 | $ | 1,727 | $ | 40,010 | 2,316.7 | % | ||||||||||||||||||
| Gross margin % | 34.1 | % | 52.0 | % | (17.9) | pp(d) | ||||||||||||||||||||
(a) Total sales changes is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars.
(b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit.
(c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume.
(d) Percentage points (“pp”).
Total sales of Branded Spirits for year to date ended September 30, 2021 increased by $119,236, or 3,590.4 percent compared to the year-ago period. Sales of value, mid, ultra premium, premium, and other increased compared to the year-ago period, primarily due to the additional brands acquired as part of the Merger.
Gross profit for year to date ended September 30, 2021 increased by $40,010, or 2,316.7 percent. Gross margin for year to date ended September 30, 2021 decreased 17.9 percent to 34.1 percent from 52.0 percent for the prior year. The increase in gross profit was primarily due to the additional brands acquired as part of the Merger. The decrease in gross margin was due to sales price mix, as the vast majority of the Company’s branded spirits sales pre-merger were in the ultra premium category. Gross profit was reduced during year to date ended September 30, 2021, due to a required step up in value due to purchase accounting related to the Merger. Of the purchase accounting step up, $2,529 was associated with marking the finished goods inventory to fair value, which fully flowed through in the second quarter and is not expected to recur in future periods.
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Ingredient Solutions
The following tables show selected financial information for the Ingredient Solutions segment for the quarter ended September 30, 2021 and 2020.
| INGREDIENT SOLUTIONS SALES | ||||||||||||||||||||||||||
| Quarter Ended September 30, | Quarter versus Quarter Sales Change Increase / (Decrease) | |||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||||||||||||
| Specialty wheat starches | $ | 12,231 | $ | 11,604 | $ | 627 | 5.4 | % | ||||||||||||||||||
| Specialty wheat proteins | 8,901 | 7,994 | 907 | 11.4 | ||||||||||||||||||||||
| Commodity wheat starches | 2,626 | 1,596 | 1,030 | 64.5 | ||||||||||||||||||||||
| Commodity wheat proteins | 248 | 148 | 100 | 67.6 | ||||||||||||||||||||||
| Total Ingredient Solutions | $ | 24,006 | $ | 21,342 | $ | 2,664 | 12.5 | % | ||||||||||||||||||
| Change in Quarter versus Quarter Sales Attributed to: | ||||||||||||||||||||||||||
Total(a) | Volume(b) | Net Price/Mix(c) | ||||||||||||||||||||||||
| Total Ingredient Solutions | 12.5% | 9.1% | 3.4% | |||||||||||||||||||||||
| Other Financial Information | ||||||||||||||||||||||||||
| Quarter Ended September 30, | Quarter versus Quarter Increase / (Decrease) | |||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||||||||||||
| Gross profit | $ | 6,888 | $ | 5,855 | $ | 1,033 | 17.6 | % | ||||||||||||||||||
| Gross margin % | 28.7 | % | 27.4 | % | 1.3 | pp(d) | ||||||||||||||||||||
(a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars.
(b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit
(c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume.
(d) Percentage points (“pp”).
Total Ingredient Solutions sales for quarter ended September 30, 2021 increased by $2,664, or 12.5 percent, compared to the prior year quarter. Quarter versus quarter, this increase was primarily driven by higher sales of commodity wheat starches, specialty wheat proteins and starches due to higher sales volume and higher average selling price.
Gross profit increased quarter versus quarter by $1,033, or 17.6 percent. Gross margin for the quarter ended September 30, 2021 increased to 28.7 percent from 27.4 percent for the prior year quarter. The increase in gross profit was primarily driven by higher average selling price of specialty wheat proteins and starches, and commodity wheat starches, partially offset by higher input costs for specialty wheat proteins and starches.
