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Item 7. Management’s Discussion and Analysis

2023-02-23 compared with 2022-02-24 · 155 added, 171 removed, 327 unchanged (50% of the section changed)

9 unchanged sentences

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

MGP’s MD&A is presented in nine sections:

• Recent Developments

MGP’s MD&A is presented in eight sections:

• Results of Operations

• Distillery Products Segment

• Distilling Solutions Segment

• Branded Spirits Segment

4 unchanged sentences

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 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.

We are also a top producer of high quality industrial alcohol for use in both food and non-food applications.

Our protein and starch food ingredients provide a host of functional, nutritional and sensory benefits for a wide range of food products to serve the 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.

The Company reports three operating segments;

Distillery Products, Branded Spirits and Ingredient Solutions.

Our strategic plan is designed to leverage our history and strengths as well as to leverage the positive macro trends we see in the industries where we compete while providing better insulation from outside factors, including swings in commodity pricing.

Distillery Products Segment

Our Distillery Products segment mission is to cultivate lasting partnerships with customers across all product categories by leveraging our strong sales and operating platform, aging whiskey inventory, and unique project development skills.

Distilled spirits include premium bourbon, rye, and other whiskeys (“brown goods”) and grain neutral spirits (“GNS”), including vodka and gin.

Our distilled spirits are either sold directly or indirectly to manufacturers of other branded spirits.

MGP is also a producer of high quality industrial alcohol for use in both food and non-food applications.

The Company has a portfolio of our own high quality branded spirits, which we produce through our distilleries and bottling facilities and sell to distributors.

Our branded spirits products account for a range of price points from value products through ultra premium brands, with a focus on high-end American whiskey, tequila and gin.

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 ingredients products are sold directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries.

During 2022, the Company changed the name of its Distillery Products segment to Distilling Solutions.

Our strategic plan is designed to leverage our history and strengths as well as to leverage the positive macro trends we see in the industries in which we compete while providing better insulation from outside factors, including swings in commodity pricing.

Distilling Solutions Segment

Our Distilling Solutions segment mission is to cultivate lasting partnerships with customers across all product categories by leveraging our strong sales and operating platform, aging whiskey inventory, and unique project development skills.

The favorable macro trends benefiting our business include the expansion of the distilled spirits’ share within beverage alcohol, particularly growth of the American whiskey category that has continued to expand over the past several years.

This includes shifting sales mix to higher margin products, such as premium bourbon and rye whiskeys, as well as extending the product range of distilled gins and grain neutral spirits (“GNS”), the base component for vodka.

Our Distillery Products segment is also subject to unfavorable macro trends which include increased competition as industry participants seek to capitalize on consumer

Our strategy within the Distillery Products segment is to continue migrating away from industrial alcohol to white beverage alcohol, cultivate additional multi-national and craft customers for brown goods sales, enhance offerings to become a beverage alcohol “solution provider”, develop an export market for our aged brown goods, and attract control label customers to boost overall brown goods growth.

This includes shifting sales mix to higher margin products, such as premium brown goods, as well as extending the product range of distilled gins and GNS, the base component for vodka.

Our Distilling Solutions segment is also subject to unfavorable macro trends which include increased competition as industry participants seek to capitalize on consumer trends as well as increased commodity prices.

Our strategy within the Distilling Solutions segment is to continue migrating away from industrial alcohol to white beverage alcohol, cultivate additional multi-national and craft customers for brown goods sales, enhance offerings to

become a beverage alcohol “solution provider”, and develop an export market for our aged brown goods.

We continued to focus on attracting and developing customers for our premium beverage alcohol products during 2022 as well as shifting our focus from industrial alcohol to white beverage alcohol.

Distillery Products segment sales for 2021 increased 12.5 percent over the prior year.

Distilling Solutions segment sales for 2022 increased 22 percent over the prior year.

Branded Spirits Segment

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Our strategy for the Branded Spirits segment is to focus on the categories, brands, price points, bottle size and market support that will maximize profit for the Company.

On January 22, 2021, we entered into a definitive agreement to acquire Luxco, Inc.

and its affiliates (“Luxco”), and subsequently completed the merger on April 1, 2021 (the “Merger”).

On April 1, 2021, we completed the merger with Luxco, Inc.

and its affiliates (“Luxco”)(the “Merger”).

As a result of the Merger we have increased our scale and market position in the branded spirits sector and believe it has strengthened our platform for future growth of higher valued-added products.

1 unchanged sentence

Ingredient Solutions Segment

Our Ingredient Solutions segment mission is to remain a strategic business partner of choice earning meaningful relationships through collaboration, innovation, and dedication to the best-in-class customer service.

