mgpi-20210930

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 September 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________________ to _________________________________

Commission File Number: 0-17196

MGP INGREDIENTS, INC.

(Exact name of registrant as specified in its charter)


Kansas			45-4082531
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)


100 Commercial Street
Atchison	Kansas	66002
(Address of principal executive offices)		(Zip Code)

(913) 367-1480

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, no par value	MGPI	NASDAQ 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.

☐ Large accelerated filer x 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:

21,964,296 shares of Common Stock, no par value as of October 29, 2021

INDEX


PART I. FINANCIAL INFORMATION			Page

	Item 1.	Financial Statements

	Condensed Consolidated Statements of Income (Unaudited)		3
	Condensed Consolidated Statements of Comprehensive Income (Unaudited)		4
	Condensed Consolidated Balance Sheets (Unaudited)		5
	Condensed Consolidated Statements of Cash Flows (Unaudited)		6
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)		7
	Notes to Unaudited Condensed Consolidated Financial Statements		9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

	Item 4.	Controls and Procedures	35

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	35

	Item 1A.	Risk Factors	35

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

	Item 3.	Defaults Upon Senior Securities	36

	Item 4.	Mine Safety Disclosures	36

	Item 5.	Other Information	36

	Item 6.	Exhibits	37

METHOD OF PRESENTATION

Throughout this Report, when we refer to “the Company,” “MGP,” “we,” “us,” “our,” and words of similar import, we are referring to the combined business of MGP Ingredients, Inc. and its consolidated subsidiaries, except to the extent that the context otherwise indicates. In this document, for any references to Note 1 through Note 11, refer to the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1.

All amounts in this report, except for share, par values, bushels, gallons, pounds, mmbtu, proof gallons, per share, per bushel, per gallon, per proof gallon, per 9-liter case and percentage amounts, are shown in thousands unless otherwise noted.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except share and per share amounts)


	Quarter Ended September 30,				Year to Date Ended September 30,
	2021		2020		2021		2020


Sales	$	176,611	$	102,964	$	459,873	$	294,606
Cost of sales	119,525		79,802		313,661		227,531
Gross profit	57,086		23,162		146,212		67,075
Selling, general and administrative expenses	24,202		9,510		65,165		28,377

Operating income	32,884		13,652		81,047		38,698
Interest expense, net	(1,116)		(594)		(2,708)		(1,701)
Other income (loss), net	(421)		185		(479)		352
Income before income taxes	31,347		13,243		77,860		37,349
Income tax expense	7,674		2,862		18,701		8,636
Net income	23,673		10,381		59,159		28,713

Net loss attributable to noncontrolling interest	203		—		279		—
Net income attributable to MGP Ingredients, Inc.	23,876		10,381		59,438		28,713

Income attributable to participating securities	(175)		(69)		(471)		(192)

Net income used in Earnings Per Share calculation	$	23,701	$	10,312	$	58,967	$	28,521


Basic and diluted weighted average common shares	21,981,201		16,916,675		20,293,818		16,943,130

Basic and diluted Earnings Per Share	$	1.08	$	0.61	$	2.91	$	1.68

See accompanying notes to unaudited condensed consolidated financial statements

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)


	Quarter Ended September 30,				Year to Date Ended September 30,
	2021		2020		2021		2020
Net income attributable to MGP Ingredients, Inc.	$	23,876	$	10,381	$	59,438	$	28,713
Other comprehensive income, net of tax:
Unrealized loss on foreign currency translation adjustment	(141)		—		(134)		—
Change in Company-sponsored post-employment benefit plan	(89)		74		(40)		89
Other comprehensive income (loss)	(230)		74		(174)		89

Comprehensive income attributable to MGP Ingredients, Inc.	23,646		10,455		59,264		28,802

Comprehensive loss attributable to noncontrolling interest	203		—		279		—
Comprehensive income	$	23,443	$	10,455	$	58,985	$	28,802

See accompanying notes to unaudited condensed consolidated financial statements

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) (Dollars in thousands)


	September 30, 2021		December 31, 2020
Current Assets
Cash and cash equivalents	$	16,162	$	21,662
Receivables (less allowance for credit losses, $150 and $24 at September 30, 2021, and December 31, 2020, respectively)	92,152		56,966
Inventory	239,312		141,011
Prepaid expenses	2,888		2,644
Refundable income taxes	1,382		—
Total current assets	351,896		222,283
Property, plant, and equipment	391,111		313,730
Less accumulated depreciation and amortization	(193,863)		(181,738)
Property, plant, and equipment, net	197,248		131,992
Operating lease right-of-use assets, net	8,436		5,151
Investment in joint ventures	5,334		—
Intangible assets, net	219,355		890
Goodwill	227,588		2,738
Other assets	7,611		3,521
Total assets	$	1,017,468	$	366,575
Current Liabilities
Current maturities of long-term debt	$	3,227	$	1,600
Accounts payable	37,004		30,273
Federal and state liquor taxes payable	6,498		107
Income taxes payable	—		704
Accrued expenses and other	39,737		20,645

Total current liabilities	86,466		53,329
Long-term debt, less current maturities	36,068		38,271
Credit agreement - revolver	208,382		—
Long-term operating lease liabilities	5,999		3,057


Other noncurrent liabilities	5,163		7,094
Deferred income taxes	60,479		2,298
Total liabilities	402,557		104,049
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 September 30, 2021 and 18,115,965 shares at December 31, 2020; and 21,963,574 and 16,915,862 shares outstanding at September 30, 2021 and December 31, 2020, respectively	6,715		6,715
Additional paid-in capital	315,543		15,503
Retained earnings	315,022		262,943
Accumulated other comprehensive income	312		486
Treasury stock, at cost, 1,161,592 and 1,200,103 shares at September 30, 2021 and December 31, 2020, respectively	(22,406)		(23,125)
Total MGP Ingredients, Inc. stockholders’ equity	615,190		262,526
Noncontrolling interest	(279)		—
Total equity	614,911		262,526
Total liabilities and equity	$	1,017,468	$	366,575

See accompanying notes to unaudited condensed consolidated financial statements

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Year to Date Ended September 30,
	2021		2020
Cash Flows from Operating Activities
Net income	$	59,159	$	28,713
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13,668		9,618

Gain on sale of assets	5		337
Share-based compensation	5,247		2,693
Deferred income taxes, including change in valuation allowance	465		460
Other, net	(236)		—
Changes in operating assets and liabilities, net of effects of acquisition:
Receivables, net	(5,593)		(11,683)
Inventory	(7,588)		(5,673)
Prepaid expenses	1,206		(2,032)
Income taxes payable	(2,086)		(673)
Accounts payable	(6,678)		2,057
Accrued expenses and other	15,859		5,647
Federal and state liquor taxes payable	(1,961)		139

Other, net	(682)		(146)
Net cash provided by operating activities	70,785		29,457

Cash Flows from Investing Activities
Additions to property, plant, and equipment	(37,257)		(13,507)

Purchase of business, net of cash acquired	(149,613)		(2,750)
Contributions to equity method investment	(988)		—
Proceeds from sale of property	—		688
Other, net	(1,308)		56
Net cash used in investing activities	(189,166)		(15,513)

Cash Flows from Financing Activities
Payment of dividends and dividend equivalents	(7,362)		(6,144)
Purchase of treasury stock	(767)		(4,395)
Loan fees paid related to borrowings	(666)		(1,148)

Principal payments on long-term debt	(813)		(300)
Proceeds from credit agreement - revolver	242,300		54,700
Payments on credit agreement - revolver	(32,300)		(40,000)
Payment on assumed debt as part of the Merger	(87,509)		—
Net cash provided by financing activities	112,883		2,713

Effect of exchange rate changes on cash	(2)		—
Increase (decrease) in cash and cash equivalents	(5,500)		16,657
Cash and cash equivalents, beginning of period	21,662		3,309
Cash and cash equivalents, end of period	$	16,162	$	19,966

See accompanying notes to unaudited condensed consolidated financial statements

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For Year to Date Ended September 30, 2021

(Unaudited) (Dollars in thousands)


	Capital Stock Preferred		Issued Common		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive income		Treasury Stock		Non-controlling Interest		Total
Balance, December 31, 2020	$	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	—		—		—		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
Comprehensive income:
Net income	—		—		—		23,876		—				(203)		23,673
Other comprehensive loss	—		—		—		—		(230)				—		(230)
Dividends and dividend equivalents of $0.12 per common share and per restricted stock unit, net of estimated forfeitures	—		—		—		(2,654)		—		—		—		(2,654)
Share-based compensation	—		—		480		—		—		—		—		480
Stock shares awarded, forfeited, or vested	—		—		(64)		—		—		64		—		—
Stock shares repurchased	—		—		—		—		—		(1)		—		(1)
Equity consideration for Merger	—		—		65		—		—		—		—		65
Balance, September 30, 2021	$	4	$	6,715	$	315,543	$	315,022	$	312	$	(22,406)	$	(279)	$	614,911

See accompanying notes to unaudited condensed consolidated financial statements

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For Year to Date Ended September 30, 2020

(Unaudited) (Dollars in thousands)


	Capital Stock Preferred		Issued Common		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total
Balance, December 31, 2019	$	4	$	6,715	$	14,029	$	230,784	$	(246)	$	(20,242)	$	231,044
Comprehensive income:
Net income	—		—		—		9,842		—		—		9,842
Other comprehensive loss	—		—		—		—		(6)		—		(6)
Dividends and dividend equivalents of $0.12 per common share and per restricted stock unit, net of estimated forfeitures	—		—		—		(2,059)		—		—		(2,059)
Share-based compensation	—		—		902		—		—		—		902
Stock shares awarded, forfeited or vested	—		—		(567)		—		—		804		237
Stock shares repurchased	—		—		—		—		—		(4,395)		(4,395)
Balance, March 31, 2020	4		6,715		14,364		238,567		(252)		(23,833)		235,565
Comprehensive income:
Net income	—		—		—		8,490		—		—		8,490
Other comprehensive income	—		—		—		—		21		—		21
Dividends and dividend equivalents of $0.12 per common share and per restricted stock unit, net of estimated forfeitures	—		—		—		(2,041)		—		—		(2,041)
Share-based compensation	—		—		662		—		—		—		662


Balance, June 30, 2020	4		6,715		15,026		245,016		(231)		(23,833)		242,697
Comprehensive income:
Net income	—		—		—		10,381		—		—		10,381
Other comprehensive income	—		—		—		—		74		—		74
Dividends and dividend equivalents of $0.12 per common share and per restricted stock unit, net of estimated forfeitures	—		—		—		(2,043)		—		—		(2,043)
Share-based compensation	—		—		258		—		—		—		258
Stock shares awarded, forfeited, or vested	—		—		—		—		—		634		634

Balance, September 30, 2020	$	4	$	6,715	$	15,284	$	253,354	$	(157)	$	(23,199)	$	252,001

See accompanying notes to unaudited condensed consolidated financial statements

MGP INGREDIENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, unless otherwise noted)

Note 1. Accounting Policies and Basis of Presentation

The Company. MGP Ingredients, Inc. (“the Company,” and “MGP”) is a Kansas corporation headquartered in Atchison, Kansas and is a leading producer and supplier of premium distilled spirits, branded spirits and food ingredients. Distilled spirits include premium bourbon and rye whiskeys and grain neutral spirits, including vodka and gin. Our distilled spirits are either packaged and sold under our own brands to distributors, sold, directly or indirectly, to manufacturers of other branded spirits, or direct to consumer. MGP is also a top producer of high quality industrial alcohol for use in both food and non-food applications. The Company’s protein and starch food ingredients provide a host of functional, nutritional, and sensory benefits for a wide range of food products to serve the packaged goods industry. Our industrial alcohol and ingredients products are sold directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries. The Company’s distillery products are derived from corn and other grains (including rye, barley, wheat, barley malt, and milo), and its ingredient products are derived, primarily, from wheat flour.

On April 1, 2021, the Company acquired Luxco, Inc. and its affiliated companies (“Luxco”, or “Luxco Companies”) which is a leading branded beverage alcohol company across various categories, with a more than 60-year business heritage. Luxco’s operations predominately involve the producing, importing, bottling and rectifying of distilled spirits. See Note 3, Business Combination, for further details.

As a result of the merger with Luxco, during the second quarter 2021, the Company established a new reportable segment structure that separates Branded Spirits from the Distillery Products segment. The Ingredient Solutions segment remains unchanged. The new segment presentation reflects how management is now operating the business and making resource allocations. The Company now reports three operating segments: Distillery Products, Branded Spirits and Ingredient Solutions. Certain amounts in the 2020 consolidated financial statements have been reclassified to conform to the 2021 presentation and prior periods have been revised to reflect the new operating segment structure.

Basis of Presentation and Principles of Consolidation. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements as of and for the quarter and year to date ended September 30, 2021, should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”). The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

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

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

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 COVID-19. 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. Bourbon 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:


	September 30, 2021		December 31, 2020
Finished goods	$	44,852	$	16,414
Barreled distillate (bourbons and whiskeys)	159,897		105,445
Raw materials	22,667		6,954
Work in process	985		1,805
Maintenance materials	9,401		8,634
Other	1,510		1,759
Total	$	239,312	$	141,011

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

Revenue is recognized for the sale of products at the point in time finished products are delivered to the customer in accordance with shipping terms. This is a faithful depiction of the satisfaction of the performance obligation because, at the point control passes to the customer, the customer has legal title and the risk and rewards of ownership have transferred, and the customer has present obligation to pay. For certain international customers, deposits are required in advance of shipment. These deposits are reported as contract liabilities until control passes to the customer and revenue is recognized.

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

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

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.

Recognition of Insurance Recoveries. Estimated loss contingencies are recognized as charges to income when they are probable and reasonably estimable. Insurance recoveries are not recognized until all contingencies related to the insurance claim have been resolved and settlement has been reached with the insurer. Insurance recoveries, to the extent of costs and losses, are reported as a reduction to costs on the Condensed Consolidated Statements of Income. Insurance recoveries, in excess of costs and losses, if any, would be reported as a separate caption in Operating income on the Condensed Consolidated

Statements of Income. Legally committed recovery amounts obtained prior to contingencies being resolved are recorded in Accrued expenses and other on the Condensed Consolidated Balance Sheets.

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 Share (“EPS”). Basic and diluted EPS are computed using the two-class method, which is an earnings allocation formula that determines net income per share for each class of Common Stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income attributable to common shareholders by the weighted average shares outstanding during each year during the period.

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 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 September 30, 2021, 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 $251,053 and $44,548 at September 30, 2021 and December 31, 2020, respectively. The financial statement carrying value of total debt was $247,677 (including unamortized loan fees) and $39,871 (including unamortized loan fees) at September 30, 2021 and December 31, 2020, 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.

Equity Method Investments. The condensed consolidated financial statements include the results of Luxco and its affiliated companies since April 1, 2021, when the Company obtained control through the Merger. 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. At September 30, 2021, the investment in LMX was $5,334, which is recorded in Investment in joint ventures on the Condensed Consolidated Balance Sheet. During the quarter and year to date ended September 30, 2021, the Company recorded a $405 and $739, respectively, loss from our equity method investments, which is recorded in Other income (loss), net on the Condensed Consolidated Statement of Income.

Recently Adopted Accounting Standard Updates. The Company did not adopt any new Accounting Standard Updates during the quarter ended September 30, 2021.

Note 2. Revenue

The Company generates revenues from the Distillery Products segment by the sale of products and by providing warehouse services related to the storage and aging of customer products. The Company generates revenues from the Branded Spirits and Ingredient Solutions segments by the sale of products. Revenue related to sales of products is recognized at a point in time whereas revenue generated from warehouse services is recognized over time. Contracts with customers include a single performance obligation (either the sale of products or the provision of warehouse services).

The following table presents the Company’s sales by segment and major products and services:


	Quarter Ended September 30,				Year to Date Ended September 30,
	2021		2020		2021		2020
Distillery Products
Brown goods	$	42,793	$	32,068	$	129,600	$	86,038
White goods	21,187		16,210		56,049		47,922
Premium beverage alcohol	63,980		48,278		185,649		133,960
Industrial alcohol	14,790		19,461		46,896		64,032
Food grade alcohol	78,770		67,739		232,545		197,992
Fuel grade alcohol	3,592		1,274		10,862		3,970
Distillers feed and related co-products	4,016		6,119		13,660		19,889
Warehouse services	4,666		4,041		12,949		11,641
Total Distillery Products	91,044		79,173		270,016		233,492

Branded Spirits
Ultra premium	13,118		2,365		23,692		3,049
Premium	6,310		72		12,692		243
Mid	17,107		—		34,894		—
Value	19,057		—		40,001		—
Other	5,969		12		11,278		29
Total Branded Spirits	61,561		2,449		122,557		3,321

Ingredient Solutions
Specialty wheat starches	12,231		11,604		35,051		30,938
Specialty wheat proteins	8,901		7,994		23,299		20,372
Commodity wheat starches	2,626		1,596		7,572		5,247
Commodity wheat proteins	248		148		1,378		1,236
Total Ingredient Solutions	24,006		21,342		67,300		57,793

Total sales	$	176,611	$	102,964	$	459,873	$	294,606

Note 3. Business Combination

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

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

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

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

The Merger was accounted for as a business combination in accordance with Financial Accounting Standards Board Accounting Standard Codification 805, Business Combinations (“ASC 805”), and as such, assets acquired, liabilities assumed, and consideration transferred were recorded at their estimated fair values on the acquisition date. The fair value of the assets acquired and liabilities assumed are based upon a preliminary assessment of fair value and may change as valuations for certain tangible assets, intangible assets and contingent liabilities are finalized and the associated income tax impacts are determined. The Company expects to finalize the purchase price allocation as soon as practicable, but no longer than one year from the acquisition date.

Purchase Price Allocation. The following table summarizes the preliminary allocation of the consideration paid for Luxco to the preliminary estimated fair value of the assets acquired and liabilities assumed at the acquisition date, with the excess recorded to goodwill.


Consideration:
Cash, net of assumed debt	$	150,092
Value of MGP Common Stock issued at close (a)	296,279
Fair value of total consideration transferred	$	446,371

Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash	$	479
Receivables	29,675
Inventory	90,854
Prepaid expenses	1,454
Property, plant and equipment, net	41,279
Investments in joint ventures	5,085
Intangible assets (b)	219,500
Other assets	4,257
Total assets	392,583
Current maturities of long-term debt (c)	87,509
Accounts payable	14,453
Federal and state liquor taxes payable	8,352
Accrued expenses and other	2,832
Other noncurrent liabilities	196
Deferred income taxes	57,720
Total liabilities	171,062
Goodwill	224,850
Total	$	446,371

(a) The Company issued 5,007,833 shares of MGP Common Stock which was valued at $59.15 per share on April 1, 2021. In September 2021, the parties finalized the purchase price adjustments which increased stock consideration by an additional 1,373 shares from the preliminary amounts that were paid at closing.

(b) Intangible assets acquired includes trade names with an estimated fair value of $178,100 and distributor relationships with an estimated fair value of $41,400.

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

Goodwill of $224,850 represents the excess of the consideration transferred over the estimated fair value of assets acquired net of liabilities assumed. No Goodwill is expected to be deductible for tax purposes. The Intangible assets acquired includes indefinite-lived intangible assets, trade names, with an estimated fair value of $178,100 and definite-lived intangible assets, distributor relationships, with an estimated fair value of $41,400 and a useful life of 20 years. The trade names and distributor relationships acquired by the Company have been adjusted to the estimated fair values using the relief from royalty method and multi-period earnings method, respectively. Management and a third party valuation team performed a preliminarily valuation analysis to determine the fair value of each trade name and distributor relationship.

Operating Results. The operating results of Luxco were consolidated with the Company’s operating results subsequent to the merger date. During the quarter and year to date ended September 30, 2021, the Company recorded $59,057 and $118,355, respectively, of Sales and $6,038 and $12,559, respectively, of Income before income taxes, attributable to Luxco on it’s Condensed Consolidated Statement of Income. During the quarter and year to date ended September 30, 2021, the Company has incurred $294 and $8,922, respectively, of transaction related costs, which are included in Selling, general and administrative expenses on the Condensed Consolidated Statements of Income.

Pro Forma Information. The following table summarizes the unaudited pro forma financial results for the quarter and year to date ended September 30, 2021 and 2020, as if the Merger had occurred on January 1, 2020:


	Pro Forma Financial Information
	Quarter Ended September 30,				Year to Date Ended September 30,
	2021		2020		2021		2020
Sales	$	176,611	$	152,090	$	504,243	$	441,984
Net income	23,673		14,479