MGP INGREDIENTS INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in thousands, unless otherwise noted) CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS This Report may contain forward-looking statements as well as historical information. All statements, other than statements of historical facts, regarding the prospects of our industries and our prospects, plans, financial position, mission, and strategy may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation statements about our source of cash being adequate; our ability to support our liquidity and operating needs through cash generated from operations and borrowings; and our capital expenditures. Forward looking statements are usually identified by or are associated with such words as “intend,” “plan,” “believe,” “estimate,” “expect,” “anticipate,” “project,” “forecast,” “hopeful,” “should,” “may,” “will,” “could,” “encouraged,” “opportunities,” “potential,” and similar terminology. These forward-looking statements reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, our performance, our financial results, and our financial condition and are not guarantees of future performance. All forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially. For information on these risks and uncertainties and other factors that could affect the Company’s business, see the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our Annual Report on Form 10-K for the year ended December 31, 2025, this Report, and our other filings with the Securities and Exchange Commission (the “SEC”). Forward looking statements in this Report are made as of the date of this Report, and we undertake no obligation to update any forward-looking statements or information made in this Report, except as required by law. OVERVIEW MGP is a leading producer of branded and distilled spirits as well as food ingredient solutions. We have an extensive award-winning global portfolio of branded spirits, which we produce through our distilleries and bottling facilities and sell to distributors. Our branded spirits products account for a range of price points from value products through premium plus brands. Distilled spirits include premium bourbon, rye, and other whiskeys (“brown goods”) and grain neutral spirits (“GNS”), including vodka and gin. Our distilled spirits are either sold directly or indirectly to manufacturers of other branded spirits. Our protein and starch food ingredients are predominately wheat based and provide a host of functional, nutritional, and sensory benefits for a wide range of food products to serve the consumer packaged goods industry. Our ingredient products are sold directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this Report, as well as our audited consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - General,” set forth in our Annual Report on Form 10-K for the year ended December 31, 2025. 20 RESULTS OF OPERATIONS Consolidated Results The table below details the consolidated results for the quarters ended March 31, 2026 and 2025: Quarter Ended March 31, 2026 2025 2026 v. 2025 Sales $ 106,427 $ 121,653 (13) % Cost of sales 72,845 78,323 (7) Gross profit 33,582 43,330 (22) Gross margin % 31.6 % 35.6 % (4.0) pp (a) Advertising and promotion expenses 6,191 8,172 (24) Selling, general, and administrative (“SG&A”) expenses 21,066 21,205 (1) Goodwill and other long-lived assets impairment 179,526 — N/A Change in fair value of contingent consideration — 14,700 N/A Operating loss (173,201) (747) (23,086) Operating margin % (162.7) % (0.6) % (162.1) pp Interest expense, net (1,421) (1,854) (23) Other income (expense), net (50) 215 (123) Loss before income taxes (174,672) (2,386) (7,221) Income tax expense (benefit) (39,865) 671 (6,041) Effective tax expense rate % 22.8 % (28.1) % 50.9 pp Net loss $ (134,807) $ (3,057) (4,310) % Net income margin % (126.7) % (2.5) % (124.2) pp (a) Percentage points (“pp”). Sales - Sales for the quarter ended March 31, 2026 were $106,427, a decrease of 13 percent compared to the year-ago quarter, which was the result of decreased sales in the Distilling Solutions and Branded Spirits segments, partially offset by increased sales in the Ingredient Solutions segment. Within the Distilling Solutions segment, sales were down 40 percent primarily due to decreased sales of brown goods. Within the Branded Spirits segment, sales were down 8 percent primarily due to decreased sales volume of our private label bottled products within the other category. Within the Ingredient Solutions segment, sales were up 29 percent, primarily due to increased sales of specialty wheat proteins and starches (see “Segment Results”). Gross profit - Gross profit for the quarter ended March 31, 2026 was $33,582, a decrease of 22 percent compared to the year-ago quarter. The decrease was driven by