The favorable macro industry trends benefiting our business include growth and focus on high fiber, high protein, meat alternative, plant-based protein, and non-GMO Products.

The favorable macro industry trends benefiting our business include growth and focus on high fiber, high protein, meat alternatives, plant-based protein, and non-GMO Products.

We continue to provide outstanding customer solutions, taking advantage of our position within growing consumer trends.

Our strategy within the Ingredient Solutions segment is to expand our market share of specialty wheat starch and protein product lines, expand textured plant protein capabilities within specialty wheat proteins, maximize the value of clean label starches, and optimize our customer set, route to market, and channels to drive profitability.

Ingredient Solutions segment sales for 2021 increased 16.1 percent over the prior year, primarily due to increased sales of specialty wheat starches and proteins, and commodity wheat starches.

RECENT DEVELOPMENTS

Merger with Luxco.

On January 22, 2021, we entered into a definitive agreement to acquire Luxco, 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, Luxco became a wholly-owned subsidiary of MGP and is included in the Branded Spirits segment.

(See Note 4, Business Combinations, 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.

At December 31, 2021, we received a legally binding commitment from our insurance carrier for final settlement of $43,688, $27,363 was related to business interruption and $16,325 was for the damaged dryer.

The business interruption portion of the settlement was recorded as a reduction of Cost of sales on the Consolidated Statement of Income and the insurance recoveries for the replacement of the damaged dryer was recorded as Insurance recoveries on the Consolidated Statement of Income.

We recorded a settlement related to the business interruption from our insurance carrier of $23,583 and $3,780 for the years ended December 31, 2021 and 2020, respectively.

Our insurance provided coverage for business interruption and other losses from damage to property, plant and equipment, less deductibles.

We completed the construction of the replacement dryer and placed the dryer into service during 2021.

As the COVID-19 pandemic continues and new variants are discovered, 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 continued operations could be affected by voluntary or mandatory temporary closures of our facilities, interruptions to our supply chain or additional efforts to protect the health and safety of our employees.

As of the date of this report, there have been no significant adverse affects to

the Company’s operations, supply chain and customer demand due to COVID-19;

however, we are monitoring the situation closely.

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

Ingredient Solutions segment sales for 2022 increased 28 percent over the prior year.

RESULTS OF OPERATIONS

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Operating margin % 19.0 % 20.2 % 13.7 % (1.2) pp 6.5 pp

Interest expense (4,037) (2,267) (1,305) 78.1 73.7

Other income (loss), net (1,230) 627 — (296.2) N/A

Interest expense, net (5,451) (4,037) (2,267) 35 78

Other income (loss), net (3,342) (1,230) 627 172 (296)

Income before income taxes 140,172 121,096 52,601 16 130

6 unchanged sentences

(a) Percentage points (“pp”).

2021 to 2020 - Sales for 2021 were $626,720, an increase of 58.5 percent compared to 2020, which was the result of increased sales in the Branded Spirits, Distillery Products and Ingredient Solutions segments.

2022 to 2021 - Sales for 2022 were $782,358, an increase of 25 percent compared to 2021, which was the result of increased sales in the Distilling Solutions, Branded Spirits, and Ingredient Solutions segments.

Within the Distilling Solutions segment, sales were up 22 percent primarily due to an increase in sales of brown goods within premium beverage alcohol.

Total Branded Spirits segment sales increased 30 percent, due to an increase in sales across all price tier categories.

Total Ingredient Solutions segment sales increased 28 percent primarily due to increased sales of specialty wheat starches and proteins.

2021 to 2020 - Sales for 2021 were $626,720, an increase of 58 percent compared to 2020, which was the result of increased sales in the Branded Spirits, Distilling Solutions and Ingredient Solutions segments.

Total Branded Spirits segment sales increased 4,324 percent, due to the additional brands acquired as part of the Merger.

Within the Distillery Products segment, sales were up 12.5 percent primarily due to an increase in sales of brown goods within premium beverage alcohol.

Within the Distillery Solutions segment, sales were up 13 percent primarily due to an increase in sales of brown goods within premium beverage alcohol.

Total Ingredient Solutions segment sales increased 16 percent primarily due to increased sales of specialty wheat starches and proteins.

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

Within the Distillery Solutions segment, sales were up 6.5 percent primarily due to an increase in sales of brown goods and white goods within premium beverage alcohol, warehouse services, and industrial alcohol.

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

Within the Branded Spirits segment, sales were up 38.5 percent due to an increase in sales within the ultra premium category.

2022 to 2021 - Gross profit for 2022 was $253,306, an increase of 27 percent compared to 2021.

The increase was driven by an increase in gross profit in Branded Spirits, Distillery Products and Ingredient Solutions segments.