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The following tables show selected financial information for the Ingredient Solutions segment for the year to date September 30, 2021 and 2020.
| INGREDIENT SOLUTIONS SALES | ||||||||||||||||||||||||||
| Year to Date Ended September 30, | Year to Date versus Year to Date Sales Change Increase/(Decrease) | |||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||||||||||||
| Specialty wheat starches | $ | 35,051 | $ | 30,938 | $ | 4,113 | 13.3 | % | ||||||||||||||||||
| Specialty wheat proteins | 23,299 | 20,372 | 2,927 | 14.4 | ||||||||||||||||||||||
| Commodity wheat starches | 7,572 | 5,247 | 2,325 | 44.3 | ||||||||||||||||||||||
| Commodity wheat proteins | 1,378 | 1,236 | 142 | 11.5 | ||||||||||||||||||||||
| Total Ingredient Solutions | $ | 67,300 | $ | 57,793 | $ | 9,507 | 16.5 | % | ||||||||||||||||||
| Change in Year to Date versus Year to Date Sales Attributed to: | ||||||||||||||||||||||||||
Total(a) | Volume(b) | Net Price/Mix(c) | ||||||||||||||||||||||||
| Total Ingredient Solutions | 16.5% | 13.0% | 3.5% | |||||||||||||||||||||||
| Other Financial Information | ||||||||||||||||||||||||||
| Year to Date Ended September 30, | Year to Date versus Year to Date Increase / (Decrease) | |||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||||||||||||
| Gross profit | $ | 17,264 | $ | 15,516 | $ | 1,748 | 11.3 | % | ||||||||||||||||||
| Gross margin % | 25.7 | % | 26.8 | % | (1.1) | pp(d) | ||||||||||||||||||||
(a) Total sales changes is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars.
(b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit
(c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume.
(d) Percentage points (“pp”).
Total Ingredient Solutions sales for year to date ended September 30, 2021 increased by $9,507, or 16.5 percent, compared to the prior year period. The increase in Ingredient Solutions sales was primarily driven by higher sales of specialty wheat starches and proteins and commodity wheat starches, primarily due to higher sales volume and higher average selling price.
Gross profit increased by $1,748, or 11.3 percent for year to date ended September 30, 2021 compared to the prior year period. Gross margin for the year to date ended September 30, 2021 decreased to 25.7 percent from 26.8 percent for the prior year period. The increase in gross profit was primarily driven by higher sales volumes and average selling price of specialty wheat starches and proteins partially offset by higher input costs.
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CASH FLOW, FINANCIAL CONDITION AND LIQUIDITY
We believe our financial condition continues to be of high quality, as evidenced by our ability to generate adequate cash from operations while having ready access to capital at competitive rates.
Operating cash flow and debt through our Credit Agreement and Note Purchase Agreement (Note 5) provide the primary sources of cash to fund operating needs and capital expenditures. These same sources of cash are used to fund shareholder dividends and other discretionary uses. Our overall liquidity reflects our strong business results and an effective cash management strategy that takes into account liquidity management, economic factors, and tax considerations. We expect our sources of cash, including our Credit Agreement and Note Purchase Agreement, to be adequate to provide for budgeted capital expenditures and anticipated operating requirements for the foreseeable future.
Cash Flow Summary
| Year to Date Ended September 30, | Changes, year versus year Increase / (Decrease) | |||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||
| Cash provided by operating activities | $ | 70,785 | $ | 29,457 | $ | 41,328 | ||||||||||||||
| Cash used in investing activities | (189,166) | (15,513) | (173,653) | |||||||||||||||||
| Cash provided by financing activities | 112,883 | 2,713 | 110,170 | |||||||||||||||||
| Effect of exchange rate changes on cash | (2) | — | (2) | |||||||||||||||||
| Increase (decrease) in cash and cash equivalents | $ | (5,500) | $ | 16,657 | $ | (22,157) | ||||||||||||||
Cash decreased $5,500 for year to date ended September 30, 2021, compared to an increase of $16,657 for year to date ended September 30, 2020, for a net decrease in cash of $22,157, period versus period.
