What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-25 compared with 2020-02-26 · 175 added, 164 removed, 303 unchanged (53% of the section changed)

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Forward looking statements are made as of the date of this report, and we undertake no obligation to update or revise publicly any forward looking statements, whether because of new information, future events or otherwise.

Recent Developments

Acquisition of Luxco.

On January 22, 2021, we entered into a definitive agreement to acquire Luxco, Inc., and its affiliated companies ("Luxco").

Luxco is a leading branded beverage alcohol company across various categories, with a more than 60-year business heritage.

As a result of the Luxco acquisition, we expect to increase our scale and market position in the branded-spirits sector and strengthen its platform for future growth of higher valued-added products.

Under the terms of the agreement, Luxco shareholders will receive $237,500 in cash (less assumed indebtedness) and 5,007,833 shares of MGP Common Stock.

The purchase price is subject to customary purchase price adjustments, including working capital, which adjustments are anticipated to be paid in cash.

The transaction is anticipated to be completed during the first half of 2021, subject to regulatory approvals and customary closing conditions (See Part I, Item 1A - Risk Factors and Note 15 for additional information).

Feed Dryer Fire.

During November 2020, we experienced a fire at the Atchison facility.

The fire damaged certain equipment in the facility's feed drying operations and caused temporary loss of production time.

We estimate that the incident adversely impacted gross profit by $4,461, which includes $3,780 for business interruption and $681 related to the impairment of spare parts and other inventory.

The business interruption impacted Sales and Cost of sales on the Consolidated Statements of Income.

The impairment of spare parts and other inventory is recorded in Cost of sales on the Consolidated Statements of Income for the year ended December 31, 2020.

Additionally, we incurred $486 in losses from the write off of property, plant and equipment, which was recorded as a component of Operating income on the Consolidated Statements of Income for the year ended December 31, 2020.

During December 2020, we recorded a $3,780 partial settlement from our insurance carrier as a reduction of Cost of sales.

We are working to construct a replacement drying system.

Ransomware Cyber-Attack.

In May 2020, we were affected by a ransomware cyber-attack that temporarily disrupted production at our Atchison facilities.

Our financial information was not affected and there is no evidence that any sensitive or confidential company, supplier, customer or employee data was improperly accessed or extracted from our network.

We estimate that the ransomware attack adversely impacted gross profit by $1,728, primarily as a result of the business interruption.

We have insurance related to this event and partially recovered $633 in December 2020 as reduction of Cost of sales.

We are currently seeking further recovery related to this event.

Following the attack, we implemented a variety of measures to further enhance our cybersecurity protections and minimize the impact of any future attack.

On March 11, 2020, the World Health Organization classified the novel strain of coronavirus ("COVID-19") a global pandemic.

Our business is part of the United States' critical infrastructure and thus is deemed to be an "essential business." As such, we are taking necessary and appropriate actions to protect our workforce as we continue our critical operations.

We have created a COVID-19 cross functional team to implement a business continuity plan and address key aspects of COVID-19 as it affects our business, including enhanced workplace safety, supply chain monitoring, and other potential operational challenges the Company could face.

We have continued to operate without any significant negative impacts;

however this could be affected by voluntary or mandatory temporary closures of our facilities, interruptions to our supply chain or additional efforts to protect the health and safety of our employees.

As of the date of this report, our operations, supply chain and customer demand have not been significantly affected by COVID-19;

however, we are monitoring the situation closely.

We have implemented social distancing at each of our facilities, provide health screenings and monitoring for employees, implemented work-from-home policies where we are able, and have restricted travel across the organization.

We have incurred incremental costs for hourly wage bonuses to our production

employees, supplies to implement health screenings, an extended sick leave policy, and additional IT-related expenses to enable employees to work-from-home.

As of December 31, 2020, such incremental costs have been immaterial to the our consolidated financial statements.

We cannot reasonably estimate the length of time or severity of the pandemic.

See Risk Factors for future discussion of the potential adverse impacts of the COVID-19 pandemic on our business.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis ("MD&A") of Financial Condition and Results of Operations is designed to provide a reader of MGP’s consolidated financial statements with a narrative from the perspective of management.

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We focus on maximizing the value of our current production volumes, particularly taking advantage of favorable macro trends in our Distillery Products segment, such as the growth of the American whiskey category that has continued to expand over the past several years.

This includes shifting sales mix to higher margin products, such as premium

bourbon and rye whiskeys, as well as extending the product range of our GNS, including vodkas and gins.

This includes shifting sales mix to higher margin products, such as premium bourbon and rye whiskeys, as well as extending the product range of our GNS, including vodkas and gins.

In our Ingredient Solutions segment, the macro trends include growth in high fiber, high protein, plant-based proteins, and non-GMO products.

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• In our Distillery Products segment, our focus on attracting and developing customers for our premium beverage alcohol continued in 2020.

Some efforts included increases in sales force, including adding an additional sales manager to the international beverage alcohol team, and providing more tailored product offerings to our craft customers.

As a result, we were able to add new customers throughout the year.

Some efforts included increases in sales force and providing more tailored product offerings to our craft customers.

Despite the uncertainty related to the pandemic, we were able to add new customers throughout the year.

Our partnerships with new and existing customers helped drive double digit sales growth for our brown goods during 2020.

Distillery Products segment sales for 2020 increased 6.8 percent over the prior year.

• In our Ingredient Solutions segment, we continue to provide outstanding customer solutions, taking advantage of our positioning within growing consumer trends.

We further developed our pipeline of wheat-based protein products to support strong customer growth.

Our sales of specialty wheat proteins grew 6.0 percent in 2019, and we continued to grow our specialty wheat starch sales in 2019.

The FDA approved our Fibersym ® RW and FiberRite ® RW specialty wheat starches as dietary fiber, which removed a major barrier to the growth for this product line.

In April 2020, we launched our Proterra ® line of textured proteins.

