MGP INGREDIENTS INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of MGP Ingredients, Inc. (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. With the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission. As a result of this assessment, management has concluded that the Company’s internal control over financial reporting as of December 31, 2020 was effective. KPMG, LLP, the independent registered public accounting firm that audited the Company’s financial statements contained herein, has issued an audit report on the Company’s internal control over financial reporting as of December 31, 2020. The combined report on the consolidated financial statements of MGP Ingredients, Inc. and subsidiaries and audit report is included in Item 8 of this Form 10-K. 34 Report of Independent Registered Public Accounting Firm To the the Stockholders and the Board of Directors MGP Ingredients, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of MGP Ingredients, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 35 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue recognition under bill and hold arrangements As discussed in Note 1 to the consolidated financial statements, the Company’s Distillery Products segment routinely enters into bill and hold arrangements, whereby the Company produces and sells aged and unaged distillate to customers. As discussed in Note 3 to the consolidated financial statements, brown goods premium beverage alcohol revenue was $125,059 thousand for the year ended December 31, 2020, a portion of which was for bill and hold arrangements. We identified the evaluation of revenue recognized under bill and hold arrangements as a critical audit matter because of the extent of additional audit effort required to test the incremental bill and hold revenue recognition criteria. The incremental bill and hold revenue recognition criteria include the evaluation of: 1) the reason for the bill and hold arrangement; 2) the identification of the product as separately belonging to the customer; 3) the product being currently ready for physical transfer to the customer; and 4) the Company’s inability to use the product or direct it to another customer. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s revenue recognition process, including controls related to bill and hold revenue recognition criteria being met. We examined a sample of bill and hold revenue transactions to assess the incremental bill and hold revenue recognition criteria. Specifically, we inspected documentation received from the customer directing the Company to warehouse distillate after production. Additionally, we observed a sample of customer-owned barrels to determine they were marked with unique identifiers separating them from Company-owned inventory and were ready for physical transfer to the customer upon request. Also, to evaluate that the Company does not have the ability to use the product or direct to another customer, we inspected underlying documentation for the same sample of bill and hold transactions to determine legal title to the product had transferred to the customer. /s/ KPMG LLP We have served as the Company’s auditor since 2008. Kansas City, Missouri February 25, 2021 36 MGP INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) Year Ended December 31, 2020 2019 2018 Sales $ 395,521 $ 362,745 $ 376,089 Cost of sales 296,715 286,213 292,490 Gross profit 98,806 76,532 83,599 Selling, general, and administrative expenses 44,565 29,290 33,451 Operating income 54,241 47,242 50,148 Interest expense, net and other ( 1,640 ) ( 1,305 ) ( 1,168 ) Income before income taxes 52,601 45,937 48,980 Income tax expense 12,256 7,144 11,696 Net income 40,345 38,793 37,284 Income attributable to participating securities 261 253 708 Net income attributable to common shareholders and used in Earnings Per Share calculation $ 40,084 $ 38,540 $ 36,576 Basic and diluted weighted average common shares 16,937,125 17,012,288 16,866,176 Basic and diluted Earnings Per Share $ 2.37 $ 2.27 $ 2.17 See Accompanying Notes to Consolidated Financial Statements 37 MGP INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) Year Ended December 31, 2020 2019 2018 Net income $ 40,345 $ 38,793 $ 37,284 Other comprehensive income (loss), net of tax: Company sponsored benefit plan: Change in post-employment benefits 732 ( 151 ) 147 Other comprehensive income (loss) 732 ( 151 ) 147 Comprehensive income $ 41,077 $ 38,642 $ 37,431 See Accompanying Notes to Consolidated Financial Statements 38 MGP INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value) December 31, 2020 2019 Current Assets Cash and cash equivalents $ 21,662 $ 3,309 Receivables (less allowance for credit loss at December 31, 2020 and 2019 - $ 24 ) 56,966 40,931 Inventory 141,011 136,931 Prepaid expenses 2,644 2,048 Refundable income taxes — 987 Total current assets 222,283 184,206 Property, plant, and equipment, net 131,992 128,419 Operating lease right-of-use assets, net 5,151 6,490 Other assets 7,149 3,482 Total assets $ 366,575 $ 322,597 Current Liabilities Current maturities of long-term debt $ 1,600 $ 401 Accounts payable 30,273 29,511 Income taxes payable 704 — Accrued expenses 20,752 9,383 Total current liabilities 53,329 39,295 Long-term debt, less current maturities 38,271 40,658 Credit agreement - revolver — 1 Long-term operating lease liabilities 3,057 4,267 Deferred credits 2,196 1,233 Other noncurrent liabilities 4,898 4,170 Deferred income taxes 2,298 1,929 Total liabilities 104,049 91,553 Commitments and Contingencies – Note 9 Stockholders’ Equity Capital stock Preferred, 5 % non-cumulative; $ 10 par value; authorized 1,000 shares; issued and outstanding 437 shares 4 4 Common stock No par value; authorized 40,000,000 shares; issued 18,115,965 shares at December 31, 2020 and 2019; 16,915,862 and 17,028,125 shares outstanding at December 31, 2020 and 2019, respectively 6,715 6,715 Additional paid-in capital 15,503 14,029 Retained earnings 262,943 230,784 Accumulated other comprehensive loss 486 ( 246 ) Treasury stock, at cost, 1,200,103 and 1,087,840 shares at December 31, 2020 and 2019, respectively ( 23,125 ) ( 20,242 ) Total stockholders’ equity 262,526 231,044 Total liabilities and stockholders’ equity $ 366,575 $ 322,597 See Accompanying Notes to Consolidated Financial Statements 39 MGP INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Year Ended December 31, 2020 2019 2018 Cash Flows from Operating Activities Net income $ 40,345 $ 38,793 $ 37,284 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,961 11,572 11,362 Share-based compensation 3,002 3,304 3,099 Deferred income taxes, including change in valuation allowance 593 252 1,665 Other, net 494 ( 116 ) — Changes in operating assets and liabilities: Receivables, net ( 16,173 ) ( 2,134 ) ( 4,450 ) Inventory ( 3,886 ) ( 28,162 ) ( 15,620 ) Prepaid expenses ( 748 ) ( 728 ) 862 Income taxes payable (refundable) 1,750 ( 275 ) 1,268 Accounts payable 1,817 2,107 ( 2,542 ) Accrued expenses 11,503 ( 4,547 ) 551 Deferred credits 963 ( 332 ) ( 586 ) Other, net 634 ( 12 ) 588 Net cash provided by operating activities 53,255 19,722 33,481 Cash Flows from Investing Activities Additions to property, plant, and equipment ( 19,701 ) ( 16,730 ) ( 31,046 ) Acquisition of business ( 2,750 ) — — Proceeds from sale of property and other 2,906 — — Other, net ( 102 ) ( 1,201 ) — Net cash used in investing activities ( 19,647 ) ( 17,931 ) ( 31,046 ) Cash Flows from Financing Activities Payment of dividends and dividend equivalents ( 8,188 ) ( 6,856 ) ( 5,500 ) Purchase of treasury stock ( 4,411 ) ( 5,489 ) ( 2,324 ) Loan fees incurred with borrowings ( 1,148 ) — — Proceeds from long-term debt — 20,000 — Principal payments on long-term debt ( 1,208 ) ( 386 ) ( 372 ) Proceeds from credit agreement - revolver 54,700 17,440 28,966 Payments on credit agreement - revolver ( 55,000 ) ( 28,140 ) ( 21,264 ) Other, net — ( 76 ) — Net cash used in financing activities ( 15,255 ) ( 3,507 ) ( 494 ) Increase (decrease) in cash and cash equivalents 18,353 ( 1,716 ) 1,941 Cash and cash equivalents, beginning of year 3,309 5,025 3,084 Cash and