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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 June 30, 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/ce975efdd38c07469e7d981369d454c3-mgpi-20220630_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: 
21,993,346 shares of Common Stock, no par value, as of July 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 June 30,Year to Date Ended June 30,
 2022202120222021
Sales$194,982 $174,939 $390,217 $283,262 
Cost of sales135,758 118,112 259,172 194,136 
Gross profit59,224 56,827 131,045 89,126 
Advertising and promotion expenses6,065 3,371 11,569 4,224 
Selling, general and administrative expenses17,859 25,793 34,125 36,739 
Other operating (income) expense, net(6) (35) 
Operating income35,306 27,663 85,386 48,163 
Interest expense, net(1,543)(1,104)(3,141)(1,592)
Other income (expense), net(1,062)(88)(1,008)(58)
Income before income taxes32,701 26,471 81,237 46,513 
Income tax expense7,339 6,412 18,504 11,027 
Net income25,362 20,059 62,733 35,486 
Net (income) loss attributable to noncontrolling interest198 76 264 76 
Net income attributable to MGP Ingredients, Inc.25,560 20,135 62,997 35,562 
Income attributable to participating securities(217)(150)(535)(299)
Net income used in Earnings Per Common Share calculation$25,343 $19,985 $62,462 $35,263 
Basic and diluted weighted average common shares22,002,385 21,916,721 21,995,779 19,436,143 
Basic and diluted Earnings Per Common Share$1.15 $0.91 $2.84 $1.81 





















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 June 30,Year to Date Ended June 30,
 2022202120222021
Net income attributable to MGP Ingredients, Inc. $25,560 $20,135 $62,997 $35,562 
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on foreign currency translation adjustment(430)1 (649)7 
Change in Company-sponsored post-employment benefit plan(13) (26)49 
Other comprehensive income (loss)(443)1 (675)56 
Comprehensive income attributable to MGP Ingredients, Inc. 25,117 20,136 62,322 35,618 
Comprehensive loss attributable to noncontrolling interest(198)(76)(264)(76)
Comprehensive income$24,919 $20,060 $62,058 $35,542 



































See accompanying notes to unaudited condensed consolidated financial statements

4


       MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Dollars in thousands)
 June 30, 2022December 31, 2021
Current Assets  
Cash and cash equivalents$37,415 $21,568 
Receivables (less allowance for credit loss, $175 and $150 at June 30, 2022, and December 31, 2021, respectively)
105,393 92,537 
Inventory272,948 245,944 
Prepaid expenses6,768 1,510 
Refundable income taxes 5,539 
Total current assets422,524 367,098 
Property, plant, and equipment418,040 404,149 
Less accumulated depreciation and amortization(206,055)(196,863)
Property, plant, and equipment, net211,985 207,286 
Operating lease right-of-use assets, net 15,559 9,671 
Investment in joint ventures5,792 4,944 
Intangible assets, net217,803 218,838 
Goodwill226,294 226,294 
Other assets6,663 7,336 
Total assets$1,106,620 $1,041,467 
Current Liabilities  
Current maturities of long-term debt$4,189 $3,227 
Accounts payable60,572 53,712 
Federal and state excise taxes payable7,673 6,992 
Income taxes payable141  
Accrued expenses and other20,681 24,869 
Total current liabilities93,256 88,800 
Long-term debt, less current maturities32,698 35,266 
Convertible senior notes195,066 194,906 
Long-term operating lease liabilities12,206 6,997 
Other noncurrent liabilities4,095 5,132 
Deferred income taxes66,226 66,101 
Total liabilities403,547 397,202 
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 June 30, 2022 and December 31, 2021; and 21,992,751 and 21,964,314 shares outstanding at June 30, 2022 and December 31, 2021, respectively
6,715 6,715 
Additional paid-in capital317,240 315,802 
Retained earnings401,915 344,237 
Accumulated other comprehensive income(321)354 
Treasury stock, at cost, 1,132,415 and 1,160,852 shares at June 30, 2022 and December 31, 2021, respectively
(21,726)(22,357)
Total MGP Ingredients, Inc. stockholders’ equity703,827 644,755 
Noncontrolling interest(754)(490)
Total equity703,073 644,265 
Total liabilities and equity$1,106,620 $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)
 Year to Date Ended June 30,
 20222021
Cash Flows from Operating Activities  
Net income$62,733 $35,486 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization10,924 8,425 
Share-based compensation2,131 4,767 
Deferred income taxes, including change in valuation allowance125 (1,568)
Other, net82 (69)
Changes in operating assets and liabilities, net of effects of acquisition:  
Receivables, net(13,142)7,531 
Inventory(27,508)(408)
Prepaid expenses266 (897)
Income taxes payable141 1,017 
Accounts payable11,438 (12,996)
Accrued expenses and other(4,791)7,987 
Federal and state excise taxes payable681 716 
Other, net(61)(2,537)
Net cash provided by operating activities43,019 47,454 
Cash Flows from Investing Activities  
Additions to property, plant, and equipment(18,087)(18,336)
Purchase of business, net of cash acquired (149,599)
Contributions to equity method investment(1,028)(988)
Other, net(369)(1,312)
Net cash used in investing activities(19,484)(170,235)
Cash Flows from Financing Activities  
Payment of dividends and dividend equivalents(5,322)(4,707)
Purchase of treasury stock(713)(765)
Loan fees paid related to borrowings (666)
Principal payments on long-term debt(1,614) 
Proceeds from credit agreement - revolver 242,300 
Payments on credit agreement - revolver (10,306)
Payment on assumed debt as part of the Merger (87,497)
Net cash provided by (used in) financing activities(7,649)138,359 
Effect of exchange rate changes on cash(39)3 
Increase in cash and cash equivalents15,847 15,581 
Cash and cash equivalents, beginning of period21,568 21,662 
Cash and cash equivalents, end of period$37,415 $37,243 
See accompanying notes to unaudited condensed consolidated financial statements
6


MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For Year to Date Ended June 30, 2022
(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 
Comprehensive income:
Net income (loss)   25,560   (198)25,362 
Other comprehensive loss    (443)  (443)
Dividends and dividend equivalents of $0.12 per common share and per restricted stock unit, net of estimated forfeitures
   (2,658)   (2,658)
Share-based compensation  1,409     1,409 
Stock shares awarded, forfeited or vested  (740)  740   
Stock shares repurchased     (2) (2)
Balance, June 30, 2022
$4 $6,715 $317,240 $401,915 $(321)$(21,726)$(754)$703,073 

















See accompanying notes to unaudited condensed consolidated financial statements





7


MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For Year to Date Ended June 30, 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, 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 
Comprehensive income:
Net income (loss)— — — 20,135 — — (76)20,059 
Other comprehensive income— — — — 1 — — 1 
Dividends and dividend equivalents of $0.12 per common share and per restricted stock unit, net of estimated forfeitures
— — — (2,653)— — — (2,653)
Share-based compensation— — 1,538 — — — — 1,538 
Stock shares awarded, forfeited, or vested— — (705)— — 705 — — 
Stock shares repurchased— — — — — (91)— (91)
Equity consideration for Merger— — 296,213 — — — — 296,213 
Balance, June 30, 2021
$4 $6,715 $315,062 $293,800 $542 $(22,469)$(76)$593,578 



See accompanying notes to unaudited condensed consolidated financial statements

8


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

Note 1.  Accounting Policies and Basis of Presentation

The Company. MGP Ingredients, Inc. (“the Company,” or “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 and year to date ended June 30, 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.

9


Immaterial Correction to Prior Period Financial Statements. During the quarter ended June 30, 2022, the Company identified an immaterial correction related to gross amounts of Property, plant and equipment and Accumulated depreciation and amortization in the Condensed Consolidated Balance Sheet as of December 31, 2021. The Company performed a materiality assessment, considering both quantitative and qualitative factors, which resulted in the determination that the correction to the financial statements is immaterial. As such, the Company corrected the December 31, 2021 gross balances for Property, plant, and equipment and Accumulated depreciation and amortization on the Condensed Consolidated Balance Sheet reported in this Form 10-Q by equal and offsetting amounts, which resulted in no change to the balance of Property, plant, and equipment, net.

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.

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:

June 30, 2022December 31, 2021
Finished goods$46,859 $35,362 
Barreled distillate (bourbons and whiskeys)184,926 174,080 
Raw materials28,176 24,981 
Work in process2,124 1,261 
Maintenance materials9,614 9,179 
Other1,249 1,081 
Total$272,948 $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: the 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.

10


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 for distinct goods and are 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.

Earnings Per Common 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 impact 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 June 30, 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.
11


 
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 $212,654 and $272,971 at June 30, 2022 and December 31, 2021, respectively. The financial statement carrying value of total debt was $231,953 (including unamortized loan fees) and $233,399 (including unamortized loan fees) at June 30, 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, Employee and Non-Employee Benefit Plans. See Note 3, Business Combination, for discussion related the the fair value of tangible and intangible assets acquired and liabilities assumed as part of the merger with Luxco.

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 are considered affiliates of the Company. The investment in LMX, which is recorded in Investment in joint ventures on the Condensed Consolidated Balance Sheet, was $5,792 and $4,944 at June 30, 2022 and December 31, 2021, respectively. During the quarter ended June 30, 2022 and 2021, the Company recorded a loss of $574 and $334 from our equity method investments, respectively, which is recorded in Other income (expense), net on the Condensed Consolidated Statement of Income. During the year to date ended June 30, 2022 and 2021, the Company recorded a loss of $180 and $334 from our equity method investments, respectively, which is recorded in Other (income) expense, net on the Condensed Consolidated Statement of Income. During the quarter and year to date ended June 30, 2022, the Company purchased $11,538 and $19,929, respectively, of bulk beverage alcohol from LMX, and during the quarter and year to date ended June 30, 2021, the Company purchased $11,672 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 June 30, 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 is 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).

12


The following table presents the Company’s sales by segment and major products and services:
Quarter Ended June 30,Year to Date Ended June 30,
2022202120222021
Distilling Solutions
Brown goods$56,331 $43,766 $118,476 $86,807 
White goods17,441 18,205 37,527 34,862 
Premium beverage alcohol73,772 61,971 156,003 121,669 
Industrial alcohol12,885 14,770 24,380 32,106 
Food grade alcohol86,657 76,741 180,383 153,775 
Fuel grade alcohol3,312 4,753 6,594 7,270 
Distillers feed and related co-products11,267 4,672 20,184 9,644 
Warehouse services5,902 4,182 11,486 8,283 
Total Distilling Solutions107,138 90,348 218,647 178,972 
Branded Spirits
Ultra premium9,435 8,002 22,032 8,128 
Super premium3,226 3,184 6,172 3,595 
Premium5,775 5,303 11,915 5,329 
Mid23,301 25,407 42,574 25,407 
Value12,908 13,228 24,207 13,228 
Other3,921 5,302 7,417 5,309 
Total Branded Spirits58,566 60,426 114,317 60,996 
Ingredient Solutions
Specialty wheat starches16,001 12,598 31,204 22,820 
Specialty wheat proteins10,109 8,352 19,528 14,398 
Commodity wheat starches3,130 2,663 6,483 4,946 
Commodity wheat proteins38 552 38 1,130 
Total Ingredient Solutions29,278 24,165 57,253 43,294 
Total sales$194,982 $174,939 $390,217 $283,262 

Note 3. Business Combination

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

Following the Merger, 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.

13


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 

(a) On April 1, 2021, the Company issued 5,007,833 shares of MGP Common Stock which was valued at $59.15 per share. 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 comparables, 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
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cost approach and the sales comparison approach.

Goodwill of $223,556, none of which is 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 names and distributor relationships.

Pro Forma Information. The following table summarizes the unaudited pro forma financial results for the quarter and year to date ended June 30, 2021, as if the Merger had occurred on January 1, 2020:
Pro Forma Financial Information
Quarter Ended June 30,Year to Date Ended June 30,
20212021
Sales$174,939 $327,632 
Net income28,124 44,747 
Basic and diluted earnings per common share1.28 2.04 

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 $6,738 and $8,628 for the quarter
and year to date ended June 30, 2021, respectively, were excluded and $6,738 is assumed to have been incurred on January 1, 2020. Merger related costs incurred by Luxco of $3,132 were excluded from the year to date ended June 30, 2021 pro forma results. A non-recurring expense of $2,529 for the quarter and year to date ended June 30, 2021 related to the fair value
adjustment of finished goods inventory estimated to have been sold was removed. 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 $38,813, net of accumulated amortization of $2,587. The distributor relationships have a useful life of 20 years. The amortization expense for the quarter and year to date ended June 30, 2022 was $517 and $1,035, respectively, and the amortization expense for the quarter and year to date ended June 30, 2021 was $518.

As of June 30, 2022, the expected future amortization expense related to definite-lived intangible assets are as follows:
Remainder of 2022$1,035 
20232,070 
20242,070 
20252,070 
20262,070 
Thereafter29,498 
Total$38,813 

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

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Changes in carrying amount of goodwill by business segment were as follows:
Distilling SolutionsBranded SpiritsIngredient SolutionsTotal
Balance, December 31, 2021
$ $226,294 $ $226,294 
Acquisitions    
Balance, June 30, 2022
$ $226,294 $ $226,294 

Changes in carrying amount of trade name intangible assets by business segment were as follows:
Distilling SolutionsBranded SpiritsIngredient SolutionsTotal