MGPI-12.31.2014-10K


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________________ 

FORM 10-K
 
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
(Mark One)
X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2014
OR
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to _______
 
Commission file number   0-17196
 
MGP Ingredients, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Kansas
48-0531200
(State or Other Jurisdiction
(I.R.S. Employer
of Incorporation or Organization)
Identification No.)
 
 
100 Commercial Street, Box 130, Atchison, Kansas
66002
(Address of Principal Executive Offices)
(Zip Code)
 
(913) 367-1480
Registrant’s telephone number, including area code
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, no par value
NASDAQ Global Select Market
 
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes __ No X
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes __ No X
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    X      No ____
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   X       No        
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to their Form 10-K.  [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of "accelerated filer", "large accelerated filer" and "smaller reporting company": in Rule 12b-2 of the Exchange Act. (Check One):
 
Large accelerated filer ___    Accelerated filer X   Non-accelerated filer  ___   Smaller reporting company  X
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ___ No    X
 
The aggregate market value of common equity held by non-affiliates, computed by reference to the last sales price as reported by NASDAQ on June 30, 2014, was $81,316,208.
 
The number of shares of the registrant’s common stock outstanding as of March 2, 2015 was 17,674,559 .
 
DOCUMENTS INCORPORATED BY REFERENCE
 
The following documents are incorporated herein by reference:
 
(1)
Portions of the MGP Ingredients, Inc. Proxy Statement for the Annual Meeting of Stockholders to be held on May 21, 2015 are incorporated by reference into Part III of this report to the extent set forth herein.





CONTENTS PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 Activities and Recent Initiatives
 
 
 
 
Year Ended December 31, 2014 Compared to December 31, 2013
 
 
 
 
 
 

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Consolidated Balance Sheets - December 31, 2014 and 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The calculation of the aggregate market value of the Common Stock held by non-affiliates is based on the assumption that affiliates include directors and executive officers. Such assumption does not constitute an admission by the Company or any director or executive officer that any director or executive officer is an affiliate of the Company.


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FORWARD-LOOKING STATEMENTS
 
This report contains forward-looking statements as well as historical information.  All statements, other than statements of historical facts, included in this Annual Report on Form 10-K regarding the prospects of our industry and our prospects, plans, financial position and business strategy may constitute forward-looking statements.  In addition, forward-looking statements are usually identified by or are associated with such words as "intend," "plan," "believe," "estimate," "expect," "anticipate," "hopeful," "should," "may," "will," "could," "encouraged," "opportunities," "potential" and/or the negatives or variations of these terms or similar terminology.  They reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, Company performance, and Company financial results and are not guarantees of future performance.  All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement.  Important factors that could cause actual results to differ materially from our expectations include, among others: (i) disruptions in operations at our Atchison facility, Indiana facility, or at the Illinois Corn Processing, LLC ("ICP") facility,  (ii) the availability and cost of grain, flour and barrels, fluctuations in energy costs, (iii) the effectiveness of our corn purchasing program to mitigate our exposure to commodity price fluctuations, (iv) the effectiveness or execution of our new five-year strategic plan, (v) the competitive environment and related market conditions, (vi) the ability to effectively pass raw material price increases on to customers, (vii) the positive or adverse impact to our earnings as a result of the high volatility in our equity method investment's, ICP's, operating results, (viii) ICP's access to capital, (ix) our limited influence over the ICP joint venture operating decisions, strategies or financial decisions (including investments, capital spending and distributions), (x) our ability to source product from the ICP joint venture or unaffiliated third parties, (xi) our ability to maintain compliance with all applicable loan agreement covenants, (xii) our ability to realize operating efficiencies, (xiii) actions of governments, (xiv) consumer tastes and preferences, and (xv) the volatility in our earnings resulting from the timing differences between a business interruption and a potential insurance recovery. For further information on these and other risks and uncertainties that may affect our business, see Item 1A. Risk Factors.

METHOD OF PRESENTATION
 
All amounts in this report, except for share, par values, bushels, gallons, pounds, mmbtu, proof gallons, per share, per bushel, per gallon, per proof gallon and percentage amounts, are shown in thousands unless otherwise noted.

AVAILABLE INFORMATION
 
We make available through our website (www.mgpingredients.com) under "Investors – Investor Relations," free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, special reports and other information, and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such material with the Securities and Exchange Commission.


iii



PART I
 
ITEM 1.  BUSINESS

Throughout this Report, when we refer to "the Company", "we", "us", "our" and words of similar import in reference to activities that occurred prior to the "Reorganization", as defined below, on January 3, 2012, we are referring to the combined business of MGPI Processing, Inc. (formerly MGP Ingredients, Inc.)  and its consolidated subsidiaries, and  when we refer to "the Company", "we", "us", "our" and  words of similar import in reference to activities occurring after the Reorganization, we are referring to the combined business of MGP Ingredients, Inc. (formerly named  MGPI Holdings, Inc.) and its consolidated subsidiaries, except to the extent that the context otherwise indicates.
 
MGP Ingredients, Inc. ("Registrant" or "Company") is a Kansas corporation headquartered in Atchison, Kansas.  It was incorporated in 2011 and is a holding company with no operations of its own.  Its principal directly-owned operating subsidiaries are MGPI Processing, Inc. ("Processing"), incorporated in Kansas in 1957 and the successor to a business founded in 1941 by Cloud L. Cray, Sr., and MGPI of Indiana, LLC ("MGPI-I").  MGPI-I acquired substantially all the beverage alcohol distillery assets of Lawrenceburg Distillers Indiana, LLC ("LDI") at its Lawrenceburg and Greendale, Indiana distillery ("Indiana facility") on December 27, 2011.

On January 3, 2012, MGP Ingredients, Inc. reorganized into a holding company structure (the "Reorganization").  By engaging in the Reorganization, we sought to better isolate risks that might reside in one facility or operating unit from our other facilities or operating units.  We also believe that a holding company structure will facilitate ramp-up of new businesses that might be developed, accommodate future growth through acquisitions and joint ventures, create tighter focus within operating units, and enhance commercial activities and financing possibilities.
 
In connection with the Reorganization and to further the holding company structure, Processing distributed two of its formerly directly-owned subsidiaries, MGPI-I and Midwest Grain Pipeline, Inc., as well as its equity investment in D.M. Ingredients, GmbH ("DMI") to the Company.  Processing’s equity investment in ICP remained with Processing and is now an equity investment of 30 percent.  

GENERAL INFORMATION

We produce certain distillery products that are derived from corn and other feedstock (including rye, barley, barley malt and milo), and ingredient products which are derived from wheat flour, primarily to serve the packaged goods industry.  Our operations have been historically classified into three reportable segments:  distillery products, ingredient solutions, and other.  On February 8, 2013, we sold all of the assets included in our other segment, the bioplastics manufacturing business, including all of the assets at our bioplastics manufacturing facility in Onaga, Kansas and certain assets at our extruder bio-resin laboratory located in Atchison, Kansas.  The sales price totaled $2,797 and resulted in a gain, net of tax, of $878 that was recognized as a gain on sale of discontinued operations for the year ended December 31, 2013. The remaining income statement activity for the year ended December 31, 2013 was not presented as discontinued operations due to its immateriality relative to the consolidated financial statements as a whole.

The distillery products segment consists of food grade alcohol, along with fuel grade alcohol, distillers feed and corn oil, which are co-products of our distillery operations.  Ingredient solutions consist of specialty starches and proteins, commodity starch, and vital wheat gluten (commodity protein).  The other segment products included plant-based polymers and composite resins manufactured through the further processing of certain of our proteins and starches and wood. The two reportable segments remaining subsequent to February 8, 2013 are the distillery products and ingredient solutions segments.
 
For the year ended December 31, 2014, we purchased corn and other feedstock, which we use in our distillery operations, from one supplier, Bunge Milling.  We also purchased feedstock, excluding corn, from other suppliers. We purchased wheat flour, the principal raw material used in the manufacture of our protein and starch products at our Atchison facility, from Ardent Mills (formerly ConAgra Mills).   


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We process flour with water to extract vital wheat gluten, the basic protein component of flour, which we use at our Atchison facility primarily to process into specialty wheat proteins with increased protein levels and/or enhanced functional characteristics.  Most wheat protein products are dried into powder and sold in packaged or bulk form.  We further process the starch slurry resulting from the extraction of the protein component to extract premium wheat starch.  A portion of wheat starch is processed into specialty starches, and a portion is sold as commodity starch, all of which is dried into powder and sold in packaged or bulk form.  We mix the remaining starch slurry with corn or other feedstock and water and then cook, ferment and distill it into alcohol.  We dry the residue of the distilling operations and sell it as a high protein additive for animal feed.  At our Indiana facility, we produce customized and premium grade corn and rye whiskeys, bourbon, gin, grain neutral spirits and distillers feed.
 
The two principal locations at which we made our products for the year ended December 31, 2014, were our facilities located in Atchison, Kansas and Lawrenceburg, Indiana. The Indiana facility was acquired on December 27, 2011, when we acquired substantially all the assets used by LDI in its beverage alcohol distillery business ("Distillery Business" or "Indiana Distillery Business").  We also operated a facility in Onaga, Kansas for the production of plant-based biopolymers and wood composite resin until February 8, 2013, when we sold this facility.  Our line of textured wheat proteins are currently produced through a toll manufacturing arrangement at a facility in the Netherlands.  In November 2009, we entered into a joint venture with a SEACOR Inc. affiliate, Illinois Corn Processing Holdings LLC ("ICP Holdings"), to reactivate distillery operations at the facility in Pekin, Illinois.  This facility is owned and operated by a non-consolidated joint venture entity named ICP, which restarted production in the quarter ended March 31, 2010.  We own 30 percent of the equity interests of ICP.  ICP produces food grade alcohol for beverage and industrial applications that is sold to the Company and other customers, and fuel grade alcohol and chemical intermediates that are marketed separately by ICP.

FINANCIAL INFORMATION ABOUT SEGMENTS
 
Note 11: Operating Segments of our Notes to Consolidated Financial Statements set forth in Item 8. Financial Statements and Supplementary Data of this report, which is incorporated herein by reference, includes information about sales, depreciation and amortization, income (loss) from continuing operations before income taxes for the years ended December 31, 2014 and 2013, by reportable segment. Information about sales to external customers and assets located in foreign countries is included.  Information about identifiable assets is included as of December 31, 2014 and 2013.

BUSINESS STRATEGY

In February 2015, we announced details of our five-year strategic business plan. Our plan is designed to leverage our history and strengths. We have a long history in the distilling industry. Our Indiana facility, which we purchased in 2011, was founded in 1847 and our Atchison, Kansas, facility was opened in 1941. Through these two distilleries, we are involved in producing some of the finest vodkas, gins, and whiskeys in the world. Likewise, our history in the food ingredient business stretches back more than 60 years.
We will focus on maximizing the value of our current production volumes, particularly taking advantage of favorable macro trends in our distillery products segment, such as the growth of the American whiskey category that has continued to expand over the past five years, and in our ingredient solutions segment, such as the growth in high fiber, high protein and non-GMO products. We intend to focus on the opportunities that will allow us to achieve the highest value from our current production facilities.
We will work to develop partnerships to support brand creation and long-term growth, and to combine our innovation capabilities and industry expertise to provide unique solutions and offerings to the marketplace. In that way, we believe we will be able to realize full value for our operational capacity, quality and commitment.

We are committed to investing to support our growth. We expect capital expenditures largely to focus on improving operational reliability, enhancing innovation and product development, and supporting the growth of the whiskey category.
Additionally, we plan to build our aged whiskey inventory and strengthen our organizational capabilities.   

We will continue a strong disciplined approach to risk management, including robust analysis and prudent decision-making to minimize the impact of commodity pricing, and adherence to established procedures, controls and authority levels.

We will focus on building our corporate brand across all of our markets and on meeting our commitments to all of our stakeholders, including shareholders, employees, business partners, consumers and our communities.


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Our new strategic plan seeks to leverage the positive macro trends we see in the industries where we compete while providing better insulation from outside factors, including swings in commodity pricing.  We believe this plan will deliver strong operating income growth.

PRODUCT SALES
 
The following table shows our net sales from continuing operations by each class of similar products, during the years ended December 31, 2014 and 2013 and such net sales as a percent of total net sales.


PRODUCT GROUP SALES

Year Ended December 31,


2014

2013

Distillery Products:
Amount

%

Amount

%

Food grade alcohol
$
208,375

 
66.5
%

$
208,695


64.6
%

Distillers feed and related co- products
30,361

 
9.7


43,513


13.5


Fuel grade alcohol
12,987

 
4.2


8,026


2.5


Warehouse revenue
4,838

 
1.5


3,864


1.1

 
Total Distillery Products
$
256,561


81.9
%
 
$
264,098


81.7
%


 
 
 







Ingredient Solutions:
 
 
 

 


 


Specialty wheat starches
$
28,217

 
9.0
%

$
27,820


8.6
%

Specialty wheat proteins
18,618

 
5.9


20,086


6.2


Commodity wheat starch
7,884

 
2.5


8,509


2.6


Vital wheat gluten (commodity wheat proteins)
2,123

 
0.7


2,552


0.8


Total Ingredient Solutions
$
56,842


18.1
%

$
58,967


18.2
%


 
 
 







Other Products:
$

 
%

$
199


0.1
%

Net Sales
$
313,403


100.0
%

$
323,264


100.0
%


The pricing of our products is impacted by the cost we pay for grain. Because of this, sales trend comparisons across years must also consider the trends in commodity prices, which historically have been subject to substantial fluctuations as further described in "- Raw Materials".

