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Item 7. Management’s Discussion and Analysis

2024-02-22 compared with 2023-02-23 · 166 added, 138 removed, 344 unchanged (47% of the section changed)

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CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS

This Report on Form 10-K contains forward looking statements as well as historical information.

All statements, other than statements of historical facts, regarding the prospects of our industry and our prospects, plans, financial position, and strategic plan may constitute forward looking statements.

In addition, forward looking statements are usually identified by or are associated with such words as “intend,” “plan,” “believe,” “estimate,” “expect,” “anticipate,” “hopeful,” “should,” “may,” “will,” “could,” “encouraged,” “opportunities,” “potential,” and/or the negatives or variations of these terms or similar terminology.

Forward looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from those expressed or implied in the forward looking statements.

A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward looking statements is included in the section titled “Risk Factors” (Item 1A of this Form 10-K).

Forward looking statements are made as of the date of this report, and we undertake no obligation to update or revise publicly any forward looking statements, whether because of new information, future events or otherwise.

This Report may contain forward looking statements as well as historical information.

All statements, other than statements of historical facts, regarding the prospects of our industries and our prospects, plans, financial position, mission, and strategy may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation statements about our sources of cash being adequate;

our capital expenditures;

our ability to support our liquidity and operating needs through cash generated from operations;

and our ability to obtain credit funding.

Forward looking statements are usually identified by or are associated with such words as “intend,” “plan,” “believe,” “estimate,” “expect,” “anticipate,” “project,” “forecast,” “hopeful,” “should,” “may,” “will,” “could,” “encouraged,” “opportunities,” “potential,” and similar terminology.

These forward-looking statements reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, our performance, our financial results, and our financial condition and are not guarantees of future performance.

All forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially.

For information on these risks and uncertainties and other factors that could affect the Company’s business, see the “Risk Factors” and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” of this Report and our other filings with the Securities and Exchange Commission (the “SEC”).

Forward-looking statements in this Report are

made as of the date of this Report, and we undertake no obligation to update any forward-looking statements or information made in this Report, except as required by law.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

MGP’s MD&A is presented in the following sections:

• Recent Developments

• Results of Operations

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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.

MGP was also a producer of high quality industrial alcohol for use in both food and non-food applications, which was primarily produced at our distillery located in Atchison, Kansas, prior to its closure during December 2023.

We have 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.

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 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.

Our strategic plan is designed to leverage our history and strengths as well as 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 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.

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

The favorable macro industry trends we anticipate will benefit our business include the expansion in the U.S.

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.

These macro industry trends also include shifting sales mix to higher margin products, such as premium brown goods.

Our Distilling Solutions segment is also subject to unfavorable macro industry trends, which include increased competition as industry participants seek to capitalize on consumer trends, inflation impacts on customers, overall American whiskey supply and consumer consumption patterns, as well as increased commodity prices.

Our strategy for the Distilling Solutions segment is to further develop our existing customer relationships, expand our Kentucky whiskey sales platform, cultivate additional multi-national and craft customers for brown goods sales, and increase our global presence in the American whiskey market.

During 2023, we continued to focus on attracting customers and developing customer relationships for our premium beverage alcohol products as well as shifting our focus away from industrial alcohol, fuel grade alcohol, and white beverage alcohol.

Distilling Solutions segment sales for 2023 increased 5 percent over the prior year.

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Our Branded Spirits segment mission is to align our product offering and enhance focus on growing spirits categories and price tiers.

The favorable macro industry trends benefiting our business include growth in high-end whiskey and tequila brands as well as growth across all spirit categories in the high-end price tiers.

Our Branded Spirits segment is also subject to unfavorable macro trends, which include increased competition as industry participants seek to capitalize on consumer trends.

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 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.

The Branded Spirits segment sales for 2022 increased 30 percent over the prior year.

The favorable macro industry trends we anticipate will benefit our business include growth in high-end whiskey and tequila brands as well as growth in the U.S.

across all spirit categories in the premium plus price tiers.

Our Branded Spirits segment is also subject to unfavorable macro industry trends, which include inflation impacts on consumers, and increased

competition as industry participants seek to capitalize on consumer trends.

Our strategy for the Branded Spirits segment is to focus on the right brands at the right price points in the right spirits categories to maximize profit for the Company.

Additionally, our strategy is to grow our overall points of distribution, increase innovation, build brand awareness, and continue to invest in our people.

Branded Spirits segment sales for 2023 increased 7 percent over the prior year.

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 best-in-class customer service.

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.

