MGP INGREDIENTS INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in thousands, unless otherwise noted) CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS This Report may contain 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 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 Condition and Results of Operations” sections of our Annual Report on Form 10-K for the year ended December 31, 2024, 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. OVERVIEW MGP is a leading producer of branded and distilled spirits as well as food ingredient solutions. 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 premium plus brands. Distilled spirits include premium bourbon, rye, and other American 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. Our protein and starch food ingredients are predominately wheat based and 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. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this Report, as well as our audited consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - General,” set forth in our Annual Report on Form 10-K for the year ended December 31, 2024. 19 RESULTS OF OPERATIONS Consolidated Results The table below details the consolidated results for the quarters ended March 31, 2025 and 2024: Quarter Ended March 31, 2025 2024 2025 v. 2024 Sales $ 121,653 $ 170,563 (29) % Cost of sales 78,323 107,768 (27) Gross profit 43,330 62,795 (31) Gross margin % 35.6 % 36.8 % (1.2) pp (a) Advertising and promotion expenses 8,172 8,683 (6) Selling, general, and administrative (“SG&A”) expenses 21,205 20,979 1 Impairment of long-lived assets and other — 116 N/A Change in fair value of contingent consideration 14,700 4,100 259 Operating income (loss) (747) 28,917 (103) Operating margin % (0.6) % 17.0 % (17.6) pp Interest expense, net (1,854) (2,019) 8 Other income (expense), net 215 (52) 513 Income (loss) before income taxes (2,386) 26,846 (109) Income tax expense 671 6,262 (89) Effective tax expense rate % (28.1) % 23.3 % (51.4) pp Net income (loss) $ (3,057) $ 20,584 (115) % Net income margin % (2.5) % 12.1 % (14.6) pp (a) Percentage points (“pp”). Sales - Sales for the quarter ended March 31, 2025 were $121,653, a decrease of 29 percent compared to the year-ago quarter, which was the result of decreased sales in each segment. Within the Distilling Solutions segment, sales were down 45 percent primarily due to decreased sales of brown goods. Within the Ingredient Solutions segment, sales were down 26 percent, primarily due to decreased sales of specialty wheat starches and proteins. Within the Branded Spirits segment, sales were down 4 percent due to decreased sales of brands in the value and mid price tiers (see “Segment Results”). Gross profit - Gross profit for the quarter ended March 31, 2025 was $43,330, a decrease of 31 percent compared to the year-ago quarter. The decrease was driven by a decrease in gross profit in each segment. Within the Distilling Solutions segment, gross profit decreased by $15,403, or 45 percent. Within the Ingredient Solutions segment, gross profit decreased by $3,728, or 60 percent. Within the Branded Spirits segment, gross profit decreased $334, or 1 percent (see “Segment Results”). Advertising and promotion expenses - Advertising and promotion expenses for the quarter ended March 31, 2025 were $8,172, a decrease of 6 percent compared to the year-ago quarter. SG&A expenses - SG&A expenses for the quarter ended March 31, 2025 were $21,205, a slight increase of 1 percent compared to the year-ago quarter. 20 Operating income (loss) - Operating income (loss) for the quarter ended March 31, 2025 decreased to a loss of $747 from income of $28,917 for the quarter ended March 31, 2024, primarily as a result of the decrease in gross profit in the Distilling Solutions segment, the change in the fair value of the contingent consideration liability related to the improved performance of the Penelope brand, and the decrease in gross profit in the Ingredient Solutions segment. Operating income, quarter versus quarter Operating Income Change Operating income for the quarter ended March 31, 2024 $ 28,917 Decrease in gross profit - Distilling Solutions segment (a) (15,403) (53) % Decrease in gross profit - Ingredient Solutions segment (a) (3,728) (13) pp (b) Decrease in gross profit - Branded Spirits segment (a) (334) (1) pp Decrease in advertising and promotion expenses 511 2 pp Increase in SG&A expenses (226) (1) pp Decrease in impairment of long-lived assets and other 116 — pp Change in fair value of contingent consideration (10,600) (37) pp Operating loss for the quarter ended March 31, 2025 $ (747) (103) % (a) See “Segment Results.” (b) Percentage points (“pp”). Income tax expense - Income tax expense for the quarter ended March 31, 2025 was $671, for an effective tax rate of (28.1) percent. Income tax expense for the quarter ended March 31, 2024 was $6,262, for an effective tax rate of 23.3 percent. The decrease in income tax expense, quarter versus quarter, was due primarily to lower income before income taxes, as the Company was in a net loss position for the quarter ended March 31, 2025, primarily due to the change in the fair value of the contingent consideration liability related to the Penelope acquisition. The tax rate for the quarter ended March 31, 2025 was negative primarily due to the net loss position and the discrete tax impact of the vesting of share based awards granted in the prior years during periods of higher stock prices. Earnings per common share (“EPS”) - Basic and Diluted EPS was $(0.14) for the quarter ended March 31, 2025, compared to $0.92 for the quarter ended March 31, 2024. The change in basic and diluted EPS, quarter versus quarter, was primarily due to a decrease in operating income and the change in effective tax rate. Change in EPS, quarter versus quarter EPS Change Basic and Diluted EPS for the quarter ended March 31, 2024 $ 0.92 Change in operating income (loss) (a) (1.01) (110) % Change in interest expense, net (a) 0.01 1 pp (b) Change in other income (expense), net (a) 0.01 1 pp Change in effective tax rate (0.07) (8) pp Change in income allocated to participating securities 0.01 1 pp Change in weighted average shares outstanding (0.01) (1) pp Basic and Diluted EPS for the quarter ended March 31, 2025 $ (0.14) (116) % (a) Net of tax based on the effective tax rate for the base year (2024). (b) Percentage points (“pp”). 21 SEGMENT RESULTS Branded Spirits The following tables show selected financial information for the Branded Spirits segment for the quarters ended March 31, 2025 and 2024. BRANDED SPIRITS SALES Quarter Ended March 31, Quarter versus Quarter Sales Change Increase/(Decrease) 2025 2024 $ Change % Change Premium plus $ 22,318 $ 20,906 $ 1,412 7 % Mid 13,027 14,761 (1,734) (12) Value 7,341 10,009 (2,668) (27) Other 5,541 4,470 1,071 24 Total Branded Spirits $ 48,227 $ 50,146 $ (1,919) (4) % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Branded Spirits (4)% (7)% 3% Other Financial Information Quarter Ended March 31, Quarter versus Quarter Increase / (Decrease) 2025 2024 $ Change % Change Gross profit $ 22,198 $ 22,532 $ (334) (1) % Gross margin % 46.0 % 44.9 % 1.1 pp (d) (a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars. (c) Net 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”). Total sales of the Branded Spirits segment for the quarter ended March 31, 2025 decreased by $1,919, or 4 percent, compared to the prior year quarter primarily due to lower sales volume, partially offset by higher net price/mix (as defined in the table above). Sales of brands within the value and mid price tiers decreased primarily driven by lower sales volume of certain tequila, liqueur, and cordial brands. Sales within the premium plus price tier increased driven by increased net price/mix and sales volume reflecting increased focus on the American whiskey and tequila categories. Gross profit decreased slightly versus prior year quarter by $334, or 1 percent, primarily driven by a decrease in sales volume, partially offset by increased net/price mix. Gross margin for the quarter ended March 31, 2025 increased to 46.0 percent from 44.9 percent for the prior year quarter, driven primarily by increased sales in the premium plus price tier. 22 Distilling Solutions The following tables show selected financial information for the Distilling Solutions segment for the quarters ended March 31, 2025 and 2024. DISTILLING SOLUTIONS SALES Quarter Ended March 31, Quarter versus Quarter Sales Change Increase/(Decrease) 2025 2024 $ Change % Change Brown goods $ 33,656 $ 66,331 $ (32,675) (49) % Warehouse services 8,077 7,956 121 2 White goods and other co-products 5,210 10,565 (5,355) (51) Total Distilling Solutions $ 46,943 $ 84,852 $ (37,909) (45) % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Brown goods (49)% (35)% (14)% Other Financial Information Quarter Ended March 31, Quarter versus Quarter Increase / (Decrease) 2025 2024 $ Change % Change Gross profit $ 18,680 $ 34,083 $ (15,403) (45) % Gross margin % 39.8 % 40.2 % (0.4) pp (d) (a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars. (c) Net 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”). Total sales of the Distilling Solutions segment for the quarter ended March 31, 2025 decreased by $37,909, or 45 percent, compared to the prior year quarter, primarily driven by lower brown goods sales. Brown goods sales volume and net price/mix decreased primarily due to reduced customer demand resulting from elevated industry-wide barrel inventory levels. White goods and other co-products sales decreased primarily due to a reduction in sales volume resulting from phasing out a number of white goods customer contracts in the wake of the Atchison distillery closure, as well as reduced production volumes of dried distillers grain. Warehouse sales were slightly up as compared to prior year quarter. Gross profit decreased versus prior year quarter by $15,403, or 45 percent, due to lower brown goods sales volume and net price/mix, partially offset by increased gross profit in white goods and other co-products due to favorable net price/mix as well as increased gross profit in warehouse services. Gross margin for the quarter ended March 31, 2025 decreased to 39.8 percent from 40.2 percent for the prior year quarter. 23 Ingredient Solutions The following tables show selected financial information for the Ingredient Solutions segment for the quarters ended March 31, 2025 and 2024. INGREDIENT SOLUTIONS SALES Quarter Ended March 31, Quarter versus Quarter Sales Change Increase / (Decrease) 2025 2024 $ Change % Change Specialty wheat starches $ 15,853 $ 22,271 $ (6,418) (29) % Specialty wheat proteins 7,348 9,995 (2,647) (26) Commodity wheat starches 2,719 3,262 (543) (17) Commodity wheat proteins 563 37 526 1,422 Total Ingredient Solutions $ 26,483 $ 35,565 $ (9,082) (26) % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions (26)% (22)% (4)% Other Financial Information Quarter Ended March 31, Quarter versus Quarter Increase / (Decrease) 2025 2024 $ Change % Change Gross profit $ 2,452 $ 6,180 $ (3,728) (60) % Gross margin % 9.3 % 17.4 % (8.1) pp (d) (a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars. (c) Net 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”). Total sales of the Ingredient Solutions segment for the quarter ended March 31, 2025 decreased by $9,082, or 26 percent, compared to the prior year quarter. The decrease was primarily driven by decreased sales volume of specialty wheat starches and decreased net/price mix of specialty wheat proteins. The declines in specialty wheat starches and proteins were impacted by supply challenges resulting from adverse weather and complexities associated with the closure of the Atchison distillery, as well as the timing of commercialization of new customers. Gross profit decreased versus prior year quarter by $3,728, or 60 percent. Gross margin for the quarter ended March 31, 2025 decreased to 9.3 percent from 17.4 percent for the prior year quarter. The decrease in gross profit was primarily driven by decreased sales volume of specialty wheat starches and decreased net/price mix of specialty wheat proteins. The declines in specialty wheat starches and proteins gross profit were impacted by supply challenges and additional costs resulting from adverse weather and complexities associated with the closure of the Atchison distillery, as well as the timing of commercialization of new customers. 24 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 (see Note 4, 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 mergers or acquisitions, and anticipated operating requirements for the next 12 months and beyond. Cash Flow Summary Quarter to Date Ended March 31, Changes, year versus year Increase / (Decrease) 2025 2024 Net cash provided by operating activities $ 44,684 $ 24,623 $ 20,061 Net cash used in investing activities (19,926) (27,266) 7,340 Net cash provided by (used in) financing activities (30,213) 3,767 (33,980) Effect of exchange rate changes on cash 294 (15) 309 Increase (decrease) in cash and cash equivalents $ (5,161) $ 1,109 $ (6,270) Cash decreased $5,161 for the quarter ended March 31, 2025, compared to a increase of $1,109 for the quarter ended March 31, 2024, for a net decrease in cash of $6,270, period versus period. Operating Activities. Cash provided by operating activities for the quarter ended March 31, 2025 was $44,684. The cash provided by operating activities resulted primarily from cash provided by operating assets and liabilities of $26,611, adjustments for non-cash or non-operating charges of $21,130, including the change in fair value of contingent consideration, depreciation and amortization, and share-based compensation, partially offset by a net loss of $3,057. The primary drivers of the changes in operating assets and liabilities were $40,594 of cash provided by decreased accounts receivables, net, due to timing of customer payments and lower sales during the quarter, this was partially offset by $13,439 use of cash related to an increase in inventories, primarily due to an increase in barreled distillate. Cash provided by operating activities for the quarter ended March 31, 2024 was $24,623. The cash provided by operating activities resulted primarily from net income of $20,584, adjustments for non-cash or non-operating charges of $11,603, including depreciation and amortization, the changes in fair value of contingent consideration, and share-based compensation, partially offset by cash used in operating assets and liabilities of $7,564. The primary drivers of the changes in operating assets and liabilities were $10,380 use of cash related to accrued expenses and other, which related to the incentive compensation payout during the quarter, and $10,207 use of cash related to a decrease in accounts payable due to timing of payments. These uses of cash were offset by $11,257 of cash provided by a decrease in accounts receivable, net, due to timing of sales and customer payments during the quarter. Investing Activities. Cash used in investing activities for the quarter ended March 31, 2025 was $19,926, which resulted from additions to property, plant, and equipment (see “Capital Spending”). Cash used in investing activities for the quarter ended March 31, 2024 was $27,266, which primarily resulted from additions to property, plant, and equipment of $27,026 (see “Capital Spending”). Capital Spending. We manage capital spending to support our business growth plans. We have incurred $8,094 and $13,134 of capital expenditures and have paid $19,926 and $27,026 for capital expenditures for the quarter ended March 31, 2025 and 2024, respectively. We expect to incur approximately $36,000 in capital expenditures in 2025, which includes capital expenditures for facility improvement and expansion, facility sustaining projects, and environmental, health, and safety projects. The difference between the amount of capital expenditures incurred and amount paid is due to the change in capital expenditures in accounts payable. 25 Financing Activities. Cash used in financing activities for the quarter ended March 31, 2025 was $30,213, due to net payments on debt of $26,600 (see “Long-Term and Short-Term Debt”), payments of dividends and dividend equivalents of $2,578 (see “Dividends and Dividend Equivalents”), and repurchases of Common Stock of $1,035 (see “Treasury Purchases” and “Share Repurchase”). Cash provided by financing activities for the quarter ended March 31, 2024 was $3,767, due to net proceeds on debt of $13,400 (see “Long-Term and Short-Term Debt”), partially offset by repurchase of Common Stock of $6,961 (see “Treasury Purchases” and “Share Repurchases”) and payments of dividends and dividend equivalents of $2,672 (see “Dividends and Dividend Equivalents”). Treasury Purchases. 105,776 RSUs vested and converted to shares of Common Stock for employees during the quarter ended March 31, 2025, of which we withheld and purchased for treasury 31,631 shares valued at $1,035 to cover payment of associated withholding taxes. 73,230 RSUs vested and converted to shares of Common Stock for employees during the quarter ended March 31, 2024, of which we withheld and purchased for treasury 22,885 shares valued at $1,961 to cover payment of associated withholding taxes. Share Repurchase. On February 29, 2024, we announced that our Board of Directors approved a $100,000 share repurchase program. Under the share repurchase program, we can repurchase stock from time to time for cash in open market purchases, privately negotiated transactions, or by other means, in accordance with applicable securities laws and other legal requirements. The repurchase program has no expiration date and may be modified, suspended, or discontinued at any time by the Company without prior notice. During the quarter ended March 31, 2025, we did not repurchase any share of Common Stock under the share repurchase program. During the quarter ended March 31, 2024, the Company repurchased approximately 59,084 shares of Company Stock for approximately $5,000. As of March 31, 2025, there was approximately $53,412 remaining under the share repurchase program. Dividends and Dividend Equivalents Dividend and Dividend Equivalent Information (per Share and Unit) Declaration date Record date Payment date Declared (a) Paid (a) Dividend payment Dividend equivalent payment (b) Total payment 2025 February 26, 2025 March 14, 2025 March 28, 2025 $ 0.12 $ 0.12 $ 2,553 $ 25 $ 2,578 2024 February 22, 2024 March 15, 2024 March 29, 2024 $ 0.12 $ 0.12 $ 2,641 $ 31 $ 2,672 (a) Per share amount. (b) Dividend equivalent payments on unvested participating securities. On May 1, 2025, 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 May 30, 2025 to stockholders of record and certain RSU holders as of May 16, 2025. 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, merger and acquisition, Board-approved dividends, and share repurchase activities), and the overall cost of capital. Total debt was $297,114 (net of unamortized loan fees of $5,736) at March 31, 2025, and $323,541 (net of unamortized loan fees of $5,909) at December 31, 2024. 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 mergers and acquisitions. 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 our debt agreements, we must meet certain financial covenants and restrictions, and at March 31, 2025, we met those covenants and restrictions. 26 At March 31, 2025, our current assets exceeded our current liabilities by $334,384, largely due to our inventories, at cost, of $378,243. At March 31, 2025, our cash balance was $20,112 and we have used our various debt agreements for liquidity purposes, with $320,000 available under our Credit Agreement for additional borrowings and $228,400 available under the Note Purchase Agreement (see Note 4, Corporate Borrowings). We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We regularly assess our cash needs and the available sources to fund these needs. We utilize short-term and long-term debt to fund discretionary items, such as capital investments, dividend payments, and 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.