Substantially all of our sales are made directly or through distributors to manufacturers and processors of finished packaged goods or to bakeries.  Sales to our customers purchasing food grade alcohol are made primarily on a spot, monthly, or quarterly basis with some annual contracts, depending on the customer’s needs and market conditions.  Customers who purchase unaged whiskey or bourbon may also enter into separate warehouse service agreements with us, allowing the product to age.  We have certain multi-year contracts to supply distilled products and certain contracts to provide barreling and warehousing services, which typically are also multi-year contracts.  Sales of fuel grade alcohol are made on the spot market.  Contracts with distributors may be for multi-year terms with periodic review of pricing.  Contracts with ingredients customers are generally price and term agreements which are fixed for three or six month periods, with very few agreements of twelve months duration or more.  During the year ended December 31, 2014, our five largest distillery products customers combined accounted for about 27 percent of our consolidated net sales, and our five largest ingredients solutions customers combined accounted for about 12 percent of our consolidated net sales.

DISTILLERY PRODUCTS SEGMENT
 
Our Atchison facility processes corn and other feedstock, mixed with starch slurry from the wheat starch and protein processing operations, into food grade alcohol and distillery co-products such as fuel grade alcohol and distillers feed.  Our Indiana facility processes corn and other feedstock into food grade alcohol (primarily beverage alcohol) and distillers feed (commonly called dried distillers grain in the industry) and provides warehouse services, including barrel put away, barrel storage and barrel retrieval services.
 

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Food grade alcohol consists of beverage alcohol and industrial food grade alcohol that are distilled to remove impurities.  Fuel grade alcohol is grain alcohol that has been distilled to remove all water to yield 200 proof alcohols suitable for blending with gasoline.  We generate and sell only minimal amounts as a co-product of the food grade alcohol production process at our Atchison distillery, reducing our exposure to the fuel grade alcohol market.
 
In December 2011, we acquired substantially all the assets used by LDI in its beverage alcohol distillery business at the Indiana facility, where we now produce premium bourbon, corn and rye whiskeys, gin, grain neutral spirits and distillers feed.  
 
Both bourbon and whiskey are typically aged in wooden barrels from two to four years. As a part of our strategy, we produce certain volumes of bourbon and whiskey that are in addition to current customer demand.  This product is barreled and included in our inventory.  Our goal is to maintain inventory levels for bourbon and whiskey sufficient to satisfy anticipated future purchase orders in the wholesale market, taking into account the possibility of buying additional aged product in the market.
 
We source food grade alcohol from ICP, our 30 percent-owned joint venture. ICP produces food grade alcohol at its Pekin, IL facility for beverage and industrial applications that is sold to us and other customers, and fuel grade alcohol and chemical intermediates that are marketed separately by ICP. See additional information related to ICP in Item 1. Investment In Equity Method Investments, Item 7. Management's Discussion And Analysis Of Financial Condition and Results of Operations - Year Ended December 31, 2014 Compared To December 31, 2013 - Equity Method Investment Earnings (Loss) and Note 3: Equity Method Investments.

Food Grade Alcohol.  The majority of our distillery capacities are dedicated to the production of high quality, high purity food grade alcohol for beverage and industrial applications.
 
Food grade alcohol sold for beverage applications consists primarily of grain neutral spirits and gin, premium bourbon, and corn and rye whiskey.  Grain neutral spirits are sold in bulk quantities at various proof concentrations to bottlers and rectifiers, which further process the alcohol for sale to consumers under numerous labels.  Our gin is created by redistilling grain neutral spirits together with proprietary customer formulations of botanicals or botanical oils.  Our bourbon is created by distilling primarily corn.  Our whiskey is made from fermented grain mash, including primarily corn and rye.
 
We believe that in terms of net sales, we are one of the four largest merchant market sellers of food grade alcohol in the United States.  Our principal competitors in the beverage alcohol market are Grain Processing Corporation of Muscatine, Iowa, Archer-Daniels-Midland Company of Decatur, Illinois, and Heaven Hill Distilleries, Inc. of Bardstown, Kentucky.
 
Significant customer consolidation has occurred in the beverage alcohol industry at the customer level over the past two decades.  As these consolidations have come about, we have maintained a strong and steady presence in the market due to longstanding relationships with customers and our reputation for producing very high quality, high purity alcohol products.

We sell food-grade industrial alcohol for use as an ingredient in foods (e.g., vinegar and food flavorings), personal care products (e.g., hair sprays and hand sanitizers), cleaning solutions, biocides, insecticides, fungicides, pharmaceuticals, and a variety of other products.  Although grain alcohol is chemically the same as petroleum-based or synthetic alcohol, certain customers prefer a natural grain-based alcohol.  We sell food-grade industrial alcohol in tank truck or rail car quantities direct to a number of industrial processors.
 
Historically, synthetic alcohol was a highly significant component of the food grade industrial alcohol market.  In recent years, however, the use of grain-based alcohol has exceeded synthetic alcohol in this market.  Our principal competitors in the grain-based food grade industrial alcohol market are Grain Processing Corporation of Muscatine, Iowa, and Archer-Daniels-Midland Company of Decatur, Illinois. Competition is based primarily upon price, service and quality factors.
 
Distillers Feed and related Co-Products.  The bulk alcohol co-products sales in the year ended December 31, 2014 and 2013 consisted of distillers feed, corn oil and fuel grade alcohol. Distillers feed is principally derived from the residue of corn from alcohol processing operations.  The residue is dried and sold primarily to processors of animal feeds as a high protein additive.  We compete with other distillers of alcohol as well as a number of other producers of animal food additives in the sale of distillers feed.  We produce corn oil as a value-added co-product through a corn oil extraction process in dry-grind ethanol plants. We produce fuel grade alcohol as a co-product of our food grade alcohol business at our distillery in Atchison.  
 

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Fuel grade alcohol is sold primarily for blending with gasoline to increase the octane and oxygen levels of the gasoline.  As an octane enhancer, fuel grade alcohol can serve as a substitute for lead and petroleum-based octane enhancers.  As an oxygenate, fuel grade alcohol has been used in gasoline to meet certain environmental regulations and laws relating to air quality by reducing carbon monoxide, hydrocarbon particulates and other toxic emissions generated from the burning of gasoline.
 
Major market participants in the fuel grade alcohol market include Poet Biorefining, Archer-Daniels-Midland Company and Valero Energy Corporation, which together account for approximately a third of the total production capacity.  We and our joint venture, ICP, compete with other producers of fuel grade alcohol on the basis of price and delivery costs.

Warehouse revenue. Customers who purchase unaged whiskey or bourbon may also enter into separate warehouse service agreements with us that include services for barrel put away, barrel storage and barrel retrieval. Revenue from warehousing services is recognized upon providing the service and/or over the passage of time, as in the case of storage fees.

INGREDIENT SOLUTIONS SEGMENT
 
Our ingredient solutions segment consists primarily of specialty wheat starches, specialty wheat proteins, commodity wheat starch and vital wheat gluten.
 
In recent years, our specialty wheat starches and proteins have accounted for a sizable share of our total sales in this segment as a result of our business strategy of focusing on higher margin products.  Our results were generated, in part, on the following factors:  partnerships with customers on product development, capacity to produce these products, and increased marketing efforts that have resulted in greater customer recognition. We use an on-line Customer Relationship Management ("CRM") solution system to improve our ability to develop new sales of our product lines.  Our commercialization functions are focused on increasing sales of our specialty products to the largest and most innovative producers of consumer packaged goods in the United States.  Future margin growth will depend on executing these strategies.

Specialty Wheat Starches.  Wheat starch constitutes the carbohydrate-bearing portion of wheat flour.  We produce a premium wheat starch powder by extracting the starch from the starch slurry, substantially free of all impurities and fibers, and then drying the starch in spray, flash or drum dryers.  Premium wheat starch differs from low grade or B wheat starches, which are extracted along with impurities and fibers and are used primarily as a binding agent for industrial applications.  We do not sell low grade or B starches.  Premium wheat starch differs from corn starch in its granular structure, color, granular size and name identification.

A substantial portion of our premium wheat starch is altered during processing to produce certain unique specialty wheat starches designed for special applications.  Our strategy is to market our specialty wheat starches in market niches where the unique characteristics of these starches are better suited to a customer’s requirements for a specific use.  We have developed a number of specialty wheat starches, and continue to explore the development of additional starch products with the view to increasing sales of value-added specialty starches.  We produce our Fibersym® resistant starch, which has become one of our more popular specialty starches, using a patented technology referred to below under Patents.  We sell our specialty starches on a global basis, primarily to food processors and distributors.
 
Our specialty wheat starches are used primarily for food applications as an ingredient in a variety of food products to affect their nutritional profile, appearance, texture, tenderness, taste, palatability, cooking temperature, stability, viscosity, binding and freeze-thaw characteristics.  Important physical properties contributed by wheat starch include whiteness, clean flavor, viscosity and texture.  For example, our starches are used to improve the taste and texture of cream puffs, éclairs, puddings, pie fillings, breading and batters; to improve the size, symmetry and taste of angel food cakes; to alter the viscosity of soups, sauces and gravies; to improve the freeze-thaw stability and shelf life of fruit pies and other frozen foods; to improve moisture retention in microwavable foods; and to add stability and to improve spreadability in frostings, mixes, glazes and sugar coatings.  We also sell our specialty starches for a number of non-food applications, which include biopolymer products, and for use in the manufacturing of adhesives, paper coatings, carbon-less paper, and wall board.
 

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Our wheat starches, as a whole, generally compete primarily with corn starch, which dominates the United States starch market.  However, the unique characteristics of our specialty wheat starches provide a number of advantages over corn and other starches for certain baking and other end uses.  Our principal competitors in the starch market are Cargill Incorporated (primarily corn and tapioca starch), Ingredion Incorporated (corn starch), Manildra Milling Corporation (wheat starch), Penford Corporation (potato starch), Archer-Daniels-Midland Company (wheat and other grain starches) and various European companies.  Competition is based on price, name, color and differing granular characteristics that affect the food product in which the starch is used.  Specialty wheat starches usually enjoy a price premium over corn starches and low grade wheat starches. Commodity wheat starch price fluctuations generally track the fluctuations in the corn starch market.  The specialty wheat starch market usually permits pricing consistent with costs that affect the industry in general, including grain costs. However, this is not always the case; during the year ended December 31, 2014, decreases in grain prices outpaced market price decreases in the specialty wheat starch market.
 
Specialty Wheat Starches
 
Fibersym® Resistant Starch series.  These starches serve as a convenient and rich source of dietary fiber.  Unlike traditional fiber sources like bran, our resistant starches possess a clean, white color and neutral flavor that allow food formulators to create a wide range of both traditional and non-traditional fiber enhanced products that are savory in both appearance and taste.  Applications include pan breads, pizza crust, flour tortillas, cookies, muffins, pastries and cakes.
FiberRite® RW Resistant Starch.  FiberRite® RW is a product that boosts dietary fiber levels while also reducing fat and caloric content in such foods as breads, sweet goods, ice cream, yogurt, salad dressings, sandwich spreads and emulsified meats.
Pregel Instant Starch series.  Our Pregel starches perform as an instant thickener in bakery mixes, allowing fruit, nuts and other particles such as chocolate pieces to be uniformly suspended in the finished product.  In coating systems, batter pick-up can be controlled for improved yield and consistent product appearance.  Additionally, shelf-life can be enhanced due to improved moisture retention, allowing products to remain tender and soft over an extended storage period.
Midsol Cook-up Starch series.  As a whole, these starches deliver increased thickening, clarity, adhesion and tolerance to high shear, temperature and acidity during food processing.  Certain varieties in this line of starches can also be used to reduce sodium content in some food formulations.  Such properties are important in products such as soups, sauces, gravies, salad dressings, fillings and batter systems.  Processing benefits of these starches also include the ability to control expansion in extruded breakfast cereals.  In addition, they provide textural enhancement and moisture management in processed foods, especially during storage under frozen and refrigerated conditions.

Specialty Wheat Proteins
 
We have developed a number of specialty wheat proteins for food and non-food applications. Specialty wheat proteins are derived from vital wheat gluten through a variety of proprietary processes which change its molecular structure.  Wheat proteins for food applications include products in the Arise®, Wheatex®, HWG 2009™ and FP™ series.  Our specialty wheat proteins generally compete with other ingredients and modified proteins having similar characteristics, primarily soy proteins and other wheat proteins, with competition being based on factors such as functionality, price and, in the case of food applications, flavor. Our principal competitors in the specialty proteins market are Archer-Daniels-Midland Company (wheat and other grain proteins), The Solae Company (soy), Manildra Milling (gluten and wheat proteins) and various European companies.  Although we are producing a number of our specialty wheat proteins on a commercial basis, some products are in the test marketing or development stage. 