The favorable macro industry trends we anticipate will benefit our business include growth and focus on high fiber, high protein, meat alternatives, plant-based protein, and non-GMO products.

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

Our strategy for the Ingredient Solutions segment is to expand and optimize our dietary fiber, plant proteins, and clean label starches;

expand our extruded products platform;

and continue to innovate and expand opportunities through research and development.

Ingredient Solutions segment sales for 2023 increased 14 percent over the prior year.

RECENT DEVELOPMENTS

Acquisition of Penelope

On May 8, 2023, we entered into a definitive agreement to acquire 100 percent of the equity of Penelope, and subsequently completed the acquisition on June 1, 2023 (the “Acquisition”).

Penelope, prior to our acquisition, was a family and founder-owned and operated American whiskey company with a diverse portfolio of high-quality whiskeys in the premium plus price tiers.

As a result of the acquisition, we enhanced our presence in the growing American whiskey category and expanded our portfolio of premium plus price tier brands.

Following the acquisition, Penelope became a wholly owned subsidiary of the Company and its financial results are included in the Branded Spirits segment (see Note 4, Business Combination for additional information).

Closure of the Atchison Distillery

On July 13, 2023, we announced the decision by our Board of Directors to approve the closure of our distillery located in Atchison, Kansas (the “Atchison Distillery”).

The Atchison Distillery ceased operations in December 2023.

The decision to close the Atchison Distillery is consistent with our plan to address profitability headwinds associated with our GNS and industrial alcohol products within the Distilling Solutions segment.

During the year ended December 31, 2023, we recorded a $17,112 impairment of assets related to the Atchison Distillery closure, which was recorded in the impairment of long-lived assets and other line on the Consolidated Statement of Income.

The impaired assets were recorded within the Distilling Solution segment.

Additionally, we recorded $2,279 of expenses related to severance costs, inventory write offs, contract termination fees, consulting fees, and other miscellaneous expenses related to the Atchison Distillery closure, which were recorded in the impairment of long-lived assets and other line on the Consolidated Statement of Income for the year ended December 31, 2023 (see Note 6, Closure of the Atchison Distillery for additional information).

RESULTS OF OPERATIONS

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SG&A expenses 91,395 74,627 72,829 22 2

Impairment of long-lived assets and other 19,391 — — N/A N/A

Change in fair value of contingent consideration 7,100 — — N/A N/A

Insurance recoveries — — (16,325) N/A N/A

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Interest expense, net (6,647) (5,451) (4,037) 22 35

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

Other expense, net (220) (3,342) (1,230) (93) 172

Income before income taxes 141,746 140,172 121,096 1 16

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2023 to 2022 - Sales for 2023 were $836,523, an increase of 7 percent compared to 2022, which was the result of increased sales in the Distilling Solutions, Branded Spirits, and Ingredient Solutions segments.

Distilling Solutions segment sales increased 5 percent, primarily due to an increase in the sales of brown goods within premium beverage alcohol.

Branded Spirits segment sales increased 7 percent, primarily due to increased sales of brands in the premium plus price tiers.

Ingredient Solutions segment sales increased 14 percent due to increased sales across all Ingredient Solutions product lines.

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.

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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 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.

2023 to 2022 - Gross profit for 2023 was $304,712, an increase of 20 percent compared to 2022.

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

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

The Distilling Solutions segment gross profit increased by $18,682, or 15 percent.

The Branded Spirits segment gross profit increased by $17,260, or 18 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.

The Ingredient Solutions segment gross profit increased by $15,464, or 49 percent.

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

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2023 to 2022 - Advertising and promotion expenses for 2023 were $38,213, an increase of 29 percent compared to 2022.

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

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.

SG&A expenses

2023 to 2022 - SG&A expenses for 2023 were $91,395, an increase of 22 percent compared to 2022.

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.

The increase in SG&A expenses was primarily due to higher personnel expenses and incentive compensation, inclusive of certain incremental costs incurred relating to our CEO transition, and business acquisition expenses related to the acquisition of Penelope.

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.

Insurance recoveries

2021 to 2020 - Gain on insurance recoveries for 2021 was $16,325.

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 a temporary loss of production time.

At December 31, 2021, we received a legally binding commitment from our insurance carrier for final settlement for the replacement of the damaged dryer which resulted in a gain of $16,325.