The increase was driven by an increase in gross profit in Branded Spirits, Distilling Solutions and Ingredient Solutions segments.

The Branded Spirits segment gross profit increased by $32,877 or 52 percent.

The Distillery Products segment gross profit increased by $38,333, or 50.6 percent and the Ingredient Solutions segment gross profit increased by $1,369, or 6.6 percent.

The Distilling Solutions segment gross profit increased by $12,176, or 11 percent and the Ingredient Solutions segment gross profit increased by $9,288, or 42 percent.

2021 to 2020 - Gross profit for 2021 was $198,965, an increase of 101 percent compared to 2020.

The increase was driven by an increase in gross profit in the Distillery Products, Ingredient Solutions and Branded Spirits segments.

The Distillery Products segment gross profit increased by $11,357, or 17.6 percent, the Ingredient Solutions segment gross profit increased by $10,266, or 97.0 percent, and the Branded Spirits Segment increased by $651, or 42.4 percent.

The increase was driven by an increase in gross profit in Branded Spirits, Distilling Solutions and Ingredient Solutions segments.

The Branded Spirits segment gross profit increased by $60,457, or 2,764 percent.

The Distilling Solutions segment gross profit increased by $38,333, or 51 percent and the Ingredient Solutions segment gross profit increased by $1,369, or 7 percent.

Advertising and promotion expenses

2022 to 2021 - Advertising and promotion expenses for 2022 were $29,714, an increase of 85 percent compared to 2021.

This was primarily driven by an increased advertising and promotion investment in the Branded Spirits segment, specifically in the premium plus price tiers.

The increase was also driven by the assumption of Luxco’s advertising and promotion expenses for the full year of 2022.

2021 to 2020 - Advertising and promotion expenses for 2021 were $16,098, an increase of 494 percent compared to 2020.

The increase in advertising and promotion expenses were primarily driven by the assumption of Luxco’s advertising and promotion expenses during 2021.

2020 to 2019 - Advertising and promotion expenses for 2020 were $2,712, a decrease of 4.1 percent compared to 2019.

The decrease in Advertising and promotion expenses were driven by a decrease in corporate communications expenses.

SG&A expenses

2022 to 2021 - SG&A expenses for 2022 were $74,627, an increase of 2 percent compared to 2021.

The increase in SG&A was driven by the assumption of Luxco’s SG&A, and one-time acquisition related costs.

The increase in SG&A was driven by the assumption of Luxco’s SG&A expenses for the full year of 2022, as well as higher personnel and incentive compensation expense, partially offset by a decrease in advisory and other transaction costs in 2021 related to the merger with Luxco that did not recur in 2022.

2021 to 2020 - SG&A expenses for 2021 were $72,829, an increase of 74 percent compared to 2020.

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

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

The increase in SG&A was driven by the assumption of Luxco’s SG&A, and one-time acquisition related costs.

Insurance recoveries

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Operating income for 2020 $ 54,241

Increase in gross profit - Distillery Products segment (a)

Increase in gross profit - Branded Spirits segment (a)

60,457 111 pp (b)

Increase in gross profit - Distilling Solutions segment (a)

Increase in gross profit - Ingredient Solutions segment (a)

10,266 21.7 pp

Increase in gross profit - Branded Spirits segment (a)

Decrease in Advertising and promotion expenses 115 0.2 pp

Increase in advertising and promotion expenses (13,386) (25) pp

Increase in SG&A expenses (30,976) (57) pp

Increase in insurance recoveries 16,325 30 pp

Operating income for 2021 126,363 133 %

1 unchanged sentence

32,877 26 pp (b)

Increase in gross profit - Distillery Products segment (a)

38,333 70.7 pp

Increase in gross profit - Distilling Solutions segment (a)

Increase in gross profit - Ingredient Solutions segment (a)

Increase in Insurance recoveries 16,325 30.1 pp

Increase in advertising and promotion expenses (13,616) (11) pp

Increase in SG&A expenses (1,798) (1) pp

Decrease in insurance recoveries (16,325) (13) pp

Operating income for 2022 $ 148,965 18 %

1 unchanged sentence

(b) Percentage points (“pp”).

2021 to 2020 - Operating income for 2021 increased to $126,363 from $54,241 for 2020, due to increases in gross profit in the Branded Spirits, Distillery Products and Ingredient Solutions segments as well as the increase from the insurance recovery.

2022 to 2021 - Operating income for 2022 increased to $148,965 from $126,363 for 2021, due to increases in gross profit in the Branded Spirits, Distilling Solutions and Ingredient Solutions segments.

These increases were partially offset by a decrease in insurance recoveries as well as increases in advertising and promotion expenses and SG&A expenses.

