MGP INGREDIENTS INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in thousands, unless otherwise noted) CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS This Report on Form 10-Q 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 our Annual Report on Form 10-K for the year ended December 31, 2020 and Part II, Item 1A of the Form 10-Q for the quarter ended March 31, 2021. 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 Merger with Luxco. On January 22, 2021, we entered into a definitive agreement to acquire Luxco, Inc. and its affiliated companies (“Luxco”, or “Luxco Companies”), and subsequently completed the merger on April 1, 2021. Luxco is a leading branded beverage alcohol company across various categories, with a more than 60-year business heritage. Following the merger, the Luxco Companies became wholly-owned subsidiaries of MGP and are included in the Branded Spirits segment.(Note 3, Business Combination for additional information). Dryer Fire Incident. 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. During the quarter and year to date ended September 30, 2021, we recorded a $6,404 and $16,244, respectively, partial settlement from our insurance carrier as a reduction of Cost of sales. We are working to construct a replacement drying system. Our insurance is expected to provide coverage for business interruption and other losses from damage to property, plant and equipment, less deductibles, but there can be no assurance to the amount or timing of possible insurance recoveries. COVID-19. As the COVID-19 pandemic continues, we are monitoring the guidance from federal, state and local public health authorities and will take the necessary actions to comply with the updated guidelines. The Company’s business is part of the United States’ critical infrastructure and thus is deemed to be an “essential business.” As such, we continue to take the necessary and appropriate actions designed to protect our workforce as it continues its critical operations. We have continued to operate without any significant negative impacts; however this could be effected 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, the Company’s operations, supply chain and customer demand have not been significantly affected by COVID-19; however, we are monitoring the situation closely. OVERVIEW MGP is a leading producer and supplier of premium distilled spirits, branded spirits and food ingredients. Distilled spirits include premium bourbon and rye whiskeys and grain neutral spirits (“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 distilled spirits are either packaged and sold under our own brands to distributors, sold, directly or indirectly, to manufacturers of other branded spirits, or direct to consumer. 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 following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this Form 10-Q, as well as our audited consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations - General, set forth in our Annual Report on Form 10-K for the year ended December 31, 2020. 22 RESULTS OF OPERATIONS Consolidated results The table below details the consolidated results for the quarters ended September 30, 2021 and 2020: Quarter Ended September 30, 2021 2020 2021 v. 2020 Sales $ 176,611 $ 102,964 71.5 % Cost of sales 119,525 79,802 49.8 Gross profit 57,086 23,162 146.5 Gross margin % 32.3 % 22.5 % 9.8 pp (a) Selling, general, and administrative (“SG&A”) expenses 24,202 9,510 154.5 Operating income 32,884 13,652 140.9 Operating margin % 18.6 % 13.3 % 5.3 pp Interest expense, net (1,116) (594) (87.9) Other income (loss), net (421) 185 (327.6) Income before income taxes 31,347 13,243 136.7 Income tax expense 7,674 2,862 168.1 Effective tax expense rate % 24.5 % 21.6 % 2.9 pp Net income $ 23,673 $ 10,381 128.0 % Net income margin % 13.4 % 10.1 % 3.3 pp (a) Percentage points (“pp”). Sales - Sales for quarter ended September 30, 2021 were $176,611, an increase of 71.5 percent compared to the year-ago quarter, which was the result of increased sales in the Branded Spirits, Distillery Products, and Ingredient Solutions segments. Within the Branded Spirits segment, sales were up 2,413.7 percent, due to the additional brands acquired as part of the Merger. Within the Distillery Products segment, sales were up 15.0 percent, primarily due