Operating income

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

Increase in insurance recoveries 16,325 30 pp

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

Operating income for 2022 148,965 18 %

Increase in gross profit - Branded Spirits segment (a)

32,877 26 pp (b)

Increase in gross profit - Distilling Solutions segment (a)

18,682 13 pp (b)

Increase in gross profit - Branded Spirits segment (a)

Increase in gross profit - Ingredient Solutions segment (a)

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Increase in SG&A expenses (16,768) (11) pp

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

Impairment of long-lived assets and other (19,391) (13) pp

Change in fair value of contingent consideration (7,100) (5) pp

Operating income for 2023 $ 148,613 — %

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(b) Percentage points (“pp”).

2023 to 2022 - Operating income for 2023 decreased to $148,613 from $148,965 for 2022, primarily due to the impairment of assets and other expenses of $19,391 related to the closure of the Atchison Distillery, increased SG&A expenses and advertising and promotion expenses as discussed above, and the change in fair value of the contingent consideration of $7,100 related to the Penelope acquisition.

These impacts were mostly offset by increased gross profit in all three segments.

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.

Income tax expense

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Income tax expense for 2022 was $31,300, for an effective tax rate for the year of 22.3 percent.

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

The 2.1 percentage point increase was primarily due to an increase in valuation allowances and lower tax credits.

2022 to 2021 - Income tax expense for 2022 was $31,300, for an effective tax rate for the year of 22.3 percent.

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.

Basic and diluted EPS

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1.12 26 pp (b)

Change in income attributable to participating securities (c)

Change in interest expense (a)

(0.06) (1) pp

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

Change in other expense, net (a)

(0.08) (2) pp

Change in weighted average shares outstanding (d)

Change in weighted average shares outstanding (c)

(0.51) (12) pp

Change in effective tax rate 0.10 2 pp

Change in noncontrolling interest (0.03) (1) pp

Basic and diluted EPS for 2021

Basic EPS for 2022

Impact of dilutive shares outstanding (0.02) — pp

Diluted EPS for 2022

EPS % Increase (Decrease)

Basic EPS for 2022

Change in operating income (a)

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(0.04) (1) pp

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

(0.08) (2) pp

Change in weighted average shares outstanding (d)

(0.51) (12) pp

Change in other expense, net (a)

Change in weighted average shares outstanding (c)

Change in effective tax rate (0.15) (3) pp

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(b) Percentage points (“pp”).

(c) Income attributable to participating securities changes primarily due to the awarding and vesting of the employee RSUs that receive dividend equivalent payments.

(d) Weighted average shares outstanding change primarily due to our repurchases of Common Stock, the vesting of employee RSUs, our purchase of vested RSUs from employees to pay withholding taxes, and the granting of Common Stock to directors.

(c) Weighted average shares outstanding change primarily related to the vesting of employee restricted stock units (“RSUs”), our withholding and purchase of vested RSUs from employees to pay withholding taxes, and the granting of Common Stock to directors.

Additionally, during 2021, the weighted average shares outstanding were impacted by the issuance of shares as part of the Merger consideration.

2023 to 2022 - Basic EPS decreased to $4.82 in 2023 from $4.94 in 2022, primarily due to the increase in effective tax rate, partially offset by a decrease in other expenses, net.

Diluted EPS decreased to $4.80 in 2023 from $4.92 in 2022, primarily due to the above described changes in basic EPS as well as the impact of the dilutive shares outstanding related to the conversion feature of the Convertible Senior Notes.

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 $4.92 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

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Total Distilling Solutions sales for 2023 increased by $22,376, or 5 percent, compared to 2022.

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.

Sales of brown goods within premium beverage alcohol and warehouse services increased while white goods within premium beverage alcohol, distillers feed and related co-products, industrial alcohol, and fuel grade alcohol decreased compared to 2022.

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

This increase was partially offset by a decrease in sales of white goods, distillers feed and related co-products, industrial alcohol and fuel grade alcohol, which was driven primarily by lower sales volume in connection with the Atchison Distillery closure.

The decreases in sales volume of white goods, distillers feed and related co-products, and industrial alcohol were partially offset by higher average selling price.

Gross profit increased year versus year by $18,682, or 15 percent.

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.

Gross margin for 2023 increased to 32.2 percent from 29.5 percent for 2022.

The increase in gross profit was due primarily to increased average selling price and volume of higher margin brown goods.

This increase was partially offset by larger gross profit losses in the Atchison Distillery.

DISTILLING SOLUTIONS SALES

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

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 1, Nature of Operations and Summary of Significant Accounting Policies for further details).

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

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.

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.

BRANDED SPIRITS SEGMENT

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Total Branded Spirits sales for 2023 increased by $15,994, or 7 percent, compared to 2022.

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.

Sales of brands within the premium plus price tiers as well as sales within the other category and the value price tier increased while sales of brands within the mid price tier decreased.

The increase in sales of brands within the premium plus price tiers was primarily due to the acquisition of Penelope, an increase in average selling price, and an increase in sales volume.

Sales within the value and other categories increased primarily due to an increase in average selling price.

These increases were partially offset by decreased sales of brands within the mid price tier, primarily due to decreased sales volume as a result of sales shifting to higher margin accretive brands within the premium plus price tiers, partially offset by an increase in average selling price within the mid price tier.

Gross profit increased year versus year by $17,260, or 18 percent.

Gross margin for 2023 increased to 44.4 percent compared to 40.1 percent for 2022.

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.

The increase in gross profit was primarily driven by contributions from the acquisition of Penelope as well as by higher average selling price in the premium plus price tiers, value, mid, and other price tiers.

These increases were partially offset by increased input costs across all categories.

BRANDED SPIRITS SALES

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

Mid 71,292 — 71,292 N/A

Value 38,520 — 38,520 N/A

Mid 82,530 71,292 11,238 16

Value 47,395 38,520 8,875 23

Other 23,284 19,469 3,815 20

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

Sales across all price tiers 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 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.

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.

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.

INGREDIENT SOLUTIONS SEGMENT

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Total Ingredient Solutions sales for 2023 increased by $15,795, or 14 percent, compared to 2022.

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.

The increase in Ingredient Solutions sales was driven by increases in sales in all product lines.

The higher sales of specialty wheat proteins was driven by higher average selling price and higher sales volume.

Additionally, sales of specialty wheat starches and commodity wheat starches increased primarily due to higher average selling price, partially offset by lower sales volume.

Gross profit increased year versus year by $15,464, or 49 percent.

Gross margin for 2023 increased to 35.7 percent from 27.2 percent for 2022.

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.

The increase in gross profit was primarily driven by higher average selling price across all product categories, partially offset by higher input costs for specialty wheat starches and proteins.

INGREDIENT SOLUTIONS SALES

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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.

CASH FLOW, FINANCIAL CONDITION, AND LIQUIDITY

We believe our financial condition continues to be of high quality, as evidenced by our ability to generate adequate cash from operations while having ready access to capital at competitive rates.

Operating cash flow and borrowings through our Credit Agreement, Convertible Senior Notes and Note Purchase Agreement (Note 6, Corporate Borrowings) 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.

Operating cash flow and borrowings through our Credit Agreement, Convertible Senior Notes and Note Purchase Agreement (see Note 7, Corporate Borrowings) provide the primary sources of cash to fund operating needs and capital expenditures.

These same sources of cash are used to fund stockholder 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 to be adequate to provide for budgeted capital expenditures, potential merger or acquisitions, and anticipated operating requirements for the foreseeable future.

We expect our sources of cash to be adequate to provide for budgeted capital expenditures, potential mergers and acquisitions, and anticipated operating requirements for the next 12 months and beyond.

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

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Cash provided by operating activities was $83,783 during the year ended December 31, 2023.

The cash provided by operating activities during 2023 resulted primarily from net income of $107,130 and adjustments for non-cash or non-operating charges of $56,263, including depreciation and amortization, impairment of long-lived assets and other, share-based compensation, partially offset by uses of cash due to changes in operating assets and liabilities of $79,610.

The primary drivers of the changes in operating assets and liabilities were $46,921 use of cash related to an increase in inventories, primarily barreled distillate, and $32,397 use of cash related to an increase in receivables.

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.

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 the year ended December 31, 2023 was $159,242, which primarily resulted from $103,712 related to the acquisition of Penelope and additions to property, plant and equipment of $55,267 (see “Capital Spending”).

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

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.

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.

We expect approximately $85,800 in capital expenditures for 2024, which we expect to use 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 provided by financing activities for the year ended December 31, 2023 was $45,924, primarily due to net proceeds on long-term debt of $57,400 (see Long-Term and Short-Term Debt), partially offset by payments of dividends and dividend equivalents of $10,675 (see Note 9, Equity and EPS for additional information).

Cash used in financing activities for the year ended December 31, 2022 was $14,764, primarily due to payments of dividends and dividend equivalents of $10,646 (see Note 9, Equity and EPS for additional information), and principal payments on long-term debt of $3,403 (see Long-Term and Short-Term Debt).

Treasury Purchases.

29,376 RSUs vested and converted to common shares during year ended December 31, 2022, of which we withheld and purchased for treasury 9,031 shares valued at $715 to cover payment of associated withholding taxes.

38,079 RSUs vested and converted to common shares during year ended December 31, 2021, of which we withheld and purchased for treasury 11,887 shares valued at $767 to cover payment of associated withholding taxes.

Share Repurchase.

On February 25, 2019, the Board of Directors approved a $25,000 share repurchase authorization commencing February 27, 2019 through February 27, 2022.

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

22,592 RSUs vested and converted to common shares during the year ended December 31, 2023, of which we withheld and purchased for treasury 8,437 shares valued at $801 to cover payment of associated withholding taxes.

29,376 RSUs vested and converted to common shares during the year ended December 31, 2022, of which we withheld and purchased for treasury 9,031 shares valued at $715 to cover payment of associated withholding taxes.

Long-Term and Short-Term Debt.

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Total debt was $287,249 (net of unamortized loan fees of $6,601) at December 31, 2023 and $230,335 (net of unamortized loan fees of $6,115) at December 31, 2022.

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 2023 and 2022 were $57,400, and $(3,403), respectively (see Note 7, Corporate Borrowings for additional information).

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See Note 9, Equity and EPS for further discussion.

On February 23, 2023, the Board of Directors declared a quarterly dividend payable to stockholders of record as of March 10, 2023, of our Common Stock and a dividend equivalent payable to holders of certain RSUs as of March 10, 2023, of $0.12 per share and per unit.

The dividend payment and dividend equivalent payment will occur on March 24, 2023.

On February 22, 2024, we announced a dividend payable to stockholders of record of our Common Stock, resulting in dividend equivalents payable to RSU holders, of $0.12 per share and per RSU.

The dividend and dividend equivalent are payable on March 29, 2024 to stockholders of record and RSU holders on March 15, 2024.

Financial Condition and Liquidity

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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.

Our principal sources of cash are product sales and borrowings on our various debt agreements.

Under these agreements, we must meet certain financial covenants and restrictions, and at December 31, 2023, we met those covenants and restrictions.

At December 31, 2023, our current assets exceeded our current liabilities by $400,191, largely due to our inventories, at cost, of $346,853.

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.

At December 31, 2023, our cash balance was $18,388, and we have used our various debt agreements for liquidity purposes, with $337,000 available under our Credit Agreement for additional borrowings and $220,400 available under the Note Purchase Agreement (see Note 7, Corporate Borrowings for additional information).

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

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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.

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

Contractual Obligations

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Long-term debt $ 293,850 $ 6,400 $ 287,450

Interest on long-term debt 76,734 5,057 71,677

Interest on long-term debt (c)

71,677 4,841 66,836

Operating leases 16,092 3,702 12,390

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(b) Includes open purchase order commitments related to raw materials and packaging used in the ordinary course of business of 101,872.

Industrial Revenue Bonds

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

We are in the process of completing several projects that have been financed using industrial revenue bonds in the state of Kentucky.

Traditionally, industrial revenue bonds have been used as an economic development tool in the state to attract desirable businesses, including business in the bourbon industry, and have allowed a 15 to 40 year real property tax abatement on our renovated and newly-constructed warehouse buildings and distilleries in Kentucky.

As of December 31, 2023, approximately $50,000 of our facilities in Nelson County, Kentucky and approximately $30,900 of our facilities in Williamstown, Kentucky were financed with industrial revenue bonds.

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.

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

We may not be able to use industrial revenue bonds in the future due to legislative, regulatory, and related changes in the state of Kentucky.

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.

Because we own all outstanding bonds, have a legal right to set-off, and intend to set-off the corresponding lease and interest payments, 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 Sheets, nor do we reflect an amount for the corresponding industrial revenue bond asset (see Note 11, Commitments and Contingencies for additional information).

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The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.

The application of certain of these policies places demands on management’s judgment, with financial reporting results relying on estimation about the effects of matters that are inherently uncertain, inclusive of effects related to the COVID-19 pandemic.

For all of these policies, management cautions that future events rarely develop as forecast, and estimates routinely require adjustment and may require material adjustment.

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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 acquisition of Penelope 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 the 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, projections of revenues and cash flows, distributor attrition rates, royalty rates, and market comparables, among others.

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 recorded at 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.

Contingent Consideration .

The estimated fair value of the contingent consideration obligation at the Acquisition date was determined using a Monte Carlo simulation approach.

This approach requires significant assumptions, including projected net sales, discount rates, and volatility rates.

The contingent consideration liability is measured on a quarterly basis and recorded at fair value.

The changes in fair value of the obligation result from changes in the key assumptions between measurement dates, such as projected net sales, discount rates, and volatility rates.

The adjustment to fair value is recorded in the change in fair value of contingent consideration line on the Consolidated Statements of Income.

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