2021 to 2020 - Operating income for 2021 increased to $126,363 from $54,241 for 2020, due to increases in gross profit in the Branded Spirits, Distilling Solutions and Ingredient Solutions segments as well as the increase from the insurance recovery.

These increases were partially offset by increases in SG&A expenses and advertising and promotion expenses.

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

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

Income tax expense

1 unchanged sentence

Income tax expense for 2021 was $30,279, for an effective tax rate for the year of 25.0 percent.

The 1.7 percentage point increase was primarily due to higher Income before income taxes, and its dilutive effect on favorable tax credits and deductions as it concerns our effective tax rate .

The 2.7 percentage point decrease was primarily due to an increase in state tax credits due to capital expenditures investments.

2021 to 2020 - Income tax expense for 2021 was $30,279, for an effective tax rate for the year of 25.0 percent.

Income tax expense for 2020 was $12,256, for an effective tax rate for the year of 23.3 percent.

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

The 1.7 percentage point increase was primarily due to higher income before income taxes, and its dilutive effect on favorable tax credits and deductions as it concerns our effective tax rate .

Basic and diluted EPS

3 unchanged sentences

3.24 137 pp (b)

Change in weighted average shares outstanding:

share repurchase program (d)

Change in weighted average shares outstanding:

withholding taxes (d)

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

Change in income attributable to participating securities (c)

Change in interest expense (a)

(0.08) (3) pp

Change in other income (expense), net (a)

(0.08) (3) pp

Change in weighted average shares outstanding (d)

(0.98) (41) pp

Change in effective tax rate (0.10) (4) pp

Change in noncontrolling interest (0.03) (1) pp

Basic and diluted EPS for 2021

1 unchanged sentence

1.12 26 pp (b)

Change in income attributable to participating securities (c)

Change in interest expense (a)

(0.06) (1) pp

Increase in other income (expense), net (a)

Change in other income (expense), net (a)

(0.08) (2) pp

2 unchanged sentences

Change in effective tax rate 0.10 2 pp

Change in noncontrolling interest (0.03) (1.3) pp

Basic EPS for 2022

Conversion feature of Convertible Senior Notes (0.03) (1.3) pp

Impact of dilutive shares outstanding (0.02) — pp

Diluted EPS for 2022

$ 4.34 83.1 %

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

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2022 to 2021 - Basic EPS increased to $4.94 in 2022 from $4.37 in 2021, primarily due to the increase in operating income, partially offset by an increase in shares outstanding as a result of shares issued as part of the consideration paid for the Merger.

Diluted EPS increased to $4.34 in 2021 from $2.37 in 2020, primarily due the above described changes in Basic EPS, partially offset by the conversion feature of the Convertible Senior Notes.

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

DISTILLERY PRODUCTS SEGMENT

DISTILLERY PRODUCTS SALES

Diluted EPS increased to $4.92 in 2022 from $4.37 in 2021, primarily due to the above described changes in Basic EPS, partially offset by the impact of dilutive shares outstanding related to the conversion feature of the Convertible Senior Notes.

2021 to 2020 - Basic and Diluted EPS increased to $4.37 in 2021 from $2.37 in 2020, primarily due to the increase in operating income, partially offset by an increase in shares outstanding as a result of shares issued as part of the consideration paid for the Merger.

DISTILLING SOLUTIONS SEGMENT

DISTILLING SOLUTIONS SALES

Year Ended December 31, Year-versus-Year Sales Change Increase/ (Decrease)

8 unchanged sentences

Warehouse services 23,598 17,523 6,075 35

Total Distillery Products $ 352,504 $ 313,309 $ 39,195 12.5 %

Total Distilling Solutions $ 428,478 $ 352,504 $ 75,974 22 %

Change in Year-versus-Year Sales Attributed to:

8 unchanged sentences

(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.

The product is then divided by prior period sales dollars.

(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.

The product is then divided by prior period sales dollars.

(d) Percentage points (“pp”).

2022 compared to 2021

Total Distillery Products sales for 2021 increased by $39,195, or 12.5 percent compared to 2020.

Sales of brown goods and white goods within premium beverage alcohol, fuel grade alcohol, and warehouse services increased, while sales of industrial alcohol and distillers feed and related co-products decreased compared to 2020.

The increase in 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 resulted from the Dryer Fire Incident and the subsequent sale of wet rather than dry distillers grains (see Note 10, Commitments and Contingencies for further details).

Total Distilling Solutions sales for 2022 increased by $75,974, or 22 percent compared to 2021.

Sales of brown goods within premium beverage alcohol, distillers feed and related co-products, and warehouse services increased while industrial alcohol, white goods within premium beverage alcohol, and fuel grade alcohol decreased compared to 2021.