Our sales of specialty wheat starches grew 35.1 percent and our sales of specialty wheat proteins grew 20.6 percent in 2020.

Ingredient Solutions segment sales for 2020 increased 19.2 percent over the prior year.

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Accomplishments

• During 2019, we announced our distribution partnership in Texas for the introduction of TILL American Wheat Vodka ® , George Remus ® Straight Bourbon Whiskey, Remus Repeal Reserve ® Straight Bourbon Whiskey, Rossville Union ® Straight Rye Whiskey and Eight & Sand Blended Bourbon Whiskey.

Additionally in October 2019, we announced partnerships with distributors in Connecticut, Maryland and the District of Columbia for the introduction of some of our brands, as we continue to expand into new markets.

• In February 2019, we launched Eight & Sand Blended Bourbon Whiskey.

Eight & Sand Blended Bourbon Whiskey celebrates the timeless journey of the American railway with a classic tribute whiskey crafted by our team in Lawrenceburg.

• In August 2019, we launched Rossville Union Barrel Select.

The Rossville Union Barrel Select program allows retail customers to custom blend their own Rossville Union Rye offering.

Rossville Union Barrel Select Rye comes with individually numbered bottles, each account's logo included on a specialty side label, a custom pewter label, and is bottled at 100-proof (50% ABV).

• In November 2019, we released the Remus Repeal Reserve Series III Straight Bourbon Whiskey.

Produced to commemorate Prohibition Repeal Day, Series III is a limited bottling showcasing a medley of two mash bills from 2007 and 2008.

• In November 2019, we released the Remus Volstead Reserve Straight Bourbon Whiskey, a one-time rare, 14 year-old bottled-in-bond reserve Bourbon.

The release coincides with the 100th anniversary of the start of Prohibition, under the Volstead Act.

• In January 2020, we launched our Single Barrel program for George Remus ® Straight Bourbon Whiskey and Rossville Union ® Straight Rye Whiskey.

• In September 2020, we released the Remus Repeal Reserve Series IV Straight Bourbon Whiskey.

Produced to commemorate Prohibition Repeal Day, Series IV is a limited annual release showcasing a medley of two mash bills from 2008.

• In March 2020, we acquired New Columbia Distllers, LLC, based in Washington, D.C.

New Columbia Distillers produces and markets Green Hat ® Gin and operates a distillery with a retail tasting room, bar and gin garden in Northeastern Washington, D.C.

• In October 2020, New Columbia Distillers was named one of the 10 Best Craft Gin Distillers by USA Today.

The top 10 winners were determined by popular vote, resulting in New Columbia Distillers placing fifth in the overall standings.

• The George Remus ® family of brands completed 2020 with significant growth, more than doubling both shipments and depletions.

Invest for Growth.

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• Select Inventories:

As demand grows for American whiskeys, in both the United States and global markets, we are building our inventories of aged premium whiskeys to fully participate in this growth.

As demand grows for American whiskeys, in both the United States and global markets, we continue to put away our inventories of aged premium whiskeys to fully participate in this growth.

This initiative helps us build strong partnerships and open new relationships with potential customers, in addition to supporting the development of our own brands.

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As needed to support our long-term growth objectives, resources and capabilities are being added, particularly in sales and marketing.

• Mergers and Acquisitions :

As we continue to invest in our long-term growth opportunities, we look for strategic acquisitions to strengthen our competitive position.

Accomplishments

• Regarding our Capital Expenditures growth strategy:

In 2019, we continued our warehouse expansion program as part of the implementation of our strategic plan to support the growth of the American whiskey category.

The program includes both the refurbishment of existing warehouse buildings and the construction of new warehouses.

We invested over $4,600 in this program in capital expenditures during 2019 and approximately $48,400 since the program’s inception.

In 2020, as part of the implementation of our strategic plan to support growth in the American whiskey category, we completed our current warehouse expansion program.

The program included both the refurbishment of existing warehouse buildings and the construction of new warehouses.

We invested approximately $1,500 of capital expenditures in this program during 2020 and approximately $49,900 since the program’s inception.

• Regarding our Select Inventories growth strategy:

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We continued to invest in people and programs to support the development of our brands initiative and our long-term growth objectives

• Regarding our Mergers and Acquisition growth strategy:

In March 2020, we acquired New Columbia Distllers, LLC, based in Washington, D.C.

New Columbia Distillers produces and markets Green Hat® Gin and operates a distillery with a retail tasting room, bar and gin garden in Northeastern Washington, D.C.

Operational Excellence.

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Accomplishments

• During 2019, we continued our implementation of the Safety Up program, including the launch of Safety Up at our Lawrenceburg facility.

Safety Up is supported by the motto , It starts with us, and focuses on employee engagement, awareness, and standardization to consistently keep on-the-job safety top of mind across all areas of the Company.

It is intended to move safety assurance into deeper and broader dimensions, giving each employee and teams of employees greater ability to act more swiftly on safety-related matters.

• In August 2019, attorney and environmental health and safety leader, Randy Simmons, joined the Company in the new role of corporate director of Environmental Health and Safety.

He will represent the Company with regulatory agencies and champion the employee-driven Safety Up program.

• In 2020, we completed a British Retail Consortium ("BRC") audit with outstanding results, again achieving a Grade AA rating for both our Atchison and Lawrenceburg facilities.

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The same is true with results of annual BRC audits that have been conducted at our Lawrenceburg facility since 2014.

For the Atchison facility’s protein and starch plant, 2019 marked the ninth time in as many years that it had scored the BRC’s highest rating.

• In 2019, we awarded our Master Distiller designation to four internal candidates and named two new Master Blenders.

Individuals are awarded the master designation after a robust certification process that includes education, experience, specialized training, and concludes with oral examinations by other masters and the completion of a dissertation.

The art and science of fermentation, distillation and blending are the foundation of the Company's distilled spirits business, and the addition of these individuals into the Masters rank ensures that MGP has the necessary talent to continue to create exceptional products.