to an increase in the sales of brown goods within premium beverage alcohol. Within the Ingredient Solutions segment, sales were up 12.5 percent, primarily due to increased sales of commodity wheat starches and specialty wheat proteins (see Segment Results). Gross profit - Gross profit for quarter ended September 30, 2021 was $57,086, an increase of 146.5 percent compared to the year-ago quarter. The increase was driven by an increase in gross profit in Branded Spirits, Distillery Products and Ingredient Solutions segments. In the Branded Spirits segment, gross profit increased by $21,828 or 1,571.5 percent. In the Distillery Products segment, gross profit increased by $11,063, or 69.5 percent. In the Ingredient Solutions segment, gross profit increased by $1,033, or 17.6 percent (see Segment Results). SG&A expenses - SG&A expenses for quarter ended September 30, 2021 were $24,202, an increase of 154.5 percent compared to the year-ago quarter. The increase in SG&A expenses was primarily driven by the assumption of Luxco’s SG&A expenses. Operating income - Operating income for quarter ended September 30, 2021 increased to $32,884 from $13,652 for quarter ended September 30, 2020, primarily due to an increase in gross profit in the Branded Spirits, Distillery Products and Ingredient Solutions segments, partially offset by the increase in the previously described SG&A expenses. Operating income, quarter versus quarter Operating Income Change Operating income for quarter ended September 30, 2020 $ 13,652 Increase in gross profit - Branded Spirits segment (a) 21,828 159.9 pp (b) Increase in gross profit - Distillery Products segment (a) 11,063 81.0 pp Increase in gross profit - Ingredient Solutions segment (a) 1,033 7.6 pp Increase in SG&A expenses (14,692) (107.6) pp Operating income for quarter ended September 30, 2021 $ 32,884 140.9 % (a) See segment discussion. (b) Percentage points (“pp”). 23 Income tax expense - Income tax expense for quarter ended September 30, 2021 was $7,674, for an effective tax rate of 24.5 percent. Income tax expense for the quarter ended September 30, 2020, was $2,862, for an effective tax rate of 21.6 percent. The increase in Income tax expense, quarter versus quarter, was primarily due to higher Income before income taxes, which lessened the effects of tax credits received. Earnings per share (“EPS”) - EPS was $1.08 for quarter ended September 30, 2021, compared to $0.61 for quarter ended September 30, 2020. The change in EPS, quarter versus quarter, was primarily due to an increase in Operating income, partially offset by an increase in shares outstanding. Change in basic and diluted EPS, quarter versus quarter Basic and Diluted EPS Change Basic and diluted EPS for quarter ended September 30, 2020 $ 0.61 Increase in operations (a) 0.88 144.3 pp (b) Increase in other income (expense), net (a) (0.03) (4.9) pp Change in interest expense, net (a) (0.02) (3.3) pp Tax: Change in effective tax rate (0.06) (9.8) pp Increase in shares outstanding resulting from the Merger (0.30) (49.2) pp Basic and diluted EPS for quarter ended September 30, 2021 $ 1.08 77.1 % (a) Item is net of tax based on the effective tax rate for the base year (2020). (b) Percentage points (“pp”). The table below details the consolidated results for year to date ended September 30, 2021 and 2020: Year to Date Ended September 30, 2021 2020 2021 v. 2020 Sales $ 459,873 $ 294,606 56.1 % Cost of sales 313,661 227,531 37.9 Gross profit 146,212 67,075 118.0 Gross margin % 31.8 % 22.8 % 9.0 pp (a) SG&A expenses 65,165 28,377 129.6 Operating income 81,047 38,698 109.4 Operating margin % 17.6 % 13.1 % 4.5 pp Interest expense, net (2,708) (1,701) (59.2) Other income (loss), net (479) 352 (236.1) Income before income taxes 77,860 37,349 108.5 Income tax expense 18,701 8,636 116.5 Effective tax expense rate % 24.0 % 23.1 % 0.9 pp Net income $ 59,159 $ 28,713 106.0 % Net income margin % 12.9 % 9.7 % 3.2 pp (a) Percentage points (“pp”). Sales - Sales for year to date ended September 30, 2021 were $459,873, an increase of 56.1 percent compared to the year-ago period, which was the result of increased sales in the Branded Spirits, Distillery Products, and Ingredient Solutions segments. Within the Branded Spirits segment, sales were up 3,590.4 percent, due to the additional brands acquired as part of the Merger. Within the Distillery Products segment, sales were up 15.6 percent, primarily due to an increase in the sales of brown goods within premium beverage alcohol. Within the Ingredient Solutions segment, sales were up 16.5 percent, primarily due to increased sales of specialty wheat starches and proteins, and commodity wheat starches (see Segment Results). Gross profit - Gross profit for year to date ended September 30, 2021 was $146,212, an increase of 118.0 percent compared to the year-ago period. The increase was driven by an increase in gross profit in the Branded Spirits, Distillery Products, and Ingredient Solutions segments. In the Branded Spirits segment, gross profit increased by $40,010 or 2,316.7 percent. In the Distillery Products segment, gross profit increased by $37,379, or 75.0 percent. In the Ingredient Solutions segment, gross profit increased by $1,748, or 11.3 percent (see Segment Results). SG&A expenses - SG&A expenses for year to date ended September 30, 2021 were $65,165, an increase of 129.6 percent 24 compared to the year-ago period. The increase in SG&A expenses was driven by the assumption of Luxco’s SG&A, one-time acquisition related costs, and higher incentive compensation expense. Operating income - Operating income for year to date ended September 30, 2021 increased to $81,047 from $38,698 for year to date period ended September 30, 2020, primarily due to an increase in gross profit in the Branded Spirits, Distillery Products, and Ingredient Solutions segments. These increases were partially offset by an increase in the above-described SG&A expenses. Operating income, year to date versus year to date Operating Income Change Operating income for year to date ended September 30, 2020 $ 38,698 Increase in gross profit - Branded Spirits segment (a) 40,010 103.4 pp(b) Increase in gross profit - Distillery Products segment (a) 37,379 96.6 pp Increase in gross profit - Ingredient Solutions segment (a) 1,748 4.5 pp Increase in SG&A expenses (36,788) (95.1) pp Operating income for year to date ended September 30, 2021 $ 81,047 109.4 % (a) See segment discussion. (b) Percentage points (“pp”). Income tax expense - Income tax expense for year to date ended September 30, 2021 was $18,701, for an effective tax rate of 24.0 percent. Income tax expense for the year to date ended September 30, 2020, was $8,636, for an effective tax rate of 23.1 percent. The increase in Income tax expense, year to date versus year to date, was primarily due to higher Income before income taxes, which lessened the effects of tax credits received. Earnings per share - EPS was $2.91 for year to date ended September 30, 2021, compared to $1.68 for year to date ended September 30, 2020. EPS increased, year to date versus year to date, primarily due to an increase in operations, partially offset by an increase in shares outstanding as a result of shares issued as part of the consideration paid for the Merger. Change in basic and diluted EPS, year to date versus year to date Basic and Diluted EPS Change Basic and diluted EPS for year to date ended September 30, 2020 $ 1.68 Increase in operations (a) 1.92 114.3 pp(b) Decrease in weighted average shares outstanding, excluding the Merger impacts 0.01 0.6 pp Change in interest expense, net (a) (0.04) (2.4) pp Increase in other income (expense), net (a) (0.03) (1.8) pp Tax: Change in effective tax rate (0.04) (2.4) pp Increase in shares outstanding resulting from the Merger (0.59) (35.1) pp Basic and diluted EPS for year to date ended September 30, 2021 $ 2.91 73.2 % (a) Item is net of tax based on the effective tax rate for the base year (2020). (b) Percentage points (“pp”). 25 SEGMENT RESULTS Distillery Products The following tables show selected financial information for the Distillery Products segment for the quarters ended September 30, 2021 and 2020. DISTILLERY PRODUCTS SALES Quarter Ended September 30, Quarter versus Quarter Sales Change Increase/(Decrease) 2021 2020 $ Change % Change Brown goods $ 42,793 $ 32,068 $ 10,725 33.4 % White goods 21,187 16,210 4,977 30.7 Premium beverage alcohol 63,980 48,278 15,702 32.5 Industrial alcohol 14,790 19,461 (4,671) (24.0) Food grade alcohol 78,770 67,739 11,031 16.3 Fuel grade alcohol 3,592 1,274 2,318 181.9 Distillers feed and related co-products 4,016 6,119 (2,103) (34.4) Warehouse services 4,666 4,041 625 15.5 Total Distillery Products $ 91,044 $ 79,173 $ 11,871 15.0 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Premium beverage alcohol 32.5% 19.9% 12.6% Other Financial Information Quarter Ended September 30, Quarter versus Quarter Increase / (Decrease) 2021 2020 $ Change % Change Gross profit $ 26,981 $ 15,918 $ 11,063 69.5 % Gross margin % 29.6 % 20.1 % 9.5 pp (d) (a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. (c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. (d) Percentage points (“pp”). Total sales of Distillery Products for the quarter ended September 30, 2021 increased by $11,871, or 15.0 percent, compared to the prior year quarter. Sales of brown goods and white goods within premium beverage alcohol, fuel grade alcohol, and warehouse services increased while industrial alcohol, and distillers feed and related co-products decreased compared to the prior year quarter. The increase in sales of brown goods, white goods and fuel grade alcohol was driven by higher sales volume and higher average selling price. These increases were offset by a decrease in sales of industrial alcohol which was driven by lower sales volume due to the discontinuing of the ICP third party sales and marketing services. The decrease in sales of distillers feed and related co-products was due to lower average selling price, partially offset by higher sales volume, both of which are results of the Dryer Fire Incident (see Note 8, Commitments and Contingencies for further details). Gross profit increased quarter versus quarter by $11,063, or 69.5 percent. Gross margin for the quarter ended September 30, 2021 increased to 29.6 percent from 20.1 percent for the prior year quarter. The increase in gross profit was primarily due to higher sales volume and higher average selling price on brown goods. Additionally, the increase in gross profit was also due to higher average selling price on industrial alcohol, white goods and fuel grade alcohol, partially offset by higher input costs of industrial alcohol and white goods. 26 The following tables show selected financial information for the Distillery Products segment for the year to date ended September 30, 2021 and 2020. DISTILLERY PRODUCTS SALES Year to Date Ended September 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2021 2020 $ Change % Change Brown Goods $ 129,600 $ 86,038 $ 43,562 50.6 % White Goods 56,049 47,922 8,127 17.0 Premium beverage alcohol 185,649 133,960 51,689 38.6 Industrial alcohol 46,896 64,032 (17,136) (26.8) Food grade alcohol 232,545 197,992 34,553 17.5 Fuel grade alcohol 10,862 3,970 6,892 173.6 Distillers feed and related co-products 13,660 19,889 (6,229) (31.3) Warehouse services 12,949 11,641 1,308 11.2 Total Distillery Products $ 270,016 $ 233,492 $ 36,524 15.6 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Premium beverage alcohol 38.6% 31.1% 7.5% Other Financial Information Year to Date Ended September 30, Year to Date versus Year to Date Increase / (Decrease) 2021 2020 $ Change % Change Gross profit $ 87,211 $ 49,832 $ 37,379 75.0 % Gross margin % 32.3 % 21.3 % 11.0 pp (d) (a) Total sales changes is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. (c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. (d) Percentage points (“pp”). Total sales of Distillery Products for year to date ended September 30, 2021 increased by $36,524, or 15.6 percent compared to the year-ago period. Sales of brown goods and white goods within premium beverage alcohol, fuel grade alcohol, and warehouse services increased while industrial alcohol, and distillers feed and related co-products decreased compared to the year-ago period. The increase in sales of brown goods, white goods and fuel grade alcohol was driven by higher sales volume and higher average selling price. These increases were partially offset by a decrease in sales of industrial alcohol which was driven by lower sales volume due to the discontinuing of the ICP third party sales and marketing services, partially offset by higher average selling price. The decrease in sales of distillers feed and related co-products was due to lower average selling price, partially offset by higher sales volume, both of which are results of the Dryer Fire Incident (see Note 8, Commitments and Contingencies for further details). Gross profit for year to date ended September 30, 2021 increased by $37,379, or 75.0 percent compared to the year-ago period. Gross margin for year to date ended September 30, 2021 increased to 32.3 percent from 21.3 percent for the prior year period. The increase in gross profit was primarily due to higher sales volume on brown goods as well as higher average selling price on industrial alcohol, white goods and fuel grade alcohol. The increase in gross profit was partially offset by higher input costs of industrial alcohol, white goods and brown goods as well as lower average selling price on distillers feed and related co-products. 