Arise® series.  Our Arise® series of products consists of specialty wheat proteins that increase the freshness and shelf life of frozen, refrigerated and fresh dough products after they are baked, or can substitute for egg whites. Certain ingredients in this series are also sold for use in the manufacturing of high protein, lower net carbohydrate products.

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Wheatex® series.  This series consists of texturized wheat proteins made from vital wheat gluten by changing it into a pliable substance through special processing.  The resulting solid food product can be further enhanced with flavoring and coloring and reconstituted with water.  Texturized wheat proteins are used for meat, poultry and fish product enhancements and/or substitutes.  Wheatex® mimics the textural characteristics and appearance of meat, fish and poultry products.  It is available in a variety of sizes and colors and can be easily formed into patties, links or virtually any other shape the customer requires.
FP series.  The FP™ series of products consists of specialty wheat proteins, each tailored for use in a variety of food applications. These include proteins that can be used to form barriers to fat and moisture penetration to enhance the crispness and improve batter adhesion in fried products, effectively bond other ingredients in vegetarian patties and extended meat products, increase the softness and pliability of flour tortillas, and fortify nutritional drinks.
HWG 2009.  This is a lightly hydrolyzed wheat protein that is rich in peptide-bonded glutamine, an amino acid that counters muscle fatigue brought on by exercise and other physical activities. Applications include nutritional beverages and snack products.

Commodity Wheat Starch.  As is the case with value-added wheat starches, our commodity wheat starch has both food and non-food applications, but such applications are more limited than those of value-added wheat starches and typically sell for a lower price in the marketplace.  As noted above, commodity wheat starch competes primarily with corn starches, which dominate the marketplace and prices generally track the fluctuations in the corn starch market.
 
Vital Wheat Gluten/(commodity wheat proteins).   Vital wheat gluten is a free-flowing light tan powder which contains approximately 70 to 80 percent protein.  When we process flour to derive starch, we also derive vital wheat gluten.  Vital wheat gluten is added by bakeries and food processors to baked goods, such as breads, and to pet foods, cereals, processed meats, fish and poultry to improve the nutritional content, texture, strength, shape and volume of the product.  The neutral flavor and color of wheat gluten also enhances the flavor and color of certain foods.  The cohesiveness and elasticity of the gluten enables the dough in wheat and other high protein breads to rise and to support added ingredients, such as whole cracked grains, raisins and fibers.  This allows the baker to make an array of different breads by varying the gluten content of the dough.  Vital wheat gluten is also added to white breads, hot dog buns and hamburger buns to improve the strength and cohesiveness of the product.

Vital wheat gluten in recent years has been considered a commodity, and therefore, competition primarily has been based upon price.
 
In prior years, vital wheat gluten has sometimes been a principal ingredients product.  However, we generally use it as a base for further processing into our specialty wheat proteins.

OTHER SEGMENT
 
Historically, we had three reportable segments: a distillery products segment, an ingredient solutions segment and an other segment.  All assets used in the other segment were sold effective February 8, 2013.  Since this date, two reportable segments remain: distillery products and ingredient solutions.

Our other segment consisted of plant-based biopolymers and composite resins, which were produced from the further processing of certain of our wheat proteins and wheat starches (and other plant sources), were used to produce a variety of eco-friendly products. We formerly manufactured plant-based resins for use primarily in pet treat applications.

PATENTS
 
We are involved in a number of patent-related activities.  We have filed patent applications to protect a range of inventions made in our expanding research and development efforts, including inventions relating to applications for our products.  Our most significant patents or patent licenses are described below.
 

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In 2003, we licensed, on an exclusive basis, certain patented technology from The Kansas State University Research Foundation relating to U. S. Patent No. 5,855,946, which describes and claims processes for making food-grade starches resistant to alpha-amylase digestion, as well as products and uses for the resistant starches.  The license relates to products derived from plant-based starches and is a royalty-bearing, worldwide license with a term that extends until the patent rights expire in 2017, subject to termination for material, uncured breaches or bankruptcy.  Royalties generally are based on net sales.  The patent rights relate to the referenced United States patent and any corresponding foreign patent application, which has been filed in Australia.  Under the license, we can make, have made, use, import, offer for sale, and sell licensed products within the scope of a claim of the patent rights or which are sold for a use within the scope of the patent rights and may, with approval of the licensor, grant similar rights to sublicensees.  We produce and sell our resistant wheat starch under this patent.  We have granted sublicenses from time to time under this patent.  Under one such arrangement, we granted Cargill Incorporated a royalty bearing sublicense to use the patented process in the production of tapioca-based starches for use in food products.  We also have agreements with Cargill Incorporated that would apply if we determined to use the patented process to make starches derived from other plant sources (other than wheat or potato).

RESEARCH AND DEVELOPMENT
 
During the years ended December 31, 2014 and 2013, we spent $1,622 and $2,472, respectively, on research and development activities. These activities are expensed and are included in Selling, general and administrative expenses on the Consolidated Statements of Operations. Research and development activities were principally in the distillery products segment for 2014 and the ingredient solutions segment for 2013.

SEASONALITY
 
Our sales are generally not seasonal.  There is a degree of seasonality with respect to our purchase of natural gas as further described under "Energy."

TRANSPORTATION
 
Historically, our output has been transported to customers by truck and rail, most of which is provided by common carriers. We use third party transportation companies to help us manage truck and rail carriers who deliver inbound materials to us and deliver our products to our North American customers. As of December 31, 2014, we leased 194 rail cars under operating leases.  

RAW MATERIALS

Our principal distillery products segment raw materials are corn and other feedstock, which are processed into food grade alcohol and distillery co-products consisting of fuel grade alcohol, distillers feed and corn oil. Our principal ingredients solutions segment raw material is wheat flour, which is processed into starches and proteins.  For the year ending December 31, 2014, we purchased most of our grain requirements from one supplier, Bunge Milling. Our historical practice has been to order corn for a month at a time.  We have contracted our grain supply with Bunge Milling since 2012. Our current grain supply contract with Bunge Milling expires December 31, 2017. This contract permits us to purchase grain for delivery up to 12 months into the future at negotiated prices.  The pricing is based on a formula using several factors.  We expect to order grain anywhere from one to 12 months into the future.  We provide for our flour requirements through a supply contract with Ardent Mills (formerly ConAgra Mills) whose term, as amended, expires in October 2015.  The supply contract is automatically renewable for an additional term of five years unless either party gives at least 180 days written notice of termination. Pricing is based on a formula that contains several factors. A less significant raw material is oak barrels, both new and used, which are required for the aging of bourbon and whiskey. We purchase oak barrels from five suppliers, and some customers supply their own.


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The cost of grain has historically been subject to substantial fluctuations, depending upon factors such as crop conditions, weather, disease, plantings, government programs and policies, competition for acquisition of inputs such as agricultural commodities, purchases by foreign governments and changes in demand resulting from population growth and customer preference.  Variations in grain prices have had, from time to time, significant adverse effects on the results of our operations in cases where we cannot recoup the cost increase in our selling prices.  Fuel grade alcohol prices, which historically have tracked the cost of gasoline, do not usually adjust to rising grain costs.  It generally has been difficult for us to compensate for increases in grain costs through adjustments in prices charged for our vital wheat gluten due to subsidized European Union wheat gluten, whose traditionally lower prices are not affected by such costs.  We have taken steps to reduce the impact of cost fluctuations on our business,  primarily by ceasing and/or significantly reducing our production and marketing of lower and negative margin commodity type products such as gluten and fuel grade alcohol, but we will continue to be affected by cost fluctuations to some degree, particularly when they are volatile.

ENERGY
 
Because energy constitutes a major cost of operations, we seek to assure the availability of fuels at competitive prices.
 
We use natural gas to operate boilers that we use to make steam heat.  We procure natural gas for our facilities in the open market from various suppliers.  We can purchase contracts for the delivery of natural gas in the future or can purchase future contracts on the exchange.  Depending on existing market conditions, in Atchison we have the ability to transport gas through a gas pipeline owned by a wholly-owned subsidiary.  Historically, prices of natural gas have been higher in the late fall and winter months than during other periods.
 
We have a risk management program whereby we may purchase at pre-determined prices a portion of our natural gas requirements for future delivery.  However, we typically enter contracts for future delivery only to protect margins on contracted alcohol sales and expected ingredients sales and general usage.

EMPLOYEES
 
As of December 31, 2014, we had a total of 268 employees.  A collective bargaining agreement, covering 95 employees at the Atchison facility, that was due to expire on August 31, 2014 was renewed until August 31, 2019.  Another collective bargaining agreement covering 48 employees at the Indiana facility expires on December 31, 2017.  As of December 31, 2013, we had a total of 268 employees. We consider our relations with our personnel generally to be good.

REGULATION
 
We are subject to a broad range of federal, state, local and foreign laws and regulations intended to protect public health and the environment.  Our operations are also subject to regulation by various federal agencies, including the Alcohol and Tobacco Tax Trade Bureau, the Occupational Safety and Health Administration, the Food and Drug Administration and the United States Environmental Protection Agency ("USEPA"), and by various state and local authorities.  Such regulations cover virtually every aspect of our operations, including production facilities, marketing, pricing, labeling, packaging, advertising, water usage, waste water discharge, disposal of hazardous wastes and emissions and other matters.
 
Our alcohol business is subject to regulation by the Alcohol and Tobacco Tax and Trade Bureau ("TTB") and the alcoholic beverage agencies in the States of Kansas, Illinois and Indiana.  Food products are also subject to regulation by the Food and Drug Administration.  TTB regulation includes periodic TTB audits of all production reports, shipping documents, and licenses to assure that proper records are maintained.  We are also required to file and maintain monthly reports with the TTB of alcohol inventories and shipments. We are currently being audited by the TTB for the period from December 27, 2011 to November 30, 2014. The outcome of this audit is unknown at this time.
 
We are subject to extensive environmental regulations at the federal, state and local levels.  All of our principal facilities are regulated at the federal level by the USEPA.  The USEPA has adopted regulations requiring the owners of certain facilities to measure and report their greenhouse gas emissions, and has also begun a process to regulate these emissions under the Clean Air Act.  At the state level, we are regulated in Kansas by the Division of Environment of the Kansas Department of Health and Environment ("KDHE") and in Indiana by the Indiana Department of Environmental Management. In Illinois, our joint venture entity, ICP, is regulated by the Illinois Environmental Protection Agency. We are required to obtain operating permits and to submit periodic reports to regulating agencies.


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Our current National Pollutant Discharge Elimination System permit is valid through September 30, 2015.  We submitted a draft research study to the KDHE on July 31, 2014 regarding the improvements needed to reduce phosphorus
concentrations in the wastewater discharges at the Atchison facility. The final study report is due by May 24, 2015.

In June and July 2014, we exceeded the limit for facility-wide individual hazardous air pollutants. The KDHE issued an order on January 29, 2015 to resolve this issue. All provisions of the order have been completed. We paid a $6 fine to the KDHE and have requested termination of the order.

 INVESTMENT IN EQUITY METHOD INVESTMENTS

Illinois Corn Processing, LLC ("ICP"). On November 20, 2009, we completed a series of related transactions pursuant to which we contributed our Pekin facility and certain maintenance and repair materials to a newly-formed company, ICP, and then sold 50 percent of the membership interest in ICP to ICP Holdings, an affiliate of SEACOR.  ICP reactivated distillery operations at the Pekin facility during the quarter ended March 31, 2010.

On February 1, 2012, ICP Holdings exercised its option and purchased an additional 20 percent from us for $9,103, reducing our ownership from 50 percent to 30 percent.

In connection with these transactions, we entered into various agreements with ICP and ICP Holdings, including a Contribution Agreement, an LLC Interest Purchase Agreement and a Limited Liability Company Agreement. Under the LLC Interest Purchase Agreement, we sold ICP Holdings 50 percent of the membership interest in ICP.  This agreement gave ICP Holdings the option to purchase up to an additional 20 percent of the membership interest in ICP at any time between the second and fifth anniversary based on an agreed to criteria.  As described above, this option was exercised on February 1, 2012.
Pursuant to the Limited Liability Company Agreement, control of day to day operations generally is retained by the members, acting by a majority in interest.  Following ICP Holdings' exercise of its option referred to above, ICP Holdings owns 70 percent of ICP and generally is entitled to control its day to day operations. The Limited Liability Company Agreement also provides for the creation of an advisory board which consists of two advisors appointed by us and four advisors appointed by ICP Holdings.  All actions of the advisory board require majority approval of the entire board, except that any transaction between ICP and ICP Holdings or its affiliates must be approved by the advisors appointed by us. The Limited Liability Company Agreement gives either member certain rights to shut down the facility if it operates at a loss.  Such rights are conditional in certain instances but absolute if EBITDA (as defined in the agreement) losses are an aggregate $1,500 over any three consecutive quarters or if ICP's net working capital is less than $2,500.  ICP Holdings also has the right to shut down the facility if ICP is in default under its loan agreement for failure to pay principal or interest for two months.

ICP’s revolving credit agreement with an affiliate of SEACOR has been amended and restated to extend the maturity to January 1, 2016.  The Company has no further funding requirement to ICP.
 
D.M. Ingredients GmbH ("DMI").  In 2007, we acquired a 50 percent interest in DMI, a German joint venture company that produces certain of our specialty ingredients products through a toller for distribution in the European Union ("E.U.") and elsewhere.  As of December 31, 2014 our total capital commitment to the joint venture was $750, of which we had contributed $571.

On December 29, 2014, we gave notice to DMI and to our partner in DMI, Crespel and Dieters GmbH & Co. KG ("C&D"), to terminate the joint venture effective June 30, 2015. C&D also provided notice to terminate DMI effective June 30, 2015. Under German law, beginning on June 30, 2015, normal operations for DMI will cease and a one-year winding up process will begin. Any distribution of liquidation proceeds is expected to occur in the third quarter of 2016.
    
EXECUTIVE OFFICERS OF THE REGISTRANT

The Company’s officers as of December 31, 2014 and their ages as of March 12, 2015 are listed below.


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Name
Age
Position
Augustus C. Griffin
55
President and Chief Executive Officer
Donald P. Tracy
57
Vice President, Finance and Chief Financial Officer
Randall M. Schrick
64
Vice President, Production and Engineering
David E. Dykstra
51
Vice President, Alcohol Sales and Marketing
Michael R. Buttshaw
52
Vice President, Ingredient Sales and Marketing
David E. Rindom
59
Vice President, Human Resources

Mr. Griffin has served as President and Chief Executive Officer of MGP since July 2014 and as a member of the Board of Directors since August 2014. Immediately prior to joining MGP, Mr. Griffin spent a year as Executive Vice President of Marketing for Next Level Spirits, a northern California-based producer, importer and distributor of premium wine and spirits brands. Between 2011 and 2013, he served as Brand and Business Consultant for Nelson’s Green Brier Distillery, Nashville, Tennessee. Prior to 2011, he served for 24 years with Brown-Forman Corporation in increasingly important brand management and general management leadership roles, where he ultimately became Senior Vice President and Global Managing Director in charge of the company's flagship Jack Daniel’s business in 2008.
    
Mr. Tracy has held the position of Vice President of Finance and Chief Financial Officer of MGP since November 2009. From December 2013 to July 2014, he also served as Interim Co-Chief Executive Officer. From 2006 until joining MGP, Mr. Tracy served as Chief Financial Officer at Emery Oleochemicals, a global chemical manufacturer, and was based in Cincinnati. He previously served as Chief Financial Officer at Briggs Industries at the company’s United States headquarters in Charleston, South Carolina. Before that, Mr. Tracy spent four years with Tenaris Corp., a global producer of steel pipe, as Director of Financial Projects and subsequently as Chief Financial Officer of Tenaris North America. His previous experience included 10 years with the Procter & Gamble Company.

Mr. Schrick has served as Vice President of Production and Engineering since September 2014. Prior to this role, he was Vice President of Engineering from June 2009 to September 2014. Mr. Schrick additionally held the role of Interim Co-Chief Executive Officer from December 2013 to July 2014. He served as President of the Company’s joint venture operation in Pekin, Illinois, ICP, from November 2009 to December 2011. Previously, Mr. Schrick was Corporate Director of Distillery Products Manufacturing from June 2008 to June 2009 and was Vice President, Manufacturing and Engineering from July 2002 to June 2008. Mr. Schrick joined MGP in 1973 and served in various increasingly important production positions, including Vice President - Operations from 1992 until July 2002. He was a Director of the Company from 1987 to 2008.

Mr. Dykstra has served as Vice President of Alcohol Sales and Marketing since 2009.  He previously has been industrial alcohol sales manager since 2006.  He first joined the Company in 1988 eventually serving as director of sales for both beverage and fuel grade alcohol.  In 1999, he left the company to assume the role of vice president of sales and marketing for Abengoa Bio Energy, Wichita, Kansas.  He remained in that position until 2003, when he joined United Bio Energy Fuels, L.L.C., in Wichita as vice president of that company’s alcohol marketing division. He returned to the Company in 2006. 

Mr. Buttshaw has served as Vice President of Ingredients Sales and Marketing at MGP since December 2014. He previously spent four years as Vice President of Sales for the ingredient group at Southeastern Mills, Inc., Rome, Georgia. Just prior to that, Mr. Buttshaw was Vice President of Sales and Marketing for Penford Food Ingredients, Centennial, Colorado. This followed two years as Vice President of Sales and Business Development-specialty enzymes for DSM Food Specialties, Parsippany, New Jersey. From 1985 to 2008, Mr. Buttshaw was employed with Hormel Foods Corporation, Austin, Minnesota.

Mr. Rindom joined the Company in 1980.  He has served as Vice President, Human Resources since June 2000.  He was Corporate Director of Human Relations from 1992 to June 2000, Personnel Director from 1988 to 1992, and Assistant Personnel Director from 1984 to 1988.


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ITEM 1A.  RISK FACTORS
 
Our business is subject to certain risks and uncertainties.  The following identifies those which we consider to be most important:
 
RISKS THAT AFFECT OUR BUSINESS AS A WHOLE
 
An interruption of operations at either our Atchison facility, our Indiana facility, at the ICP facility, or a disruption of transportation services could negatively affect our business.

The bulk of our ingredient solutions production takes place at our facility in Atchison, while food grade alcohol is produced at both our Atchison and Indiana facilities. An interruption in or loss of operations at either of our facilities could reduce or postpone production of our products, which could have a material adverse effect on our business, results of operations and/or financial condition. To the extent that our value-added products rely on unique or proprietary processes or techniques, replacing lost production by purchasing from outside suppliers becomes more difficult.

We hold a substantial amount of inventory of aged whiskeys and bourbons at our Indiana facility. If there were a catastrophic event at our Indiana facility, our business could be adversely affected. The loss of a significant amount of aged inventory - through fire, natural disaster, or otherwise - could result in a significant reduction in supply of the affected product or products and could result in customer claims against us.

We source industrial alcohol products from ICP. We participate in ICP's operating results through our equity investment in ICP. An interruption in or loss of operations at ICP’s Pekin, Illinois facility could have a material adverse effect on our business, results of operations and/or financial condition.

A disruption in transportation services could result in difficulties supplying materials to our facilities and impact our ability to deliver products to our customers in a timely manner.

Our profitability is affected by the costs of energy, grain, and flour that we use in our business, the availability and cost of which are subject to weather and other factors beyond our control.  We may not be able to recoup in our selling prices changes in the prices of commodities and natural gas.

Grain and flour costs are a significant portion of our costs of goods sold. Historically, the cost of such raw materials has been subject to substantial fluctuation, depending upon a number of factors which affect commodity prices in general and over which we have no control.  These include crop conditions, weather, disease, plantings, government programs and policies, competition for acquisition of inputs such as agricultural commodities, purchases by foreign governments, and changes in demand resulting from population growth and customer preferences.  The price of natural gas also fluctuates based on anticipated changes in supply and demand, weather and the prices of alternative fuels.  Fluctuations in the price of commodities and natural gas can be sudden and volatile at times and have had, from time to time, significant adverse effects on the results of our operations. Higher energy costs could result in higher transportation costs and other operating costs.

We have eliminated futures and options contracts because we can purchase corn for delivery up to 12 months into the future under our grain supply agreements.  We intend to contract for the future delivery of flour only to protect margins on expected ingredients sales.  On the portion of volume not hedged, Management will attempt to recover higher commodity costs through higher sales prices, but market considerations may not always permit this.  Even where prices can be adjusted, there would likely be a lag between when we experience higher commodity or natural gas costs and when we might be able to increase prices.  To the extent we are unable to timely pass increases in the cost of raw materials to our customers under sales contracts, market fluctuations in the cost of grain, natural gas and ethanol may have a material adverse effect on our results of operations and financial condition.  
 
We source our grain and wheat flour from a limited number of suppliers.
 
We have a signed supply agreements with Bunge Milling for our grain supply (primarily corn) and Ardent Mills (formerly ConAgra Mills) for our wheat flour.  If either of these companies encounters an operational or financial issue, or otherwise can not meet our supply demands, it could lead to an interruption in supply to us and/or higher prices than those we have negotiated or than are available in the market at the time.
 

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There may be risks with the effectiveness or execution of our new five-year strategic plan.

If our business strategy is unsuccessful, or if we otherwise fail to develop or implement effective strategies, our growth, stock price, or financial results could suffer. More broadly, consumers may shift away from spirits (particularly brown spirits) or high fiber, high protein, or non-GMO products. Many of these risks are beyond our control. Failure to effectively execute or implement our strategic plan could have a material adverse effect on our results of operations, cash flows and financial condition.  
    
Any business interruptions and the timing of the associated insurance recovery, if any, may cause volatility in our operating results.

In January 2014, we experienced a fire at our Indiana facility. In December 2014, we negotiated a final settlement with our insurance carrier to close this claim. As part of the settlement, MGP agreed to assume the risk of any future downtime of the repaired equipment until the permanent replacement is installed, which is expected by the end of 2015. The cost of the replacement is likely to exceed the cost of settlement funds received from the insurance carrier. Because the potential exists for business interruption until completion of permanent repairs, and because the installation is complex, we may experience volatility in our future operating results.

During October 2014, we experienced a fire at our Atchison facility.  We are currently working with our insurance carrier to determine the coverage for equipment repairs and business interruption losses. Because the timing and amount of the business interruption and the insurance recovery may differ, we may experience volatility in our future operating results.

ICP, like many others in the ethanol industry, has recently experienced high levels of profitability, resulting in a disproportionate share to our improvements in net income for the year ended December 31, 2014, and these levels may not be sustained. Because of ICP's recent strong financial performance, ICP was able to distribute cash to us, but this may not recur.

Our proportionate share of the profits of ICP has recently had a significant positive impact on our net income. The significant earnings improvement from 2013 to 2014 was due to much improved margins in the production of chemical intermediates and high quality alcohol. The improved margins were driven primarily by a low current supply and strong demand for these products and for fuel grade alcohol, which affects their pricing. We currently expect that ICP's recent levels of profitability may not be sustained and, as a consequence that ICP's contributions to our future net income may be reduced.

On December 4, 2014, we received a $4,835 distribution from ICP. This is the first distribution we have received from ICP, and there is no assurance such distributions will be received in the future.

If ICP incurs losses, it could result in closure of its Pekin facility. ICP’s access to capital may limit needed financing.  Either of these events could result in reduced sales and impairment losses in the future for us.

ICP's Limited Liability Company Agreement grants the right to either member to elect to shut down the Pekin facility if ICP operates at an EBITDA loss of $500 in any quarter, subject to the right of the other member to override that election. If the Objecting Member overrides the election, then EBITDA loss and EBITDA profit for each subsequent quarter are allocated 80 percent to the Objecting Member and 20 percent to the Electing Member until the end of the applicable quarter in which the Electing Member withdraws its Shutdown Election and thereafter allocations revert to the general 70 percent/30 percent split (subject to a catch-up allocation of 80 percent of EBITDA profits to the Objecting Member until it equals the amount of EBITDA loss allocated to such member on an 80 percent/20 percent basis).

Either we or ICP Holdings has the absolute right to cause the shutdown of the Pekin facility if ICP losses aggregate $1,500 over any three consecutive quarters or if ICP’s net working capital is less than $2,500. 
 
ICP experienced an EBITDA loss in excess of $500 for the quarter ended March 31, 2013, which was one factor that prompted the Company to provide notice to shut down the facility on April 18, 2013 (withdrawn on March 31, 2014), but ICP experienced positive EBITDA for the remainder of 2013 and has sustained this performance in 2014. There can be no assurance that ICP will continue to experience positive EBITDA. While ICP had a significant amount of cash on hand in late 2014 and a line of credit with SEACOR through January 1, 2016, its ability to secure financing could limit its operations in the future.


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The Company has a minority interest in ICP, and that could limit our ability to influence ICP's operations and profitability. 

We have a minority interest in ICP of 30 percent, and have only two representatives on the six-member Advisory Board of ICP.  Our minority ownership position and limited advisory role mean that our ability to influence operating decisions and affect profitability of the joint venture is limited.   We do not control ICP's operations, strategies, or financial decisions. The majority equity owner may have economic, business or legal interests that are inconsistent with our goals or the goals we would set for ICP. We are dependent on the management of ICP and the other members of the Advisory Board to operate the joint venture profitably and take our interests into account. We must rely on others to implement beneficial management strategies, including appropriate risk management, internal controls over financial reporting, and compliance monitoring. The ICP Limited Liability Company Agreement generally allocates the profits, losses and distributions of cash of ICP based on our percentage membership interest in ICP which is derived from our capital contributions to ICP relative to the total contributions to ICP from all members. Our proportionate share of the earnings and losses are reflected in our financial statements. Any cash distributions from ICP (other than certain mandatory distributions for tax liabilities) must be approved by the Advisory Board, which we do not control.
 
Our ability to supply our basic industrial alcohol business is highly dependent on sourcing the product from ICP or unaffiliated third parties.

Pursuant to a Marketing Agreement between us and ICP, ICP manufactured and supplied high quality products, including industrial alcohol, for us and we purchased, marketed and sold such products for a marketing fee until January 1, 2013, when the Marketing Agreement expired.  
 
