mgpi-20220930

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, 2022

☐ 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.

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:

21,994,036 shares of Common Stock, no par value, as of October 28, 2022

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	35

	Item 4.	Controls and Procedures	35

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	36

	Item 1A.	Risk Factors	36

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

	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, 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.

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,
	2022		2021		2022		2021


Sales	$	201,146	$	176,611	$	591,363	$	459,873
Cost of sales	142,098		119,525		401,270		313,661
Gross profit	59,048		57,086		190,093		146,212
Advertising and promotion expenses	7,279		5,664		18,848		9,888
Selling, general and administrative expenses	17,904		18,527		52,029		55,266
Other operating (income) expense, net	1		11		(34)		11
Operating income	33,864		32,884		119,250		81,047
Interest expense, net	(1,350)		(1,116)		(4,491)		(2,708)
Other income (expense), net	(1,353)		(421)		(2,361)		(479)
Income before income taxes	31,161		31,347		112,398		77,860
Income tax expense	7,533		7,674		26,037		18,701
Net income	23,628		23,673		86,361		59,159
Net (income) loss attributable to noncontrolling interest	180		203		444		279
Net income attributable to MGP Ingredients, Inc.	23,808		23,876		86,805		59,438
Income attributable to participating securities	(188)		(175)		(688)		(471)

Net income used in Earnings Per Common Share calculation	$	23,620	$	23,701	$	86,117	$	58,967

Share information:
Basic weighted average common shares	22,008,381		21,981,201		22,000,026		20,293,818
Diluted weighted average common shares	22,228,814		21,981,201		22,000,026		20,293,818

Basic Earnings Per Common Share	$	1.07	$	1.08	$	3.91	$	2.91
Diluted Earnings Per Common Share	$	1.06	$	1.08	$	3.91	$	2.91

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,
	2022		2021		2022		2021
Net income attributable to MGP Ingredients, Inc.	$	23,808	$	23,876	$	86,805	$	59,438
Other comprehensive loss, net of tax:
Unrealized loss on foreign currency translation adjustment	(467)		(141)		(1,116)		(134)
Change in Company-sponsored post-employment benefit plan	(76)		(89)		(102)		(40)
Other comprehensive loss	(543)		(230)		(1,218)		(174)

Comprehensive income attributable to MGP Ingredients, Inc.	23,265		23,646		85,587		59,264

Comprehensive loss attributable to noncontrolling interest	(180)		(203)		(444)		(279)
Comprehensive income	$	23,085	$	23,443	$	85,143	$	58,985

See accompanying notes to unaudited condensed consolidated financial statements

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)


	September 30, 2022		December 31, 2021
Current Assets
Cash and cash equivalents	$	50,674	$	21,568
Receivables (less allowance for credit loss, $175 and $150 at September 30, 2022, and December 31, 2021, respectively)	107,653		92,537
Inventory	275,478		245,944
Prepaid expenses	5,833		1,510
Refundable income taxes	1,006		5,539
Total current assets	440,644		367,098
Property, plant, and equipment	430,945		404,149
Less accumulated depreciation and amortization	(210,254)		(196,863)
Property, plant, and equipment, net	220,691		207,286
Operating lease right-of-use assets, net	14,516		9,671
Investment in joint ventures	6,140		4,944
Intangible assets, net	217,285		218,838
Goodwill	226,294		226,294
Other assets	6,505		7,336
Total assets	$	1,132,075	$	1,041,467
Current Liabilities
Current maturities of long-term debt	$	4,800	$	3,227
Accounts payable	64,858		53,712
Federal and state excise taxes payable	4,713		6,992

Accrued expenses and other	26,420		24,869

Total current liabilities	100,791		88,800
Long-term debt, less current maturities	31,105		35,266
Convertible senior notes	195,146		194,906
Long-term operating lease liabilities	11,327		6,997


Other noncurrent liabilities	4,047		5,132
Deferred income taxes	65,799		66,101
Total liabilities	408,215		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 September 30, 2022 and December 31, 2021; and 21,993,355 and 21,964,314 shares outstanding at September 30, 2022 and December 31, 2021, respectively	6,715		6,715
Additional paid-in capital	317,541		315,802
Retained earnings	423,063		344,237
Accumulated other comprehensive income	(864)		354
Treasury stock, at cost, 1,131,811 and 1,160,852 shares at September 30, 2022 and December 31, 2021, respectively	(21,665)		(22,357)
Total MGP Ingredients, Inc. stockholders’ equity	724,794		644,755
Noncontrolling interest	(934)		(490)
Total equity	723,860		644,265
Total liabilities and equity	$	1,132,075	$	1,041,467

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,
	2022		2021
Cash Flows from Operating Activities
Net income	$	86,361	$	59,159
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	16,257		13,668