For the Atchison facility’s protein and starch plant, 2020 marked the tenth time in as many years that it had scored the BRC’s highest rating.

• In September 2020, we were recognized by Union Pacific Railroad with a 2019 Pinnacle Award for our commitment to safely transporting chemical products.

The annual award honors select Union Pacific customers who implement release prevention protocols, corrective action plans and have zero non-accident releases of regulated hazardous materials shipments.

Build the MGP Brand.

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Accomplishments

• In February 2019, MGP Ingredients family lost our longtime leader and former Chairman Cloud "Bud" Cray, Jr.

Cray helped envision and implement the Company's transformation from industrial alcohol production to the distillation of more profitable beverage alcohol, specifically vodka and gin.

Additionally, he was instrumental in the Company's successful entrance into the food ingredients business, producing specialty wheat proteins and starches.

Cray was a generous resident of our headquarters community of Atchison, Kansas, where he provided countless resources to help make Atchison a better place.

We continue our unbroken commitment to support our communities to honor his legacy.

• In May 2020, MGP's then Chief Executive Officer ("CEO") Gus Griffin retired from the Company and the Company's Board of Directors.

Gus became CEO in July 2014 and under his leadership, the Company developed and successfully implemented a new long-term strategic plan that produced significant improvements in the Company's financial results, while also establishing a strong foundation for future growth.

The Board of Directors named David Colo as the new President and CEO upon Gus's retirement.

David has served on the MGP Board of Directors since 2015.

• In 2020, we continued our unbroken commitment to support our communities by providing strong financial support and donating time and leadership talent.

◦ During 2019, MGP collaborated with Farm Rescue, a nonprofit organization that provides practical assistance to help farmers and ranchers navigate crises such as natural disasters.

MGP donated dried distillers grain to the farming community, who were affected by devastating Midwest floods.

◦ In December 2019, we participated in our sixth year of the Boxes of Blessing program which was created by our longtime distributor partner, Ben C.

MGP and other local organizations distributed 1,000 boxes of food to our community in Atchison.

Each box contained nearly 45 pounds of non-perishable items, enough to feed a family of four for a week.

• During 2019, MGP elected two new Board of Directors, Lynn Jenkins and Kerry Walsh Skelly.

◦ Lynn Jenkins, former U.S.

Representative from Kansas, has 20 years experience in elected office assisting Kansas residents.

She represented Kansas' 2nd Congressional District in the U.S.

House of Representatives from 2009 until her retirement.

Jenkins, a Certified Public Accountant, contributed her financial expertise as a member of the House Financial Services Committee for two years and on the House Ways and Means Committee for eight years.

Prior to that, she held offices in the Kansas Senate and Kansas House of Representatives.

◦ Kerry Walsh Skelly held officer-level positions with Brown-Forman for more than 25 years until her retirement in 2018.

Her last role with the Brown-Forman was as a senior vice president of Corporate Affairs-EMEA (Europe-Middle East-Africa), beginning in 2011.

Her Brown-Forman career spanned countries and corporate functions including Corporate Administration, Human Resources, Marketing and Strategy.

In addition to founding the Brown-Forman's Government Relations function, she was responsible for corporate affairs across more than 50 markets.

◦ In April 2020, we helped support the COVID-19 relief efforts with both financial aid and other support to the United States Bartenders' Guild and the Restaurant Workers Community Foundation.

Working with these two partnerships, we assisted in providing assistance to the bar and restaurant community on the local and national level by providing financial aid and other resources for workers who were most impacted by COVID-19 as a result of restaurant and bar closures.

◦ During 2020, in response to the COVID-19 pandemic, we increased our production of industrial alcohol to support an exponential increase in demand for industrial alcohol, used in the production of hand sanitizers and commercial disinfectants.

Additionally, we launched our first ever hand sanitizer production for donations to front line workers in our communities.

• During 2020, MGP's shareholders elected a new member to its Board of Directors, Lori L.S.

She is the fourth generation of the founding Cray family to serve MGP and the Atchison community, where she is a trustee of the Evan C.

Cray Historical Museum and a board member of the Amelia Earhart Foundation.

She also serves on the board of the Cray Medical Research Organization at the University of Kansas Medical Center in Kansas City, Kansas.

RESULTS OF OPERATIONS

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Operating margin % 13.7 % 13.0 % 13.3 % 0.7 pp (0.3) pp

Gain on sale of equity method investment — — 11,381 N/A (100.0)

Equity method investment loss — — ( 348 ) N/A 100.0

Interest expense, net ( 1,305 ) ( 1,168 ) ( 1,184 ) 11.7 (1.4)

Interest expense, net and other (1,640) (1,305) (1,168) 25.7 11.7

Income before income taxes 52,601 45,937 48,980 14.5 (6.2)

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(a) Percentage points ("pp").

2020 to 2019 - Sales for 2020 were $395,521, an increase of 9.0 percent compared to 2019, which was the result of increased sales in both the Distillery Products and Ingredient Solutions segments.

Within the Distillery Products segment, sales were up 6.8 percent primarily due to an increase in sales of brown goods and white goods within premium beverage alcohol, warehouse services, and industrial alcohol.

Total Ingredient Solutions segment sales increased 19.2 percent due to increased sales of specialty wheat starches and proteins.

2019 to 2018 - Sales for 2019 were $362,745, a decrease of 3.5 percent compared to 2018, which was the result of decreased sales in the Distillery Products segment, partially offset by increased sales in the Ingredient Solutions segment.

Within the Distillery Products segment, sales were down 5.4 percent primarily due to a decrease in sales of brown goods within premium beverage alcohol, industrial alcohol and fuel grade alcohol, partially offset by an increase in sales of warehouse services, distillers feed and related co-products and white goods within premium beverage alcohol.

Total Ingredient Solutions segment sales increased 5.6 percent due to increased sales of specialty wheat starches and proteins, and commodity wheat starches, partially offset by decreased sales of commodity wheat proteins.

2018 to 2017 - Sales for 2018 were $ 376,089 , an increase of 8.2 percent compared to 2017, which was the result of increased sales in both segments.

Within the Distillery Solutions segment, sales were up 7.9 percent.

Driven by continued strong demand, sales of premium beverage alcohol products increased 5.9 percent.

Industrial alcohol product sales increased 5.2 percent, contributing to an overall food grade alcohol sales increase of 5.7 percent.

Sales of distillers feed and related co-products and warehouse services revenue both increased and the gains were partially offset by a small decline in the sales of fuel grade alcohol products.

Total Ingredient Solutions sales increased 9.9 percent.

This increase was driven by higher sales across all Ingredient Solutions product categories, with the largest increases in commodity wheat proteins and specialty wheat proteins.

Within the Distillery Solutions segment, sales were down 5.4 percent primarily due to a decrease in sales of brown goods within premium beverage alcohol, industrial alcohol and fuel grade alcohol, partially offset by an increase in sales of warehouse services, distillers feed and related co-products and white goods within premium beverage alcohol.

Total Ingredient Solutions sales increased 5.6 percent due to increased sales of specialty wheat starches and proteins, and commodity wheat starches, partially offset by decreased sales of commodity wheat proteins.

2020 to 2019 - Gross profit for 2020 was $98,806, an increase of 29.1 percent compared to 2019.

The increase was driven by an increase in gross profit in both segments.

The Distillery Products segment gross profit increased by $12,008, or 18.2 percent and the Ingredient Solutions segment gross profit increased by $10,266, or 97.0 percent.

2019 to 2018 - Gross profit for 2019 was $76,532, a decrease of 8.5 percent compared to 2018.

The decrease was driven by a decrease in gross profit in both segments.

The Distillery Products segment gross profit decreased by $5,841, or 8.1 percent and the Ingredient Solutions segment gross profit decreased by $1,226, or 10.4 percent.

2018 to 2017 - Gross profit for 2018 was $ 83,599 , an increase of 10.0 percent percent compared to 2017.

The increase was driven by an increase in gross profit in both segments.

In the Distillery Products segment, gross profit grew by $4,976, or 7.4 percent.

In the Ingredient Solutions segment, gross profit grew by $2,607, or 28.3 percent.

In the Distillery Products segment, gross profit decreased by $5,841, or 8.1 percent and the Ingredient Solutions segment gross profit decreased by $1,226, or 10.4 percent.

SG&A expenses

2019 to 2018 - SG&A expenses for 2019 were $ 29,290 , a decrease of 12.4 percent compared to 2018.

The decrease in SG&A was primarily due to lower incentive compensation expense, partially offset by increased costs related to legal matters discussed in Note 9 and investments to support our brands initiative (personnel costs).

2020 to 2019 - SG&A expenses for 2020 were $44,565, an increase of 52.2 percent compared to 2019.

The increase in SG&A was primarily due to investments to support our brands initiative (personnel costs and advertising and promotion).

The increase in SG&A was due primarily to higher personnel and incentive compensation expense, inclusive of certain incremental costs incurred relating to the transition at the CEO position.

Additionally, the increase was due to an increase related to advisory and other transaction costs.

2019 to 2018 - SG&A expenses for 2019 were $29,290, a decrease of 12.4 percent compared to 2018.

The decrease in SG&A was primarily due to lower incentive compensation expense, partially offset by increased costs related to legal matters and investments to support our brands initiative (personnel costs).

Operating income

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Operating income for 2018 $ 50,148

Increase in gross profit - Distillery Products segment (a)

4,976 11.6 pp (b)

Increase in gross profit - Ingredient Solutions segment (a)

Increase in SG&A expenses (344) (0.8) pp

Operating income for 2018 50,148 16.9 %

Decrease in gross profit - Distillery Products segment (a)

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Operating income for 2019 47,242 (5.8) %

Increase in gross profit - Distillery Products segment (a)

12,008 25.4 pp (b)

Increase in gross profit - Ingredient Solutions segment (a)

10,266 21.7 pp

Increase in SG&A expenses (15,275) (32.3) pp

Operating income for 2020 $ 54,241 14.8 %

(a) See segment discussion.

(b) Percentage points ("pp").

2020 to 2019 - Operating income for 2020 increased to $54,241 from $47,242 for 2019, due to increases in gross profit in both our Distillery Products and Ingredient Solutions segments.

These increases were partially offset by an increase in SG&A expenses.

2019 to 2018 - Operating income for 2019 decreased to $47,242 from $50,148 for 2018, due to gross profit declines in both our Distillery Products and Ingredient Solutions segments.

These decreases were partially offset by a decrease in SG&A expenses.

2018 to 2017 - Operating income for 2018 increased to $ 50,148 from $ 42,909 for 2017, due to gross profit growth in both our Distillery Products and Ingredient Solutions segments, partially offset by an increase in SG&A expenses.

Equity method investment

We had no equity method investment transactions for the years ended December 31, 2019 and 2018 (see Note 4 for additional information).

In 2017, we completed the sale of our 30 percent equity ownership interest in ICP to Pacific Ethanol, consistent with a Merger Agreement.

Our total transaction proceeds from the ICP sale transaction represented a return of our investment in ICP of $22,832 (net of fees and including additional dividends), which included a gain on sale of equity method investment of $11,381 (before tax) (see Note 4 for additional information).

Additionally, we recognized an equity method investment loss of $348 during 2017.

Income tax expense

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Income tax expense for 2019 was $7,144, for an effective tax rate for the year of 15.6 percent.

The principal reasons for the 8.3 percentage point decrease in the effective tax rate, year versus year, were an increase in the favorable tax impact of vested share-based awards (which may not continue in future years), a favorable tax impact related to the change in the Company's valuation allowance, higher tax credits, and a change in estimate in 2018 related to the 2017 sale of the Company's equity method investment that did not reoccur in 2019, partially offset by the tax impact of legal matters discussed in Note 9, and certain compensation being subject to the deduction limit applicable to public companies.

The 7.7 percentage point increase was primarily due to the favorable tax impact of vested share-based awards that occurred during 2019 .

2019 to 2018 - Income tax expense for 2019 was $7,144, for an effective tax rate for the year of 15.6 percent.

Income tax expense for 2018 was $11,696, for an effective tax rate for the year of 23.9 percent.

The principal reasons for the 3.2 percentage point increase in the effective tax rate, year versus year, are the tax impact caused by the re-measurement of our deferred tax assets and liabilities directly into income tax expense from continuing operations at December 31, 2017, the reduction in the tax impact of vested share-based awards , the loss of the Domestic Production Activities Deduction as required by the Tax Act, a change in estimate related to the sale of the Company’s equity ownership interest in ICP during 2017, an increase in the Company’s valuation allowance, and lower state income tax credits.

These effects were partially offset by the 14 percent rate reduction enacted by the Tax Act, and by the Company not being subject to certain compensation deduction limits as updated by the Tax Act and subsequent guidance issued by the Internal Revenue Service in 2018.

The principal reasons for the 8.3 percentage point decrease in the effective tax rate, year versus year, were an increase in the favorable tax impact of vested share-based awards (which may not continue in future years), a favorable tax impact related to the change in the Company's valuation allowance, higher tax credits, and a change in estimate in 2018 related to the 2017 sale of the Company's equity method investment that did not reoccur in 2019, partially offset by the tax impact of legal matters, and certain compensation being subject to the deduction limit applicable to public companies.

Basic and diluted EPS

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(0.15) (6.9) pp (b)

Gain on sale of equity method investment (Note 4) (c)

(0.44) (18.0) pp

Change in equity method investment earnings (a)

Change in income attributable to participating securities (d)

Change in weighted average shares outstanding (d)

Change in income attributable to participating securities (c)

Change in weighted average shares outstanding (c)

(0.03) (1.3) pp

Change in share-based compensation 0.12 5.5 pp

Effect of Tax Act on deferred tax attributes (e)

(0.19) (7.8) pp

Change in discrete items (excluding effect of Tax Act) (0.12) (4.9) pp

Change in effective tax rate (excluding tax items above) 0.37 15.1 pp

Change in discrete items 0.12 5.5 pp

Change in effective tax rate 0.02 0.9 pp

Basic and diluted EPS for 2019

$ 2.17 (11.1) %

Change in operating income (a)

0.41 18.1 pp (b)

Change in income attributable to participating securities (d)

Change in weighted average shares outstanding (d)

(0.03) (1.3) pp

Change in weighted average shares outstanding:

share repurchase program (c)

Change in weighted average shares outstanding:

withholding taxes (c)

Change in share-based compensation (0.21) (9.3) pp

Change in discrete items 0.12 5.5 pp

Change in effective tax rate (0.13) (5.7) pp

Basic and diluted EPS for 2020

(a) Items are net of tax based on the effective tax rate for each base year, excluding the effect of the Tax Act and other discrete tax items on the 2017 rate.

(a) Items are net of tax based on the effective tax rate for each base year.

(b) Percentage points ("pp").

(d) Income attributable to participating securities changes primarily due to the awarding and vesting of the employee RSUs that receive dividend equivalent payments.

Weighted average shares outstanding change primarily due to the vesting of employee RSUs, the granting of Common Stock to directors, our purchase of vested RSUs from employees to pay withholding taxes, and our repurchases of Common Stock.

(e) On December 22, 2017, the United States enacted tax reform legislation, the Tax Act, that resulted in significant modifications to existing law.

We recorded a discrete net tax benefit resulting from the revaluation of our deferred income taxes in 2017 (see Note 6 for additional information).

(c) Income attributable to participating securities changes primarily due to the awarding and vesting of the employee RSUs that receive dividend equivalent payments.

Weighted average shares outstanding change primarily due to our repurchases of Common Stock, the vesting of employee RSUs, our purchase of vested RSUs from employees to pay withholding taxes, and the granting of Common Stock to directors.

2020 to 2019 - EPS increased to $2.37 in 2020 from $2.27 in 2019, primarily due to the increase in operations, partially offset by the favorable tax impact of vested share-based awards that occurred during 2019.

2019 to 2018 - EPS increased to $2.27 in 2019 from $2.17 in 2018, primarily due to the tax impacts of vested share-based awards and higher state tax credits in the effective tax rate.

Partially offsetting these increases was a decrease in operations.

2018 to 2017 - EPS decreased to $2.17 in 2018 from $2.44 in 2017, primarily due to the gain on sale of equity method investment in 2017 (see Note 4 for additional information), partially offset by improved performance from operations.

DISTILLERY PRODUCTS SEGMENT

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2020 compared to 2019

Total sales of Distillery Products decreased year versus year by $16,822, or 5.4 percent.

Sales of premium beverage alcohol were down due to lower volumes, predominantly in brown goods within premium beverage alcohol (mix), partially offset by better pricing in both brown goods and white goods within premium beverage alcohol.

Sales of brown goods, industrial alcohol and fuel grade alcohol decreased, while sales of warehouse services, distillers feed and related co-products and white goods increased.

Sales of brown goods decreased 14.8 percent, due to lower sales volume, partially offset by higher average selling price.

Industrial alcohol product sales decreased primarily driven by lower sales volume, partially offset by slightly favorable pricing.

These decreases were partially offset by an increase in warehouse services sales of 13.4 percent and an increase in sales of distillers feed and related co-product of 4.1 percent, primarily due to an increase in sales volume.

Gross profit decreased year versus year by $5,841, or 8.1 percent.

Gross margin for 2019 decreased to 22.2 percent from 22.9 percent for 2018.