     Our Atchison and Lawrenceburg facilities are constrained in their ability to produce additional volumes of industrial alcohol. For 2014 and the foreseeable future, we expect that ICP or other third party sources will be important sources of product for us. While we plan to continue to source product from ICP in 2015, ICP is under no obligation to sell us these products. If we are unsuccessful in sourcing product from ICP or other sources, our ability to supply our basic industrial alcohol business at current levels will be limited.

We have incurred impairment and restructuring losses in the past and may suffer such losses in the future.

We review long-lived assets for impairment at year end or if events or circumstances indicate that usage may be limited and carrying values may not be recoverable. Should events indicate the assets cannot be used as planned, the realization from alternative uses or disposal is compared to their carrying value. If an impairment loss is measured, this estimate is recognized. Considerable judgment is used in these measurements, and a change in the assumptions could result in a different determination of impairment loss and/or the amount of any impairment.

The markets for our products are very competitive, and our results could be adversely affected if we do not compete effectively.
 
The markets for products in which we participate are very competitive. Our principal competitors in these markets have substantial financial, marketing and other resources, and several are much larger enterprises than us.

We are dependent on being able to generate net sales and other operating income in excess of cost of products sold in order to obtain margins, profits and cash flows to meet or exceed its targeted financial performance measures.  Competition is based on such factors as product innovation, product characteristics, product quality, pricing, color and name.  Pricing of our products is partly dependent upon industry processing capacity, which is impacted by competitor actions to bring on-line idled capacity or to build new production capacity.  If market conditions make our specialty ingredients too expensive for use in consumer goods, our revenues could be affected.  If our large competitors were to decrease their pricing, we could choose to do the same, which could adversely affect our margins and profitability.  If we did not do the same, our revenues could be adversely affected due to the potential loss of sales or market share. Our revenue growth could also be adversely affected if we are not successful in developing new ingredients products for our customers or through new product introductions by our competitors.  In addition, more stringent new customer demands may require us to make internal investments to achieve or sustain competitive advantage and meet customer expectations.

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Our unionized workforce could cause interruptions in the Company’s operations.

As of December 31, 2014, approximately 143 of our 268 employees were members of a union.  Although our relations with our two unions are stable and our labor contracts do not expire until December 2017 and August 2019, there is no assurance that we will not experience work disruptions or stoppages in the future, which could have a material adverse effect on our business and results of operations and adversely affect our relationships with our customers.

If we were to lose any of our key management personnel, we may not be able to fully implement our business strategies.

We rely on the continued services of key personnel involved in management, finance, product development, sales, manufacturing and distribution, and, in particular, upon the efforts and abilities of our executive management team.  The loss of service of any of our key personnel could have a material adverse effect on our business, financial condition and results of operations.  

If we cannot attract and retain key management personnel, or if our search for qualified personnel is prolonged, our operating results could be adversely affected. In addition, it could be difficult, time consuming and expensive to replace any key management member or other critical personnel, and no guarantee exists that we will be able to recruit suitable replacements or assimilate new key management personnel into our organization.

Covenants and other provisions in our credit facility could hinder our ability to operate.  Our failure to comply with covenants in our credit facility could result in the acceleration of the debt extended under such facility, limit our liquidity, and trigger other rights.

Our credit agreement contains a number of financial and other covenants, including provisions that require us, in certain circumstances, to meet certain financial tests.  These covenants may limit or restrict our ability to: 

incur additional indebtedness;
pay cash dividends or make distributions;
dispose of assets;
create liens on our assets;
pledge the fixed and real property assets; or
merge or consolidate.

These covenants could hinder our ability to operate and could reduce our profitability.  For all periods in which the Excess Availability (which is the total availability for loans, less the Company’s and its subsidiaries’ trade payables aged in excess of historical levels and book overdrafts) is less than $10,000, the Borrowers are required to have a Fixed Charge Coverage Ratio ("FCCR"), as defined in Note 4: Corporate Borrowings and Capital Lease Obligations, measured on a month end trailing basis, of at least 1.10:1.00 as of each month-end using a trailing twelve-month measure. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Financial Covenants.

In addition, our credit agreement permits the lender to modify borrowing base and advance rates, the effect of which may limit the amount of loans that we may have outstanding at any given time.  The lender may also terminate or accelerate our obligations under the credit agreement upon the occurrence of various events in addition to payment defaults and other breaches, including such matters as a change of control of the Company, defaults under other material contracts with third parties, and ERISA violations.  Any modification to reduce our borrowing base or termination of our credit agreement would negatively impact our overall liquidity and may require us to take other actions to preserve any remaining liquidity.  Although we anticipate that we will be able to meet the covenants in our credit agreement, there can be no assurance that we will do so, as there are a number of external factors that affect our operations, such as commodity prices, over which we have little or no control.    If we default on any of our covenants, and if such default is not cured or waived, our lenders could, among other remedies, terminate its commitment to lend and/or accelerate any outstanding debt and declare that such debt is immediately due and payable.  If our lenders were to terminate our credit, or materially change our borrowing base, we may not have sufficient funds available for us to operate.  If our lenders were to accelerate our debt, we might be unable to repay such debt immediately and might not be able to borrow sufficient funds to refinance.  Even if new financing were available, it may not be on terms that are acceptable to us.  Acceleration could result in foreclosure on assets that we have pledged to our lenders.  Further, certain of our other secured debt instruments contain cross default provisions, such that an event of default under our credit agreement with our lenders may result in an event of default under these other debt instruments.  If our lenders

15



were to terminate our credit or accelerate our debt, or if our lenders were to materially change our borrowing base, we might not have sufficient funds to operate.

We are subject to extensive regulation and taxation, and compliance with existing or future laws and regulations, including those relating to greenhouse gases and climate change, may require us to incur substantial expenditures or require us to make product recalls.
 
We are subject to a broad range of federal, state, local and foreign laws and regulations relating to the protection of the public health and the environment. Our operations are also subject to regulation by various federal agencies, including TTB, the Occupational Safety and Health Administration, the Food and Drug Administration, and the USEPA, and by various state and local authorities. Such regulations cover virtually every aspect of our operations, including production facilities, marketing, pricing, labeling, packaging, advertising, water usage, waste water discharge, disposal of hazardous wastes and emissions and other matters. Violations of any of these laws and regulations may result in administrative, civil or criminal fines or penalties being levied against us, including temporary or prolonged cessation of production, revocation or modification of permits, performance of environmental investigatory or remedial activities, voluntary or involuntary product recalls, or a cease and desist order against operations that are not in compliance. These laws and regulations may change in the future and we may incur material costs in our efforts to comply with current or future laws and regulations or to effect any product recalls. These matters may have a material adverse effect on our business and financial results.

Our Atchison and joint venture facilities currently produce fuel grade alcohol as a by-product and emit carbon dioxide into the atmosphere as a by-product of the fermentation process. In 2007, the United States Supreme Court classified carbon dioxide as an air pollutant under the Clean Air Act in a case seeking to require the USEPA to regulate carbon dioxide in vehicle emissions. On February 3, 2010, the USEPA released its final regulations on the Renewable Fuel Standard program ("RFS2"). We believe these final regulations grandfather both facilities at their current operating capacity for fuel grade alcohol, but facility expansion would need to meet a 20 percent threshold reduction in greenhouse gas emissions from a 2005 baseline measurement to produce fuel grade alcohol eligible for the RFS2 mandate. Additionally, legislation is pending in Congress on a comprehensive carbon dioxide regulatory scheme, such as a carbon tax or cap-and-trade system. We may be required to install carbon dioxide mitigation equipment or take other steps unknown to us at this time in order to comply with other future laws or regulations. Compliance with future laws or regulations relating to emission of carbon dioxide could be costly and may require additional capital, which may not be available, preventing us and our joint venture from operating our facilities as originally designed, which may have a material adverse impact on our respective operations, cash flows and financial position.

We import some of the ingredients used in our production. The import of the ingredients is subject to federal regulation. Difficulty in complying with existing federal rules or any changes in such federal rules could impact how we source our ingredients. This, in turn, could have an impact on our profitability.

Also, the distribution of beverage alcohol products is subject to extensive taxation in the United States and internationally (and, in the United States, at both at the federal and state government levels), and beverage alcohol products themselves are the subject of national import and excise duties in most countries around the world. This taxation has a minor effect on us; however, it has larger effects on our beverage alcohol customers, and accordingly, an increase in taxation or in import or excise duties could significantly harm our sales revenues and margins, both through the reduction of overall consumption and by encouraging consumers to switch to lower-taxed categories of beverage alcohol.

We face risk related to changes in the global economic environment.
 
Our business may be impacted by the weak United States and global economic conditions, which are increasingly volatile.  General business and economic conditions that could affect us include short-term and long-term interest rates, unemployment, inflation, fluctuations in debt markets and the strength of the United States economy and the local economies in which we operate.  While currently these conditions have not impaired our ability to access credit markets and finance our operations and acquisitions, there can be no assurance that there will not be a further deterioration in the financial markets.
 
There could be a number of other effects from these economic developments on our business, including reduced consumer demand for products; insolvency of our customers, resulting in increased provisions for credit losses; decreased customer demand, including order delays or cancellations and counterparty failures negatively impacting our results of operations, business and financial results. 


16



A failure of one or more of our key information technology systems, networks, processes, associated sites, or service providers could have a material adverse impact on our business.
    
We rely on information technology (IT) systems, networks, and services, including internet sites, data hosting and processing facilities and tools, hardware (including laptops and mobile devices), software and technical applications and platforms, some of which are managed and hosted by third-party vendors to assist us in the management of our business. The various uses of these IT systems, networks, and services include, but are not limited to: hosting our internal network and communication systems; enterprise resource planning; processing transactions; summarizing and reporting results of operations; business plans, and financial information; complying with regulatory, legal, or tax requirements; providing data security; and handling other processes necessary to manage our business. Although the Company has an offsite back-up system and disaster recovery plan, any failure of our information systems could adversely impact the Company’s ability to operate.  Routine maintenance or development of new information systems may result in systems failures, which may adversely affect our business, results of operations and financial results. 

Increased IT security threats and more sophisticated cyber crime pose a potential risk to the security of our IT systems, networks, and services, as well as the confidentiality, availability, and integrity of our data. This can lead to outside parties having access to privileged data or strategic information of the Company, its employees or customers.  Any breach of our data security systems or failure of our information systems may have a material adverse impact on our business operations and financial results.   If the IT systems, networks, or service providers we rely upon fail to function properly, or if we suffer a loss or disclosure of business or other sensitive information, due to any number of causes, ranging from catastrophic events to power outages to security breaches, and our disaster recovery plans do not effectively address these failures on a timely basis, we may suffer interruptions in our ability to manage operations and reputational, competitive, or business harm, which may adversely affect our business operations or financial condition. In addition, such events could result in unauthorized disclosure of material confidential information, and we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us or to our partners, our employees, customers,  and suppliers. In any of these events, we could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and IT systems.
Damage to our reputation, or that of any of our key customers or their brands, could affect our stock price and business performance.
The success of our products depends upon the positive image that consumers have of the third party brands that consume our products.  Contamination, whether arising accidentally or through deliberate third-party action, or other events that harm the integrity or consumer support for our products and could affect the demand for our products. Unfavorable media, whether accurate or not, related to our industry or to us or our products, or to the brands that consume our products, marketing, personnel, operations, business performance or prospects could negatively affect our corporate reputation, stock price, ability to attract high-quality talent or the performance of our business. Adverse publicity or negative commentary on social media outlets could cause consumers to react rapidly by avoiding our brands or choosing brands offered by our competitors, which could materially negatively affect our financial results, business and financial condition. 

Unsuccessful research and product launches could affect our profitability.

Research activities and products launch activities are inherently uncertain.  The failure to launch a new product successfully can give rise to inventory write-offs and other costs and can affect consumer perception of an existing brand. Any significant changes in consumer preferences and failure to anticipate and react to such changes could result in reduced demand for our products.  Unsuccessful research and product launches could affect our profitability.

    
RISKS SPECIFIC TO OUR DISTILLERY PRODUCTS SEGMENT

Disruption in the supply or shortage of oak barrels could negatively affect our business.

New oak barrels are available from only a few sources and the industry is currently experiencing a shortage of oak barrels compared to the rapidly increasing demand for products aged in these barrels. The shortage could limit our ability to fulfill our existing customer arrangements and our ability to lay out stock for our own use in future years. The effect of our inability to stock for our own use could also limit future growth and results of operations.

17



The relationship between the price we pay for corn and the sales prices of our distillery co-products can fluctuate significantly and affect our results of operations.

Dried grain, or distillers feed, and fuel grade alcohol are the principal co-products of our alcohol production process and can contribute in varying degrees to the profitability of our distillery products segment.  We sell fuel grade alcohol, the prices for which typically, but not always, have tracked price fluctuations in gasoline prices.  Distillers feed is sold for prices which historically have tracked the price of corn, but, certain of our co-products compete with similar products made from other plant feedstocks whose cost may not have risen in unison with corn prices.  As a result, the profitability of these products to us could be affected.

Decisions concerning the quantity of maturing stock of our aged distillate could affect our future profitability.