Share-based compensation	3,086		5,247

Deferred income taxes, including change in valuation allowance	(302)		465
Other, net	1,462		(231)
Changes in operating assets and liabilities, net of effects of acquisition:
Receivables, net	(15,582)		(5,593)
Inventory	(30,599)		(7,588)
Prepaid expenses	1,165		1,206
Refundable income taxes	(1,006)		(2,086)
Accounts payable	12,613		(6,678)
Accrued expenses and other	1,220		15,859
Federal and state excise taxes payable	(2,279)		(1,961)

Other, net	(143)		(682)
Net cash provided by operating activities	72,253		70,785

Cash Flows from Investing Activities
Additions to property, plant, and equipment	(29,217)		(37,257)

Purchase of business, net of cash acquired	—		(149,613)
Contributions to equity method investment	(2,232)		(988)

Other, net	(315)		(1,308)
Net cash used in investing activities	(31,764)		(189,166)

Cash Flows from Financing Activities
Payment of dividends and dividend equivalents	(7,984)		(7,362)
Purchase of treasury stock	(714)		(767)
Loan fees paid related to borrowings	—		(666)

Principal payments on long-term debt	(2,603)		(813)
Proceeds from credit agreement - revolver	—		242,300
Payments on credit agreement - revolver	—		(32,300)
Payment on assumed debt as part of the Merger	—		(87,509)
Net cash provided by (used in) financing activities	(11,301)		112,883

Effect of exchange rate changes on cash	(82)		(2)
Increase (decrease) in cash and cash equivalents	29,106		(5,500)
Cash and cash equivalents, beginning of period	21,568		21,662
Cash and cash equivalents, end of period	$	50,674	$	16,162

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, 2022

(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, 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
Comprehensive income:
Net income (loss)	—		—		—		23,808		—				(180)		23,628
Other comprehensive loss	—		—		—		—		(543)				—		(543)
Dividends and dividend equivalents of $0.12 per common share and per restricted stock unit, net of estimated forfeitures	—		—		—		(2,660)		—		—		—		(2,660)
Share-based compensation	—		—		363		—		—		—		—		363
Stock shares awarded, forfeited, or vested	—		—		(62)		—		—		62		—		—
Stock shares repurchased	—		—		—		—		—		(1)		—		(1)

Balance, September 30, 2022	$	4	$	6,715	$	317,541	$	423,063	$	(864)	$	(21,665)	$	(934)	$	723,860

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 (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
Comprehensive income:
Net income (loss)	—		—		—		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.

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 September 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 a 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.

Immaterial Correction to Prior Period Financial Statements. During the year to date ended September 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 was 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. Inventory consists of the following:


	September 30, 2022		December 31, 2021
Finished goods	$	49,008	$	35,362
Barreled distillate (bourbons and whiskeys)	185,681		174,080
Raw materials	27,496		24,981
Work in process	1,581		1,261
Maintenance materials	10,020		9,179
Other	1,692		1,081
Total	$	275,478	$	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.

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 September 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.

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 $178,062 and $272,971 at September 30, 2022 and December 31, 2021, respectively. The financial statement carrying value of total debt was $231,051 (including unamortized loan fees) and $233,399 (including unamortized loan fees) at September 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 to 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 $6,140 and $4,944 at September 30, 2022 and December 31, 2021, respectively. During the quarter ended September 30, 2022 and 2021, the Company recorded a loss of $856 and $405 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 September 30, 2022 and 2021, the Company recorded a loss of $1,036 and $739 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 September 30, 2022, the Company purchased $8,265 and $28,194, respectively, of bulk beverage alcohol from LMX, and during the quarter and year to date ended September 30, 2021, the Company purchased $8,052 and $19,724, respectively, 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 September 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).

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,
	2022		2021		2022		2021
Distilling Solutions
Brown goods	$	57,423	$	42,793	$	175,899	$	129,600
White goods	20,469		21,187		57,996		56,049
Premium beverage alcohol	77,892		63,980		233,895		185,649
Industrial alcohol	10,761		14,790		35,141		46,896
Food grade alcohol	88,653		78,770		269,036		232,545
Fuel grade alcohol	3,713		3,592		10,307		10,862
Distillers feed and related co-products	9,943		4,016		30,127		13,660
Warehouse services	6,335		4,666		17,821		12,949
Total Distilling Solutions	108,644		91,044		327,291		270,016

Branded Spirits
Ultra premium	13,804		11,363		35,836		19,491
Super premium	3,350		2,798		9,522		6,393
Premium	6,013		5,683		17,928		11,012
Mid	20,834		22,992		63,408		48,399
Value	12,097		12,756		36,304		25,984
Other	6,663		5,969		14,080		11,278
Total Branded Spirits	62,761		61,561		177,078		122,557

Ingredient Solutions
Specialty wheat starches	16,241		12,231		47,445		35,051
Specialty wheat proteins	9,697		8,901		29,225		23,299
Commodity wheat starches	3,803		2,626		10,286		7,572
Commodity wheat proteins	—		248		38		1,378
Total Ingredient Solutions	29,741		24,006		86,994		67,300

Total sales	$	201,146	$	176,611	$	591,363	$	459,873

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.

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
Receivables