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, our Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 2024, 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 September 30, 2024 and 2023: Quarter Ended September 30, 2024 2023 2024 v. 2023 Sales $ 161,461 $ 211,624 (24) % Cost of sales 95,646 138,176 (31) Gross profit 65,815 73,448 (10) Gross margin % 40.8 % 34.7 % 6.1 pp (a) Advertising and promotion expenses 9,647 9,505 1 Selling, general, and administrative (“SG&A”) expenses 17,204 21,570 (20) Impairment of long-lived assets and other — 18,334 N/A Change in fair value of contingent consideration 6,400 4,200 52 Operating income 32,564 19,839 64 Operating margin % 20.2 % 9.4 % 10.8 pp Interest expense, net (2,174) (2,353) 8 Other income (expense), net 1,026 (25) 4,204 Income before income taxes 31,416 17,461 80 Income tax expense 7,554 4,373 73 Effective tax expense rate % 24.0 % 25.0 % (1.0) pp Net income $ 23,862 $ 13,088 82 % Net income margin % 14.8 % 6.2 % 8.6 pp (a) Percentage points (“pp”). Sales - Sales for the quarter ended September 30, 2024 were $161,461, a decrease of 24 percent compared to the year-ago quarter, which was the result of decreased sales in each segment. Within the Distilling Solutions segment, sales were down 36 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”), as well as decreased brown goods sales. Within the Ingredient Solutions segment, sales were down 18 percent, due to decreased sales of specialty wheat proteins, commodity wheat starches, and specialty wheat starches. Within the Branded Spirits segment, sales were down 6 percent, primarily due to decreased sales of brands in the mid and value price tiers (see “Segment Results”). Gross profit - Gross profit for the quarter ended September 30, 2024 was $65,815, a decrease of 10 percent compared to the year-ago quarter. The decrease was driven by a decrease in gross profit in the Ingredient Solutions and Distilling Solutions segments, partially offset by an increase in gross profit in the Branded Spirits segment. Within the Ingredient Solutions segment, gross profit decreased by $6,403, or 58 percent. Within the Distilling Solutions segment, gross profit declined by $4,636, or 14 percent. Within the Branded Spirits segment, gross profit increased $3,406, or 12 percent (see “Segment Results”). Advertising and promotion expenses - Advertising and promotion expenses for the quarter ended September 30, 2024 were $9,647, a slight increase of 1 percent compared to the year-ago quarter. SG&A expenses - SG&A expenses for the quarter ended September 30, 2024 were $17,204, a decrease of 20 percent compared to the year-ago quarter. The decrease in SG&A expenses was primarily due to reduced incentive compensation expenses. 22 Operating income - Operating income for the quarter ended September 30, 2024 increased to $32,564 from $19,839 for the quarter ended September 30, 2023, primarily as a result of the 2023 impairment of long-lived assets and other expenses of $18,334 related to the closure of the Atchison Distillery that did not recur during the quarter ended September 30, 2024. Additionally, the increase in operating income was due to the lower SG&A expenses and the increase in gross profit in the Branded Spirits segment. These increases were partially offset by decreases in gross profit in the Ingredient Solutions and Distilling Solutions segments. Operating income, quarter versus quarter Operating Income Change Operating income for the quarter ended September 30, 2023 $ 19,839 Increase in gross profit - Branded Spirits segment (a) 3,406 17 % Decrease in gross profit - Ingredient Solutions segment (a) (6,403) (32) pp (b) Decrease in gross profit - Distilling Solutions segment (a) (4,636) (23) pp Increase in advertising and promotion expenses (142) (1) pp Decrease in SG&A expenses 4,366 22 pp Impairment of long-lived assets and other 18,334 92 pp Change in fair value of contingent consideration (2,200) (11) pp Operating income for the quarter ended September 30, 2024 $ 32,564 64 % (a) See “Segment Results.” (b) Percentage points (“pp”). Income tax expense - Income tax expense for the quarter ended September 30, 2024 was $7,554, for an effective tax rate of 24.0 percent. Income tax expense for the quarter ended September 30, 2023 was $4,373, for an effective tax rate of 25.0 percent. The increase in income tax expense, quarter versus quarter, was due to higher income before income taxes. The decrease in effective tax rate, quarter versus quarter, was primarily due to larger tax credits than in the prior year. Earnings per common share (“EPS”) - Basic and Diluted EPS was $1.07 for the quarter ended September 30, 2024, compared to $0.59 and $0.58, respectively for the quarter ended September 30, 2023. The change in basic and diluted EPS, quarter versus quarter, was primarily due to an increase in operating income and the change in other income (expense), net. Change in EPS, quarter versus quarter EPS Change Basic EPS for the quarter ended September 30, 2023 $ 0.59 Change in operating income (a) 0.43 73 % Change in interest expense, net (a) 0.01 2 pp (b) Change in other income (expense), net (a) 0.04 7 pp Change in effective tax rate 0.01 2 pp Change in weighted average shares outstanding (0.01) (2) pp Basic and Diluted EPS for the quarter ended September 30, 2024 $ 1.07 82 % (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 September 30, 2024 and 2023: Year to Date Ended September 30, 2024 2023 2024 v. 2023 Sales $ 522,829 $ 621,635 (16) % Cost of sales 310,987 402,068 (23) Gross profit 211,842 219,567 (4) Gross margin % 40.5 % 35.3 % 5.2 pp (a) Advertising and promotion expenses 29,995 25,877 16 SG&A expenses 60,942 65,615 (7) Impairment of long-lived assets and other 137 18,334 (99) Change in fair value of contingent consideration 15,900 4,200 279 Operating income 104,868 105,541 (1) Operating margin % 20.1 % 17.0 % 3.1 pp Interest expense, net (6,398) (4,630) (38) Other income, net 1,917 5 38,240 Income before income taxes 100,387 100,916 (1) Income tax expense 23,924 24,832 (4) Effective tax expense rate % 23.8 % 24.6 % (0.8) pp Net income $ 76,463 $ 76,084 — % Net income margin % 14.6 % 12.2 % 2.4 pp (a) Percentage points (“pp”). Sales - Sales for the year to date ended September 30, 2024 were $522,829, a decrease of 16 percent compared to the year-ago period, which was the result of decreased sales in each segment. Within the Distilling Solutions segment, sales were down 27 percent primarily due to decreased sales of white goods and other co-products in connection with the December 2023 closure of the Atchison Distillery. Sales of Branded Spirits were down 2 percent, primarily due to decreased sales of brands within the mid and value price tiers. Within the Ingredient Solutions segment, sales were down 3 percent, primarily due to decreased sales of specialty wheat proteins and commodity wheat starches (see “Segment Results”). Gross profit - Gross profit for the year to date ended September 30, 2024 was $211,842, a decrease of 4 percent compared to the year-ago period. The decrease was driven by a decrease in gross profit in the Ingredient Solutions segment, partially offset by an increase in gross profit in the Branded Spirits segment. In the Ingredient Solutions segment, gross profit decreased by $16,914, or 48 percent. In the Branded Spirits segment, gross profit increased by $8,975, or 11 percent. In the Distilling Solutions segment, gross profit was consistent with the year-ago period (see “Segment Results”). Advertising and promotion expenses - Advertising and promotion expenses for the year to date ended September 30, 2024 were $29,995, an increase of 16 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 September 30, 2024 were $60,942, a decrease of 7 percent compared to the year-ago period. The decrease in SG&A expenses was primarily due to reduced incentive compensation expenses. Operating income - Operating income for the year to date ended September 30, 2024 decreased to $104,868 from $105,541 for the year to date period ended September 30, 2023, primarily due to the decrease in gross profit in the Ingredient Solutions segment, the change in fair value of the contingent consideration related to the Penelope acquisition, and the increase in advertising and promotion expenses. These decreases were partially offset by the impairment of assets and other expenses in the year ago period related to the closure of the Atchison Distillery which was closed in December 2023, increased gross profit in the Branded Spirits segment, and a decrease in SG&A expenses. 24 Operating income, year to date versus year to date Operating Income Change Operating income for the year to date ended September 30, 2023 $ 105,541 Decrease in gross profit - Ingredient Solutions segment (a) (16,914) (16) % Increase in gross profit - Branded Spirits segment (a) 8,975 9 pp(b) Increase in gross profit - Distilling Solutions segment (a) 214 — pp Increase in advertising and promotion expenses (4,118) (4) pp Decrease in SG&A expenses 4,673 4 pp Impairment of long-lived assets and other 18,197 17 pp Change in fair value of contingent consideration (11,700) (11) pp Operating income for the year to date ended September 30, 2024 $ 104,868 (1) % (a) See “Segment Results.” (b) Percentage points (“pp”). Income tax expense - Income tax expense for the year to date ended September 30, 2024 was $23,924, for an effective tax rate of 23.8 percent. Income tax expense for the year to date ended September 30, 2023, was $24,832, for an effective tax rate of 24.6 percent. The decrease in income tax expense, year to date versus year to date, was due to the decrease in effective tax rate and lower income before income taxes. Earnings per common share - Basic and diluted EPS was $3.43 for the year to date ended September 30, 2024, compared to $3.43 and $3.41, respectively for the year to date ended September 30, 2023. The change in basic and diluted EPS, year to date versus year to date, was primarily due to a change in other income (expense), net related to equity method investment income. The increase was partially offset by a change in interest expense, net. Change in EPS, year to date versus year to date EPS Change Basic EPS for the year to date ended September 30, 2023 $ 3.43 Change in operating income (a) (0.02) (1) % Change in interest expense, net (a) (0.06) (2) pp(b) Change in other income (expense), net (a) 0.07 3 pp Change in effective tax rate 0.03 1 pp Change in weighted average shares outstanding (0.02) (1) pp Basic and Diluted EPS for the year to date ended September 30, 2024 $ 3.43 — % (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 September 30, 2024 and 2023. DISTILLING SOLUTIONS SALES Quarter Ended September 30, Quarter versus Quarter Sales Change Increase/(Decrease) 2024 2023 $ Change % Change Brown goods $ 57,110 $ 73,409 $ (16,299) (22) % Warehouse services 8,264 7,353 911 12 White goods and other co-products 6,545 31,091 (24,546) (79) Total Distilling Solutions $ 71,919 $ 111,853 $ (39,934) (36) % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Brown goods (22)% (10)% (12)% Other Financial Information Quarter Ended September 30, Quarter versus Quarter Increase / (Decrease) 2024 2023 $ Change % Change Gross profit $ 28,644 $ 33,280 $ (4,636) (14) % Gross margin % 39.8 % 29.8 % 10.0 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 the Distilling Solutions segment for the quarter ended September 30, 2024 decreased by $39,934, or 36 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 due to the closure of the Atchison Distillery during December 2023. Sales of brown goods decreased primarily due to a decrease in net price/mix and decreased sales volume (as defined in the table above). The brown goods decline was primarily the result of softening American whiskey category trends and elevated industry-wide barrel inventories, leading to instances of customer contract non-performance that put pressure on our brown goods business with a larger impact on our smaller, craft customer base. We expect these trends to continue, which may impact our future results of operations. Gross profit decreased quarter versus quarter by $4,636, or 14 percent. Gross margin for the quarter ended September 30, 2024 increased to 39.8 percent from 29.8 percent for the prior year quarter. The decrease in gross profit was primarily due to a decrease in brown goods sales due to decreases in net price/mix and sales volumes of brown goods, partially offset by lower average unit costs. This was partially offset by the positive impact the closure of the Atchison Distillery had on white goods and other co-products’ gross profit. 26 The following tables show selected financial information for the Distilling Solutions segment for the year to date ended September 30, 2024 and 2023. DISTILLING SOLUTIONS SALES Year to Date Ended September 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2024 2023 $ Change % Change Brown goods $ 198,884 $ 214,857 $ (15,973) (7) % Warehouse services 24,612 20,958 3,654 17 White goods and other co-products 26,663 106,126 (79,463) (75) Total Distilling Solutions $ 250,159 $ 341,941 $ (91,782) (27) % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Brown goods (7)% 6% (13)% Other Financial Information Year to Date Ended September 30, Year to Date versus Year to Date Increase / (Decrease) 2024 2023 $ Change % Change Gross profit $ 105,200 $ 104,986 $ 214 — % Gross margin % 42.1 % 30.7 % 11.4 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 year to date ended September 30, 2024 decreased by $91,782, or 27 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 due to the closure of the Atchison Distillery during December 2023. The decrease in brown goods was primarily related to a decrease in net price/mix (as defined above), partially offset by increased sales volume. These decreases were partially offset by increased sales of warehouse services. Gross profit for the year to date ended September 30, 2024 increased by $214 compared to the year-ago period. Gross margin for the year to date ended September 30, 2024 increased to 42.1 percent from 30.7 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 due to an increase in warehouse services sales. These increases were partially offset by decreased net price/mix of brown goods. 27 Branded Spirits The following tables show selected financial information for the Branded Spirits segment for the quarters ended September 30, 2024 and 2023. BRANDED SPIRITS SALES Quarter Ended September 30, Quarter versus Quarter Sales Change Increase/(Decrease) 2024 2023 $ Change % Change Premium plus $ 31,086 $ 30,843 $ 243 1 % Mid 14,788 17,650 (2,862) (16) Value 10,034 11,049 (1,015) (9) Other 6,716 7,277 (561) (8) Total Branded Spirits $ 62,624 $ 66,819 $ (4,195) (6) % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Branded Spirits (6)% (7)% 1% Other Financial Information Quarter Ended September 30, Quarter versus Quarter Increase / (Decrease) 2024 2023 $ Change % Change Gross profit $ 32,446 $ 29,040 $ 3,406 12 % Gross margin % 51.8 % 43.5 % 8.3 pp (d) (a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars. (b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars. (c) 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 September 30, 2024 decreased by $4,195, or 6 percent, compared to the prior year quarter. The decrease was driven by a decrease in the sales of brands within the mid, value, and other price tiers, partially offset by an increase in sales of the premium plus price tier. The decrease in sales of brands within the mid and value price tiers was driven by lower sales volumes, as we increased pricing on certain lower margin mid and value brands. Gross profit increased quarter versus quarter by $3,406, or 12 percent. Gross margin for the quarter ended September 30, 2024 increased to 51.8 percent from 43.5 percent for the prior year quarter. The increase in gross profit was primarily driven by increased net price/mix of certain American whiskey brands within the premium plus price tier and increased gross profit in the mid and value price tiers, which was driven by lower average unit costs and higher average net price/mix. 28 The following tables show selected financial information for the Branded Spirits segment for the year to date ended September 30, 2024 and 2023. BRANDED SPIRITS SALES Year to Date Ended September 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2024 2023 $ Change % Change Premium plus $ 82,699 $ 73,352 $ 9,347 13 % Mid 46,610 55,575 (8,965) (16) Value 31,698 36,048 (4,350) (12) Other 15,804 16,343 (539) (3) Total Branded Spirits $ 176,811 $ 181,318 $ (4,507) (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)% 6% Other Financial Information Year to Date Ended September 30, Year to Date versus Year to Date Increase / (Decrease) 2024 2023 $ Change % Change Gross profit $ 88,611 $ 79,636 $ 8,975 11 % Gross margin % 50.1 % 43.9 % 6.2 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 Branded Spirits for the year to date ended September 30, 2024 decreased by $4,507, or 2 percent, compared to the year-ago period, due primarily to decreased sales volume of select brands within the mid and value price tiers due to increased pricing on certain lower margin mid and value brands. This decrease was partially offset by an increase in sales of brands within the premium plus price tier which was primarily due to the acquisition of Penelope. Gross profit for the year to date ended September 30, 2024 increased by $8,975, or 11 percent, compared to the year-ago period. Gross margin for the year to date ended September 30, 2024 increased to 50.1 percent from 43.9 percent from the prior year period The increase in gross profit was primarily driven by the acquisition of Penelope and increased gross profit in the mid and value price tiers, which was driven by lower unit cost and higher average net price/mix. 29 Ingredient Solutions The following tables show selected financial information for the Ingredient Solutions segment for the quarters ended September 30, 2024 and 2023. INGREDIENT SOLUTIONS SALES Quarter Ended September 30, Quarter versus Quarter Sales Change Increase / (Decrease) 2024 2023 $ Change % Change Specialty wheat starches $ 16,172 $ 17,196 $ (1,024) (6) % Specialty wheat proteins 7,752 11,440 (3,688) (32) Commodity wheat starches 2,611 4,226 (1,615) (38) Commodity wheat proteins 383 90 293 326 Total Ingredient Solutions $ 26,918 $ 32,952 $ (6,034) (18) % Change in Quarter versus Quarter Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions (18)% (16)% (2)% Other Financial Information Quarter Ended September 30, Quarter versus Quarter Increase / (Decrease) 2024 2023 $ Change % Change Gross profit $ 4,725 $ 11,128 $ (6,403) (58) % Gross margin % 17.6 % 33.8 % (16.2) 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 September 30, 2024 decreased by $6,034, or 18 percent, compared to the prior year quarter. The decrease was primarily driven by decreased sales volume of specialty wheat proteins primarily due to continued export market headwinds. The decrease was also driven by decreased sales volume of commodity wheat starches due to increased domestic competition. Gross profit decreased quarter versus quarter by $6,403, or 58 percent. Gross margin for the quarter ended September 30, 2024 decreased to 17.6 percent from 33.8 percent for the prior year quarter. The decrease in gross profit was primarily driven by increased input costs primarily due to 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, the decrease in gross profit was attributable to decreased sales volume of specialty wheat proteins. 30 The following tables show selected financial information for the Ingredient Solutions segment for the year to date September 30, 2024 and 2023. INGREDIENT SOLUTIONS SALES Year to Date Ended September 30, Year to Date versus Year to Date Sales Change Increase/(Decrease) 2024 2023 $ Change % Change Specialty wheat starches $ 57,646 $ 48,977 $ 8,669 18 % Specialty wheat proteins 28,947 35,918 (6,971) (19) Commodity wheat starches 8,846 12,870 (4,024) (31) Commodity wheat proteins 420 611 (191) (31) Total Ingredient Solutions $ 95,859 $ 98,376 $ (2,517) (3) % Change in Year to Date versus Year to Date Sales Attributed to: Total (a) Volume (b) Net Price/Mix (c) Total Ingredient Solutions (3)% 2% (5)% Other Financial Information Year to Date Ended September 30, Year to Date versus Year to Date Increase / (Decrease) 2024 2023 $ Change % Change Gross profit $ 18,031 $ 34,945 $ (16,914) (48) % Gross margin % 18.8 % 35.5 % (16.7) 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 September 30, 2024 decreased by $2,517, or 3 percent, compared to the prior year period. The decrease was primarily driven by decreased net price/mix across all product categories, as well as a decrease in sales volume of specialty wheat protein primarily due to continued export market headwinds. These decreases were partially offset by an increase in sales volume of specialty wheat starches. Gross profit decreased by $16,914, or 48 percent for the year to date ended September 30, 2024 compared to the prior year period. Gross margin for the year to date ended September 30, 2024 decreased to 18.8 percent from 35.5 percent for the prior year period. The decrease in gross profit was primarily driven by higher input costs associated with 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. The decrease in gross profit was also attributable to decreased sales volume of specialty wheat proteins. 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 September 30, Changes, year versus year Increase / (Decrease) 2024 2023 Net cash provided by operating activities $ 73,512 $ 48,605 $ 24,907 Net cash used in investing activities (53,126) (146,690) 93,564 Net cash provided by (used in) financing activities (18,048) 78,193 (96,241) Effect of exchange rate changes on cash 46 33 13 Increase (decrease) in cash and cash equivalents $ 2,384 $ (19,859) $ 22,243 Cash increased $2,384 for the year to date ended September 30, 2024, compared to a decrease of $19,859 for the year to date ended September 30, 2023, for a net increase in cash of $22,243, period versus period. Operating Activities. Cash provided by operating activities for the year to date ended September 30, 2024 was $73,512. The cash provided by operating activities resulted primarily from net income of $76,463, adjustments for non-cash or non-operating charges of $32,845, 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 $35,796. The primary drivers of the changes in operating assets and liabilities were $24,979 use of cash related to an increase in inventories, primarily due to an increase in barreled distillate, $10,627 use of cash related to a decrease in accounts payable due to timing of payments, $9,935 related to accrued expenses and other, which related to a decrease in our incentive compensation accrual, partially offset by $13,979 cash provided by decreased accounts receivables, net, due to the timing of sales and customer payments during the year to date period as well as the closure of the Atchison Distillery in December 2023. 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. Investing Activities. Cash used in investing activities for the year to date ended September 30, 2024 was $53,126, which primarily resulted from additions to property, plant, and equipment of $52,850 (see “Capital Spending”). 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”). Capital Spending. We manage capital spending to support our business growth plans. We have incurred $43,503 and $36,879 of capital expenditures and have paid $52,850 and $42,062 for capital expenditures for the year to date ended September 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 $78,000 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 used in financing activities for the year to date ended September 30, 2024 was $18,048, due to repurchases of Common Stock of $12,235 (see “Treasury Purchases” and “Share Repurchase”), and payments of dividends and dividend equivalents of $8,013 (see “Dividends and Dividend Equivalents”), partially offset by net proceeds on debt of $2,200 (see “Long-Term and Short-Term Debt”). 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 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 September 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 September 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 September 30, 2024, we repurchased 128,360 shares of Common Stock for approximately $10,000, resulting in approximately $90,000 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 August 1, 2024 August 16, 2024 August 30, 2024 0.12 0.12 2,639 30 2,669 $ 0.36 $ 0.36 $ 7,922 $ 91 $ 8,013 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 (a) Dividend equivalent payments on unvested participating securities. (b) Includes estimated forfeitures. (c) Per share amount. On October 31, 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 November 29, 2024 to stockholders of record and RSU holders on November 15, 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 $289,968 (net of unamortized loan fees of $6,082) at September 30, 2024, and $287,249 (net of unamortized loan fees of $6,601) at December 31, 2023. 33 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, 2024, we met those covenants and restrictions. At September 30, 2024, our current assets exceeded our current liabilities by $449,670, largely due to our inventories, at cost, of $372,153. At September 30, 2024, our cash balance was $20,772 and we have used our various debt agreements for liquidity purposes, with $330,000 available under our Credit Agreement for additional borrowings and $225,200 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.