The increase in sales of brown goods was driven by higher sales volume and higher average selling price.

The increase in sales of distillers feed and related co-products was due to higher average selling price, partially offset by lower sales volumes, both of which primarily resulted from the previously disclosed dryer fire at our Atchison facility which occurred in 2020.

Our warehouse services sales increased due to the increase in storage of our customer owned barreled whiskey and related warehouse services that we provide.

These increases were partially offset by a decrease in sales of industrial alcohol and white goods, which were driven by lower sales volume, partially offset by higher average selling price.

Gross profit increased year versus year by $12,176, or 11 percent.

Gross margin for 2021 increased to 32.4 percent from 24.2 percent for 2020.

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

The increase in gross profit was partially offset by lower average selling price on distillers feed and related co-products and higher input costs of industrial alcohol, white goods and brown goods.

DISTILLERY PRODUCTS SALES

Gross margin for 2022 decreased to 29.5 percent from 32.4 percent for 2021.

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

These increases were partially offset by lower gross profit in industrial alcohol, white goods, and fuel grade alcohol, all of which were driven by higher input costs.

The average selling price for these products also increased, but not enough to offset the higher input costs which caused a decrease in the gross margin percentage.

DISTILLING SOLUTIONS SALES

Year Ended December 31, Year-versus-Year Sales Change Increase/ (Decrease)

8 unchanged sentences

Warehouse services 17,523 15,631 1,892 12

Total Distillery Products $ 313,309 $ 294,238 $ 19,071 6.5 %

Total Distilling Solutions $ 352,504 $ 313,309 $ 39,195 13 %

Change in Year-versus-Year Sales Attributed to:

8 unchanged sentences

(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.

The product is then divided by prior period sales dollars.

(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.

The product is then divided by prior period sales dollars.

(d) Percentage points (“pp”).

2021 compared to 2020

Total Distillery Products sales for 2020 increased by $19,071, or 6.5 percent compared to 2019.

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

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

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

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

Total Distilling Solutions sales for 2021 increased by $39,195, or 13 percent compared to 2020.

The increase in brown goods, white goods and fuel grade alcohol was driven by higher sales volume and 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 resulted from the Dryer Fire Incident and the subsequent sale of wet rather than dry distillers grains (see Note 1, Nature of Operations and Summary of Significant Accounting Policies for further details).

Gross profit increased year versus year by $38,333, or 51 percent.

Gross margin for 2020 increased to 24.2 percent compared to 21.9 percent for 2019.

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

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

Gross margin for 2021 increased to 32.4 percent from 24.2 percent for 2020.

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

The increase in gross profit was partially offset by lower average selling price on distillers feed and related co-products and higher input costs of industrial alcohol, white goods and brown goods.

BRANDED SPIRITS SEGMENT

3 unchanged sentences

Ultra Premium $ 48,245 $ 27,722 $ 20,523 74 %

Super Premium 12,274 8,937 3,337 37

Premium 24,211 17,626 6,585 37

Mid 51,890 — 51,890 N/A

Value 58,514 — 58,514 N/A

Premium Plus 84,730 54,285 30,445 56

Mid 82,530 71,292 11,238 16

Value 47,395 38,520 8,875 23

Other 23,284 19,469 3,815 20

10 unchanged sentences

(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.

The product is then divided by prior period sales dollars.

(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.

The product is then divided by prior period sales dollars.

(d) Percentage points (“pp”).

1 unchanged sentence

Total Branded Spirits sales for 2022 increased by $54,373, or 30 percent compared to 2021.

Sales of value, mid, ultra premium, other and premium increased compared to 2020, primarily due to the additional brands acquired as part of the Merger.

Sales across all pricing tiers increased compared to 2021, primarily due to the additional brands acquired as part of the Merger that occurred on April 1, 2021.

Additionally, sales increased in the premium plus price tiers due primarily to increased sales of American whiskey brands.

Gross profit increased year versus year by $32,877, or 52 percent.

Gross margin for 2021 decreased to 34.1 percent compared to 52.7 percent for 2020.

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, as the vast majority of the Company’s branded spirits sales pre-merger were in the ultra premium category.

Gross profit was reduced during 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 year and is not expected to recur in the future periods.

Gross margin for 2022 increased to 40.1 percent compared to 34.1 percent for 2021.

The increase in gross profit was primarily driven by volume associated with the additional brands acquired as part of the Merger, increased average net price and mix as well as a required step up in value of certain assets due to purchase accounting related to the Merger in 2021 that did not recur in 2022.

Of the purchase accounting step ups, $2,529 was associated with marking the finished goods inventory to fair value and fully flowed through in the prior year period.

Additionally, gross profit increased due to increased sales of American whiskey brands within our premium plus price tiers.

BRANDED SPIRITS SALES

2 unchanged sentences

Ultra Premium $ 27,722 $ 1,785 $ 25,937 1,453 %

Super Premium 8,937 2,196 6,741 307

Premium 17,626 125 17,501 14,001

Premium Plus 54,285 4,106 50,179 1,222

Mid 71,292 — 71,292 N/A

Value 38,520 — 38,520 N/A

Other 43 — 43 N/A

Other 19,469 43 19,426 45,177

Total Branded Spirits $ 183,566 $ 4,149 $ 179,417 4,324 %

9 unchanged sentences

(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.

The product is then divided by prior period sales dollars.

(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.

The product is then divided by prior period sales dollars.

(d) Percentage points (“pp”).

2021 compared to 2020

Total Branded Spirits sales for 2020 increased by $1,154, or 38.5 percent compared to 2019, primarily driven by an increase in ultra premium.

The increase in ultra premium sales was due to expanding into more markets and increasing points of distribution, as well as additional brands acquired during 2020.

Total Branded Spirits sales for 2021 increased by $179,417, or 4,324 percent compared to 2020.

Sales across all price tiers increased compared to 2020, primarily due to the additional brands acquired as part of the Merger.

Gross profit increased year versus year by $60,457, or 2,764 percent.

Gross margin for 2020 increased to 52.7 percent compared to 51.3 percent for 2019.

The increase in gross profit was primarily due to increased sales of branded spirits and additional brands acquired during 2020.

Gross margin for 2021 decreased to 34.1 percent compared to 52.7 percent for 2020.

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, as the vast majority of the Company’s branded spirits sales pre-merger were in the premium plus price tiers.

Gross profit was reduced during 2021, due to a required step up in value due to purchase accounting related to the Merger.

INGREDIENT SOLUTIONS SEGMENT

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(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.

The product is then divided by prior period sales dollars.

(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.

The product is then divided by prior period sales dollars.

(d) Percentage points (“pp”).

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Total Ingredient Solutions sales for 2022 increased by $25,291, or 28 percent compared to 2021.

Sales of specialty wheat starches and proteins and commodity wheat starches increased, while sales of commodity wheat proteins decreased.

The increase in specialty wheat starches was primarily due to higher sales volume.

The increase in specialty wheat proteins was primarily due to higher sales volume and higher average selling prices.

The increase in commodity wheat starches was due to higher sales volume.

The increase in Ingredient Solutions sales was primarily driven by higher sales of specialty wheat starches and proteins primarily due to higher average selling prices and higher sales volume.

Additionally, the increase in Ingredient Solutions sales was driven by higher sales of commodity wheat starches primarily due to higher average selling price.

These increases were partially offset by a decrease in sales of commodity wheat proteins due to lower sales volume.

Gross profit increased year versus year by $9,288, or 42 percent.

Gross margin for 2021 decreased to 24.5 percent from 26.7 percent for 2020.

The increase in gross profit was primarily driven by higher sales volume of specialty wheat starches and commodity wheat starches, as well as higher sales volume and higher average selling prices of specialty wheat proteins.

These increases were partially offset by higher input costs.

Gross margin for 2022 increased to 27.2 percent from 24.5 percent for 2021.

The increase in gross profit was primarily driven by higher average selling price and higher sales volumes of specialty wheat starches and proteins.

These increases were partially offset by higher input costs for all product lines within the segment.

INGREDIENT SOLUTIONS SALES

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(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.

The product is then divided by prior period sales dollars.

(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.

The product is then divided by prior period sales dollars.

(d) Percentage points (“pp”).

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Total Ingredient Solutions sales for 2021 increased by $12,587, or 16 percent compared to 2020.

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

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

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

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

Sales of specialty wheat starches and proteins and commodity wheat starches increased, while sales of commodity wheat proteins decreased.

The increase in specialty wheat starches was primarily due to higher sales volume.

The increase in specialty wheat proteins was primarily due to higher sales volume and higher average selling prices.

The increase in commodity wheat starches was due to higher sales volume.

Gross profit increased year versus year by $1,369, or 7 percent.

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

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

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

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

Gross margin for 2021 decreased to 24.5 percent from 26.7 percent for 2020.

These increases were partially offset by higher input costs.

CASH FLOW, FINANCIAL CONDITION AND LIQUIDITY

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Cash Flow Summary Year Ended December 31, Changes, Year versus Year-Increase / (Decrease)

2021 2020 2019 2021 vs.

2020 2020 vs.

2022 2021 2020 2022 v.

Cash provided by operating activities $ 88,936 $ 88,263 $ 53,255 $ 673 $ 35,008

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Operating Activities.

Cash provided by operating activities were $88,263 during the year ended December 31, 2021.

Cash provided by operating activities was $88,936 during the year ended December 31, 2022.

The cash provided by operating activities during 2022 resulted primarily from net income of $108,872, adjustments for non-cash or non-operating charges of $30,382 including depreciation and amortization, share-based compensation, equity method investment loss, and by uses of cash due to changes in operating assets and liabilities of $50,318.

The primary drivers of the changes in operating assets and liabilities were $44,350 use of cash related to an increase in inventories, primarily barreled distillate, and $16,786 use of cash related to an increase in receivables, partially offset by $10,626 of cash provided by an increase in accounts payable related to the timing of cash disbursements.

Cash provided by operating activities was $88,263 during the year ended December 31, 2021.

The cash provided by operating activities during 2021 resulted primarily from net income of $90,817, adjustments for non-cash or non-operating charges of $16,850 including depreciation and amortization, deferred income taxes, share-based compensation, and partially offset by a gain on insurance recoveries, and by uses of cash due to changes in operating assets and liabilities of $19,404.

The primary drivers of the changes in operating assets and liabilities were $14,214 use of cash related to an increase in inventories, primarily barrel distillate, $6,242 use of cash related to income taxes refundable, and $6,031 use of cash related to an increase in receivables, inclusive of insurance receivables, partially offset by $5,301 of cash provided by an increase in accounts payable related to the timing of cash disbursements.

Cash provided by operating activities were $53,255 during the year ended December 31, 2020.

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

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

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

Investing Activities.

Cash used in investing activities for year ended December 31, 2022 was $47,813, which primarily resulted from additions to property, plant and equipment of $45,323 (see Capital Spending).

Cash used in investing activities for year ended December 31, 2021 was $182,619, which primarily resulted from $149,005 related to the Merger with Luxco and additions to property, plant and equipment of $47,389 (see Capital Spending), partially offset by cash proceeds of $16,325 from property insurance recoveries.

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

Capital Spending.

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The difference between the amount of capital expenditures incurred and amount paid is due to the change in capital expenditures in accounts payable.

The increase in capital expenditures for 2021 as compared to 2020 was primarily due to the replacement of the feed dryer system.

We expect approximately $58,000, in capital expenditures for 2023 which will be used for facility improvement and expansion, facility sustenance projects and environmental health and safety projects.

Financing Activities .

Cash used in financing activities for year ended December 31, 2022 was $14,764, primarily due to payments of dividends and dividend equivalents of $10,646 (see Note 8, Equity and EPS for additional information), and principal payments on long-term debt of $3,403 (see Long-Term and Short-Term Debt).

Cash provided by financing activities for year ended December 31, 2021 was $94,287, primarily due to net debt proceeds of $192,580 (see Long-Term and Short-Term Debt), primarily resulting from the issuance of the Convertible Senior Notes, partially offset by $87,509 payment on assumed debt as part of the Merger, and payments of dividends and dividend equivalents of $10,017 (see Note 8, Equity and EPS for additional information).

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

Treasury Purchases.

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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, 2021, we did not repurchase any shares of MGP Common Stock and have $20,947 remaining under the share repurchase plan.

During the year ended December 31, 2020, we repurchased approximately 159,104 shares of MGP Common Stock for $4,053.

The Company did not repurchase any shares during 2022 prior to the expiration of the program on February 27, 2022.

Long-Term and Short-Term Debt.

We maintain debt levels we consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment and financing plans (including brand development, share repurchases, and Board-approved dividends) and the overall cost of capital.

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 Board-approved dividends) and the overall cost of capital.

Total debt was $230,335 (net of unamortized loan fees of $6,115) at December 31, 2022 and $233,399 (net of unamortized loan fees of $6,454) at December 31, 2021.

During 2021, we had net borrowings on our Convertible Senior Notes of $201,250, and during 2020, we had net payments on our Credit Agreement of $300.

Additionally, during 2021 and 2020, we had net payments on our long-term debt of $1,620, and $1,208, respectively.

During 2021 and 2020, we incurred $7,050 and $1,148, respectively, of loan fees associated with the issuance of the Convertible Senior Notes and refinancing our credit agreement.

During 2022, we had net payments on our long-term debt of $3,403.

During 2021, we had net borrowings on our Convertible Senior Notes of $201,250, net payments on our long-term debt of $1,620, loan fees associated with the issuance of Convertible Senior Notes and refinancing of our credit agreement of $7,050.

Net borrowings / (payments) on all debt for 2022 and 2021 were $(3,403), and $192,580, respectively (see Note 6, Corporate Borrowings for additional information).

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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 and potential merger and acquisitions.

Generally, during periods when commodity 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, Convertible Senior Notes and Note Purchase Agreement.