Operating Activities. Cash provided by operating activities for year to date ended September 30, 2021 was $70,785. The cash provided by operating activities resulted primarily from net income of $59,159, adjustments for non-cash or non-operating charges of $19,149 including, depreciation and amortization, and share-based compensation as well as cash used in operating assets and liabilities of $7,523. The primary drivers of the changes in operating assets and liabilities were $7,588 use of cash related to an increase in inventories, primarily barreled distillate, $6,678 use of cash related to decrease in accounts payable, and $5,593 use of cash related to accounts receivables, net due to increased sales during the quarter as well as an increase in insurance recoveries receivable. These uses of cash were partially offset by $15,859 cash provided by accrued expenses and other primarily related to legally committed insurance recovery amounts obtained prior to contingencies related to the insurance claim being resolved.
Cash provided by operating activities for year to date ended September 30, 2020 was $29,457. The cash provided by operating activities resulted primarily from net income of $28,713, adjustments for non-cash or non-operating charges of $13,108, including depreciation and amortization and share-based compensation, partially offset by uses of cash due to changes in operating assets and liabilities of $12,364. The primary drivers of the changes in operating assets and liabilities were $11,683 use of cash related to an increase in accounts receivables, net due to timing of customer payments as well as increased sales during the year, $5,673 use of cash related to an increase in inventories, primarily barreled distillate, and $2,032 use of cash related to an increase in prepaid expenses due to an increase in prepaid insurance and vendor deposits. These uses of cash were partially offset by $5,647 cash provided by accrued expenses primarily related to incentive compensation expenses and $2,057 cash provided by accounts payable related to the timing cash disbursements.
Investing Activities. Cash used in investing activities for year to date ended September 30, 2021 was $189,166, which primarily resulted from $149,613 related to the Merger of Luxco and additions to property, plant and equipment of $37,257 (see Capital Spending). Cash used in investing activities for year to date ended September 30, 2020 was $15,513, which resulted from additions to property, plant and equipment of $13,507 (see Capital Spending) and an increase related to the acquisition of a business of $2,750, partially offset by proceeds from sale of property of $688.
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Capital Spending. We manage capital spending to support our business growth plans. Investments in property, plant and equipment were $37,257 and $13,507 for year to date ended September 30, 2021 and 2020, respectively. Adjusted for the change in capital expenditures in accounts payable for year to date ended September 30, 2021 and 2020, of $(3,375) and $(2,654), respectively, total capital expenditures were $33,882 and $10,853, respectively.
We expect approximately $51,500 in capital expenditures in 2021, excluding any insurance recoveries. Of the $51,500 expected capital expenditures $31,400 is allocated for the replacement of the feed dryer system. The remainder is for facility improvement and expansion, facility sustenance projects, and environmental health and safety projects.
Financing Activities. Cash provided by financing activities for year to date ended September 30, 2021 was $112,883, due to net proceeds from debt of $208,521 (see Long-Term and Short-Term Debt), partially offset by $87,509 payment on assumed debt as part of the Merger, payments of dividends and dividend equivalents of $7,362 (see Dividends and Dividend Equivalents) and purchases of treasury stock of $767 (see Treasury Purchases and Share Repurchases).
Cash provided by financing activities for year to date ended September 30, 2020 was $2,713, primarily due to net proceeds from debt of $13,252 (See Long-Term and Short-Term Debt), payments of dividends and dividend equivalents of $6,144 (see Dividends and Dividend Equivalents) and purchases of treasury stock of $4,395 (see Treasury Purchases and Share Repurchases).
Treasury Purchases. 38,059 RSUs vested and converted to common shares for employees during year to date ended September 30, 2021, of which we withheld and purchased for treasury 11,885 shares valued at $767 to cover payment of associated withholding taxes.
