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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q 
(Mark One) 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022  
or
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________________ to _________________________________
 
Commission File Number:  0-17196
https://cdn.kscope.io/0e80f0214c78d9d34662e28b1517d60c-mgpi-20220331_g1.jpg 
MGP INGREDIENTS, INC.
(Exact name of registrant as specified in its charter) 
Kansas45-4082531
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
100 Commercial Street
AtchisonKansas66002
(Address of principal executive offices)(Zip Code)
(913) 367-1480
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, no par valueMGPINASDAQ Global Select Market
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an “emerging growth company.”  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
x Large accelerated filer                                                          Accelerated filer
 Non-accelerated filer                          Smaller Reporting Company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 
21,985,745 shares of Common Stock, no par value as of April 29, 2022



INDEX
 
Page
  
  
    
 
 
 
 
 
   
 
   
 
   
 
   
 
 
   
 
   
 
   
 
   
 
   
 
   
 

METHOD OF PRESENTATION

Throughout this Report, when we refer to “the Company,” “MGP,” “we,” “us,” “our,” and words of similar import, we are referring to the combined business of MGP Ingredients, Inc. and its consolidated subsidiaries, except to the extent that the context otherwise indicates. In this document, for any references to Note 1 through Note 11, refer to the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1.
 
All amounts in this report, except for share, par values, bushels, gallons, pounds, mmbtu, proof gallons, 9-liter cases, per share, per bushel, per gallon, per proof gallon, per 9-liter case and percentage amounts, are shown in thousands unless otherwise noted.


2


PART I. FINANCIAL INFORMATION 

ITEM 1. FINANCIAL STATEMENTS

MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except share and per share amounts)

 Quarter Ended March 31,
 20222021
Sales$195,235 $108,323 
Cost of sales123,414 76,024 
Gross profit71,821 32,299 
Advertising and promotion expenses5,504 853 
Selling, general and administrative expenses16,266 10,946 
Other operating income, net(29) 
Operating income50,080 20,500 
Interest expense, net(1,598)(488)
Other income, net54 30 
Income before income taxes48,536 20,042 
Income tax expense11,165 4,615 
Net income37,371 15,427 
Net loss attributable to noncontrolling interest66  
Net income attributable to MGP Ingredients, Inc.37,437 15,427 
Income attributable to participating securities(318)(146)
Net income used in Earnings Per Share calculation$37,119 $15,281 
Basic and diluted weighted average common shares21,989,100 16,928,003 
Basic and diluted Earnings Per Share$1.69 $0.90 





















See accompanying notes to unaudited condensed consolidated financial statements

3


MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
Quarter Ended March 31,
 20222021
Net income attributable to MGP Ingredients, Inc. $37,437 $15,427 
Other comprehensive income, net of tax:
Unrealized loss on foreign currency translation adjustment(219) 
Change in Company-sponsored post-employment benefit plan(13)55 
Other comprehensive income (loss)(232)55 
Comprehensive income attributable to MGP Ingredients, Inc. 37,205 15,482 
Comprehensive loss attributable to noncontrolling interest(66) 
Comprehensive income$37,139 $15,482 



































See accompanying notes to unaudited condensed consolidated financial statements

4


       MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Dollars in thousands)
 March 31, 2022December 31, 2021
Current Assets  
Cash and cash equivalents$27,295 $21,568 
Receivables (less allowance for credit loss, $175 and $150 at March 31, 2022, and December 31, 2021, respectively)
102,062 92,537 
Inventory259,517 245,944 
Prepaid expenses6,391 1,510 
Refundable income taxes 5,539 
Total current assets395,265 367,098 
Property, plant, and equipment433,017 428,249 
Less accumulated depreciation and amortization(225,651)(220,963)
Property, plant, and equipment, net207,366 207,286 
Operating lease right-of-use assets, net 15,981 9,671 
Investment in joint ventures6,366 4,944 
Intangible assets, net218,320 218,838 
Goodwill226,294 226,294 
Other assets7,227 7,336 
Total assets$1,076,819 $1,041,467 
Current Liabilities  
Current maturities of long-term debt$3,228 $3,227 
Accounts payable52,763 53,712 
Federal and state excise taxes payable6,476 6,992 
Income taxes payable5,437  
Accrued expenses and other16,559 24,869 
Total current liabilities84,463 88,800 
Long-term debt, less current maturities34,463 35,266 
Convertible senior notes194,986 194,906 
Long-term operating lease liabilities12,595 6,997 
Other noncurrent liabilities4,513 5,132 
Deferred income taxes66,394 66,101 
Total liabilities397,414 397,202 
Commitments and Contingencies (Note 8)
Stockholders’ Equity  
Capital stock  
Preferred, 5% non-cumulative; $10 par value; authorized 1,000 shares; issued and outstanding 437 shares
4 4 
Common stock  
No par value; authorized 40,000,000 shares; issued 23,125,166 shares at March 31, 2022 and December 31, 2021; and 21,985,100 and 21,964,314 shares outstanding at March 31, 2022 and December 31, 2021, respectively
6,715 6,715 
Additional paid-in capital316,571 315,802 
Retained earnings379,013 344,237 
Accumulated other comprehensive income122 354 
Treasury stock, at cost, 1,140,066 and 1,160,852 shares at March 31, 2022 and December 31, 2021, respectively
(22,464)(22,357)
Total MGP Ingredients, Inc. stockholders’ equity679,961 644,755 
Noncontrolling interest(556)(490)
Total equity679,405 644,265 
Total liabilities and equity$1,076,819 $1,041,467 
See accompanying notes to unaudited condensed consolidated financial statements
5


MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 Quarter Ended March 31,
 20222021
Cash Flows from Operating Activities  
Net income$37,371 $15,427 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization5,621 3,311 
Share-based compensation1,373 3,229 
Gain on equity method investment(394) 
Deferred income taxes, including change in valuation allowance347 (648)
Other, net24  
Changes in operating assets and liabilities:  
Receivables, net(9,601)(4,348)
Inventory(13,696)4,924 
Prepaid expenses657 (1,084)
Income taxes payable5,437 5,237 
Accounts payable4,638 509 
Accrued expenses and other(8,896)(8,278)
Federal and state excise taxes payable(515)(107)
Other, net(136)(1,182)
Net cash provided by operating activities22,230 16,990 
Cash Flows from Investing Activities  
Additions to property, plant, and equipment(10,642)(12,059)
Contributions to equity method investment(1,028) 
Other, net(363)(1,281)
Net cash used in investing activities(12,033)(13,340)
Cash Flows from Financing Activities  
Payment of dividends and dividend equivalents(2,661)(2,052)
Purchase of treasury stock(714)(674)
Principal payments on long-term debt(807) 
Net cash used in financing activities(4,182)(2,726)
Effect of exchange rate changes on cash(288) 
Increase in cash and cash equivalents5,727 924 
Cash and cash equivalents, beginning of period21,568 21,662 
Cash and cash equivalents, end of period$27,295 $22,586 
See accompanying notes to unaudited condensed consolidated financial statements
6


MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For Quarter Ended March 31, 2022 and 2021
(Unaudited) (Dollars in thousands)
Capital
Stock
Preferred
Issued CommonAdditional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
income
Treasury
Stock
Non-controlling InterestTotal
Balance, December 31, 2021
$4 $6,715 $315,802 $344,237 $354 $(22,357)$(490)$644,265 
Comprehensive income:
Net income (loss)   37,437   (66)37,371 
Other comprehensive loss    (232)  (232)
Dividends and dividend equivalents of $0.12 per common share and per restricted stock unit, net of estimated forfeitures
   (2,661)   (2,661)
Share-based compensation  1,373     1,373 
Stock shares awarded, forfeited or vested  (604)  604   
Stock shares repurchased     (711) (711)
Balance, March 31, 2022
$4 $6,715 $316,571 $379,013 $122 $(22,464)$(556)$679,405 


Capital
Stock
Preferred
Issued CommonAdditional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
income
Treasury
Stock
Total
Balance, December 31, 2020
$4 $6,715 $15,503 $262,943 $486 $(23,125)$262,526 
Comprehensive income:
Net income— — — 15,427 — — 15,427 
Other comprehensive income— — — — 55 — 55 
Dividends and dividend equivalents of $0.12 per common share and per restricted stock unit, net of estimated forfeitures
— — — (2,052)— — (2,052)
Share-based compensation— — 3,229 — — — 3,229 
Stock shares awarded, forfeited or vested— — (716)— — 716  
Stock shares repurchased— — — — — (674)(674)
Balance, March 31, 2021
$4 $6,715 $18,016 $276,318 $541 $(23,083)$278,511 



See accompanying notes to unaudited condensed consolidated financial statements

7


MGP INGREDIENTS, INC.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise noted)

Note 1.  Accounting Policies and Basis of Presentation

The Company. MGP Ingredients, Inc. (“the Company,” and “MGP”) is a Kansas corporation headquartered in Atchison, Kansas and is a leading producer and supplier of premium distilled spirits, branded spirits and food ingredients. Distilled spirits include premium bourbon and rye whiskeys and grain neutral spirits, including vodka and gin. The Company’s distilled spirits are either packaged and sold under its own brands to distributors, sold, directly or indirectly to manufacturers of other branded spirits, or direct to consumer. MGP is also a top producer of high quality industrial alcohol for use in both food and non-food applications. The Company’s protein and starch food ingredients provide a host of functional, nutritional, and sensory benefits for a wide range of food products to serve the consumer packaged goods industry. The Company’s industrial alcohol and ingredients products are sold directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries. The Company’s distillery products are derived from corn and other grains (including rye, barley, wheat, barley malt, and milo), and its ingredient products are derived primarily from wheat flour.  
On April 1, 2021, the Company acquired Luxco, Inc. and its affiliated companies (“Luxco”) which is a leading branded beverage alcohol company across various categories, with a more than 60-year business heritage. Luxco’s operations predominately involve the producing, importing, bottling and rectifying of distilled spirits. See Note 3, Business Combination, for further details.

The Company reports three operating segments: Distilling Solutions, Branded Spirits and Ingredient Solutions. During 2022, the Company changed the name of its Distillery Products segment to Distilling Solutions. Certain amounts in the 2021 consolidated financial statements have been reclassified to conform to the 2022 presentation.

Basis of Presentation and Principles of Consolidation. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements as of and for the quarter ended March 31, 2022, should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”).  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal and recurring adjustments) necessary to fairly present the results for interim periods in accordance with U.S. generally accepted accounting principles (“GAAP”).  Pursuant to the rules and regulations of the SEC, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted.

The Company holds 60 percent interest in Dos Primos Tequila, LLC (“Dos Primos”). The Company consolidated Dos Primos activity on the financial statements and presented the 40 percent non-controlling interest portion on a separate line.

Use of Estimates.  The financial reporting policies of the Company conform to GAAP.  The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  The application of certain of these policies places demands on management’s judgment, with financial reporting results relying on estimation about the effects of matters that are inherently uncertain, inclusive of the effects related to the COVID-19 pandemic.  For all of these policies, management cautions that future events rarely develop as forecast, and estimates routinely require adjustment and may require material adjustment.

Inventory.  Inventory includes finished goods, raw materials in the form of agricultural commodities used in the production process as well as bottles, caps, and labels used in the bottling process, and certain maintenance and repair items.  Bourbons and whiskeys, included in inventory, are normally aged in barrels for several years, following industry practice; all barreled bourbon and whiskey is classified as a current asset. The Company includes warehousing, insurance, and other carrying charges applicable to barreled whiskey in inventory costs.

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Inventories are stated at lower of cost or net realizable value on the first-in, first-out, or FIFO, method.  Inventory valuations are impacted by constantly changing prices paid for key materials, primarily corn. Inventory consists of the following:
March 31, 2022December 31, 2021
Finished goods$40,842 $35,362 
Barreled distillate (bourbons and whiskeys)180,074 174,080 
Raw materials26,316 24,981 
Work in process1,269 1,261 
Maintenance materials9,446 9,179 
Other1,570 1,081 
Total$259,517 $245,944 

Revenue Recognition. Revenue is recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration it expects to be entitled to receive in exchange for the performance obligations. The term between invoicing and when payment is due is not significant and the period between when the entity transfers the promised good or service to the customer and when the customer pays for that good or service is one year or less.

Revenue is recognized for the sale of products at the point in time finished products are delivered to the customer in accordance with shipping terms. This is a faithful depiction of the satisfaction of the performance obligation because, at the point control passes to the customer, the customer has legal title and the risk and rewards of ownership have transferred, and the customer has present obligation to pay.

The Company’s Distilling Solutions segment routinely enters into bill and hold arrangements, whereby the Company produces and sells aged and unaged distillate to customers, and the product is barreled at the customer’s request and warehoused at a Company location for an extended period of time in accordance with directions received from the Company’s customers. Even though the aged and unaged distillate remains in the Company’s possession, a sale is recognized at the point in time when the customer obtains control of the product. Control is transferred to the customer in bill and hold transactions when: customer acceptance specifications have been met, legal title has transferred, the customer has a present obligation to pay for the product, and the risk and rewards of ownership have transferred to the customer. Additionally, all of the following bill and hold criteria have to be met in order for control to be transferred to the customer: the reason for the bill and hold arrangement is substantive - the customer has requested the product be warehoused, the product has been identified as separately belonging to the customer, the product is currently ready for physical transfer to the customer, and the Company does not have the ability to use the product or direct it to another customer.

Warehouse services revenue is recognized over the time that warehouse services are rendered and as they are rendered. This is a faithful depiction of the satisfaction of the performance obligation because control of the aging products has already passed to the customer and there are no additional performance activities required by the Company, except as requested by the customer. The performance of the service activities, as requested, is invoiced as satisfied and revenue is concurrently recognized. Contract bottling is recognized over the time contract bottling services are rendered and as they are rendered.

Sales in the Branded Spirits segment reflect reductions attributable to consideration given to customers in incentive programs, including discounts and allowances for certain volume targets. These allowances and discounts are not estimated, are not for distinct goods, and paid only when the depletion volume targets are achieved by the customer. The amounts reimbursed to customers are determined based on agreed-upon amounts and are recorded as a reduction of revenue.

Excise Taxes. The Company is responsible for compliance with the Alcohol and Tobacco Tax and Trade Bureau
of the U.S. Treasury Department (the “TTB”) regulations which includes making timely and accurate excise tax payments. The Company is subject to periodic compliance audits by the TTB. Individual states also impose excise taxes on alcohol beverages in varying amounts. The Company calculates its Federal and state excise tax expense based upon units shipped and on its understanding of the applicable excise tax laws. Excise taxes that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer are excluded from revenue.

Income Taxes. The Company accounts for income taxes using an asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. A valuation allowance is recognized if it is “more likely than not” that at least some portion of the deferred tax asset will not be realized.

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Earnings Per Share (“EPS”).  Basic and diluted EPS is computed using the two-class method, which is an earnings allocation formula that determines net income per share for each class of Common Stock and participating security according to dividends declared and participation rights in undistributed earnings.  Basic EPS amounts are computed by dividing net income attributable to common shareholders by the weighted average shares outstanding during each period. Diluted EPS is computed using the if-converted method by dividing the net income attributable to common shareholders by the weighted average shares outstanding, inclusive of the impacts of the Convertible Senior Notes, except for where the result would be anti-dilutive as of the balance sheet date.

Translation of Foreign Currencies. Assets and liabilities of Niche Drinks Co., Ltd. (“Niche”), a wholly-owned subsidiary of the Company whose functional currency is the British pound sterling, are translated to U.S. dollars using the exchange rate in effect at the condensed consolidated balance sheet date. Results of operations are translated using average rates during the period. Adjustments resulting from the translation process are included as a component of Accumulated other comprehensive income.

Business Combinations. Assets acquired and liabilities assumed during a business combination are generally recorded at fair market value as of the acquisition date. Goodwill is recognized to the extent that the purchase consideration exceeds the value of the assets acquired and liabilities assumed. The Company uses its best estimate and third party valuation specialists to determine the fair value of the assets acquired and liabilities assumed. During the measurement period, which can be up to one year after the acquisition date, the Company can make adjustments to the fair value of the assets acquired and liabilities assumed, with the offset being an adjustment to goodwill.

Goodwill and Indefinite-Lived Intangible Assets. The Company records goodwill and other indefinite-lived intangible assets in connection with various acquisitions of businesses and allocates the goodwill and other indefinite-lived intangible assets to its respective reporting units. The Company evaluates goodwill for impairment at least annually, in the fourth quarter, or on an interim basis if events and circumstances occur that would indicate it is more likely than not that the fair value of a reporting unit is less than the carrying value. To the extent that the carrying amount exceeds fair value, an impairment of goodwill is recognized. Judgment is required in the determination of reporting units, the assignment of assets and liabilities to reporting units, including goodwill, and the determination of fair value of the reporting units. The Company separately evaluates indefinite-lived intangible assets for impairment. As of March 31, 2022, the Company determined that goodwill and indefinite-lived intangible assets were not impaired.

Fair Value of Financial Instruments.  The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy is broken down into three levels based upon the observability of inputs. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability.
 
The Company’s short-term financial instruments include cash and cash equivalents, accounts receivables and accounts payable.  The carrying value of the short-term financial instruments approximates the fair value due to their short term nature. These financial instruments have no stated maturities or the financial instruments have short term maturities that approximate market.
 
The fair value of the Company’s debt is estimated based on current market interest rates for debt with similar maturities and credit quality. The fair value of the Company’s debt was $257,784 and $272,971 at March 31, 2022 and December 31, 2021, respectively. The financial statement carrying value of total debt was $232,677 (including unamortized loan fees) and $233,399 (including unamortized loan fees) at March 31, 2022 and December 31, 2021, respectively.  These fair values are considered Level 2 under the fair value hierarchy. Fair value disclosure for deferred compensation plan investments is included in Note 9.

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Equity Method Investments. The Company holds 50 percent interests in DGL Destiladores, S.de R.L. de C.V. (“DGL”) and Agricola LG, S.de R.L. de C.V. (“Agricola”) (combined “LMX”), which are accounted for as equity method investments since the date of acquisition and is considered an affiliate of the Company. The investment in LMX, which is recorded in Investment in joint ventures on the Condensed Consolidated Balance Sheet, was $6,366 and $4,944 at March 31, 2022 and December 31, 2021, respectively. During the quarter ended March 31, 2022, the Company recorded a $394 gain from our equity method investments, which is recorded in Other income, net on the Condensed Consolidated Statement of Income. During the quarter ended March 31, 2022, the Company purchased $8,391 of bulk beverage alcohol from LMX.

Recently Adopted Accounting Standard Updates. The Company did not adopt any new Accounting Standard Updates during the quarter ended March 31, 2022.

Note 2.  Revenue

The Company generates revenues from the Distilling Solutions segment by the sale of products and by providing warehouse services related to the storage and aging of customer products. The Company generates revenues from the Branded Spirits segment by the sale of products and by providing contract bottling services. The Company generates revenues from Ingredient Solutions segment by the sale of products. Revenue related to sales of products is recognized at a point in time whereas revenue generated from warehouse services and contract bottling services are recognized over time. Contracts with customers include a single performance obligation (either the sale of products, the provision of warehouse services or contract bottling services). The following table presents the Company’s sales by segment and major products and services:
Quarter Ended March 31,
20222021
Distilling Solutions
Brown goods$62,145 $43,041 
White goods20,086 16,657 
Premium beverage alcohol82,231 59,698 
Industrial alcohol11,495 17,336 
Food grade alcohol93,726 77,034 
Fuel grade alcohol3,282 2,517 
Distillers feed and related co-products8,917 4,972 
Warehouse services5,584 4,101 
Total Distilling Solutions111,509 88,624 
Branded Spirits
Ultra premium12,597 126 
Super premium2,946 411 
Premium6,140 26 
Mid19,273  
Value11,299  
Other3,496 7 
Total Branded Spirits55,751 570 
Ingredient Solutions
Specialty wheat starches15,203 10,222 
Specialty wheat proteins9,419 6,046 
Commodity wheat starches3,353 2,283 
Commodity wheat proteins 578 
Total Ingredient Solutions27,975 19,129 
Total sales$195,235 $108,323 

Note 3. Business Combination

Description of the Transaction. On January 22, 2021, the Company entered into a definitive agreement to acquire Luxco, and subsequently completed the merger on April 1, 2021 (the “Merger”). Luxco is a leading branded beverage alcohol company
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across various categories, with a more than 60-year business heritage. As a result of the Merger, MGP increased its scale and market position in the branded-spirits sector and believes it strengthened its platform for future growth of higher valued-added products.

Following the Merger, Luxco became a wholly-owned subsidiary of MGP and is included within the Branded Spirits segment. The aggregate consideration paid by the Company in connection with the Merger was $237,500 in cash (less assumed indebtedness) and 5,007,833 shares of common stock of the Company, subject to adjustment for fractional shares (the “Company Shares,” and together with the cash portion, the “Merger Consideration”). The Company Shares were valued at $296,213 and represented approximately 22.8 percent of the Company’s outstanding common stock immediately following the closing of the Merger. The Merger Consideration was subject to customary purchase price adjustments related to, among other things, net working capital, acquired cash and assumed debt. The consideration paid at closing included a preliminary estimated purchase price adjustment. In September 2021, the parties finalized the purchase price adjustment, which decreased the cash consideration paid by approximately $608 and increased stock consideration by an additional 1,373 shares from the preliminary amounts that were paid at closing.

The cash portion of the Merger Consideration, the repayment of assumed debt, and transaction-related expenses were financed with borrowings under the Company’s existing Credit Agreement which was drawn down on April 1, 2021. See Note 5, Corporate Borrowings, for further details.

For tax purposes, the transaction was structured partially as a tax-free reorganization and partially as a taxable acquisition, as defined in the Internal Revenue Code. The amount transferred in a tax deferred manner, under the tax-free reorganization rules, did not create additional tax basis for the Company. The taxable component of the transaction created additional tax basis and a corresponding future tax deduction for the Company.

Purchase Price Allocation. The Merger was accounted for as a business combination in accordance with Financial Accounting Standards Board Accounting Standard Codification 805, Business Combinations (“ASC 805”), and as such, assets acquired, liabilities assumed, and consideration transferred were recorded at their estimated fair values on the acquisition date. The following table summarizes the allocation of the consideration paid for Luxco to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date, with the excess recorded to goodwill.
Consideration:
Cash, net of assumed debt$149,484 
Value of MGP Common Stock issued at close (a)
296,279 
Fair value of total consideration transferred$445,763 
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash $479 
Receivables29,675 
Inventory90,854 
Prepaid expenses1,454 
Property, plant and equipment, net41,279 
Investments in joint ventures5,085 
Intangible assets (b)
219,500 
Other assets4,257 
Total assets392,583 
Current maturities of long-term debt (c)
87,509 
Accounts payable14,453 
Federal and state excise taxes payable8,352 
Accrued expenses and other2,832 
Other noncurrent liabilities196 
Deferred income taxes57,034 
Total liabilities170,376 
Goodwill223,556 
Total $445,763 

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(a) The Company issued 5,007,833 shares of MGP Common Stock which was valued at $59.15 per share on April 1, 2021. In September 2021, the parties finalized the purchase price adjustments which increased stock consideration by an additional 1,373 shares from the preliminary amounts that were paid at closing.
(b) Intangible assets acquired includes trade names with an estimated fair value of $178,100 and distributor relationships with an estimated fair value of $41,400.
(c) The fair value of Luxco’s debt that was assumed by MGP in the transaction and repaid on the closing date.

In accordance with ASC 805 assets acquired, liabilities assumed, and consideration transferred were recorded at their estimated fair values on the acquisition date. The fair value measurements of tangible and intangible assets and liabilities were based on significant inputs not observable in the market and represent Level 3 measurements within the fair value hierarchy. Level 3 inputs include discount rates that would be used by a market participant in valuing these assets and liabilities, projections of revenues and cash flows, distributor attrition rates, royalty rates and market comparable, among others. The fair value of work-in-process and finished goods inventory was determined using the comparative sales method and raw materials was determined using the replacement cost method. The fair value of personal property assets was determined using the market approach and the indirect and direct method of the cost approach, and the fair value of real property was determined using the cost approach and the sales comparison approach.

Goodwill of $223,556, none of which is to be deductible for tax purposes, represents the excess of the consideration transferred over the estimated fair value of assets acquired net of liabilities assumed. The Intangible assets acquired includes indefinite-lived intangible assets, trade names, with an estimated fair value of $178,100 and definite-lived intangible assets, distributor relationships, with an estimated fair value of $41,400 and a useful life of 20 years. The trade names and distributor relationships acquired by the Company have been recorded at the estimated fair values using the relief from royalty method and multi-period earnings method, respectively. Management engaged a third party valuation specialist to assist in the valuation analysis of certain acquired assets including trade name and distributor relationship.

Pro Forma Information. The following table summarizes the unaudited pro forma financial results for the quarter ended March 31, 2021, as if the Merger had occurred on January 1, 2020:
Pro Forma Financial Information
Quarter Ended March 31,
2021
Sales$152,693 
Net income16,843 
Basic and diluted earnings per share0.76 

The pro forma results are adjusted for items that are non-recurring in nature and directly attributable to the Merger, including the income tax effect of the adjustments. Merger related costs incurred by the Company of $1,890 is assumed to have been incurred on January 1, 2020. Merger related costs incurred by Luxco of $3,132 were excluded from the quarter ended March 31, 2021 pro forma results. Other acquired tangible and intangible assets are assumed to be recorded at estimated fair value on January 1, 2020 and are amortized or depreciated over their estimated useful lives.     

The summary pro forma financial information is for informational purposes only, is based on estimates and assumptions, and does not purport to represent what the Company’s consolidated results of operations actually would have been if the Merger had occurred at an earlier date, and such data does not purport to project the Company’s results of operations for any future period. The basic and diluted shares outstanding used to calculate the pro forma net income per share amounts presented above have been adjusted to assume shares issued at the closing of the Merger were outstanding since January 1, 2020.

Note 4. Goodwill and Intangible Assets

Definite-Lived Intangible Assets. The Company has a definite-lived intangible asset which was acquired as a result of the Merger. The distributor relationships have a carrying value of $39,330, net of accumulated amortization of $2,070. The distributor relationships have a useful life of 20 years. The amortization expense for the quarter ended March 31, 2022 was $518.

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As of March 31, 2022, the expected future amortization expense related to definite-lived intangibles assets are as follows:
Remainder of 2022$1,552 
20232,070 
20242,070 
20252,070 
20262,070 
Thereafter29,498 
Total$39,330 

Goodwill and Indefinite-Lived Intangible Assets. The Company records goodwill and indefinite-lived intangible assets in connection with various acquisitions of businesses and allocates the goodwill and indefinite-lived intangible assets to its respective reporting units.

Changes in carrying amount of goodwill by business segment were as follows:
Distilling SolutionsBranded SpiritsIngredient SolutionsTotal
Balance, December 31, 2021
$ $226,294 $ $226,294 
Acquisitions    
Balance, March 31, 2022
$ $226,294 $ $226,294 

Changes in carrying amount of trade name intangible assets by business segment were as follows:
Distilling SolutionsBranded SpiritsIngredient SolutionsTotal
Balance, December 31, 2021
$ $178,990 $ $178,990 
Acquisitions    
Balance, March 31, 2022
$ $178,990 $ $178,990 

Note 5.  Corporate Borrowings

The following table presents the Company’s outstanding indebtedness:
Description(a)
March 31, 2022December 31, 2021
Credit Agreement - Revolver, 1.45% (variable rate) due 2025
$ $ 
Convertible Senior Notes, 1.88% (fixed rate) due 2041
201,250 201,250 
Note Purchase Agreement
Senior Secured Notes, 3.53% (fixed rate) due 2027
17,600 18,400 
Senior Secured Notes, 3.80% (fixed rate) due 2029
20,000 20,000 
Other long-term borrowings196 203 
Total indebtedness outstanding239,046 239,853 
Less unamortized loan fees(b)
(6,369)(6,454)
Total indebtedness outstanding, net232,677 233,399 
Less current maturities of long-term debt(3,228)(3,227)
Long-term debt and Credit Agreement - Revolver$229,449 $230,172 
(a) Interest rates are as of March 31, 2022.
(b) Loan fees are being amortized over the life of the Credit Agreement and Note Purchase Agreement.

Credit Agreement. On February 14, 2020, the Company entered into a credit agreement (the “Credit Agreement”) with multiple participants led by Wells Fargo Bank, National Association (“Wells Fargo Bank”) that matures on February 14, 2025. The Credit Agreement provided for a $300,000 revolving credit facility. On May 14, 2021, the Credit Agreement was amended to increase the principal amount to $400,000 and to increase the amount of the revolving credit facility by up to an additional $100,000. The Credit Agreement includes certain requirements and covenants, which the Company was in compliance with at March 31, 2022. As of March 31, 2022, the Company had no outstanding borrowings under the Credit Agreement leaving $400,000 available. The cash portion of the Merger Consideration, the repayment of assumed debt, and transaction-related expenses were financed with $242,300 borrowings under the Credit Agreement which was drawn down on April 1, 2021.
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Convertible Senior Notes. On November 16, 2021, the Company issued $201,250 in aggregate principle of 1.875% convertible senior notes due in 2041 (“2041 Notes”). The total aggregate principal amount includes $26,250 aggregate principal amount of 2041 Notes purchased by the initial purchasers in the offering pursuant to their exercise in full of their option to purchase additional notes under the purchase agreement for the offering. The 2041 Notes were issued pursuant to an indenture, dated as of November 16, 2021 ( the “Indenture”), by and among the Company, as issuer, Luxco, Inc., MGPI Processing, Inc. and MGPI of Indiana, LLC as subsidiary guarantors, and U.S. Bank National Association, as trustee. The 2041 Notes are senior, unsecured obligations of the Company and interest is payable semi-annually in arrears at a fixed interest rate of 1.875% on May 15 and November 15 of each year. The 2041 Notes mature on November 15, 2041 (“Maturity Date”) unless earlier repurchased, redeemed or converted, per the agreement. Upon conversion, the Company will pay cash up to the aggregate principle amount of the 2041 Notes to be converted and pay or deliver, as the case may be, cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at its election, in respect to the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the 2041 Notes being converted.

Note Purchase Agreements. The Company’s Note Purchase and Private Shelf Agreement (the “Note Purchase Agreement”), with PGIM, Inc., an affiliate of Prudential Financial, Inc., and certain affiliates of PGIM, Inc., provides for the issuance of up to $105,000 of Senior Secured Notes (or any higher amount solely to the extent PGIM, Inc. has provided written notice to the Company of its authorization of such a higher amount) and issuance of $20,000 of Senior Secured Notes. On July 29, 2021, PGIM, Inc. (“Prudential”) provided the Company notice pursuant to Section 1.2 of the Note Agreement that Prudential has authorized an increase in the amount of the senior promissory notes that may be issued under the uncommitted shelf facility under the Note Agreement from $105,000 to $140,000, effective as of July 29, 2021. The deadline for issuing the notes under the shelf facility is August 23, 2023.

During 2017, the Company issued $20,000 of Senior Secured Notes with a maturity date of August 23, 2027. During 2019, the Company issued $20,000 of additional Senior Secured Notes with a maturity date of April 30, 2029. The Note Purchase Agreement includes certain requirements and covenants, which the Company was in compliance with at March 31, 2022.

Other long-term borrowings. As part of the Merger, the Company acquired additional long-term notes payable to certain counties in Kentucky.

Note 6. Income Taxes
The Company’s tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the estimated annual effective tax rate is updated and a year to date adjustment is made to the provision. The Company’s quarterly effective tax rate can be subject to significant change due to the effect of discrete items arising in a given quarter. Beginning in the second quarter of 2021, the estimated annual effective tax rate includes both domestic and foreign entities acquired in the Merger. See Note 3, Business Combination, for further details.
Income tax expense for the quarter ended March 31, 2022, was $11,165 for an effective tax rate of 23.0 percent. The effective tax rate differed from the 21 percent federal statutory rate on pretax income primarily due to state income taxes, income taxes on foreign subsidiaries, partially offset by state and federal tax credits, and the deduction applicable to export activity.

Income tax expense for the quarter ended March 31, 2021, was $4,615 for an effective tax rate of 23.0 percent. The effective tax rate differed from the 21 percent federal statutory rate on pretax income primarily due to state taxes, nondeductible transaction costs, partially offset by state and federal tax credits and the deduction applicable to export activity.

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Note 7.  Equity and EPS

The computations of basic and diluted EPS:
Quarter Ended March 31,
20222021
Operations:
Net income(a)
$37,371 $15,427 
Net loss attributable to noncontrolling interest66  
Income attributable to participating securities (unvested shares and units)(b)
(318)(146)
Net income used in EPS calculation$37,119 $15,281 
Basic and diluted weighted average common shares(c)
21,989,100 16,928,003 
Basic and diluted EPS$1.69 $0.90 
(a)Net income attributable to all shareholders.
(b)Participating securities included 189,297 and 162,496 unvested restricted stock units (“RSUs”), at March 31, 2022 and 2021, respectively.
(c)Under the two-class method, basic and diluted weighted average common shares at March 31, 2022 and 2021 exclude unvested participating securities.

Share Issuance. On April 1, 2021, as part of the consideration for the Merger, the Company issued 5,007,833 shares of common stock. In September 2021, the parties finalized the purchase price adjustments, which increased stock consideration by an additional 1,373 shares from the preliminary amounts that were paid at closing.

Share Repurchase. On February 25, 2019, MGP’s Board of Directors approved a $25,000 share repurchase authorization commencing February 27, 2019, through February 27, 2022. The Company did not renew the share repurchase program upon its expiration. Under the share repurchase program, the Company could have repurchased stock from time to time for cash in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws. The Company did not repurchase any shares during the quarter ended March 31, 2022.

Common Stock Share Activity.
Shares Outstanding
Capital Stock PreferredCommon Stock
Balance, December 31, 2021437 21,964,314 
Issuance of Common Stock 29,807 
Repurchase of Common Stock (a)
 (9,021)
Balance, March 31, 2022437 21,985,100 

Shares Outstanding
Capital Stock PreferredCommon Stock
Balance, December 31, 2020437 16,915,862 
Issuance of Common Stock 35,114 
Repurchase of Common Stock (a)
 (10,376)
Balance, March 31, 2021437 16,940,600 
(a)The Common Stock repurchases were for tax withholding on equity based compensation

Note 8.  Commitments and Contingencies

There are various legal and regulatory proceedings involving the Company and its subsidiaries.  The Company accrues estimated costs for a contingency when management believes that a loss is probable and can be reasonably estimated.

Shareholder matters. On May 11, 2020, Mitchell Dorfman, a shareholder in MGP, filed an action in the United States District Court for the District of Kansas, under the caption Dorfman, derivatively on behalf of MGP Ingredients v. Griffin, et al., Case 2:20-cv-02239. On June 4, 2020, Justin Carter, a shareholder in MGP, filed an action in the United States District Court for the
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District of Kansas, under the caption Carter, derivatively on behalf of MGP Ingredients v. Griffin, et al., Case 2:20-cv-02281. On June 18, 2020, Alexandra Kearns, a shareholder in MGP, filed an action in the District Court of Atchison County, Kansas, under the caption Kearns, derivatively on behalf of MGP Ingredients v. Griffin, et al., Case 2020-CV-000042. The defendants are certain of the Company’s current and former officers and directors. The Company is a nominal defendant in each action. Plaintiffs allege that the Company was damaged as a result of the commencement of securities litigation against defendants, the repurchase of Company stock at artificially inflated prices, and compensation paid to the individual defendants. The Complaint in Dorfman asserts claims for violations of Sections 14(a), 10(b), and 20(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, waste of corporate assets, and unjust enrichment. The Complaint in Carter asserts claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, waste of corporate assets, and unjust enrichment. The Petition in Kearns asserts claims for breach of fiduciary duties, waste of corporate assets, and unjust enrichment. The pleadings pray for an award of compensatory damages, including interest, in favor of the Company, for equitable relief related to the Company’s corporate governance, for disgorgement of compensation, and for an award of attorneys’ fees and costs.

On August 31, 2021, the court dismissed with prejudice the securities litigation on which some of the derivative claims were based. On January 4, 2022, the court dismissed the Carter action. On January 11, 2022, the court dismissed the Dorfman action. On February 2, 2022, the plaintiffs and defendants entered into a stipulation of dismissal of the Kearns action. The federal claims alleged in Carter were dismissed with prejudice. All other derivative claims were dismissed without prejudice.

2016 Atchison Chemical Release. A chemical release occurred at the Company’s Atchison facility on October 21, 2016, which resulted in emissions venting into the air (“the Atchison Chemical Release”). Private plaintiffs initiated legal proceedings against the Company for damages resulting from the Atchison Chemical Release. The Company reached a settlement with the plaintiffs in December 2021 and the legal proceedings were dismissed with prejudice in January 2022.

Note 9.  Employee and Non-Employee Benefit Plans

Share-Based Compensation Plans.  The Company’s share-based compensation plans provide for the awarding of stock options, stock appreciation rights, shares of restricted stock (“Restricted Stock”), and RSUs for senior executives and salaried employees, as well as non-employee directors. The Company has two active equity-based compensation plans: the Employee Equity Incentive Plan of 2014 (the “2014 Plan”) and the Non-Employee Director Equity Incentive Plan (the “Directors’ Plan”).

As of March 31, 2022, 585,353 RSUs had been granted of the 1,500,000 shares approved under the 2014 Plan, and 122,740 shares had been granted of the 300,000 shares approved under the Directors’ Plan. As of March 31, 2022, there were 191,767 unvested RSUs under the Company’s long-term incentive plans and 189,297 were participating securities (Note 7).

Deferred Compensation Plan. The Company established an unfunded Executive Deferred Compensation Plan (“EDC Plan”) effective as of June 30, 2018, with a purpose to attract and retain highly-compensated key employees by providing participants with an opportunity to defer receipt of a portion of their salary, bonus, and other specified compensation. The Company’s obligations under this plan will change in conjunction with the performance of the participants’ investments, along with contributions to and withdrawals from the plan. Realized and unrealized gains (losses) on deferred compensation plan investments were included as a component of Other income, net on the Company’s Condensed Consolidated Statements of Income for the quarter ended March 31, 2022. For quarter ended March 31, 2022, the Company had a loss on deferred compensation plan investments of $339. For quarter ended March 31, 2021, the Company had a gain on deferred compensation plan investments of $30.

Plan investments are classified as Level 1 in the fair value hierarchy since the investments trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis. Participants were able to direct the deferral of a portion of their base salary and a portion of their estimated accrued Short-term incentive plan (“STI Plan”) amounts that were paid during first quarter of the following year. Base salary amounts elected for deferral are deposited into the EDC Plan by the Company on a weekly basis and allocated by participants among Company-determined investment options. STI plan deferral were deposited, at the time of payment, into the EDC Plan by the Company and allocated by participants among Company-determined investment options.

At March 31, 2022 and December 31, 2021, the EDC Plan investments were $3,071 and $3,072, respectively, which were recorded in Other assets on the Company’s Condensed Consolidated Balance Sheets. The EDC Plan current liabilities were $617 at both March 31, 2022 and December 31, 2021, which were included in Accrued expenses and other on the Company’s Condensed Consolidated Balance Sheets. The EDC Plan non-current liabilities were $2,565 and $2,981 at March 31, 2022 and
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December 31, 2021, respectively, and were included in Other noncurrent liabilities on the Company’s Condensed Consolidated Balance Sheets.

Note 10.  Operating Segments

At March 31, 2022, the Company had three segments: Distilling Solutions, Branded Spirits, and Ingredient Solutions. The Distilling Solutions segment consists of food grade alcohol and distillery co-products, such as distillers feed (commonly called dried distillers grain in the industry) and fuel grade alcohol. The Distilling Solutions segment also includes warehouse services, including barrel put away, storage, retrieval, and blending services. The Branded Spirits segment consists of producing, importing, bottling and rectifying of distilled spirits. Ingredient Solutions segment consists of specialty starches and proteins and commodity starches and proteins.

Operating profit for each segment is based on sales less identifiable operating expenses.  Non-direct selling, general and administrative expenses, interest expense, other special charges, and other general miscellaneous expenses are excluded from segment operations and are classified as Corporate.  Receivables, inventories, property, plant and equipment, leases, goodwill and intangible assets have been identified with the segments to which they relate.  All other assets are considered as Corporate.
Quarter Ended March 31,
20222021
Sales to Customers
Distilling Solutions$111,509 $88,624 
Branded Spirits55,751 570 
Ingredient Solutions27,975 19,129 
Total$195,235 $108,323 
Gross Profit
Distilling Solutions$38,933 $28,245 
Branded Spirits24,782 86 
Ingredient Solutions8,106 3,968 
Total$71,821 $32,299 
Depreciation and Amortization
Distilling Solutions$2,861 $2,573 
Branded Spirits1,782 10 
Ingredient Solutions612 475 
Corporate366 253 
Total$5,621 $3,311 
Income (loss) before Income Taxes
Distilling Solutions$37,992 $26,863 
Branded Spirits10,786 (1,224)
Ingredient Solutions7,471 3,172 
Corporate(7,713)(8,769)
Total$48,536 $20,042 
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The following table allocates assets to each segment as of:
March 31, 2022December 31, 2021
Identifiable Assets
Distilling Solutions$317,767 $314,816 
Branded Spirits677,283 658,826 
Ingredient Solutions55,185 43,009 
Corporate26,584 24,816 
Total$1,076,819 $1,041,467 

Note 11.  Subsequent Events

Dividend. On May 5, 2022, the Company’s Board of Directors declared a quarterly dividend payable to stockholders of record as of May 20, 2022, of the Company’s Common Stock, and a dividend equivalent payable to holders of certain RSUs as of May 20, 2022, of $0.12 per share and per unit, payable on June 3, 2022.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands, unless otherwise noted)

CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS

This Report on Form 10-Q contains forward looking statements as well as historical information.  All statements, other than statements of historical facts, regarding the prospects of our industry and our prospects, plans, financial position, and strategic plan may constitute forward looking statements.  In addition, forward looking statements are usually identified by or are associated with such words as “intend,” “plan,” “believe,” “estimate,” “expect,” “anticipate,” “hopeful,” “should,” “may,” “will,” “could,” “encouraged,” “opportunities,” “potential,” and/or the negatives or variations of these terms or similar terminology.  Forward looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from those expressed or implied in the forward looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward looking statements is included in the section titled “Risk Factors” (Item 1A) of our Annual Report on Form 10-K for the year ended December 31, 2021. Forward looking statements are made as of the date of this report, and we undertake no obligation to update or revise publicly any forward looking statements, whether because of new information, future events or otherwise.

As the COVID-19 pandemic continues, we are monitoring the guidance from federal, state and local public health authorities and will take the necessary actions to comply with the updated guidelines. The Company’s business is part of the United States’ critical infrastructure and thus is deemed to be an “essential business.” As such, we continue to take the necessary and appropriate actions designed to protect our workforce as it continues its critical operations. We have continued to operate without any significant negative impacts; however this could be effected by voluntary or mandatory temporary closures of our facilities, interruptions to our supply chain or additional efforts to protect the health and safety of our employees. As of the date of this report, the Company’s operations, supply chain and customer demand have not been significantly affected by COVID-19; however, we are monitoring the situation closely.

OVERVIEW

MGP is a leading producer and supplier of premium distilled spirits, branded spirits and food ingredients. Distilled spirits include premium bourbon and rye whiskeys and grain neutral spirits (“GNS”), including vodka and gin. We are also a top producer of high quality industrial alcohol for use in both food and non-food applications. Our distilled spirits are either packaged and sold under our own brands to distributors, sold, directly or indirectly, to manufacturers of other branded spirits, or direct to consumer. The Company’s protein and starch food ingredients provide a host of functional, nutritional, and sensory benefits for a wide range of food products to serve the packaged goods industry.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this Form 10-Q, as well as our audited consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations - General, set forth in our Annual Report on Form 10-K for the year ended December 31, 2021.


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RESULTS OF OPERATIONS

Consolidated Results

The table below details the consolidated results for the quarters ended March 31, 2022 and 2021:
Quarter Ended March 31,
202220212022 v. 2021
Sales$195,235 $108,323 80.2 %
Cost of sales123,414 76,024 62.3 
Gross profit71,821 32,299 122.4 
   Gross margin %36.8 %29.8 %7.0 
pp(a)
Advertising and promotion expenses5,504 853 545.3 
Selling, general, and administrative (“SG&A”) expenses16,266 10,946 48.6 
Other operating income, net(29) N/A
Operating income50,080 20,500 144.3 
   Operating margin %25.7 %18.9 %6.8 pp
Interest expense(1,598)(488)(227.5)
Other income, net54 30 80.0 
Income before income taxes48,536 20,042 142.2 
Income tax expense11,165 4,615 141.9 
   Effective tax expense rate %23.0 %23.0 %— pp
Net income$37,371