MGP INGREDIENTS INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS This Report on Form 10-K contains forward looking statements as well as historical information. All statements, other than statements of historical facts, regarding the prospects of our industry and our prospects, plans, financial position, and strategic plan may constitute forward looking statements. In addition, forward looking statements are usually identified by or are associated with such words as "intend," "plan," "believe," "estimate," "expect," "anticipate," "hopeful," "should," "may," "will," "could," "encouraged," "opportunities," "potential," and/or the negatives or variations of these terms or similar terminology. Forward looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from those expressed or implied in the forward looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward looking statements is included in the section titled "Risk Factors" (Item 1A of this Form 10-K). 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. COVID-19. 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 19 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. MGP’s MD&A is presented in seven sections: • Overview • Results of Operations • Distillery Products Segment • Ingredient Solutions Segment • Cash Flow, Financial Condition and Liquidity • Off Balance Sheet Obligations • New Accounting Pronouncements OVERVIEW MGP is a leading producer and supplier of premium distilled spirits and specialty wheat protein and starch food ingredients. Distilled spirits include premium bourbon and rye whiskeys and GNS, including vodka and gin. We are also a top producer of high quality industrial alcohol for use in both food and non-food applications. Our protein and starch food ingredients provide a host of functional, nutritional and sensory benefits for a wide range of food products to serve the packaged goods industry. We have two reportable segments: our Distillery Products segment and our Ingredient Solutions segment. Our Mission Secure our future by consistently delivering superior financial results by more fully participating in all levels of the alcohol and food ingredients segments for the betterment of our shareholders, employees, partners, consumers, and communities. Our Strategic Plan Our strategic plan is designed to leverage our history and strengths. We have a long history in the distilling industry. Our Lawrenceburg facility, which we purchased in 2011, was founded in 1847 and our Atchison facility was opened in 1941. Through these two distilleries, we are involved in producing some of the finest whiskeys, vodkas, and gins in the world. Likewise, our history in the food ingredient business stretches back more than 65 years. Our strategic plan seeks to leverage the positive macro trends we see in the industries where we compete while providing better insulation from outside factors, including swings in commodity pricing. We believe the successful execution of our strategy will continue to deliver strong operating income growth. Specifically, our strategic plan is built on five key growth strategies: Maximize Value, Capture Value Share, Invest for Growth, Operational Excellence, and Build the MGP Brand. Each of these strategies, along with related 2020 accomplishments, are discussed below. Maximize Value. 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. In our Ingredient Solutions segment, the macro trends include growth in high fiber, high protein, plant-based proteins, and non-GMO products. Although these macro trends are currently favorable, we have seen competition intensify as industry participants in both of our segments seek to capitalize on consumers' interest in these categories. While we believe we are well-positioned to benefit from these favorable trends, we may also be negatively affected by the increase in competition in one or both of our segments. We intend to continue to focus on opportunities that will allow us to achieve the highest value from our production facilities. 20 Accomplishments • 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 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. 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. See the "Distillery Products Segment" and "Ingredient Solutions Segment" discussions. Capture Value Share. We work to develop partnerships to support brand creation, long-term growth, and to combine our innovation capabilities and industry expertise to provide unique solutions and offerings to the marketplace. In that way, we believe we are able to realize full value for our operational capacity, quality, and commitment. Accomplishments • 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. We are committed to investing to support our growth. Components of this growth strategy include: • Capital Expenditures: Capital expenditures focus largely on supporting innovation and product development, improving operational reliability, and strengthening our ability to support all aspects of growth in the American whiskey category. • Select Inventories: 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. • Selling, General, and Administrative Expenses ("SG&A"): 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. 