30,404 RSUs vested and converted to common shares for employees during year to date ended September 30, 2020, of which we withheld and purchased for treasury 10,051 shares valued at $342 to cover payment of associated withholding taxes.
Share Repurchases. On February 25, 2019, our Board of Directors approved a $25,000 share repurchase authorization commencing February 27, 2019, through February 27, 2022. Under the share repurchase program, we can repurchase stock from time to time for cash in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws. This share repurchase program may be modified, suspended, or terminated by us at any time without prior notice. The Company did not repurchase any shares during the year to date ended September 30, 2021 and has $20,947 remaining under the share repurchase plan.
During year to date ended September 30, 2020, we repurchased approximately 159,104 shares of MGP Common Stock for $4,053.
Dividends and Dividend Equivalents
| Dividend and Dividend Equivalent Information (per Share and Unit) | ||||||||||||||||||||||||||||||||||||||||||||
| Declaration date | Record date | Payment date | Declared | Paid | Dividend payment | Dividend equivalent payment(a)(b) | Total payment(b) | |||||||||||||||||||||||||||||||||||||
| 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| February 23, 2021 | March 12, 2021 | March 26, 2021 | $ | 0.12 | $ | 0.12 | $ | 2,033 | $ | 19 | $ | 2,052 | ||||||||||||||||||||||||||||||||
| May 3, 2021 | May 21, 2021 | June 4, 2021 | 0.12 | 0.12 | 2,635 | 20 | 2,655 | |||||||||||||||||||||||||||||||||||||
| August 2, 2021 | August 20, 2021 | September 3, 2021 | 0.12 | 0.12 | 2,635 | 20 | 2,655 | |||||||||||||||||||||||||||||||||||||
| $ | 0.36 | $ | 0.36 | $ | 7,303 | $ | 59 | $ | 7,362 | |||||||||||||||||||||||||||||||||||
| 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| February 24, 2020 | March 13, 2020 | March 27, 2020 | $ | 0.12 | $ | 0.12 | $ | 2,047 | $ | 13 | $ | 2,060 | ||||||||||||||||||||||||||||||||
| April 28, 2020 | May 22, 2020 | June 5, 2020 | 0.12 | 0.12 | 2,027 | 14 | 2,041 | |||||||||||||||||||||||||||||||||||||
| July 28, 2020 | August 21, 2020 | September 4, 2020 | 0.12 | 0.12 | 2,029 | 14 | 2,043 | |||||||||||||||||||||||||||||||||||||
| $ | 0.36 | $ | 0.36 | $ | 6,103 | $ | 41 | $ | 6,144 | |||||||||||||||||||||||||||||||||||
(a) Dividend equivalent payments on unvested participating securities.
(b) Includes estimated forfeitures.
33
On November 1, 2021, our Board of Directors declared a quarterly dividend payable to stockholders of record as of November 19, 2021, of the Company’s Common Stock, and a dividend equivalent payable to holders of certain RSUs as of November 19, 2021, of $0.12 per share and per unit, payable on December 3, 2021.
Long-Term and Short-Term Debt. We maintain debt levels we consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment and financing plans (including brand development and share repurchase activities) and the overall cost of capital. Total debt was $247,677 (net of unamortized loan fees of $1,733) at September 30, 2021, and $39,871 (net of unamortized loan fees of $129) at December 31, 2020.
Financial Condition and Liquidity. Our principal uses of cash in the ordinary course of business are for input costs used in our production processes, salaries, capital expenditures, and investments supporting our strategic plan, such as the aging of barreled distillate. Generally, during periods when commodities prices are rising, our operations require increased use of cash to support inventory levels.
Our principal sources of cash are product sales and borrowing on our Credit Agreement and Note Purchase Agreement. Under our Credit Agreement and Note Purchase Agreement, we must meet certain financial covenants and restrictions, and at September 30, 2021, we met those covenants and restrictions.
