SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
|☒||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended December 31, 2020
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the transition period from _______ to _______
Commission file number 0-17196
MGP Ingredients, Inc.
(Exact Name of Registrant as Specified in Its Charter)
|(State or Other Jurisdiction||(I.R.S. Employer|
|of Incorporation or Organization)||Identification No.)|
|100 Commercial Street, Box 130|
|(Address of Principal Executive Offices)||(Zip Code)|
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
|Title of Each Class||Trading Symbol||Name of Each Exchange on Which Registered|
|Common Stock, no par value||MGPI||NASDAQ Global Select Market|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||☐||Accelerated filer ||☒|
|Non-accelerated filer||☐||Smaller reporting company||☐|
|(do not check if smaller reporting company)||Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as reported by NASDAQ on June 30, 2020, was $480,094,591.
The number of shares of the registrant’s common stock, no par value ("Common Stock") outstanding as of February 19, 2021 was 16,919,797.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference:
(1)Portions of the MGP Ingredients, Inc. Proxy Statement for the Annual Meeting of Stockholders to be held on June 17, 2021 are incorporated by reference into Part III of this report to the extent set forth herein.
The calculation of the aggregate market value of the Common Stock held by non-affiliates is based on the assumption that affiliates include directors and executive officers. Such assumption does not constitute an admission by the Company or any director or executive officer that any director or executive officer is an affiliate of the Company.
ITEM 1. BUSINESS
MGP Ingredients, Inc. was incorporated in 2011 in Kansas, continuing a business originally founded by Cloud L. Cray, Sr. in Atchison, Kansas in 1941. As used herein, the term "MGP," "Company," "we," "our," or "us" refers to MGP Ingredients, Inc. and its subsidiaries unless the context indicates otherwise. In this document, for any references to Note 1 through Note 15 refer to the Notes to Consolidated Financial Statements in Item 8.
We make available through our website (www.mgpingredients.com) under "For Investors," free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, special reports and other information, and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such material with the Securities and Exchange Commission ("SEC").
The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company. The address of the SEC site is http://www.sec.gov.
METHOD OF PRESENTATION
All amounts in this report, except for shares, par values, bushels, gallons, pounds, mmbtu, proof gallons, per share, per bushel, per gallon, per proof gallon, and percentage amounts are shown in thousands, unless otherwise noted.
MGP is a leading producer and supplier of premium distilled spirits and specialty wheat protein and starch food ingredients. Distilled spirits include premium bourbon and rye whiskeys and grain neutral spirits ("GNS"), including vodka and gin. MGP is also a top producer of high quality industrial alcohol for use in both food and non-food applications. Our protein and starch food ingredients provide a host of functional, nutritional, and sensory benefits for a wide range of food products to serve the packaged goods industry. Our distillery products are derived from corn and other grains, and our ingredient products are derived primarily from wheat flour. The majority of our distillery and ingredient product sales are made directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries.
Acquisition of Luxco. On January 22, 2021, we entered into a definitive agreement to acquire Luxco, Inc., and its affiliated companies ("Luxco"). Luxco is a leading branded beverage alcohol company across various categories, with a more than 60-year business heritage. As a result of the Luxco acquisition, we expect to increase our scale and market position in the branded-spirits sector and strengthen our platform for future growth of higher valued-added products. Under the terms of the agreement, Luxco shareholders will receive $237,500 in cash (less assumed indebtedness) and 5,007,833 shares of MGP Common Stock. The purchase price is subject to customary purchase price adjustments, including working capital, which adjustments are anticipated to be paid in cash. The transaction is anticipated to be completed during the first half of 2021, subject to regulatory approvals and customary closing conditions (See Part I, Item 1A - Risk Factors and Note 15 for additional information).
INFORMATION ABOUT SEGMENTS
As of December 31, 2020, we had two reportable segments: Distillery Products and Ingredient Solutions.
Distillery Products Segment. We process corn and other grains (including rye, barley, wheat, barley malt, and milo) into food grade alcohol and distillery co-products, such as distillers feed (commonly called dried distillers grain in the industry), fuel grade alcohol, and corn oil. We also provide warehouse services, including barrel put away, barrel storage, and barrel retrieval services, as well as blending services. We have certain contracts with customers to supply distilled products (or "distillate"), as well as certain contracts with customers to provide barreling and warehousing services. Contracts with customers may be monthly, annual, and multi-year with periodic reviews of pricing. Sales of fuel grade alcohol are made on the spot market. Since 2015, our Distillery Products segment includes production and sales of our own branded alcohol products, including sales under the following brands: TILL® American Wheat Vodka, George Remus® Straight Bourbon Whiskey, Remus Repeal Reserve® Straight Bourbon Whiskey, Tanner’s Creek® Blended Bourbon Whiskey, Rossville Union® Straight Rye Whiskey, Eight & Sand Blended Bourbon Whiskey and Green Hat® Gin. During 2020, our five largest Distillery Products customers, combined, accounted for 18.9 percent of our consolidated sales.
Food Grade Alcohol - The majority of our distillery capacities are dedicated to the production of high quality, high purity food grade alcohol for beverage and industrial applications.
Food grade alcohol sold for beverage applications, premium beverage alcohol, consists primarily of premium bourbon and rye whiskeys ("brown goods") and GNS, including vodka and gin ("white goods"). Our premium bourbon is created by distilling grains, primarily corn. Our whiskey is made from fermented grain mash, including rye and corn. Our whiskeys are sold as aged and unaged distillate, which may be further aged by our customers or warehoused at our facilities, and are sold at various proof concentrations. Our GNS is sold in bulk quantities at various proof concentrations. Our gin is created by redistilling GNS together with proprietary formulations of botanicals or botanical oils.
Food grade industrial alcohol is used as an ingredient in foods (e.g., vinegar and food flavorings), personal care products (e.g., hair sprays and hand sanitizers), cleaning solutions, pharmaceuticals, and a variety of other products. We sell food grade industrial alcohol in tank truck or rail car quantities direct to a number of industrial processors.
Fuel grade alcohol - Fuel grade alcohol is sold primarily for blending with gasoline to increase the octane and oxygen levels of the gasoline. As an octane enhancer, fuel grade alcohol can serve as a substitute for lead and petroleum-based octane enhancers. As an oxygenate, fuel grade alcohol has been used in gasoline to meet certain environmental regulations and laws relating to air quality by reducing carbon monoxide, hydrocarbon particulates, and other toxic emissions generated from the burning of gasoline. We produce fuel grade alcohol as a co-product of our food grade alcohol business at our Atchison facility.
Distillers Feed and related Co-Products - The bulk alcohol co-products sales include distillers feed and corn oil. Distillers feed is principally derived from the mash from alcohol processing operations. The mash is dried and sold primarily to processors of animal feeds as a high protein additive. In addition, we produce corn oil as a value added co-product through a corn oil extraction process at our Atchison facility.
Warehouse Services - Customers who purchase barreled distillate may, and in most cases do, also enter into separate warehouse service agreements with us for the storage of product for aging. Services under warehouse agreements include barrel put away, barrel storage, and barrel retrieval, as well as blending services.
Ingredient Solutions Segment. Our Ingredient Solutions segment consists primarily of specialty wheat starches, specialty wheat proteins, commodity wheat starches, and commodity wheat proteins. Contracts with Ingredient Solutions customers are generally price, volume, and term agreements, which are fixed-term contracts, with very few agreements longer than 12 months in duration. During 2020, our five largest Ingredient Solutions customers, combined, accounted for 13.4 percent of our consolidated sales.
Specialty Wheat Starches - Wheat starch is derived from the carbohydrate-bearing portion of wheat flour. We produce a premium wheat starch powder by extracting the starch from the starch slurry, substantially free of all impurities and then dry the starch in spray, flash, or drum dryers.
A substantial portion of our premium wheat starch is altered during processing to produce certain unique specialty wheat starches designed for special applications. We sell our specialty wheat starches on a global basis, primarily to food processors and distributors.
We market our specialty wheat starches under the trademarks Fibersym® Resistant Starch series, FiberRite® RW Resistant Starch, Pregel® Instant Starch series, and Midsol® Cook-up Starch series. They are used primarily for food applications as an ingredient in a variety of food products to affect their nutritional profile, appearance, texture, tenderness, taste, palatability, cooking temperature, stability, viscosity, binding, and freeze-thaw characteristics. Important physical properties contributed by wheat starch include whiteness, clean flavor, viscosity, and texture. For example, our starches are used to improve the taste and texture of cream puffs, éclairs, puddings, pie fillings, breading, and batters; to improve the size, symmetry, and taste of angel food cakes; to alter the viscosity of soups, sauces, and gravies; to improve the freeze-thaw stability and shelf life of fruit pies and other frozen foods; to improve moisture retention in microwavable foods; and to add stability and to improve texture in frostings, mixes, glazes, and sugar coatings.
Our wheat starches, as a whole, generally compete primarily with corn starch, which dominates the United States starch market. Additionally, our wheat starches compete with potato and tapioca. However, the unique characteristics of our specialty wheat starches provide a number of advantages over other starches for certain functionality in baking and pasta end uses.
Specialty Wheat Proteins - We have developed a number of specialty wheat proteins for food applications. Specialty wheat proteins are derived from vital wheat gluten through a variety of proprietary processes which change its molecular structure. Specialty wheat proteins for food applications include the products Arise® and Proterra®.
We produce clean label ingredients under our Arise® line of wheat protein isolates. Along with Arise® 8000, this series includes Arise® 8100 and Arise® 8200. Each of these ingredients is also Non-Genetically Modified Organism ("Non-GMO") Project Verified. We also offer a Non-GMO Project Verified food ingredients portfolio of Proterra® 1000, Proterra® 2000, and plant protein combinations textured and ready for meat replacement applications. Additionally, we offer gluten free textured pea proteins.
Our specialty wheat proteins generally compete with other ingredients and modified proteins having similar characteristics, primarily soy proteins and other wheat proteins, with differentiation being based on factors such as functionality, price, and, in the case of food applications, flavor.
Commodity Wheat Starches - As is the case with value added wheat starches, our commodity wheat starches have both food and non-food applications, but such applications are more limited than those of value added wheat starches and typically sell for a lower price in the marketplace. Commodity wheat starches compete primarily with other commodity starches, corn starches and tapioca. Marketplace prices generally track the fluctuations in the overall commodity markets in this category.
Commodity Wheat Proteins - Commodity wheat protein, or vital wheat gluten, is a free-flowing light tan powder which contains approximately 75 percent protein. When we process wheat flour to derive starch, we also derive vital wheat gluten. Vital wheat gluten is added by bakeries and food processors to baked goods, such as breads, and to pet foods, cereals, processed meats, and fish and poultry to improve the nutritional content, texture, strength, shape, and volume of the product. The neutral flavor and color of vital wheat gluten also enhances the flavor and color of certain foods. The cohesiveness and elasticity of the gluten enables the dough in wheat and other high protein breads to rise and to support added ingredients, such as whole cracked grains, raisins and fibers. This allows bakers to make an array of different breads by varying the gluten content of the dough. Vital wheat gluten is also added to white breads, hot dog buns, and hamburger buns to improve the strength and cohesiveness of the product. Additionally, our wheat gluten is being used in more vegan and vegetarian food options than in years past. This is a relatively new application and is generating additional volume opportunities in this segment.
While we believe that the overall market environment offers considerable growth opportunities for us in 2021 and beyond, the markets in which our products are sold are competitive. Our products compete against similar products of many large and small companies. In our Distillery Products segment, competition is based primarily on product innovation, product characteristics, functionality, price, service, and quality factors, such as flavor. In our Ingredient Solutions segment, competition is based primarily on product innovation, product characteristics, price, name, color, flavor, or other properties that affect how the ingredient is being used.
PATENTS, TRADEMARKS, AND LICENSES
We are involved in a number of patent-related activities, primarily within our Ingredient Solutions segment. We have filed patent applications to protect a range of inventions made in our research and development efforts, including inventions relating
to applications for our products. Some of these patents or licenses cover significant product formulation and processes used to manufacture our products.
Sales for some of our products, including brown goods, can fluctuate from period to period due to inherent demands and timing of our customers needs; however, our sales are generally not seasonal.
Historically, our output has been transported to customers by truck and rail, most of which is provided by common carriers. We use third party transportation companies to help us manage truck and rail carriers who deliver our products to our North American customers as well as overseas shipments to our international customers.
RAW MATERIALS, PACKAGING MATERIALS, AND FOOD GRADE ALCOHOL
Our principal Distillery Products segment raw materials, or input costs, are corn and other grains (including rye, barley, wheat, barley malt, and milo), which are processed into food grade alcohol and distillery co-products consisting of distillers feed, fuel grade alcohol, and corn oil. Our principal Ingredient Solutions segment raw material is wheat flour, which is processed into starches and proteins. The cost of grain and wheat flour has, at times, been subject to substantial fluctuation.
In 2020, we purchased most of our grain requirements from two suppliers, Bunge Milling, Inc. ("Bunge") and Consolidated Grain and Barge Co. ("CGB"). Our current grain supply contracts with Bunge and CGB expire on December 31, 2021 and December 31, 2023, respectively. Through these contracts, we purchase grain for delivery into the future at negotiated prices based on several factors. We also order wheat flour for delivery into the future at negotiated prices based on several factors. We purchase most of our wheat flour through a supply contract with Ardent Mills, which expires August 20, 2023. We typically enter contracts for future delivery only to protect margins on contracted alcohol sales, expected ingredient sales, and general usage.
Our principal packaging material for our Distillery Products segment is oak barrels. Both new and used barrels are utilized for the aging of premium bourbon and rye whiskeys. We purchase oak barrels from multiple suppliers and some customers supply their own barrels.
