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, 2021 and the additional risk factors included in this Form 10-Q in Part II, Item 1A. 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. 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. Our Branded Spirits consist of producing, importing, bottling and rectifying distilled spirits through our distilleries and bottling facilities. 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, 2021. 22 RESULTS OF OPERATIONS Consolidated Results The table below details the consolidated results for the quarters ended June 30, 2022 and 2021: Quarter Ended June 30, 2022 2021 2022 v. 2021 Sales $ 194,982 $ 174,939 11 % Cost of sales 135,758 118,112 15 Gross profit 59,224 56,827 4 Gross margin % 30.4 % 32.5 % (2.1) pp (a) Advertising and promotion expenses 6,065 3,371 80 Selling, general, and administrative (“SG&A”) expenses 17,859 25,793 (31) Other operating (income) expense, net (6) — N/A Operating income 35,306 27,663 28 Operating margin % 18.1 % 15.8 % 2.3 pp Interest expense, net (1,543) (1,104) (40) Other income (expense), net (1,062) (88) (1,107) Income before income taxes 32,701 26,471 24 Income tax expense 7,339 6,412 14 Effective tax expense rate % 22.4 % 24.2 % (1.8) pp Net income $ 25,362 $ 20,059 26 % Net income margin % 13.0 % 11.5 % 1.5 pp (a) Percentage points (“pp”). Sales - Sales for quarter ended June 30, 2022 were $194,982, an increase of 11 percent compared to the year-ago quarter, which was the result of increased sales in the Distilling Solutions and Ingredient Solutions segments, partially offset by decreased sales in the Branded Spirits segment. Within the Distilling Solutions segment, sales were up 19 percent, primarily due to an increase in the sales of brown goods within premium beverage alcohol. Within the Ingredient Solutions segment, sales were up 21 percent, primarily due to increased sales of specialty wheat starches and proteins. Within the Branded Spirits segment, sales were down 3 percent, due to decreased sales of mid and other price tiers (see Segment Results). Gross profit - Gross profit for quarter ended June 30, 2022 was $59,224, an increase of 4 percent compared to the year-ago quarter. The increase was driven by an increase in gross profit in the Branded Spirits and Ingredient Solutions segments, partially offset by a decrease in Distilling Solutions segment gross profit. In the Branded Spirits segment, gross profit increased by $2,526, or 14 percent. In the Ingredient Solutions segment, gross profit increased by $2,076, or 32 percent. In the Distilling Solutions segment, gross profit declined by $2,205, or 7 percent (see Segment Results). Advertising and promotion expenses - Advertising and promotion expenses for quarter ended June 30, 2022 were $6,065, an increase of 80 percent compared to the year-ago quarter, primarily driven by increased advertising and promotion investment in the Branded Spirits segment, specifically in the ultra premium, super premium and premium price tiers. SG&A expenses - SG&A expenses for quarter ended June 30, 2022 were $17,859, a decrease of 31 percent compared to the year-ago quarter, primarily due to the one-time acquisition costs in 2021 related to the Merger with Luxco that did not recur in 2022. 23 Operating income - Operating income for quarter ended June 30, 2022 increased to $35,306 from $27,663 for quarter ended June 30, 2021, primarily due to an increase in gross profit in the Branded Spirits and Ingredient Solutions segments as well as a decrease in the previously described SG&A expenses. These were partially offset by an increase in the previously described Advertising and promotion expenses and a decrease in gross profit in the Distilling Solutions segment. Operating income, quarter versus quarter Operating Income Change Operating income for quarter ended June 30, 2021 $ 27,663 Increase in gross profit - Branded Spirits segment (a) 2,526 9 pp (b) Increase in gross profit - Ingredient Solutions segment (a) 2,076 8 pp Decrease in gross profit - Distilling Solutions segment (a) (2,205) (8) pp Increase in Advertising and promotion expenses (2,694) (10) pp Decrease in SG&A expenses 7,934 29 pp Increase in Other operating income (expense), net 6 — pp Operating income for quarter ended June 30, 2022 $ 35,306 28 % (a) See segment discussion. (b) Percentage points (“pp”). Income tax expense - Income tax expense for quarter ended June 30, 2022 was $7,339, for an effective tax rate of 22.4 percent. Income tax expense for the quarter ended June 30, 2021, was $6,412, for an effective tax rate of 24.2 percent. The increase in Income tax expense, quarter versus quarter, was due to higher Income before income taxes. The decrease in effective tax rate, quarter versus quarter, was due to favorable tax benefits, related to certain tax credits concerning our capital spend, and related to our foreign operations. Earnings per common share (“EPS”) - EPS was $1.15 for quarter ended June 30, 2022, compared to $0.91 for quarter ended June 30, 2021. The change in EPS, quarter versus quarter, was primarily due to an increase in Operating income. Change in basic and diluted EPS, quarter versus quarter Basic and Diluted EPS Change Basic and diluted EPS for quarter ended June 30, 2021 $ 0.91 Increase in Operating income (a) 0.26 28 pp (b) Increase in other income (expense), net (a) (0.03) (3) pp Tax: Change in effective tax rate 0.04 4 pp Change in income allocated to participating securities (0.01) (1) pp Change in interest expense, net (a) (0.02) (2) pp Basic and diluted EPS for quarter ended June 30, 2022 $ 1.15 26 % (a) Item is net of tax based on the effective tax rate for the base year (2021). (b) Percentage points (“pp”). 24 The table below details the consolidated results for year to date ended June 30, 2022 and 2021: Year to Date Ended June 30, 2022 2021 2022 v. 2021 Sales $ 390,217 $ 283,262 38 % Cost of sales 259,172 194,136 34 Gross profit 131,045 89,126 47 Gross margin % 33.6 % 31.5 % 2.1 pp (a) Advertising and promotion expenses 11,569 4,224 174 SG&A expenses 34,125 36,739 (7) Other operating income, net (35) — N/A Operating income 85,386 48,163 77 Operating margin % 21.9 % 17.0 % 4.9 pp Interest expense, net (3,141) (1,592) (97) Other income (expense), net (1,008) (58) (1,638) Income before income taxes 81,237 46,513 75 Income tax expense 18,504 11,027 68 Effective tax expense rate % 22.8 % 23.7 % (0.9) pp Net income $ 62,733 $ 35,486 77 % Net income margin % 16.1 % 12.5 % 3.6 pp (a) Percentage points (“pp”). Sales - Sales for year to date ended June 30, 2022 were $390,217, an increase of 38 percent compared to the year-ago period, which was the result of increased sales in the Branded Spirits, Distilling Solutions and Ingredient Solutions segments. Within the Branded Spirits segment, sales were up 87 percent, primarily due to the additional brands acquired as part of the April 1, 2021 Merger. Within the Distilling Solutions segment, sales were up 22 percent, primarily due to an increase in the sales of brown goods within premium beverage alcohol and distillers feed and related co-products. Within the Ingredient Solutions segment, sales were up 32 percent, primarily due to increased sales of specialty wheat starches and proteins, and commodity wheat starches (see Segment Results). Gross profit - Gross profit for year to date ended June 30, 2022 was $131,045, an increase of 47 percent compared to the year-ago period. The increase was driven by an increase in gross profit in the Branded Spirits, Distilling Solutions, and Ingredient Solutions segments. In the Branded Spirits segment, gross profit increased by $27,222, or 147 percent. In the Distilling Solutions segment, gross profit increased by $8,483, or 14 percent. In the Ingredient Solutions segment, gross profit increased by $6,214, or 60 percent (see Segment Results). Advertising and promotion expenses - Advertising and promotion expenses for year to date ended June 30, 2022 were $11,569, an increase of 174 percent compared to the year-ago period, primarily driven by the assumption of Luxco’s Advertising and promotion expenses. SG&A expenses - SG&A expenses for year to date ended June 30, 2022 were $34,125, a decrease of 7 percent compared to the year-ago period. The decrease in SG&A expenses was driven primarily by the one-time acquisition costs in 2021 related to the Merger with Luxco that did not recur in 2022, partially offset by the assumption of Luxco’s SG&A expenses. Operating income - Operating income for year to date ended June 30, 2022 increased to $85,386 from $48,163 for year to date period ended June 30, 2021, primarily due to an increase in gross profit in the Branded Spirits, Distilling Solutions, and Ingredient Solutions segments as well as a decrease in the previously described SG&A expenses. These were partially offset by an increase in the above-described Advertising and promotion expenses. 25 Operating income, year to date versus year to date Operating Income Change Operating income for year to date ended June 30, 2021 $ 48,163 Increase in gross profit - Branded Spirits segment (a) 27,222 57 pp(b) Increase in gross profit - Distilling Solutions segment (a) 8,483 17 pp Increase in gross profit - Ingredient Solutions segment (a) 6,214 13 pp Increase in Advertising and promotion expenses (7,345) (15) pp Decrease in SG&A expenses 2,614 5 pp Increase in Other operating income (expense), net 35 — pp Operating income for year to date ended June 30, 2022 $ 85,386 77 % (a) See segment discussion. (b) Percentage points (“pp”). Income tax expense - Income tax expense for year to date ended June 30, 2022 was $18,504, for an effective tax rate of 22.8 percent. Income tax expense for the year to date ended June 30, 2021, was $11,027, for an effective tax rate of 23.7 percent. The increase in Income tax expense, year to date versus year to date, was primarily due to higher Income before income taxes. The decrease in effective tax rate, year to date versus year to date, was due to favorable tax benefits, related to certain tax credits concerning our capital spend, and related to our foreign operations. Earnings per common share - EPS was $2.84 for year to date ended June 30, 2022, compared to $1.81 for year to date ended June 30, 2021. EPS increased, year to date versus year to date, 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, year to date versus year to date Basic and Diluted EPS Change Basic and diluted EPS for year to date ended June 30, 2021 $ 1.81 Increase in operating income (a) 1.60 88 pp(b) Change in interest expense, net (a) (0.07) (4) pp Increase in other income (expense), net (a) (0.03) (1) pp Tax: Change in effective tax rate 0.04 2 pp Change in weighted average shares outstanding (0.51) (28) pp Basic and diluted EPS for year to date ended June 30, 2022 $ 2.84 57 % (a) Item is net of tax based on the effective tax rate for the base year (2021). (b) Percentage points (“pp”). 26 SEGMENT RESULTS Distilling Solutions The following tables show selected financial information for the Distilling Solutions segment for the quarters ended June 30, 2022 and 2021. DISTILLING SOLUTIONS SALES Quarter Ended June 30, Quarter versus Quarter Sales Change Increase/(Decrease) 2022 2021 $ Change % Change Brown goods $ 56,331 $ 43,766 $ 12,565 29 % White goods 17,441 18,205 (764) (4) Premium beverage alcohol 73,772 61,971 11,801 19 Industrial alcohol 12,885 14,770 (1,885) (13) Food grade alcohol 86,657 76,741 9,916 13 Fuel grade alcohol 3,312 4,753 (1,441) (30) Distillers feed and related co-products 11,267 4,672 6,595 141 Warehouse services 5,902 4,182 1,720 41 Total Distilling Solutions $ 107,138 $ 90,348 $ 16,790 19 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Premium beverage alcohol 19% (5)% 24% Other Financial Information Quarter Ended June 30, Quarter versus Quarter Increase / (Decrease) 2022 2021 $ Change % Change Gross profit $ 29,780 $ 31,985 $ (2,205) (7) % Gross margin % 27.8 % 35.4 % (7.6) 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. The product is then divided by prior period sales dollars. (c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. The product is then divided by prior period sales dollars. (d) Percentage points (“pp”). Total sales of Distilling Solutions for quarter ended June 30, 2022 increased by $16,790, or 19 percent, compared to the prior year quarter. Sales of brown goods within premium beverage alcohol, distillers feed and related co-products, and warehouse services increased while industrial alcohol, fuel grade alcohol and white goods within premium beverage alcohol decreased compared to the prior year quarter. The increase in sales of brown goods was driven by higher average selling price. The increase in sales of distillers feed and related co-products was due to higher average selling price, partially offset by lower sales volumes, both of which primarily resulted from the previously disclosed dryer fire at our Atchison facility which occurred in 2020. These increases were partially offset by a decrease in sales of industrial alcohol, fuel grade alcohol and white goods which was driven primarily by lower sales volume. Gross profit decreased quarter versus quarter by $2,205, or 7 percent. Gross margin for the quarter ended June 30, 2022 decreased to 27.8 percent from 35.4 percent for the prior year quarter. The decrease in gross profit was primarily due to higher input costs for industrial alcohol, white goods, and fuel grade alcohol. The average selling price for these products also increased, but not enough to offset the higher input costs. This decrease in gross profit was partially offset by an increase in brown goods gross profit, as increased average selling price offset the higher input costs. 27 The following tables show selected financial information for the Distilling Solutions segment for the year to date ended June 30, 2022 and 2021. DISTILLING SOLUTIONS SALES Year to Date Ended June 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2022 2021 $ Change % Change Brown Goods $ 118,476 $ 86,807 $ 31,669 36 % White Goods 37,527 34,862 2,665 8 Premium beverage alcohol 156,003 121,669 34,334 28 Industrial alcohol 24,380 32,106 (7,726) (24) Food grade alcohol 180,383 153,775 26,608 17 Fuel grade alcohol 6,594 7,270 (676) (9) Distillers feed and related co-products 20,184 9,644 10,540 109 Warehouse services 11,486 8,283 3,203 39 Total Distilling Solutions $ 218,647 $ 178,972 $ 39,675 22 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Premium beverage alcohol 28% 8% 20% Other Financial Information Year to Date Ended June 30, Year to Date versus Year to Date Increase / (Decrease) 2022 2021 $ Change % Change Gross profit $ 68,713 $ 60,230 $ 8,483 14 % Gross margin % 31.4 % 33.7 % (2.3) 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) 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 Distilling Solutions for year to date ended June 30, 2022 increased by $39,675, or 22 percent compared to the year-ago period. Sales of brown goods within premium beverage alcohol, distillers feed and related co-products, warehouse services and white goods within premium beverage alcohol increased while industrial alcohol and fuel grade alcohol decreased compared to the prior year to date period. The increase in sales of brown goods was driven by higher average selling price and higher sales volume. The increase in sales of distillers feed and related co-products was due to higher average selling price, partially offset by lower sales volumes, both of which primarily resulted from the previously disclosed dryer fire at our Atchison facility which occurred in 2020. The increase in sales of white goods was driven by 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 primarily due to the discontinuing of third party sales and marketing services, partially offset by higher average selling price. Gross profit for year to date ended June 30, 2022 increased by $8,483, or 14 percent compared to the year-ago period. Gross margin for year to date ended June 30, 2022 decreased to 31.4 percent from 33.7 percent for the prior year period. The increase in gross profit was due primarily to higher average selling price and higher sales volume on brown goods. These increases were partially offset by higher input costs for industrial alcohol, white goods, and fuel grade alcohol. The average selling price for these products also increased, but not enough to offset the higher input costs. 28 Branded Spirits The following tables show selected financial information for the Branded Spirits segment for the quarters ended June 30, 2022 and 2021. BRANDED SPIRITS SALES Quarter Ended June 30, Quarter versus Quarter Sales Change Increase/(Decrease) 2022 2021 $ Change % Change Ultra premium $ 9,435 $ 8,002 $ 1,433 18 % Super premium 3,226 3,184 42 1 Premium 5,775 5,303 472 9 Mid 23,301 25,407 (2,106) (8) Value 12,908 13,228 (320) (2) Other 3,921 5,302 (1,381) (26) Total Branded Spirits $ 58,566 $ 60,426 $ (1,860) (3) % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Branded Spirits (3)% (9)% 6% Other Financial Information Quarter Ended June 30, Quarter versus Quarter Increase / (Decrease) 2022 2021 $ Change % Change Gross profit $ 20,960 $ 18,434 $ 2,526 14 % Gross margin % 35.8 % 30.5 % 5.3 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) 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 Branded Spirits for quarter ended June 30, 2022 decreased by $1,860, or 3 percent compared to the prior year quarter. Sales decreased primarily due to a decrease in sales of brands within the mid price tier as a result of the re-opening of on-premise locations during the prior year period as well as a change in product mix. Sales in the other price tier decreased due to the timing of certain contracted private label sales. These decreases were partially offset by an increase in the ultra premium price tier due primarily to increased sales of American whiskey brands. Gross profit increased quarter versus quarter by $2,526, or 14 percent. Gross margin for the quarter ended June 30, 2022 increased to 35.8 percent from 30.5 percent for the prior year quarter. The increase in gross profit was primarily driven by a required step up in value of certain assets due to purchase accounting related to the Merger in 2021 that did not recur in 2022. Of the purchase accounting step ups, $2,529 was associated with marking the finished goods inventory to fair value and fully flowed through in the prior year period. 29 The following tables show selected financial information for the Branded Spirits segment for year to date ended June 30, 2022 and 2021. BRANDED SPIRITS SALES Year to Date Ended June 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2022 2021 $ Change % Change Ultra premium $ 22,032 $ 8,128 $ 13,904 171 % Super premium 6,172 3,595 2,577 72 Premium 11,915 5,329 6,586 124 Mid 42,574 25,407 17,167 68 Value 24,207 13,228 10,979 83 Other 7,417 5,309 2,108 40 Total Branded Spirits $ 114,317 $ 60,996 $ 53,321 87 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Branded Spirits 87% 66% 21% Other Financial Information Year to Date Ended June 30, Year to Date versus Year to Date Increase / (Decrease) 2022 2021 $ Change % Change Gross profit $ 45,742 $ 18,520 $ 27,222 147 % Gross margin % 40.0 % 30.4 % 9.6 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. The product is then divided by prior period sales dollars. (c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. The product is then divided by prior period sales dollars. (d) Percentage points (“pp”). Total sales of Branded Spirits for year to date ended June 30, 2022 increased by $53,321, or 87 percent compared to the year-ago period. Sales across all pricing tiers 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, 2022 increased by $27,222, or 147 percent. Gross margin for year to date ended June 30, 2022 increased 9.6 percent to 40.0 percent from 30.4 percent for the prior year. The increase in gross profit was primarily driven by the additional brands acquired as part of the Merger as well as a required step up in value of certain assets due to purchase accounting related to the Merger in 2021 that did not recur in 2022. Of the purchase accounting step ups, $2,529 was associated with marking the finished goods inventory to fair value and fully flowed through in the prior year period. 30 Ingredient Solutions The following tables show selected financial information for the Ingredient Solutions segment for the quarters ended June 30, 2022 and 2021. INGREDIENT SOLUTIONS SALES Quarter Ended June 30, Quarter versus Quarter Sales Change Increase / (Decrease) 2022 2021 $ Change % Change Specialty wheat starches $ 16,001 $ 12,598 $ 3,403 27 % Specialty wheat proteins 10,109 8,352 1,757 21 Commodity wheat starches 3,130 2,663 467 18 Commodity wheat proteins 38 552 (514) (93) Total Ingredient Solutions $ 29,278 $ 24,165 $ 5,113 21 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions 21% 1% 20% Other Financial Information Quarter Ended June 30, Quarter versus Quarter Increase / (Decrease) 2022 2021 $ Change % Change Gross profit $ 8,484 $ 6,408 $ 2,076 32 % Gross margin % 29.0 % 26.5 % 2.5 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) 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 Ingredient Solutions sales for quarter ended June 30, 2022 increased by $5,113, or 21 percent, compared to the prior year quarter. The increase was primarily driven by higher sales of specialty wheat starches due to higher average selling prices and higher sales volume. Specialty wheat proteins increased due to higher average selling price, partially offset by lower sales volume. These increases were partially offset by a decrease in commodity wheat proteins due to lower sales volume. Gross profit increased quarter versus quarter by $2,076, or 32 percent. Gross margin for the quarter ended June 30, 2022 increased to 29.0 percent from 26.5 percent for the prior year quarter. The increase in gross profit was primarily driven by higher average selling price of specialty wheat proteins and starches, and commodity wheat starches, partially offset by higher input costs for specialty wheat starches and proteins, and commodity starches. 31 The following tables show selected financial information for the Ingredient Solutions segment for the year to date June 30, 2022 and 2021. INGREDIENT SOLUTIONS SALES Year to Date Ended June 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2022 2021 $ Change % Change Specialty wheat starches $ 31,204 $ 22,820 $ 8,384 37 % Specialty wheat proteins 19,528 14,398 5,130 36 Commodity wheat starches 6,483 4,946 1,537 31 Commodity wheat proteins 38 1,130 (1,092) (97) Total Ingredient Solutions $ 57,253 $ 43,294 $ 13,959 32 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions 32% 11% 21% Other Financial Information Year to Date Ended June 30, Year to Date versus Year to Date Increase / (Decrease) 2022 2021 $ Change % Change Gross profit $ 16,590 $ 10,376 $ 6,214 60 % Gross margin % 29.0 % 24.0 % 5.0 pp (d) (a) Total sale 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. The product is then divided by prior period sales dollars. (c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. The product is then divided by prior period sales dollars. (d) Percentage points (“pp”). Total Ingredient Solutions sales for year to date ended June 30, 2022 increased by $13,959, or 32 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, primarily due to higher average selling price and higher sales volume. Commodity wheat starches increased due to higher average selling price, partially offset by lower sales volume. These increases were partially offset by a decrease in sales of commodity wheat proteins due to lower sales volume. Gross profit increased by $6,214, or 60 percent for year to date ended June 30, 2022 compared to the prior year period. Gross margin for the year to date ended June 30, 2022 increased to 29.0 percent from 24.0 percent for the prior year period. The increase in gross profit was primarily driven by higher average selling price and higher sales volumes of specialty wheat starches and proteins. Gross profit in the prior year to date period was impacted by a temporary curtailment of natural gas usage due to extreme weather conditions which caused the Company to shut down the Atchison facilities for several days. 32 CASH FLOW, FINANCIAL CONDITION AND LIQUIDITY We believe our financial condition continues to be of high quality, as evidenced by our ability to generate adequate cash from operations while having ready access to capital at competitive rates. Operating cash flow and borrowings through our Credit Agreement, Convertible Senior Notes and Note Purchase Agreement (Note 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 to be adequate to provide for budgeted capital expenditures, potential merger or acquisitions, and anticipated operating requirements for the foreseeable future. Cash Flow Summary Year to Date Ended June 30, Changes, year versus year Increase / (Decrease) 2022 2021 Cash provided by operating activities $ 43,019 $ 47,454 $ (4,435) Cash used in investing activities (19,484) (170,235) 150,751 Cash provided by (used in) financing activities (7,649) 138,359 (146,008) Effect of exchange rate changes on cash (39) 3 (42) Increase in cash and cash equivalents $ 15,847 $ 15,581 $ 266 Cash increased $15,847 for year to date ended June 30, 2022, compared to an increase of $15,581 for year to date ended June 30, 2021, for a net increase in cash of $266, period versus period. Operating Activities. Cash provided by operating activities for year to date ended June 30, 2022 was $43,019. The cash provided by operating activities resulted primarily from net income of $62,733, adjustments for non-cash or non-operating charges of $13,262, including depreciation and amortization, and share-based compensation, partially offset by cash used in operating assets and liabilities of $32,976. The primary drivers of the changes in operating assets and liabilities were $27,508 use of cash related to an increase in inventories, primarily due to an increase in barreled distillate and finished goods inventory, $13,142 use of cash related to increased accounts receivables, net due to increased sales during the year to date period, as well as timing of customer payments, and $4,791 use of cash related to accrued expenses and other primarily related to increase in incentive compensation. These uses of cash were partially offset, primarily, by $11,438 cash provided by an increase in accounts payable. 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, excluding the asset and liability balances acquired as part of the Merger were $7,987 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. Investing Activities. Cash used in investing activities for year to date ended June 30, 2022 was $19,484, which primarily resulted from additions to property, plant and equipment of $18,087 (see Capital Spending). 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 with Luxco, and additions to property, plant and equipment of $18,336 (see Capital Spending). 33 Capital Spending. We manage capital spending to support our business growth plans. We have incurred $14,553 and $14,961 of capital expenditures and have paid $18,087 and $18,336 for capital expenditures for year to date ended June 30, 2022 and 2021, respectively. The difference between the amount of capital expenditures incurred and amount paid is due to the change in capital expenditures in accounts payable. We expect approximately $47,200 in capital expenditures in 2022, which will be used for facility improvement and expansion, facility sustaining projects, and environmental health and safety projects. Financing Activities. Cash used in financing activities for year to date ended June 30, 2022 was $7,649, due to payments of dividends and dividend equivalents of $5,322 (see Dividends and Dividend Equivalents), net payments on debt of $1,614 (see Long-Term and Short-Term Debt) and purchases of treasury stock of $713 (see Treasury Purchases). 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). Treasury Purchases. 29,356 RSUs vested and converted to common shares for employees during year to date ended June 30, 2022, of which we withheld and purchased for treasury 9,025 shares valued at $713 to cover payment of associated withholding taxes. 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. 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. The Company did not repurchase any shares during 2022 prior to the expiration of the program on February 27, 2022. 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) 2022 February 22, 2022 March 11, 2022 March 25, 2022 $ 0.12 $ 0.12 $ 2,638 $ 23 $ 2,661 May 5, 2022 May 20, 2022 June 3, 2022 0.12 0.12 2,638 23 2,661 $ 0.24 $ 0.24 $ 5,276 $ 46 $ 5,322 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 (a) Dividend equivalent payments on unvested participating securities. (b) Includes estimated forfeitures. On August 4, 2022, our Board of Directors declared a quarterly dividend payable to stockholders of record as of August 19, 2022, of the Company’s Common Stock, and a dividend equivalent payable to holders of certain RSUs as of August 19, 2022, of $0.12 per share and per unit, payable on September 2, 2022. Long-Term and Short-Term Debt. We maintain debt levels we consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment and financing plans (including brand development and share repurchase activities) and the overall cost of capital. Total debt was $231,953 (net of unamortized loan fees of $6,286) at June 30, 2022, and $233,399 (net of unamortized loan fees of $6,454) at December 31, 2021. 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. 34 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 June 30, 2022, we met those covenants and restrictions. At June 30, 2022, our current assets exceeded our current liabilities by $329,268, largely due to our inventories, at cost, of $272,948. At June 30, 2022, our cash balance was $37,415 and we have used our Credit Agreement, Convertible Senior Notes and Note Purchase Agreement for liquidity purposes, with $400,000 under our Credit Agreement remaining for additional borrowings and up to $120,000 potentially available under the Note Purchase Agreement. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We regularly assess our cash needs and the available sources to fund these needs. We utilize short-term and long-term debt to fund discretionary items, such as capital investments and dividend payments. In addition, we have strong operating results such that we believe financial institutions should provide sufficient credit funding to meet short-term financing requirements, if needed.