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 various debt agreements.

Under these agreements, we must meet certain financial covenants and restrictions, and at December 31, 2022, we met those covenants and restrictions.

At December 31, 2022, our current assets exceeded our current liabilities by $348,787, largely due to our inventories, at cost, of $289,722.

At December 31, 2021, our cash balance was $21,568 and we have used our Credit Agreement, Convertible Senior Notes and Note Purchase Agreement for liquidity purposes, with $400,000 remaining for additional borrowings.

At December 31, 2022, our cash balance was $47,889 and we have used our various debt agreements for liquidity purposes, with $400,000 remaining for additional borrowings and up to $120,000 potentially available under the Note Purchase Agreement.

We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations.

We regularly assess our cash needs and the available sources to fund these needs.

We utilize short-term and long-term debt to fund discretionary items, such as capital investments and dividend payments.

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

We utilize short-term and long-term debt to fund discretionary items, such as capital investments, dividend payments as well as potential mergers and acquisitions.

Subject to market conditions, we could also fund future mergers and acquisitions through the issuance of additional shares of common stock.

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

Contractual Obligations

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We are in various stages of financing projects with industrial revenue bond transactions for our facilities located in Kentucky.

The bonds allow a 30 year real property tax abatement on our renovated and newly-constructed warehouse buildings and distilleries in Kentucky.

The bonds allow a 15 to 40 year real property tax abatement on our renovated and newly-constructed warehouse buildings and distilleries in Kentucky.

We have been approved for $55,500 of industrial revenue bonds with the City of Williamstown Kentucky, and have used approximately $21,000.

Additionally, we have been approved for $175,000 of industrial revenue bonds with Nelson County Kentucky and have used approximately $48,000.

The City of Williamstown and Nelson County issued the industrial revenue bonds to us and then used the proceeds to purchase the land and warehouse from us.

The City of Williamstown and Nelson County issued the industrial revenue bonds to us.

The city then leased the facilities back to us under a capital lease, the terms of which provide for the payment of basic rent in an amount sufficient to pay principal and interest on the bonds.

Our obligation to pay rent under the lease is in the same amount and due on the same date as the city’s obligation to pay debt service on the bonds which we hold.

Our obligation to pay rent under the lease is in the same amount and due on the same date as the obligation to pay debt service on the bonds which we hold.

The lease permits us to present the bonds at any time for cancellation, upon which our obligation to pay basic rent would be canceled.

At the bonds’ maturity the facilities will revert to us without costs.

If we were to present the bonds for cancellation prior to maturity, a nominal fee would be incurred.

If we were to present the bonds for cancellation prior to maturity, a nominal fee could be incurred.

We recorded the land and buildings as assets in property, plant, and equipment, net, on our Consolidated Balance Sheets.

Because we own all outstanding bonds, have a legal right to set-off, and intend to set-off the corresponding lease and interest payment, we have netted the capital lease obligation with the bond asset.

No amount for our obligation under the capital lease is reflected on our Consolidated Balance Sheet, nor do we reflect an amount for the corresponding industrial revenue bond asset (see Note 10, Commitments and Contingencies for additional information).

No amount for our obligation under the capital lease is reflected on our Consolidated Balance Sheets, nor do we reflect an amount for the corresponding industrial revenue bond asset (see Note 10, Commitments and Contingencies for additional information).

CRITICAL ACCOUNTING ESTIMATES

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These should be read in conjunction with the significant accounting policies discussed in Note 1, Nature of Operations and Summary of Significant Accounting Policies.

Business Combinations.

The merger with Luxco was accounted for as a business combination in accordance with Financial Accounting Standards Board Accounting Standard Codification 805, Business Combinations (“ASC 805”), and as such, we allocated the consideration paid for a business to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date, with the excess recorded to goodwill.

The fair value measurements of tangible and intangible assets and liabilities were based on significant inputs not observable in the market.

Critical estimates used in determining the fair value include, but are not limited to discount rates that would be used by a market participant in valuing these assets and liabilities, forecasted revenue growth rates, including the terminal growth rates, projected cash flows, distributor attrition rates, royalty rates and market comparable, among others.

The fair value of personal property assets was determined using the market approach and the indirect and direct method of the cost approach, and the fair value of real property was determined using the cost approach and the sales comparison approach.

The fair value of work-in-process and finished goods inventory was determined using the comparative sales method and raw materials was determined using the replacement cost method.

The trade names and distributor relationships acquired were adjusted to fair value using the relief from royalty method and multi-period excess earnings method, respectively.

Management engaged a third party valuation specialist to assist in the valuation analysis of certain acquired assets including trade name and distributor relationship.

Goodwill and Other Intangible Assets.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis