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, 2020 and Part II, Item 1A of the Form 10-Q for the quarter ended March 31, 2021. 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. RECENT DEVELOPMENTS Merger with Luxco. On January 22, 2021, we entered into a definitive agreement to acquire Luxco, Inc. and its affiliated companies (“Luxco”, or “Luxco Companies”), and subsequently completed the merger on April 1, 2021. Luxco is a leading branded beverage alcohol company across various categories, with a more than 60-year business heritage. Following the merger, the Luxco Companies became wholly-owned subsidiaries of MGP and are included in the Branded Spirits segment.(Note 3, Business Combination for additional information). Dryer Fire Incident. During November 2020, we experienced a fire at the Atchison facility. The fire damaged certain equipment in the facility’s feed drying operations and caused temporary loss of production time. During the quarter and year to date ended June 30, 2021, we recorded a $6,230 and $9,840, respectively, partial settlement from our insurance carrier as a reduction of Cost of sales. We are working to construct a replacement drying system. Our insurance is expected to provide coverage of any business interruption and other losses from damage to property, plant and equipment, less deductibles, but there can be no assurance to the amount or timing of possible insurance recoveries if ultimately claimed by the Company. COVID-19. As the COVID-19 pandemic continues, we are monitoring the guidance from federal, state and local public health authorities and will take the necessary actions to comply with the updated guidelines. The Company’s business is part of the United States’ critical infrastructure and thus is deemed to be an “essential business.” As such, we continue to take the necessary and appropriate actions designed to protect our workforce as it continues its critical operations. We have continued to operate without any significant negative impacts; however 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. OVERVIEW MGP is a leading producer and supplier of premium distilled spirits, branded spirits and food ingredients. Distilled spirits include premium bourbon and rye whiskeys and grain neutral spirits (“GNS”), including vodka and gin. We are also a top producer of high quality industrial alcohol for use in both food and non-food applications. Our distilled spirits are either packaged and sold under our own brands to distributors, sold, directly or indirectly, to manufacturers of other branded spirits, or direct to consumer. 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 packaged goods industry. 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 Condition and Results of Operations - General, set forth in our Annual Report on Form 10-K for the year ended December 31, 2020. 21 RESULTS OF OPERATIONS Consolidated results The table below details the consolidated results for the quarters ended June 30, 2021 and 2020: Quarter Ended June 30, 2021 2020 2021 v. 2020 Sales $ 174,939 $ 92,560 89.0 % Cost of sales 118,112 71,858 64.4 Gross profit 56,827 20,702 174.5 Gross margin % 32.5 % 22.4 % 10.1 pp (a) Selling, general, and administrative (“SG&A”) expenses 29,164 9,364 211.4 Operating income 27,663 11,338 144.0 Operating margin % 15.8 % 12.2 % 3.6 pp Interest expense, net (1,104) (628) (75.8) Other income (loss), net (88) 330 (126.7) Income before income taxes 26,471 11,040 139.8 Income tax expense 6,412 2,550 151.5 Effective tax expense rate % 24.2 % 23.1 % 1.1 pp Net income $ 20,059 $ 8,490 136.3 % Net income margin % 11.5 % 9.2 % 2.3 pp (a) Percentage points (“pp”). Sales - Sales for quarter ended June 30, 2021 were $174,939, an increase of 89.0 percent compared to the year-ago quarter, which was the result of increased sales in the Branded Spirits, Distillery Products, and Ingredient Solutions segments. Within the Branded Spirits segment, sales were up 15,635.9 percent, due to the additional brands acquired as part of the Merger. Within the Distillery Products segment, sales were up 20.8 percent, primarily due to an increase in the sales of brown goods within premium beverage alcohol. Within the Ingredient Solutions segment, sales were up 39.1 percent, primarily due to increased sales of specialty wheat starches and proteins (see Segment Results). Gross profit - Gross profit for quarter ended June 30, 2021 was $56,827, an increase of 174.5 percent compared to the year-ago quarter. The increase was driven by an increase in gross profit in Branded Spirits, Distillery Products and Ingredient Solutions segments. In the Branded Spirits segment, gross profit increased by $18,286 or 12,355.4 percent. In the Distillery Products segment, gross profit increased by $16,131, or 101.7 percent. In the Ingredient Solutions segment, gross profit increased by $1,708, or 36.3 percent (see Segment Results). SG&A expenses - SG&A expenses for quarter ended June 30, 2021 were $29,164, an increase of 211.4 percent compared to the year-ago quarter. The increase in SG&A expenses was primarily driven by the assumption of Luxco’s SG&A expenses, as well as one-time acquisition related costs. 22 Operating income - Operating income for quarter ended June 30, 2021 increased to $27,663 from $11,338 for quarter ended June 30, 2020, primarily due to an increase in gross profit in the Branded Spirits, Distillery Products and Ingredient Solutions segments, partially offset by the increase in the previously described SG&A expenses. Operating income, quarter versus quarter Operating Income Change Operating income for quarter ended June 30, 2020 $ 11,338 Increase in gross profit - Branded Spirits segment (a) 18,286 161.3 pp (b) Increase in gross profit - Distillery Products segment (a) 16,131 142.3 pp Increase in gross profit - Ingredient Solutions segment (a) 1,708 15.0 pp Increase in SG&A expenses (19,800) (174.6) pp Operating income for quarter ended June 30, 2021 $ 27,663 144.0 % (a) See segment discussion. (b) Percentage points (“pp”). Income tax expense - Income tax expense for quarter ended June 30, 2021 was $6,412, for an effective tax rate of 24.2 percent. Income tax expense for the quarter ended June 30, 2020, was $2,550, for an effective tax rate of 23.1 percent. The increase in Income tax expense, quarter versus quarter, was primarily due to higher Income before income taxes, which lessened the effects of tax credits received. Earnings per share (“EPS”) - EPS was $0.91 for quarter ended June 30, 2021, compared to $0.50 for quarter ended June 30, 2020. The change in EPS, quarter versus quarter, was primarily due to an 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. Change in basic and diluted EPS, quarter versus quarter Basic and Diluted EPS Change Basic and diluted EPS for quarter ended June 30, 2020 $ 0.50 Increase in operations (a) 0.74 148.0 pp (b) Change in interest expense, net (a) (0.02) (4.0) pp Tax: Change in effective tax rate (0.02) (4.0) pp Increase in shares outstanding resulting from the Merger (0.29) (58.0) pp Basic and diluted EPS for quarter ended June 30, 2021 $ 0.91 82.0 % (a) Item is net of tax based on the effective tax rate for the base year (2020). (b) Percentage points (“pp”). 23 The table below details the consolidated results for year to date ended June 30, 2021 and 2020: Year to Date Ended June 30, 2021 2020 2021 v. 2020 Sales $ 283,262 $ 191,642 47.8 % Cost of sales 194,136 147,729 31.4 Gross profit 89,126 43,913 103.0 Gross margin % 31.5 % 22.9 % 8.6 pp (a) SG&A expenses 40,963 18,867 117.1 Operating income 48,163 25,046 92.3 Operating margin % 17.0 % 13.1 % 3.9 pp Interest expense, net (1,592) (1,107) (43.8) Other income (loss), net (58) 167 (134.7) Income before income taxes 46,513 24,106 93.0 Income tax expense 11,027 5,774 91.0 Effective tax expense rate % 23.7 % 24.0 % (0.3) pp Net income $ 35,486 $ 18,332 93.6 % Net income margin % 12.5 % 9.6 % 2.9 pp (a) Percentage points (“pp”). Sales - Sales for year to date ended June 30, 2021 were $283,262, an increase of 47.8 percent compared to the year-ago period, which was the result of increased sales in the Branded Spirits, Distillery Products, and Ingredient Solutions segments. Within the Branded Spirits segment, sales were up 6,895.0 percent, due to the additional brands acquired as part of the Merger. Within the Distillery Products segment, sales were up 16.0 percent, primarily due to an increase in the sales of brown goods within premium beverage alcohol. Within the Ingredient Solutions segment, sales were up 18.8 percent, primarily due to increased sales of specialty wheat starches and proteins (see Segment Results). Gross profit - Gross profit for year to date ended June 30, 2021 was $89,126, an increase of 103.0 percent compared to the year-ago period. The increase was driven by an increase in gross profit in the Distillery Products, Branded Spirits and Ingredient Solutions segments. In the Distillery Products segment, gross profit increased by $26,317, or 77.6 percent. In the Branded Spirits segment, gross profit increased by $18,182 or 5,379.3 percent. In the Ingredient Solutions segment, gross profit increased by $714, or 7.4 percent (see Segment Results). SG&A expenses - SG&A expenses for year to date ended June 30, 2021 were $40,963, an increase of 117.1 percent compared to the year-ago period. The increase in SG&A expenses was driven by the assumption of Luxco’s SG&A, as well as one-time acquisition related costs. Operating income - Operating income for year to date ended June 30, 2021 increased to $48,163 from $25,046 for year to date period ended June 30, 2020, primarily due to an increase in gross profit in the Distillery Products, Branded Spirits and Ingredient Solutions 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 June 30, 2020 $ 25,046 Increase in gross profit - Distillery Products segment (a) 26,317 105.1 pp(b) Increase in gross profit - Branded Spirits segment (a) 18,182 72.6 pp Increase in gross profit - Ingredient Solutions segment (a) 714 2.8 pp Increase in SG&A expenses (22,096) (88.2) pp Operating income for year to date ended June 30, 2021 $ 48,163 92.3 % (a) See segment discussion. (b) Percentage points (“pp”). 24 Income tax expense - Income tax expense for year to date ended June 30, 2021 was $11,027, for an effective tax rate of 23.7 percent. Income tax expense for the year to date ended June 30, 2020, was $5,774, for an effective tax rate of 24.0 percent. The increase in Income tax expense, year to date versus year to date, was primarily due to higher Income before income taxes, which lessened the effects of tax credits received. Earnings per share - EPS was $1.81 for year to date ended June 30, 2021, compared to $1.07 for year to date ended June 30, 2020. EPS increased, year to date versus year to date, primarily due to an increase in operations, partially offset by an increase in shares outstanding as a result of shares issued as part of the consideration paid for the Merger. 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 June 30, 2020 $ 1.07 Increase in operations (a) 1.04 97.2 pp(b) Decrease in weighted average shares outstanding, excluding the Merger impacts 0.01 0.9 pp Change in interest expense, net (a) (0.02) (1.9) pp Increase in shares outstanding resulting from the Merger (0.29) (27.1) pp Basic and diluted EPS for year to date ended June 30, 2021 $ 1.81 69.1 % (a) Item is net of tax based on the effective tax rate for the base year (2020). (b) Percentage points (“pp”). 25 SEGMENT RESULTS Distillery Products The following tables show selected financial information for the Distillery Products segment for the quarters ended June 30, 2021 and 2020. DISTILLERY PRODUCTS SALES Quarter Ended June 30, Quarter versus Quarter Sales Change Increase/(Decrease) 2021 2020 $ Change % Change Brown goods $ 43,766 $ 25,325 $ 18,441 72.8 % White goods 18,205 14,873 3,332 22.4 Premium beverage alcohol 61,971 40,198 21,773 54.2 Industrial alcohol 14,770 22,953 (8,183) (35.7) Food grade alcohol 76,741 63,151 13,590 21.5 Fuel grade alcohol 4,753 1,174 3,579 304.9 Distillers feed and related co-products 4,672 6,781 (2,109) (31.1) Warehouse services 4,182 3,699 483 13.1 Total Distillery Products $ 90,348 $ 74,805 $ 15,543 20.8 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Premium beverage alcohol 54.2% 54.1% 0.1% Other Financial Information Quarter Ended June 30, Quarter versus Quarter Increase / (Decrease) 2021 2020 $ Change % Change Gross profit $ 31,985 $ 15,854 $ 16,131 101.7 % Gross margin % 35.4 % 21.2 % 14.2 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. (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 June 30, 2021 increased by $15,543, or 20.8 percent, compared to the prior year quarter. Sales of brown goods within premium beverage alcohol, fuel grade alcohol, white goods within premium beverage alcohol and warehouse services increased while industrial alcohol, and distillers feed and related co-products decreased compared to the prior year quarter. The increase in sales of brown goods was driven by higher sales volume. The increase in fuel grade alcohol was driven by higher average selling price as well as higher sales volume. The increase in white goods was primarily driven by higher average selling price. These increases were 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 are results of the Dryer Fire Incident (see Note 8, Commitments and Contingencies for further details). Gross profit increased quarter versus quarter by $16,131, or 101.7 percent. Gross margin for the quarter ended June 30, 2021 increased to 35.4 percent from 21.2 percent for the prior year quarter. The increase in gross profit was primarily due to higher sales volume on brown goods as well as higher average selling price on industrial alcohol, white goods and fuel grade alcohol. The increase in gross profit was partially offset by higher input costs of industrial alcohol and white goods. 26 The following tables show selected financial information for the Distillery Products segment for the year to date ended June 30, 2021 and 2020. DISTILLERY PRODUCTS SALES Year to Date Ended June 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2021 2020 $ Change % Change Brown Goods $ 86,807 $ 53,970 $ 32,837 60.8 % White Goods 34,862 31,712 3,150 9.9 Premium beverage alcohol 121,669 85,682 35,987 42.0 Industrial alcohol 32,106 44,571 (12,465) (28.0) Food grade alcohol 153,775 130,253 23,522 18.1 Fuel grade alcohol 7,270 2,696 4,574 169.7 Distillers feed and related co-products 9,644 13,770 (4,126) (30.0) Warehouse services 8,283 7,600 683 9.0 Total Distillery Products $ 178,972 $ 154,319 $ 24,653 16.0 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Premium beverage alcohol 42% 38.2% 3.8% Other Financial Information Year to Date Ended June 30, Year to Date versus Year to Date Increase / (Decrease) 2021 2020 $ Change % Change Gross profit $ 60,230 $ 33,913 $ 26,317 77.6 % Gross margin % 33.7 % 22.0 % 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 sales of Distillery Products for year to date ended June 30, 2021 increased by $24,653, or 16.0 percent compared to the year-ago period. Sales of brown goods within premium beverage alcohol, fuel grade alcohol, white goods within premium beverage alcohol and warehouse services increased while industrial alcohol, and distillers feed and related co-products decreased compared to the year-ago period. The increase in sales of brown goods was driven by higher sales volume. The increase in sales of fuel grade alcohol was driven by higher average selling price and higher sales volume. The increase in sales of white goods was primarily a result of higher average selling price, partially offset by lower sales volume. 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 are results of the Dryer Fire Incident (see Note 8, Commitments and Contingencies for further details). Gross profit for year to date ended June 30, 2021 increased by $26,317, or 77.6 percent compared to the year-ago period. Gross margin for year to date ended June 30, 2021 increased to 33.7 percent from 22.0 percent for the prior year period. The increase in gross profit was primarily due to higher sales volume on brown goods as well as higher average selling price on industrial alcohol, white goods and fuel grade alcohol. The increase in gross profit was partially offset by higher input costs of industrial alcohol, white goods and brown goods. 27 Branded Spirits The following tables show selected financial information for the Branded Spirits segment for the quarters ended June 30, 2021 and 2020. BRANDED SPIRITS SALES Quarter Ended June 30, Quarter versus Quarter Sales Change Increase/(Decrease) 2021 2020 $ Change % Change Ultra premium $ 10,093 $ 320 $ 9,773 3,054.1 % Premium 6,301 47 6,254 13,306.4 Mid 17,786 — 17,786 n/a Value 20,944 — 20,944 n/a Other 5,302 17 5,285 31,088.2 Total Branded Spirits $ 60,426 $ 384 $ 60,042 15,635.9 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Branded Spirits 15,635.9% 83,073.1% (67,437.2)% Other Financial Information Quarter Ended June 30, Quarter versus Quarter Increase / (Decrease) 2021 2020 $ Change % Change Gross profit $ 18,434 $ 148 $ 18,286 12,355.4 % Gross margin % 30.5 % 38.5 % (8.0) 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 Branded Spirits for the quarter ended June 30, 2021 increased by $60,042, or 15,635.9 percent compared to the prior year quarter. Sales of ultra premium, premium, mid, value, and other increased compared to the prior year quarter, primarily due to the additional brands acquired as part of the Merger. Gross profit increased quarter versus quarter by $18,286, or 12,355.4 percent. Gross margin for the quarter ended June 30, 2021 decreased 8.0 percent to 30.5 percent from 38.5 percent for the prior year quarter. The increase in gross profit was primarily due to the additional brands acquired as part of the Merger. Gross profit was reduced by $3,116 in the quarter due to a required step up in value due to purchase accounting related to the Merger. This decreased margin by 5.2 percentage points. Of the purchase accounting step up, $2,529 was associated with marking the finished goods inventory to fair value and fully flowed through in the period and is not expected to recur in future periods. 28 The following tables show selected financial information for the Branded Spirits segment for year to date ended June 30, 2021 and 2020. BRANDED SPIRITS SALES Year to Date Ended June 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2021 2020 $ Change % Change Ultra Premium $ 10,574 $ 684 $ 9,890 1,445.9 % Premium 6,383 171 6,212 3,632.7 % Mid 17,786 — 17,786 n/a Value 20,944 — 20,944 n/a Other 5,309 17 5,292 31,129.4 % Total Branded Spirits $ 60,996 $ 872 $ 60,124 6,895.0 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Branded Spirits 6,895.0% 35,981.0% (29,086.0)% Other Financial Information Year to Date Ended June 30, Year to Date versus Year to Date Increase / (Decrease) 2021 2020 $ Change % Change Gross profit $ 18,520 $ 338 $ 18,182 5,379.3 % Gross margin % 30.4 % 38.8 % (8.4) 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 Branded Spirits for year to date ended June 30, 2021 increased by $60,124, or 6,895 percent compared to the year-ago period. Sales of ultra premium, premium, mid, value, and other increased compared to the year-ago period, primarily due to the additional brands acquired as part of the Merger. Gross profit for year to date ended June 30, 2021 increased by $18,182, or 5,379 percent. Gross margin for year to date ended June 30, 2021 decreased 8.4 percent to 30.4 percent from 38.8 percent for the prior year. The increase in gross profit was primarily due to the additional brands acquired as part of the Merger. Gross profit was reduced by $3,116 in the quarter due to a required step up in value due to purchase accounting related to the Merger. This decreased margin by 5.2 percentage points. Of the purchase accounting step up, $2,529 was associated with marking the finished goods inventory to fair value and fully flowed through in the period and is not expected to recur in future periods. 29 Ingredient Solutions The following tables show selected financial information for the Ingredient Solutions segment for the quarter ended June 30, 2021 and 2020. INGREDIENT SOLUTIONS SALES Quarter Ended June 30, Quarter versus Quarter Sales Change Increase / (Decrease) 2021 2020 $ Change % Change Specialty wheat starches $ 12,598 $ 9,122 $ 3,476 38.1 % Specialty wheat proteins 8,352 6,013 2,339 38.9 Commodity wheat starches 2,663 1,774 889 50.1 Commodity wheat proteins 552 462 90 19.5 Total Ingredient Solutions $ 24,165 $ 17,371 $ 6,794 39.1 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions 39.1% 31.8% 7.3% Other Financial Information Quarter Ended June 30, Quarter versus Quarter Increase / (Decrease) 2021 2020 $ Change % Change Gross profit $ 6,408 $ 4,700 $ 1,708 36.3 % Gross margin % 26.5 % 27.1 % (0.6) 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 (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 June 30, 2021 increased by $6,794, or 39.1 percent, compared to the prior year quarter. Quarter versus quarter, this increase was primarily driven by higher sales of specialty wheat starches and proteins due to higher sales volume and higher average selling prices. Gross profit increased quarter versus quarter by $1,708, or 36.3 percent. Gross margin for the quarter ended June 30, 2021 decreased to 26.5 percent from 27.1 percent for the prior year quarter. The increase in gross profit was primarily driven by higher sales volumes of specialty wheat proteins and starches partially offset by higher input costs. 30 The following tables show selected financial information for the Ingredient Solutions segment for the year to date June 30, 2021 and 2020. INGREDIENT SOLUTIONS SALES Year to Date Ended June 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2021 2020 $ Change % Change Specialty wheat starches $ 22,820 $ 19,334 $ 3,486 18.0 % Specialty wheat proteins 14,398 12,378 2,020 16.3 Commodity wheat starches 4,946 3,651 1,295 35.5 Commodity wheat proteins 1,130 1,088 42 3.9 Total Ingredient Solutions $ 43,294 $ 36,451 $ 6,843 18.8 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions 18.8% 15.1% 3.7% Other Financial Information Year to Date Ended June 30, Year to Date versus Year to Date Increase / (Decrease) 2021 2020 $ Change % Change Gross profit $ 10,376 $ 9,662 $ 714 7.4 % Gross margin % 24.0 % 26.5 % (2.5) 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 Ingredient Solutions sales for year to date ended June 30, 2021 increased by $6,843, or 18.8 percent, compared to the prior year period. The increase in Ingredient Solutions sales was primarily driven by higher sales of specialty wheat starches and proteins due to higher sales volume and higher average selling prices. Gross profit increased by $714, or 7.4 percent for year to date ended June 30, 2021 compared to the prior year period. Gross margin for the year to date ended June 30, 2021 decreased to 24.0 percent from 26.5 percent for the prior year period. The increase in gross profit was primarily driven by higher sales volumes of specialty wheat starches and proteins partially offset by higher input costs. 31 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 5) 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. 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 June 30, Changes, year versus year Increase / (Decrease) 2021 2020 Cash provided by operating activities $ 47,454 $ 5,986 $ 41,468 Cash used in investing activities (170,235) (12,407) (157,828) Cash provided by financing activities 138,359 14,857 123,502 Effect of exchange rate changes on cash 3 — 3 Increase in cash and cash equivalents $ 15,581 $ 8,436 $ 7,145 Cash increased $15,581 for year to date ended June 30, 2021, compared to an increase of $8,436 for year to date ended June 30, 2020, for a net increase in cash of $7,145, period versus period. Operating Activities. Cash provided by operating activities for year to date ended June 30, 2021 was $47,454. The cash provided by operating activities resulted primarily from net income of $35,486, adjustments for non-cash or non-operating charges of $11,555 including, depreciation and amortization, and share-based compensation as well as cash provided by operating assets and liabilities of $413. The primary drivers of the changes in operating assets and liabilities were $7,987 cash provided by accrued expenses and other primarily related to legally committed insurance recovery amounts obtained prior to contingencies related to the insurance claim being resolved, and $7,531 cash provided by accounts receivables, net due to increased sales during the quarter as well as an increase in insurance recoveries receivable. These sources of cash were partially offset by $12,996 use of cash related to decrease in accounts payable. Cash provided by operating activities for year to date ended June 30, 2020 was $5,986. The cash provided by operating activities resulted primarily from net income of $18,332, adjustments for non-cash or non-operating charges of $8,038, including depreciation and amortization and share-based compensation, partially offset by uses of cash due to changes in operating assets and liabilities of $20,384. The primary drivers of the changes in operating assets and liabilities were $13,174 use of cash related to an increase in receivables, net due to timing of customer payments as well as increased sales during the year, $9,983 use of cash related to an increase in inventories, primarily barreled distillate, and $4,218 use of cash related to decrease in accounts payable related to the timing cash disbursements. These uses of cash were partially offset by $5,778 cash provided by income taxes payable (refundable) related to a deferral of our income tax payments until July 15, 2020 in accordance with the Coronavirus Aid, Relief, and Economic Security Act. Investing Activities. Cash used in investing activities for year to date ended June 30, 2021 was $170,235, which primarily resulted from $149,599 related to the Merger of Luxco and additions to property, plant and equipment of $18,336 (see Capital Spending). Cash used in investing activities for year to date ended June 30, 2020 was $12,407, which resulted from additions to property, plant and equipment of $10,177 (see Capital Spending) and an increase related to the acquisition of a business of $2,750, partially offset by proceeds from sale of property of $688. 32 Capital Spending. We manage capital spending to support our business growth plans. Investments in property, plant and equipment were $18,336 and $10,177 for year to date ended June 30, 2021 and 2020, respectively. Adjusted for the change in capital expenditures in accounts payable for year to date ended June 30, 2021 and 2020, of $(3,375) and $(3,865), respectively, total capital expenditures were $14,961 and $6,312, respectively. We expect approximately $51,500 in capital expenditures in 2021, excluding any insurance recoveries. Of the $51,500 expected capital expenditures $31,400 is allocated for the replacement of the feed dryer system. The remainder is for facility improvement and expansion, facility sustenance projects, and environmental health and safety projects. Financing Activities. Cash provided by financing activities for year to date ended June 30, 2021 was $138,359, due to net proceeds from debt of $231,328 (see Long-Term and Short-Term Debt, partially offset by $87,497 payment on assumed debt as part of the Merger, payments of dividends and dividend equivalents of $4,707 (see Dividends and Dividend Equivalents) and purchases of treasury stock of $765 (see Treasury Purchases and Share Repurchases). Cash provided financing activities for year to date ended June 30, 2020 was $14,857, primarily due to net proceeds from debt of $24,501 (See Long-Term and Short-Term Debt), offset by purchases of treasury stock of $4,395 (see Treasury Purchases and Share Repurchases) and payments of dividends and dividend equivalents of $4,101 (see Dividends and Dividend Equivalents). Treasury Purchases. 38,009 RSUs vested and converted to common shares for employees during year to date ended June 30, 2021, of which we withheld and purchased for treasury 11,865 shares valued at $765 to cover payment of associated withholding taxes. 30,388 RSUs vested and converted to common shares for employees during year to date ended June 30, 2020, of which we withheld and purchased for treasury 10,044 shares valued at $342 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. The Company did not repurchase any shares during the year to date ended June 30, 2021 and has $20,947 remaining under the share repurchase plan. During year to date ended June 30, 2020, we repurchased approximately 159,104 shares of MGP Common Stock 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) 2021 February 23, 2021 March 12, 2021 March 26, 2021 $ 0.12 $ 0.12 $ 2,033 $ 19 $ 2,052 May 3, 2021 May 21, 2021 June 4, 2021 0.12 0.12 2,635 20 2,655 $ 0.24 $ 0.24 $ 4,668 $ 39 $ 4,707 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 $ 0.24 $ 0.24 $ 4,074 $ 27 $ 4,101 (a) Dividend equivalent payments on unvested participating securities. (b) Includes estimated forfeitures. On August 2, 2021, our Board of Directors declared a quarterly dividend payable to stockholders of record as of August 20, 2021, of the Company’s Common Stock, and a dividend equivalent payable to holders of certain RSUs as of August 20, 2021, of $0.12 per share and per unit, payable on September 3, 2021. 33 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 $270,391 (net of unamortized loan fees of $1,825) at June 30, 2021, and $39,871 (net of unamortized loan fees of $129) at December 31, 2020. 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 June 30, 2021, we met those covenants and restrictions. At June 30, 2021, our current assets exceeded our current liabilities by $270,203, largely due to our inventories, at cost, of $232,292. At June 30, 2021, our cash balance was $37,243 and we have used our Credit Agreement and Note Purchase Agreement for liquidity purposes, with $168,000 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. On April 1, 2021, the Company completed the merger with Luxco. The aggregate consideration paid by the Company in connection with the merger was $237,500 in cash (less assumed indebtedness) and 5,007,833 shares of common stock of the Company, subject to adjustment for fractional shares (the “Company Shares,” and together with the cash portion, the “Merger Consideration”). The Merger Consideration is subject to customary purchase price adjustments, including working capital, a portion of which may be paid in common stock. The cash portion of the Merger Consideration, the repayment of assumed debt and transaction-related expenses were financed with a $242,300 borrowing under the Credit Agreement. We anticipate having sufficient cash flows to support our short-term liquidity and operating needs.