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 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, 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. OVERVIEW MGP is a leading producer of branded and distilled spirits as well as food ingredient solutions. Distilled spirits include premium bourbon, rye, and other whiskeys (“brown goods”) and grain neutral spirits (“GNS”), including vodka and gin (“white goods and other co-products”). Our distilled spirits are either sold directly or indirectly to manufacturers of other branded spirits. 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 premium plus brands. 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. 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, 2023. 21 RESULTS OF OPERATIONS Consolidated Results The table below details the consolidated results for the quarters ended June 30, 2024 and 2023: Quarter Ended June 30, 2024 2023 2024 v. 2023 Sales $ 190,805 $ 209,001 (9) % Cost of sales 107,573 132,706 (19) Gross profit 83,232 76,295 9 Gross margin % 43.6 % 36.5 % 7.1 pp (a) Advertising and promotion expenses 11,665 8,639 35 Selling, general, and administrative (“SG&A”) expenses 22,759 23,513 (3) Impairment of long-lived assets and other 21 — N/A Change in fair value of contingent consideration 5,400 — N/A Operating income 43,387 44,143 (2) Operating margin % 22.7 % 21.1 % 1.6 pp Interest expense, net (2,205) (1,282) (72) Other income (expense), net 943 (93) 1,114 Income before income taxes 42,125 42,768 (2) Income tax expense 10,108 10,804 (6) Effective tax expense rate % 24.0 % 25.3 % (1.3) pp Net income $ 32,017 $ 31,964 — % Net income margin % 16.8 % 15.3 % 1.5 pp (a) Percentage points (“pp”). Sales - Sales for the quarter ended June 30, 2024 were $190,805, a decrease of 9 percent compared to the year-ago quarter, which was the result of decreased sales in the Distilling Solutions and Ingredient Solution segments, partially offset by increased sales in the Branded Spirits segment. Within the Distilling Solutions segment, sales were down 20 percent due to decreased sales of white goods and other co-products in connection with the December 2023 closure of our distillery located in Atchison, Kansas (the “Atchison Distillery”). Within the Ingredient Solutions segment, sales were down 3 percent, primarily due to decreased sales of commodity wheat starches and specialty wheat proteins. Within the Branded Spirits segment, sales were up 11 percent, primarily due to increased sales of brands in the premium plus price tier (see “Segment Results”). Gross profit - Gross profit for the quarter ended June 30, 2024 was $83,232, an increase of 9 percent compared to the year-ago quarter. The increase was driven by an increase in gross profit in the Branded Spirits and Distilling Solutions segments, partially offset by a decrease in gross profit in the Ingredient Solutions segment. Within the Branded Spirits segment, gross profit increased $7,630, or 29 percent. Within the Distilling Solutions segment, gross profit increased by $3,795, or 10 percent Within the Ingredient Solutions segment, gross profit decreased by $4,488, or 39 percent (see “Segment Results”). Advertising and promotion expenses - Advertising and promotion expenses for the quarter ended June 30, 2024 were $11,665, an increase of 35 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 tier. SG&A expenses - SG&A expenses for the quarter ended June 30, 2024 were $22,759, a slight decrease of 3 percent compared to the year-ago quarter. 22 Operating income - Operating income for the quarter ended June 30, 2024 decreased to $43,387 from $44,143 for the quarter ended June 30, 2023, primarily due to the change in fair value of the contingent consideration of $5,400 related to the acquisition of Penelope, the decrease in gross profit in the Ingredient Solutions segment, and the increase in advertising and promotion expense. These decreases were partially offset by an increase in gross profit in the Branded Spirits and Distilling Solutions segments, and lower SG&A expenses. Operating income, quarter versus quarter Operating Income Change Operating income for the quarter ended June 30, 2023 $ 44,143 Decrease in gross profit - Ingredient Solutions segment (a) (4,488) (10) % Increase in gross profit - Branded Spirits segment (a) 7,630 17 pp (b) Increase in gross profit - Distilling Solutions segment (a) 3,795 9 pp Increase in advertising and promotion expenses (3,026) (7) pp Decrease in SG&A expenses 754 2 pp Impairment of long-lived assets and other (21) (1) pp Change in fair value of contingent consideration (5,400) (12) pp Operating income for the quarter ended June 30, 2024 $ 43,387 (2) % (a) See “Segment Results.” (b) Percentage points (“pp”). Income tax expense - Income tax expense for the quarter ended June 30, 2024 was $10,108, for an effective tax rate of 24.0 percent. Income tax expense for the quarter ended June 30, 2023 was $10,804, for an effective tax rate of 25.3 percent. The decrease in income tax expense, quarter