Item 1. Business
ITEM 1. BUSINESS
MGP Ingredients, Inc. was incorporated in 2011 in Kansas, continuing a business originally founded by Cloud L. Cray, Sr. in Atchison, Kansas in 1941. As used herein, the term “MGP,” “Company,” “we,” “our,” or “us” refers to MGP Ingredients, Inc. and its subsidiaries unless the context indicates otherwise. In this document, for any references to Note 1 through Note 16 refer to the Notes to Consolidated Financial Statements in Item 8.
AVAILABLE INFORMATION
We make available through our website (www.mgpingredients.com) under “For Investors,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, special reports and other information, and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such material with the Securities and Exchange Commission (“SEC”).
The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company. The address of the SEC site is http://www.sec.gov.
METHOD OF PRESENTATION
All amounts in this report, except for shares, par values, bushels, gallons, pounds, mmbtu, proof gallons, 9-liter cases, per share, per bushel, per gallon, per proof gallon, per 9-liter case, and percentage amounts are shown in thousands, unless otherwise noted.
GENERAL INFORMATION
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. 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 consumers. 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 consumer packaged goods industry. Our industrial alcohol and ingredients products are sold directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries.
Mission Statement
Our mission is to secure our future by consistently delivering superior financial results by more fully participating in all levels of the alcohol and food ingredients segments for the betterment of our shareholders, employees, partners, consumers, and communities.
Recent Developments
Merger with Luxco, Inc. On January 22, 2021, we entered into an Agreement and Plan of Merger to acquire Luxco, Inc. and its affiliates (“Luxco”) and subsequently completed the merger on April 1, 2021 (“the Merger”). Luxco is a leading branded beverage alcohol company across various categories, with a more than 60-year business heritage. Luxco’s operations involve the producing, importing, bottling and rectifying of distilled spirits.
INFORMATION ABOUT SEGMENTS
As a result of the merger with Luxco, during 2021, we established a new reportable segment structure that separates the Branded Spirits from the Distillery Products segment. The Ingredient Solutions segment remains unchanged. The new segment presentation reflects how management is now operating the business and making resource allocations. We report three operating segments; Distillery Products, Branded Spirits and Ingredient Solutions.
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Distillery Products Segment. We process corn and other grains (including rye, barley, wheat, barley malt, and milo) into food grade alcohol and distillery co-products, such as distillers feed (commonly called dried distillers grain in the industry), fuel grade alcohol, and corn oil. We also provide warehouse services, including barrel put away, barrel storage, and barrel retrieval services, as well as blending services. We have certain contracts with customers to supply distilled products (or “distillate”), as well as certain contracts with customers to provide barreling and warehousing services. Contracts with customers may be monthly, annual, or multi-year in term with periodic reviews of pricing. Sales of co-products are primarily made on the spot market. During 2021, our five largest Distillery Products customers, combined, accounted for 14.2 percent of our consolidated sales.
Food Grade Alcohol - The majority of our distillery capacities are dedicated to the production of high quality, high purity food grade alcohol for beverage and industrial applications.
Food grade alcohol sold for beverage applications, premium beverage alcohol , consists primarily of premium bourbon and rye whiskeys (“brown goods”) and GNS, including vodka and gin (“white goods”). Our premium bourbon is created by distilling grains, primarily corn. Our whiskey is made from fermented grain mash, including rye and corn. Our whiskeys are sold as aged and unaged distillate, which may be further aged by our customers or warehoused at our facilities, and are sold at various proof concentrations. Our GNS is sold in bulk quantities at various proof concentrations. Our gin is primarily created by redistilling GNS together with proprietary formulations of botanicals or botanical oils.
Food grade industrial alcohol is used as an ingredient in foods (e.g., vinegar and food flavorings), personal care products (e.g., hair sprays and hand sanitizers), cleaning solutions, pharmaceuticals, and a variety of other products. We sell food grade industrial alcohol in tank truck or rail car quantities direct to a number of industrial processing customers.
Fuel grade alcohol - Fuel grade alcohol is sold primarily for blending with gasoline to increase the octane and oxygen levels of the gasoline. As an octane enhancer, fuel grade alcohol can serve as a substitute for lead and petroleum-based octane enhancers. As an oxygenate, fuel grade alcohol has been used in gasoline to meet certain environmental regulations and laws relating to air quality by reducing carbon monoxide, hydrocarbon particulates, and other toxic emissions generated from the burning of gasoline. We produce fuel grade alcohol as a co-product of our food grade alcohol business at our Atchison facility.
Distillers Feed and related Co-Products - The bulk alcohol co-products sales include distillers feed and corn oil. Distillers feed is principally derived from the mash from alcohol processing operations. The mash is dried and sold primarily to processors of animal feed as a high protein additive. In addition, we produce corn oil as a value added co-product through a corn oil extraction process at our Atchison facility.
Warehouse Services - Customers who purchase barreled distillate may, and in most cases do, also enter into separate warehouse service agreements with us for the storage of product for aging. Services under warehouse agreements include barrel put away, barrel storage, and barrel retrieval, as well as blending services.
Branded Spirits Segment. Our Branded Spirits segment consists primarily of producing, importing, bottling and rectifying of distilled spirits through our distilleries and bottling facilities. Contracts with customers are generally in the form of purchase orders. MGP’s branded spirits include a wide spectrum of brands across numerous segments. During 2021, our five largest Branded Spirits customers, combined, accounted for 16.5 percent of our consolidated sales.
Ultra Premium - Ultra Premium includes brands such as Yellowstone ® Select Kentucky Straight Bourbon Whiskey, George Remus ® Straight Bourbon Whiskey, Blood Oath Bourbon, Minor Case ® Straight Rye Whiskey, Rossville Union ® Straight Rye Whiskey, Green Hat ® Gin, Rebel ® 10 Year Single Barrel Kentucky Straight Bourbon Whiskey, and Old Ezra Brooks ® 7 Year Kentucky Straight Bourbon Whiskey.
Premium - Premium branded spirits includes brands such as Everclear ® , The Quiet Man Irish Whiskey, Ezra Brooks ® 99 Proof Kentucky Straight Bourbon Whiskey, and Rebel ® 100 Proof Kentucky Straight Bourbon Whiskey. Additionally, Premium includes El Mayor Tequila and Dos Primos tm Tequila which is produced with our Joint Ventures; DGL Destiladores, S.de R.L. de C.V. (“DGL”) and Agricola LG, S.de R.L. de C.V. (“Agricola”) (combined “LMX”).
Mid - Mid includes brands such as Saint Brendan’s ® Irish Cream Liqueur, Pearl ® Vodka, Ezra Brooks ® 90 Proof Kentucky Straight Bourbon Whiskey, Rebel ® 80 Proof Kentucky Straight Bourbon Whiskey and Lord Calvert ® Canadian Whiskey. Additionally, Mid includes Exotico ® Tequila, which is produced by our joint venture, LMX.
Value - Value includes brands such as Arrow ® Cordials, Canada House Canadian Whiskey, and Lady Bligh ® Rum. Additionally, Value includes Juarez Group, which is produced by our joint venture, LMX.
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Other - Other includes contract bottling, private and control label products, and retail sales. Contract bottling is a service provided to a customer to process, bottle and distribute spirits for brands not owned by the Company. Private label products are distilled, processed, bottled, and distributed by MGP for sales under another company’s brand. Control label sales are similar to private label, but MGP owns and controls the brand name and enters into sales agreements with certain customers to allow them to exclusively sell a branded spirit. We operate retail locations at three of our distilleries, including Limestone Branch Distillery in Lebanon, Kentucky, Lux Row Distillers in Bardstown, Kentucky, and Green Hat Gin Distillery in Washington D.C.
Ingredient Solutions Segment. Our Ingredient Solutions segment consists primarily of specialty wheat starches, specialty wheat proteins, commodity wheat starches, and commodity wheat proteins. Contracts with Ingredient Solutions customers are generally price, volume, and term agreements, which are fixed-term contracts, with very few agreements longer than 12 months in duration. In effort to best serve our customers and maximize returns to shareholders, we have strategically been migrating our sales towards higher price, higher margin specialty wheat products. During 2021, our five largest Ingredient Solutions customers, combined, accounted for 9.9 percent of our consolidated sales.
Specialty Wheat Starches - Wheat starch is the carbohydrate-bearing portion of wheat flour. We produce a premium wheat starch powder by extracting the starch from the starch slurry. We use proprietary processing steps to purify and clean impurities from the starch, and then dry the starch using spray, flash, or drum dryers.
A substantial portion of our premium wheat starch is processed to produce certain unique specialty wheat starches designed for special applications. We sell our specialty wheat starches on a global basis, primarily to food processors and distributors.
We primarily market our specialty wheat starches under the trademarks Fibersym ® Resistant Starch series, and FiberRite ® RW Resistant Starch. These flagship brands are FDA approved dietary fibers and are useful in creating lower net carb baked goods for many industrial bakers and pasta makers. Our other specialty starches are used primarily for food applications to improve their nutritional profile, appearance, texture, tenderness, taste, palatability, cooking temperature, stability, viscosity, binding, and freeze-thaw characteristics. Important physical properties contributed by specialty wheat starch include whiteness, clean flavor, viscosity, and texture. For example, our starches improve the taste and texture of cream puffs, éclairs, puddings, frostings, pie fillings, breading, and batters, and can also improve the taste of angel food cakes. Our other starch ingredients will improve the viscosity of soups, sauces, and gravies. Additionally, these specialty starches will improve the freeze-thaw stability and shelf life of fruit pies and other frozen foods as well as support moisture retention in microwavable foods.
Our wheat starches, as a whole, generally compete primarily with cornstarch, which dominates the United States starch market. Additionally, our wheat starches compete with potato and tapioca. However, the unique characteristics of our specialty wheat starches provide a number of advantages over other starches for certain functionality in baking and pasta end uses.
Specialty Wheat Proteins - We have developed a number of specialty wheat proteins for food applications. Specialty wheat proteins are created from vital wheat gluten through a variety of proprietary processes which change its molecular structure. Specialty wheat proteins for food applications include the products Arise ® and Proterra ® .
We produce clean label ingredients under our Arise ® line of wheat protein isolates. Along with Arise ® 8000, this series includes Arise ® 8100 and Arise ® 8200. Each of these ingredients is also Non-Genetically Modified Organism (“Non-GMO”) Project Verified. We also offer a Non-GMO Project Verified food ingredients portfolio of Proterra ® 1000, Proterra ® 2000, and plant protein combinations textured and ready for meat replacement applications. Additionally, we offer gluten-free textured pea proteins within the Proterra ® portfolio of products.
Our specialty wheat proteins generally compete with other ingredients and modified proteins having similar characteristics, primarily soy proteins and other wheat proteins, with differentiation being based on factors such as functionality, price, and, in the case of food applications, flavor.
Commodity Wheat Starches - As is the case with value added wheat starches, our commodity wheat starches have both food and non-food applications, but such applications are more limited than those of value added wheat starches. These are clean label starches and are minimally processed. They have a simple and clean ingredient declaration, which is a benefit for food formulators. Commodity wheat starches compete primarily with other commodity starches, corn starches and tapioca. Market place prices generally track the fluctuations in the overall starch market in this category. However, wheat starch has
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unique funtions in wheat based food formulations and provide for a cleaner more neutral flavor profile in finished goods.
Commodity Wheat Proteins - Commodity wheat protein, or vital wheat gluten, is a free-flowing light tan powder which contains approximately 75 percent protein. When we process wheat flour to derive starch, we also derive vital wheat gluten. Vital wheat gluten is added by bakeries and food processors to baked goods, such as breads, and to pet foods, cereals, processed meats, and fish and poultry to improve the nutritional content, texture, strength, shape, and volume of the product. The neutral flavor and color of vital wheat gluten also enhances the flavor and color of certain foods. The cohesiveness and elasticity of the gluten enables the dough in wheat and other high protein breads to rise and to support added ingredients, such as whole cracked grains, raisins and fibers. This allows bakers to make an array of different breads by varying the gluten content of the dough. Vital wheat gluten is also added to white breads, hot dog buns, and hamburger buns to improve the strength and cohesiveness of the product. Additionally, our wheat gluten is being used in more vegan and vegetarian food options than in years past. This wheat protein is also the starter material used to create our textured wheat product line branded under Proterra ® .
COMPETITIVE CONDITION
While we believe that the overall market environment offers considerable growth opportunities for us in 2022 and beyond, the markets in which our products are sold are competitive. Our products compete against similar products of many large and small companies. In our Distillery Products segment, competition is based primarily on product innovation, product characteristics, functionality, price, service, and quality factors, such as flavor. In our Branded Spirits segment, competition is based primarily on product innovation, price, brand recognition, and quality factors, such as flavor. In our Ingredient Solutions segment, competition is based primarily on product innovation, product characteristics, price, name, color, flavor, or other properties that affect how the ingredient is being used.
PATENTS, TRADEMARKS, AND LICENSES
We are involved in a number of patent-related activities, primarily within our Ingredient Solutions segment. We have filed patent applications to protect a range of inventions made in our research and development efforts, including inventions relating to applications for our products. We have trade names on the majority of the brands we produce within our Branded Spirits segment. We believe our trade names are critical to the success of the brands we produce and the marketing of those products. Some of these patents or licenses cover significant product formulation and processes used to manufacture our products.
SEASONALITY
Sales for some of our products, including brown goods and branded spirits, can fluctuate from period to period due to the inherent demands and timing of our customers and consumer needs. Within our diversified Branded Spirits portfolio, there are certain product lines, limited offerings and categories that experience higher demand certain periods throughout the year. However, our sales, on average, are generally not seasonal.
TRANSPORTATION
Historically, our output has been transported to customers by truck and rail, most of which is provided by common carriers. We use third party transportation companies to help us manage truck and rail carriers who deliver our products to our North American customers as well as overseas shipments to our international customers.
RAW MATERIALS AND PACKAGING MATERIALS
Our principal Distillery Products segment raw materials, or input costs, are corn and other grains (including rye, barley, wheat, barley malt, and milo), which are processed into food grade alcohol and distillery co-products consisting of distillers feed, fuel grade alcohol, and corn oil. Our principal Branded Spirits segment raw materials, or input costs, include corn and other grains (including rye, barley, wheat, barley malt, and milo), agave, and flavoring. Our principal Ingredient Solutions segment raw material is wheat flour, which is processed into starches and proteins. The cost of grain and wheat flour has, at times, been subject to substantial fluctuation.
Our principal packaging material for our Distillery Products segment is oak barrels. Both new and used barrels are utilized for the aging of premium bourbon and rye whiskeys. We purchase oak barrels from multiple suppliers and some customers supply their own barrels. Our packaging for our Branded Spirits segment includes oak barrels, glass bottles, labels, aluminum cans and cartons.
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ENERGY
Natural gas is an input cost used to operate boilers to make steam heat. We procure natural gas for our facilities in the open market from various suppliers. We have a risk management program whereby we may purchase contracts for delivery of natural gas into the future at negotiated prices based on several factors, or we can purchase futures contracts on the exchange. Historically, prices of natural gas have been higher in the late fall and winter months than during other periods.
HUMAN CAPITAL
As of December 31, 2021, we had a total of 672 employees. A collective bargaining agreement, covering 107 employees at the Atchison facility, expires on August 31, 2024. A collective bargaining agreement, covering 67 employees at the Lawrenceburg facility, expires on December 31, 2022. A collective bargaining agreement, covering 69 employees at the St. Louis facility, expires on February 29, 2024. We have not experienced any recent work stoppages, and we consider our relationship with our employees to be good.