21 Accomplishments • Regarding our Capital Expenditures growth strategy: 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: We produce, and will continue to produce barrels of premium bourbon and rye whiskeys for sale in future periods. Product is barreled and included in our inventory. Our goal is to maintain inventory levels of premium bourbon and rye whiskeys sufficient to support our own brands, engage in partnerships, and support industry growth. We increased our premium bourbon and rye whiskey inventory by $1,196, at cost, during 2020. • Regarding our SG&A growth strategy: 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. We continue a solid commitment to operational excellence across the Company by strengthening our emphasis on excellence in all stages of operations, from sourcing through processing and, ultimately, delivering the finest quality products. This also means striving to de-risk all aspects of our business. Accomplishments • 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. Per the BRC standard, a Grade AA is awarded if five or fewer non-conformances are cited out of 256 total audit items. Each year since undergoing its initial BRC audit in 2013, the Atchison facility’s distillery has achieved BRC’s highest grade. 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, 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. We continue to build our brand across all stakeholders, including shareholders, employees, partners, consumers, and communities. We are achieving this by producing consistent growth through an understandable business model, proactively engaging with the investment community, creating a desirable organization for our employees, strengthening our relationship with our customers and vendors, increasing awareness and understanding of MGP with consumers, and supporting the communities in which we operate. 22 Accomplishments • 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. ◦ 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. Mingus. 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 Consolidated results The table below details the consolidated results for 2020, 2019 and 2018: Year Ended December 31, % Increase (Decrease) 2020 2019 2018 2020 v. 2019 2019 v. 2018 Sales $ 395,521 $ 362,745 $ 376,089 9.0 % (3.5) % Cost of sales 296,715 286,213 292,490 3.7 (2.1) Gross profit 98,806 76,532 83,599 29.1 (8.5) Gross margin % 25.0 % 21.1 % 22.2 % 3.9 pp (a) (1.1) pp (a) SG&A expenses 44,565 29,290 33,451 52.2 (12.4) Operating income 54,241 47,242 50,148 14.8 (5.8) Operating margin % 13.7 % 13.0 % 13.3 % 0.7 pp (0.3) pp 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) Income tax expense 12,256 7,144 11,696 71.6 (38.9) Effective tax expense rate % 23.3 % 15.6 % 23.9 % 7.7 pp (8.3) pp Net income $ 40,345 $ 38,793 $ 37,284 4.0 % 4.0 % Net income margin % 10.2 % 10.7 % 9.9 % (0.5) pp 0.8 pp Basic and diluted Earnings Per Share $ 2.37 $ 2.27 $ 2.17 4.4 % 4.6 % (a) Percentage points ("pp"). 23 Sales 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 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. Gross profit 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. 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 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 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 Operating income % Increase (Decrease) Operating income for 2018 $ 50,148 Decrease in gross profit - Distillery Products segment (a) (5,841) (11.6) pp (b) Decrease in gross profit - Ingredient Solutions segment (a) (1,226) (2.5) pp Decrease in SG&A expenses 4,161 8.3 pp 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"). 24 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. Income tax expense 2020 to 2019 - Income tax expense for 2020 was $12,256, for an effective tax rate for the year of 23.3 percent. Income tax expense for 2019 was $7,144, for an effective tax rate for the year of 15.6 percent. 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 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 Basic and Diluted EPS % Increase (Decrease) Basic and diluted EPS for 2018 $ 2.17 Change in operating income (a) (0.15) (6.9) pp (b) Change in income attributable to participating securities (c) 0.02 0.9 pp Change in weighted average shares outstanding (c) (0.03) (1.3) pp Tax: Change in share-based compensation 0.12 5.5 pp Tax: Change in discrete items 0.12 5.5 pp Tax: Change in effective tax rate 0.02 0.9 pp Basic and diluted EPS for 2019 $ 2.27 4.6 % Change in operating income (a) 0.41 18.1 pp (b) Change in weighted average shares outstanding: share repurchase program (c) 0.02 0.9 pp Change in weighted average shares outstanding: withholding taxes (c) 0.01 0.4 pp Tax: Change in share-based compensation (0.21) (9.3) pp Tax: Change in effective tax rate (0.13) (5.7) pp Basic and diluted EPS for 2020 $ 2.37 4.4 % (a) Items are net of tax based on the effective tax rate for each base year. (b) Percentage points ("pp"). (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. 25 DISTILLERY PRODUCTS SEGMENT DISTILLERY PRODUCTS SALES Year Ended December 31, Year-versus-Year Sales Change Increase/ (Decrease) 2020 2019 $ Change % Change Brown Goods $ 125,059 $ 107,190 $ 17,869 16.7 % White Goods 64,347 62,862 1,485 2.4 Premium beverage alcohol 189,406 170,052 19,354 11.4 Industrial alcohol 80,682 79,833 849 1.1 Food grade alcohol 270,088 249,885 20,203 8.1 Fuel grade alcohol 5,630 5,949 (319) (5.4) Distillers feed and related co-products 26,109 26,743 (634) (2.4) Warehouse services 15,631 14,656 975 6.7 Total Distillery Products $ 317,458 $ 297,233 $ 20,225 6.8 % Change in Year-versus-Year Sales Attributed to: Total Volume Net Price/Mix Premium beverage alcohol 11.4% 13.7% (2.3)% Other Financial Information Year Ended December 31, Year-versus-Year Increase/(Decrease) 2020 2019 Change % Change Gross profit $ 77,960 $ 65,952 $ 12,008 18.2 % Gross margin % 24.6 % 22.2 % 2.4 pp (a) (a) Percentage points ("pp") 2020 compared to 2019 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. 26 DISTILLERY PRODUCTS SALES Year Ended December 31, Year-versus-Year Sales Change Increase/ (Decrease) 2019 2018 $ Change % Change Brown Goods $ 107,190 $ 125,857 $ (18,667) (14.8) % White Goods 62,862 62,574 288 0.5 Premium beverage alcohol 170,052 188,431 (18,379) (9.8) Industrial alcohol 79,833 80,650 (817) (1.0) Food grade alcohol 249,885 269,081 (19,196) (7.1) Fuel grade alcohol 5,949 6,347 (398) (6.3) Distillers feed and related co-products 26,743 25,698 1,045 4.1 Warehouse services 14,656 12,929 1,727 13.4 Total Distillery Products $ 297,233 $ 314,055 $ (16,822) (5.4) % Change in Year-versus-Year Sales Attributed to: Total Volume Net Price/Mix Premium beverage alcohol (9.8)% (4.2)% (5.6)% Other Financial Information Year Ended December 31, Year-versus-Year Increase/(Decrease) 2019 2018 Change % Change Gross profit $ 65,952 $ 71,793 $ (5,841) (8.1) % Gross margin % 22.2 % 22.9 % (0.7) pp (a) (a) Percentage points ("pp") 2019 compared to 2018 Total Distillery Products sales for 2019 decreased by $16,822, or 5.4 percent compared to 2018. 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 volumes. 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. 27 INGREDIENT SOLUTIONS SEGMENT INGREDIENT SOLUTIONS SALES Year Ended December 31, Year-versus-Year Sales Change Increase/ (Decrease) 2020 2019 $ Change % Change Specialty wheat starches $ 41,631 $ 30,816 $ 10,815 35.1 % Specialty wheat proteins 26,960 22,359 4,601 20.6 Commodity wheat starches 7,630 9,628 (1,998) (20.8) Commodity wheat proteins 1,842 2,709 (867) (32.0) Total Ingredient Solutions $ 78,063 $ 65,512 $ 12,551 19.2 % Change in Year-versus-Year Sales Attributed to: Total Volume Net Price/Mix Total Ingredient Solutions 19.2% 8.5% 10.7% Other Financial Information Year Ended December 31, Year-versus-year Increase/(Decrease) 2020 2019 Change % Change Gross profit $ 20,846 $ 10,580 $ 10,266 97.0 % Gross margin % 26.7 % 16.2 % 10.5 pp (a) (a) Percentage points ("pp") 2020 compared to 2019 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, 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. 28 INGREDIENT SOLUTIONS SALES Year Ended December 31, Year-versus-Year Sales Change Increase/ (Decrease) 2019 2018 $ Change % Change Specialty wheat starches $ 30,816 $ 28,594 $ 2,222 7.8 % Specialty wheat proteins 22,359 21,098 1,261 6.0 Commodity wheat starches 9,628 9,223 405 4.4 Commodity wheat proteins 2,709 3,119 (410) (13.1) Total Ingredient Solutions $ 65,512 $ 62,034 $ 3,478 5.6 % Change in Year-versus-Year Sales Attributed to: Total Volume Net Price/Mix Total Ingredient Solutions 5.6% 2.3% 3.3% Other Financial Information Year Ended December 31, Year-versus-year Increase/(Decrease) 2019 2018 Change % Change Gross profit $ 10,580 $ 11,806 $ (1,226) (10.4) % Gross margin % 16.2 % 19.0 % (2.8) pp (a) (a) Percentage points ("pp") 2019 compared to 2018 Total Ingredient Solutions sales for 2019 increased by $3,478, or 5.6 percent compared to 2018. 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. 29 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 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. 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. We expect our sources of cash, including our Credit Agreement and Note Purchase Agreement, to be adequate to provide for budgeted capital expenditures and anticipated operating requirements for the foreseeable future. Cash Flow Summary Year Ended December 31, Changes, Year versus Year-Increase / (Decrease) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Cash provided by operating activities $ 53,255 $ 19,722 $ 33,481 $ 33,533 $ (13,759) 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) Increase (decrease) in cash and cash equivalents $ 18,353 $ (1,716) $ 1,941 $ 20,069 $ (3,657) Operating Activities. Cash provided by operating activities were $53,255 during the year ended December 31, 2020. 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 $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 Cash provided by operating activities were $33,481 during the year ended December 31, 2018. The cash provided by operating activities during 2018 resulted primarily from net income of $37,284, adjustments for non-cash or non-operating charges of $16,126 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 $19,929. The primary drivers of the changes in operating assets and liabilities were $15,620 use of cash related to an increase in inventories driven primarily by barreled distillate and $4,450 use of cash related to an increase in receivables, net. The change in receivables, net is primarily related to the timing of sales and cash collections. Investing Activities. 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. 30 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. We manage capital spending to support our business growth plans. Investments in plant, property and equipment were $19,701, $16,730, and $31,046 for years ended December 31, 2020, 2019, and 2018, respectively. 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 $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, 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, 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, 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. 31,741 RSUs vested and converted to common shares during year ended December 31, 2020, of which we withheld and purchased for treasury 10,437 shares valued at $358 to cover payment of associated withholding taxes. 235,409 RSUs vested and converted to common shares during year ended December 31, 2019, of which we withheld and purchased for treasury 77,481 shares valued at $5,489 to cover payment of associated withholding taxes. 80,343 RSUs vested and converted to common shares during year ended December 31, 2018, of which we withheld and purchased for treasury 27,214 shares valued at $2,324 to cover payment of associated withholding taxes. Share Repurchase. On February 25, 2019, the Board of Directors approved a $25,000 share repurchase authorization commencing February 27, 2019 through February 27, 2022. Under the share repurchase program, the company can repurchase stock from time to time for cash in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws. This share repurchase program may be modified, suspended, or terminated by the company at any time without prior notice. 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. 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, share repurchases, and Board-approved dividends) and the overall cost of capital. Total debt was $39,871 (net of unamortized loan fees of $129) at December 31, 2020 and $41,060 (net of unamortized loan fees of $448) at December 31, 2019. 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). 31 Dividends and Dividend Equivalents. See Note 7 for further discussion. On February 23, 2021, the Board of Directors declared a quarterly dividend payable to stockholders of record as of March 12, 2021, of our Common Stock and a dividend equivalent payable to holders of certain RSUs as of March 12, 2021, of $0.12 per share and per unit. The dividend payment and dividend equivalent payment will occur on March 26, 2021. Financial Condition and Liquidity 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. Generally, during periods when commodities prices are rising, our operations require increased use of cash to support inventory levels. Our principal sources of cash are product sales and borrowing on our Credit Agreement and Note Purchase Agreement. Under our Credit Agreement and Note Purchase Agreement, we must meet certain financial covenants and restrictions, and at December 31, 2020, we met those covenants and restrictions. At December 31, 2020, our current assets exceeded our current liabilities by $168,954, largely due to our inventories, at cost, of $141,011. At December 31, 2020, our cash balance was $21,662 and we have used our Credit Agreement and Note Purchase Agreement for liquidity purposes, with $300,000 remaining for additional borrowings. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We regularly assess our cash needs and the available sources to fund these needs. We utilize short-term and long-term debt to fund discretionary items, such as capital investments and dividend payments. 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 Industrial Revenue Bonds. On October 24, 2018, we closed an industrial revenue bond transaction with the City of Williamstown, Kentucky (the "City") in order to receive a 30-year real property tax abatement on our renovated and newly-constructed warehouse buildings near the City. Pursuant to this transaction, the City issued a principal amount of $10,000 of its industrial revenue bonds to us and then used the proceeds to purchase the land and warehouse from us. The City then leased the facilities back to us under a capital lease, the terms of which provide for the payment of basic rent in an amount sufficient to pay principal and interest on the bonds. Our obligation to pay rent under the lease is in the same amount and due on the same date as the City’s obligation to pay debt service on the bonds which we hold. The lease permits us to present the bonds at any time for cancellation, upon which our obligation to pay basic rent would be canceled. The bonds’ maturity date is 2047, at which time the facilities will revert to us without costs. If we were to present the bonds for cancellation prior to maturity, a nominal fee would be incurred. We recorded the land and buildings as assets in property, plant, and equipment, net, on our Consolidated Balance Sheets. Because we own all outstanding bonds, have a legal right to set-off, and intend to set-off the corresponding lease and interest payment, we have netted the capital lease obligation with the bond asset. No amount for our obligation under the capital lease is reflected on our Consolidated Balance Sheet, nor do we reflect an amount for the corresponding industrial revenue bond asset (see Note 9 for additional information). 32 Contractual Obligations The following table provides information on the amounts and payments of our contractual obligations at December 31, 2020: Payments due by period Total 2021 2022-2023 2024-2025 After 2025 Long-term debt $ 40,000 $ 1,600 $ 8,800 $ 12,800 $ 16,800 Interest on long-term debt 6,858 1,482 2,606 1,774 996 Operating leases 5,511 2,308 2,782 421 — Purchase commitments 174,540 136,298 (a) 37,521 721 — Other 1,374 266 476 287 345 Total $ 228,283 $ 141,954 $ 52,185 $ 16,003 $ 18,141 (a) Includes open purchase order commitments related to raw materials and packaging used in the ordinary course of business of $112,641. NEW ACCOUNTING PRONOUNCEMENTS For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 1.