We also source food grade alcohol from Pacific Ethanol Central, LLC ("Pacific Ethanol"), formerly Illinois Corn Processing, LLC ("ICP").
Natural gas is an input cost used to operate boilers to make steam heat. We procure natural gas for our facilities in the open market from various suppliers. We have a risk management program whereby we may purchase contracts for the delivery of natural gas for delivery into the future at negotiated prices based on several factors, or we can purchase futures contracts on the exchange. Historically, prices of natural gas have been higher in the late fall and winter months than during other periods.
All of our electricity needs for both our Atchison and Lawrenceburg facilities is sourced from renewable wind power. Through an agreement with a supplier, we purchase renewable energy credits. The wind energy, equal in value to the credits, will then be sourced from wind farms in Kansas and added to the overall energy grid system.
As of December 31, 2020, we had a total of 360 employees. A collective bargaining agreement, covering 103 employees at the Atchison facility, expires on August 31, 2024. A collective bargaining agreement, covering 64 employees at the Lawrenceburg facility, expires on December 31, 2022. We have not experienced any recent work stoppages, and we consider our relationship with our employees to be good. Headcount by facility is as follows:
•Atchison, Kansas - 237
•Lawrenceburg, Indiana - 120
•Washington, D.C. - 3
We believe our employees are key to achieving our business objectives. Our key human capital measures include employee safety, turnover, absenteeism and productivity. We frequently benchmark our compensation practices and benefits programs against those of comparable industries and in the geographic areas where our facilities are located. We believe that our compensation and employee benefits are competitive and allow us to attract and retain skilled and unskilled labor throughout our organization. Our notable health, welfare and retirement benefits include:
•Company subsidized health insurance
•401(k) Plan with Company matching contributions
•Tuition assistance program
•Paid time off
Employee safety is one of our top priorities. We develop and administer company-wide policies designed to ensure the safety of each team member and compliance with Occupational Safety and Health Administration ("OSHA") standards. This includes a program called Safety Up, which promotes safety from the plant floor up and includes employee-led safety meetings, training and assessments, and weekly safety audits. Throughout the COVID-19 pandemic we were deemed an essential employer and continued to operate with COVID-19 prevention protocols in place to minimize the risk of the spread of COVID-19 in our workplaces. Many of our administrative staff were encouraged or required to work from home. These protocols remain in place and will continue so long as the pandemic continues.
Our Company strives for workforce retention. We have programs for continuing education through our MGP University and also provide tuition reimbursement. New and open positions are posted for our current workforce to apply for and internal promotions are encouraged.
We strive to maintain an inclusive environment free from discrimination of any kind, including sexual or other discriminatory harassment. Our employees have multiple avenues available through which inappropriate behavior can be reported, including a confidential hotline. Our policies require all reports of inappropriate behavior to be promptly investigated with appropriate action taken.
We are subject to a broad range of federal, state, local, and foreign laws and regulations intended to protect public health and the environment. Our operations are also subject to regulation by various federal agencies, including the Alcohol and Tobacco Tax Trade Bureau ("TTB"), OSHA, the Food and Drug Administration ("FDA"), the United States Environmental Protection Agency ("EPA"), and by various state and local authorities. Such laws and regulations cover virtually every aspect of our operations, including production and storage facilities, distillation and maturation requirements, importing ingredients, distribution of beverage alcohol products, marketing, pricing, labeling, packaging, advertising, water usage, waste water discharge, disposal of hazardous wastes and emissions, and other matters. In addition, beverage alcohol products are subject to customs, duties or excise taxation in many countries, including taxation at the federal, state, and local level in the United States.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Our officers as of December 31, 2020 and their ages as of February 25, 2021:
|Name||Age||Principal Occupation and Business Experience|
|David J. Colo||58||President and Chief Executive Officer for the Company since May 2020 and member of the Board of Directors for the Company since August 2015. President, Chief Executive Officer and director of SunOpta from February 2017 to February 2019. Executive Vice President and Chief Operating Officer of Diamond Foods, Inc. from 2013 to March 2016. Executive Vice President of Global Operations and Supply Chain for Diamond Foods, Inc. from 2012 to 2013.|
|Brandon M. Gall||39||Vice President, Finance and Chief Financial Officer for the Company since April 2019. Corporate Controller for the Company from June 2018 to March 2019. Director of Supply Chain and New Business Development Finance for the Company from May 2014 to May 2018. Director of Financial Planning and Analysis for the Company from January 2012 to April 2014.|
|Stephen J. Glaser||60||Vice President, Production and Engineering for the Company since October 2015. Corporate Director of Operations for the Company from January 2014 to October 2015. Plant Manager for the Company of the Atchison facility from May 2011 to December 2013.|
|David E. Dykstra||57||Vice President, Alcohol Sales and Marketing for the Company since 2009.|
|Michael R. Buttshaw||58||Vice President, Ingredient Sales and Marketing for the Company since December 2014. Vice President of Sales for the ingredient group at Southeastern Mills, Inc. from October 2010 to November 2014.|
|David E. Rindom||65||Vice President and Chief Administrative Officer for the Company since December 2015. Vice President, Human Resources for the Company from June 2000 to December 2015.|
|Andrew P. Mansinne||61||Vice President, Brands for the Company since November 2016. Managing director at Intercontinental Beverage Capital and President of Tattico Strategies from March 2015 to October 2016. President of Aveniu Brands from May 2010 to April 2014.|
ITEM 1A. RISK FACTORS
Our business is subject to certain risks and uncertainties that could cause actual results and events to differ materially from forward looking statements. The following discussion identifies those which we consider to be most important. The following discussion of risks is not all inclusive. Additional risks not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, or results of operations.
RISKS THAT AFFECT OUR BUSINESS AS A WHOLE
An interruption of operations or a catastrophic event at our facilities could negatively affect our business.
Although we maintain insurance coverage for various property damage and loss events, an interruption in or loss of operations at either of our production facilities could reduce or postpone production of our products, which could have a material adverse effect on our business, results of operations, or financial condition. To the extent that our value added products rely on unique or proprietary processes or techniques, replacing lost production by purchasing from outside suppliers would be difficult.
In November 2020 a dryer at our Atchison facility was destroyed in a fire, resulting in an interruption in operations at our Atchison facility. We had significant property damage. The Company’s insurance is expected to provide coverage for property damage and business interruption losses, but there can be no assurance as to the amount or timing of possible insurance recoveries if ultimately claimed by the Company.
Our customers store a substantial amount of barreled inventory of aged premium bourbon and rye whiskeys at our Lawrenceburg facility and our nearby warehouses in Williamstown, Kentucky and Sunman, Indiana. If a catastrophic event were to occur at our Lawrenceburg facility or our warehouses, our customers' business could be adversely affected. The loss of a significant amount of aged inventory through fire, natural disaster, or otherwise could result in customer claims against us, liability for customer losses, and a reduction of warehouse services revenue.
We also store a substantial amount of our own inventory of aged premium bourbon and rye whiskeys at our Lawrenceburg facility and our nearby warehouses. If a catastrophic event were to occur at our Lawrenceburg facility or our nearby warehouses, our business, financial condition, or results of operations could be adversely affected. The loss of a significant amount of our aged inventory through fire, natural disaster, or otherwise, could result in a reduction in supply of the affected product or products and could affect our long-term growth.
A disruption in transportation services could negatively affect our business.
A disruption in transportation services could result in difficulties supplying materials to our facilities and impact our ability to deliver products to our customers in a timely manner, and our business, financial condition, or results of operations could be adversely affected.
Our profitability is affected by the costs of grain, wheat flour, and natural gas, or input costs, that we use in our business, the availability and costs of which are subject to weather and other factors beyond our control. We may not be able to recover the costs of commodities and energy by increasing our selling prices.
Grain and wheat flour costs are a significant portion of our costs of goods sold. Historically, the cost of such raw materials has, at times, been subject to substantial fluctuation, depending upon a number of factors which affect commodity prices in general and over which we have no control. These include crop conditions, weather, disease, plantings, government programs and policies, competition for acquisition of inputs such as agricultural commodities, purchases by foreign governments, and changes in demand resulting from population growth and customer preferences. The price of natural gas also fluctuates based on anticipated changes in supply and demand, weather, and the prices of alternative fuels. Fluctuations in the price of commodities and natural gas can be sudden and volatile at times and have had, from time to time, significant adverse effects on the results of our operations. Higher energy costs could result in higher transportation costs and other operating costs.
We do not enter into futures and options contracts ourselves because we can purchase grain and wheat flour for delivery into the future under our grain and wheat flour supply agreements. We intend to contract for the future delivery of grain and wheat flour only to protect margins on expected sales. On the portion of volume not contracted, we attempt to recover higher commodity costs through higher selling prices, but market considerations may not always permit this result. Even where prices can be adjusted, there is likely a lag between when we experience higher commodity or natural gas costs and when we might be able to increase prices. To the extent we are unable to timely pass increases in the cost of raw materials to our customers under sales contracts, market fluctuations in the cost of grain, natural gas, and ethanol may have a material adverse effect on our business, financial condition, or results of operations.
We have a high concentration of certain raw material and finished goods purchases from a limited number of suppliers which exposes us to risk.
We have signed supply agreements with Bunge and CGB for our grain supply (primarily corn) and with Ardent Mills for our wheat flour. The Company also procures some textured wheat proteins through a third-party toll manufacturer in the United States. If any of these companies encounters an operational or financial issue, or otherwise cannot meet our supply demands, it could lead to an interruption in supply to us and/or higher prices than those we have negotiated or than are available in the market at the time, and in turn, have a material adverse effect on our business, financial condition, or results of operations.
The markets for our products are very competitive, and our business could be negatively affected if we do not compete effectively.
The markets for products in which we participate are very competitive. Our principal competitors in these markets have substantial financial, marketing, and other resources, and several are much larger enterprises than us. In recent years, the global beverage alcohol industry has continued to experience consolidation. Industry consolidation can have varying degrees of impact, including the creation of new and larger competitors.
We are dependent on being able to generate sales and other operating income in excess of the costs of products sold in order to obtain margins, profits, and cash flows to meet or exceed our targeted financial performance measures. Competition is based on such factors as product innovation, product characteristics, product quality, pricing, color, and name. Pricing of our products is partly dependent upon industry capacity, which is impacted by competitor actions to bring online idled capacity or to build new production capacity. If market conditions make our products too expensive for use in consumer goods, our revenues could be affected. If our principal competitors were to decrease their pricing, we could choose to do the same, which could adversely affect our margins and profitability. If we did not do the same, our revenues could be adversely affected due to the potential loss of sales or market share. Our revenue growth could also be adversely affected if we are not successful in developing new products for our customers or as a result of new product introductions by our competitors. In addition, more stringent new customer demands may require us to make internal investments to achieve or sustain competitive advantage and meet customer expectations.
Work disruptions or stoppages by our unionized workforce could cause interruptions in our operations.
As of December 31, 2020, approximately 167 of our 360 employees were members of a union. Although our relations with our two unions are stable, there is no assurance that we will not experience work disruptions or stoppages in the future, which could have a material adverse effect on our business, financial condition, or results of operations and could adversely affect our relationships with our customers.
If we were to lose any of our key management personnel, we may not be able to fully implement our strategic plan, our system of internal controls could be impacted.
We rely on the continued services of key personnel involved in management, finance, product development, sales, manufacturing and distribution, and, in particular, upon the efforts and abilities of our executive management team. The loss of service of any of our key personnel could have a material adverse effect on our business, financial condition, results of operations, and on our system of internal controls.
If we cannot attract and retain key management personnel, or if our search for qualified personnel is prolonged, our system of internal controls may be affected, which could lead to an adverse effect on our business, financial condition, or results of operations. In addition, it could be difficult, time consuming, and expensive to replace any key management member or other critical personnel, and no guarantee exists that we will be able to recruit suitable replacements or assimilate new key management personnel into our organization.
Covenants and other provisions in our credit arrangements could hinder our ability to operate. Our failure to comply with covenants in our credit arrangements could result in the acceleration of the debt extended under such agreements, limit our liquidity, and trigger other rights of our lenders.
Our credit arrangements (Note 5) contain a number of financial and other covenants that include provisions which require us, in certain circumstances, to meet certain financial tests. These covenants could hinder our ability to operate and could reduce our profitability. The lender may also terminate or accelerate our obligations under our credit arrangements upon the occurrence of various events in addition to payment defaults and other breaches. Any acceleration of our debt or termination of our credit arrangements would negatively impact our overall liquidity and might require us to take other actions to preserve any remaining liquidity. Although we anticipate that we will be able to meet the covenants in our credit arrangements, there can be no assurance that we will do so, as there are a number of external factors that affect our operations over which we have little or no control, that could have a material adverse effect on our business, financial condition, or results of operations.
Product recalls or other product liability claims could materially and negatively affect our business.
Selling products for human consumption involves inherent legal and other risks, including product contamination, spoilage, product tampering, allergens, or other adulteration. We could decide to, or be required to, recall products due to suspected or confirmed product contamination, adulteration, misbranding, tampering, or other deficiencies. Although we maintain product recall insurance, product recalls or market withdrawals could result in significant losses due to their costs, the destruction of product inventory, and lost sales due to the unavailability of the product for a period of time. We could be adversely affected if our customers lose confidence in the safety and quality of certain of our products, or if consumers lose confidence in the food and beverage safety system generally. Negative attention about these types of concerns, whether or not valid, may damage our reputation, discourage consumers from buying our products, or cause production and delivery disruptions.
We may also suffer losses if our products or operations cause injury, illness, or death. In addition, we could face claims of false or deceptive advertising or other criticism. A significant product liability or other legal judgment or a related regulatory enforcement action against us, or a significant product recall, may materially and adversely affect our reputation and profitability. Moreover, even if a product liability or other legal or regulatory claim is unsuccessful, has no merit, or is not pursued, the negative publicity surrounding assertions against our products or processes could have a material adverse effect on our business, financial condition, or results of operations.
We are subject to extensive regulation and taxation, as well as compliance with existing or future laws and regulations, which may require us to incur substantial expenditures.
We are subject to a broad range of federal, state, local, and foreign laws and regulations intended to protect public health and the environment. Our operations are also subject to regulation by various federal agencies, including the TTB, OSHA, the FDA, the EPA, and by various state and local authorities. Such laws and regulations cover virtually every aspect of our operations, including production and storage facilities, distillation and maturation requirements, importing ingredients, distribution of beverage alcohol products, marketing, pricing, labeling, packaging, advertising, water usage, waste water discharge, disposal of hazardous wastes and emissions, and other matters. In addition, beverage alcohol products are subject to customs, duties, or excise taxation in many countries, including taxation at the federal, state, and local level in the United States.
Violations of any of these laws and regulations may result in administrative, civil, or criminal fines or penalties being levied against us, including temporary or prolonged cessation of production, revocation or modification of permits, performance of environmental investigatory or remedial activities, voluntary or involuntary product recalls, or a cease and desist order against operations that are not in compliance with applicable laws. These laws and regulations may change in the future and we may incur material costs in our efforts to comply with current or future laws and regulations. These matters may have a material adverse effect on our business, financial condition, or results of operations.
Tariffs imposed by the U.S. and those imposed in response by other countries, as well as rapidly changing trade relations, could negatively impact our customers and have a material adverse effect on our business and results of operations.
Changes in U.S. and foreign governments' trade policies have resulted in, and may continue to result in, tariffs on imports into and exports from the U.S. The U.S. has imposed tariffs on imports from several countries, including those in the European Union. In response, the European Union has proposed or implemented their own tariffs on certain products including ours and our customers. Such retaliatory tariffs continue to remain in place and other countries may implement similar tariffs in the future. Any further deterioration of economic relations between the U.S. and other countries or any increase in existing tariffs or the imposition of additional tariffs could result in an increase in the price of our and our customer's products in those countries and could prompt consumers in those countries to seek alternative products. Any resulting impact on the continued growth on our or of our customer's business could potentially impact our financial performance and results of operations.
A failure of one or more of our key information technology ("IT") systems, networks, processes, associated sites, or service providers could have a negative impact on our business.
We rely on IT systems, networks, and services, including internet sites, data hosting and processing facilities and tools, hardware (including laptops and mobile devices), software and technical applications and platforms, some of which are managed and hosted by third party vendors to assist us in the management of our business. The various uses of these IT systems, networks, and services include, but are not limited to: hosting our internal network and communication systems; enterprise resource planning; processing transactions; summarizing and reporting results of operations; business plans, and financial information; complying with regulatory, legal, or tax requirements; providing data security; and handling other processes necessary to manage our business. Any failure of our IT systems or those of our third party vendors could adversely impact our ability to operate. Routine maintenance or development of new IT systems may result in systems failures, which may have a material adverse effect on our business, financial condition, or results of operations.
Increased IT security threats and more sophisticated cyber crime pose a potential risk to the security of our IT systems, networks, and services, as well as the confidentiality, availability, and integrity of our data. This could lead to outside parties having access to our privileged data or strategic information or information regarding our employees, suppliers or customers. Any breach of our data security systems or failure of our IT systems may have a material adverse impact on our business operations and financial results. If the IT systems, networks or service providers we rely upon fail to function properly, or if we or our third party vendors suffer a loss or disclosure of business or other sensitive information due to any number of causes, including power outages, computer and telecommunications failures, viruses, phishing attempts, cyber-attacks, malware and ransomware attacks, security breaches, natural disasters, and errors by employees, and the disaster recovery plans do not effectively address these failures on a timely basis, we may suffer interruptions in our ability to manage operations and
reputational, competitive, or business harm, which may have a material adverse effect on our business, financial condition, or results of operations. If our critical IT systems or back-up systems or those of our third party vendors were damaged or ceased to function properly, we might have to make a significant investment to repair or replace them. If a ransomware attack or other cybersecurity breach occurs, either internally or at our third-party technology service providers, it is possible we could be prevented from accessing our data which may cause interruptions or delays in our business, cause us to incur remediation costs or require us to pay ransom to a hacker which takes over our systems, or damage our reputation. In addition, such events could result in unauthorized disclosure of material confidential information, and we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us or to our partners, our employees, customers, and suppliers. Additionally, we could be exposed to potential liability, litigation, governmental inquiries, investigations or regulatory enforcement actions and we could be subject to the payment of fines or other penalties, legal claims by our suppliers, customers or employees and significant remediation costs. Although we maintain insurance coverage for various cybersecurity risks, we may incur costs or financial losses that are either not insured against or not fully covered through our insurance.
Despite the protections we had in place, in May 2020, we were affected by a ransomware attack that temporarily disrupted production at our Atchison facilities. Our 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’s insurance is expected to provide coverage for business interruption losses, but there can be no assurance as to the amount or timing of possible insurance recoveries if ultimately claimed by the Company.
Following the attack, we implemented a variety of measures to further enhance our cybersecurity protections and minimize the impact of any future attack. Cyber threats are constantly evolving however, and although we continually assess and improve our protections, there can be no guarantee that a future cyber event will not occur.
Damage to our reputation, or that of any of our key customers or their brands, could affect our business performance.
The success of our products depends in part upon the positive image that consumers have of the third party brands that use our products. Contamination, whether arising accidentally or through deliberate third party action, or other events that harm the integrity or consumer support for our and/or our customers’ products could affect the demand for our and/or our customers’ products. Unfavorable media, whether accurate or not, related to our industry, to us, our products, or to the brands that use our products, marketing, personnel, operations, business performance, or prospects could negatively affect our corporate reputation, stock price, ability to attract high quality talent, or the performance of our business. Negative publicity or commentary on social media outlets could cause consumers to react rapidly by avoiding our brands or by choosing brands offered by our competitors, which could have a material adverse effect on our business, financial condition, or results of operations.
We may not be able to adequately protect our intellectual property rights or may be accused of infringing intellectual property rights of third parties.
We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and patent law, trade secret protection, and confidentiality and/or license agreements with our employees, customers, and others to protect our proprietary rights. We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. Third parties that license our proprietary rights also may take actions that diminish the value of our proprietary rights or reputation. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights.
Our intellectual property rights may not be upheld if challenged. Such claims, if they are proved, could materially and adversely affect our business. If we are unable to maintain the proprietary nature of our technologies, we may lose any competitive advantage provided by our intellectual property. We and our customers and other users of our products may be subject to allegations that we or they or certain uses of our products infringe the intellectual property rights of third parties. The outcome of any litigation is inherently uncertain. Any intellectual property claims, with or without merit, could be time-consuming and expensive to resolve, could divert management attention from executing our business plan, and could require us or our customers or other users of our products to change business practices, pay monetary damages, or enter into licensing or similar arrangements. Any adverse determination related to intellectual property claims or litigation could be material to our business, financial condition, or results of operations.
Climate change, or legal, regulatory or market measures to address climate change, may negatively affect our business or operations, and water scarcity or quality could negatively impact our production costs and capacity.
Increasing concentrations of carbon dioxide and other greenhouse gases in the atmosphere may have an adverse effect on global temperatures, weather patterns, and the frequency and severity of extreme weather events and natural disasters. In the event that climate change, or legal, regulatory, or market measures enacted to address climate change, has a negative effect on agricultural productivity in the regions from which we procure agricultural products such as corn and wheat, we could be subject to decreased availability or increased prices for a such agricultural products, which could have a material adverse effect on our business, financial condition, or results of operations.
Water is the main ingredient in substantially all of our distillery products and is necessary for the production of our food ingredients. It is also a limited resource, facing unprecedented changes from climate change, increasing pollution, and poor management. As demand for water continues to increase, water becomes more scarce and the quality of available water deteriorates, we may be affected by increasing production costs or capacity constraints, which could have a material adverse effect on our business, financial condition, or results of operations.
Our business may suffer from risks related to acquisitions and potential future acquisitions.
Part of our strategic business plan is to grow our business through acquisitions, and we continue to evaluate and engage in discussions concerning potential acquisition opportunities, some of which could be material. Failure to successfully integrate or otherwise realize the anticipated benefits of these acquisitions could adversely impact our long-term competitiveness and profitability. The integration of any future acquisitions will involve a number of risks that could harm our financial condition, results of operations and competitive position. In particular:
•the integration plans for our acquisitions are based on benefits that involve assumptions as to future events, including our ability to successfully achieve anticipated synergies, leveraging our existing relationships, as well as general business and industry conditions, many of which are beyond our control and may not materialize. Unforeseen factors may offset components of our integration plans in whole or in part. As a result, our actual results may vary considerably, or be considerably delayed, compared to our estimates;
•the integration process could disrupt the activities of the businesses that are being combined. The combination of companies requires, among other things, coordination of administrative and other functions. In addition, the loss of key employees, customers or vendors of acquired businesses could materially and adversely impact the integration of the acquired businesses;
•the execution of our integration plans may divert the attention of our management from other key responsibilities;
•we may assume unanticipated liabilities and contingencies; or
•our acquisition targets could fail to perform in accordance with our expectations at the time of purchase.
Future acquisitions may be effected through the issuance of our Common Stock or securities convertible into our Common Stock, which could substantially dilute the ownership percentage of our current stockholders. In addition, shares issued in connection with future acquisitions could be publicly tradable, which could result in a material decrease in the market price of our Common Stock.
If we consummate the acquisition of Luxco, Inc. (the "Luxco Acquisition"), we may face significant disruptions and other risks.
If it is completed, the Luxco Acquisition will involve numerous risks, including the following:
•during the period until and after we consummate the Luxco Acquisition, uncertainty and disruptions may negatively impact Luxco’s relationships with their employees, distributors, vendors, and other business partners, which could harm Luxco’s financial condition and results of operations;
•we may fail to realize the anticipated benefits of the Luxco Acquisition, including the level of revenue and profitability and the expected operational, revenue, and cost synergies that we are expecting;
•we may face difficulties in retaining key management and employees, or we may need to attract and retain additional management resources, which could negatively impact the operations of Luxco, disrupt our ongoing operations, and divert our and Luxco’s management’s attention from ongoing operations and opportunities;
•after we acquire Luxco, our management’s attention may be diverted from the daily operations of our existing businesses;
•our financial results may be negatively impacted by cash expenses and non-cash charges incurred in connection with Luxco or in the future if goodwill or other intangible assets we acquire in the Luxco Acquisition become impaired;
•notwithstanding the due diligence we performed in connection with the Luxco Acquisition, Luxco may have liabilities, losses, or other exposures (including regulatory risks) for which we do not have adequate insurance coverage, indemnification, or other protection; and
•we expect to incur substantial additional indebtedness to finance the Luxco Acquisition, enhancing our vulnerability to increased debt service requirements should interest rates rise, reducing the amount of expected cash flow available for other purposes, including capital expenditures and acquisitions, and limiting our flexibility in planning for, or reacting to, changes in our businesses and industries.
Any failure of the pending Luxco Acquisition to be completed may adversely affect our business, financial condition, results of operations, and stock price.
Each of our and Luxco’s obligations to complete the Luxco Acquisition is subject to a number of conditions specified in the Merger Agreement, including, among others (i) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (ii) the absence of any order restraining, enjoining, or otherwise prohibiting the consummation of the Luxco Acquisition, (iii) filing of all required notices, transfers, applications, termination or documentation required under applicable law with the Alcohol and Tobacco Tax and Trade Bureau of the United States, and the licensing boards of the states of Kentucky, Missouri and Ohio such that there is continuity and survival of permits held by Luxco for the operation of the business as of the Closing, (iv) the accuracy of the parties’ respective representations and warranties in the Merger Agreement, subject to specified materiality qualifications, (v) compliance by the parties with their respective covenants in the Merger Agreement in all material respects, and (vi) the absence of a material adverse effect (as defined in the Merger Agreement) with respect to either party on or after the date of the Merger Agreement.
There can be no assurance that these conditions to the completion of the Luxco Acquisition will be satisfied within the timeframe specified in the Merger Agreement or at all. If the Luxco Acquisition is not completed, our stock price could decline to the extent that our current share price reflects an assumption that the Luxco Acquisition will be completed. Furthermore, if the Luxco Acquisition is not completed, we may suffer other consequences that could adversely affect our business, financial condition, results of operations, and stock price, including the following:
•we have incurred, and will continue to incur, significant costs and expenses, including fees for professional services and other transaction costs in connection with the Luxco Acquisition, and many of these fees and costs are payable by us regardless of whether the Luxco Acquisition is completed;
•the failure to complete the Luxco Acquisition may result in adverse publicity, negatively impact the reputation of the Company in the capital markets and investment community, and result in critical responses from our customers, partners, and other third parties;
•legal proceedings may be instituted against us, our directors and others relating to the Luxco Acquisition and related transactions;
•any disruptions to our business resulting from the announcement and pendency of the Luxco Acquisition, including any adverse changes to our relationships with customers, vendors, distributors, and employees, may continue or intensify in the event the Luxco Acquisition is not completed;
•we may experience employee departures; and
•we may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures.
The Company will incur significant transaction and acquisition-related costs in connection with the Luxco Acquisition.
We expect to incur a number of non-recurring costs associated with the Luxco Acquisition and combining the operations of Luxco’s with our own. Some of these costs have already been incurred or may be incurred regardless of whether the Luxco Acquisition is completed. The Company also will incur transaction fees and costs related to formulating and implementing integration plans with respect to the two companies. We continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred in the Luxco Acquisition and the integration of Luxco’s business with our business. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow us to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all.
The outbreak of the coronavirus ("COVID-19") has negatively impacted and could continue to negatively impact the global economy. In addition, the COVID-19 pandemic could continue to disrupt or otherwise negatively impact global credit markets and could disrupt or otherwise negatively impact our operations, including the demand for our products and our ability to produce and deliver our products.
The significant outbreak of COVID-19 has resulted in a widespread health crisis, which has negatively impacted and could continue to negatively impact the global economy. In addition, the global and regional impact of the outbreak, including official or unofficial quarantines and governmental restrictions on activities taken in response to the outbreak, could have a negative impact on our operations, including voluntary or mandatory temporary closures of our facilities or offices; interruptions in our supply chain, which could impact the cost or availability of raw materials; disruptions or restrictions on our
ability to travel or to market and distribute our products; reduced consumer demand for our products or those of our customers due to bar and restaurant closures or reduced consumer traffic in bars, restaurants and other locations where our products or those of our customers are sold; and labor shortages. More broadly, the outbreak could lead to an economic downturn that could affect future demand for our products and those of our customers.
Furthermore, our facilities and those of our customers and suppliers have been required to comply with additional regulations and may be required to comply with new regulations imposed by state and local governments in response to the COVID-19 pandemic, including COVID-19 safety guidance for production and manufacturing facilities. Compliance with these measures, or new measures, may cause increases in the cost, or delays or reduction in the volume, of products produced at our facilities or those of our suppliers.
The COVID-19 outbreak has disrupted credit markets, and may continue to disrupt or negatively impact credit markets, which could adversely affect the availability and cost of capital. Such impacts could limit our ability to fund our operations and satisfy our obligations.
The response to COVID-19 has resulted in social distancing, travel bans, temporary closures of businesses, shelter-in-place orders, and quarantines, among other measures. Although certain of the restrictions have begun, and may continue, to ease in some places, the ongoing COVID-19 pandemic has limited and may continue to limit access to our facilities, customers, management, support staff, professional advisors and our independent auditors. These factors, in turn, may not only impact our operations, financial condition and demand for our products but our overall ability to react timely to mitigate the impact of this ongoing event. Also, these measures may continue to hamper our efforts to comply with our filing obligations with the Securities and Exchange Commission.
The extent and potential short and long-term impact of the ongoing COVID-19 outbreak on our operational and financial performance will continue to depend on future developments, including the duration, severity and spread of the virus, actions that may be taken by governmental authorities and the impact on our supply chain, customers, operations, workforce and the financial markets, all of which remain highly uncertain and cannot be predicted. These and other potential impacts of an epidemic, pandemic or other health crisis, such as COVID-19, could therefore materially and adversely affect our business, financial condition and results of operations.
RISKS SPECIFIC TO OUR DISTILLERY PRODUCTS SEGMENT
The relationship between the price we pay for grain and the sales prices of our distillery co-products can fluctuate significantly and negatively impact our business.
Distillers feed, fuel grade alcohol, and corn oil are the principal co-products of our alcohol production process and can contribute in varying degrees to the profitability of our Distillery Products segment. Distillers feed and corn oil are sold for prices which historically have tracked the price of corn, but are also susceptible to other factors. In the case of distillers feed, other factors could include weather, other available feedstock, and global trade relations. In the case of corn oil, other factors could include soy oil and the overall level of ethanol production. We sell fuel grade alcohol, the prices for which typically, but not always, have tracked price fluctuations in gasoline prices. As a result, the profitability of these products could be adversely affected, which could be material to our business, financial condition, or results of operations.
Our strategic plan involves significant investment in the aging of barreled distillate. Decisions concerning the quantity of maturing stock of our aged distillate could materially affect our future profitability.
There is an inherent risk in determining the quantity of maturing stock of aged distillate to lay down in a given year for future sales as a result of changes in consumer demand, pricing, new brand launches, changes in product cycles, increase in competitive supply, and other factors. Demand for products could change significantly between the time of production and the date of sale. It may be more difficult to make accurate predictions regarding new products and brands. Inaccurate decisions and/or estimations could lead to an inability to supply future demand or lead to a future surplus of inventory and consequent write-down in the value of maturing stocks of aged distillate. As a result, our business, financial condition, or results of operations could be materially adversely affected.
If the brands we develop or acquire do not achieve consumer acceptance, our growth may be limited, which could have a material adverse impact on our business, financial condition, or results of operations.
A component of our strategic plan is to develop or acquire our own portfolio of brands, particularly whiskeys. Risks related to this strategy include:
•Because our brands, internally developed and acquired, are early in their growth cycle or have not yet been developed, they have not achieved extensive brand recognition. Accordingly, if consumers do not accept our brands, we will not be able to penetrate our markets and our growth may be limited.
•We depend, in part, on the marketing initiatives and efforts of our independent distributors in promoting our products and creating consumer demand, and we have limited, or no, control regarding their promotional initiatives or the success of their efforts.
•We depend on our independent distributors to distribute our products. The failure or inability of even a few of our independent distributors to adequately distribute our products within their territories could harm our sales and result in a decline in our results of operations.
•We compete for shelf space in retail stores and for marketing focus by our independent distributors, most of whom carry extensive product portfolios.
•The laws and regulations of several states prohibit changes of independent distributors, except under certain limited circumstances, making it difficult to terminate an independent distributor for poor performance without reasonable cause, as defined by applicable statutes. Any difficulty or inability to replace independent distributors, poor performance of our major independent distributors or our inability to collect accounts receivable from our major independent distributors could harm our business. There can be no assurance that the independent distributors and retailers we use will continue to purchase our products or provide our products with adequate levels of promotional support.
•Our brands compete with the brands of our bulk alcohol customers.
Warehouse expansion issues could negatively impact our operations and our business.
In 2015, we announced a major expansion in warehousing capacity, which we completed during 2020. Our future business operations may require additional warehouse capacity. In the event additional warehouse capacity is required, there is the potential risk of completion delays, including risk of delay associated with required permits and cost overruns, which could have a material adverse effect on our business, financial condition, or results of operations.
We may be subject to litigation directed at the beverage alcohol industry.
Companies in the beverage alcohol industry are, from time to time, exposed to class action or other litigation relating to alcohol advertising, product liability, alcohol abuse problems or health consequences from the misuse of alcohol. Such litigation may result in damages, penalties or fines as well as damage to our reputation, which could have a material adverse effect on our business, financial condition, or results of operations.
A change in public opinion about alcohol could reduce demand for our products.
For many years, there has been a high level of social and political attention directed at the beverage alcohol industry. The attention has focused largely on public health concerns related to alcohol abuse, including drunk driving, underage drinking, and the negative health impacts of the abuse and misuse of beverage alcohol. Anti-alcohol groups have, in the past, advocated successfully for more stringent labeling requirements, higher taxes, and other regulations designed to discourage alcohol consumption. More restrictive regulations, higher taxes, negative publicity regarding alcohol consumption and/or changes in consumer perceptions of the relative healthfulness or safety of beverage alcohol could decrease sales and consumption of alcohol, and thus, the demand for our products. This could, in turn, significantly decrease both our revenues and our revenue growth and have a material adverse effect on our business, financial condition, or results of operations.
Changes in consumer preferences and purchases, and our ability to anticipate or react to them, could negatively affect our business results.
We operate in highly competitive markets, and our success depends on our continued ability to offer our customers and consumers appealing, high-quality products. In recent years there has been increased demand for the products we produce, including, in particular, increased demand for bourbons and rye whiskeys. Customer and consumer preferences and purchases may shift due to a host of factors, many of which are difficult to predict, including:
•demographic and social trends;
•public health policies and initiatives;
•changes in government regulation and taxation of beverage alcohol products;
•the expansion of, legalization of, and increased acceptance or use of, marijuana; and
•changes in travel, leisure, dining, entertaining, and beverage consumption trends.
If our customers and consumers shift away from spirits (particularly brown spirits, such as our premium bourbon and rye whiskeys), our business, financial condition, or results of operations could be adversely affected.
RISKS SPECIFIC TO OUR INGREDIENT SOLUTIONS SEGMENT
Our focus on higher margin specialty ingredients may make us more reliant on fewer, more profitable customer relationships.
Our strategic plan for our Ingredient Solutions segment includes focusing our efforts on the sale of specialty proteins and starches to targeted domestic consumer packaged goods customers. Our major focus is directed at food ingredients, which are primarily used in foods that are developed to address consumers’ desire for healthier and more convenient products; these consist of dietary fiber, wheat protein isolates and concentrates, and textured wheat proteins. The bulk of our applications technology and research and development efforts are dedicated to providing customers with specialty ingredient solutions that deliver nutritional benefits, as well as desired functional and sensory qualities to their products. Our business, financial condition, and results of operations could be materially adversely affected if our customers were to reduce their new product development ("NPD") activities or cease using our unique dietary fibers, starches, and proteins in their NPD efforts.
Adverse public opinion about any of our specialty ingredients could reduce demand for our products.
Consumer preferences with respect to our specialty ingredients might change. In fact, in recent years, we have noticed shifting consumer preferences and media attention directed to gluten, gluten intolerance, and "clean label" products. Shifting consumer preferences could decrease demand for our specialty ingredients. This could, in turn, significantly decrease our revenues and revenue growth, which could have a material adverse affect on our business, financial condition, and results of operations.
RISKS RELATED TO OUR COMMON STOCK
Common Stockholders have limited rights under our Articles of Incorporation.
Under our Articles of Incorporation, holders of our Preferred Stock are entitled to elect five of our nine directors and only holders of our Preferred Stock are entitled to vote with respect to a merger, dissolution, lease, exchange or sale of substantially all of our assets, or on an amendment to the Articles of Incorporation, unless such action would increase or decrease the authorized shares or par value of the Common or Preferred Stock, or change the powers, preferences or special rights of the Common or Preferred Stock so as to affect the holders of Common Stock adversely. Generally, the Common Stock and Preferred Stock vote as separate classes on all other matters requiring stockholder approval.
The majority of the outstanding shares of our Preferred Stock is beneficially owned by one individual, who is effectively in control of the election of five of our nine directors under our Articles of Incorporation.
We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate our stockholders' ability to sell their shares for a premium in a change of control transaction.
Various provisions of our Articles of Incorporation and bylaws and of Kansas corporate law may discourage, delay or prevent a change in control or takeover attempt of our Company by a third party which our management and Board of Directors opposes.
Public stockholders who might desire to participate in such a transaction may not have the opportunity to do so. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change of control or change in our management and Board of Directors. These provisions include:
•Preferred Stock that could be issued by our Board of Directors to make it more difficult for a third party to acquire, or to discourage a third party from acquiring, a majority of our outstanding voting stock;
•non-cumulative voting directors;
•limitations on the ability of stockholders to call special meetings of stockholders; and
•advance notice requirements for nominations of candidates for election to our Board of Directors or for proposing matters that can be acted upon by our stockholders at stockholder meetings.
We are authorized to issue up to a total of 40,000,000 shares of Common Stock, potentially diluting equity ownership of current holders and the share price of our Common Stock
We believe that it is necessary to maintain a sufficient number of available authorized shares of our Common Stock in order to provide us with the flexibility to issue Common Stock for business purposes that may arise as deemed advisable by our Board. These purposes could include, among other things, (i) to declare future stock dividends or stock splits, which may increase the liquidity of our shares; (ii) the sale of stock to obtain additional capital or to acquire other companies or businesses, which could enhance our growth strategy or allow us to reduce debt if needed; (iii) use in additional stock incentive programs and (iv) other bona fide purposes. Our Board of Directors may issue the available authorized shares of Common Stock without notice to, or further action by, our stockholders, unless stockholder approval is required by law or the rules of the NASDAQ Global Select Market. The issuance of additional shares of Common Stock may significantly dilute the equity ownership of the current holders of our Common Stock. Further, over the course of time, all of the issued shares have the potential to be publicly traded, perhaps in large blocks. This may result in dilution of the market price of the Common Stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
MGP has five primary locations, one in Kansas, two in Indiana, one in Kentucky and one in Washington, D.C. Grain processing, distillery, warehousing, research and quality control laboratories, principal executive offices, and a technical innovation center are located in Atchison, Kansas on a 28.5 acre campus which are utilized by both the Distillery Product and Ingredient Solutions segments. A distillery, warehousing, tank farm, quality control laboratory, and research and development facility are located on a 78 acre campus that spans portions of both Lawrenceburg and Greendale, Indiana which are utilized by the Distillery Products segment. A warehousing facility is located on 33 acres in Williamstown, Kentucky, and a warehousing facility is located on 36.5 acres in Sunman, Indiana which are utilized by the Distillery Products segment. A distillery, office space and retail location are located in Washington, D.C which is utilized by the Distillery Products segment.
These facilities are generally in good operating condition and are generally suitable for the business activity conducted therein. All of our production facilities, executive office building, and technical innovation center are owned, and all of our owned properties are subject to mortgages in favor of one or more of our lenders. We also own or lease transportation equipment and facilities and a gas pipeline.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to legal or regulatory proceedings arising in the ordinary course of its business. The discussion regarding litigation in Note 9 to the Consolidated Financial Statements included elsewhere in this report is incorporated herein by reference.
In accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), we record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These liabilities are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case or proceeding.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERS MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Equity compensation plan information is incorporated by reference from Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," of this document, should be considered an integral part of Item 5. Our Common Stock is traded on the NASDAQ Global Select Market under the ticker symbol MGPI. As of February 19, 2021, there were approximately 343 holders of record of our Common Stock. According to reports received from NASDAQ, the average daily trading volume of our Common Stock (excluding block trades) ranged from 23,100 to 2,436,000 shares during the year ended December 31, 2020.