27 Branded Spirits The following tables show selected financial information for the Branded Spirits segment for the quarters ended September 30, 2021 and 2020. BRANDED SPIRITS SALES Quarter Ended September 30, Quarter versus Quarter Sales Change Increase/(Decrease) 2021 2020 $ Change % Change Ultra premium $ 13,118 $ 2,365 $ 10,753 454.7 % Premium 6,310 72 6,238 8,663.9 Mid 17,107 — 17,107 n/a Value 19,057 — 19,057 n/a Other 5,969 12 5,957 49,641.7 Total Branded Spirits $ 61,561 $ 2,449 $ 59,112 2,413.7 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Branded Spirits 2,413.7% 16,253.1% (13,839.4)% Other Financial Information Quarter Ended September 30, Quarter versus Quarter Increase / (Decrease) 2021 2020 $ Change % Change Gross profit $ 23,217 $ 1,389 $ 21,828 1,571.5 % Gross margin % 37.7 % 56.7 % (19.0) pp (d) (a) Total sales changes is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. (c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. (d) Percentage points (“pp”). Total sales of Branded Spirits for the quarter ended September 30, 2021 increased by $59,112, or 2,413.7 percent compared to the prior year quarter. Sales of value, mid, ultra premium, premium, and other increased compared to the prior year quarter, primarily due to the additional brands acquired as part of the Merger. Gross profit increased quarter versus quarter by $21,828, or 1,571.5 percent. Gross margin for the quarter ended September 30, 2021 decreased 19.0 percent to 37.7 percent from 56.7 percent for the prior year quarter. The increase in gross profit was primarily due to the additional brands acquired as part of the Merger. The decrease in gross margin was due to sales price mix, as the vast majority of the Company’s branded spirits sales pre-merger were in the ultra premium category. 28 The following tables show selected financial information for the Branded Spirits segment for year to date ended September 30, 2021 and 2020. BRANDED SPIRITS SALES Year to Date Ended September 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2021 2020 $ Change % Change Ultra Premium $ 23,692 $ 3,049 $ 20,643 677.0 % Premium 12,692 243 12,449 5,123.1 % Mid 34,894 — 34,894 n/a Value 40,001 — 40,001 n/a Other 11,278 29 11,249 38,789.7 % Total Branded Spirits $ 122,557 $ 3,321 $ 119,236 3,590.4 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Branded Spirits 3,590.4% 22,743.4% (19,153.0)% Other Financial Information Year to Date Ended June 30, Year to Date versus Year to Date Increase / (Decrease) 2021 2020 $ Change % Change Gross profit $ 41,737 $ 1,727 $ 40,010 2,316.7 % Gross margin % 34.1 % 52.0 % (17.9) pp (d) (a) Total sales changes is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. (c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. (d) Percentage points (“pp”). Total sales of Branded Spirits for year to date ended September 30, 2021 increased by $119,236, or 3,590.4 percent compared to the year-ago period. Sales of value, mid, ultra premium, premium, and other increased compared to the year-ago period, primarily due to the additional brands acquired as part of the Merger. Gross profit for year to date ended September 30, 2021 increased by $40,010, or 2,316.7 percent. Gross margin for year to date ended September 30, 2021 decreased 17.9 percent to 34.1 percent from 52.0 percent for the prior year. The increase in gross profit was primarily due to the additional brands acquired as part of the Merger. The decrease in gross margin was due to sales price mix, as the vast majority of the Company’s branded spirits sales pre-merger were in the ultra premium category. Gross profit was reduced during year to date ended September 30, 2021, due to a required step up in value due to purchase accounting related to the Merger. Of the purchase accounting step up, $2,529 was associated with marking the finished goods inventory to fair value, which fully flowed through in the second quarter and is not expected to recur in future periods. 29 Ingredient Solutions The following tables show selected financial information for the Ingredient Solutions segment for the quarter ended September 30, 2021 and 2020. INGREDIENT SOLUTIONS SALES Quarter Ended September 30, Quarter versus Quarter Sales Change Increase / (Decrease) 2021 2020 $ Change % Change Specialty wheat starches $ 12,231 $ 11,604 $ 627 5.4 % Specialty wheat proteins 8,901 7,994 907 11.4 Commodity wheat starches 2,626 1,596 1,030 64.5 Commodity wheat proteins 248 148 100 67.6 Total Ingredient Solutions $ 24,006 $ 21,342 $ 2,664 12.5 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions 12.5% 9.1% 3.4% Other Financial Information Quarter Ended September 30, Quarter versus Quarter Increase / (Decrease) 2021 2020 $ Change % Change Gross profit $ 6,888 $ 5,855 $ 1,033 17.6 % Gross margin % 28.7 % 27.4 % 1.3 pp (d) (a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit (c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. (d) Percentage points (“pp”). Total Ingredient Solutions sales for quarter ended September 30, 2021 increased by $2,664, or 12.5 percent, compared to the prior year quarter. Quarter versus quarter, this increase was primarily driven by higher sales of commodity wheat starches, specialty wheat proteins and starches due to higher sales volume and higher average selling price. Gross profit increased quarter versus quarter by $1,033, or 17.6 percent. Gross margin for the quarter ended September 30, 2021 increased to 28.7 percent from 27.4 percent for the prior year quarter. The increase in gross profit was primarily driven by higher average selling price of specialty wheat proteins and starches, and commodity wheat starches, partially offset by higher input costs for specialty wheat proteins and starches. 30 The following tables show selected financial information for the Ingredient Solutions segment for the year to date September 30, 2021 and 2020. INGREDIENT SOLUTIONS SALES Year to Date Ended September 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2021 2020 $ Change % Change Specialty wheat starches $ 35,051 $ 30,938 $ 4,113 13.3 % Specialty wheat proteins 23,299 20,372 2,927 14.4 Commodity wheat starches 7,572 5,247 2,325 44.3 Commodity wheat proteins 1,378 1,236 142 11.5 Total Ingredient Solutions $ 67,300 $ 57,793 $ 9,507 16.5 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions 16.5% 13.0% 3.5% Other Financial Information Year to Date Ended September 30, Year to Date versus Year to Date Increase / (Decrease) 2021 2020 $ Change % Change Gross profit $ 17,264 $ 15,516 $ 1,748 11.3 % Gross margin % 25.7 % 26.8 % (1.1) pp (d) (a) Total sales changes is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit (c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. (d) Percentage points (“pp”). Total Ingredient Solutions sales for year to date ended September 30, 2021 increased by $9,507, or 16.5 percent, compared to the prior year period. The increase in Ingredient Solutions sales was primarily driven by higher sales of specialty wheat starches and proteins and commodity wheat starches, primarily due to higher sales volume and higher average selling price. Gross profit increased by $1,748, or 11.3 percent for year to date ended September 30, 2021 compared to the prior year period. Gross margin for the year to date ended September 30, 2021 decreased to 25.7 percent from 26.8 percent for the prior year period. The increase in gross profit was primarily driven by higher sales volumes and average selling price of specialty wheat starches and proteins partially offset by higher input costs. 31 CASH FLOW, FINANCIAL CONDITION AND LIQUIDITY We believe our financial condition continues to be of high quality, as evidenced by our ability to generate adequate cash from operations while having ready access to capital at competitive rates. Operating cash flow and debt through our Credit Agreement and Note Purchase Agreement (Note 5) provide the primary sources of cash to fund operating needs and capital expenditures. These same sources of cash are used to fund shareholder dividends and other discretionary uses. 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 to Date Ended September 30, Changes, year versus year Increase / (Decrease) 2021 2020 Cash provided by operating activities $ 70,785 $ 29,457 $ 41,328 Cash used in investing activities (189,166) (15,513) (173,653) Cash provided by financing activities 112,883 2,713 110,170 Effect of exchange rate changes on cash (2) — (2) Increase (decrease) in cash and cash equivalents $ (5,500) $ 16,657 $ (22,157) Cash decreased $5,500 for year to date ended September 30, 2021, compared to an increase of $16,657 for year to date ended September 30, 2020, for a net decrease in cash of $22,157, period versus period. Operating Activities. Cash provided by operating activities for year to date ended September 30, 2021 was $70,785. The cash provided by operating activities resulted primarily from net income of $59,159, adjustments for non-cash or non-operating charges of $19,149 including, depreciation and amortization, and share-based compensation as well as cash used in operating assets and liabilities of $7,523. The primary drivers of the changes in operating assets and liabilities were $7,588 use of cash related to an increase in inventories, primarily barreled distillate, $6,678 use of cash related to decrease in accounts payable, and $5,593 use of cash related to accounts receivables, net due to increased sales during the quarter as well as an increase in insurance recoveries receivable. These uses of cash were partially offset by $15,859 cash provided by accrued expenses and other primarily related to legally committed insurance recovery amounts obtained prior to contingencies related to the insurance claim being resolved. Cash provided by operating activities for year to date ended September 30, 2020 was $29,457. The cash provided by operating activities resulted primarily from net income of $28,713, adjustments for non-cash or non-operating charges of $13,108, including depreciation and amortization and share-based compensation, partially offset by uses of cash due to changes in operating assets and liabilities of $12,364. The primary drivers of the changes in operating assets and liabilities were $11,683 use of cash related to an increase in accounts receivables, net due to timing of customer payments as well as increased sales during the year, $5,673 use of cash related to an increase in inventories, primarily barreled distillate, and $2,032 use of cash related to an increase in prepaid expenses due to an increase in prepaid insurance and vendor deposits. These uses of cash were partially offset by $5,647 cash provided by accrued expenses primarily related to incentive compensation expenses and $2,057 cash provided by accounts payable related to the timing cash disbursements. Investing Activities. Cash used in investing activities for year to date ended September 30, 2021 was $189,166, which primarily resulted from $149,613 related to the Merger of Luxco and additions to property, plant and equipment of $37,257 (see Capital Spending). Cash used in investing activities for year to date ended September 30, 2020 was $15,513, which resulted from additions to property, plant and equipment of $13,507 (see Capital Spending) and an increase related to the acquisition of a business of $2,750, partially offset by proceeds from sale of property of $688. 32 Capital Spending. We manage capital spending to support our business growth plans. Investments in property, plant and equipment were $37,257 and $13,507 for year to date ended September 30, 2021 and 2020, respectively. Adjusted for the change in capital expenditures in accounts payable for year to date ended September 30, 2021 and 2020, of $(3,375) and $(2,654), respectively, total capital expenditures were $33,882 and $10,853, respectively. We expect approximately $51,500 in capital expenditures in 2021, excluding any insurance recoveries. Of the $51,500 expected capital expenditures $31,400 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. Financing Activities. Cash provided by financing activities for year to date ended September 30, 2021 was $112,883, due to net proceeds from debt of $208,521 (see Long-Term and Short-Term Debt), partially offset by $87,509 payment on assumed debt as part of the Merger, payments of dividends and dividend equivalents of $7,362 (see Dividends and Dividend Equivalents) and purchases of treasury stock of $767 (see Treasury Purchases and Share Repurchases). Cash provided by financing activities for year to date ended September 30, 2020 was $2,713, primarily due to net proceeds from debt of $13,252 (See Long-Term and Short-Term Debt), payments of dividends and dividend equivalents of $6,144 (see Dividends and Dividend Equivalents) and purchases of treasury stock of $4,395 (see Treasury Purchases and Share Repurchases). Treasury Purchases. 38,059 RSUs vested and converted to common shares for employees during year to date ended September 30, 2021, of which we withheld and purchased for treasury 11,885 shares valued at $767 to cover payment of associated withholding taxes. 30,404 RSUs vested and converted to common shares for employees during year to date ended September 30, 2020, of which we withheld and purchased for treasury 10,051 shares valued at $342 to cover payment of associated withholding taxes. Share Repurchases. On February 25, 2019, our Board of Directors approved a $25,000 share repurchase authorization commencing February 27, 2019, through February 27, 2022. Under the share repurchase program, we 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 us at any time without prior notice. The Company did not repurchase any shares during the year to date ended September 30, 2021 and has $20,947 remaining under the share repurchase plan. During year to date ended September 30, 2020, we repurchased approximately 159,104 shares of MGP Common Stock for $4,053. 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) 2021 February 23, 2021 March 12, 2021 March 26, 2021 $ 0.12 $ 0.12 $ 2,033 $ 19 $ 2,052 May 3, 2021 May 21, 2021 June 4, 2021 0.12 0.12 2,635 20 2,655 August 2, 2021 August 20, 2021 September 3, 2021 0.12 0.12 2,635 20 2,655 $ 0.36 $ 0.36 $ 7,303 $ 59 $ 7,362 2020 February 24, 2020 March 13, 2020 March 27, 2020 $ 0.12 $ 0.12 $ 2,047 $ 13 $ 2,060 April 28, 2020 May 22, 2020 June 5, 2020 0.12 0.12 2,027 14 2,041 July 28, 2020 August 21, 2020 September 4, 2020 0.12 0.12 2,029 14 2,043 $ 0.36 $ 0.36 $ 6,103 $ 41 $ 6,144 (a) Dividend equivalent payments on unvested participating securities. (b) Includes estimated forfeitures. 33 On November 1, 2021, our Board of Directors declared a quarterly dividend payable to stockholders of record as of November 19, 2021, of the Company’s Common Stock, and a dividend equivalent payable to holders of certain RSUs as of November 19, 2021, of $0.12 per share and per unit, payable on December 3, 2021. 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 and share repurchase activities) and the overall cost of capital. Total debt was $247,677 (net of unamortized loan fees of $1,733) at September 30, 2021, and $39,871 (net of unamortized loan fees of $129) at December 31, 2020. 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 September 30, 2021, we met those covenants and restrictions. At September 30, 2021, our current assets exceeded our current liabilities by $265,430, largely due to our inventories, at cost, of $239,312. At September 30, 2021, our cash balance was $16,162 and we have used our Credit Agreement and Note Purchase Agreement for liquidity purposes, with $190,000 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. While we currently believe we are well positioned with our credit agreement, we will continue to monitor the impact of the COVID-19 pandemic on our operations and liquidity 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 April 1, 2021, the Company completed the merger with Luxco. The aggregate consideration paid by the Company in connection with the merger was $237,500 in cash (less assumed indebtedness) and 5,007,833 shares of common stock of the Company, subject to adjustment for fractional shares (the “Company Shares,” and together with the cash portion, the “Merger Consideration”). The Merger Consideration is subject to customary purchase price adjustments, including working capital, a portion of which may be paid in common stock. The cash portion of the Merger Consideration, the repayment of assumed debt and transaction-related expenses were financed with a $242,300 borrowing under the Credit Agreement. We anticipate having sufficient cash flows to support our short-term liquidity and operating needs.