decreased gross profit in the Distilling Solutions and Branded Spirits segments, partially offset by increased gross profit in the Ingredient Solutions segment. Within the Distilling Solutions segment, gross profit decreased by $10,055, or 54 percent. Within the Branded Spirits segment, gross profit decreased $1,062, or 5 percent. Within the Ingredient Solutions segment, gross profit increased by $1,369, or 56 percent (see “Segment Results”). Advertising and promotion expenses - Advertising and promotion expenses for the quarter ended March 31, 2026 were $6,191, a decrease of 24 percent compared to the year-ago quarter, primarily driven by realignment of our advertising and promotion spend to brands we believe have the most attractive growth opportunities. SG&A expenses - SG&A expenses for the quarter ended March 31, 2026 were $21,066, a decrease of 1 percent compared to the year-ago quarter. 21 Operating income (loss) - Operating income for the quarter ended March 31, 2026 decreased to a loss of $173,201 from a loss of $747 for the quarter ended March 31, 2025, primarily due to the $179,526 goodwill and other long-lived assets impairment related to the Branded Spirits segment recorded during first quarter 2026. Additionally, contributing to the operating loss was a decrease in gross profit in the Distilling Solutions and Branded Spirits segments. These decreases were partially offset by an increase in gross profit in the Ingredient Solutions segment, decreases in advertising and promotion expenses and SG&A expenses as well as the change in fair value of contingent consideration. Operating income (loss), quarter versus quarter Operating Income Change Operating loss for the quarter ended March 31, 2025 $ (747) Decrease in gross profit - Distilling Solutions segment (a) (10,055) (1,346) % Decrease in gross profit - Branded Spirits segment (a) (1,062) (142) pp (b) Increase in gross profit - Ingredient Solutions segment (a) 1,369 183 pp Decrease in advertising and promotion expenses 1,981 265 pp Decrease in SG&A expenses 139 19 pp Increase in goodwill and other long-lived assets impairment (179,526) (24,033) pp Change in fair value of contingent consideration 14,700 1,968 pp Operating loss for the quarter ended March 31, 2026 $ (173,201) (23,086) % (a) See “Segment Results.” (b) Percentage points (“pp”). Income tax expense (benefit) - Income tax benefit for the quarter ended March 31, 2026 was $39,865, for an effective tax rate of 22.8 percent. Income tax expense for the quarter ended March 31, 2025 was $671, for an effective tax rate of (28.1) percent. The decrease in income tax expense, quarter versus quarter, was due primarily to lower income before income taxes. The increase in tax rate, quarter versus quarter, was primarily due to the tax impact of the goodwill and other long-lived assets impairment. Earnings per common share (“EPS”) - Basic and Diluted EPS was $(6.30) for the quarter ended March 31, 2026, compared to $(0.14) for the quarter ended March 31, 2025. The change in basic and diluted EPS, quarter versus quarter, was primarily due to a decrease in operating income. Change in EPS, quarter versus quarter EPS Change Basic and Diluted EPS for the quarter ended March 31, 2025 $ (0.14) Change in operating income (a) (10.24) (7,314) % Change in interest expense, net (a) 0.03 21 pp (b) Change in other income, net (a) (0.02) (14) pp Change in effective tax rate 4.06 2,900 pp Change in weighted average shares outstanding 0.01 7 pp Basic and Diluted EPS for the quarter ended March 31, 2026 $ (6.30) (4,400) % (a) Net of tax based on the effective tax rate for the base year (2025). (b) Percentage points (“pp”). 22 SEGMENT RESULTS Branded Spirits The following tables show selected financial information for the Branded Spirits segment for the quarters ended March 31, 2026 and 2025. BRANDED SPIRITS SALES Quarter Ended March 31, Quarter versus Quarter Sales Change Increase/(Decrease) 2026 2025 $ Change % Change Premium plus $ 22,651 $ 22,318 $ 333 1 % Mid 13,243 13,027 216 2 Value 6,503 7,341 (838) (11) Other 1,840 5,541 (3,701) (67) Total Branded Spirits $ 44,237 $ 48,227 $ (3,990) (8) % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Branded Spirits (8)% (7)% (1)% Other Financial Information Quarter Ended March 31, Quarter versus Quarter Increase / (Decrease) 2026 2025 $ Change % Change Gross profit $ 21,136 $ 22,198 $ (1,062) (5) % Gross margin % 47.8 % 46.0 % 1.8 pp (d) (a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars. (c) Net price/mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. The product is then divided by prior period sales dollars. (d) Percentage points (“pp”). Total sales of the Branded Spirits segment for the quarter ended March 31, 2026 decreased by $3,990, or 8 percent, compared to the prior year quarter, primarily due to a decrease in