cash equivalents, end of year $ 21,662 $ 3,309 $ 5,025 See Accompanying Notes to Consolidated Financial Statements 40 MGP INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Dollars in thousands) Capital Stock Preferred Issued Common Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Balance, December 31, 2017 $ 4 $ 6,715 $ 13,912 $ 167,129 $ ( 311 ) $ ( 18,719 ) $ 168,730 Comprehensive income: Net income — — — 37,284 — — 37,284 Other comprehensive income — — — — 147 — 147 Dividends and dividend equivalents of $ 0.32 per common share and per restricted stock unit, net of estimated forfeitures — — — ( 5,499 ) — — ( 5,499 ) Share-based compensation — — 2,687 — — — 2,687 Stock shares awarded, forfeited or vested — — ( 1,224 ) — — 1,640 416 Stock shares repurchased — — — — — ( 2,324 ) ( 2,324 ) Balance, December 31, 2018 4 6,715 15,375 198,914 ( 164 ) ( 19,403 ) 201,441 Comprehensive income (loss): Net income — — — 38,793 — — 38,793 Other comprehensive loss — — — — ( 151 ) — ( 151 ) Dividends and dividend equivalents of $ 0.40 per common share and per restricted stock unit, net of estimated forfeitures — — — ( 6,854 ) — — ( 6,854 ) Share-based compensation — — 2,453 — — — 2,453 Stock shares awarded, forfeited or vested — — ( 3,799 ) — — 4,650 851 Stock shares repurchased — — — — — ( 5,489 ) ( 5,489 ) Adjustment related to Accounting Standards Update 2018-02 adoption — — — ( 69 ) 69 — Balance, December 31, 2019 4 6,715 14,029 230,784 ( 246 ) ( 20,242 ) 231,044 Comprehensive income: Net income — — — 40,345 — — 40,345 Other comprehensive income — — — — 732 — 732 Dividends and dividend equivalents of $ 0.48 per common share and per restricted stock unit, net of estimated forfeitures — — — ( 8,186 ) — — ( 8,186 ) Share-based compensation — — 2,067 — — — 2,067 Stock shares awarded, forfeited or vested — — ( 593 ) — — 1,528 935 Stock shares repurchased — — — — — ( 4,411 ) ( 4,411 ) Balance, December 31, 2020 $ 4 $ 6,715 $ 15,503 $ 262,943 $ 486 $ ( 23,125 ) $ 262,526 See Accompanying Notes to Consolidated Financial Statements 41 MGP INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company. MGP Ingredients, Inc. ("Company") is a Kansas corporation headquartered in Atchison, Kansas and 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 grain neutral spirits, including vodka and gin. MGP is also a top producer of high quality industrial alcohol for use in both food and non-food applications. The Company's protein and starch food ingredients provide a host of functional, nutritional, and sensory benefits for a wide range of food products to serve the packaged goods industry. The Company's distillery products are derived from corn and other grains (including rye, barley, wheat, barley malt, and milo), and its ingredient products are derived from wheat flour. The majority of the Company’s sales are made directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the 2018 and 2019 consolidated financial statements have been reclassified to conform to the 2020 presentation. Use of Estimates. The financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The application of certain of these policies places demands on management's judgment, with financial reporting results relying on estimation about the effects of matters that are inherently uncertain, inclusive of effects related to the COVID-19 pandemic. For all of these policies, management cautions that future events rarely develop as forecast, and estimates routinely require adjustment and may require material adjustment. Inventory. Inventory includes finished goods, raw materials in the form of agricultural commodities used in the production process, and certain maintenance and repair items. Bourbons and whiskeys are normally aged in barrels for several years, following industry practice; all barreled bourbon and whiskey is classified as a current asset. The Company includes warehousing, insurance, and other carrying charges applicable to barreled whiskey in inventory costs. Inventories are stated at the lower of cost or net realizable value on the first-in, first-out, or FIFO, method. Inventory valuations are impacted by constantly changing prices paid for key materials, primarily corn. Properties, Depreciation, and Amortization. Property, plant, and equipment are typically stated at cost. Additions, including those that increase the life or utility of an asset, are capitalized and all properties are depreciated over their estimated remaining useful lives. Depreciation and amortization are computed using the straight line method over the following estimated useful lives: Buildings and improvements (a) 10 – 30 years Machinery and equipment 3 – 10 years Office furniture and equipment 5 – 10 years Computer equipment and software 3 – 5 years Motor vehicles 5 years (a) Leasehold improvements are the shorter of economic useful life or life of lease 42 Maintenance costs are expensed as incurred. The cost of property, plant, and equipment sold, retired, or otherwise disposed of, as well as related accumulated depreciation and amortization, are eliminated from the property accounts with related gains and losses reflected in the Consolidated Statements of Income. The Company capitalizes interest costs associated with significant construction projects. Total interest incurred for 2020, 2019, and 2018 is noted below: Year Ended December 31, 2020 2019 2018 Interest costs charged to expense $ 2,267 $ 1,305 $ 1,168 Plus: Interest cost capitalized 246 575 562 Total $ 2,513 $ 1,880 $ 1,730 Revenue Recognition. Revenue is recognized when control of the promised goods or services, through performance obligations by the Company, is transferred to the customer in an amount that reflects the consideration it expects to be entitled to in exchange for the performance obligations. The term between invoicing and when payment is due is not significant and the period between when the entity transfers the promised good or service to the customer and when the customer pays for that good or service is one year or less. Excise taxes that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer are excluded from revenue. Revenue is recognized for the sale of products at the point in time finished products are delivered to the customer in accordance with shipping terms. This is a faithful depiction of the satisfaction of the performance obligation because, at that point control passes to the customer, the customer has legal title and the risk and rewards of ownership have transferred, and the customer has present obligation to pay. The Company’s Distillery Products segment routinely enters into bill and hold arrangements, whereby the Company produces and sells aged and unaged distillate to customers, and the product is barreled at the customer’s request and warehoused at a Company location for an extended period of time in accordance with directions received from the Company’s customers. Even though the aged and unaged distillate remains in the Company’s possession, a sale is recognized at the point in time when the customer obtains control of the product. Control is transferred to the customer in bill and hold transactions when: customer acceptance specifications have been met, legal title has transferred, the customer has a present obligation to pay for the product and the risk and rewards of ownership have transferred to the customer. Additionally, all the following bill and hold criteria have been met in order for control to be transferred to the customer: the reason for the bill and hold arrangement is substantive -the customer has requested the product be warehoused, the product has been identified as separately belonging to the customer, the product is currently ready for physical transfer to the customer, and the Company does not have the ability to use the product or direct it to another customer. Warehouse service revenue is recognized over the time that warehouse services are rendered and as they are rendered. This is a faithful depiction of the satisfaction of the performance obligation because control of the aging products has already passed to the customer and there are no additional performance activities required by the Company, except as requested by the customer. The performance of the service activities, as requested, is invoiced as satisfied and revenue is concurrently recognized. Recognition of Insurance Recoveries. Estimated loss contingencies are recognized as charges to income when they are probable and reasonably estimable. Insurance recoveries are not recognized until all contingencies related to the insurance claim have been resolved and settlement has been reached with the insurer. Insurance recoveries, to the extent of costs and losses, are reported as a reduction to costs on the Consolidated Statements of Income. Insurance recoveries, in excess of costs and losses, if any, would be reported as a separate caption in Operating income on the Consolidated Statements of Income. Income Taxes. The Company accounts for income taxes using an asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. A valuation allowance is recognized if it is "more likely than not" that at least some portion of the deferred tax asset will not be realized. 43 Earnings Per Share ("EPS"). Basic and diluted EPS is computed using the two class method, which is an earnings allocation formula that determines net income per share for each class of Common Stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income attributable to common shareholders by the weighted average shares outstanding during each year or period. Goodwill and Other Intangible Assets. The Company records goodwill and other indefinite-lived intangible assets in connection with various acquisitions of businesses and allocates the goodwill and other indefinite-lived intangible assets to its respective reporting units. The Company tests goodwill for impairment at least annually, in the fourth quarter, or on an interim basis if events and circumstances occur that would indicate it is more likely than not that the fair value of a reporting unit is less than the carrying value. To the extent that the carrying amount exceeds fair value, an impairment of goodwill is recognized and allocated to the reporting units. Judgment is required in the determination of reporting units, the assignment of assets and liabilities to reporting units, including goodwill, and the determination of fair value of the reporting units. The fair value of the reporting units was estimated with the assistance of third party independent appraisals. The Company separately evaluates indefinite-lived intangible assets for impairment. As of December 31, 2020, the Company determined that goodwill and indefinite lived intangible assets were not impaired. Fair Value of Financial Instruments. The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy is broken down into three levels based upon the observability of inputs. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability. The Company’s short-term financial instruments include cash and cash equivalents, accounts receivable and accounts payable. The carrying value of the short-term financial instruments approximates the fair value due to their short-term nature. These financial instruments have no stated maturities or the financial instruments have short-term maturities that approximate market. The fair value of the Company’s debt is estimated based on current market interest rates for debt with similar maturities and credit quality. The fair value of the Company’s debt was $ 44,548 and $ 42,534 at December 31, 2020 and 2019, respectively. The financial statement carrying value (including unamortized loan fees) was $ 39,871 and $ 41,060 at December 31, 2020 and 2019, respectively. These fair values are considered Level 2 under the fair value hierarchy. Derivative Instruments. Certain commodities the Company uses in its production process, or input costs, exposes it to market price risk due to volatility in the prices for those commodities. Through the Company’s grain supply contracts for its Atchison and Lawrenceburg facilities, its wheat flour supply contract for the Atchison facility, and its natural gas contracts for both facilities, it purchases grain, wheat flour, and natural gas, respectively, for delivery from one to 24 months into the future at negotiated fixed prices. The Company has determined that the firm commitments to purchase grain, wheat flour, and natural gas under the terms of its supply contracts meets the normal purchases and sales exception as defined under ASC 815, Derivatives and Hedging , because the quantities involved are for amounts to be consumed within the normal expected production process. Recently Adopted Accounting Standard Updates. Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) and subsequent updates, which changes the methodology for measuring credit losses on financial instruments and the timing when such losses are recorded. The Company adopted this standard on January 1, 2020 using the modified retrospective approach, and it had no impact on its consolidated financial statements and disclosures. ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill by eliminating the step 2 from the goodwill impairment test. An impairment in goodwill is recognized if the carrying amount of the reporting unit exceeds its fair value. The Company adopted this standard on January 1, 2020 on a prospective basis. The adoption of this standard had no impact on the Company's consolidated financial statements and disclosures. 44 ASU 2018-13, Fair Value Measurement (Topic 820), which modifies the disclosure requirements on fair value measurements. The Company adopted this guidance on January 1, 2020 and it had no impact on its consolidated financial statements and disclosures. ASU 2019-12, Simplifying the Accounting for Income Taxes , which clarifies and simplifies certain aspects of accounting for income taxes. This standard requires certain aspects to be adopted on either a retrospective or modified retrospective basis, while others apply prospectively. This guidance is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The Company elected to early adopt this standard on January 1, 2020 and it had no impact on its consolidated financial statements and disclosures. Recently Issued Accounting Pronouncements. ASU 2020-04, Facilitation of Effects of Reference Rate Reform on Financial Reporting , which provide optional expedients and exceptions for a period of time to help facilitate the adoption of reference rate reform and the impact on financial reporting. This guidance is effective immediately upon issuance and may be applied prospectively to contract modifications and transactions affected by reference rate reform before December 31, 2022. This amendment is not applicable to contract modifications made after December 31, 2022. The Company is still evaluating the effect that ASU 2020-04 will have on its consolidated financial statements and related disclosures. ASU 2021-01, Reference Rate Reform - Scope , which provides certain expedients and exceptions when applying the reference rate reform to certain derivative and hedging contracts. This guidance is effective immediately for all entities on a full retrospective basis subsequent to March 12, 2020 or on a prospective basis to new contracts. The amendment is not applicable to contract modifications made after December 31, 2020. The Company is still evaluating the effect that ASU 2021-01 will have on its consolidated financial statements and related disclosures. NOTE 2: OTHER BALANCE SHEET CAPTIONS Inventory. December 31, 2020 2019 Finished goods $ 16,414 $ 16,654 Barreled distillate (bourbons and whiskeys) 105,445 104,249 Raw materials 6,954 4,920 Work in process 1,805 1,766 Maintenance materials 8,634 8,200 Other 1,759 1,142 Total $ 141,011 $ 136,931 Property, plant, and equipment, net. December 31, 2020 2019 Land, buildings, and improvements $ 114,374 $ 105,257 Transportation equipment 664 3,317 Machinery and equipment 181,990 190,930 Construction in progress 16,702 14,454 Property, plant, and equipment, at cost 313,730 313,958 Less accumulated depreciation and amortization ( 181,738 ) ( 185,539 ) Property, plant, and equipment, net $ 131,992 $ 128,419 45 