The decline in gross profit was primarily due to lower sales volume on brown goods.

Industrial alcohol and white goods gross profits declined as the market remains challenged due to oversupply.

This decline was partially offset by favorable average selling price on brown goods as well as increased gross profits on distillers feed and related co-products and warehouse services.

Total Distillery Products sales for 2020 increased by $20,225, or 6.8 percent compared to 2019.

Sales of brown goods and white goods within premium beverage alcohol, warehouse services, and industrial alcohol increased, while sales of distillers feed and related co-products and fuel grade alcohol decreased compared to 2019.

The increase in brown goods was due to increased sales volume, partially offset by lower average selling price.

The increase in white goods and industrial alcohol was due to higher average selling prices, partially offset by decreased sales volume.

These increases were slightly offset by decreases in distillers feed and related co-products and fuel grade alcohol due to lower average selling prices.

Gross profit increased year versus year by $12,008, or 18.2 percent.

Gross margin for 2020 increased to 24.6 percent from 22.2 percent for 2019.

The increase in gross profit was primarily due to higher sales volume on brown goods and higher average selling price on white goods and industrial alcohol.

The increase in gross profit was partially offset by higher costs relating to a reduction in brown goods put-away for aging, lower average selling price on brown goods and increased production costs due to the temporary shutdown of the Atchison facilities as a result of the ransomware cyber-attack.

DISTILLERY PRODUCTS SALES

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2019 compared to 2018

Total sales of Distillery Products increased year versus year by $23,047, or 7.9 percent.

Driven by continued strong demand, sales of premium beverage alcohol products increased 5.9 percent over 2017, primarily due to an 11.0 percent increase in brown goods sales.

Industrial alcohol product sales increased 5.2 percent, contributing to an overall food grade alcohol sales increase of 5.7 percent.

Industrial alcohol sales growth was driven by volume as the average selling price was down due to more difficult market conditions.

Sales of distillers feed and related co-products increased due to a higher average selling price reflecting improved market conditions during the year.

An increase in warehouse services revenue was partially offset by a small decline in the sales of fuel grade alcohol products.

Gross profit increased year versus year by $4,976, or 7.4 percent.

Gross margin for 2018 remained consistent at 22.9 percent compared to 23.0 percent for 2017.

The improvement in gross profit was primarily due to increased sales of brown goods products, higher gross profit on sales of distillers feed and related co-products, and an increase in warehouse services revenue.

These gains were partially offset primarily by increased input costs and lower gross profit on sales of white goods, industrial, and fuel grade alcohol products.

Total Distillery Products sales for 2019 decreased by $16,822, or 5.4 percent compared to 2018.

Sales of brown goods, industrial alcohol and fuel grade alcohol decreased, while sales of warehouse services, distillers feed and related co-products and white goods increased.

Sales of brown goods decreased 14.8 percent, due to lower sales volume, partially offset by higher average selling price.

Industrial alcohol product sales decreased primarily driven by lower sales volume, partially offset by slightly favorable pricing.

Gross profit decreased year versus year by $5,841, or 8.1 percent.

Gross margin for 2019 decreased to 22.2 percent compared to 22.9 percent for 2018.

The decline in gross profit was primarily due to lower sales volume on brown goods.

Industrial alcohol and white goods gross profits declined as the market remains challenged due to oversupply.

This decline was partially offset by favorable average selling price on brown goods as well as increased gross profits on distillers feed and related co-products and warehouse services.

INGREDIENT SOLUTIONS SEGMENT

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Total Ingredient Solutions sales for 2020 increased by $12,551, or 19.2 percent compared to 2019.

This increase was driven by higher sales of specialty wheat starches and proteins, and commodity wheat starches, partially offset by a decrease in sales of commodity wheat proteins.

The increase in specialty wheat starches was driven by an increase in sales volume and favorable average selling pricing.

The increase in commodity wheat starches was primarily due to favorable pricing, partially offset by a decrease in sales volume.

The increase in specialty wheat proteins was due to an increase in sales volume, partially offset by lower average selling price driven by the loss of a large specialty wheat protein customer.

These increases were partially offset by decreased sales of commodity wheat proteins which was driven by lower sales volume.

Gross profit decreased year versus year by $1,226, or 10.4 percent.

Gross margin for 2019 decreased to 16.2 percent from 19.0 percent for 2018.

The decrease in gross profit was primarily due to the above mentioned specialty wheat protein customer loss, increased production costs resulting from higher input costs, partially offset by increased gross profit of commodity wheat starches and proteins.

This increase was driven by higher sales of specialty wheat starches and proteins, partially offset by a decrease in sales of commodity wheat starches and proteins.

The increase in sales of specialty wheat starches was driven by increased sales volume and higher average selling prices.

The increase in sales of specialty wheat proteins was driven by increased sales volume, partially offset by lower average selling prices.

These increases were partially offset by decreased sales volume of commodity wheat starches and proteins.

Gross profit increased year versus year by $10,266, or 97.0 percent.

Gross margin for 2020 increased to 26.7 percent from 16.2 percent for 2019.

The increase in gross profit was primarily driven by the increased sales volume and higher average selling prices of specialty wheat starches and proteins and decreased sales volume of commodity wheat starches and proteins (mix).

Additionally, gross profit was positively impacted by the optimization of higher margin specialty products to meet the increased demand of customers' high fiber and high protein products.

These increases in gross profit were partially offset by increased production costs due to the temporary shutdown of the Atchison facilities as a result of the ransomware cyber-attack.

INGREDIENT SOLUTIONS SALES

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Total Ingredient Solutions sales for 2019 increased by $3,478, or 5.6 percent compared to 2018.

This increase was driven by higher sales across all product categories, with the largest increases in commodity wheat proteins and specialty wheat proteins, year versus year.

The increase in sales of wheat proteins was driven by strong demand for the Company’s plant-based protein products.

Gross profit increased year versus year by $2,607, or 28.3 percent.

Gross margin for 2018 increased to 19.0 percent from 16.3 percent for 2017.

The increase in gross profit was primarily due to higher gross profits on specialty wheat proteins and starches and commodity wheat proteins, partially offset by lower gross profits on commodity wheat starches.

Overall gross profit growth was aided by improved plant efficiencies relative to the prior year.

This increase was driven by higher sales of specialty wheat starches and proteins, and commodity wheat starches, partially offset by a decrease in sales of commodity wheat proteins.

The increase in specialty wheat starches was driven by an increase in sales volume and favorable average selling pricing.

The increase in commodity wheat starches was primarily due to favorable pricing, partially offset by a decrease in sales volume.

The increase in specialty wheat proteins was due to an increase in sales volume, partially offset by lower average selling price driven by the loss of a large specialty wheat protein customer.

These increases were partially offset by decreased sales of commodity wheat proteins which was driven by lower sales volume.

Gross profit decreased year versus year by $1,226, or 10.4 percent.

Gross margin for 2019 decreased to 16.2 percent from 19.0 percent for 2018.

CASH FLOW, FINANCIAL CONDITION AND LIQUIDITY

We believe our financial condition continues to be of high quality, as evidenced by our ability to generate adequate cash from operations while having ready access to capital at competitive rates.

Operating cash flow and debt through our Credit Agreement and Note Purchase Agreement (Note 5) provide the primary sources of cash to fund operating needs and capital expenditures.

Operating cash flow and borrowings through our Credit Agreement and Note Purchase Agreement (Note 5) provide the primary sources of cash to fund operating needs and capital expenditures.

These same sources of cash are used to fund shareholder dividends and other discretionary uses.

Going forward, we expect to use cash to implement our invest to grow strategy, particularly in the Distillery Products segment.

Going forward, we expect to use cash to implement our invest to grow strategy.

Our overall liquidity reflects our strong business results and an effective cash management strategy that takes into account liquidity management, economic factors, and tax considerations.

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Cash provided by operating activities $ 53,255 $ 19,722 $ 33,481 $ 33,533 $ (13,759)

$ 19,722 $ 33,481 $ 33,471 (13,759) 10

Cash provided by (used in) investing activities:

( 17,931 ) ( 31,046 ) 1,777 13,115 (32,823)

Cash used in investing activities (19,647) (17,931) (31,046) (1,716) 13,115

Cash used in financing activities (15,255) (3,507) (494) (11,748) (3,013)

( 3,507 ) ( 494 ) ( 33,733 ) (3,013) 33,239

Increase (decrease) in cash and cash equivalents $ 18,353 $ (1,716) $ 1,941 $ 20,069 $ (3,657)

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The cash provided by operating activities during 2020 resulted primarily from net income of $40,345, adjustments for non-cash or non-operating charges of $17,050 including depreciation and amortization, share-based compensation, and deferred income taxes, partially offset by uses of cash due to changes in operating assets and liabilities of $4,140.

The primary drivers of the changes in operating assets and liabilities were $ 28,162 use of cash related to an increase in inventories driven primarily by barreled distillate, $ 4,547 use of cash related to a decrease in accrued expenses primarily due to lower incentive compensation expense, and $ 2,134 use of cash related to an increase in receivables, net primarily related to the timing of sales and cash collections.

The primary drivers of the changes in operating assets and liabilities were $16,173 use of cash related to an increase in receivables, inclusive of insurance receivables, $3,886 use of cash related to an increase in inventories, partially offset by $11,503 provided by cash related to an increase in accrued expenses primarily due to higher incentive compensation expense and $1,817 provided by cash related to an increase in accounts payable related to the timing of cash disbursements.

Additionally, there was $1,750 provided by cash related to income taxes payable, due to higher than expected income before taxes.

Cash provided by operating activities were $19,722 during the year ended December 31, 2019.

The cash provided by operating activities during 2019 resulted primarily from net income of $38,793, adjustments for non-cash or non-operating charges of $15,012 including depreciation and amortization, share-based compensation and deferred income taxes, partially offset by uses of cash due to change in operating assets and liabilities of $34,083.

The primary drivers of the changes in operating assets and liabilities were $28,162 use of cash related to an increase in inventories driven primarily by barreled distillate and $2,134 use of cash related to an increase in receivables, net primarily related to the timing of sales and cash collections.

Additionally, there was $2,107 provided by cash related to an increase in accounts payable related to the timing of cash disbursements

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The change in receivables, net is primarily related to the timing of sales and cash collections.

Cash provided by operating activities were $33,471 during the year ended December 31, 2017.

The cash provided by operating activities during 2017 resulted primarily from net income of $41,823, adjusted for non-cash or non-operating charges of $6,621 including depreciation and amortization, distributions received from equity method investees and gain on sale of equity method investment, partially offset by uses of cash due to changes in assets and liabilities of $14,973.

The primary drivers of the changes in operating assets and liabilities were $14,291 use of cash related to an increase in inventories driven primarily by barreled distillate, $8,262 use of cash related to an increase in receivables, net and $9,540 cash provided by an increase in accounts payable.

The change in receivables, net is primarily related to increased sales during the year.

The change in accounts payable is primarily due to the timing of cash disbursements related to operating expenses associated with increased sales (the accounts payable to affiliate, net, decreased to zero when we sold our equity ownership interest in ICP on July 3, 2017 as detailed in Note 4).

Investing Activities.

Cash used in investing activities for year ended December 31, 2019 was $ 17,931 , which primarily resulted from an increase in additions to property, plant and equipment of $ 16,730 (see capital spending).

Cash used in investing activities for year ended December 31, 2018 was $31,046, which resulted from an increase in additions to property, plant and equipment of $31,046 (see capital spending).

Cash provided by investing activities for year ended December 31, 2017 was $1,777.

Cash provided by investing activities was due to cash provided from the divestiture of our equity method investment during 2017 of $22,832 (see Note 4 for additional information), offset by cash used for property, plant, and equipment of $21,055 (see Capital Spending).

Cash used in investing activities for year ended December 31, 2020 was $19,647, which primarily resulted from additions to property, plant and equipment of $19,701 (see capital spending) and an increase in proceeds from sale of property of $2,906, partially offset by cash of $2,750 used in the acquisition of a business.

Cash used in investing activities for year ended December 31, 2019 was $17,931, which primarily resulted from additions to property, plant and equipment of $16,730 (see capital spending).

Cash used in investing activities for year ended December 31, 2018 was $31,046, which resulted from additions to property, plant and equipment of $31,046 (see capital spending).

Capital Spending.

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Adjusted for the change in capital expenditures in accounts payable for years ended December 31, 2020, 2019, and 2018 of $(1,055), $2,041, and $(2,133), respectively, and total capital expenditures were $18,646, $18,771, and $28,913, respectively.

We expect approximately $19,600 in capital expenditures in 2020 for facility improvement and expansion (including warehouse expansion), facility sustenance projects, and environmental health and safety projects.

We expect approximately $43,300 in capital expenditures in 2021, excluding any insurance recoveries.

Of the $43,300 expected capital expenditures $29,400 is allocated for the replacement of the feed dryer system.

The remainder is for facility improvement and expansion, facility sustenance projects, and environmental health and safety projects.

As part of our strategic plan to support the growth of the American whiskey category, we previously announced a warehouse expansion project.

As of December 31, 2019, we had incurred approximately $48,400 of the total investment and expect our total warehouse expansion project investment to be approximately $49,800.

The estimated project completion date is by the end of calendar year 2020.

As of December 31, 2020, we had incurred approximately $49,900 of the total investment, which completes our current warehouse expansion project.

Financing Activities .

Cash used in financing activities for year ended December 31, 2019 was $ 3,507 , primarily due to payments of dividends and dividend equivalents of $ 6,856 (see Note 7 for additional information), purchases of treasury stock for tax withholding on share-based compensation of $ 5,489 (see Treasury Purchases), offset by net proceeds from debt of $8,914 (see Long-Term and Short-Term Debt).

Cash used in financing activities for year ended December 31, 2020 was $15,255, primarily due to payments of dividends and dividend equivalents of $8,188 (see Note 7 for additional information), purchases of treasury stock of $4,411 (see Treasury Purchases) and net debt payments of $2,656 (see Long-Term and Short-Term Debt).

Cash used in financing activities for year ended December 31, 2019 was $3,507, primarily due to payments of dividends and dividend equivalents of $6,856 (see Note 7 for additional information), purchases of treasury stock for tax withholding on share-based compensation of $5,489 (see Treasury Purchases), offset by net proceeds from debt of $8,914 (see Long-Term and Short-Term Debt).

Cash used in financing activities for year ended December 31, 2017 was $33,733, primarily due to payments on our credit agreement - revolver of $30,955 (see Long-Term and Short-Term Debt), payment of dividends and dividend equivalents of $17,380 (see Note 7 for additional information) and purchases of treasury stock for tax withholding on share-based compensation of $ 4,663 (see Treasury Purchases), partially offset by net proceeds in long-term debt $19,642 (see Long-Term and Short-Term Debt).

Cash used in financing activities for year ended December 31, 2018 was $494, primarily due to payments of dividends and dividend equivalents of $5,500 (see Note 7 for additional information), purchases of treasury stock for tax withholding on share-based compensation of $2,324 (see Treasury Purchases), partially offset by net proceeds in long-term debt $7,330 (see Long-Term and Short-Term Debt).

Treasury Purchases.

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This share repurchase program may be modified, suspended, or terminated by the company at any time without prior notice.

From the commencement date of the authorization period through the year ended December 31, 2019, no shares were repurchased under the program.

During the year ended December 31, 2020, we purchased approximately 159,104 shares of MGP Common Stock for $4,053, resulting in $20,947 remaining under the share repurchase plan.

Long-Term and Short-Term Debt.

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During 2020, 2019, and 2018, we had net borrowings / (payments) on our Credit Agreement of $(300), $(10,700), and $7,702, and net borrowings / (payments) on our long-term debt of $(1,208), $19,614, and $(372), respectively.

During 2020, we incurred $1,148 of loan fees associated with refinancing our credit agreement.

Net borrowings / (payments) on all debt for 2020, 2019, and 2018 were $(2,656), $8,914, and $7,330, respectively (see Note 5 for additional information).

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Our principal uses of cash in the ordinary course of business are for input costs used in our production processes, salaries, capital expenditures, and investments supporting our strategic plan, such as the aging of barreled distillate.

As part of our strategy, as demand grows for American whiskeys, in both the United States and global markets, we are building our inventories of aged premium whiskeys to fully participate in this growth (see "Barreled distillate (bourbon and whiskey)" in Note 2).

Generally, during periods when commodities prices are rising, our operations require increased use of cash to support inventory levels.

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In addition, we have strong operating results such that financial institutions should provide sufficient credit funding to meet short-term financing requirements, if needed.

On January 22, 2021, we entered into a definitive agreement to acquire Luxco, Inc., and its affiliated companies ("Luxco").

Under the terms of the agreement, Luxco shareholders will receive $237,500 in cash (less assumed indebtedness) and 5,007,833 shares of MGP Common Stock.

The purchase price is subject to customary purchase price adjustments, including working capital, which adjustments are anticipated to be paid in cash.

The transaction is anticipated to be completed during the first half of 2021, subject to regulatory approvals and customary closing conditions.

The cash portion of the purchase price, plus transaction-related expenses, will be financed by borrowings under our existing revolving credit facility.

We anticipate having sufficient cash flows to support our support our short-term liquidity and operating needs (See Part I, Item 1A - Risk Factors and Note 15 for additional information).

OFF BALANCE SHEET OBLIGATIONS

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis