MGP INGREDIENTS INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in thousands, unless otherwise noted) CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS This Report on Form 10-Q contains forward looking statements as well as historical information. All statements, other than statements of historical facts, regarding the prospects of our industry and our prospects, plans, financial position, and strategic plan may constitute forward looking statements. In addition, forward looking statements are usually identified by or are associated with such words as “intend,” “plan,” “believe,” “estimate,” “expect,” “anticipate,” “hopeful,” “should,” “may,” “will,” “could,” “encouraged,” “opportunities,” “potential,” and/or the negatives or variations of these terms or similar terminology. Forward looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from those expressed or implied in the forward looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward looking statements is included in the section titled “Risk Factors” (Item 1A) of our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A of this report Form 10Q. 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. On March 11, 2020, the World Health Organization classified the novel strain of coronavirus ("COVID-19") a global pandemic. The Company's business is part of the United States' critical infrastructure and thus is deemed to be an "essential business." As such, MGP is taking necessary and appropriate actions to protect its workforce as it continues its critical operations. MGP has created a COVID-19 cross functional team to implement a business continuity plan and address key aspects of COVID-19 as it affects its business, including enhanced workplace safety, supply chain monitoring, and other potential operational challenges the Company could face. We have continued to operate without any significant negative impacts; however this could be effected by voluntary or mandatory temporary closures of our facilities, interruptions to our supply chain or additional efforts to protect the health and safety of our employees. As of the date of this report, the Company's operations, supply chain and customer demand have not been significantly affected by COVID-19; however, we are monitoring the situation closely. The Company has implemented social distancing at each of its facilities, provides health screenings and monitoring for employees, implemented work-from-home policies where the Company is able, and restricted travel across the organization. The Company has incurred incremental costs for hourly wage bonuses to the Company's production employees, supplies to implement health screenings, an extended sick leave policy and additional IT related expenses to enable employees to work-from-home. As of September 30, 2020, such incremental costs have been immaterial to the Company's financial statements. The Company cannot reasonably estimate the length of time or severity of the pandemic and cannot estimate the impact this pandemic will have on our consolidated financial results for 2020. See Risk Factors for future discussion of the potential adverse impacts of the COVID-19 pandemic on our business. In May 2020, the Company was affected by a ransomware cyber-attack that temporarily disrupted production at its Atchison facilities. The Company's financial information was not affected and there is no evidence that any sensitive or confidential company, supplier, customer or employee data was improperly accessed or extracted from our network. The Company estimates that the ransomware attack adversely impacted gross profit by $1,728, primarily as a result of the business interruption. The Company has insurance related to this event and is seeking to recover a portion, if not all, of any profit impact including the profit associated with any loss of revenue resulting from this event. Following the attack, MGP implemented a variety of measures to further enhance our cybersecurity protections and minimize the impact of any future attack. OVERVIEW MGP is a leading producer and supplier of premium distilled spirits and specialty wheat protein and starch food ingredients. Distilled spirits include premium bourbon and rye whiskeys and grain neutral spirits (“GNS”), including vodka and gin. We are also a top producer of high quality industrial alcohol for use in both food and non-food applications. Our protein and starch food ingredients provide a host of functional, nutritional and sensory benefits for a wide range of food products to serve the packaged goods industry. We have two reportable segments: our Distillery Products segment and our Ingredient Solutions segment. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this Form 10-Q, as well as our audited consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial 18 Condition and Results of Operations - General, set forth in our Annual Report on Form 10-K for the year ended December 31, 2019. RESULTS OF OPERATIONS Consolidated results The table below details the consolidated results for the quarters ended September 30, 2020 and 2019: Quarter Ended September 30, 2020 2019 2020 v. 2019 Sales $ 102,964 $ 90,685 13.5 % Cost of sales 79,802 71,895 11.0 Gross profit 23,162 18,790 23.3 Gross margin % 22.5 % 20.7 % 1.8 pp (a) Selling, general, and administrative (“SG&A”) expenses 9,510 7,186 32.3 Operating income 13,652 11,604 17.7 Operating margin % 13.3 % 12.8 % 0.5 pp Interest expense, net and other (409) (364) 12.4 Income before income taxes 13,243 11,240 17.8 Income tax expense 2,862 3,025 (5.4) Effective tax expense rate % 21.6 % 26.9 % (5.3) pp Net income $ 10,381 $ 8,215 26.4 % Net income margin % 10.1 % 9.1 % 1.0 pp (a) Percentage points (“pp”). Sales - Sales for quarter ended September 30, 2020 were $102,964, an increase of 13.5 percent compared to the year-ago quarter, which was the result of increased sales in both the Distillery Products and Ingredient Solutions segments. Within the Distillery Products segment, sales were up 11.4 percent, primarily due to an increase in the sales of brown goods and white goods within premium beverage alcohol. Within the Ingredient Solutions segment, sales were up 22.7 percent, primarily due to increased sales of specialty wheat starches and proteins (see Segment Results). Gross profit - Gross profit for quarter ended September 30, 2020 was $23,162, an increase of 23.3 percent compared to the year-ago quarter. The increase was driven by an increase in gross profit in both the Ingredient Solutions and Distillery Products segment. In the Ingredient Solutions segment, gross profit increased by $2,970, or 102.9 percent. In the Distillery Products segment, gross profit increased by $1,402, or 8.8 percent. (see Segment Results). SG&A expenses - SG&A expenses for quarter ended September 30, 2020 were $9,510, an increase of 32.3 percent compared to the year-ago quarter. The increase in SG&A was primarily due to higher incentive compensation expense and professional service fees, partially offset by decreased costs related to the EPA settlement discussed in Note 7. Operating income - Operating income for quarter ended September 30, 2020 increased to $13,652 from $11,604 for quarter ended September 30, 2019, primarily due to an increase in gross profit in both the Ingredient Solutions and Distillery Products segment, partially offset by the increase in the previously described SG&A expenses. 19 Operating income, quarter versus quarter Operating Income Change Operating income for quarter ended September 30, 2019 $ 11,604 Increase in gross profit - Ingredient Solutions segment (a) 2,970 25.6 pp (b) Increase in gross profit - Distillery Products segment (a) 1,402 12.1 pp Increase in SG&A expenses (2,324) (20.0) pp Operating income for quarter ended September 30, 2020 $ 13,652 17.7 % (a) See segment discussion. (b) Percentage points (“pp”). Income tax expense - Income tax expense for quarter ended September 30, 2020 was $2,862, for an effective tax rate of 21.6 percent. Income tax expense for the quarter ended September 30, 2019, was $3,025, for an effective tax rate of 26.9 percent. The decrease, quarter versus quarter, was primarily due to the release of a portion of the Company's valuation allowance. Earnings per share (“EPS”) - EPS was $0.61 for quarter ended September 30, 2020, compared to $0.48 for quarter ended September 30, 2019. The change in EPS, quarter versus quarter, was primarily due to an increase in operations, and by a change in income tax expense as previously described. Change in basic and diluted EPS, quarter versus quarter Basic and Diluted EPS Change Basic and diluted EPS for quarter ended September 30, 2019 $ 0.48 Increase in operations (a) 0.09 18.8 pp (b) Tax: Change in income tax 0.03 6.3 pp Decrease in weighted average shares outstanding 0.01 2.1 pp Basic and diluted EPS for quarter ended September 30, 2020 $ 0.61 27.2 % (a) Item is net of tax based on the effective tax rate for the base year (2019). (b) Percentage points (“pp”). The table below details the consolidated results for the year to date ended September 30, 2020 and 2019: Year to Date Ended September 30, 2020 2019 2020 v. 2019 Sales $ 294,606 $ 270,282 9.0 % Cost of sales 227,531 215,310 5.7 Gross profit 67,075 54,972 22.0 Gross margin % 22.8 % 20.3 % 2.5 pp (a) SG&A expenses 28,377 23,981 18.3 Operating income 38,698 30,991 24.9 Operating margin % 13.1 % 11.5 % 1.6 pp Interest expense, net and other (1,349) (937) 44.0 Income before income taxes 37,349 30,054 24.3 Income tax expense 8,636 4,208 105.2 Effective tax expense rate % 23.1 % 14.0 % 9.1 pp Net income $ 28,713 $ 25,846 11.1 % Net income margin % 9.7 % 9.6 % 0.1 pp (a) Percentage points (“pp”). Sales - Sales for year to date ended September 30, 2020 were $294,606, an increase of 9.0 percent compared to the year-ago period, which was the result of increased sales in both the Distillery Products and Ingredient Solutions segments. Within the Distillery Products segment, sales were up 6.7 percent, primarily due to an increase in the sales of brown goods within premium beverage alcohol, industrial alcohol, white goods within premium beverage alcohol, and warehouse services. Within the Ingredient Solutions segment, sales were up 19.4 percent, primarily due to increased sales of specialty wheat starches and proteins (see Segment Results). 20 Gross profit - Gross profit for year to date ended September 30, 2020 was $67,075, an increase of 22.0 percent compared to the year-ago period. The increase was driven by an increase in gross profit in both the Ingredient Solutions and Distillery Products segments. In the Ingredient Solutions segment, gross profit increased by $8,191, or 111.8 percent. In the Distillery Products segment, gross profit increase by $3,912, or 8.2 percent. Additionally, gross profits for both segments were negatively impacted by increased production costs due to the shutdown of the Atchison facilities as a result of the cyber-attack (see Segment Results). SG&A expenses - SG&A expenses for year to date ended September 30, 2020 were $28,377, an increase of 18.3 percent compared to the year-ago period. The increase in SG&A was due to higher personnel and incentive compensation costs, inclusive of certain incremental costs incurred relating to the transition at the CEO position. Operating income - Operating income for year to date ended September 30, 2020 increased to $38,698 from $30,991 for year to date period ended September 30, 2019, primarily due to a increase in gross profit in both the Ingredient Solutions and Distillery Products segments. These increases were partially offset by an increase in the above-described SG&A expenses. Operating income, year to date versus year to date Operating Income Change Operating income for year to date ended September 30, 2019 $ 30,991 Increase in gross profit - Ingredient Solutions segment (a) 8,191 26.4 pp(b) Increase in gross profit - Distillery Products segment (a) 3,912 12.6 pp Increase in SG&A expenses (4,396) (14.1) pp Operating income for year to date ended September 30, 2020 $ 38,698 24.9 % (a) See segment discussion. (b) Percentage points (“pp”). Income tax expense - Income tax expense for year to date ended September 30, 2020 was $8,636, for an effective tax rate of 23.1 percent. Income tax expense for the year to date ended September 30, 2019, was $4,208, for an effective tax rate of 14.0 percent. The increase, year to date versus year to date, was primarily due to the tax benefit of vested share-based awards realized in the prior year. Earnings per share - EPS was $1.68 for year to date ended September 30, 2020, compared to $1.51 for year to date ended September 30, 2019. EPS increased, year to date versus year to date, primarily due to an increase in operations, partially offset by a change in income tax expense as previously described. Change in basic and diluted EPS, year to date versus year to date Basic and Diluted EPS Change Basic and diluted EPS for year to date ended September 30, 2019 $ 1.51 Increase in operations (a) 0.47 31.1 pp(b) Decrease in weighted average shares outstanding 0.02 1.3 pp Change in interest expense, net (a) (0.03) (2.0) pp Tax: Change in share-based compensation (0.21) (13.9) pp Tax: Change in effective tax rate (excluding above tax item) (0.08) (5.3) pp Basic and diluted EPS for year to date ended September 30, 2020 $ 1.68 11.2 % (a) Item is net of tax based on the effective tax rate for the base year (2019). (b) Percentage points (“pp”). 21 SEGMENT RESULTS Distillery Products The following tables show selected financial information for the Distillery Products segment for the quarters ended September 30, 2020 and 2019. DISTILLERY PRODUCTS SALES Quarter Ended September 30, Quarter versus Quarter Sales Change Increase/(Decrease) 2020 2019 $ Change % Change Brown goods $ 34,365 $ 26,606 $ 7,759 29.2 % White goods 16,362 15,359 1,003 6.5 Premium beverage alcohol 50,727 41,965 8,762 20.9 Industrial alcohol 19,461 19,525 (64) (0.3) Food grade alcohol 70,188 61,490 8,698 14.1 Fuel grade alcohol 1,274 1,438 (164) (11.4) Distillers feed and related co-products 6,119 6,630 (511) (7.7) Warehouse services 4,041 3,737 304 8.1 Total Distillery Products $ 81,622 $ 73,295 $ 8,327 11.4 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Premium beverage alcohol 20.9% 25.7% (4.8)% Other Financial Information Quarter Ended September 30, Quarter versus Quarter Increase / (Decrease) 2020 2019 $ Change % Change Gross profit $ 17,307 $ 15,905 $ 1,402 8.8 % Gross margin % 21.2 % 21.7 % (0.5) pp (d) (a) Total sales changes is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit (c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. (d) Percentage points (“pp”). Total sales of Distillery Products for the quarter ended September 30, 2020 increased by $8,327, or 11.4 percent, compared to the prior year quarter. Sales of brown goods and white goods within premium beverage alcohol and warehouse services increased while distillers feed and related co-products, fuel grade alcohol and industrial alcohol decreased compared to the prior year quarter. The increase in sales of brown goods was driven by higher sales volume partially offset by lower average selling price. The increase in white goods was driven by higher sales volume and favorable average selling price. These increases were slightly offset by a decrease in distillers feed and related co-products and fuel grade alcohol which were driven by lower average selling price and lower sales volumes. The slight decrease in sales of industrial alcohol was driven by lower sales volume, partially offset by higher sales price. Gross profit increased quarter versus quarter by $1,402, or 8.8 percent. Gross margin for the quarter ended September 30, 2020 decreased to 21.2 percent from 21.7 percent for the prior year quarter. The increase in gross profit was primarily due to higher sales volume on brown goods as well as decreased input costs and favorable average selling price on industrial alcohol. The increase in gross profit was partially offset by higher costs relating to a reduction in brown goods put-away for aging during the quarter, lower average selling price on brown goods and higher input costs of white goods, as well as lower average selling price and lower sales volume on distillers feed and related co-products. 22 The following tables show selected financial information for the Distillery Products segment for the year to date ended September 30, 2020 and 2019. DISTILLERY PRODUCTS SALES Year to Date Ended September 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2020 2019 $ Change % Change Brown Goods $ 88,975 $ 79,054 $ 9,921 12.5 % White Goods 48,306 47,232 1,074 2.3 Premium beverage alcohol 137,281 126,286 10,995 8.7 Industrial alcohol 64,032 60,604 3,428 5.7 Food grade alcohol 201,313 186,890 14,423 7.7 Fuel grade alcohol 3,970 4,337 (367) (8.5) Distillers feed and related co-products 19,889 19,906 (17) (0.1) Warehouse services 11,641 10,762 879 8.2 Total Distillery Products $ 236,813 $ 221,895 $ 14,918 6.7 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Premium beverage alcohol 8.7% 11.1% (2.4)% Other Financial Information Year to Date Ended September 30, Year to Date versus Year to Date Increase / (Decrease) 2020 2019 $ Change % Change Gross profit $ 51,559 $ 47,647 $ 3,912 8.2 % Gross margin % 21.8 % 21.5 % 0.3 pp (d) (a) Total sales changes is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit (c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. (d) Percentage points (“pp”). Total sales of Distillery Products for year to date ended September 30, 2020 increased by $14,918, or 6.7 percent compared to the year-ago period. Sales of brown goods within premium beverage alcohol, industrial alcohol, white goods within premium beverage alcohol, and warehouse services increased, while sales of fuel grade alcohol and distillers feed and related co-products decreased compared to the year-ago period. The increase in brown goods was due to increased sales volume, partially offset by a decrease in average selling price. The increase in industrial alcohol and white goods was due to increased sales volume and favorable average selling price. These increases were partially offset by lost potential sales volume due to the shutdown of the Atchison facilities as a result of the cyber-attack. Gross profit for year to date ended September 30, 2020 increased by $3,912, or 8.2 percent compared to the year-ago period. Gross margin for year to date ended September 30, 2020 increased to 21.8 percent from 21.5 percent for the prior year period. The increase in gross profit was primarily due to higher sales volumes on brown goods and favorable average selling price on industrial alcohol and white goods. 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 shutdown of the Atchison facilities as a result of the cyber-attack. 23 Ingredient Solutions The following tables show selected financial information for the Ingredient Solutions segment for the quarter ended September 30, 2020 and 2019. INGREDIENT SOLUTIONS SALES Quarter Ended September 30, Quarter versus Quarter Sales Change Increase / (Decrease) 2020 2019 $ Change % Change Specialty wheat starches $ 11,604 $ 8,432 $ 3,172 37.6 % Specialty wheat proteins 7,994 6,166 1,828 29.6 Commodity wheat starches 1,596 2,300 (704) (30.6) Commodity wheat proteins 148 492 (344) (69.9) Total Ingredient Solutions $ 21,342 $ 17,390 $ 3,952 22.7 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions 22.7% 10.2% 12.5% Other Financial Information Quarter Ended September 30, Quarter versus Quarter Increase / (Decrease) 2020 2019 $ Change % Change Gross profit $ 5,855 $ 2,885 $ 2,970 102.9 % Gross margin % 27.4 % 16.6 % 10.8 pp (d) (a) Total sales changes is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit (c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. (d) Percentage points (“pp”). Total Ingredient Solutions sales for quarter ended September 30, 2020 increased by $3,952, or 22.7 percent, compared to the prior year quarter. Quarter versus quarter, 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 and proteins was primarily driven by increased sales volume. These increases were partially offset by decreased sales volume of commodity wheat starches and proteins. Gross profit increased quarter versus quarter by $2,970, or 102.9 percent. Gross margin for the quarter ended September 30, 2020 increased to 27.4 percent from 16.6 percent for the prior year quarter. The increase in gross profit was primarily driven by the increased sales volume 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. 24 The following tables show selected financial information for the Ingredient Solutions segment for the year to date September 30, 2020 and 2019. INGREDIENT SOLUTIONS SALES Year to Date Ended September 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2020 2019 $ Change % Change Specialty wheat starches $ 30,938 $ 22,523 $ 8,415 37.4 % Specialty wheat proteins 20,372 15,884 4,488 28.3 Commodity wheat starches 5,247 7,575 (2,328) (30.7) Commodity wheat proteins 1,236 2,405 (1,169) (48.6) Total Ingredient Solutions $ 57,793 $ 48,387 $ 9,406 19.4 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions 19.4% 5.3% 14.1% Other Financial Information Year to Date Ended September 30, Year to Date versus Year to Date Increase / (Decrease) 2020 2019 $ Change % Change Gross profit $ 15,516 $ 7,325 $ 8,191 111.8 % Gross margin % 26.8 % 15.1 % 11.7 pp (d) (a) Total sales changes is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit (c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. (d) Percentage points (“pp”). Total Ingredient Solutions sales for year to date ended September 30, 2020 increased by $9,406, or 19.4 percent, compared to the prior year period. The increase in Ingredient Solutions sales 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 favorable average selling prices. The increase in sales of specialty wheat proteins was driven by increased sales volume, partially offset by unfavorable average selling prices. These increases were partially offset by decreased sales volume of commodity wheat starches and proteins, and by lost potential sales volume due to the shutdown of the Atchison facilities as a result of the cyber-attack. Gross profit increased by $8,191, or 111.8 percent for year to date ended September 30, 2020 compared to the prior year period. Gross margin for the year to date ended September 30, 2020 increased to 26.8 percent from 15.1 percent for the prior year period. The increase in gross profit was primarily driven by the increased sales volume and favorable 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 offset by increased production costs due to the shutdown of the Atchison facilities as a result of the cyber-attack. 25 CASH FLOW, FINANCIAL CONDITION AND LIQUIDITY We believe our financial condition continues to be of high quality, as evidenced by our ability to generate adequate cash from operations while having ready access to capital at competitive rates. Operating cash flow and debt through our Credit Agreement and Note Purchase Agreement (Note 4) 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. Going forward, we expect to use cash to implement our invest to grow strategy, particularly in the Distillery Products segment. Our overall liquidity reflects our strong business results and an effective cash management strategy that takes into account liquidity management, economic factors, and tax considerations. We expect our sources of cash, including our Credit Agreement and Note Purchase Agreement, to be adequate to provide for budgeted capital expenditures and anticipated operating requirements for the foreseeable future. Cash Flow Summary Year to Date Ended September 30, Changes, quarter versus quarter Increase / (Decrease) 2020 2019 Cash provided by operating activities $ 29,457 $ 12,413 $ 17,044 Cash used in investing activities (15,513) (11,564) (3,949) Cash provided by (used in) financing activities 2,713 (1,477) 4,190 Increase (decrease) in cash and cash equivalents $ 16,657 $ (628) $ 17,285 Cash increased $16,657 for year to date ended September 30, 2020, compared to a decrease of $628 for year to date ended September 30, 2019, for a net increase in cash of $17,285, period versus period. Operating Activities. Cash provided by operating activities for year to date ended September 30, 2020 was $29,457. The cash provided by operating activities during year to date ended September 30, 2020 resulted primarily from net income of $28,713, adjustments for non-cash or non-operating charges of $13,108 including depreciation and amortization, and share-based compensation, partially offset by uses of cash due to changes in operating assets and liabilities of $12,364. The primary drivers of the changes in operating assets and liabilities were $11,683 use of cash related to an increase in accounts receivables, net due to the timing of customer payments as well as increased sales during the quarter, $5,673 use of cash related to an increase in inventories, primarily barreled distillate, and $2,032 use of cash related to an increase in prepaid expenses due to an increase in prepaid insurance and vendor deposits. These uses of cash were partially offset by $5,647 cash provided by accrued expenses primarily related to incentive compensation expenses and $2,196 cash provided by accounts payable related to the timing of cash disbursements. Cash provided by operating activities for year to date ended September 30, 2019 was $12,413. The cash provided by operating activities during year to date ended September 30, 2019 resulted primarily from net income of $25,846, adjustments for non-cash or non-operating charges of $12,103, including depreciation and amortization and share-based compensation, partially offset by uses of cash due to changes in operating assets and liabilities of $25,536. The primary drivers of the changes in operating assets and liabilities were $17,424 use of cash related to an increase in inventories, primarily barreled distillate, $3,236 use of cash related to accrued expenses, $2,138 use of cash related to refundable income taxes, primarily due to discrete items and lower than expected income before taxes, and $1,757 use of cash related to an increase in receivables, due to increased sales and timing of customer payments. Investing Activities. Cash used in investing activities for year to date ended September 30, 2020 was $15,513, which resulted from additions to property, plant and equipment of $13,507 (see Capital Spending) and the acquisition of a business of $2,750, partially offset by proceeds from sale of property of $688. Cash used in investing activities for year to date ended September 30, 2019 was $11,564, which primarily resulted from additions to property, plant and equipment of $10,375 (see Capital Spending) and an increase in the deferred compensation plan investments of $1,189. 26 Capital Spending. We manage capital spending to support our business growth plans. Investments in property, plant and equipment were $13,507 and $10,375 for year to date ended September 30, 2020 and 2019, respectively. Adjusted for the change in capital expenditures in accounts payable for year to date ended September 30, 2020 and 2019, of $(2,654) and $(832), respectively, total capital expenditures were $10,853 and $9,543, respectively. We expect approximately $19,600 in capital expenditures in 2020 for facility improvement and expansion (including warehouse expansion), facility sustenance projects, and environmental health and safety projects. As part of our strategic plan to support the growth of the American Whiskey category, we previously announced a warehouse expansion project. As of September 30, 2020, we had incurred approximately $49,900 of the total investment, which completes our current warehouse expansion project. Financing Activities. Cash provided by financing activities for year to date ended September 30, 2020 was $2,713, primarily due to net proceeds from debt of $13,252 (see Long-Term and Short-Term Debt), partially offset by dividends and dividend equivalents of $6,144 (see Dividends and Dividend Equivalents) and purchases of treasury stock of $4,395 (see Treasury Purchases and Stock Repurchases). Cash used in financing activities for year to date ended September 30, 2019 was $1,477, primarily due to net proceeds from debt of $9,212 (See Long-Term and Short-Term Debt), offset by purchases of treasury stock for tax withholding on share-based compensation of $5,470 (see Treasury Purchases) and payments of dividends and dividend equivalents of $5,141 (see Dividends and Dividend Equivalents). Treasury Purchases. 30,404 RSUs vested and converted to common shares for employees during year to date ended September 30, 2020, of which we withheld and purchased for treasury 10,051 shares valued at $342 to cover payment of associated withholding taxes. 245,538 RSUs vested and converted to common shares for employees during year to date ended September 30, 2019, of which we withheld and purchased for treasury 77,014 shares valued at $5,468 to cover payment of associated withholding taxes. Share Repurchases. On February 25, 2019, our Board of Directors approved a $25,000 share repurchase authorization commencing February 27, 2019, through February 27, 2022. Under the share repurchase program, we can repurchase stock from time to time for cash in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws. This share repurchase program may be modified, suspended, or terminated by us at any time without prior notice. During the year to date ended September 30, 2020, 159,104 shares were repurchased under the program for $4,053. Dividends and Dividend Equivalents Dividend and Dividend Equivalent Information (per Share and Unit) Declaration date Record date Payment date Declared Paid Dividend payment Dividend equivalent payment (a)(b) Total payment (b) 2020 February 24, 2020 March 13, 2020 March 27, 2020 $ 0.12 $ 0.12 $ 2,047 $ 13 $ 2,060 April 28, 2020 May 22, 2020 June 5, 2020 0.12 0.12 2,027 14 2,041 July 28, 2020 August 21, 2020 September 4, 2020 0.12 0.12 2,029 14 2,043 $ 0.36 $ 0.36 $ 6,103 $ 41 $ 6,144 2019 February 25, 2019 March 13, 2019 March 29, 2019 $ 0.10 $ 0.10 $ 1,701 $ 13 $ 1,714 April 29, 2019 May 15, 2019 May 31, 2019 0.10 0.10 1,702 11 1,713 July 29, 2019 August 14, 2019 August 30, 2019 0.10 0.10 1,703 11 1,714 $ 0.30 $ 0.30 $ 5,106 $ 35 $ 5,141 (a) Dividend equivalent payments on unvested participating securities. (b) Includes estimated forfeitures. 27 On October 27, 2020, our Board of Directors declared a quarterly dividend payable to stockholders of record as of November 20, 2020, of the Company’s Common Stock, and a dividend equivalent payable to holders of certain RSUs as of November 20, 2020, of $0.12 per share and per unit, payable on December 4, 2020. Long-Term and Short-Term Debt. We maintain debt levels we consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment and financing plans (including brand development and share repurchase activities) and the overall cost of capital. Total debt was $54,508 (net of unamortized loan fees of $1,401) at September 30, 2020, and $41,060 (net of unamortized loan fees of $448) at December 31, 2019. Financial Condition and Liquidity. Our principal uses of cash in the ordinary course of business are for input costs used in our production processes, salaries, capital expenditures, and investments supporting our strategic plan, such as the aging of barreled distillate. Generally, during periods when commodities prices are rising, our operations require increased use of cash to support inventory levels. Our principal sources of cash are product sales and borrowing on our Credit Agreement and Note Purchase Agreement. Under our Credit Agreement and Note Purchase Agreement, we must meet certain financial covenants and restrictions, and at September 30, 2020, we met those covenants and restrictions. At September 30, 2020, our current assets exceeded our current liabilities by $176,679, largely due to our inventories, at cost, of $142,798. At September 30, 2020, our cash balance was $19,966 and we have used our Credit Agreement and Note Purchase Agreement for liquidity purposes, with $285,000 remaining for additional borrowings. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We regularly assess our cash needs and the available sources to fund these needs. While we currently believe we are well positioned with our credit agreement, we will continue to monitor the impact of the COVID-19 pandemic on our operations and liquidity needs. We utilize short-term and long-term debt to fund discretionary items, such as capital investments and dividend payments. In addition, we have strong operating results such that financial institutions should provide sufficient credit funding to meet short-term financing requirements, if needed.