MGP INGREDIENTS INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in thousands, unless otherwise noted) CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS This Report may contain forward looking statements as well as historical information. All statements, other than statements of historical facts, regarding the prospects of our industry and our prospects, plans, financial position, and strategic plan may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation statements about the timing of the Atchison, Kansas distillery closure; our sources of cash being adequate; our capital expenditures; our ability to support our liquidity and operating needs through cash generated from operations; and our ability to obtain credit funding. Forward looking statements are usually identified by or are associated with such words as “intend,” “plan,” “believe,” “estimate,” “expect,” “anticipate,” “project,” “forecast,” “hopeful,” “should,” “may,” “will,” “could,” “encouraged,” “opportunities,” “potential,” and similar terminology. These forward-looking statements reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, our performance, our financial results, and our financial condition and are not guarantees of future performance. All forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially. For information on these risks and uncertainties and other factors that could affect the Company’s business, see the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our Annual Report on Form 10-K for the year ended December 31, 2022, our Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 2023, this Report, and our other filings with the Securities and Exchange Commission (the “SEC”). Forward looking statements in this Report are made as of the date of this Report, and we undertake no obligation to update any forward-looking statements or information made in this Report, except as required by law. RECENT DEVELOPMENTS Acquisition of Penelope. On May 8, 2023, we entered into a definitive agreement to acquire 100 percent of the equity of Penelope Bourbon LLC (“Penelope”), and subsequently completed the acquisition on June 1, 2023. Penelope, prior to our acquisition, was a family and founder-owned and operated American whiskey company with a diverse portfolio of high-quality whiskeys in the premium plus price tiers. As a result of the acquisition, we enhance our presence in the growing American whiskey category and expand our portfolio of premium plus price tier brands. Following the acquisition, Penelope became a wholly owned subsidiary of the Company and its financial results are included in the Branded Spirits segment (see Note 3, Business Combination for additional information). Planned Closure of the Atchison Distillery. On July 13, 2023, we announced the decision by our Board of Directors to approve the closure of our distillery located in Atchison, Kansas (the “Atchison Distillery”). The anticipated closure date is January 2024. The decision to close the Atchison Distillery is consistent with our plan to address profitability headwinds associated with our grain neutral spirits (“GNS”) and industrial alcohol products within the Distilling Solutions segment. During the quarter and year to date ended September 30, 2023, we recorded a $17,112 impairment of assets, which was recorded in impairment of long-lived assets and other line on the Condensed Consolidated Statement of Income. The impaired assets were recorded within the Distilling Solution segment. Additionally, we recorded $1,222 of expenses related to severance costs, contract termination fees, and consulting fees, which were recorded in impairment of long-lived assets and other line on the Condensed Consolidated Statement of Income for the quarter and year to date ended September 30, 2023 (see Note 5, Planned Closure of the Atchison Distillery for additional information). OVERVIEW MGP is a leading producer and supplier of premium distilled spirits, branded spirits, and food ingredients. Distilled spirits include premium bourbon, rye, and other whiskeys (“brown goods”) and GNS, including vodka and gin. Our distilled spirits are either sold directly or indirectly to manufacturers of other branded spirits. MGP is also a producer of high quality industrial alcohol for use in both food and non-food applications. We have a portfolio of our own high quality branded spirits, which we produce through our distilleries and bottling facilities and sell to distributors. Our branded spirits products account for a range of price points from value products through ultra premium brands, with a focus on high-end American whiskey, tequila, and gin. Our protein and starch food ingredients serve a host of functional, nutritional, and sensory benefits for a wide range of food products to serve the consumer packaged goods industry. Our ingredients products are sold directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries. 22 The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this Report, as well as our audited consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations - General, set forth in our Annual Report on Form 10-K for the year ended December 31, 2022. RESULTS OF OPERATIONS Consolidated Results The table below details the consolidated results for the quarters ended September 30, 2023 and 2022: Quarter Ended September 30, 2023 2022 2023 v. 2022 Sales $ 211,624 $ 201,146 5 % Cost of sales 138,176 142,098 (3) Gross profit 73,448 59,048 24 Gross margin % 34.7 % 29.4 % 5.3 pp (a) Advertising and promotion expenses 9,505 7,279 31 Selling, general, and administrative (“SG&A”) expenses 21,570 17,905 20 Impairment of long-lived assets and other 18,334 — N/A Change in fair value of contingent consideration 4,200 — N/A Operating income 19,839 33,864 (41) Operating margin % 9.4 % 16.8 % (7.4) pp Interest expense, net (2,353) (1,350) (74) Other expense, net (25) (1,353) 98 Income before income taxes 17,461 31,161 (44) Income tax expense 4,373 7,533 (42) Effective tax expense rate % 25.0 % 24.2 % 0.8 pp Net income $ 13,088 $ 23,628 (45) % Net income margin % 6.2 % 11.7 % (5.5) pp (a) Percentage points (“pp”). Sales - Sales for the quarter ended September 30, 2023 were $211,624, an increase of 5 percent compared to the year-ago quarter, which was the result of increased sales in the Branded Spirits, Ingredient Solutions, and Distilling Solutions segments. Within the Branded Spirits segment, sales were up 6 percent, primarily due to increased sales of brands in the ultra premium price tier. Within the Ingredient Solutions segment, sales were up 11 percent, primarily due to increased sales of specialty wheat proteins and starches. Within the Distilling Solutions segment, sales were up 3 percent, primarily due to an increase in the sales of brown goods within premium beverage alcohol (see “Segment Results”). Gross profit - Gross profit for the quarter ended September 30, 2023 was $73,448, an increase of 24 percent compared to the year-ago quarter. The increase was driven by an increase in gross profit in the Distilling Solutions, Branded Spirits, and Ingredient Solutions segments. Within the Distilling Solutions segment, gross profit increased by $7,363, or 28 percent. Within the Branded Spirits segment, gross profit increased $3,973, or 16 percent. Within the Ingredient Solutions segment, gross profit increased by $3,064, or 38 percent (see “Segment Results”). Advertising and promotion expenses - Advertising and promotion expenses for the quarter ended September 30, 2023 were $9,505, an increase of 31 percent compared to the year-ago quarter, primarily driven by increased advertising and promotion investment in the Branded Spirits segment, specifically in the premium plus price tiers. SG&A expenses - SG&A expenses for the quarter ended September 30, 2023 were $21,570, an increase of 20 percent compared to the year-ago quarter, primarily due to higher personnel expenses. 23 Operating income - Operating income for the quarter ended September 30, 2023 decreased to $19,839 from $33,864 for the quarter ended September 30, 2022, primarily due to the impairment of assets and other expenses of $18,334 related to the planned closure of the Atchison Distillery and the change in fair value of the contingent consideration of $4,200 related to the Penelope acquisition. These decreases were partially offset by increases in gross profit in all three segments. Operating income, quarter versus quarter Operating Income Change Operating income for the quarter ended September 30, 2022 $ 33,864 Increase in gross profit - Distilling Solutions segment (a) 7,363 22 % Increase in gross profit - Branded Spirits segment (a) 3,973 12 pp (b) Increase in gross profit - Ingredient Solutions segment (a) 3,064 9 pp Increase in advertising and promotion expenses (2,226) (7) pp Increase in SG&A expenses (3,665) (11) pp Impairment of long-lived assets and other (18,334) (54) pp Change in fair value of contingent consideration (4,200) (12) pp Operating income for the quarter ended September 30, 2023 $ 19,839 (41) % (a) See “Segment Results.” (b) Percentage points (“pp”). Income tax expense - Income tax expense for the quarter ended September 30, 2023 was $4,373, for an effective tax rate of 25.0 percent. Income tax expense for the quarter ended September 30, 2022 was $7,533, for an effective tax rate of 24.2 percent. The decrease in income tax expense, quarter versus quarter, was due to lower income before income taxes. Earnings per common share (“EPS”) - Basic EPS was $0.59 for the quarter ended September 30, 2023, compared to $1.07 for the quarter ended September 30, 2022. The change in basic EPS quarter versus quarter, was primarily due to a decrease in operating income. Diluted EPS was $0.58 for the quarter ended September 30, 2023, compared to $1.06 for the quarter ended September 30, 2022. The change in diluted EPS, quarter versus quarter, was primarily due to the same change as basic EPS as well as the impact of dilutive shares outstanding related to the conversion feature of the Convertible Senior Notes. Change in EPS , quarter versus quarter EPS Change Basic EPS for the quarter ended September 30, 2022 $ 1.07 Change in operating income (a) (0.48) (45) % Change in other income (expense), net (a) 0.05 5 pp (b) Change in interest expense, net (a) (0.03) (3) pp Change in effective tax rate (0.02) (2) pp Basic EPS for the quarter ended September 30, 2023 $ 0.59 (45) % Impact of dilutive shares outstanding (0.01) (1) pp Diluted EPS for the quarter ended September 30, 2023 $ 0.58 (46) % (a) Net of tax based on the effective tax rate for the base year (2022). (b) Percentage points (“pp”). 24 The table below details the consolidated results for the year to date ended September 30, 2023 and 2022: Year to Date Ended September 30, 2023 2022 2023 v. 2022 Sales $ 621,635 $ 591,363 5 % Cost of sales 402,068 401,270 — Gross profit 219,567 190,093 16 Gross margin % 35.3 % 32.1 % 3.2 pp (a) Advertising and promotion expenses 25,877 18,848 37 SG&A expenses 65,615 51,995 26 Impairment of long-lived assets and other 18,334 — N/A Change in fair value of contingent consideration 4,200 — N/A Operating income 105,541 119,250 (11) Operating margin % 17.0 % 20.2 % (3.2) pp Interest expense, net (4,630) (4,491) (3) Other income (expense), net 5 (2,361) 100 Income before income taxes 100,916 112,398 (10) Income tax expense 24,832 26,037 (5) Effective tax expense rate % 24.6 % 23.2 % 1.4 pp Net income $ 76,084 $ 86,361 (12) % Net income margin % 12.2 % 14.6 % (2.4) pp (a) Percentage points (“pp”). Sales - Sales for the year to date ended September 30, 2023 were $621,635, an increase of 5 percent compared to the year-ago period, 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 4 percent, primarily due to an increase in the sales of brown goods within premium beverage alcohol. Within the Ingredient Solutions segment, sales were up 13 percent, primarily due to increased sales across all Ingredient Solutions product lines. Within the Branded Spirits segment, sales were up 2 percent, primarily due to increased sales of brands in the ultra premium price tiers (see “Segment Results”). Gross profit - Gross profit for the year to date ended September 30, 2023 was $219,567, an increase of 16 percent compared to the year-ago period. The increase was driven by an increase in gross profit in the Distilling Solutions, Ingredient Solutions, and Branded Spirits segments. In the Distilling Solutions segment, gross profit increased by $10,356, or 11 percent. In the Ingredient Solutions segment, gross profit increased by $10,291, or 42 percent. In the Branded Spirits segment, gross profit increased by $8,827, or 12 percent (see “Segment Results”). Advertising and promotion expenses - Advertising and promotion expenses for the year to date ended September 30, 2023 were $25,877, an increase of 37 percent compared to the year-ago period, primarily driven by increased advertising and promotion investment in the Branded Spirits segment, specifically in the premium plus price tiers. SG&A expenses - SG&A expenses for the year to date ended September 30, 2023 were $65,615, an increase of 26 percent compared to the year-ago period. The increase in SG&A expenses was primarily due to higher personnel expenses and business acquisition expenses related to the acquisition of Penelope. Operating income - Operating income for the year to date ended September 30, 2023 decreased to $105,541 from $119,250 for the year to date period ended September 30, 2022, primarily due to the impairment of assets and other expenses of $18,334 related to the planned closure of the Atchison Distillery and the change in fair value of the contingent consideration of $4,200 related to the Penelope acquisition, as well as increased SG&A and advertising and promotion expenses as discussed above. These decreases were partially offset by increased gross profit in all three segments. 25 Operating income, year to date versus year to date Operating Income Change Operating income for the year to date ended September 30, 2022 $ 119,250 Increase in gross profit - Distilling Solutions segment (a) 10,356 9 % Increase in gross profit - Ingredient Solutions segment (a) 10,291 9 pp(b) Increase in gross profit - Branded Spirits segment (a) 8,827 7 pp Increase in advertising and promotion expenses (7,029) (6) pp Increase in SG&A expenses (13,620) (11) pp Impairment of long-lived assets and other (18,334) (15) pp Change in fair value of contingent consideration (4,200) (4) pp Operating income for the year to date ended September 30, 2023 $ 105,541 (11) % (a) See “Segment Results.” (b) Percentage points (“pp”). Income tax expense - Income tax expense for the year to date ended September 30, 2023 was $24,832, for an effective tax rate of 24.6 percent. Income tax expense for the year to date ended September 30, 2022, was $26,037, for an effective tax rate of 23.2 percent. The decrease in income tax expense, year to date versus year to date, was due to lower income before income taxes. Earnings per common share - Basic EPS was $3.43 for the year to date ended September 30, 2023, compared to $3.91 for the year to date ended September 30, 2022. The change in basic EPS, year to date versus year to date, was primarily due to a decrease in operating income. Diluted EPS was $3.41 for the year to date ended September 30, 2023, compared to $3.91 for the year to date ended September 30, 2022. The change in diluted EPS, year to date versus year to date, was primarily due to the same change as basic EPS as well as the impact of dilutive shares outstanding related to the conversion feature of the Convertible Senior Notes. Change in EPS, year to date versus year to date EPS Change Basic EPS for the year to date ended September 30, 2022 $ 3.91 Change in operating income (a) (0.47) (12) % Change in other income (expense), net (a) 0.08 2 pp(b) Change in effective tax rate (0.08) (2) pp Change in weighted average shares outstanding (0.01) — pp Basic EPS for the year to date ended September 30, 2023 $ 3.43 (12) % Impact of dilutive shares outstanding (0.02) (1) pp Diluted EPS for the year to date ended September 30, 2023 $ 3.41 (13) % (a) Net of tax based on the effective tax rate for the base year (2022). (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, 2023 and 2022. DISTILLING SOLUTIONS SALES Quarter Ended September 30, Quarter versus Quarter Sales Change Increase/(Decrease) 2023 2022 $ Change % Change Brown goods $ 73,409 $ 57,423 $ 15,986 28 % White goods 14,429 20,469 (6,040) (30) Premium beverage alcohol 87,838 77,892 9,946 13 Industrial alcohol 9,407 10,761 (1,354) (13) Food grade alcohol 97,245 88,653 8,592 10 Fuel grade alcohol 1,509 3,713 (2,204) (59) Distillers feed and related co-products 5,746 9,943 (4,197) (42) Warehouse services 7,353 6,335 1,018 16 Total Distilling Solutions $ 111,853 $ 108,644 $ 3,209 3 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Premium beverage alcohol 13% (15)% 28% Other Financial Information Quarter Ended September 30, Quarter versus Quarter Increase / (Decrease) 2023 2022 $ Change % Change Gross profit $ 33,280 $ 25,917 $ 7,363 28 % Gross margin % 29.8 % 23.9 % 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 the Distilling Solutions segment for the quarter ended September 30, 2023 increased by $3,209, or 3 percent, compared to the prior year quarter. Sales of brown goods within premium beverage alcohol and warehouse services increased while white goods within premium beverage alcohol, distillers feed and related co-products, fuel grade alcohol, and industrial alcohol decreased. The increase in sales of brown goods was primarily driven by higher average selling price, partially offset by decreased sales volume. This increase was partially offset by a decrease in sales of white goods, distillers feed and related co-products, fuel grade alcohol, and industrial alcohol, which was driven primarily by lower sales volume. Gross profit increased quarter versus quarter by $7,363, or 28 percent. Gross margin for the quarter ended September 30, 2023 increased to 29.8 percent from 23.9 percent for the prior year quarter. The increase in gross profit was primarily due to higher average selling price for brown goods. These increases in gross profit were partially offset by higher input costs across all product categories. 27 The following tables show selected financial information for the Distilling Solutions segment for the year to date ended September 30, 2023 and 2022. DISTILLING SOLUTIONS SALES Year to Date Ended September 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2023 2022 $ Change % Change Brown Goods $ 214,857 $ 175,899 $ 38,958 22 % White Goods 47,199 57,996 (10,797) (19) Premium beverage alcohol 262,056 233,895 28,161 12 Industrial alcohol 29,911 35,141 (5,230) (15) Food grade alcohol 291,967 269,036 22,931 9 Fuel grade alcohol 5,963 10,307 (4,344) (42) Distillers feed and related co-products 23,053 30,127 (7,074) (23) Warehouse services 20,958 17,821 3,137 18 Total Distilling Solutions $ 341,941 $ 327,291 $ 14,650 4 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Premium beverage alcohol 12% (13)% 25% Other Financial Information Year to Date Ended September 30, Year to Date versus Year to Date Increase / (Decrease) 2023 2022 $ Change % Change Gross profit $ 104,986 $ 94,630 $ 10,356 11 % Gross margin % 30.7 % 28.9 % 1.8 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 the Distilling Solutions segment for the year to date ended September 30, 2023 increased by $14,650, or 4 percent compared to the year-ago period. Sales of brown goods within premium beverage alcohol and warehouse services increased while white goods within premium beverage alcohol, distillers feed and related co-products, 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, partially offset by lower sales volume. This increase was partially offset by a decrease in sales of white goods, distillers feed and related co-products, industrial alcohol and fuel grade alcohol, which was driven primarily by lower sales volume. The decreases in white goods, distillers feed and related co-products, and industrial alcohol were partially offset by higher average selling price. Gross profit for the year to date ended September 30, 2023 increased by $10,356, or 11 percent compared to the year-ago period. Gross margin for the year to date ended September 30, 2023 increased to 30.7 percent from 28.9 percent for the prior year period. The increase in gross profit was due primarily to higher average selling price for brown goods and white goods. This increase was partially offset by higher input costs across all product categories. 28 Branded Spirits The following tables show selected financial information for the Branded Spirits segment for the quarters ended September 30, 2023 and 2022. BRANDED SPIRITS SALES Quarter Ended September 30, Quarter versus Quarter Sales Change Increase/(Decrease) 2023 2022 $ Change % Change Ultra premium $ 20,107 $ 13,804 $ 6,303 46 % Super premium 3,637 3,350 287 9 Premium 7,099 6,013 1,086 18 Premium plus 30,843 23,167 7,676 33 Mid 17,650 20,834 (3,184) (15) Value 11,049 12,097 (1,048) (9) Other 7,277 6,663 614 9 Total Branded Spirits $ 66,819 $ 62,761 $ 4,058 6 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Branded Spirits 6% (16)% 22% Other Financial Information Quarter Ended September 30, Quarter versus Quarter Increase / (Decrease) 2023 2022 $ Change % Change Gross profit $ 29,040 $ 25,067 $ 3,973 16 % Gross margin % 43.5 % 39.9 % 3.6 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 the Branded Spirits segment for the quarter ended September 30, 2023 increased by $4,058, or 6 percent compared to the prior year quarter. The increase was driven by sales of brands within the premium plus price tiers, partially offset by a decrease in sales of brands within the mid and value price tiers. The increase in sales of brands within the ultra premium price tier was primarily due to an increase in sales of our American whiskey brands, including the additional brands acquired as part of the acquisition of Penelope. The increase in sales of brands within the premium price tier was primarily due to an increase in sales of our tequila brands. These increases were partially offset by decreased sales of brands within the mid and value price tiers due to a decrease in sales volume. Gross profit increased quarter versus quarter by $3,973, or 16 percent. Gross margin for the quarter ended September 30, 2023 increased to 43.5 percent from 39.9 percent for the prior year quarter. The increase in gross profit was primarily driven by an increase in sales volume and average selling price in the ultra premium price tier. 29 The following tables show selected financial information for the Branded Spirits segment for the year to date ended September 30, 2023 and 2022. BRANDED SPIRITS SALES Year to Date Ended September 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2023 2022 $ Change % Change Ultra premium $ 43,594 $ 35,836 $ 7,758 22 % Super premium 9,614 9,522 92 1 Premium 20,144 17,928 2,216 12 Premium plus 73,352 63,286 10,066 16 Mid 55,575 63,408 (7,833) (12) Value 36,048 36,304 (256) (1) Other 16,343 14,080 2,263 16 Total Branded Spirits $ 181,318 $ 177,078 $ 4,240 2 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Branded Spirits 2% (8)% 10% Other Financial Information Year to Date Ended September 30, Year to Date versus Year to Date Increase / (Decrease) 2023 2022 $ Change % Change Gross profit $ 79,636 $ 70,809 $ 8,827 12 % Gross margin % 43.9 % 40.0 % 3.9 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 the year to date ended September 30, 2023 increased by $4,240, or 2 percent compared to the year-ago period. Sales of brands within the premium plus price tiers as well as sales within the other category increased while sales of brands within the mid and value price tiers decreased. The increase in sales of brands within the ultra premium and premium price tiers was primarily due to an increase in average selling price as well as the additional brands acquired as part of the acquisition of Penelope. Sales within the other category increased primarily due to increased sales volume of private label brands. These increases were partially offset by decreased sales of brands within the mid price tier, primarily due to decreased sales volume as a result of shifting to higher margin accretive brands within the premium plus price tiers, partially offset by an increase in average selling price. Gross profit for the year to date ended September 30, 2023 increased by $8,827, or 12 percent compared to the year-ago period. Gross margin for the year to date ended September 30, 2023 increased to 43.9 percent from 40.0 percent for the prior year. The increase in gross profit was primarily driven by an increase in average selling price in the premium plus, mid, value, and other price tiers. These increases were partially offset by increased costs in the ultra premium price tier, the other category, and mid price tiers. 30 Ingredient Solutions The following tables show selected financial information for the Ingredient Solutions segment for the quarters ended September 30, 2023 and 2022. INGREDIENT SOLUTIONS SALES Quarter Ended September 30, Quarter versus Quarter Sales Change Increase / (Decrease) 2023 2022 $ Change % Change Specialty wheat starches $ 17,196 $ 16,241 $ 955 6 % Specialty wheat proteins 11,440 9,697 1,743 18 Commodity wheat starches 4,226 3,803 423 11 Commodity wheat proteins 90 — 90 N/A Total Ingredient Solutions $ 32,952 $ 29,741 $ 3,211 11 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions 11% (8)% 19% Other Financial Information Quarter Ended September 30, Quarter versus Quarter Increase / (Decrease) 2023 2022 $ Change % Change Gross profit $ 11,128 $ 8,064 $ 3,064 38 % Gross margin % 33.8 % 27.1 % 6.7 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 the Ingredient Solutions segment for the quarter ended September 30, 2023 increased by $3,211, or 11 percent, compared to the prior year quarter, reflecting an increase across all product categories. The increase was primarily driven by higher sales of specialty wheat proteins, specialty wheat starches, and commodity wheat starches primarily due to higher average selling prices, partially offset by lower sales volume. Gross profit increased quarter versus quarter by $3,064, or 38 percent. Gross margin for the quarter ended September 30, 2023 increased to 33.8 percent from 27.1 percent for the prior year quarter. The increase in gross profit was primarily driven by higher average selling price of specialty wheat starch and proteins, partially offset by higher input costs across all product categories. 31 The following tables show selected financial information for the Ingredient Solutions segment for the year to date September 30, 2023 and 2022. INGREDIENT SOLUTIONS SALES Year to Date Ended September 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2023 2022 $ Change % Change Specialty wheat starches $ 48,977 $ 47,445 $ 1,532 3 % Specialty wheat proteins 35,918 29,225 6,693 23 Commodity wheat starches 12,870 10,286 2,584 25 Commodity wheat proteins 611 38 573 1,508 Total Ingredient Solutions $ 98,376 $ 86,994 $ 11,382 13 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions 13% (7)% 20% Other Financial Information Year to Date Ended September 30, Year to Date versus Year to Date Increase / (Decrease) 2023 2022 $ Change % Change Gross profit $ 34,945 $ 24,654 $ 10,291 42 % Gross margin % 35.5 % 28.3 % 7.2 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 sales of the Ingredient Solutions segment for the year to date ended September 30, 2023 increased by $11,382, or 13 percent, compared to the prior year period, reflecting an increase across all product categories. The increase in Ingredient Solutions sales was primarily driven by higher sales of specialty wheat proteins due to higher average selling price and higher sales volume. Additionally, sales of commodity wheat starches and specialty wheat starches increased primarily due to higher average selling price, partially offset by lower sales volume. Gross profit increased by $10,291, or 42 percent for the year to date ended September 30, 2023 compared to the prior year period. Gross margin for the year to date ended September 30, 2023 increased to 35.5 percent from 28.3 percent for the prior year period. The increase in gross profit was primarily driven by higher average selling price across all product categories, partially offset by higher input across those same product categories. 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 (see Note 6) provide the primary sources of cash to fund operating needs and capital expenditures. These same sources of cash are used to fund stockholder dividends and other discretionary uses. Our overall liquidity reflects our strong business results and an effective cash management strategy that takes into account liquidity management, economic factors, and tax considerations. We expect our sources of cash to be adequate to provide for budgeted capital expenditures, potential mergers or acquisitions, and anticipated operating requirements for the next 12 months and beyond. Cash Flow Summary Year to Date Ended September 30, Changes, year versus year Increase / (Decrease) 2023 2022 Cash provided by operating activities $ 48,605 $ 72,253 $ (23,648) Cash used in investing activities (146,690) (31,764) (114,926) Cash provided by (used in) financing activities 78,193 (11,301) 89,494 Effect of exchange rate changes on cash 33 (82) 115 Increase (decrease) in cash and cash equivalents $ (19,859) $ 29,106 $ (48,965) Cash decreased $19,859 for the year to date ended September 30, 2023, compared to an increase of $29,106 for the year to date ended September 30, 2022, for a net decrease in cash of $48,965, period versus period. Operating Activities. Cash provided by operating activities for the year to date ended September 30, 2023 was $48,605. The cash provided by operating activities resulted primarily from net income of $76,084, adjustments for non-cash or non-operating charges of $42,912, including impairment of long-lived assets and other, depreciation and amortization, share-based compensation, and the change in fair value of contingent consideration, partially offset by cash used in operating assets and liabilities, net of the effects of acquisition, of $70,391. The primary drivers of the changes in operating assets and liabilities were $42,015 use of cash related to an increase in inventories, primarily due to an increase in barreled distillate, $14,980 use of cash related to increased accounts receivable, net due to timing of sales and customer payments during the quarter, and $10,069 use of cash related to a decrease in accounts payable due to timing of payments. Cash provided by operating activities for the 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. Investing Activities. Cash used in investing activities for the year to date ended September 30, 2023 was $146,690, which primarily resulted from $103,712 related to the acquisition of Penelope, net of cash acquired, and additions to property, plant, and equipment of $42,062 (see “Capital Spending”). Cash used in investing activities for the 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”). Capital Spending. We manage capital spending to support our business growth plans. We have incurred $36,879 and $28,524 of capital expenditures and have paid $42,062 and $29,217 for capital expenditures for the year to date ended September 30, 2023 and 2022, 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 $63,000 in capital expenditures in 2023, which includes capital expenditures for facility improvement and expansion, facility sustaining projects, environmental health and safety projects, as well as the planned closure of the Atchison Distillery. 33 Financing Activities. Cash provided by financing activities for the year to date ended September 30, 2023 was $78,193, due to net proceeds on debt of $87,000 (see “Long-Term and Short-Term Debt”), partially offset by payments of dividends and dividend equivalents of $8,006 (see “Dividends and Dividend Equivalents”), and purchases of treasury stock of $801 (see “Treasury Purchases”). Cash used in financing activities for the 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”). Treasury Purchases. 22,592 RSUs vested and converted to shares of common stock for employees during the year to date ended September 30, 2023, of which we withheld and purchased for treasury 8,437 shares valued at $801 to cover payment of associated withholding taxes. 29,366 RSUs vested and converted to shares of common stock for employees during the 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. 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) 2023 February 23, 2023 March 10, 2023 March 24, 2023 $ 0.12 $ 0.12 $ 2,640 $ 29 $ 2,669 May 4, 2023 May 19, 2023 June 2, 2023 0.12 0.12 2,641 27 2,668 August 3, 2023 August 18, 2023 September 1, 2023 0.12 0.12 2,642 27 2,669 $ 0.36 $ 0.36 $ 7,923 $ 83 $ 8,006 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 (a) Dividend equivalent payments on unvested participating securities. (b) Includes estimated forfeitures. (c) Per share amount. On November 2, 2023, we announced a dividend payable to stockholders of record of our common stock, resulting in dividend equivalents payable to certain RSU holders, of $0.12 per share and per RSU. The dividend and dividend equivalent are payable on December 1, 2023 to stockholders of record and certain RSU holders on November 17, 2023. Long-Term and Short-Term Debt. We maintain debt levels we consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment and financing plans (including brand development, merger and acquisition, and share repurchase activities), and the overall cost of capital. Total debt was $316,677 (net of unamortized loan fees of $6,773) at September 30, 2023, and $230,335 (net of unamortized loan fees of $6,115) at December 31, 2022. 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, 2023, we met those covenants and restrictions. 34 At September 30, 2023, our current assets exceeded our current liabilities by $413,808, largely due to our inventories, at cost, of $342,401. At September 30, 2023, our cash balance was $28,030 and we have used our various debt agreements for liquidity purposes, with $309,000 available under our Credit Agreement for additional borrowings and $218,800 available under the Note Purchase Agreement (see Note 6). We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We regularly assess our cash needs and the available sources to fund these needs. We utilize short-term and long-term debt to fund discretionary items, such as capital investments, dividend payments, and potential mergers and acquisitions. Subject to market conditions, we could also fund future mergers and acquisitions through the issuance of additional shares of our common stock or preferred 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.