sales volume of our private label bottled products within the other category. Sales of brands within the value price tier decreased, driven by lower sales volume and net price/mix as we continued to optimize our offerings in these price tiers. These decreases were partially offset by increased sales volume in the premium plus price tier reflecting our continued focus on the American whiskey and tequila categories. Gross profit decreased versus the prior year quarter by $1,062, or 5 percent, primarily driven by lower sales volume of private label bottled products within the other category. Gross margin for the quarter ended March 31, 2026 increased to 47.8 percent from 46.0 percent for the prior year quarter, driven primarily by increased sales volume in the premium plus price tier. 23 Distilling Solutions The following tables show selected financial information for the Distilling Solutions segment for the quarters ended March 31, 2026 and 2025. DISTILLING SOLUTIONS SALES Quarter Ended March 31, Quarter versus Quarter Sales Change Increase/(Decrease) 2026 2025 $ Change % Change Brown goods $ 14,909 $ 33,656 $ (18,747) (56) % Warehouse services 8,292 8,077 215 3 White goods and other co-products 4,799 5,210 (411) (8) Total Distilling Solutions $ 28,000 $ 46,943 $ (18,943) (40) % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Brown goods (56)% (57)% 1% Other Financial Information Quarter Ended March 31, Quarter versus Quarter Increase / (Decrease) 2026 2025 $ Change % Change Gross profit $ 8,625 $ 18,680 $ (10,055) (54) % Gross margin % 30.8 % 39.8 % (9.0) pp (d) (a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars. (c) Net price/mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. The product is then divided by prior period sales dollars. (d) Percentage points (“pp”). Total sales of the Distilling Solutions segment for the quarter ended March 31, 2026 decreased by $18,943, or 40 percent, compared to the prior year quarter, primarily driven by lower brown goods sales. Brown goods sales volume decreased due to reduced customer demand resulting primarily from continued elevated industry-wide barrel inventory levels. This decrease was partially offset by an increase in net price/mix of brown goods compared to the prior year quarter. Gross profit decreased versus the prior year quarter by $10,055, or 54 percent, primarily due to lower brown goods sales volume and decreased gross profit of white goods and other co-products. Gross margin for the quarter ended March 31, 2026 decreased to 30.8 percent from 39.8 percent for the prior year quarter primarily due to lower brown goods sales. 24 Ingredient Solutions The following tables show selected financial information for the Ingredient Solutions segment for the quarters ended March 31, 2026 and 2025. INGREDIENT SOLUTIONS SALES Quarter Ended March 31, Quarter versus Quarter Sales Change Increase / (Decrease) 2026 2025 $ Change % Change Specialty wheat starches $ 18,416 $ 15,853 $ 2,563 16 % Specialty wheat proteins 12,708 7,348 5,360 73 Commodity wheat starches 2,617 2,719 (102) (4) Commodity wheat proteins 383 563 (180) (32) Biofuel and other 66 — 66 N/A Total Ingredient Solutions $ 34,190 $ 26,483 $ 7,707 29 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions 29% 17% 12% Other Financial Information Quarter Ended March 31, Quarter versus Quarter Increase / (Decrease) 2026 2025 $ Change % Change Gross profit $ 3,821 $ 2,452 $ 1,369 56 % Gross margin % 11.2 % 9.3 % 1.9 pp (d) (a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars. (c) Net price/mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. The product is then divided by prior period sales dollars. (d) Percentage points (“pp”). Total sales of the Ingredient Solutions segment for the quarter ended March 31, 2026 increased by $7,707, or 29 percent, compared to the prior year quarter. The increase was primarily driven by increased sales volume and net price/mix of specialty wheat proteins and starches due to cycling against the supply challenges resulting from adverse weather during the prior year quarter, complexities associated with the closure of the Atchison distillery, as well as cycling against the timing of commercialization of new customers during the prior year quarter. Gross profit increased versus the prior year quarter by $1,369, or 56 percent. Gross margin for the quarter ended March 31, 2026 increased to 11.2 percent from 9.3 percent for the prior year quarter. The increase in gross profit was primarily driven by an increase in net price/mix and volume of specialty wheat proteins and starches. This increase was partially offset by higher costs associated with the disposal of waste starch streams. 25 CASH FLOW, FINANCIAL CONDITION, AND LIQUIDITY Our primary sources of liquidity have been cash flow from operating activities and borrowings through our Credit Agreement, Convertible Senior Notes and Note Purchase Agreement (see Note 4, Corporate Borrowings). These sources of cash are used to fund our operating needs, capital expenditures, stockholder dividends and other discretionary uses. We continue to monitor market conditions which may create credit and economic challenges that could adversely impact our cash flow from operating activities and cash provided by borrowings. Our overall liquidity reflects our effective cash management strategy that takes into account liquidity management, economic factors, and tax considerations. We expect our sources of cash to be adequate to provide for budgeted capital expenditures, potential mergers or acquisitions, and anticipated operating requirements for the next 12 months and beyond. Our principal uses of cash in the ordinary course of business are for input costs used in our production processes, salaries, and investments supporting our strategic plan, such as capital expenditures, the aging of barreled distillate primarily to support our branded spirits segment, and potential mergers or acquisitions. Generally, during periods when commodity prices are rising, our operations require increased use of cash to support inventory levels. At March 31, 2026, our current assets exceeded our current liabilities by $321,058, largely due to our inventories, at cost, of $403,107. At March 31, 2026, our cash balance was $10,357 and we have used our various debt agreements for liquidity purposes, with $464,000 available under our credit agreement for additional borrowings and $234,800 available under the Note Purchase Agreement (see Note 4, Corporate Borrowings). Under these agreements (including the Credit Agreement amendment and the Note Purchase Agreement amendment we entered into on February 20, 2026), we must meet certain financial covenants and restrictions, and at March 31, 2026, we met those covenants and restrictions. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations and borrowings under our various debt agreements. We expect some holders of the Convertible Senior Notes to require the Company to repurchase the Convertible Senior Notes during the fourth quarter of 2026. We have sufficient availability to repurchase the Convertible Senior Notes under our Credit Agreement, Note purchase Agreement, new financing instruments, or a combination thereof. Additionally, in accordance with the terms of the agreement, we paid out the full contingent consideration related to the Penelope acquisition on April 28, 2026. We utilize short-term and long-term debt to fund discretionary items, such as capital investments, dividend payments, share repurchases, as well as potential mergers or acquisitions. Subject to market conditions, we could also fund future mergers and acquisitions through the issuance of additional shares of Common Stock or preferred stock. Cash Flow Summary Quarter to Date Ended March 31, Changes, year versus year Increase / (Decrease) 2026 2025 Net cash provided by operating activities $ 6,955 $ 44,684 $ (37,729) Net cash used in investing activities (3,773) (19,926) 16,153 Net cash used in financing activities (11,084) (30,213) 19,129 Effect of exchange rate changes on cash (201) 294 (495) Decrease in cash and cash equivalents $ (8,103) $ (5,161) $ (2,942) Cash decreased $8,103 for the quarter ended March 31, 2026, compared to a decrease of $5,161 for the quarter ended March 31, 2025, for a net decrease in cash of $2,942, period versus period. Operating Activities. Cash provided by operating activities for the quarter ended March 31, 2026 was $6,955. The cash provided by operating activities resulted primarily from net loss of $134,807, adjustments for non-cash or non-operating charges of $143,619, including goodwill and other long-lived assets impairment, depreciation and amortization, and share-based compensation and cash used in operating assets and liabilities of $1,857. The primary drivers of the changes in operating assets and liabilities were $29,441 of cash provided by decreased accounts receivables, net, due to timing of customer payments and lower sales during the quarter. This was partially offset by $20,299 use of cash related to an increase in inventories, primarily due to an increase in barreled distillate, and $6,792 use of cash related accrued expenses and other primarily related to an incentive compensation payout during the quarter. 26 Cash provided by operating activities for the quarter ended March 31, 2025 was $44,684. The cash provided by operating activities resulted primarily from cash provided by operating assets and liabilities of $26,611, adjustments for non-cash or non-operating charges of $21,130, including changes in fair value of contingent consideration, depreciation and amortization, and share-based compensation, partially offset by a net loss of $3,057. The primary drivers of the changes in operating assets and liabilities were $40,594 of cash provided by decreased accounts receivables, net, due to the timing of customer payments and lower sales during the quarter, this was partially offset by $13,439 use of cash related to an increase in inventories, primarily due to an increase in barreled distillate. Investing Activities. Cash used in investing activities for the quarter ended March 31, 2026 was $3,773, which resulted primarily from additions to property, plant, and equipment of $5,722 (see “Capital Spending”), partially offset by distributions from equity method investments of $1,500. Cash used in investing activities for the quarter ended March 31, 2025 was $19,926, which resulted from additions to property, plant, and equipment (see “Capital Spending”). Capital Spending. We manage capital spending to support our business growth plans. We have incurred $2,003 and $8,094 of capital expenditures and have paid $5,722 and $19,926 for capital expenditures for the years to date ended March 31, 2026 and 2025, respectively. The difference between the amount of capital expenditures incurred and amount paid is due to the change in capital expenditures in accounts payable. We expect to incur approximately $20,000 in capital expenditures in 2026, which we expect to use for facility improvement and facility sustenance projects, and environmental health and safety projects. Financing Activities. Cash used in financing activities for the quarter ended March 31, 2026 was $11,084, due to net payments on debt of $7,600 (see “Long-Term and Short-Term Debt”), payments of dividends and dividend equivalents of $2,598 (see “Dividends and Dividend Equivalents”), and repurchases of Common Stock of $886 (see “Treasury Purchases” and “Share Repurchases”). Cash used in financing activities for the quarter ended March 31, 2025 was $30,213, due to net payments on debt of $26,600 (see “Long-Term and Short-Term Debt”), payments of dividends and dividend equivalents of $2,578 (see “Dividends and Dividend Equivalents”), and repurchases of Common Stock of $1,035 (see “Treasury Purchases” and “Share Repurchases”). Treasury Purchases. 107,631 RSUs vested and converted to shares of Common Stock for employees during the quarter ended March 31, 2026, of which we withheld and purchased for treasury 34,415 shares valued at $886 to cover payment of associated withholding taxes. 105,776 RSUs vested and converted to shares of Common Stock for employees during the quarter ended March 31, 2025, of which we withheld and purchased for treasury 31,631 shares valued at $1,035 to cover payment of associated withholding taxes. Share Repurchases. On February 29, 2024, we announced that our Board of Directors approved a $100,000 share repurchase program. Under the share repurchase program, we can repurchase stock from time to time for cash in open market purchases, privately negotiated transactions, or by other means, in accordance with applicable securities laws and other legal requirements. The repurchase program has no expiration date and may be modified, suspended, or discontinued at any time by the Company without prior notice. During the quarter ended March 31, 2026 and 2025 we did not repurchase any shares of Common Stock under the share repurchase program. As of March 31, 2026, there was approximately $53,412 remaining under the share repurchase program. Dividends and Dividend Equivalents Dividend and Dividend Equivalent Information (per Share and Unit) Declaration date Record date Payment date Declared (a) Paid (a) Dividend payment Dividend equivalent payment (b) Total payment 2026 February 25, 2026 March 13, 2026 March 27, 2026 $ 0.12 $ 0.12 $ 2,564 $ 34 $ 2,598 2025 February 26, 2025 March 14, 2025 March 28, 2025 $ 0.12 $ 0.12 $ 2,553 $ 25 $ 2,578 (a) Per share amount. (b) Dividend equivalent payments on unvested participating securities. 27 On April 29, 2026, we announced a dividend payable to stockholders of record of our Common Stock, resulting in dividend equivalents payable to certain RSU holders, of $0.12 per share and per RSU. The dividend and dividend equivalents are payable on May 29, 2026 to stockholders of record and certain RSU holders as of May 15, 2026. Long-Term and Short-Term Debt. We maintain debt levels we consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment and financing plans (including brand development, merger and acquisition, Board-approved dividends, and share repurchase activities), and the overall cost of capital. Total debt was $244,958 (net of unamortized loan fees of $7,492) at March 31, 2026, and $252,318 (net of unamortized loan fees of $7,732) at December 31, 2025. We had net payments on debt of $7,600 and $26,600 for quarter ended March 31, 2026 and 2025, respectively.