There is an inherent risk in determining the quantity of maturing stock of aged distillate to lay down in a given year for future sales. This could lead to an inability to supply future demand or lead to a future surplus of inventory and consequent write-down in the value of maturing stocks of aged distillate.  As a result, profitability of the distillery products segment could be affected.
 
Water scarcity or quality could negatively impact our production costs and capacity.

Water is the main ingredient in substantially all of our distillery products. It is also a limited resource, facing unprecedented challenges from climate change, increasing pollution, and poor management. As demand for water continues to increase, water becomes more scarce and the quality of available water deteriorates, we may be affected by increasing production costs or capacity constraints, which could adversely affect our results of operations, business and financial results.

We may be subject to litigation directed at the beverage alcohol industry and other litigation.

Companies in the beverage alcohol industry are, from time to time, exposed to class action or other litigation relating to alcohol advertising, product liability, alcohol abuse problems or health consequences from the misuse of alcohol. Such litigation may result in damages, penalties or fines as well as damage to our reputation, which could have a material adverse effect on our cash flows, financial condition and financial results.

Adverse public opinion about alcohol could reduce demand for our products.

In recent years, there has been increased social and political attention directed at the beverage alcohol industry.  The recent attention has focused largely on public health concerns related to alcohol abuse, including drunk driving, underage drinking, and the negative health impacts of the abuse and misuse of beverage alcohol.

Anti-alcohol groups have, in the past, advocated successfully for more stringent labeling requirements, higher taxes and other regulations designed to discourage alcohol consumption.  More restrictive regulations, negative publicity regarding alcohol consumption and/or changes in consumer perceptions of the relative healthfulness or safety of beverage alcohol could decrease sales and consumption of alcohol and thus the demand for our products.  This could, in turn, significantly decrease both our revenues and our revenue growth and have a material adverse effect on our results of operations, business and financial results.


18



RISKS SPECIFIC TO OUR INGREDIENT SOLUTIONS SEGMENT
 
Our focus on higher margin specialty ingredients may make us more reliant on fewer, more profitable customer relationships.
 
Our business strategy for our ingredient solutions segment includes focusing our efforts on the sale of specialty proteins and starches to targeted domestic consumer packaged goods customers.  Our major focus is directed at food ingredients, which are primarily used in foods that are developed to address consumers’ desire for healthier and more convenient products; these consist of dietary fiber, wheat protein isolates and concentrates and textured wheat proteins.  The bulk of our applications technology and research and development efforts are dedicated to providing customers with specialty ingredient solutions that deliver nutritional benefits, as well as desired functional and sensory qualities to their products.  Our business and financial results could be materially adversely affected if our customers were to determine to reduce their new product development ("NPD") activities or cease using our unique dietary fibers, starches and proteins in their NPD efforts. In addition, our sales growth opportunities could be at risk in these areas if consumers abandon or significantly limit their interest in healthier foods, limit their interest in convenience foods and/or adopt a widespread aversion to foods containing wheat gluten.

Adverse public opinion about any of our specialty ingredients could reduce demand for our products.
Consumer preferences with respect to our specialty ingredients might change. In fact, in recent years, we have noticed shifting consumer preferences with respect to gluten and increased media attention directed at gluten intolerance. Shifting consumer preferences could decrease demand for our specialty ingredients. This could, in turn, significantly decrease our revenues and revenue growth, which could have a material adverse affect on our cash flows, financial condition and financial results.
New products competing with our Fibersym® resistant starch could lead to decreasing margins and lower profitability.
Our patent rights to Fibersym® will expire in 2017. We are already facing competition with our Fibersym® resistant starch. This competition could lead to diminished returns and lower our margins. Over the next two to three years, we could face increased costs from intellectual property defense. Each of these events could result in significant costs and could have a material adverse effect on our business, cash flows and financial results.
We may experience a supply disruption of certain textured wheat proteins.
On December 29, 2014 we gave notice to our 50 percent-owned joint venture subsidiary, DMI, and our business partner in DMI, C&D, to terminate the joint venture effective June 30, 2015. C&D also provided notice to us to terminate DMI on June 30, 2015. Pursuant to German law, commencing on June 30, 2015, normal operations for DMI will cease and a one-year winding up process will begin. DMI’s primary operation is the production and tolling of the Trutex®/Wheatex® series of textured wheat proteins made from vital wheat gluten and DMI has been the sole source of our supply of Trutex®/Wheatex® for the past two years. The ability to find another source to supply the product will be critical to our continued ability to market Trutex®/Wheatex®. We are in the early stages of finding alternative sources for production for our Trutex®/Wheatex® product within the United States. Any difficulties we have in finding these alternative sources, qualifying one or more as a supplier, and successfully starting up production may result in shortages of product to meet customer demand, which could impact our operating results, cash flows and financial results.
RISKS RELATED TO OUR COMMON STOCK

Common stockholders have limited rights under our Articles of Incorporation.
 
Under our Articles of Incorporation, holders of our Preferred Stock are entitled to elect five of our nine directors and only holders of our Preferred Stock are entitled to vote with respect to a merger, dissolution, lease, exchange or sale of substantially all of the Company’s assets, or on an amendment to the Articles of Incorporation, unless such action would increase or decrease the authorized shares or par value of the Common or Preferred Stock, or change the powers, preferences or special rights of the Common or Preferred Stock so as to affect the holders of Common Stock adversely.  Generally, the Common Stock and Preferred Stock vote as separate classes on all other matters requiring stockholder approval.  

The majority of the outstanding shares of our Preferred Stock is beneficially owned by one individual, who is effectively in control of the election of five of our nine directors under the limited rights of the common stockholders under our Articles of Incorporation.

19



The trading volume in our common stock fluctuates depending on market conditions. The sale of a substantial number of shares in the public market could depress the price of our stock and make it difficult for stockholders to sell their shares.

Our common stock is listed on the NASDAQ Stock Market.  Our public float at December 31, 2014 (including non-vested restricted stock awards held by non-affiliates) was approximately 11,645,491 shares, as approximately 6,307,968 shares are held by affiliates.  Over the year ended December 31, 2014, our daily trading volume as reported to us by NASDAQ has fluctuated from 700 to 391,400 shares (excluding block trades).  When trading volumes are relatively light, significant price changes can occur even when a relatively small number of shares are being traded and an investor’s ability to quickly sell quantities of stock may be affected.

ITEM 1B.  UNRESOLVED STAFF COMMENTS
 
None.


20



ITEM 2.  PROPERTIES

We own or lease the following principal production, warehouse and office facilities:
Location
 
Purpose
 
Owned or Leased
 
Area (in sq. ft.)
 
Tract Area
(in acres)
Atchison, Kansas
 
Grain processing, distillery, warehousing, and research and quality control laboratories (Distillery Products and Ingredient Solutions)
 
Owned
 
494,640
 
26
 
 
 
 
 
 
 
 
 
 
 
Principal executive office building (Corporate)
 
Leased
 
18,000
 
1
 
 
 
 
 
 
 
 
 
 
 
Technical Innovation Center (Ingredient Solutions and Distillery Products)
 
Leased
 
19,600
 
1
 
 
 
 
 
 
 
 
 
Lawrenceburg and
Greendale, Indiana
 
Distillery, warehousing, tank farm and quality control facilities
 
Owned
 
1,458,143
 
43
 
 
 
 
 
 
 
 
 
Lenexa, Kansas
 
Administrative office space
 
Leased
 
3,222
 
1

Our joint venture subsidiary, ICP, of which we own 30 percent, owns the following facility:

Pekin, Illinois
 
Distillery, warehousing and quality control
laboratories (Distillery Products)
 
Owned
 
462,926
 
49

The foregoing facilities are generally in good operating condition, and are generally suitable for the business activity conducted therein.  We operated both our Atchison and Indiana facilities at or near full capacity during much of 2014, with the exception of two disruptions due to fires as further described in "Item 7. Management's Discussion and Analysis - 2014 Activities and Recent Initiatives." We have existing manufacturing capacity to grow our ingredient solutions business at our Atchison facility if the market for our ingredient solutions products improves.   
 
Except for our process water cooling system project, which is leased under a capital lease, all of the other production facilities that we utilize are owned, and all of our owned properties are subject to mortgages in favor of one or more of our lenders.  The executive offices and technical innovation center in Atchison are leased from the City of Atchison pursuant to an industrial revenue bond financing. Our leasehold interest in these properties is subject to a leasehold mortgage.  We also own or lease transportation equipment and facilities and a gas pipeline described under Item 1. Business – Transportation and Item 1. Business – Energy.  Our loan agreements contain covenants that limit our ability to pledge our facilities to others.

ITEM 3.  LEGAL PROCEEDINGS

There are various legal proceedings involving the Company and its subsidiaries. Management considers that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the consolidated financial position or overall trends in results of operations of the Company.
ITEM 4.  MINE SAFETY DISCLOSURES
 
Not applicable.

    

21



PART II
 
ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERS MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
TRADING MARKET
 
Our Common Stock is traded on the NASDAQ Global Select Market.  Our trading symbol is MGPI.
 
HISTORICAL STOCK PRICES AND DIVIDENDS
 
The table below reflects the high and low closing prices of our Common Stock and dividends per share for each quarter of the years ended December 31, 2014 and 2013:
 
 
Sales Price
 
Dividend
Per Share
 
High
 
Low
 
2014
 
 
 
 
 
First Quarter
$
6.75

 
$
5.16

 
$
0.05

Second Quarter
8.05

 
5.16

 

Third Quarter
13.64

 
7.20

 

Fourth Quarter
17.04

 
11.16

 

 
 
 
 
 
$
0.05

2013
 
 
 
 
 
First Quarter
$
5.62

 
$
3.26

 
$
0.05

Second Quarter
5.96

 
4.24

 

Third Quarter
6.18

 
4.77

 

Fourth Quarter
5.32

 
4.60

 

 
 

 
 

 
$
0.05


Our Credit Agreement with Wells Fargo Bank, allows for the payment of cash dividends provided we maintain excess availability of $9,625 and a Fixed Charge Coverage Ratio for the most recently completed twelve months of at least 1.20:1.00.

On February 27, 2015, the Board of Directors declared a dividend payable to stockholders of record as of March 26, 2015, of the Company's common stock, no par value ("Common Stock") and a dividend equivalent payable to holders of restricted stock units ("RSUs") as of March 26, 2015, of $0.06 per share and per unit.  The dividend payment and dividend equivalent payment will be paid on April 21, 2015.

We expect to continue our policy of paying periodic cash dividends, although there is no assurance as to the declaration or amount of any future dividends because they are dependent on future earnings, capital requirements, and debt service obligations.

RECORD HOLDERS
 
At March 2, 2015, there were approximately 621 holders of record of our Common Stock.

TRADING VOLUMES
 
According to reports received from NASDAQ, the average daily trading volume of our Common Stock (excluding block trades) ranged from 700 to 391,400 shares during the year ended December 31, 2014.


22



PURCHASES OF EQUITY SECURITIES BY ISSUER
 
We did not sell equity securities during the quarter ended December 31, 2014.

ISSUER PURCHASES OF EQUITY SECURITIES

 
 
(a) Total
Number of
Shares (or
Units)
Purchased
 
 
(b) Average
Price Paid
per Share (or
Unit)
 
 
(c) Total
Number of
Shares (or
Units)
Purchased as
Part of
Publicly
Announced
Plans or
Programs
 
(d) Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs
October 1, 2014 through October 31, 2014
 

 
 
 
 
 

 
$

November 1, 2014 through November 30, 2014
 
4,734

(a) 
 
$
14.88

(a) 
 

 
 
December 1, 2014 through December 31, 2014
 
4,240

(b) 
 
$
13.51

(b) 
 

 
 
Total
 
8,974

 
 
 
 
 

 
 

(a) 
Aggregate number of shares repurchased to satisfy withholding tax obligations under restricted stock that vested during the month.
(b) 
Aggregate number of shares repurchased as part of net exercises of stock options during November 2014.

ITEM 6. SELECTED FINANCIAL DATA
 
Not applicable.

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands except per-share amounts)
 
GENERAL
 
We produce certain distillery products and ingredients and historically we had three reportable segments: a distillery products segment, an ingredient solutions segment, and an other segment.  All assets used in the other segment were sold effective February 8, 2013.  Since this date, two reportable segments remain: distillery products and ingredient solutions. Substantially all of our sales are made directly or through distributors to manufacturers and processors of finished goods.  Sales to our customers purchasing food grade alcohol are made primarily on a spot, monthly or quarterly basis, with some annual contracts, depending on the customer’s needs and market conditions.  Customers who purchase whiskey or bourbon may also enter into separate warehouse service agreements with us, allowing the product to age.  We have certain multi-year contracts to supply distilled products as well as certain contracts to provide barreling warehousing services, which typically are multi-year contracts.  Sales of fuel grade alcohol are made on the spot market.  Contracts with distributors may be for multi-year terms with periodic review of pricing.  Contracts with ingredients customers are generally price and term agreements which are fixed for three- or six-month periods, with very few agreements of twelve months duration or more.
 
Our business is focused on the production, sales and marketing of value-added ingredients and distillery products.  Given the available capacity at our Indiana facility, we produce certain volumes of bourbon and whiskey that is in addition to current customer demand.  This product is barreled and included in our inventory.  Our goal is to maintain inventory levels for whiskey and bourbon sufficient to satisfy anticipated future purchase orders in the wholesale market.  


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Our principal raw materials are corn and flour.  Corn is processed into alcohol and animal feed and flour is processed into all of our products, except whiskey and bourbon.  The cost of raw materials is subject to substantial fluctuations depending upon a number of factors which affect commodity prices in general, including crop conditions, weather, disease, plantings, government programs and policies, competition for acquisition of inputs such as agricultural commodities, purchases by foreign governments and changes in demand resulting from population growth and customer preferences.  Corn prices have fluctuated significantly over the past several years. We expect corn pricing to remain volatile due to a number of factors impacting global demand and supply of this commodity. These fluctuating prices create challenges since our customers are interested in stable prices for the distillery products they purchase from us. 

We have separate grain supply contracts for our Atchison and Indiana facilities that permit us to purchase corn for delivery up to twelve months into the future at negotiated prices.  The pricing is based on a formula with several factors.  We expect to order corn anywhere from one to 12 months into the future.

We have a supply agreement to purchase wheat flour for use in the production of protein and starch ingredients.  The supply agreement price we pay for flour is a function of the per-bushel cost of wheat and, accordingly, wheat prices continue to directly impact the cost of raw materials.  We believe our focus on value-added products can reduce our risk to such price variations as larger profit margins related to such products can absorb higher levels of raw material volatility and as we may more readily seek adjustable price terms in contracts for such products. However, we will continue to be affected by commodity price fluctuations to some degree, which may be significant at times, and may not be able to recoup cost increases in our selling prices, particularly when price fluctuations are volatile.

Energy represents a major cost of operations, and seasonal increases in natural gas and other utility costs can affect our profitability.  Energy costs have typically increased year to year.  We sometimes try to protect ourselves from increased energy costs by entering into natural gas contracts for future delivery.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
In preparing consolidated financial statements, management must make estimates and judgments that affect the carrying values of our assets and liabilities as well as recognition of revenue and expenses.  Management’s estimates and judgments are based on our historical experience and management’s knowledge and understanding of current facts and circumstances.  The policies discussed below are considered by management to be critical to an understanding of our consolidated financial statements.  The application of certain of these policies places significant demands on management’s judgment, with financial reporting results relying on estimations about the effects of matters that are inherently uncertain.  For all of these policies, management cautions that future events rarely develop as forecast and estimates routinely require adjustment and may require material adjustment.
 
Revenue Recognition. Except as discussed below, revenue from the sale of the our products is recognized as products are delivered to customers according to shipping terms and when title and risk of loss have transferred.  Income from various government incentive grant programs is recognized as it is earned. We do not offer a right of return but will accept returns if we shipped the wrong product or wrong quantity.
 
Our distillery segment routinely produces unaged distillate and this product is frequently barreled and warehoused at a Company location for an extended period of time in accordance with directions received from our customers.  This product must meet customer acceptance specifications (if applicable), the risks of ownership and title for these goods must be passed, and requirements for bill and hold revenue recognition must be met prior to us recognizing revenue for this product.  Separate warehousing agreements are maintained for customers who store their product with us, and warehouse revenues are recognized as the service is provided.

Recognition of Insurance Recoveries. Estimated loss contingencies are recognized as charges to income when they are probable and reasonably estimable.  Insurance recoveries are not recognized until all contingencies related to the insurance claim have been resolved and settlement has been reached with the insurer.  Insurance recoveries, to the extent of costs and losses, are reported as a reduction to Cost of sales on the Consolidated Statement of Operations. Insurance recoveries, in excess of costs and losses, if any, are included in Insurance recoveries on the Consolidated Statement of Operations. For a detail of the activity and related accounting treatment, see Note 17: Property and Business Interruption Insurance Claims and Recoveries.


24



Inventory.  Inventory includes finished goods, raw materials in the form of agricultural commodities used in the production process, and certain maintenance and repair items.  Whiskey is typically aged in barrels for several years, following industry practice; we classify all barreled whiskey as a current asset. We include insurance, and other carrying charges applicable to barreled whiskey in inventory costs.

Inventories are stated at the lower of cost or market on the first-in, first-out ("FIFO") method.  Inventory valuations are impacted by constantly changing prices paid for key materials, primarily corn. We assess the valuation of our inventories and reduce the carrying value of those inventories that are obsolete or in excess of our forecasted usage to their estimated net realizable value. We estimate the net realizable value of such inventories based on analyses and assumptions including, but not limited to, historical usage, future demand, and market requirements. Reductions to the carrying value of inventories are recorded in cost of product sold. If the future demand for the our products is less favorable than the our forecasts, then the value of the inventories may be required to be reduced, which could result in material additional expense to the Company and have a material adverse impact on our consolidated financial statements.

Impairment of Assets.

Impairment of Investments

We review our investments in equity method investments for impairment whenever events or changes in business circumstances indicate that the carrying amount of the investments may not be fully recoverable. Evidence of a loss in value that is other than temporary include, but are not limited to, the absence of an ability to recover the carrying amount of the investment, the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment, or, where applicable, estimated sales proceeds which are insufficient to recover the carrying amount of the investment. If the fair value of the investment is determined to be less than the carrying value and the decline in value is considered to be other than temporary, an appropriate write-down is recorded based on the excess of the carrying value over the best estimate of fair value of the investment.  Considerable judgment is used in these measurements, and a change in the assumptions could result in a different determination of impairment loss and/or the amount of any impairment. No other than temporary impairments were recorded during the years ended December 31, 2014 and 2013 for the Company's equity method investments.

Impairment of Long-Lived Assets

We review long-lived assets, mainly buildings and equipment assets, for impairment when events or circumstances indicate that usage may be limited and carrying values may not be fully recoverable.

In making an assessment to whether the carrying values are fully recoverable, management must make estimates and judgments relating to anticipated revenues and expenses and values of our assets and liabilities.  Management’s estimates and judgments are based on our historical experience and management’s knowledge and understanding of current facts and circumstances.  Management derives data for its estimates from both outside appraisals and internal sources, and considers such matters as product mix, unit sales, unit prices, input costs, expected target volume levels in supply contracts and expectations about new customers as well as overall market trends. Should events indicate the assets cannot be used as planned, the realization from alternative uses or disposal is compared to the carrying value.  Considerable judgment is used in these measurements, and a change in the assumptions could result in a different determination of impairment loss and/or the amount of any impairment.

No events or conditions occurred during the years ended December 31, 2014 and 2013 that required us to record an impairment.

Income Taxes. We account for deferred income tax assets and liabilities resulting from the effects of transactions reported in different periods for financial reporting and income tax under the liability method of accounting for income taxes. This method gives consideration to the future tax consequences of the deferred income tax items and immediately recognizes changes in income tax laws upon enactment as well as applied income tax rates when facts and circumstances warrant such changes. We establish a valuation allowance to reduce deferred tax assets when it is more likely than not that a deferred tax asset may not be realized. Accounting for uncertainty in income tax positions requires management judgment and the use of estimates in determining whether the impact of a tax position is "more likely than not" of being sustained on audit by the relevant taxing authority. We consider many factors when evaluating and estimating its tax positions, which may require periodic adjustment and which may not accurately anticipate actual outcomes.


25



Income tax expense for the year ended December 31, 2014 was primarily related to our operating results for the year ended December 31, 2014 and a partial release of valuation allowance during the year. We recorded income tax expense of $2,265 for the year ended December 31, 2014. We reduced our valuation allowance by $7,618, which partially offset the income tax expense for the year ended December 31, 2014. We evaluated the potential realization of our deferred income tax assets, considering both positive and negative evidence, including cumulative income or loss for the past three years and forecasted taxable income. As a result of this evaluation, we concluded that a significant portion of the valuation allowance on our net deferred income tax assets as of December 31, 2014 was no longer required. We continue to retain a valuation allowance of $3,829 as of December 31, 2014 associated with certain capital loss carryovers, state net operating loss carryovers and state income tax credit carryovers. We will continue to assess the need for a valuation allowance in future periods. See Note 5: Income Taxes of Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for additional information.

2014 ACTIVITIES AND RECENT INITIATIVES
 
Business Interruption

During January 2014, we experienced a fire at our Indiana facility.  The fire damaged certain equipment in the feed dryer house and caused a temporary loss of production in late January. The fire did not impact our own or customer-owned warehoused inventory. The Indiana facility was at pre-fire production levels by the end of February 2014. We wrote off $160 of damaged assets, which is included in Insurance recoveries on the Consolidated Statement of Operations for the year ended December 31, 2014, and incurred $447 of out-of-pocket expenses related to interruption of business, which are included as a reduction to Cost of sales on the Consolidated Statement of Operations for the year ended December 31, 2014.
In December 2014, we negotiated a settlement with our insurance carrier to close this claim. The claim capped our insurance recoveries at $9,375, all of which was received during the year ended December 31, 2014. As part of the settlement, we assume the risk of all future business interruption until permanent repairs are completed. Permanent repairs are expected to be completed by the end of 2015. Replacement cost of permanent repairs is likely to exceed the cost of funds received from the insurance carrier. The replacement of equipment may result in additional disruption to our business for which we bear the risk.
During October 2014, we experienced a fire at our Atchison facility.  Certain equipment in the facility's feed drying operations was damaged, but repairable, and we experienced a seven-day temporary loss of production. We incurred $170 of out-of-pocket expenses to repair this equipment, which are treated as interruption of business and are included as a reduction to Cost of sales on the Consolidated Statement of Operations for the year ended December 31, 2014. We are currently working with our insurance carrier to determine the coverage for equipment damage and business interruption losses.

Because the timing and amount of the business interruption and the insurance recovery may differ, we may experience volatility in our future operating results.

ICP Activities

Our proportionate share of the profits of ICP had a significant positive impact on our 2014 financial results, contributing $10,098 to our net income for the year ended December 31, 2014. The significant earnings improvement from 2013 to 2014 was due to much improved margins in the production of chemical intermediates and high quality alcohol. The improved margins were driven primarily by a low current supply and strong demand for these products and for fuel grade alcohol, which affects their pricing. We currently expect that ICP's recent levels of profitability may not be sustained, and as a consequence, that ICP's contributions to our future net income may be reduced.

On December 3, 2014, the ICP advisory board recommended payment of a cash distribution to its members. We received our portion of the distribution, $4,835, on December 4, 2014. This is the first distribution we have received from ICP, and there is no assurance such distributions will be received in the future.

26




Valuation Allowance for Deferred Tax Assets

We had a net deferred tax asset of $11,275 as of December 31, 2013 that was reduced by a valuation allowance. During the year ended December 31, 2014, we evaluated the potential realization of our deferred income tax assets. Our analysis was significantly influenced by the fact that we reached three years of cumulative positive earnings in the year ended December 31, 2014. We believe it is appropriate to rely upon expected reversals of taxable temporary differences as well as projections of future taxable income in assessing the realization of our net deferred tax assets. In consideration of all evidence available (both positive and negative), we determined that it is more likely than not that we will realize a substantial portion of our net deferred tax assets. Therefore, we reduced our valuation allowance by $7,618 in the year ended December 31, 2014. We continue to retain a valuation allowance of $3,829 as of December 31, 2014 associated with certain capital loss carryovers, state net operating loss carryovers and state income tax credit carryovers.

Change to Post-Employment Benefit Plan

We made a change to the plan to eliminate retiree insurance benefit eligibility effective April 16, 2014 for certain union employees. The effect of this plan change was a negative plan amendment of $919 and a $52 curtailment gain. The negative plan amendment will be recognized into income over average remaining years to full eligibility.  The accounting for the curtailment resulted in immediate recognition of unamortized prior service cost of $52 in the second quarter of 2014.


27



Filing Status with the Securities and Exchange Commission ("SEC")

At June 30, 2014, we determined that we no longer qualify for smaller reporting company SEC filing status and will transition to accelerated filing status for the period ended March 31, 2015, per Item 10(f) of Regulation S-K. Also as a result of our change in filing status from smaller reporting company to accelerated, we no longer qualify for our exemption from compliance with Section 404(b) of the Sarbanes-Oxley Act at December 31, 2014.
 
New Officers

Effective July 28, 2014, Augustus "Gus" C. Griffin became our new President and Chief Executive Officer. Upon the appointment of Mr. Griffin as President and Chief Executive Officer of the Company, Don Tracy and Randall M. Schrick resigned from their positions as Interim Co-Chief Executive Officers effective July 28, 2014. Following their resignations as Interim Co-Chief Executive Officers, Mr. Tracy continues to serve as Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer), and Mr. Schrick serves as Vice President, Production and Engineering.

On December 1, 2014, Michael R. Buttshaw became our Vice President of Ingredients Sales and Marketing.