versus quarter, was due to lower income before income taxes. The decrease in effective tax rate, quarter versus quarter, was primarily due to larger tax credits than in the prior year quarter. Earnings per common share (“EPS”) - Basic and Diluted EPS was $1.43 for the quarter ended June 30, 2024, compared to $1.44 for the quarter ended June 30, 2023. The change in basic and diluted EPS, quarter versus quarter, was primarily due to a decrease in operating income, increase in interest expense, net, partially offset by an increase in other income (expense), net. Change in EPS, quarter versus quarter EPS Change Basic and Diluted EPS for the quarter ended June 30, 2023 $ 1.44 Change in operating income (a) (0.03) (2) % Change in interest expense, net (a) (0.03) (2) pp (b) Change in other income (expense), net (a) 0.04 3 pp Change in effective tax rate 0.02 1 pp Change in weighted average shares outstanding (0.01) (1) pp Basic and Diluted EPS for the quarter ended June 30, 2024 $ 1.43 (1) % (a) Net of tax based on the effective tax rate for the base year (2023). (b) Percentage points (“pp”). 23 The table below details the consolidated results for the year to date ended June 30, 2024 and 2023: Year to Date Ended June 30, 2024 2023 2024 v. 2023 Sales $ 361,368 $ 410,011 (12) % Cost of sales 215,341 263,892 (18) Gross profit 146,027 146,119 — Gross margin % 40.4 % 35.6 % 4.8 pp (a) Advertising and promotion expenses 20,348 16,372 24 SG&A expenses 43,738 44,045 (1) Impairment of long-lived assets and other 137 — N/A Change in fair value of contingent consideration 9,500 — N/A Operating income 72,304 85,702 (16) Operating margin % 20.0 % 20.9 % (0.9) pp Interest expense, net (4,224) (2,277) (86) Other income, net 891 30 2,870 Income before income taxes 68,971 83,455 (17) Income tax expense 16,370 20,459 (20) Effective tax expense rate % 23.7 % 24.5 % (0.8) pp Net income $ 52,601 $ 62,996 (17) % Net income margin % 14.6 % 15.4 % (0.8) pp (a) Percentage points (“pp”). Sales - Sales for the year to date ended June 30, 2024 were $361,368, a decrease of 12 percent compared to the year-ago period, which was the result of decreased sales in the Distilling Solutions segment, partially offset by increased sales in the Ingredient Solutions segment. Sales of Branded Spirits were consistent with sales from the year ago period. Within the Distilling Solutions segment, sales were down 23 percent due to decreased sales of white goods and other co-products in connection with the December 2023 closure of the Atchison Distillery. Within the Ingredient Solutions segment, sales were up 5 percent, primarily due to increased sales of specialty wheat starches (see “Segment Results”). Gross profit - Gross profit for the year to date ended June 30, 2024 was $146,027, which was consistent with the year-ago period. In the Branded Spirits segment, gross profit increased by $5,569, or 11 percent. In the Distilling Solutions segment, gross profit increased by $4,850, or 7 percent. In the Ingredient Solutions segment, gross profit decreased by $10,511, or 44 percent (see “Segment Results”). Advertising and promotion expenses - Advertising and promotion expenses for the year to date ended June 30, 2024 were $20,348, an increase of 24 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 tier. SG&A expenses - SG&A expenses for the year to date ended June 30, 2024 were $43,738, a slight decrease of 1 percent compared to the year-ago period. Operating income - Operating income for the year to date ended June 30, 2024 decreased to $72,304 from $85,702 for the year to date period ended June 30, 2023, primarily due to the decrease in gross profit in the Ingredient Solutions segment, the change in fair value of the contingent consideration of $9,500 related to the Penelope acquisition, and the increase in advertising and promotion expense. These decreases were partially offset by increased gross profit in the Branded Spirits and Distilling Solutions segments. 24 Operating income, year to date versus year to date Operating Income Change Operating income for the year to date ended June 30, 2023 $ 85,702 Decrease in gross profit - Ingredient Solutions segment (a) (10,511) (12) % Increase in gross profit - Branded Spirits segment (a) 5,569 7 pp(b) Increase in gross profit - Distilling Solutions segment (a) 4,850 6 pp Increase in advertising and promotion expenses (3,976) (5) pp Decrease in SG&A expenses 307 — pp Impairment of long-lived assets and other (137) — pp Change in fair value of contingent consideration (9,500) (11) pp Operating income for the year to date ended June 30, 2024 $ 72,304 (16) % (a) See “Segment Results.” (b) Percentage points (“pp”). Income tax expense - Income tax expense for the year to date ended June 30, 2024 was $16,370, for an effective tax rate of 23.7 percent. Income tax expense for the year to date ended June 30, 2023, was $20,459, for an effective tax rate of 24.5 percent. The decrease in income tax expense, year to date versus year to date, was due to lower income before income taxes. The decrease in effective tax rate, year versus year, was primarily due to larger tax credits than in the prior year period. Earnings per common share - Basic EPS was $2.36 for the year to date ended June 30, 2024, compared to $2.84 for the year to date ended June 30, 2023. The change in basic EPS, year to date versus year to date, was primarily due to a decrease in operating income. Diluted EPS was $2.36 for the year to date ended June 30, 2024, compared to $2.83 for the year to date ended June 30, 2023. 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 June 30, 2023 $ 2.84 Change in operating income (a) (0.46) (16) % Change in interest expense, net (a) (0.07) (2) pp(b) Change in other income (expense), net (a) 0.03 1 pp Change in effective tax rate 0.03 1 pp Change in weighted average shares outstanding (0.01) — pp Basic and Diluted EPS for the year to date ended June 30, 2024 $ 2.36 (17) % (a) Net of tax based on the effective tax rate for the base year (2023). (b) Percentage points (“pp”) 25 SEGMENT RESULTS Distilling Solutions The following tables show selected financial information for the Distilling Solutions segment for the quarters ended June 30, 2024 and 2023. DISTILLING SOLUTIONS SALES Quarter Ended June 30, Quarter versus Quarter Sales Change Increase/(Decrease) 2024 2023 $ Change % Change Brown goods $ 75,443 $ 73,124 $ 2,319 3 % Warehouse services 8,392 6,747 1,645 24 White goods and other co-products 9,553 36,994 (27,441) (74) Total Distilling Solutions $ 93,388 $ 116,865 $ (23,477) (20) % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Brown goods 3% 21% (18)% Other Financial Information Quarter Ended June 30, Quarter versus Quarter Increase / (Decrease) 2024 2023 $ Change % Change Gross profit $ 42,473 $ 38,678 $ 3,795 10 % Gross margin % 45.5 % 33.1 % 12.4 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) Net 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 June 30, 2024 decreased by $23,477, or 20 percent, compared to the prior year quarter. The decrease in sales of the Distilling Solutions segment is primarily related to the decrease in sales volume of white goods and other co-products, which was primarily due to the closure of the Atchison Distillery during December 2023. Sales of brown goods increased primarily due to an increase in sales volume, partially offset by a decrease in net price/mix (as defined in the table above). Gross profit increased quarter versus quarter by $3,795, or 10 percent. Gross margin for the quarter ended June 30, 2024 increased to 45.5 percent from 33.1 percent for the prior year quarter. The increase in gross profit was primarily due to the positive impact the closure of the Atchison Distillery had on white goods and other co-products’ gross profit. The increase was also due to an increase in warehouse service sales and brown goods sales. 26 The following tables show selected financial information for the Distilling Solutions segment for the year to date ended June 30, 2024 and 2023. DISTILLING SOLUTIONS SALES Year to Date Ended June 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2024 2023 $ Change % Change Brown goods $ 141,774 $ 141,448 $ 326 — % Warehouse services 16,348 13,605 2,743 20 White goods and other co-products 20,118 75,035 (54,917) (73) Total Distilling Solutions $ 178,240 $ 230,088 $ (51,848) (23) % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Brown goods —% 15% (15)% Other Financial Information Year to Date Ended June 30, Year to Date versus Year to Date Increase / (Decrease) 2024 2023 $ Change % Change Gross profit $ 76,556 $ 71,706 $ 4,850 7 % Gross margin % 43.0 % 31.2 % 11.8 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) Net 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 June 30, 2024 decreased by $51,848, or 23 percent compared to the year-ago period. The decrease in sales of the Distilling Solutions segment is primarily related to the decrease in sales volume of white goods and other co-products, which was primarily due to the closure of the Atchison Distillery during December 2023. This decrease was partially offset by increased sales of warehouse services. Brown goods sales were consistent with prior year, with increased sales volume largely offset by a decrease in net price/mix (as defined in table above). Gross profit for the year to date ended June 30, 2024 increased by $4,850, or 7 percent compared to the year-ago period. Gross margin for the year to date ended June 30, 2024 increased to 43.0 percent from 31.2 percent for the prior year period. The increase in gross profit was primarily due to the positive impact the closure of the Atchison Distillery had on white goods and other co-products’ gross profit. Additionally, the increase was also due to an increase in warehouse service sales and brown goods sales. 27 Branded Spirits The following tables show selected financial information for the Branded Spirits segment for the quarters ended June 30, 2024 and 2023. BRANDED SPIRITS SALES Quarter Ended June 30, Quarter versus Quarter Sales Change Increase/(Decrease) 2024 2023 $ Change % Change Premium plus $ 30,707 $ 23,763 $ 6,944 29 % Mid 17,061 17,090 (29) — Value 11,655 11,578 77 1 Other 4,618 5,185 (567) (11) Total Branded Spirits $ 64,041 $ 57,616 $ 6,425 11 % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Branded Spirits 11% 6% 5% Other Financial Information Quarter Ended June 30, Quarter versus Quarter Increase / (Decrease) 2024 2023 $ Change % Change Gross profit $ 33,633 $ 26,003 $ 7,630 29 % Gross margin % 52.5 % 45.1 % 7.4 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) Net 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 June 30, 2024 increased by $6,425, or 11 percent compared to the prior year quarter. The increase was driven by sales of brands within the premium plus price tier partially offset by a decrease in sales of the other price tier. Mid and value sales were consistent with the prior year quarter. The increase in sales of brands within the premium plus price tier was primarily due to the acquisition of Penelope as well as increased sales volume of certain tequila brands. Gross profit increased quarter versus quarter by $7,630, or 29 percent. Gross margin for the quarter ended June 30, 2024 increased to 52.5 percent from 45.1 percent for the prior year quarter. The increase in gross profit was primarily driven by increased gross profit due to the acquisition of Penelope as well as increased sales of certain tequila brands. 28 The following tables show selected financial information for the Branded Spirits segment for the year to date ended June 30, 2024 and 2023. BRANDED SPIRITS SALES Year to Date Ended June 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2024 2023 $ Change % Change Premium plus $ 51,613 $ 42,509 $ 9,104 21 % Mid 31,822 37,925 (6,103) (16) Value 21,664 24,999 (3,335) (13) Other 9,088 9,066 22 — Total Branded Spirits $ 114,187 $ 114,499 $ (312) — % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Branded Spirits —% (9)% 9% Other Financial Information Year to Date Ended June 30, Year to Date versus Year to Date Increase / (Decrease) 2024 2023 $ Change % Change Gross profit $ 56,165 $ 50,596 $ 5,569 11 % Gross margin % 49.2 % 44.2 % 5.0 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) Net 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 June 30, 2024 remained consistent with the year-ago period. The increase in sales of brands within the premium plus price tier was primarily due to the acquisition of Penelope, partially offset by a planned decrease in allocated single barrel premium plus offerings. This increase was offset by decreased sales volume of brands within the mid and value price tiers which was primarily a result of the distributor realignment in 2023 which resulted in increased sales volume in these price tiers during the prior year period. Gross profit for the year to date ended June 30, 2024 increased by $5,569, or 11 percent compared to the year-ago period. Gross margin for the year to date ended June 30, 2024 increased to 49.2 percent from 44.2 percent. The increase in gross profit was primarily driven by the acquisition of Penelope. The increase was partially offset by a decrease in sales volume in the mid and value price tiers as well as an increase in costs incurred in connection with the completion of the Lux Row distillery expansion. 29 Ingredient Solutions The following tables show selected financial information for the Ingredient Solutions segment for the quarters ended June 30, 2024 and 2023. INGREDIENT SOLUTIONS SALES Quarter Ended June 30, Quarter versus Quarter Sales Change Increase / (Decrease) 2024 2023 $ Change % Change Specialty wheat starches $ 19,203 $ 17,095 $ 2,108 12 % Specialty wheat proteins 11,200 12,588 (1,388) (11) Commodity wheat starches 2,973 4,837 (1,864) (39) Commodity wheat proteins — — — N/A Total Ingredient Solutions $ 33,376 $ 34,520 $ (1,144) (3) % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions (3)% 2% (5)% Other Financial Information Quarter Ended June 30, Quarter versus Quarter Increase / (Decrease) 2024 2023 $ Change % Change Gross profit $ 7,126 $ 11,614 $ (4,488) (39) % Gross margin % 21.4 % 33.6 % (12.2) 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) Net 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 June 30, 2024 decreased by $1,144, or 3 percent, compared to the prior year quarter. The decrease was primarily driven by decreased sales volume and net price/mix of commodity wheat starches and specialty wheat proteins. These decreases were partially offset by higher sales volume of specialty wheat starches. Gross profit decreased quarter versus quarter by $4,488, or 39 percent. Gross margin for the quarter ended June 30, 2024 decreased to 21.4 percent from 33.6 percent for the prior year quarter. The decrease in gross profit was primarily driven by higher input costs across all product categories. The increase in input costs is driven primarily by the removal of the intercompany credit for the waste starch slurry by-product since the closure of the Atchison Distillery, as well as other costs incurred to ready the waste starch for commercial sale. Additionally, we incurred incremental costs for the new extrusion manufacturing facility during the quarter. 30 The following tables show selected financial information for the Ingredient Solutions segment for the year to date June 30, 2024 and 2023. INGREDIENT SOLUTIONS SALES Year to Date Ended June 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2024 2023 $ Change % Change Specialty wheat starches $ 41,474 $ 31,781 $ 9,693 30 % Specialty wheat proteins 21,195 24,478 (3,283) (13) Commodity wheat starches 6,235 8,644 (2,409) (28) Commodity wheat proteins 37 521 (484) (93) Total Ingredient Solutions $ 68,941 $ 65,424 $ 3,517 5 % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions 5% 11% (6)% Other Financial Information Year to Date Ended June 30, Year to Date versus Year to Date Increase / (Decrease) 2024 2023 $ Change % Change Gross profit $ 13,306 $ 23,817 $ (10,511) (44) % Gross margin % 19.3 % 36.4 % (17.1) 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) Net 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 June 30, 2024 increased by $3,517, or 5 percent, compared to the prior year period. The increase was primarily driven by higher sales volume of specialty wheat starches. This increase was partially offset by a decrease in sales volume and average selling price of specialty wheat proteins and commodity wheat starches. Gross profit decreased by $10,511, or 44 percent for the year to date ended June 30, 2024 compared to the prior year period. Gross margin for the year to date ended June 30, 2024 decreased to 19.3 percent from 36.4 percent for the prior year period. The decrease in gross profit was primarily driven by higher input costs across all product categories. The increase in input costs is driven primarily by the removal of the intercompany credit for the waste starch slurry by-product since the closure of the Atchison Distillery, as well as other costs incurred to ready the waste starch for commercial sale. Additionally, we incurred incremental costs for the new extrusion manufacturing facility during the year to date period. 31 CASH FLOW, FINANCIAL CONDITION, AND LIQUIDITY We believe our financial condition continues to be of high quality, as evidenced by our ability to generate adequate cash from operations while having ready access to capital at competitive rates. Operating cash flow and borrowings through our Credit Agreement, Convertible Senior Notes, and Note Purchase Agreement (see Note 5, Corporate Borrowings) 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 June 30, Changes, year versus year Increase / (Decrease) 2024 2023 Net cash provided by operating activities $ 29,582 $ 20,156 $ 9,426 Net cash used in investing activities (33,657) (135,589) 101,932 Net cash provided by financing activities 6,721 89,462 (82,741) Effect of exchange rate changes on cash (23) 41 (64) Increase (decrease) in cash and cash equivalents $ 2,623 $ (25,930) $ 28,553 Cash increased $2,623 for the year to date ended June 30, 2024, compared to a decrease of $25,930 for the year to date ended June 30, 2023, for a net increase in cash of $28,553, period versus period. Operating Activities. Cash provided by operating activities for the year to date ended June 30, 2024 was $29,582. The cash provided by operating activities resulted primarily from net income of $52,601, adjustments for non-cash or non-operating charges of $21,745, including depreciation and amortization, the change in fair value of contingent consideration, and share-based compensation, partially offset by cash used in operating assets and liabilities of $44,764. The primary drivers of the changes in operating assets and liabilities were $14,766 use of cash related to increased accounts receivables net, due to the timing of sales and customer payments during the year to date period, $11,754 use of cash related to an increase in inventories, primarily due to an increase in barreled distillate, $10,738 use of cash related to accrued expenses and other, which related to the incentive compensation payout during the year to date period, and $6,345 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 June 30, 2023 was $20,156. The cash provided by operating activities resulted primarily from net income of $62,996, adjustments for non-cash or non-operating charges of $17,041, including depreciation and amortization and share-based compensation, partially offset by cash used in operating assets and liabilities, net of the effects of acquisition, of $59,881. The primary drivers of the changes in operating assets and liabilities were $41,020 use of cash related to an increase in inventories, primarily due to an increase in barreled distillate and finished goods inventory, $35,833 use of cash related to increased accounts receivable, net due to timing of sales and customer payments during the quarter, and $7,048 use of cash related to a decrease in accrued expenses and other, primarily due to incentive compensation expense. These uses of cash were partially offset, primarily by $22,328 cash provided by an increase in accounts payable due to timing of payments. Investing Activities. Cash used in investing activities for the year to date ended June 30, 2024 was $33,657, which primarily resulted from additions to property, plant, and equipment of $33,397 (see “Capital Spending”). Cash used in investing activities for the year to date ended June 30, 2023 was $135,589, which primarily resulted from $104,398 related to the acquisition of Penelope, net of cash acquired, and additions to property, plant, and equipment of $30,055 (see “Capital Spending”). Capital Spending. We manage capital spending to support our business growth plans. We have incurred $22,560 and $23,863 of capital expenditures and have paid $33,397 and $30,055 for capital expenditures for the year to date ended June 30, 2024 and 2023, 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 $85,800 in capital expenditures in 2024, which includes capital expenditures for facility improvement and expansion, facility sustaining projects, and environmental health and safety projects. 32 Financing Activities. Cash provided by financing activities for the year to date ended June 30, 2024 was $6,721, due to net proceeds on debt of $21,800 (see “Long-Term and Short-Term Debt”), partially offset by repurchases of Common Stock of $9,735 (see “Treasury Purchases” and “Share Repurchase”), and payments of dividends and dividend equivalents of $5,344 (see “Dividends and Dividend Equivalents”). Cash provided by financing activities for the year to date ended June 30, 2023 was $89,462, due to net proceeds on debt of $95,600 (see “Long-Term and Short-Term Debt”), partially offset by payments of dividends and dividend equivalents of $5,337 (see “Dividends and Dividend Equivalents”), and repurchase of Common Stock of $801 (see “Treasury Purchases”). Treasury Purchases. 81,942 RSUs vested and converted to shares of Common Stock for employees during the year to date ended June 30, 2024, of which we withheld and purchased for treasury 25,521 shares valued at $2,185 to cover payment of associated withholding taxes. 22,592 RSUs vested and converted to shares of Common Stock for employees during the year to date ended June 30, 2023, of which we withheld and purchased for treasury 8,437 shares valued at $801 to cover payment of associated withholding taxes. Share Repurchase. On February 29, 2024, we announced that our Board of Directors approved a $100,000 share repurchase program. Under the share repurchase program, we can repurchase Common Stock from time to time for cash in open market purchases, privately negotiated transactions, or by other means, in accordance with applicable securities laws and other legal requirements. The repurchase program has no expiration date and may be modified, suspended, or discontinued at any time by the Company without prior notice. During the year to date ended June 30, 2024, we repurchased 92,447 shares of Common Stock for approximately $7,500, resulting in approximately $92,500 remaining under the share repurchase program. 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) 2024 February 22, 2024 March 15, 2024 March 29, 2024 $ 0.12 $ 0.12 $ 2,641 $ 31 $ 2,672 May 2, 2024 May 17, 2024 May 31, 2024 0.12 0.12 2,642 30 2,672 $ 0.24 $ 0.24 $ 5,283 $ 61 $ 5,344 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 $ 0.24 $ 0.24 $ 5,281 $ 56 $ 5,337 (a) Dividend equivalent payments on unvested participating securities. (b) Includes estimated forfeitures. (c) Per share amount. On August 1, 2024, we announced a dividend payable to stockholders of record of our Common Stock, resulting in dividend equivalents payable to RSU holders, of $0.12 per share and per RSU. The dividend and dividend equivalent are payable on August 30, 2024 to stockholders of record and RSU holders on August 16, 2024. 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 $309,396 (net of unamortized loan fees of $6,254) at June 30, 2024, and $287,249 (net of unamortized loan fees of $6,601) at December 31, 2023. 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. 33 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, 2024, we met those covenants and restrictions. At June 30, 2024, our current assets exceeded our current liabilities by $461,609, largely due to our inventories, at cost, of $358,567. At June 30, 2024, our cash balance was $21,011 and we have used our various debt agreements for liquidity purposes, with $312,000 available under our Credit Agreement for additional borrowings and $223,600 available under the Note Purchase Agreement (see Note 5, Corporate Borrowings). We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We regularly assess our cash needs and the available sources to fund these needs. 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 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.