At September 30, 2021, our current assets exceeded our current liabilities by $265,430, largely due to our inventories, at cost, of $239,312. At September 30, 2021, our cash balance was $16,162 and we have used our Credit Agreement and Note Purchase Agreement for liquidity purposes, with $190,000 remaining for additional borrowings. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We regularly assess our cash needs and the available sources to fund these needs. While we currently believe we are well positioned with our credit agreement, we will continue to monitor the impact of the COVID-19 pandemic on our operations and liquidity needs. We utilize short-term and long-term debt to fund discretionary items, such as capital investments and dividend payments. In addition, we have strong operating results such that financial institutions should provide sufficient credit funding to meet short-term financing requirements, if needed.
On April 1, 2021, the Company completed the merger with Luxco. The aggregate consideration paid by the Company in connection with the merger was $237,500 in cash (less assumed indebtedness) and 5,007,833 shares of common stock of the Company, subject to adjustment for fractional shares (the “Company Shares,” and together with the cash portion, the “Merger Consideration”). The Merger Consideration is subject to customary purchase price adjustments, including working capital, a portion of which may be paid in common stock. The cash portion of the Merger Consideration, the repayment of assumed debt and transaction-related expenses were financed with a $242,300 borrowing under the Credit Agreement. We anticipate having sufficient cash flows to support our short-term liquidity and operating needs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to commodity price and interest rate market risks. We monitor and manage these exposures as part of our overall risk management program. Our risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results.
Commodity Costs. Certain commodities we use in our production process, or input costs, expose us to market price risk due to volatility in the prices for those commodities. Through our grain supply contracts for our Atchison and Lawrenceburg facilities, our wheat flour supply contract for our Atchison facility, and our natural gas contracts for both facilities, we purchase grain, wheat flour, and natural gas, respectively, for delivery from one to 24 months into the future at negotiated prices. We have determined that the firm commitments to purchase grain, wheat flour, and natural gas under the terms of our supply contracts meet the normal purchases and sales exception as defined under Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging, because the quantities involved are for amounts to be consumed within the normal expected production process.
Interest Rate Exposures. Our Credit Agreement and Note Purchase Agreement (Note 5) expose us to market risks arising from adverse changes in interest rates. Established procedures and internal processes govern the management of this market risk.
Increases in market interest rates would cause interest expense to increase and earnings before income taxes to decrease. The change in interest expense and earnings before income taxes would be dependent upon the weighted average outstanding borrowings during the reporting period following an increase in market interest rates. Based on weighted average outstanding variable-rate borrowings at September 30, 2021, a 100 basis point increase over the non-default rates actually in effect at such date would increase our interest expense on an annualized basis by $2,235. Based on weighted average outstanding fixed-rate
34
borrowings at September 30, 2021, a 100 basis point increase in market rates would result in a decrease in the fair value of our outstanding fixed-rate debt of $1,385, and a 100 basis point decrease in market rates would result in an increase in the fair value of our outstanding fixed-rate debt of $1,454.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. As of the quarter ended September 30, 2021, our Chief Executive Officer and Chief Financial Officer have each reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have each concluded that our current disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. On April 1, 2021, we completed the acquisition of Luxco, Inc. and its affiliated companies (“Luxco”). We are currently integrating Luxco into our operations and internal control processes and, pursuant to the Securities and Exchange Commission staff interpretative guidance that assessment of a recently acquired business may be omitted from the scope of an assessment for a period not to exceed one year from the date of acquisition, the scope of our assessment of our internal controls over financial reporting at September 30, 2021 does not include Luxco.
Changes in Internal Controls. Except for internal controls related to integration activities associated with our acquisition of Luxco, there were no changes in the Company’s internal controls over financial reporting during the fiscal quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Part I, Item 3, Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2020, and Note 8 to this Report on Form 10-Q for information on certain proceedings to which we are subject.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed under “Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There was no unregistered sale of equity securities during the quarter ended September 30, 2021.
ISSUER PURCHASES OF EQUITY SECURITIES
| (1) Total Number of Shares (or Units) Purchased | (2) Average Price Paid per Share (or Unit) | (3) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (4) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||||||
| July 1, 2021 through July 31, 2021 | 12 | (a) | $ | 66.16 | $ | — | $ | 20,947,113 | (b) | ||||||||||||||||||||
| August 1, 2021 through August 31, 2021 | — | (a) | $ | — | $ | — | $ | 20,947,113 | (b) | ||||||||||||||||||||
| September 1, 2021 through September 30, 2021 | 8 | (a) | $ | 61.55 | $ | — | $ | 20,947,113 | (b) | ||||||||||||||||||||
| Total | 20 | $ | — | ||||||||||||||||||||||||||
35
(a) Vested RSUs awarded under the 2014 Plan purchased to cover employee withholding taxes.
(b) On February 25, 2019, our Board of Directors approved a $25,000 share repurchase authorization commencing February 27, 2019 through February 27, 2022. Under the share repurchase program, we can repurchase stock from time to time for cash in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws. This share repurchase program may be modified, suspended, or terminated by us at any time without prior notice.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
36
ITEM 6. EXHIBITS
| Exhibit Number | Description of Exhibit | ||||
| 10.1 | |||||
| *31.1 | |||||
| *31.2 | |||||
| *32.1 | |||||
| *32.2 | |||||
| *101 | The following financial information from MGP Ingredients, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in iXBRL (Inline Extensible Business Reporting Language) includes: (i) Condensed Consolidated Balance Sheets as of September 30, 2021, and December 31, 2020, (ii) Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, (v) Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020, and (vi) the Notes to Condensed Consolidated Financial Statements. | ||||
| *104 | Cover Page Interactive Data Filed - formatted in iXBRL (Inline Extensible Business Reporting Language ) and contained in Exhibit 101 | ||||
| *Filed herewith ** Management contract or compensatory plan or arrangement | |||||
37
SIGNATURES
Pursuant to the requirements on the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MGP INGREDIENTS, INC.
| Date: | November 3, 2021 | By | /s/ David J. Colo | ||||||||
| David J. Colo, President and Chief Executive Officer | |||||||||||
| Date: | November 3, 2021 | By | /s/ Brandon M. Gall | ||||||||
| Brandon M. Gall, Vice President, Finance and Chief Financial Officer | |||||||||||
38
Exhibit 31.1
CERTIFICATION
I, David J. Colo, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of MGP Ingredients, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | November 3, 2021 | ||||||||||
| /s/ David J. Colo | |||||||||||
| David J. Colo, President and Chief Executive Officer | |||||||||||
Exhibit 31.2
CERTIFICATION
I, Brandon M. Gall, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of MGP Ingredients, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | November 3, 2021 | ||||||||||
| /s/ Brandon M. Gall | |||||||||||
| Brandon M. Gall, Vice President, Finance and Chief Financial Officer | |||||||||||
Exhibit 32.1
CERTIFICATION
OF
PERIODIC REPORT
I, David J. Colo, President and Chief Executive Officer of MGP Ingredients, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2021 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: | November 3, 2021 | ||||||||||
| /s/ David J. Colo | |||||||||||
| David J. Colo | |||||||||||
| President and Chief Executive Officer | |||||||||||
[A signed original of this written statement required by Section 906 has been provided to MGP Ingredients, Inc. and will be retained by MGP Ingredients, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.]
Exhibit 32.2
CERTIFICATION
OF
PERIODIC REPORT
I, Brandon M. Gall, Vice President and Chief Financial Officer of MGP Ingredients, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2021 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: | November 3, 2021 | ||||||||||
| /s/ Brandon M. Gall | |||||||||||
| Brandon M. Gall | |||||||||||
| Vice President, Finance and Chief Financial Officer | |||||||||||
[A signed original of this written statement required by Section 906 has been provided to MGP Ingredients, Inc. and will be retained by MGP Ingredients, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.]