Accrued expenses. December 31, 2020 2019 Employee benefit plans $ 3,033 $ 590 Salaries and wages 12,607 3,189 Property taxes 1,461 1,445 Current operating lease liabilities 2,112 2,244 Other 1,539 1,915 Total $ 20,752 $ 9,383 NOTE 3: REVENUE The Company generates revenues from the Distillery Products segment by the sale of products and by providing warehouse services related to the storage and aging of customer products. The Company generates revenues from the Ingredient Solutions segment by the sale of products. Revenue related to sales of products is recognized at a point in time whereas revenue generated from warehouse services is recognized over time. Contracts with customers in both segments include a single performance obligation (either the sale of products or the provision of warehouse services). Disaggregation of Sales. The following table presents the Company's sales disaggregated by segment and major products and services. Year Ended December 31, 2020 2019 2018 Distillery Products Brown Goods $ 125,059 $ 107,190 $ 125,857 White Goods 64,347 62,862 62,574 Premium beverage alcohol 189,406 170,052 188,431 Industrial alcohol 80,682 79,833 80,650 Food grade alcohol 270,088 249,885 269,081 Fuel grade alcohol 5,630 5,949 6,347 Distillers feed and related co-products 26,109 26,743 25,698 Warehouse services 15,631 14,656 12,929 Total Distillery Products 317,458 297,233 314,055 Ingredient Solutions Specialty wheat starches 41,631 30,816 28,594 Specialty wheat proteins 26,960 22,359 21,098 Commodity wheat starch 7,630 9,628 9,223 Commodity wheat protein 1,842 2,709 3,119 Total Ingredient Solutions 78,063 65,512 62,034 Total sales $ 395,521 $ 362,745 $ 376,089 NOTE 4: GOODWILL AND OTHER INTANGIBLE ASSETS The Company records goodwill and indefinite-lived intangible assets in connection with various acquisitions of businesses and allocates the goodwill and indefinite-lived intangible assets to its respective reporting units. Goodwill and indefinite-lived intangible assets are included in Other assets on the Consolidated Balance Sheets. Changes in carrying amount of goodwill and indefinite-lived intangible assets by business segment were as follows: 46 Distillery Products (a) Ingredient Solutions Total (a) Balance at December 31, 2019 $ 1,850 $ — $ 1,850 Acquisitions 1,778 — 1,778 Balance at December 31, 2020 $ 3,628 $ — $ 3,628 (a) Includes $ 890 and $ 350 of trade names at December 31, 2020 and 2019, respectively. Trade names are considered indefinite-lived intangible assets. NOTE 5: CORPORATE BORROWINGS Indebtedness Outstanding. The following table presents the Company’s outstanding indebtedness December 31, Description (a) 2020 2019 Credit Agreement - Revolver, 1.15 % (variable rate) due 2025 $ — $ — Previous Credit Agreement - Revolver, 3.19 % (variable rate) due 2022 — 300 Secured Promissory Note, 3.71 % (fixed rate) due 2022 — 1,208 Prudential Note Purchase Agreement, 3.53 % (fixed rate) due 2027 20,000 20,000 Prudential Note Purchase Agreement, 3.80 % (fixed rate) due 2029 20,000 20,000 Total indebtedness outstanding 40,000 41,508 Less unamortized loan fees (b) ( 129 ) ( 448 ) Total indebtedness outstanding, net 39,871 41,060 Less current maturities of long-term debt ( 1,600 ) ( 401 ) Long-term debt $ 38,271 $ 40,659 (a) Interest rates are as of December 31, 2020, except for the Previous Credit Agreement which is as of December 31, 2019. (b) Loan fees are being amortized over the life of the Credit Agreement and Note Purchase Agreement. Credit Agreement and Note Purchase Agreements. On February 14, 2020, the Company entered into a new credit agreement (the "Credit Agreement") with multiple participants led by Wells Fargo Bank, National Association ("Wells Fargo Bank"). The Credit Agreement provides for a $ 300,000 revolving credit facility. The Company may increase the facility from time to time by an aggregate principal amount of up to $ 100,000 provided certain conditions are satisfied and at the discretion of the lender. The Credit Agreement matures on February 14, 2025. The Credit Agreement is secured by substantially all assets, excluding real property. The Credit Agreement includes certain requirements and covenants, which the Company was in compliance with at December 31, 2020. The Company incurred $ 1,148 new loan fees related to the Credit Agreement during 2020. The unamortized balance of total loan fees related to the Credit Agreement was $ 1,195 at December 31, 2020, which were included in Other assets, net on the Consolidated Balance Sheet. The unamortized loan fees are being amortized over the life of the Credit Agreement. As of December 31, 2020, the Company had no outstanding borrowings under the Credit Agreement leaving $ 300,000 available. The interest rate for the borrowings of the Credit Agreement at December 31, 2020 was 1.2 %. The Credit Agreement replaced the Company's $ 150,000 Credit Agreement ("Previous Credit Agreement) with Wells Fargo Bank, which was entered into on August 23, 2017. The Previous Credit Agreement was set to mature on August 23, 2022. The Previous Credit Agreement was secured by substantially all assets, excluding real property. The interest rate for borrowings of the Previous Credit Agreement at December 31, 2019 was 3.2 %. On August 23, 2017, the Company also entered into a Note Purchase and Private Shelf Agreement (the "Note Purchase Agreement") with PGIM, Inc. ("Prudential Capital Group"), an affiliate of Prudential Financial, Inc., and certain affiliates of PGIM, Inc. The Note Purchase Agreement was amended by the First Amendment to Private Shelf Agreement as of February 14, 2020 and the Second Amendment to Private Shelf Agreement as of September 30, 2020. The amended agreement provides for the issuance of up to $ 105,000 of Senior Secured Notes the shelf facility and issuance of up $ 20,000 Senior Secured Notes. The Company issued $ 20,000 of Senior Secured Notes with a maturity date of August 23, 2027. The Senior Secured Notes bear interest at a rate of 3.5 percent per year. On April 30, 2019, the Company issued $ 20,000 of additional Senior Secured 47 Notes with a maturity date of April 30, 2029. The Senior Secured Notes bear interest at a rate of 3.8 percent per year. The Note Purchase Agreement includes certain requirements and covenants, which the Company was in compliance with at December 31, 2020. The Company incurred no new loan fees related to the Note Purchase Agreement during 2020. The unamortized balance of total loan fees related to the Note Purchase Agreement was $ 129 at December 31, 2020 and is being amortized over the life of the Note Purchase Agreement. The Note Purchase Agreement is secured by substantially all assets, excluding real property. Debt Maturities. Aggregate amount of maturities for long-term debt as of December 31, 2020 are as follows: 2021 $ 1,600 2022 3,200 2023 5,600 2024 6,400 2025 6,400 Thereafter 16,800 Total $ 40,000 NOTE 6: INCOME TAXES Income tax expense is composed of the following: Year Ended December 31, 2020 2019 2018 Current: Federal $ 10,825 $ 6,426 $ 8,844 State 1,291 412 1,317 12,116 6,838 10,161 Deferred: Federal ( 302 ) 352 55 State 442 ( 46 ) 1,480 140 306 1,535 Total $ 12,256 $ 7,144 $ 11,696 Income tax expense also included tax expense allocated to comprehensive income for 2020, 2019, and 2018 of $ 229 , $ 14 , and $ 73 , respectively (see the Consolidated Statements of Comprehensive Income). In response to COVID-19, President Donald Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") on March 27, 2020. The CARES Act along with other guidance issued by the IRS provides for numerous tax provisions and other stimulus measures, including temporary suspension of certain payment requirements for the employer portion of Social Security taxes, deferral of income tax payments until July 15, 2020, and technical corrections from prior tax legislation. The Company is in the process of monetizing certain parts of the CARES Act and continues to monitor tax legislation for additional potential benefits available to the Company. In addition, President Trump signed a second COVID-19 stimulus bill, the Coronavirus Relief and Government Funding Act, on December 27, 2020. The Company is in the process of reviewing that legislation. As of December 31, 2020, to the extent applicable, MGP has reflected both stimulus packages in its consolidated financial statements. 48 A reconciliation of income tax expense at the normal statutory federal rate to income tax expense included in the accompanying Consolidated Statements of Income is below: Year Ended December 31, 2020 2019 2018 "Expected" provision at federal statutory rate $ 11,046 $ 9,654 $ 10,286 State income taxes, net 2,408 1,540 2,029 Change in valuation allowance ( 422 ) ( 168 ) 1,304 Share-based compensation 56 ( 2,877 ) ( 1,201 ) Compensation limits 125 148 — Federal and state tax credits ( 1,035 ) ( 1,302 ) ( 807 ) Other 78 149 85 Income tax expense $ 12,256 $ 7,144 $ 11,696 Effective tax rate 23.3 % 15.6 % 23.9 % The tax effects of temporary differences giving rise to deferred income taxes shown on the Consolidated Balance Sheets are as follows: December 31, 2020 2019 Deferred income tax assets: Post-retirement liability $ 446 $ 717 Deferred income 250 300 Share-based compensation 2,123 1,238 Capital loss carryforwards — 91 State tax credit carryforwards 2,986 3,198 State operating loss carryforwards 1,264 1,529 Inventories 2,077 1,738 Operating lease liabilities 1,322 1,582 Deferred compensation 1,250 — Other 1,036 1,291 Gross deferred income tax assets 12,754 11,684 Less: valuation allowance ( 862 ) ( 1,284 ) Net deferred income tax assets 11,892 10,400 Deferred income tax liabilities: Fixed assets ( 12,205 ) ( 10,332 ) Operating lease right-of-use assets ( 1,318 ) ( 1,577 ) Other ( 667 ) ( 420 ) Gross deferred income tax liabilities ( 14,190 ) ( 12,329 ) Net deferred income tax liability $ ( 2,298 ) $ ( 1,929 ) A schedule of the change in valuation allowance is as follows: Balance at December 31, 2018 $ 1,452 Decrease ( 168 ) Balance at December 31, 2019 1,284 Decrease ( 422 ) Balance at December 31, 2020 $ 862 49 As of December 31, 2020, the Company’s total valuation allowance of $ 862 related to net operating loss carryforwards and certain tax credits in states in which it is not "more likely than not" to create enough state taxable income to fully utilize the carryforwards before expiration of the carryforward periods. As of December 31, 2019, the Company’s total valuation allowance of $ 1,284 related to net operating loss carryforwards in states in which it is not "more likely than not" to create enough state taxable income to fully utilize the carryforwards before expiration of the carryforward periods, and capital loss carryforwards that the Company is not "more likely than not" to use before they expire. The reduction of the valuation allowance year-over-year is due to certain capital loss carryforwards and the corresponding deferred tax asset and related valuation allowance expiring at the end of 2020, and the reduction of the valuation allowance related to certain state tax attributes. As of December 31, 2020 and 2019, the Company had $ 18,697 and $ 21,918 in gross state net operating loss carryforwards, respectively. Due to varying state carryforward periods, the state net operating loss carryforwards will expire in varying years between calendar years 2021 and 2040. As of December 31, 2020 and 2019, the Company had gross state tax credit carryforwards of $ 3,778 and $ 4,049 , respectively. State credits, if not used to offset income tax expense in their respective jurisdictions, will expire in varying years between 2021 and 2036. The Company treats accrued interest and penalties related to tax liabilities, if any, as a component of income tax expense. During 2020, 2019, and 2018, the Company's activity in accrued interest and penalties was not significant. The following is a reconciliation of the total amount of unrecognized tax benefits (excluding interest and penalties) for 2020, 2019, and 2018: Year Ended December 31, 2020 2019 2018 Beginning of year balance $ 255 $ 193 $ 185 Additions based on prior year tax positions 2 3 2 Additions based on current year tax positions 20 78 11 Reduction for prior year tax positions — ( 19 ) ( 5 ) Reductions for settlements ( 165 ) — — End of year balance $ 112 $ 255 $ 193 For each period presented, substantially all of the amount of unrecognized benefits (excluding interest and penalties) would impact the effective tax rate, if recognized. The Company reasonably expects that the amount of unrecognized tax benefit will not change significantly over the next 12 months. The Company completed an audit of federal income tax audit for tax year 2016, without significant findings. For federal tax purpose, all tax years after 2016 remain open to adjustment. The Company is subject to examination for its state tax returns for years 2016, and forward, with the exception of certain net operating losses and credit carryforwards originating in years prior to 2016 that remain subject to adjustment. 50 NOTE 7: EQUITY AND EPS Capital Stock. Common Stockholders are entitled to elect four of the nine members of the Board of Directors, while Preferred Stockholders are entitled to elect the remaining five members. All directors are elected annually for a one year term. Any vacancies on the Board are to be filled only by the shareholders and not by the Board. Shareholders who own 10 percent or more of the outstanding Common or Preferred Stock have the right to call a special meeting of stockholders. Common Stockholders are not entitled to vote with respect to a merger, dissolution, lease, exchange or sale of substantially all of the Company’s assets, or on an amendment to the Articles of Incorporation, unless such action would increase or decrease the authorized shares or par value of the Common or Preferred Stock, or change the powers, preferences or special rights of the Common or Preferred Stock so as to affect the Common Stockholders adversely. Generally, Common Stockholders and Preferred Stockholders vote as separate classes on all other matters requiring shareholder approval. EPS. The computations of basic and diluted EPS: Year Ended December 31, 2020 2019 2018 Operations: Net income (a) $ 40,345 $ 38,793 $ 37,284 Less: Income attributable to participating securities (unvested shares and units) (b) 261 253 708 Net income attributable to common shareholders $ 40,084 $ 38,540 $ 36,576 Share information: Basic and diluted weighted average common shares (c) 16,937,125 17,012,288 16,866,176 Basic and diluted EPS $ 2.37 $ 2.27 $ 2.17 (a) Net income attributable to all shareholders. (b) Participating securities included RSUs of 110,665 , 111,365 , and 326,375 for the years ended December 31, 2020, 2019, and 2018, respectively. (c) Under the two class method, basic weighted average common shares exclude outstanding unvested participating securities. 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, the Company repurchased approximately 159,104 shares of MGP Common Stock for $ 4,053 , resulting in $ 20,947 remaining under the share repurchase plan. The shares were repurchased in multiple separate tranches with the final purchase concluding on March 16, 2020. 51 Dividends and Dividend Equivalents Dividend and Dividend Equivalent Information (per Share and Unit) Declaration date Record date Payment date Declared Paid Dividend payment Dividend equivalent payment (a)(b) Total payment (b) 2020 February 24 March 13 March 27 $ 0.12 $ 0.12 $ 2,047 $ 13 $ 2,060 April 28 May 22 June 5 0.12 0.12 2,027 14 2,041 July 28 August 21 September 4 0.12 0.12 2,029 14 2,043 October 27 November 20 December 4 0.12 0.12 2,030 14 2,044 $ 0.48 $ 0.48 $ 8,133 $ 55 $ 8,188 2019 February 25 March 13 March 29 $ 0.10 $ 0.10 $ 1,701 $ 13 $ 1,714 April 29 May 15 May 31 0.10 0.10 1,702 11 1,713 July 29 August 14 August 30 0.10 0.10 1,703 11 1,714 October 29 November 14 November 26 0.10 0.10 1,703 12 1,715 $ 0.40 $ 0.40 $ 6,809 $ 47 $ 6,856 2018 February 21 March 9 March 23 $ 0.08 $ 0.08 $ 1,348 $ 27 $ 1,375 April 30 May 16 June 1 0.08 0.08 1,348 27 1,375 July 31 August 16 August 31 0.08 0.08 1,348 27 1,375 October 30 November 15 November 30 0.08 0.08 1,349 26 1,375 $ 0.32 $ 0.32 $ 5,393 $ 107 $ 5,500 (a) Dividend equivalent payments on unvested participating securities (see Note 10). (b) Includes estimated forfeitures. NOTE 8: LEASES The Company has operating leases for railcars, computer equipment, an office space, and certain equipment. The Company has no finance leases. Leases with terms of twelve months or less are not recorded on the Company’s Consolidated Balance Sheets. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. For leases beginning in 2019 and later, lease components are accounted for separately from non-lease components, such as common-area maintenance, based on the relative, observable stand-alone prices of the components. The Company’s leases have remaining lease terms of one year to five years , some of which may include options to extend the lease. Options to renew the Company’s leases were not considered when assessing the value of the right-of-use assets because the Company was not reasonably certain that it will assert the options to renew the leases. As most of the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental collateralized borrowing rate based on the information available at commencement date in determining the present value of lease payments. The following table provides supplemental balance sheet classification information related to leases: December 31, Leases Balance Sheet Classification 2020 2019 Assets Operating Operating lease right-of-use-assets, net $ 5,151 $ 6,490 Total leased assets $ 5,151 $ 6,490 Liabilities Current Operating Accrued expenses $ 2,112 $ 2,244 Noncurrent Operating Long-term operating lease liabilitites 3,057 4,267 Total operating lease liability $ 5,169 $ 6,511 52 The following table presents the components of lease costs: Year Ended December 31, 2020 2019 Operating lease costs $ 2,704 $ 2,434 Short-term lease costs 281 767 Sublease income ( 99 ) ( 247 ) Net lease costs (a) $ 2,886 $ 2,954 (a) Recorded as a component of Operating income on the Company’s Consolidated Statement of Income. The following table presents supplemental cash flow and non-cash activity related to lease information: Year Ended December 31, 2020 2019 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 2,707 $ 2,414 Right-of-use assets obtained in exchange for lease obligations Operating leases $ 1,048 $ 2,064 The following table presents weighted average discount rate and remaining lease term: December 31, 2020 2019 Weighted average discount rate Operating leases 5.01 % 5.77 % Weighted average remaining lease term Operating leases 2.8 years 3.3 years As of December 31, 2020, the maturities of operating lease liabilities were as follows: 2021 $ 2,308 2022 1,689 2023 1,093 2024 420 2025 1 Thereafter — Total lease payments 5,511 Less interest ( 342 ) Total operating lease liability $ 5,169 53 NOTE 9: COMMITMENTS AND CONTINGENCIES Commitments. Beginning in October 2018, the Company carries $ 10,000 in industrial revenue bonds with the City of Williamstown, Kentucky (the "City") that mature in 2047, and leases back facilities owned by the City that the Company recorded as property, plant, and equipment, net, on its Consolidated Balance Sheet under a capital lease. The lease payment on the facilities is sufficient to pay principal and interest on the bonds. Because the Company owns all of the outstanding bonds, has a legal right to set-off, and intends to set-off the corresponding lease and interest payment, the Company netted the capital lease obligation with the bond asset and, in turn, reflected no amount for the obligation or the corresponding asset on its Consolidated Balance Sheet at December 31, 2020 and 2019. Contingencies. There are various legal and regulatory proceedings involving the Company and its subsidiaries. The Company accrues estimated costs for a contingency when management believes that a loss is probable and can be reasonably estimated. Feed Dryer Fire. During November 2020, the Company 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. The Company impaired $ 681 of spare parts and other inventory which was recorded in Cost of sales on the Consolidated Statements of Income for the year ended December 31, 2020. Additionally, the Company 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, the Company recorded a $ 3,780 partial settlement from its insurance carrier as a reduction of Cost of sales. The Company is working to construct a replacement drying system. The Company’s insurance is expected to provide coverage of any business interruption and other losses from damage to property, plant and equipment, but there can be no assurance to the amount or timing of possible insurance recoveries if ultimately claimed by the Company. Ransomware Cyber-Attack . In May 2020, the Company was affected by a ransomware cyber-attack that temporarily disrupted production at its Atchison facilities. The Company's 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. The Company has insurance related to this event and partially recovered $ 633 in December 2020 as reduction of Cost of sales. The Company is currently evaluating if it will seek further recovery related to this event. Following the attack, MGP implemented a variety of measures to further enhance our cybersecurity protections and minimize the impact of any future attack. The Company’s insurance may cover additional losses from this incident, but there can be no assurance as to the amount or timing of any possible insurance recoveries if ultimately claimed by the Company. Shareholder matters. In 2020, two putative class action lawsuits were filed in the United States District Court for District of Kansas, naming the Company and certain of its current and former executive officers as defendants, asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs seek to pursue claims on behalf of a class consisting of purchasers or acquirers of the Company's Common Stock during certain specified periods (the “Class Periods”). On May 28, 2020, the two lawsuits were consolidated and the Court appointed City of Miami Fire Fighters’ and Police Officers’ Retirement Trust as lead plaintiff. The consolidated action is captioned In re MGP Ingredients, Inc. Securities Litigation and the file is maintained under Master File No. 2:20-cv-2090-DDCJPO. On July 22, 2020, the Retirement Trust filed a consolidated Amended Complaint. The Consolidated Complaint alleges that the defendants made false and/or misleading statements regarding the Company’s forecasts of sales of aged whiskey, and that, as a result the Company's Common Stock traded at artificially inflated prices throughout the Class Periods. The plaintiffs seek compensatory damages, interest, attorneys’ fees, costs, and unspecified equitable relief, but have not specified the amount of damages being sought. On September 8, 2020, defendants filed a Motion to Dismiss the Consolidated Amended Complaint. The Motion has been fully briefed and remains pending. Discovery is stayed while the motion is pending. The Company intends to continue to vigorously defend itself in this action. On May 11, 2020, Mitchell Dorfman, a shareholder in MGP, filed an action in the United States District Court for the District of Kansas, under the caption Dorfman, derivatively on behalf of MGP Ingredients v. Griffin, et al. , Case 2:20-cv-02239. On June 4, 2020, Justin Carter, a shareholder in MGP, filed an action in the United States District Court for the District of Kansas, under the caption Carter, derivatively on behalf of MGP Ingredients v. Griffin, et al. , Case 2:20-cv-02281. On June 18, 2020, Alexandra Kearns, a shareholder in MGP, filed an action in the District Court of Atchison County, Kansas , under the caption Kearns, derivatively on behalf of MGP Ingredients v. Griffin, et al. , Case 2020-CV-000042 . The defendants are certain of the Company’s current and former officers and directors. The Company is a nominal defendant in each action. Plaintiffs allege that the Company was damaged as a result of the conduct of the individual defendants alleged in the MGP Ingredients, Inc. Securities Litigation , the repurchase of company stock at artificially inflated prices, and compensation paid to the individual defendants. The Complaint in Dorfman asserts claims for violations of Sections 14(a), 10(b), and 20(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, waste of corporate assets, and unjust enrichment. The Complaint in Carter asserts claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, waste of corporate assets, and unjust enrichment. The Petition in Kearns asserts claims for breach of fiduciary duties, waste of 54 corporate assets, and unjust enrichment. The pleadings pray for an award of compensatory damages, including interest, in favor of the Company, for equitable relief related to the Company’s corporate governance, for disgorgement of compensation, and for an award of attorneys’ fees and costs. On July 13, 2020, defendants filed a Motion to Dismiss in Dorfman . The Motion has been fully briefed and remains pending. On August 13, 2020, defendants filed a Motion to Stay the Kearns action pending the resolution of Dorfman. The Motion has been fully briefed and remains pending. On November 3, 2020, the court entered an order providing that Defendants’ response to the Carter Complaint shall be due 14 days after a ruling on the Motion to Dismiss filed in Dorfman. On November 25, 2020, Kenneth Laury filed an action in the District Court of Shawnee County, Kansas under the caption Laury v. MGP Ingredients, Inc., Case Number: 2020-CV-000609. The Petition alleges that plaintiff commenced the action under K.S.A. 17-6510 to enforce his alleged right to inspect books and records of the Company, in order to enable him to evaluate possible misconduct by the Company’s Board of Directors and management. On January 8, 2021, the Company filed an Answer to the Petition, denying that plaintiff has satisfied the statutory requirements for his demand. 2016 Atchison Chemical Release. A chemical release occurred at the Company's Atchison facility on October 21, 2016, which resulted in emissions venting into the air ("the Atchison Chemical Release"). Private plaintiffs have initiated, and additional private plaintiffs may initiate, legal proceedings for damages resulting from the Atchsion Chemical Release, but the Company is currently unable to reasonably estimate the amount of any such damages that might result. The Company’s insurance may provide coverage of any damages to private plaintiffs, subject to a deductible of $ 250 , but certain regulatory fines or penalties may not be covered and there can be no assurance to the amount or timing of possible insurance recoveries if ultimately claimed by the Company. NOTE 10: EMPLOYEE BENEFIT PLANS 401(k) Plans. The Company has established 401(k) plans covering all employees after certain eligibility requirements are met. Amounts charged to operations for employer contributions related to the plans totaled $ 1,733 , $ 1,603 , and $ 1,488 for 2020, 2019, and 2018, respectively. Post-Employment Benefits. The Company sponsors life insurance coverage as well as medical benefits, including prescription drug coverage, to certain retired employees and their spouses. In 2014, the Company made a change to the plan to terminate post-employment health care and life insurance benefits for retirees and employees except for a specified grandfathered group. As of December 31, 2020 and 2019, total current benefit obligation recorded in Accrued expense on the Consolidated Balance Sheets was $ 266 and $ 441 , respectively. As of December 31, 2020 and 2019, total noncurrent benefit obligation was $ 1,476 and $ 2,509 , which was recorded in Other noncurrent liabilities on the Consolidated Balance Sheets, respectively. Share-Based Compensation Plans. As of December 31, 2020, the Company was authorized to issue 40,000,000 shares of Common Stock and had a treasury share balance of 1,200,103 at December 31, 2020. The Company currently has two active share-based compensation plans: the Employee Equity Incentive Plan of 2014 (the "2014 Plan") and the Non-Employee Director Equity Incentive Plan (the "Directors' Plan"). The plans were approved by shareholders at the Company’s annual meeting in May 2014. Detail of activities in both plans follows below. The Company’s share-based compensation plans provide for the awarding of stock options, stock appreciation rights, and shares of restricted stock and RSUs for senior executives and salaried employees, as well as for outside directors. Compensation expense related to restricted stock awards is based on the market price of the stock on the date the Board of Directors communicates the approved award and is amortized over the vesting period of the restricted stock award. The Consolidated Statements of Income for 2020, 2019, and 2018 reflect total share-based compensation costs and director fees for awarded grants of $ 2,723 , $ 2,424 , $ 2,612 , respectively, related to these plans. For long-term incentive awards to be granted in the form of RSUs in 2021 based on 2020 results, the Human Resources and Compensation Committee ("HRCC") determined that the grants would have performance conditions that would be based on the same performance metrics as the Short-Term Incentive Plan (the "STI Plan"). The performance metrics are operating income, earnings before interest, taxes, depreciation, and amortization ("EBITDA"), and EPS. Because management determined at the beginning of 2020 that the performance metrics would most likely be met, amortization of the estimated dollar pool of RSUs to be awarded based on 2020 results was started in the first quarter over an estimated 48 month period, including 12 months to the grant date and an additional 36 months to the vesting date. The Consolidated Statements of Income for 2020, 2019, and 2018 reflects share-based compensation costs for grants to be awarded of $ 2,566 , $ 123 , and $ 821 , respectively. 55 2014 Plan. The 2014 Plan, with 1,500,000 shares registered for future grants, provides that vesting occurs pursuant to the time period specified in the particular award agreement approved for that issuance of RSUs, which is to be not less than three years unless vesting is accelerated due to the occurrence of certain events. As of December 31, 2020, 421,748 RSUs had been granted of the 1,500,000 shares approved for under the 2014 Plan. Directors’ Plan. The Director’s Plan, with 300,000 shares registered for future grants, provides that vesting occurs pursuant to the time period specified in the particular award agreement approved for that issuance of equity. As of December 31, 2020, 109,220 shares were granted of the 300,000 shares approved for grants under the Directors’ Plan and all 109,220 shares were vested. RSUs. Summary of unvested RSUs under the Company’s share-based compensation plans for 2020, 2019, and 2018: Year Ended December 31, 2020 2019 2018 Units Weighted Average Grant-Date Fair Value Units Weighted Average Grant-Date Fair Value Units Weighted Average Grant-Date Fair Value Unvested balance at beginning of year 116,855 $ 65.73 329,205 $ 25.42 368,492 $ 17.20 Granted 38,700 31.93 45,993 77.78 42,136 78.37 Forfeited ( 5,278 ) 63.17 ( 22,934 ) 57.27 ( 1,080 ) 28.30 Vested ( 31,422 ) 44.06 ( 235,409 ) 12.54 ( 80,343 ) 15.42 Unvested balance at end of year 118,855 $ 60.56 116,855 $ 65.73 329,205 $ 25.42 During 2020, 2019, and 2018, the total grant date fair value of RSU awards vested was $ 1,384 , $ 2,951 , and $ 1,239 , respectively. As of December 31, 2020 there was $ 1,570 of total estimated unrecognized compensation costs (net of estimated forfeitures) related to granted RSU awards. These costs are expected to be recognized over a weighted average period of approximately 1.6 years. Upon their vesting, the Company purchased restricted stock and RSUs from employees to cover associated withholding taxes. Total treasury stock purchases added 10,437 shares for $ 358 in 2020; 77,481 shares for $ 5,489 in 2019; and 27,214 shares for $ 2,324 in 2018. Annual Cash Incentive Plan. The STI Plan was amended and restated as of January 1, 2019. The STI Plan is designed to motivate and retain the Company’s officers and employees and tie short-term incentive compensation to achievement of certain profitability goals by the Company. Pursuant to the STI Plan, short-term incentive compensation is dependent on the achievement of certain performance metrics by the Company, established by the Board of Directors. Each performance metric is calculated in accordance with the rules approved by the HRCC, which may adjust the results to eliminate unusual items. For 2020, 2019, and 2018, the performance metrics were operating income, EBITDA, and EPS. Operating income for the performance metric was defined as reported GAAP operating income adjusted for certain discretionary items as determined by the Company’s management, if applicable ("adjusted operating income"). The HRCC determines the officers and employees eligible to participate under the STI Plan for the plan year as well as the target annual incentive compensation for each participant for each plan year. Amounts expensed under the STI Plan totaled $ 9,732 , $ 461 , and $ 5,581 for 2020, 2019, and 2018, respectively. Deferred Compensation Plan. The Company established an unfunded Executive Deferred Compensation Plan ("EDC Plan") effective as of June 30, 2018, with a purpose to attract and retain highly-compensated key employees by providing participants with an opportunity to defer receipt of a portion of their salary, bonus, and other specified compensation. The Company's obligations under this plan will change in conjunction with the performance of the participants’ investments, along with contributions to and withdrawals from the plan. Realized and unrealized gains (losses) on deferred compensation plan investments were insignificant and were included as a component of Operating income in the Company's Consolidated Statements of Income, because the Company's deferred compensation investments consist of mutual funds that are considered trading securities. Plan investments are classified as Level 1 in the fair value hierarchy since the investments trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis. The current portion of deferred compensation plan deferrals is comprised of estimated amounts to be paid within one year depending on timing of planned 56 disbursements. At December 31, 2020 and 2019, the EDC Plan investments were $ 2,007 and $ 1,185 , respectively, which were recorded in Other assets on the Company's Consolidated Balance Sheet. The EDC Plan liabilities were $ 3,140 and $ 1,337 as of December 31, 2020 and 2019, respectively, which were recorded in Other non-current liabilities on the Company's Consolidated Balance Sheet. NOTE 11: CONCENTRATIONS Significant customers. For 2020, 2019, and 2018, the Company had no sales to an individual customer that accounted for more than 10 percent of consolidated sales. During the years 2020, 2019, and 2018, the Company’s ten largest customers accounted for approximately 37 percent, 39 percent, and 40 percent of consolidated sales, respectively. Significant suppliers. For 2020, the Company had purchases from two grain suppliers that approximated 30 percent of consolidated purchases. In addition, the Company’s ten largest suppliers, accounted for approximately 65 percent of consolidated purchases. For 2019, the Company had purchases from two grain suppliers that approximated 31 percent of consolidated purchases. In addition, the Company’s ten largest suppliers accounted for approximately 66 percent of consolidated purchases. For 2018, the Company had purchases from two grain suppliers that approximated 29 percent of consolidated purchases. The Company also purchased food grade alcohol from Pacific Ethanol of approximately 12 percent of consolidated purchases. In addition, the Company’s ten largest suppliers, including these three suppliers, accounted for approximately 68 percent of consolidated purchases. NOTE 12: OPERATING SEGMENTS At December 31, 2020 and 2019, the Company had two segments: Distillery Products and Ingredient Solutions. The Distillery Products segment consists of food grade alcohol and distillery co-products, such as distillers feed (commonly called dried distillers grain in the industry) and fuel grade alcohol. The Distillery Products segment also includes warehouse services, including barrel put away, barrel storage, and barrel retrieval services. Ingredient Solutions segment consists of specialty starches and proteins and commodity starches and proteins. Operating profit for each segment is based on sales less identifiable operating expenses. Non-direct SG&A, interest expense, and other general miscellaneous expenses are excluded from segment operations and are classified as Corporate. Receivables, inventories, and equipment have been identified with the segments to which they relate. All other assets are considered as Corporate. 57 Year Ended December 31, 2020 2019 2018 Sales to customers: Distillery Products $ 317,458 $ 297,233 $ 314,055 Ingredient Solutions 78,063 65,512 62,034 Total (a) $ 395,521 $ 362,745 $ 376,089 Gross profit: Distillery Products $ 77,960 $ 65,952 $ 71,793 Ingredient Solutions 20,846 10,580 11,806 Total $ 98,806 $ 76,532 $ 83,599 Depreciation and amortization: Distillery Products $ 9,916 $ 8,974 $ 8,739 Ingredient Solutions 1,871 1,554 1,567 Corporate 1,174 1,044 1,056 Total $ 12,961 $ 11,572 $ 11,362 Income (loss) before income taxes: Distillery Products $ 71,023 $ 59,309 $ 64,791 Ingredient Solutions 18,024 8,051 9,336 Corporate ( 36,446 ) ( 21,423 ) ( 25,147 ) Total $ 52,601 $ 45,937 $ 48,980 (a) Sales revenue from foreign sources totaled $ 23,905 , $ 19,372 , and $ 19,782 for 2020, 2019, and 2018, respectively, and is largely derived from Japan, Thailand, Mexico, and Canada. The balance of total sales revenue is from domestic sources. December 31, 2020 2019 Identifiable Assets Distillery Products $ 288,069 $ 271,766 Ingredient Solutions 41,276 30,802 Corporate 37,230 20,029 Total (a) $ 366,575 $ 322,597 (a) The Company has no assets located in foreign countries. NOTE 13: SUPPLEMENTAL CASH FLOW INFORMATION Year Ended December 31, 2020 2019 2018 Non-cash investing and financing activities: Purchase of property, plant, and equipment in accounts payable $ 3,375 $ 4,430 $ 2,389 Additional cash payment information: Interest paid 2,212 1,611 1,578 Income taxes paid 10,566 7,111 8,818 See Note 8 for operating lease supplemental cash flow information. 58 NOTE 14: QUARTERLY FINANCIAL DATA (UNAUDITED) Year Ended December 31, 2020 Fourth Quarter Third Quarter Second Quarter First Quarter Sales $ 100,915 $ 102,964 $ 92,560 $ 99,082 Cost of sales 69,184 79,802 71,858 75,871 Gross profit 31,731 23,162 20,702 23,211 SG&A expenses 16,188 9,510 9,364 9,503 Operating income 15,543 13,652 11,338 13,708 Interest expense, net and other ( 291 ) ( 409 ) ( 298 ) ( 642 ) Income before income taxes 15,252 13,243 11,040 13,066 Income tax expense 3,620 2,862 2,550 3,224 Net income $ 11,632 $ 10,381 $ 8,490 $ 9,842 Basic and diluted EPS data (a) $ 0.69 $ 0.61 $ 0.50 $ 0.57 Year Ended December 31, 2019 Fourth Quarter Third Quarter Second Quarter First Quarter Sales $ 92,463 $ 90,685 $ 90,501 $ 89,096 Cost of sales 70,903 71,895 70,979 72,436 Gross profit 21,560 18,790 19,522 16,660 SG&A expenses 5,309 7,186 8,648 8,147 Operating income 16,251 11,604 10,874 8,513 Interest expense, net ( 368 ) ( 364 ) ( 321 ) ( 252 ) Income before income taxes 15,883 11,240 10,553 8,261 Income tax expense (benefit) 2,936 3,025 2,642 ( 1,459 ) Net income $ 12,947 $ 8,215 $ 7,911 $ 9,720 Basic and diluted EPS data (a) $ 0.76 $ 0.48 $ 0.46 $ 0.57 (a) Quarterly EPS amounts may not add to amounts for the year because quarterly and annual EPS calculations are performed separately. NOTE 15: SUBSEQUENT EVENTS Definitive Merger Agreement with Luxco, Inc. On January 22, 2021, the Company 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, MGP expects to increase it's 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 common stock of the Company. The purchase price is subject to customary purchase price adjustments, including working capital, which adjustments are anticipated to be paid in cash. Dividend Declaration 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. 59 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.