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total return of our Common Stock for the five year period ended December 31, 2020, against the cumulative total return of the S&P 500 Stock Index (broad market comparison), Russell 3000 - Beverage and Distillers (line of business comparison), and Russell 2000 - Consumer Staples (line of business comparison). The graph assumes $100 (one hundred dollars) was invested on December 31, 2015, and that all dividends were reinvested.
PURCHASES OF EQUITY SECURITIES BY ISSUER
We did not sell equity securities during the quarter ended December 31, 2020.
Issuer Purchases of Equity Securities
|(a) Total Number of|
|(b) Average Price Paid per Share (or Unit)||(c) Total Number of Shares (or|
Units) Purchased as Part of Publicly Announced Plans or Programs
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (b)
|October 1, 2020 through October 31, 2020||375 ||(a)||$||38.18 ||— ||$||20,947,113 |
|November 1, 2020 through November 30, 2020||11 ||(a)||42.15 ||— ||20,947,113 |
|December 1, 2020 through December 31, 2020||— ||— ||— ||20,947,113 |
|Total||386 ||— |
(a)Vested RSU awards under the 2014 Plan that were purchased to cover employee withholding taxes.
(b)On February 25, 2019, our Board of Directors approved a $25,000 share repurchase plan commencing February 27, 2019 through February 27, 2022. Under the share repurchase program, we can repurchase stock from time to time for cash in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws. This share repurchase program may be modified, suspended, or terminated by us at any time without prior notice.
ITEM 6. SELECTED FINANCIAL DATA
|Year Ended December 31,|
|Consolidated Statements of Income Data:|
|Sales||$||395,521 ||$||362,745 ||$||376,089 ||$||347,448 ||$||318,263 |
|Income before income taxes||52,601 ||45,937 ||48,980 ||52,758 ||44,717 |
|Net income||40,345 ||38,793 ||37,284 ||41,823 ||31,184 |
|Basic and Diluted Earnings Per Share ("EPS")||2.37 ||2.27 ||2.17 ||2.44 ||1.82 |
|Dividends and Dividend Equivalents Per Common Share||0.48 ||0.40 ||0.32 ||1.01 ||0.12 |
|Consolidated Balance Sheet Data:|
|Total assets||366,575 ||322,597 ||277,892 ||240,328 ||225,336 |
|Long-term debt, less current maturities||38,271 ||40,659 ||31,628 ||24,182 ||31,642 |
(a)During 2020, 2019, 2017 and 2016, we determined that we would "more likely than not" realize a portion of our deferred tax asset and reduced our valuation allowance by $422, $168, $578 and $718, respectively. During 2018, we determined that we would not "more likely than not" realize a portion of our deferred tax asset and increased our valuation allowance by $1,304. (see Note 6 for additional information)
(b)Net income for 2020 included $633 insurance recovery income related to estimated business interruption losses of $1,728 for the ransonware cyber-attack. Net income also included $3,780 insurance recovery income for estimated business interruption and other related insurable costs of $4,947 related to the feed dryer fire incident in Atchison, Kansas. Additionally, net income includes $1,932 of CEO transition costs and $919 of business acquisition costs (Luxco).
(c)Net income for 2020 included legal fees of $585 in connection with the chemical release incident in Atchison, Kansas in October 2016. Additionally, net income for 2019 included the Company's agreement to pay a $1,000 fine, an administrative penalty of $251 and legal fees of $597. (see Note 9 for additional information)
(d)For 2020, 2019, 2018, and 2017, respectively, we received a combined federal and state tax effected excess tax benefit of $67, $3,336, $1,437, and $4,625 related to employee share-based compensation recognized as a reduction to income tax expense.
(e)Net income for 2016 included a legal settlement agreement and a gain on sale of long-lived assets of $3,385 before tax.
(f)In 2017, we completed the sale of our equity ownership interest in ICP to Pacific Ethanol, consistent with a Merger Agreement, and, as a result, recorded a gain on sale of equity method investment of $11,381 before tax, which is included in Net income for 2017.
(g)On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the "Tax Act"), resulting in significant modifications to existing law. We recorded a provisional discrete net tax benefit in our Consolidated Statements of Income through Net income of $3,343 in 2017.
Selected Financial Information. Selected quarterly financial information (unaudited) is detailed in Note 14.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report on Form 10-K contains forward looking statements as well as historical information. All statements, other than statements of historical facts, regarding the prospects of our industry and our prospects, plans, financial position, and strategic plan may constitute forward looking statements. In addition, forward looking statements are usually identified by or are associated with such words as "intend," "plan," "believe," "estimate," "expect," "anticipate," "hopeful," "should," "may," "will," "could," "encouraged," "opportunities," "potential," and/or the negatives or variations of these terms or similar terminology. Forward looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from those expressed or implied in the forward looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward looking statements is included in the section titled "Risk Factors" (Item 1A of this Form 10-K). Forward looking statements are made as of the date of this report, and we undertake no obligation to update or revise publicly any forward looking statements, whether because of new information, future events or otherwise.
Acquisition of Luxco. On January 22, 2021, we entered into a definitive agreement to acquire Luxco, Inc., and its affiliated companies ("Luxco"). Luxco is a leading branded beverage alcohol company across various categories, with a more than 60-year business heritage. As a result of the Luxco acquisition, we expect to increase our scale and market position in the branded-spirits sector and strengthen its platform for future growth of higher valued-added products. Under the terms of the agreement, Luxco shareholders will receive $237,500 in cash (less assumed indebtedness) and 5,007,833 shares of MGP Common Stock. The purchase price is subject to customary purchase price adjustments, including working capital, which adjustments are anticipated to be paid in cash. The transaction is anticipated to be completed during the first half of 2021, subject to regulatory approvals and customary closing conditions (See Part I, Item 1A - Risk Factors and Note 15 for additional information).
Feed Dryer Fire. 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. We estimate that the incident adversely impacted gross profit by $4,461, which includes $3,780 for business interruption and $681 related to the impairment of spare parts and other inventory. The business interruption impacted Sales and Cost of sales on the Consolidated Statements of Income. The impairment of spare parts and other inventory is recorded in Cost of sales on the Consolidated Statements of Income for the year ended December 31, 2020. Additionally, we incurred $486 in losses from the write off of property, plant and equipment, which was recorded as a component of Operating income on the Consolidated Statements of Income for the year ended December 31, 2020. During December 2020, we recorded a $3,780 partial settlement from our insurance carrier as a reduction of Cost of sales. We are working to construct a replacement drying system.
Ransomware Cyber-Attack. In May 2020, we were affected by a ransomware cyber-attack that temporarily disrupted production at our Atchison facilities. Our 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. We estimate that the ransomware attack adversely impacted gross profit by $1,728, primarily as a result of the business interruption. We have insurance related to this event and partially recovered $633 in December 2020 as reduction of Cost of sales. We are currently seeking further recovery related to this event. Following the attack, we implemented a variety of measures to further enhance our cybersecurity protections and minimize the impact of any future attack.
COVID-19. On March 11, 2020, the World Health Organization classified the novel strain of coronavirus ("COVID-19") a global pandemic. Our business is part of the United States' critical infrastructure and thus is deemed to be an "essential business." As such, we are taking necessary and appropriate actions to protect our workforce as we continue our critical operations. We have created a COVID-19 cross functional team to implement a business continuity plan and address key aspects of COVID-19 as it affects our business, including enhanced workplace safety, supply chain monitoring, and other potential operational challenges the Company could face. We have continued to operate without any significant negative impacts; however this could be affected 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, our operations, supply chain and customer demand have not been significantly affected by COVID-19; however, we are monitoring the situation closely. We have implemented social distancing at each of our facilities, provide health screenings and monitoring for employees, implemented work-from-home policies where we are able, and have restricted travel across the organization. We have incurred incremental costs for hourly wage bonuses to our production
employees, supplies to implement health screenings, an extended sick leave policy, and additional IT-related expenses to enable employees to work-from-home. As of December 31, 2020, such incremental costs have been immaterial to the our consolidated financial statements. We cannot reasonably estimate the length of time or severity of the pandemic. See Risk Factors for future discussion of the potential adverse impacts of the COVID-19 pandemic on our business.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis ("MD&A") of Financial Condition and Results of Operations is designed to provide a reader of MGP’s consolidated financial statements with a narrative from the perspective of management. MGP’s MD&A is presented in seven sections:
•Results of Operations
•Distillery Products Segment
•Ingredient Solutions Segment
•Cash Flow, Financial Condition and Liquidity
•Off Balance Sheet Obligations
•New Accounting Pronouncements
MGP is a leading producer and supplier of premium distilled spirits and specialty wheat protein and starch food ingredients. Distilled spirits include premium bourbon and rye whiskeys and GNS, including vodka and gin. We are also a top producer of high quality industrial alcohol for use in both food and non-food applications. Our protein and starch food ingredients provide a host of functional, nutritional and sensory benefits for a wide range of food products to serve the packaged goods industry. We have two reportable segments: our Distillery Products segment and our Ingredient Solutions segment.
Secure our future by consistently delivering superior financial results by more fully participating in all levels of the alcohol and food ingredients segments for the betterment of our shareholders, employees, partners, consumers, and communities.
Our Strategic Plan
Our strategic plan is designed to leverage our history and strengths. We have a long history in the distilling industry. Our Lawrenceburg facility, which we purchased in 2011, was founded in 1847 and our Atchison facility was opened in 1941. Through these two distilleries, we are involved in producing some of the finest whiskeys, vodkas, and gins in the world. Likewise, our history in the food ingredient business stretches back more than 65 years.
Our strategic plan seeks to leverage the positive macro trends we see in the industries where we compete while providing better insulation from outside factors, including swings in commodity pricing. We believe the successful execution of our strategy will continue to deliver strong operating income growth. Specifically, our strategic plan is built on five key growth strategies: Maximize Value, Capture Value Share, Invest for Growth, Operational Excellence, and Build the MGP Brand. Each of these strategies, along with related 2020 accomplishments, are discussed below.
Maximize Value. We focus on maximizing the value of our current production volumes, particularly taking advantage of favorable macro trends in our Distillery Products segment, such as the growth of the American whiskey category that has continued to expand over the past several years. This includes shifting sales mix to higher margin products, such as premium bourbon and rye whiskeys, as well as extending the product range of our GNS, including vodkas and gins. In our Ingredient Solutions segment, the macro trends include growth in high fiber, high protein, plant-based proteins, and non-GMO products.
Although these macro trends are currently favorable, we have seen competition intensify as industry participants in both of our segments seek to capitalize on consumers' interest in these categories. While we believe we are well-positioned to benefit from these favorable trends, we may also be negatively affected by the increase in competition in one or both of our segments. We intend to continue to focus on opportunities that will allow us to achieve the highest value from our production facilities.
•In our Distillery Products segment, our focus on attracting and developing customers for our premium beverage alcohol continued in 2020. Some efforts included increases in sales force and providing more tailored product offerings to our craft customers. Despite the uncertainty related to the pandemic, we were able to add new customers throughout the year. Our partnerships with new and existing customers helped drive double digit sales growth for our brown goods during 2020. Distillery Products segment sales for 2020 increased 6.8 percent over the prior year.
•In our Ingredient Solutions segment, we continue to provide outstanding customer solutions, taking advantage of our positioning within growing consumer trends. We further developed our pipeline of wheat-based protein products to support strong customer growth. In April 2020, we launched our Proterra® line of textured proteins. Our sales of specialty wheat starches grew 35.1 percent and our sales of specialty wheat proteins grew 20.6 percent in 2020. Ingredient Solutions segment sales for 2020 increased 19.2 percent over the prior year.
See the "Distillery Products Segment" and "Ingredient Solutions Segment" discussions.
Capture Value Share. We work to develop partnerships to support brand creation, long-term growth, and to combine our innovation capabilities and industry expertise to provide unique solutions and offerings to the marketplace. In that way, we believe we are able to realize full value for our operational capacity, quality, and commitment.
•In January 2020, we launched our Single Barrel program for George Remus® Straight Bourbon Whiskey and Rossville Union® Straight Rye Whiskey.
•In September 2020, we released the Remus Repeal Reserve Series IV Straight Bourbon Whiskey. Produced to commemorate Prohibition Repeal Day, Series IV is a limited annual release showcasing a medley of two mash bills from 2008.
•In March 2020, we acquired New Columbia Distllers, LLC, based in Washington, D.C. New Columbia Distillers produces and markets Green Hat® Gin and operates a distillery with a retail tasting room, bar and gin garden in Northeastern Washington, D.C.
•In October 2020, New Columbia Distillers was named one of the 10 Best Craft Gin Distillers by USA Today. The top 10 winners were determined by popular vote, resulting in New Columbia Distillers placing fifth in the overall standings.
•The George Remus® family of brands completed 2020 with significant growth, more than doubling both shipments and depletions.
Invest for Growth. We are committed to investing to support our growth. Components of this growth strategy include:
•Capital Expenditures: Capital expenditures focus largely on supporting innovation and product development, improving operational reliability, and strengthening our ability to support all aspects of growth in the American whiskey category.
•Select Inventories: As demand grows for American whiskeys, in both the United States and global markets, we continue to put away our inventories of aged premium whiskeys to fully participate in this growth. This initiative helps us build strong partnerships and open new relationships with potential customers, in addition to supporting the development of our own brands.
•Selling, General, and Administrative Expenses ("SG&A"): As needed to support our long-term growth objectives, resources and capabilities are being added, particularly in sales and marketing.
•Mergers and Acquisitions: As we continue to invest in our long-term growth opportunities, we look for strategic acquisitions to strengthen our competitive position.
•Regarding our Capital Expenditures growth strategy:
In 2020, as part of the implementation of our strategic plan to support growth in the American whiskey category, we completed our current warehouse expansion program. The program included both the refurbishment of existing warehouse buildings and the construction of new warehouses. We invested approximately $1,500 of capital expenditures in this program during 2020 and approximately $49,900 since the program’s inception.
•Regarding our Select Inventories growth strategy:
We produce, and will continue to produce barrels of premium bourbon and rye whiskeys for sale in future periods. Product is barreled and included in our inventory. Our goal is to maintain inventory levels of premium bourbon and rye whiskeys sufficient to support our own brands, engage in partnerships, and support industry growth. We increased our premium bourbon and rye whiskey inventory by $1,196, at cost, during 2020.
•Regarding our SG&A growth strategy:
We continued to invest in people and programs to support the development of our brands initiative and our long-term growth objectives
•Regarding our Mergers and Acquisition growth strategy:
In March 2020, we acquired New Columbia Distllers, LLC, based in Washington, D.C. New Columbia Distillers produces and markets Green Hat® Gin and operates a distillery with a retail tasting room, bar and gin garden in Northeastern Washington, D.C.
Operational Excellence. We continue a solid commitment to operational excellence across the Company by strengthening our emphasis on excellence in all stages of operations, from sourcing through processing and, ultimately, delivering the finest quality products. This also means striving to de-risk all aspects of our business.
•In 2020, we completed a British Retail Consortium ("BRC") audit with outstanding results, again achieving a Grade AA rating for both our Atchison and Lawrenceburg facilities. Per the BRC standard, a Grade AA is awarded if five or fewer non-conformances are cited out of 256 total audit items. Each year since undergoing its initial BRC audit in 2013, the Atchison facility’s distillery has achieved BRC’s highest grade. The same is true with results of annual BRC audits that have been conducted at our Lawrenceburg facility since 2014. For the Atchison facility’s protein and starch plant, 2020 marked the tenth time in as many years that it had scored the BRC’s highest rating.
•In September 2020, we were recognized by Union Pacific Railroad with a 2019 Pinnacle Award for our commitment to safely transporting chemical products. The annual award honors select Union Pacific customers who implement release prevention protocols, corrective action plans and have zero non-accident releases of regulated hazardous materials shipments.
Build the MGP Brand. We continue to build our brand across all stakeholders, including shareholders, employees, partners, consumers, and communities. We are achieving this by producing consistent growth through an understandable business model, proactively engaging with the investment community, creating a desirable organization for our employees, strengthening our relationship with our customers and vendors, increasing awareness and understanding of MGP with consumers, and supporting the communities in which we operate.
•In May 2020, MGP's then Chief Executive Officer ("CEO") Gus Griffin retired from the Company and the Company's Board of Directors. Gus became CEO in July 2014 and under his leadership, the Company developed and successfully implemented a new long-term strategic plan that produced significant improvements in the Company's financial results, while also establishing a strong foundation for future growth. The Board of Directors named David Colo as the new President and CEO upon Gus's retirement. David has served on the MGP Board of Directors since 2015.
•In 2020, we continued our unbroken commitment to support our communities by providing strong financial support and donating time and leadership talent.
◦In April 2020, we helped support the COVID-19 relief efforts with both financial aid and other support to the United States Bartenders' Guild and the Restaurant Workers Community Foundation. Working with these two partnerships, we assisted in providing assistance to the bar and restaurant community on the local and national level by providing financial aid and other resources for workers who were most impacted by COVID-19 as a result of restaurant and bar closures.
◦During 2020, in response to the COVID-19 pandemic, we increased our production of industrial alcohol to support an exponential increase in demand for industrial alcohol, used in the production of hand sanitizers and commercial disinfectants. Additionally, we launched our first ever hand sanitizer production for donations to front line workers in our communities.
•During 2020, MGP's shareholders elected a new member to its Board of Directors, Lori L.S. Mingus. She is the fourth generation of the founding Cray family to serve MGP and the Atchison community, where she is a trustee of the Evan C. Cray Historical Museum and a board member of the Amelia Earhart Foundation. She also serves on the board of the Cray Medical Research Organization at the University of Kansas Medical Center in Kansas City, Kansas.
RESULTS OF OPERATIONS
The table below details the consolidated results for 2020, 2019 and 2018:
|Year Ended December 31,||% Increase (Decrease)|
|2020||2019||2018||2020 v. 2019||2019 v. 2018|
|Sales||$||395,521 ||$||362,745 ||$||376,089 ||9.0 ||%||(3.5)||%|
|Cost of sales||296,715 ||286,213 ||292,490 ||3.7 ||(2.1)|
|Gross profit||98,806 ||76,532 ||83,599 ||29.1 ||(8.5)|
| Gross margin %||25.0 ||%||21.1 ||%||22.2 ||%||3.9 |
|SG&A expenses||44,565 ||29,290 ||33,451 ||52.2 ||(12.4)|
|Operating income||54,241 ||47,242 ||50,148 ||14.8 ||(5.8)|
| Operating margin %||13.7 ||%||13.0 ||%||13.3 ||%||0.7 ||pp||(0.3)||pp|
|Interest expense, net and other||(1,640)||(1,305)||(1,168)||25.7 ||11.7 |
|Income before income taxes||52,601 ||45,937 ||48,980 ||14.5 ||(6.2)|
|Income tax expense||12,256 ||7,144 ||11,696 ||71.6 ||(38.9)|
| Effective tax expense rate %||23.3 ||%||15.6 ||%||23.9 ||%||7.7 ||pp||(8.3)||pp|
|Net income ||$||40,345 ||$||38,793 ||$||37,284 ||4.0 ||%||4.0 ||%|
| Net income margin %||10.2 ||%||10.7 ||%||9.9 ||%||(0.5)||pp||0.8 ||pp|
|Basic and diluted Earnings Per Share||$||2.37 ||$||2.27 ||$||2.17 ||4.4 ||%||4.6 ||%|
(a) Percentage points ("pp").
2020 to 2019 - Sales for 2020 were $395,521, an increase of 9.0 percent compared to 2019, which was the result of increased sales in both the Distillery Products and Ingredient Solutions segments. Within the Distillery Products segment, sales were up 6.8 percent primarily due to an increase in sales of brown goods and white goods within premium beverage alcohol, warehouse services, and industrial alcohol. Total Ingredient Solutions segment sales increased 19.2 percent due to increased sales of specialty wheat starches and proteins.
2019 to 2018 - Sales for 2019 were $362,745, a decrease of 3.5 percent compared to 2018, which was the result of decreased sales in the Distillery Products segment, partially offset by increased sales in the Ingredient Solutions segment. Within the Distillery Solutions segment, sales were down 5.4 percent primarily due to a decrease in sales of brown goods within premium beverage alcohol, industrial alcohol and fuel grade alcohol, partially offset by an increase in sales of warehouse services, distillers feed and related co-products and white goods within premium beverage alcohol. Total Ingredient Solutions sales increased 5.6 percent due to increased sales of specialty wheat starches and proteins, and commodity wheat starches, partially offset by decreased sales of commodity wheat proteins.
2020 to 2019 - Gross profit for 2020 was $98,806, an increase of 29.1 percent compared to 2019. The increase was driven by an increase in gross profit in both segments. The Distillery Products segment gross profit increased by $12,008, or 18.2 percent and the Ingredient Solutions segment gross profit increased by $10,266, or 97.0 percent.
2019 to 2018 - Gross profit for 2019 was $76,532, a decrease of 8.5 percent compared to 2018. The decrease was driven by a decrease in gross profit in both segments. In the Distillery Products segment, gross profit decreased by $5,841, or 8.1 percent and the Ingredient Solutions segment gross profit decreased by $1,226, or 10.4 percent.
2020 to 2019 - SG&A expenses for 2020 were $44,565, an increase of 52.2 percent compared to 2019. The increase in SG&A was due primarily to higher personnel and incentive compensation expense, inclusive of certain incremental costs incurred relating to the transition at the CEO position. Additionally, the increase was due to an increase related to advisory and other transaction costs.
2019 to 2018 - SG&A expenses for 2019 were $29,290, a decrease of 12.4 percent compared to 2018. The decrease in SG&A was primarily due to lower incentive compensation expense, partially offset by increased costs related to legal matters and investments to support our brands initiative (personnel costs).
|Operating income||% Increase (Decrease)|
|Operating income for 2018||$||50,148 |
Decrease in gross profit - Distillery Products segment(a)
Decrease in gross profit - Ingredient Solutions segment(a)
|Decrease in SG&A expenses||4,161 ||8.3 ||pp|
|Operating income for 2019||47,242 ||(5.8)||%|
Increase in gross profit - Distillery Products segment(a)
|12,008 ||25.4 |
Increase in gross profit - Ingredient Solutions segment(a)
|10,266 ||21.7 ||pp|
|Increase in SG&A expenses||(15,275)||(32.3)||pp|
|Operating income for 2020||$||54,241 ||14.8 ||%|
(a) See segment discussion.
(b) Percentage points ("pp").
2020 to 2019 - Operating income for 2020 increased to $54,241 from $47,242 for 2019, due to increases in gross profit in both our Distillery Products and Ingredient Solutions segments. These increases were partially offset by an increase in SG&A expenses.
2019 to 2018 - Operating income for 2019 decreased to $47,242 from $50,148 for 2018, due to gross profit declines in both our Distillery Products and Ingredient Solutions segments. These decreases were partially offset by a decrease in SG&A expenses.
Income tax expense
2020 to 2019 - Income tax expense for 2020 was $12,256, for an effective tax rate for the year of 23.3 percent. Income tax expense for 2019 was $7,144, for an effective tax rate for the year of 15.6 percent. The 7.7 percentage point increase was primarily due to the favorable tax impact of vested share-based awards that occurred during 2019.
2019 to 2018 - Income tax expense for 2019 was $7,144, for an effective tax rate for the year of 15.6 percent. Income tax expense for 2018 was $11,696, for an effective tax rate for the year of 23.9 percent. The principal reasons for the 8.3 percentage point decrease in the effective tax rate, year versus year, were an increase in the favorable tax impact of vested share-based awards (which may not continue in future years), a favorable tax impact related to the change in the Company's valuation allowance, higher tax credits, and a change in estimate in 2018 related to the 2017 sale of the Company's equity method investment that did not reoccur in 2019, partially offset by the tax impact of legal matters, and certain compensation being subject to the deduction limit applicable to public companies.
Basic and diluted EPS
|Basic and Diluted EPS||% Increase (Decrease)|
|Basic and diluted EPS for 2018||$||2.17 |
Change in operating income(a)
Change in income attributable to participating securities(c)
|0.02 ||0.9 ||pp|
Change in weighted average shares outstanding(c)
|Tax: Change in share-based compensation||0.12 ||5.5 ||pp|
|Tax: Change in discrete items||0.12 ||5.5 ||pp|
|Tax: Change in effective tax rate||0.02 ||0.9 ||pp|
Basic and diluted EPS for 2019
|$||2.27 ||4.6 ||%|
Change in operating income(a)
|0.41 ||18.1 |
Change in weighted average shares outstanding: share repurchase program(c)
|0.02 ||0.9 ||pp|
Change in weighted average shares outstanding: withholding taxes(c)
|0.01 ||0.4 ||pp|
|Tax: Change in share-based compensation||(0.21)||(9.3)||pp|
|Tax: Change in effective tax rate||(0.13)||(5.7)||pp|
Basic and diluted EPS for 2020
|$||2.37 ||4.4 ||%|
(a)Items are net of tax based on the effective tax rate for each base year.
(b)Percentage points ("pp").
(c)Income attributable to participating securities changes primarily due to the awarding and vesting of the employee RSUs that receive dividend equivalent payments. Weighted average shares outstanding change primarily due to our repurchases of Common Stock, the vesting of employee RSUs, our purchase of vested RSUs from employees to pay withholding taxes, and the granting of Common Stock to directors.
2020 to 2019 - EPS increased to $2.37 in 2020 from $2.27 in 2019, primarily due to the increase in operations, partially offset by the favorable tax impact of vested share-based awards that occurred during 2019.
2019 to 2018 - EPS increased to $2.27 in 2019 from $2.17 in 2018, primarily due to the tax impacts of vested share-based awards and higher state tax credits in the effective tax rate. Partially offsetting these increases was a decrease in operations.
DISTILLERY PRODUCTS SEGMENT
|DISTILLERY PRODUCTS SALES|
|Year Ended December 31, ||Year-versus-Year Sales Change Increase/ (Decrease)|
|2020||2019||$ Change||% Change|
|Brown Goods||$||125,059 ||$||107,190 ||$||17,869 ||16.7 ||%|
|White Goods||64,347 ||62,862 ||1,485 ||2.4 |
|Premium beverage alcohol||189,406 ||170,052 ||19,354 ||11.4 |
|Industrial alcohol||80,682 ||79,833 ||849 ||1.1 |
|Food grade alcohol||270,088 ||249,885 ||20,203 ||8.1 |
|Fuel grade alcohol||5,630 ||5,949 ||(319)||(5.4)|
|Distillers feed and related co-products||26,109 ||26,743 ||(634)||(2.4)|
|Warehouse services||15,631 ||14,656 ||975 ||6.7 |
|Total Distillery Products||$||317,458 ||$||297,233 ||$||20,225 ||6.8 ||%|
|Change in Year-versus-Year Sales Attributed to:|
|Premium beverage alcohol||11.4%||13.7%||(2.3)%|
|Other Financial Information|
|Year Ended December 31, ||Year-versus-Year Increase/(Decrease)|
|Gross profit||$||77,960 ||$||65,952 ||$||12,008 ||18.2 ||%|
|Gross margin %||24.6 ||%||22.2 ||%||2.4 |
(a) Percentage points ("pp")
2020 compared to 2019
Total Distillery Products sales for 2020 increased by $20,225, or 6.8 percent compared to 2019. Sales of brown goods and white goods within premium beverage alcohol, warehouse services, and industrial alcohol increased, while sales of distillers feed and related co-products and fuel grade alcohol decreased compared to 2019. The increase in brown goods was due to increased sales volume, partially offset by lower average selling price. The increase in white goods and industrial alcohol was due to higher average selling prices, partially offset by decreased sales volume. These increases were slightly offset by decreases in distillers feed and related co-products and fuel grade alcohol due to lower average selling prices.
Gross profit increased year versus year by $12,008, or 18.2 percent. Gross margin for 2020 increased to 24.6 percent from 22.2 percent for 2019. The increase in gross profit was primarily due to higher sales volume on brown goods and higher average selling price on white goods and industrial alcohol. The increase in gross profit was partially offset by higher costs relating to a reduction in brown goods put-away for aging, lower average selling price on brown goods and increased production costs due to the temporary shutdown of the Atchison facilities as a result of the ransomware cyber-attack.
|DISTILLERY PRODUCTS SALES|
|Year Ended December 31, ||Year-versus-Year Sales Change Increase/ (Decrease)|
|2019||2018||$ Change||% Change|
|Brown Goods||$||107,190 ||$||125,857 ||$||(18,667)||(14.8)||%|
|White Goods||62,862 ||62,574 ||288 ||0.5 |
|Premium beverage alcohol||170,052 ||188,431 ||(18,379)||(9.8)|
|Industrial alcohol||79,833 ||80,650 ||(817)||(1.0)|
|Food grade alcohol||249,885 ||269,081 ||(19,196)||(7.1)|
|Fuel grade alcohol||5,949 ||6,347 ||(398)||(6.3)|
|Distillers feed and related co-products||26,743 ||25,698 ||1,045 ||4.1 |
|Warehouse services||14,656 ||12,929 ||1,727 ||13.4 |
|Total Distillery Products||$||297,233 ||$||314,055 ||$||(16,822)||(5.4)||%|
|Change in Year-versus-Year Sales Attributed to:|
|Premium beverage alcohol||(9.8)%||(4.2)%||(5.6)%|
|Other Financial Information|
|Year Ended December 31, ||Year-versus-Year Increase/(Decrease)|
|Gross profit||$||65,952 ||$||71,793 ||$||(5,841)||(8.1)||%|
|Gross margin %||22.2 ||%||22.9 ||%||(0.7)|
(a) Percentage points ("pp")
2019 compared to 2018
Total Distillery Products sales for 2019 decreased by $16,822, or 5.4 percent compared to 2018. Sales of premium beverage alcohol were down due to lower volumes, predominantly in brown goods within premium beverage alcohol (mix), partially offset by better pricing in both brown goods and white goods within premium beverage alcohol. Sales of brown goods, industrial alcohol and fuel grade alcohol decreased, while sales of warehouse services, distillers feed and related co-products and white goods increased. Sales of brown goods decreased 14.8 percent, due to lower sales volume, partially offset by higher average selling price. Industrial alcohol product sales decreased primarily driven by lower sales volume, partially offset by slightly favorable pricing. These decreases were partially offset by an increase in warehouse services sales of 13.4 percent and an increase in sales of distillers feed and related co-product of 4.1 percent, primarily due to an increase in sales volumes.
Gross profit decreased year versus year by $5,841, or 8.1 percent. Gross margin for 2019 decreased to 22.2 percent compared to 22.9 percent for 2018. The decline in gross profit was primarily due to lower sales volume on brown goods. Industrial alcohol and white goods gross profits declined as the market remains challenged due to oversupply. This decline was partially offset by favorable average selling price on brown goods as well as increased gross profits on distillers feed and related co-products and warehouse services.
INGREDIENT SOLUTIONS SEGMENT
|INGREDIENT SOLUTIONS SALES|
|Year Ended December 31, ||Year-versus-Year Sales Change Increase/ (Decrease)|
|2020||2019||$ Change||% Change|
|Specialty wheat starches||$||41,631 ||$||30,816 ||$||10,815 ||35.1 ||%|
|Specialty wheat proteins||26,960 ||22,359 ||4,601 ||20.6 |
|Commodity wheat starches||7,630 ||9,628 ||(1,998)||(20.8)|
|Commodity wheat proteins||1,842 ||2,709 ||(867)||(32.0)|
|Total Ingredient Solutions||$||78,063 ||$||65,512 ||$||12,551 ||19.2 ||%|
|Change in Year-versus-Year Sales Attributed to:|
|Total Ingredient Solutions||19.2%||8.5%||10.7%|
|Other Financial Information|
|Year Ended December 31, ||Year-versus-year Increase/(Decrease)|
|Gross profit||$||20,846 ||$||10,580 ||$||10,266 ||97.0 ||%|
|Gross margin %||26.7 ||%||16.2 ||%||10.5 |
(a) Percentage points ("pp")
2020 compared to 2019
Total Ingredient Solutions sales for 2020 increased by $12,551, or 19.2 percent compared to 2019. This increase was driven by higher sales of specialty wheat starches and proteins, partially offset by a decrease in sales of commodity wheat starches and proteins. The increase in sales of specialty wheat starches was driven by increased sales volume and higher average selling prices. The increase in sales of specialty wheat proteins was driven by increased sales volume, partially offset by lower average selling prices. These increases were partially offset by decreased sales volume of commodity wheat starches and proteins.
Gross profit increased year versus year by $10,266, or 97.0 percent. Gross margin for 2020 increased to 26.7 percent from 16.2 percent for 2019. The increase in gross profit was primarily driven by the increased sales volume and higher average selling prices of specialty wheat starches and proteins and decreased sales volume of commodity wheat starches and proteins (mix). Additionally, gross profit was positively impacted by the optimization of higher margin specialty products to meet the increased demand of customers' high fiber and high protein products. These increases in gross profit were partially offset by increased production costs due to the temporary shutdown of the Atchison facilities as a result of the ransomware cyber-attack.
|INGREDIENT SOLUTIONS SALES|
|Year Ended December 31, ||Year-versus-Year Sales Change Increase/ (Decrease)|
|2019||2018||$ Change||% Change|
|Specialty wheat starches||$||30,816 ||$||28,594 ||$||2,222 ||7.8 ||%|
|Specialty wheat proteins||22,359 ||21,098 ||1,261 ||6.0 |
|Commodity wheat starches||9,628 ||9,223 ||405 ||4.4 |
|Commodity wheat proteins||2,709 ||3,119 ||(410)||(13.1)|
|Total Ingredient Solutions||$||65,512 ||$||62,034 ||$||3,478 ||5.6 ||%|
|Change in Year-versus-Year Sales Attributed to:|
|Total Ingredient Solutions||5.6%||2.3%||3.3%|
|Other Financial Information|
|Year Ended December 31, ||Year-versus-year Increase/(Decrease)|
|Gross profit||$||10,580 ||$||11,806 ||$||(1,226)||(10.4)||%|
|Gross margin %||16.2 ||%||19.0 ||%||(2.8)|
(a) Percentage points ("pp")
2019 compared to 2018
Total Ingredient Solutions sales for 2019 increased by $3,478, or 5.6 percent compared to 2018. This increase was driven by higher sales of specialty wheat starches and proteins, and commodity wheat starches, partially offset by a decrease in sales of commodity wheat proteins. The increase in specialty wheat starches was driven by an increase in sales volume and favorable average selling pricing. The increase in commodity wheat starches was primarily due to favorable pricing, partially offset by a decrease in sales volume. The increase in specialty wheat proteins was due to an increase in sales volume, partially offset by lower average selling price driven by the loss of a large specialty wheat protein customer. These increases were partially offset by decreased sales of commodity wheat proteins which was driven by lower sales volume.
Gross profit decreased year versus year by $1,226, or 10.4 percent. Gross margin for 2019 decreased to 16.2 percent from 19.0 percent for 2018. The decrease in gross profit was primarily due to the above mentioned specialty wheat protein customer loss, increased production costs resulting from higher input costs, partially offset by increased gross profit of commodity wheat starches and proteins.
CASH FLOW, FINANCIAL CONDITION AND LIQUIDITY
We believe our financial condition continues to be of high quality, as evidenced by our ability to generate adequate cash from operations while having ready access to capital at competitive rates.
Operating cash flow and borrowings through our Credit Agreement and Note Purchase Agreement (Note 5) provide the primary sources of cash to fund operating needs and capital expenditures. These same sources of cash are used to fund shareholder dividends and other discretionary uses. Going forward, we expect to use cash to implement our invest to grow strategy. Our overall liquidity reflects our strong business results and an effective cash management strategy that takes into account liquidity management, economic factors, and tax considerations. We expect our sources of cash, including our Credit Agreement and Note Purchase Agreement, to be adequate to provide for budgeted capital expenditures and anticipated operating requirements for the foreseeable future.
|Cash Flow Summary||Year Ended December 31,||Changes, Year versus Year-Increase / (Decrease)|
|2020||2019||2018||2020 vs. 2019||2019 vs. 2018|
|Cash provided by operating activities||$||53,255 ||$||19,722 ||$||33,481 ||$||33,533 ||$||(13,759)|
|Cash used in investing activities||(19,647)||(17,931)||(31,046)||(1,716)||13,115 |
|Cash used in financing activities||(15,255)||(3,507)||(494)||(11,748)||(3,013)|
|Increase (decrease) in cash and cash equivalents||$||18,353 ||$||(1,716)||$||1,941 ||$||20,069 ||$||(3,657)|
Operating Activities. Cash provided by operating activities were $53,255 during the year ended December 31, 2020. The cash provided by operating activities during 2020 resulted primarily from net income of $40,345, adjustments for non-cash or non-operating charges of $17,050 including depreciation and amortization, share-based compensation, and deferred income taxes, partially offset by uses of cash due to changes in operating assets and liabilities of $4,140. The primary drivers of the changes in operating assets and liabilities were $16,173 use of cash related to an increase in receivables, inclusive of insurance receivables, $3,886 use of cash related to an increase in inventories, partially offset by $11,503 provided by cash related to an increase in accrued expenses primarily due to higher incentive compensation expense and $1,817 provided by cash related to an increase in accounts payable related to the timing of cash disbursements. Additionally, there was $1,750 provided by cash related to income taxes payable, due to higher than expected income before taxes.
Cash provided by operating activities were $19,722 during the year ended December 31, 2019. The cash provided by operating activities during 2019 resulted primarily from net income of $38,793, adjustments for non-cash or non-operating charges of $15,012 including depreciation and amortization, share-based compensation and deferred income taxes, partially offset by uses of cash due to change in operating assets and liabilities of $34,083. The primary drivers of the changes in operating assets and liabilities were $28,162 use of cash related to an increase in inventories driven primarily by barreled distillate and $2,134 use of cash related to an increase in receivables, net primarily related to the timing of sales and cash collections. Additionally, there was $2,107 provided by cash related to an increase in accounts payable related to the timing of cash disbursements
Cash provided by operating activities were $33,481 during the year ended December 31, 2018. The cash provided by operating activities during 2018 resulted primarily from net income of $37,284, adjustments for non-cash or non-operating charges of $16,126 including depreciation and amortization, share-based compensation and deferred income taxes, partially offset by uses of cash due to change in operating assets and liabilities of $19,929. The primary drivers of the changes in operating assets and liabilities were $15,620 use of cash related to an increase in inventories driven primarily by barreled distillate and $4,450 use of cash related to an increase in receivables, net. The change in receivables, net is primarily related to the timing of sales and cash collections.
Investing Activities. Cash used in investing activities for year ended December 31, 2020 was $19,647, which primarily resulted from additions to property, plant and equipment of $19,701 (see capital spending) and an increase in proceeds from sale of property of $2,906, partially offset by cash of $2,750 used in the acquisition of a business.
Cash used in investing activities for year ended December 31, 2019 was $17,931, which primarily resulted from additions to property, plant and equipment of $16,730 (see capital spending).
Cash used in investing activities for year ended December 31, 2018 was $31,046, which resulted from additions to property, plant and equipment of $31,046 (see capital spending).
Capital Spending. We manage capital spending to support our business growth plans. Investments in plant, property and equipment were $19,701, $16,730, and $31,046 for years ended December 31, 2020, 2019, and 2018, respectively. Adjusted for the change in capital expenditures in accounts payable for years ended December 31, 2020, 2019, and 2018 of $(1,055), $2,041, and $(2,133), respectively, and total capital expenditures were $18,646, $18,771, and $28,913, respectively. We expect approximately $43,300 in capital expenditures in 2021, excluding any insurance recoveries. Of the $43,300 expected capital expenditures $29,400 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.
As part of our strategic plan to support the growth of the American whiskey category, we previously announced a warehouse expansion project. As of December 31, 2020, we had incurred approximately $49,900 of the total investment, which completes our current warehouse expansion project.
Financing Activities. Cash used in financing activities for year ended December 31, 2020 was $15,255, primarily due to payments of dividends and dividend equivalents of $8,188 (see Note 7 for additional information), purchases of treasury stock of $4,411 (see Treasury Purchases) and net debt payments of $2,656 (see Long-Term and Short-Term Debt).
Cash used in financing activities for year ended December 31, 2019 was $3,507, primarily due to payments of dividends and dividend equivalents of $6,856 (see Note 7 for additional information), purchases of treasury stock for tax withholding on share-based compensation of $5,489 (see Treasury Purchases), offset by net proceeds from debt of $8,914 (see Long-Term and Short-Term Debt).
Cash used in financing activities for year ended December 31, 2018 was $494, primarily due to payments of dividends and dividend equivalents of $5,500 (see Note 7 for additional information), purchases of treasury stock for tax withholding on share-based compensation of $2,324 (see Treasury Purchases), partially offset by net proceeds in long-term debt $7,330 (see Long-Term and Short-Term Debt).
