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 our Form 10-Q for the quarter ended June 30, 2022 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 September 30, 2022 and 2021: Quarter Ended September 30, 2022 2021 2022 v. 2021 Sales $ 201,146 $ 176,611 14 % Cost of sales 142,098 119,525 19 Gross profit 59,048 57,086 3 Gross margin % 29.4 % 32.3 % (2.9) pp (a) Advertising and promotion expenses 7,279 5,664 29 Selling, general, and administrative (“SG&A”) expenses 17,904 18,527 (3) Other operating (income) expense, net 1 11 (91) Operating income 33,864 32,884 3 Operating margin % 16.8 % 18.6 % (1.8) pp Interest expense, net (1,350) (1,116) (21) Other income (expense), net (1,353) (421) (221) Income before income taxes 31,161 31,347 (1) Income tax expense 7,533 7,674 (2) Effective tax expense rate % 24.2 % 24.5 % (0.3) pp Net income $ 23,628 $ 23,673 — % Net income margin % 11.7 % 13.4 % (1.7) pp (a) Percentage points (“pp”). Sales - Sales for quarter ended September 30, 2022 were $201,146, an increase of 14 percent compared to the year-ago quarter, which was the result of increased sales in the Distilling Solutions, Ingredient Solutions and Branded Spirits segments. 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 and distillers feed and related co-products. Within the Ingredient Solutions segment, sales were up 24 percent, primarily due to increased sales of specialty wheat starches and commodity wheat starches. Within the Branded Spirits segment, sales were up 2 percent, primarily due to increased sales of brands in the ultra premium price tier (see Segment Results). Gross profit - Gross profit for quarter ended September 30, 2022 was $59,048, an increase of 3 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 $1,850, or 8 percent. In the Ingredient Solutions segment, gross profit increased by $1,176, or 17 percent. In the Distilling Solutions segment, gross profit declined by $1,064, or 4 percent (see Segment Results). Advertising and promotion expenses - Advertising and promotion expenses for quarter ended September 30, 2022 were $7,279, an increase of 29 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 September 30, 2022 were $17,904, a decrease of 3 percent compared to the year-ago quarter, primarily due to lower incentive compensation expense and 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 September 30, 2022 increased to $33,864 from $32,884 for quarter ended September 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 September 30, 2021 $ 32,884 Increase in gross profit - Branded Spirits segment (a) 1,850 5 pp (b) Increase in gross profit - Ingredient Solutions segment (a) 1,176 4 pp Decrease in gross profit - Distilling Solutions segment (a) (1,064) (3) pp Increase in Advertising and promotion expenses (1,615) (5) pp Decrease in SG&A expenses 623 2 pp Change in Other operating income (expense), net 10 — pp Operating income for quarter ended September 30, 2022 $ 33,864 3 % (a) See segment discussion. (b) Percentage points (“pp”). Income tax expense - Income tax expense for quarter ended September 30, 2022 was $7,533, for an effective tax rate of 24.2 percent. Income tax expense for the quarter ended September 30, 2021, was $7,674, for an effective tax rate of 24.5 percent. The decrease in Income tax expense, quarter versus quarter, was due primarily to lower Income before income taxes. The decrease in effective tax rate, quarter versus quarter, was due primarily to favorable tax benefits, related to certain tax credits concerning our capital spend. Earnings per common share (“EPS”) - Basic EPS was $1.07 for quarter ended September 30, 2022, compared to $1.08 for quarter ended September 30, 2021. The change in Basic EPS, quarter versus quarter, was primarily due to a change in Other income (expense), net and a change in interest expense, net, partially offset by an increase in Operating income. Dilutive EPS was $1.06 for the quarter ended September 30, 2022, compared to $1.08 for the quarter ended September 30, 2021. The change in Diluted EPS, quarter versus quarter, was primarily due to the same changes as Basic EPS as well as the impact of dilutive shares outstanding. Change in basic and diluted EPS, quarter versus quarter Basic and Diluted EPS Change Basic and diluted EPS for quarter ended September 30, 2021 $ 1.08 Increase in Operating income (a) 0.03 3 pp (b) Change in Other income (expense), net (a) (0.03) (3) pp Change in Interest expense, net (a) (0.01) (1) pp Basic EPS for quarter ended September 30, 2022 $ 1.07 (1) % Impact of dilutive shares outstanding (0.01) (1) pp Diluted EPS for quarter ended September 30, 2022 $ 1.06 (2) % (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 September 30, 2022 and 2021: Year to Date Ended September 30, 2022 2021 2022 v. 2021 Sales $ 591,363 $ 459,873 29 % Cost of sales 401,270 313,661 28 Gross profit 190,093 146,212 30 Gross margin % 32.1 % 31.8 % 0.3 pp (a) Advertising and promotion expenses 18,848 9,888 91 SG&A expenses 52,029 55,266 (6) Other operating (income) expense, net (34) 11 (409) Operating income 119,250 81,047 47 Operating margin % 20.2 % 17.6 % 2.6 pp Interest expense, net (4,491) (2,708) (66) Other income (expense), net (2,361) (479) (393) Income before income taxes 112,398 77,860 44 Income tax expense 26,037 18,701 39 Effective tax expense rate % 23.2 % 24.0 % (0.8) pp Net income $ 86,361 $ 59,159 46 % Net income margin % 14.6 % 12.9 % 1.7 pp (a) Percentage points (“pp”). Sales - Sales for year to date ended September 30, 2022 were $591,363, an increase of 29 percent compared to the year-ago period, which was the result of increased sales in the Distilling Solutions, Branded Spirits and Ingredient Solutions segments. Within the Distilling Solutions segment, sales were up 21 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 Branded Spirits segment, sales were up 44 percent, primarily due to the additional brands acquired as part of the April 1, 2021 Merger. Within the Ingredient Solutions segment, sales were up 29 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 September 30, 2022 was $190,093, an increase of 30 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 $29,072, or 70 percent. In the Distilling Solutions segment, gross profit increased by $7,419, or 9 percent. In the Ingredient Solutions segment, gross profit increased by $7,390, or 43 percent (see Segment Results). Advertising and promotion expenses - Advertising and promotion expenses for year to date ended September 30, 2022 were $18,848, an increase of 91 percent compared to the year-ago period, primarily driven by the assumption of Luxco’s Advertising and promotion expenses as well as 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 year to date ended September 30, 2022 were $52,029, a decrease of 6 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 September 30, 2022 increased to $119,250 from $81,047 for year to date period ended September 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 previously 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 September 30, 2021 $ 81,047 Increase in gross profit - Branded Spirits segment (a) 29,072 36 pp(b) Increase in gross profit - Distilling Solutions segment (a) 7,419 9 pp Increase in gross profit - Ingredient Solutions segment (a) 7,390 9 pp Increase in Advertising and promotion expenses (8,960) (11) pp Decrease in SG&A expenses 3,237 4 pp Change in Other operating income (expense), net 45 — pp Operating income for year to date ended September 30, 2022 $ 119,250 47 % (a) See segment discussion. (b) Percentage points (“pp”). Income tax expense - Income tax expense for year to date ended September 30, 2022 was $26,037, for an effective tax rate of 23.2 percent. Income tax expense for the year to date ended September 30, 2021, was $18,701, 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. 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. Earnings per common share - EPS was $3.91 for year to date ended September 30, 2022, compared to $2.91 for year to date ended September 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 with Luxco. 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, 2021 $ 2.91 Increase in operating income (a) 1.63 56 pp(b) Change in interest expense, net (a) (0.08) (3) pp Change in other income (expense), net (a) (0.06) (2) pp Tax: Change in effective tax rate 0.02 1 pp Change in weighted average shares outstanding (0.51) (18) pp Basic and diluted EPS for year to date ended September 30, 2022 $ 3.91 34 % (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 September 30, 2022 and 2021. DISTILLING SOLUTIONS SALES Quarter Ended September 30, Quarter versus Quarter Sales Change Increase/(Decrease) 2022 2021 $ Change % Change Brown goods $ 57,423 $ 42,793 $ 14,630 34 % White goods 20,469 21,187 (718) (3) Premium beverage alcohol 77,892 63,980 13,912 22 Industrial alcohol 10,761 14,790 (4,029) (27) Food grade alcohol 88,653 78,770 9,883 13 Fuel grade alcohol 3,713 3,592 121 3 Distillers feed and related co-products 9,943 4,016 5,927 148 Warehouse services 6,335 4,666 1,669 36 Total Distilling Solutions $ 108,644 $ 91,044 $ 17,600 19 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Premium beverage alcohol 22% 4% 18% Other Financial Information Quarter Ended September 30, Quarter versus Quarter Increase / (Decrease) 2022 2021 $ Change % Change Gross profit $ 25,917 $ 26,981 $ (1,064) (4) % Gross margin % 23.9 % 29.6 % (5.7) 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 September 30, 2022 increased by $17,600, or 19 percent, compared to the prior year quarter. Sales of brown goods within premium beverage alcohol, distillers feed and related co-products, warehouse services, and fuel grade alcohol increased while industrial 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 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. These increases were partially offset by a decrease in sales of industrial alcohol and white goods which were driven primarily by lower sales volume, partially offset by higher average selling price. Gross profit decreased quarter versus quarter by $1,064, or 4 percent. Gross margin for the quarter ended September 30, 2022 decreased to 23.9 percent from 29.6 percent for the prior year quarter. The decrease in gross profit was primarily due to higher input costs for white goods and industrial 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. 27 The following tables show selected financial information for the Distilling Solutions segment for the year to date ended September 30, 2022 and 2021. DISTILLING SOLUTIONS SALES Year to Date Ended September 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2022 2021 $ Change % Change Brown Goods $ 175,899 $ 129,600 $ 46,299 36 % White Goods 57,996 56,049 1,947 3 Premium beverage alcohol 233,895 185,649 48,246 26 Industrial alcohol 35,141 46,896 (11,755) (25) Food grade alcohol 269,036 232,545 36,491 16 Fuel grade alcohol 10,307 10,862 (555) (5) Distillers feed and related co-products 30,127 13,660 16,467 121 Warehouse services 17,821 12,949 4,872 38 Total Distilling Solutions $ 327,291 $ 270,016 $ 57,275 21 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Premium beverage alcohol 26% 6% 20% Other Financial Information Year to Date Ended September 30, Year to Date versus Year to Date Increase / (Decrease) 2022 2021 $ Change % Change Gross profit $ 94,630 $ 87,211 $ 7,419 9 % Gross margin % 28.9 % 32.3 % (3.4) pp (d) (a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars. (c) 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 September 30, 2022 increased by $57,275, or 21 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 sales volume and higher average selling price. The increase in sales of distillers feed and related co-products was due to higher average selling price, partially offset by lower sales volumes, both of which primarily resulted from the previously disclosed dryer fire at our Atchison facility which occurred in 2020. 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, partially offset by higher average selling price. Gross profit for year to date ended September 30, 2022 increased by $7,419, or 9 percent compared to the year-ago period. Gross margin for year to date ended September 30, 2022 decreased to 28.9 percent from 32.3 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 which caused a decrease in the gross margin percentage. 28 Branded Spirits The following tables show selected financial information for the Branded Spirits segment for the quarters ended September 30, 2022 and 2021. BRANDED SPIRITS SALES Quarter Ended September 30, Quarter versus Quarter Sales Change Increase/(Decrease) 2022 2021 $ Change % Change Ultra premium $ 13,804 $ 11,363 $ 2,441 21 % Super premium 3,350 2,798 552 20 Premium 6,013 5,683 330 6 Mid 20,834 22,992 (2,158) (9) Value 12,097 12,756 (659) (5) Other 6,663 5,969 694 12 Total Branded Spirits $ 62,761 $ 61,561 $ 1,200 2 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Branded Spirits 2% (6)% 8% Other Financial Information Quarter Ended September 30, Quarter versus Quarter Increase / (Decrease) 2022 2021 $ Change % Change Gross profit $ 25,067 $ 23,217 $ 1,850 8 % Gross margin % 39.9 % 37.7 % 2.2 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. 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 September 30, 2022 increased by $1,200, or 2 percent compared to the prior year quarter. Sales increased primarily due to an increase in the ultra premium price tier due primarily to increased sales of American whiskey brands as well as an increase in the other tier due to timing of certain contracted private label sales. These increases were partially offset by a decrease in sales of brands within the mid price tier as a result of a change in the product mix towards more premium brands as well as the re-opening of on-premise locations during the prior year period. Gross profit increased quarter versus quarter by $1,850, or 8 percent. Gross margin for the quarter ended September 30, 2022 increased to 39.9 percent from 37.7 percent for the prior year quarter. The increase in gross profit was primarily driven by increased sales volume and higher average selling price of brands within the ultra premium price tier. These increases were partially offset by increased inputs costs in the mid and value price tier categories. 29 The following tables show selected financial information for the Branded Spirits segment for year to date ended September 30, 2022 and 2021. BRANDED SPIRITS SALES Year to Date Ended September 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2022 2021 $ Change % Change Ultra premium $ 35,836 $ 19,491 $ 16,345 84 % Super premium 9,522 6,393 3,129 49 Premium 17,928 11,012 6,916 63 Mid 63,408 48,399 15,009 31 Value 36,304 25,984 10,320 40 Other 14,080 11,278 2,802 25 Total Branded Spirits $ 177,078 $ 122,557 $ 54,521 44 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Branded Spirits 44% 31% 13% Other Financial Information Year to Date Ended September 30, Year to Date versus Year to Date Increase / (Decrease) 2022 2021 $ Change % Change Gross profit $ 70,809 $ 41,737 $ 29,072 70 % Gross margin % 40.0 % 34.1 % 5.9 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 September 30, 2022 increased by $54,521, or 44 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 September 30, 2022 increased by $29,072, or 70 percent. Gross margin for year to date ended September 30, 2022 increased to 40.0 percent from 34.1 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 September 30, 2022 and 2021. INGREDIENT SOLUTIONS SALES Quarter Ended September 30, Quarter versus Quarter Sales Change Increase / (Decrease) 2022 2021 $ Change % Change Specialty wheat starches $ 16,241 $ 12,231 $ 4,010 33 % Specialty wheat proteins 9,697 8,901 796 9 Commodity wheat starches 3,803 2,626 1,177 45 Commodity wheat proteins — 248 (248) (100) Total Ingredient Solutions $ 29,741 $ 24,006 $ 5,735 24 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions 24% 5% 19% Other Financial Information Quarter Ended September 30, Quarter versus Quarter Increase / (Decrease) 2022 2021 $ Change % Change Gross profit $ 8,064 $ 6,888 $ 1,176 17 % Gross margin % 27.1 % 28.7 % (1.6) 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 Ingredient Solutions sales for quarter ended September 30, 2022 increased by $5,735, or 24 percent, compared to the prior year quarter. The increase was primarily driven by higher sales of specialty wheat starches due to higher sales volume and higher average selling prices. Commodity wheat starches and specialty wheat proteins increased due primarily to higher average selling price. Gross profit increased quarter versus quarter by $1,176, or 17 percent. Gross margin for the quarter ended September 30, 2022 decreased to 27.1 percent from 28.7 percent for the prior year quarter. The increase in gross profit was primarily driven by higher average selling price of specialty wheat starches and proteins, and commodity wheat starches, partially offset by higher input costs for specialty wheat starches and proteins, and commodity starches. These increased input costs are the primary driver for the decrease in gross margin percentage. 31 The following tables show selected financial information for the Ingredient Solutions segment for the year to date September 30, 2022 and 2021. INGREDIENT SOLUTIONS SALES Year to Date Ended September 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2022 2021 $ Change % Change Specialty wheat starches $ 47,445 $ 35,051 $ 12,394 35 % Specialty wheat proteins 29,225 23,299 5,926 25 Commodity wheat starches 10,286 7,572 2,714 36 Commodity wheat proteins 38 1,378 (1,340) (97) Total Ingredient Solutions $ 86,994 $ 67,300 $ 19,694 29 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions 29% 9% 20% Other Financial Information Year to Date Ended September 30, Year to Date versus Year to Date Increase / (Decrease) 2022 2021 $ Change % Change Gross profit $ 24,654 $ 17,264 $ 7,390 43 % Gross margin % 28.3 % 25.7 % 2.6 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 September 30, 2022 increased by $19,694, or 29 percent, compared to the prior year period. The increase in Ingredient Solutions sales was primarily driven by higher sales of specialty wheat starches primarily due to higher sales volume and higher average selling prices. Additionally, the increase in Ingredient Solutions sales was driven by higher sales of specialty wheat proteins primarily due to higher average selling price and higher sales volume. Sales of commodity wheat starches were also up due to higher average selling price. These increases were partially offset by a decrease in sales of commodity wheat proteins due to lower sales volume. Gross profit increased by $7,390, or 43 percent for year to date ended September 30, 2022 compared to the prior year period. Gross margin for the year to date ended September 30, 2022 increased to 28.3 percent from 25.7 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 and commodity wheat starches. These increases were partially offset by higher input costs for all product lines within the segment. 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 mergers or acquisitions, and anticipated operating requirements for the foreseeable future. Cash Flow Summary Year to Date Ended September 30, Changes, year versus year Increase / (Decrease) 2022 2021 Cash provided by operating activities $ 72,253 $ 70,785 $ 1,468 Cash used in investing activities (31,764) (189,166) 157,402 Cash provided by (used in) financing activities (11,301) 112,883 (124,184) Effect of exchange rate changes on cash (82) (2) (80) Increase (decrease) in cash and cash equivalents $ 29,106 $ (5,500) $ 34,606 Cash increased $29,106 for year to date ended September 30, 2022, compared to a decrease of $5,500 for year to date ended September 30, 2021, for a net increase in cash of $34,606, period versus period. Operating Activities. Cash provided by operating activities for year to date ended September 30, 2022 was $72,253. The cash provided by operating activities resulted primarily from net income of $86,361, adjustments for non-cash or non-operating charges of $20,503, including depreciation and amortization, and share-based compensation, partially offset by cash used in operating assets and liabilities of $34,611. The primary drivers of the changes in operating assets and liabilities were $30,599 use of cash related to an increase in inventories, primarily due to an increase in finished goods inventory and barreled distillate, as well as $15,582 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. These uses of cash were partially offset, primarily by $12,613 cash provided by an increase in accounts payable. Cash provided by operating activities for year to date ended September 30, 2021 was $70,785. The cash provided by operating activities resulted primarily from net income of $59,159, adjustments for non-cash or non-operating charges of $19,149, including depreciation and amortization, and share-based compensation, as well as cash used in operating assets and liabilities of $7,523. The primary drivers of the changes in operating assets and liabilities, excluding the asset and liability balances acquired as part of the Merger, were $7,588 use of cash related to an increase in inventories, primarily barreled distillate, $6,678 use of cash related to a decrease in accounts payable, and $5,593 use of cash related to accounts receivables, net due to increased sales during the quarter as well as an increase in insurance recoveries receivable. These uses of cash were partially offset by $15,859 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. Investing Activities. Cash used in investing activities for year to date ended September 30, 2022 was $31,764, which primarily resulted from additions to property, plant and equipment of $29,217 (see Capital Spending). Cash used in investing activities for year to date ended September 30, 2021 was $189,166, which primarily resulted from $149,613 related to the Merger with Luxco, and additions to property, plant and equipment of $37,257 (see Capital Spending). 33 Capital Spending. We manage capital spending to support our business growth plans. We have incurred $28,524 and $33,882 of capital expenditures and have paid $29,217 and $37,257 for capital expenditures for year to date ended September 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 September 30, 2022 was $11,301, due to payments of dividends and dividend equivalents of $7,984 (see Dividends and Dividend Equivalents), net payments on debt of $2,603 (see Long-Term and Short-Term Debt) and purchases of treasury stock of $714 (see Treasury Purchases). Cash provided by financing activities for year to date ended September 30, 2021 was $112,883, due to net proceeds from debt of $208,521 (see Long-term and Short-term Debt), partially offset by $87,509 payment on assumed debt as part of the Merger, payments of dividends and dividend equivalents of $7,362 (see Dividends and Dividend Equivalents) and purchases of treasury stock of $767 (see Treasury Purchases). Treasury Purchases. 29,366 RSUs vested and converted to common shares for employees during year to date ended September 30, 2022, of which we withheld and purchased for treasury 9,027 shares valued at $714 to cover payment of associated withholding taxes. 38,059 RSUs vested and converted to common shares for employees during year to date ended September 30, 2021, of which we withheld and purchased for treasury 11,885 shares valued at $767 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 (c) Paid (c) 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 August 4, 2022 August 19, 2022 September 2, 2022 0.12 0.12 2,639 23 2,662 $ 0.36 $ 0.36 $ 7,915 $ 69 $ 7,984 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 August 2, 2021 August 20, 2021 September 3, 2021 0.12 0.12 2,635 20 2,655 $ 0.36 $ 0.36 $ 7,303 $ 59 $ 7,362 (a) Dividend equivalent payments on unvested participating securities. (b) Includes estimated forfeitures. (c) Per share amount On November 3, 2022, our Board of Directors declared a quarterly dividend payable to stockholders of record as of November 18, 2022, of the Company’s Common Stock, and a dividend equivalent payable to holders of certain RSUs as of November 18, 2022, of $0.12 per share and per unit, payable on December 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 $231,051 (net of unamortized loan fees of $6,199) at September 30, 2022, and $233,399 (net of unamortized loan fees of $6,454) at December 31, 2021. 34 Financial Condition and Liquidity. Our principal uses of cash in the ordinary course of business are for input costs used in our production processes, salaries, capital expenditures, and investments supporting our strategic plan, such as the aging of barreled distillate and potential mergers and acquisitions. Generally, during periods when commodities prices are rising, our operations require increased use of cash to support inventory levels. Our principal sources of cash are product sales and borrowing on our various debt agreements. Under our debt agreements, we must meet certain financial covenants and restrictions, and at September 30, 2022, we met those covenants and restrictions. At September 30, 2022, our current assets exceeded our current liabilities by $339,853, largely due to our inventories, at cost, of $275,478. At September 30, 2022, our cash balance was $50,674 and we have used our various debt agreements 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, dividend payments as well as potential mergers and acquisitions. Subject to market conditions, we could also fund future mergers and acquisitions through the issuance of additional shares of common stock. In addition, we have strong operating results such that we believe financial institutions should provide sufficient credit funding to meet short-term financing requirements, if needed.