We believe our employees are key to achieving our business objectives. Our key human capital measures include employee safety, turnover, absenteeism and productivity. We frequently benchmark our compensation practices and benefit programs against those of comparable industries and in the geographic areas where our facilities are located. We believe that our compensation and employee benefits are competitive and allow us to attract and retain skilled and unskilled labor throughout our organization. Our notable health, welfare and retirement benefits include:
• Company subsidized health insurance
• 401(k) Plan with Company matching contributions
• Tuition assistance program
• Paid time off
Employee safety is one of our top priorities. We develop and administer company-wide policies designed to ensure the safety of each team member and compliance with Occupational Safety and Health Administration (“OSHA”) standards. This includes a program called “Safety Up,” which promotes safety from the plant floor up and includes employee-led safety meetings, training and assessments, and weekly safety audits. Throughout the COVID-19 pandemic we were deemed an essential employer and continued to operate with COVID-19 prevention protocols in place to minimize the risk of the spread of COVID-19 in our workplaces. Many of our administrative staff were encouraged or required to work from home. These protocols remain in place and will continue so long as the pandemic continues.
Our Company strives for workforce retention. We have programs for continuing education and also provide tuition reimbursement. New and open positions are posted for our current workforce to apply for and internal promotions are encouraged.
We strive to maintain an inclusive environment free from discrimination of any kind, including sexual or other discriminatory harassment. Our employees have multiple avenues available through which inappropriate behavior can be reported, including a confidential hotline. Our policies require all reports of inappropriate behavior to be promptly investigated with appropriate action taken.
REGULATION
We are subject to a broad range of federal, state, local, and foreign laws and regulations intended to protect public health and the environment. Our operations are also subject to regulation by various federal agencies, including the Alcohol and Tobacco Tax Trade Bureau (“TTB”), OSHA, the Food and Drug Administration (“FDA”), the United States Environmental Protection Agency (“EPA”), and by various state and local authorities. Such laws and regulations cover virtually every aspect of our operations, including production and storage facilities, distillation and maturation requirements, importing ingredients, distribution of beverage alcohol products, marketing, pricing, labeling, packaging, advertising, water usage, waste water discharge, disposal of hazardous wastes and emissions, and other matters. In addition, beverage alcohol products are subject to customs, duties or excise taxation in many countries, including taxation at the federal, state, and local level in the United States.
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Our officers as of December 31, 2021 and their ages as of February 24, 2022:
Name Age Principal Occupation and Business Experience
David J. Colo 59 President and Chief Executive Officer for the Company since May 2020 and member of the Board of Directors for the Company since August 2015. President, Chief Executive Officer and director of SunOpta from February 2017 to February 2019. Executive Vice President and Chief Operating Officer of Diamond Foods, Inc. from 2013 to March 2016. Executive Vice President of Global Operations and Supply Chain for Diamond Foods, Inc. from 2012 to 2013.
Brandon M. Gall 40 Vice President, Finance and Chief Financial Officer for the Company since April 2019. Corporate Controller for the Company from June 2018 to March 2019. Director of Supply Chain and New Business Development Finance for the Company from May 2014 to May 2018. Director of Financial Planning and Analysis for the Company from January 2012 to April 2014.
Stephen J. Glaser 61 Vice President, Production and Engineering for the Company since October 2015. Corporate Director of Operations for the Company from January 2014 to October 2015. Plant Manager for the Company of the Atchison facility from May 2011 to December 2013.
David E. Dykstra 58 Vice President, Alcohol Sales and Marketing for the Company since 2009.
Michael R. Buttshaw 59 Vice President, Ingredient Sales and Marketing for the Company since December 2014. Vice President of Sales for the ingredient group at Southeastern Mills, Inc. from October 2010 to November 2014.
David Bratcher 54 Chief Operating Officer for the Company since July 2021 and President of Branded Spirits for the Company since the merger with Luxco on April 2021. President of Luxco, Inc. from 2013 to April 2021.