Treasury Purchases. 31,741 RSUs vested and converted to common shares during year ended December 31, 2020, of which we withheld and purchased for treasury 10,437 shares valued at $358 to cover payment of associated withholding taxes.
235,409 RSUs vested and converted to common shares during year ended December 31, 2019, of which we withheld and purchased for treasury 77,481 shares valued at $5,489 to cover payment of associated withholding taxes.
80,343 RSUs vested and converted to common shares during year ended December 31, 2018, of which we withheld and purchased for treasury 27,214 shares valued at $2,324 to cover payment of associated withholding taxes.
Share Repurchase. On February 25, 2019, the Board of Directors approved a $25,000 share repurchase authorization commencing February 27, 2019 through February 27, 2022. Under the share repurchase program, the company can repurchase stock from time to time for cash in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws. This share repurchase program may be modified, suspended, or terminated by the company at any time without prior notice. During the year ended December 31, 2020, we purchased approximately 159,104 shares of MGP Common Stock for $4,053, resulting in $20,947 remaining under the share repurchase plan.
Long-Term and Short-Term Debt. We maintain debt levels we consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment and financing plans (including brand development, share repurchases, and Board-approved dividends) and the overall cost of capital. Total debt was $39,871 (net of unamortized loan fees of $129) at December 31, 2020 and $41,060 (net of unamortized loan fees of $448) at December 31, 2019. During 2020, 2019, and 2018, we had net borrowings / (payments) on our Credit Agreement of $(300), $(10,700), and $7,702, and net borrowings / (payments) on our long-term debt of $(1,208), $19,614, and $(372), respectively. During 2020, we incurred $1,148 of loan fees associated with refinancing our credit agreement. Net borrowings / (payments) on all debt for 2020, 2019, and 2018 were $(2,656), $8,914, and $7,330, respectively (see Note 5 for additional information).
Dividends and Dividend Equivalents. See Note 7 for further discussion.
On February 23, 2021, the Board of Directors declared a quarterly dividend payable to stockholders of record as of March 12, 2021, of our Common Stock and a dividend equivalent payable to holders of certain RSUs as of March 12, 2021, of $0.12 per share and per unit. The dividend payment and dividend equivalent payment will occur on March 26, 2021.
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 December 31, 2020, we met those covenants and restrictions.
At December 31, 2020, our current assets exceeded our current liabilities by $168,954, largely due to our inventories, at cost, of $141,011. At December 31, 2020, our cash balance was $21,662 and we have used our Credit Agreement and Note Purchase Agreement for liquidity purposes, with $300,000 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. 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 January 22, 2021, we entered into a definitive agreement to acquire Luxco, Inc., and its affiliated companies ("Luxco"). Under the terms of the agreement, Luxco shareholders will receive $237,500 in cash (less assumed indebtedness) and 5,007,833 shares of MGP Common Stock. The purchase price is subject to customary purchase price adjustments, including working capital, which adjustments are anticipated to be paid in cash. The transaction is anticipated to be completed during the first half of 2021, subject to regulatory approvals and customary closing conditions. The cash portion of the purchase price, plus transaction-related expenses, will be financed by borrowings under our existing revolving credit facility. We anticipate having sufficient cash flows to support our support our short-term liquidity and operating needs (See Part I, Item 1A - Risk Factors and Note 15 for additional information).
OFF BALANCE SHEET OBLIGATIONS
Industrial Revenue Bonds. On October 24, 2018, we closed an industrial revenue bond transaction with the City of Williamstown, Kentucky (the "City") in order to receive a 30-year real property tax abatement on our renovated and newly-constructed warehouse buildings near the City. Pursuant to this transaction, the City issued a principal amount of $10,000 of its industrial revenue bonds to us and then used the proceeds to purchase the land and warehouse from us. The City then leased the facilities back to us under a capital lease, the terms of which provide for the payment of basic rent in an amount sufficient to pay principal and interest on the bonds. Our obligation to pay rent under the lease is in the same amount and due on the same date as the City’s obligation to pay debt service on the bonds which we hold. The lease permits us to present the bonds at any time for cancellation, upon which our obligation to pay basic rent would be canceled. The bonds’ maturity date is 2047, at which time the facilities will revert to us without costs. If we were to present the bonds for cancellation prior to maturity, a nominal fee would be incurred.
We recorded the land and buildings as assets in property, plant, and equipment, net, on our Consolidated Balance Sheets. Because we own all outstanding bonds, have a legal right to set-off, and intend to set-off the corresponding lease and interest payment, we have netted the capital lease obligation with the bond asset. No amount for our obligation under the capital lease is reflected on our Consolidated Balance Sheet, nor do we reflect an amount for the corresponding industrial revenue bond asset (see Note 9 for additional information).
The following table provides information on the amounts and payments of our contractual obligations at December 31, 2020:
|Payments due by period|
|Long-term debt||$||40,000 ||$||1,600 ||$||8,800 ||$||12,800 ||$||16,800 |
|Interest on long-term debt||6,858 ||1,482 ||2,606 ||1,774 ||996 |
|Operating leases||5,511 ||2,308 ||2,782 ||421 ||— |
|Purchase commitments||174,540 ||136,298 ||(a)||37,521 ||721 ||— |
|Other||1,374 ||266 ||476 ||287 ||345 |
|Total||$||228,283 ||$||141,954 ||$||52,185 ||$||16,003 ||$||18,141 |
(a) Includes open purchase order commitments related to raw materials and packaging used in the ordinary course of business of $112,641.
NEW ACCOUNTING PRONOUNCEMENTS
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 1.
ITEM 7A. 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 December 31, 2020, 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 $70. Based on weighted average outstanding fixed-rate borrowings at December 31, 2020, a 100 basis point increase in market rates would result in a decrease in the fair value of our outstanding fixed-rate debt of $1,624, 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 $1,714.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of MGP Ingredients, Inc. (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Internal control over financial reporting is a process designed 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. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
With the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission. As a result of this assessment, management has concluded that the Company’s internal control over financial reporting as of December 31, 2020 was effective.
KPMG, LLP, the independent registered public accounting firm that audited the Company’s financial statements contained herein, has issued an audit report on the Company’s internal control over financial reporting as of December 31, 2020. The combined report on the consolidated financial statements of MGP Ingredients, Inc. and subsidiaries and audit report is included in Item 8 of this Form 10-K.
Report of Independent Registered Public Accounting Firm
To the the Stockholders and the Board of Directors
MGP Ingredients, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of MGP Ingredients, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition under bill and hold arrangements
As discussed in Note 1 to the consolidated financial statements, 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. As discussed in Note 3 to the consolidated financial statements, brown goods premium beverage alcohol revenue was $125,059 thousand for the year ended December 31, 2020, a portion of which was for bill and hold arrangements.
We identified the evaluation of revenue recognized under bill and hold arrangements as a critical audit matter because of the extent of additional audit effort required to test the incremental bill and hold revenue recognition criteria. The incremental bill and hold revenue recognition criteria include the evaluation of: 1) the reason for the bill and hold arrangement; 2) the identification of the product as separately belonging to the customer; 3) the product being currently ready for physical transfer to the customer; and 4) the Company’s inability to use the product or direct it to another customer.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s revenue recognition process, including controls related to bill and hold revenue recognition criteria being met. We examined a sample of bill and hold revenue transactions to assess the incremental bill and hold revenue recognition criteria. Specifically, we inspected documentation received from the customer directing the Company to warehouse distillate after production. Additionally, we observed a sample of customer-owned barrels to determine they were marked with unique identifiers separating them from Company-owned inventory and were ready for physical transfer to the customer upon request. Also, to evaluate that the Company does not have the ability to use the product or direct to another customer, we inspected underlying documentation for the same sample of bill and hold transactions to determine legal title to the product had transferred to the customer.
/s/ KPMG LLP
We have served as the Company’s auditor since 2008.
Kansas City, Missouri
February 25, 2021
MGP INGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
|Year Ended December 31, |
|Sales||$||395,521 ||$||362,745 ||$||376,089 |
|Cost of sales||296,715 ||286,213 ||292,490 |
|Gross profit||98,806 ||76,532 ||83,599 |
|Selling, general, and administrative expenses||44,565 ||29,290 ||33,451 |
|Operating income||54,241 ||47,242 ||50,148 |
|Interest expense, net and other||(1,640)||(1,305)||(1,168)|
|Income before income taxes||52,601 ||45,937 ||48,980 |
|Income tax expense||12,256 ||7,144 ||11,696 |
|Net income||40,345 ||38,793 ||37,284 |
|Income attributable to participating securities||261 ||253 ||708 |
|Net income attributable to common shareholders and used in Earnings Per Share calculation||$||40,084 ||$||38,540 ||$||36,576 |
|Basic and diluted weighted average common shares||16,937,125 ||17,012,288 ||16,866,176 |
|Basic and diluted Earnings Per Share||$||2.37 ||$||2.27 ||$||2.17 |
See Accompanying Notes to Consolidated Financial Statements
MGP INGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
|Year Ended December 31, |
|Net income||$||40,345 ||$||38,793 ||$||37,284 |
|Other comprehensive income (loss), net of tax:|
|Company sponsored benefit plan:|
|Change in post-employment benefits ||732 ||(151)||147 |
|Other comprehensive income (loss)||732 ||(151)||147 |
|Comprehensive income||$||41,077 ||$||38,642 ||$||37,431 |
See Accompanying Notes to Consolidated Financial Statements
MGP INGREDIENTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
|Cash and cash equivalents||$||21,662 ||$||3,309 |
Receivables (less allowance for credit loss at December 31, 2020 and 2019 - $24)
|56,966 ||40,931 |
|Inventory||141,011 ||136,931 |
|Prepaid expenses||2,644 ||2,048 |
|Refundable income taxes||— ||987 |
|Total current assets||222,283 ||184,206 |
|Property, plant, and equipment, net||131,992 ||128,419 |
|Operating lease right-of-use assets, net||5,151 ||6,490 |
|Other assets||7,149 ||3,482 |
|Total assets||$||366,575 ||$||322,597 |
|Current maturities of long-term debt||$||1,600 ||$||401 |
|Accounts payable||30,273 ||29,511 |
|Income taxes payable||704 ||— |
|Accrued expenses||20,752 ||9,383 |
|Total current liabilities||53,329 ||39,295 |
|Long-term debt, less current maturities||38,271 ||40,658 |
|Credit agreement - revolver||— ||1 |
|Long-term operating lease liabilities||3,057 ||4,267 |
|Deferred credits||2,196 ||1,233 |
|Other noncurrent liabilities||4,898 ||4,170 |
|Deferred income taxes||2,298 ||1,929 |
|Total liabilities||104,049 ||91,553 |
Commitments and Contingencies – Note 9
Preferred, 5% non-cumulative; $10 par value; authorized 1,000 shares; issued and outstanding 437 shares
|4 ||4 |
No par value; authorized 40,000,000 shares; issued 18,115,965 shares at December 31, 2020 and 2019; 16,915,862 and 17,028,125 shares outstanding at December 31, 2020 and 2019, respectively
|6,715 ||6,715 |
|Additional paid-in capital||15,503 ||14,029 |
|Retained earnings||262,943 ||230,784 |
|Accumulated other comprehensive loss||486 ||(246)|
Treasury stock, at cost, 1,200,103 and 1,087,840 shares at December 31, 2020 and 2019, respectively
|Total stockholders’ equity||262,526 ||231,044 |
|Total liabilities and stockholders’ equity||$||366,575 ||$||322,597 |
See Accompanying Notes to Consolidated Financial Statements
MGP INGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|Year Ended December 31, |
|Cash Flows from Operating Activities|
|Net income ||$||40,345 ||$||38,793 ||$||37,284 |
|Adjustments to reconcile net income to net cash provided by operating activities:|
|Depreciation and amortization||12,961 ||11,572 ||11,362 |
|Share-based compensation||3,002 ||3,304 ||3,099 |
|Deferred income taxes, including change in valuation allowance||593 ||252 ||1,665 |
|Other, net||494 ||(116)||— |
|Changes in operating assets and liabilities:|
|Prepaid expenses||(748)||(728)||862 |
|Income taxes payable (refundable)||1,750 ||(275)||1,268 |
|Accounts payable||1,817 ||2,107 ||(2,542)|
|Accrued expenses||11,503 ||(4,547)||551 |
|Deferred credits||963 ||(332)||(586)|
|Other, net||634 ||(12)||588 |
|Net cash provided by operating activities||53,255 ||19,722 ||33,481 |
|Cash Flows from Investing Activities|
|Additions to property, plant, and equipment||(19,701)||(16,730)||(31,046)|
|Acquisition of business||(2,750)||— ||— |
|Proceeds from sale of property and other||2,906 ||— ||— |
|Other, net||(102)||(1,201)||— |
|Net cash used in investing activities||(19,647)||(17,931)||(31,046)|
|Cash Flows from Financing Activities|
|Payment of dividends and dividend equivalents||(8,188)||(6,856)||(5,500)|
|Purchase of treasury stock||(4,411)||(5,489)||(2,324)|
|Loan fees incurred with borrowings||(1,148)||— ||— |
|Proceeds from long-term debt||— ||20,000 ||— |
|Principal payments on long-term debt||(1,208)||(386)||(372)|
|Proceeds from credit agreement - revolver||54,700 ||17,440 ||28,966 |
|Payments on credit agreement - revolver||(55,000)||(28,140)||(21,264)|
|Other, net||— ||(76)||— |
|Net cash used in financing activities||(15,255)||(3,507)||(494)|
|Increase (decrease) in cash and cash equivalents||18,353 ||(1,716)||1,941 |
|Cash and cash equivalents, beginning of year|