New Employment Agreement

On July 24, 2014, we entered into an employment agreement (the "Employment Agreement") with our President and Chief Executive Officer, Augustus Griffin.  Pursuant to his Employment Agreement, Mr. Griffin receives an initial base salary of $375 per year, subject to upward adjustment.  Mr. Griffin received a signing bonus of 12,000 RSUs with a three-year cliff vesting term, as well as a guaranteed award under the 2014 Short-Term Incentive Plan (the "STI Plan") to be prorated from Mr. Griffin's actual date of employment. Mr. Griffin's threshold STI Plan award is 80 percent of target ($220) if Company performance measures are equivalent to not less than 80 percent of target, subject to proration as described above. The maximum STI Plan award that Mr. Griffin may earn is 120 percent of the target award ($330), subject to proration as described above. For 2014, Mr. Griffin will not receive less than the pro-rata targeted award amount of $275, regardless of the Company's performance. 

The Employment Agreement provides that in the event Mr. Griffin's employment with the Company is terminated, he will be entitled to: (1) all previously earned and accrued but unpaid base salary up to the date of termination,  (2) accrued and unused vacation pay, and (3) any annual bonus earned with respect to a fiscal year ending prior to the date of termination but unpaid as of that date, payable at the same time in the year of termination as payment would be made if he continued to be employed by the Company. Unless Mr. Griffin's employment is terminated for "Cause" as defined in the Employment Agreement or he terminates his employment, he will also be entitled, subject to satisfaction of certain conditions,  to (1) a severance payment equal to his then-current annual base salary, and (2) any performance bonus related to the year in which the termination occurs calculated based on actual performance through the end of the applicable performance period and prorated for the number of days of his employment in the year in which the termination occurs, payable in a single lump sum at the same time as payment would be made if he continued to be employed by the Company.

Amendment to Credit Agreement

On August 5, 2014, we entered into Amendment No. 2 to the Credit Agreement (the "Second Amendment") by and among Wells Fargo Bank, N.A. as administrative agent and sole lender and MGP Ingredients, Inc., MGPI Processing, Inc., MGPI Pipeline, Inc. and MGPI of Indiana, LLC.  The Second Amendment amended and restated the definition of the term "Fixed Asset Sub-Line" and added Thunderbird Real Estate Holdings, LLC ("Thunderbird"), a wholly-owned subsidiary of MGPI Processing, Inc. which is a wholly-owned subsidiary of the Company, to the Credit Agreement as a Loan Party, as defined in the Credit Agreement.
On February 27, 2015, we entered into a five year, $80,000 revolving loan pursuant to a Second Amended and Restated Credit Agreement with Wells Fargo Bank, National Association, as Administrative Agent (see Note 18: Subsequent Events for additional details). 

Pending Termination of Pension Benefit Plans

We took steps during 2014 to terminate the pension plans for employees covered under collective bargaining agreements. Our projected additional funding cost to terminate the plans is approximately $716, which will be recognized immediately in the period that the pension benefit plan distribution is fully executed, expected to be during 2015.


28



Termination of DMI Joint Venture

On December 29, 2014, we gave notice to DMI and to our partner in DMI, C&D, to terminate the joint venture effective June 30, 2015. C&D also provided notice to terminate DMI effective June 30, 2015. Under German law, commencing on June 30, 2015, normal operations for DMI will cease and a one-year winding up process will begin. DMI has been the sole source of our supply of Trutex®/Wheatex® for the past 2 years. The ability to find another source to supply the product will be critical to our continued ability to market Trutex®/Wheatex®. We are in the early stages of finding alternative sources for production for our Trutex®/Wheatex® product within the United States.

YEAR ENDED DECEMBER 31, 2014 COMPARED TO DECEMBER 31, 2013

CONSOLIDATED RESULTS

Consolidated earnings for the year ended December 31, 2014 improved by $28,604 compared to a year ago, with net income of $23,675 on consolidated net sales of $313,403 versus a net loss of $4,929 on consolidated net sales of $323,264 for the year ended December 31, 2013. The table below details the significant year-versus-year increases and decreases in net income/loss:
 
 
$ (thousands)
Net loss for the year ended December 31, 2013
 
$
(4,929
)
    Improved by:
 
 
        Change in operating profits from distillery products segment
 
16,714

        Improved earnings from equity method investments
 
10,341

        Savings from reduced selling general and administrative expenses
 
6,101

 
 

     Reduced by:
 
 
          Change in operating profits from ingredients solutions segment
 
(564
)
          Impact of income taxes
 
(2,979
)
          Change in discontinued operations
 
(878
)
          Other
 
(131
)
Net income for the year ended December 31, 2014
 
$
23,675


In our distillery products segment, the significant year-versus-year increase in earnings was primarily due to improved volumes in the distillery segment, and a continuing shift in mix toward premium spirits. Total alcohol volume increased 18.5 percent for the year ended December 31, 2014 compared to a year ago, while total food grade alcohol net sales increased as a percentage of total distillery products segment sales to 81.2 percent for the year ended December 31, 2014 from 79.0 percent for the year ended December 31, 2013. Our earnings in the distillery products segment were positively impacted by the insurance recovery activities related to two separate fires, which resulted in a net favorable impact of $8,598 (see Note 17: Property and Business Interruption Insurance Claims and Recoveries). The result of this transaction was a positive impact to our 2014 earnings; however because the potential exists for additional business interruption until the completion of repairs in 2015, we may experience a negative impact to our future operating results.

Our equity method investment earnings increased to $10,137 (net of our change in accounting estimate of $1,882) for the year ended December 31, 2014 from a net loss of $204 in the prior year. The significant year-versus-year increase in equity method investment earnings was from ICP, which experienced much improved margins. The improved margins were driven primarily by a low current supply and strong demand for their products and for fuel grade alcohol, which affects their pricing. ICP experienced a 34 percent growth in the volume of alcohol sales compared to a year ago (see Note 3: Equity Method Investments). There can be no assurance that ICP's strong financial results will continue in the future.

In 2014, reduced levels of selling, general and administrative costs resulted in a year-versus-year cost decrease of $6,101. This decrease was primarily due to year-versus-year expense decreases related to the proxy contest and severance costs.

In our ingredients solutions segment, the year-versus-year decrease in earnings was primarily due to a 3.6 percent decrease in net sales combined with a 4.8 percent decrease in average selling prices.


29



In 2013, our earnings included a $878 gain (net of tax) recognized on the sale of our bioplastics manufacturing business.

In the year ended December 31, 2014, we evaluated the potential realization of our deferred income tax assets, considering both positive and negative evidence, including cumulative income or loss for the past three years and forecasted taxable income. We determined that it is more likely than not a substantial portion of our net deferred tax assets will be realized. As a result, we partially reduced our valuation allowance arising from expected realization of net deferred tax assets in future years. Our total income tax expense recorded for the year ended December 31, 2014, including the effect of the valuation allowance release, was $2,265, as compared to an income tax benefit of $714 for the year ended December 31, 2013 (see Note 5: Income Taxes).

NET SALES

Net sales for the year ended December 31, 2014 decreased $9,861, or 3.1 percent, compared to the year ended December 31, 2013. Net sales in the distillery products segment as a whole decreased primarily as a result of lower average selling price, as well as decreased volume and pricing of distillers feed and related co-products, year-versus-year. The average selling prices of total high quality food grade alcohol and distillers feed and related co-products were impacted by declines in commodity pricing, primarily corn, as discussed further under "--Cost of Sales" below. Net sales in the ingredient solutions segment as a whole decreased primarily due to declines in volume of wheat proteins, as well as a decrease related to the impact in overall segment average selling price. The average selling price in the ingredients solutions segment was impacted by declines in commodity costing, primarily flour, as discussed further under "--Cost of Sales" below. Net sales in the other segment fell to zero for the year ended December 31, 2014 due to the sale of the bioplastics manufacturing business on February 8, 2013.

COST OF SALES
 
For the year ended December 31, 2014, cost of sales decreased $17,053, or 5.6 percent, compared to the year ended December 31, 2014.  For the year ended December 31, 2014, cost of sales was 90.9 percent of net sales, which generated a gross profit margin of 9.1 percent. For the year ended December 31, 2013, cost of sales was 93.4 percent of net sales, which generated a gross profit margin of 6.6 percent.  

For the year ended December 31, 2014, our lower overall costs were primarily the result of lower costs for corn and flour partially offset by an increase in the cost of natural gas. We saw decreases in the per-bushel cost of corn and the per-pound cost of flour, which averaged 33.5 percent and 11.3 percent lower, respectively, compared to the year ended December 31, 2013. On the other hand, the per-million cubic foot cost of natural gas increased by 8.5 percent compared to the year ended December 31, 2013.

INSURANCE RECOVERIES

During January 2014, we experienced a fire at our Indiana facility.  The fire damaged certain equipment in the feed dryer house and caused a temporary loss of production in late January. The fire did not impact our own or customer-owned warehoused inventory. The Indiana facility was at pre-fire production levels by the end of February 2014. We received $8,450 of insurance recovery proceeds during the year ended December 31, 2014 related to the fire at our Indiana facility, which, after the $160 property write-off, resulted in $8,290 of net Insurance recoveries.

In December 2014, we negotiated a settlement with our insurance carrier to close this claim. As part of this settlement, we assume the risk of all future business interruption until permanent repairs can be made. For a detail of the activity and related accounting treatment, see Note 17: Property and Business Interruption Insurance Claims and Recoveries.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the year ended December 31, 2014 decreased by $6,101, or 23.3 percent, compared to the year ended December 31, 2013. This decrease was primarily due to year-versus-year decreases of $4,894 and $1,303 related to the proxy contest and severance costs, respectively.


30



INTEREST EXPENSE

Interest expense for the year ended December 31, 2014 decreased $302, compared to the year ended December 31, 2013. This decrease was primarily the result of a lower average daily loan balance combined with average lower interest rates on our Credit Agreement compared to a year ago.

EQUITY METHOD INVESTMENT EARNINGS (LOSS)

ICP

ICP's Limited Liability Company Agreement generally allocates profits, losses and distributions of cash of ICP based on the percentage of a member's capital contributions to ICP relative to total capital contributions of all members to ICP, of which we have 30 percent and our joint venture partner, ICP Holdings, has 70 percent. That agreement grants the right to either member to elect to shut down the Pekin facility if ICP operates at an EBITDA loss of greater than or equal to $500 in any quarter, subject to the right of the other member to override that election. If the Objecting Member overrides the election, then EBITDA loss and EBITDA profit for each subsequent quarter are allocated 80 percent to the Objecting Member and 20 percent to the Electing Member until the end of the applicable quarter in which the Electing Member withdraws its Shutdown Election and thereafter allocation revert to a 70 percent/30 percent split (subject to a catch-up allocation of 80 percent of EBITDA profits to the Objection Member until it equals the amount of EBITDA loss allocated to such member on an 80 percent/20 percent basis). ICP experienced an EBITDA loss of $500 for the quarter ended March 31, 2013, which was one factor that prompted us to deliver notice of our Shutdown Election on April 18, 2013. However, we withdrew our Shutdown Election on March 31, 2014 (thereby causing the allocation of profits and losses to revert to 30 percent to us and 70 percent to ICP Holdings as of April 1, 2014) based partially on the strong financial results ICP generated during the period ended March 31, 2014.

As of June 30, 2014 and during the year ended December 31, 2014, we measured our cumulative equity in the undistributed earnings of ICP using an 80 percent/20 percent allocation for the Shutdown Election period (April 1, 2013 through March 31, 2014) and a 70 percent/30 percent allocation thereafter. The cumulative effect of this change in estimate resulted in a decrease in equity method investment earnings of ICP of $1,882 for the year ended December 31, 2014; a decrease in the earnings per share of $0.10 per share for the year ended December 31, 2014; and a decrease in the related equity method investment in ICP at December 31, 2014, of $1,882.

For the year ended December 31, 2014, ICP reported total net income of $39,935.  Our portion of the earnings for the year ended December 31, 2014 was $10,098 net of the change in estimate. For the year ended December 31, 2013, ICP recorded a loss of $837 and our portion of the loss was $251. The significant year-versus-year increase in earnings was due to higher volume and much improved margins in the production of chemical intermediates, fuel grade alcohol, and high quality food grade alcohol, partially offset by our change in accounting estimate which reduced our equity method investment earnings by $1,882. The improved margins were driven primarily by a low current supply and strong demand for these products and for fuel grade alcohol, which affects their pricing.

Our proportionate share of the ICP earnings has had a significant positive impact on our net income for the year ended December 31, 2014. There can be no assurance that such results will continue in future periods. We presently expect that ICP's recent levels of profitability may not be sustained, and as a consequence that ICP's contributions to our earnings may be reduced in future periods.

On July 23, 2014 ICP's alcohol production was interrupted resulting in inconsequential damage to equipment. Production was restarted on a limited basis on August 1, 2014, and ICP was back to normal production rates on or about August 14, 2014. ICP anticipates finalizing the business interruption and property insurance claims in 2015. Insurance recoveries will be recognized when all contingencies to the insurance claims have been resolved and settlement has been reached with the insurer. Because the timing and amount of ICP's business interruption and the insurance recovery may differ, we may experience volatility in Equity Method Investment Earnings (Loss) in our future periods.

On December 3, 2014, the ICP advisory board recommended payment of a cash distribution to its members. We received our portion of the distribution, $4,835, on December 4, 2014. This is the first distribution we have received from ICP, and there can be no assurance such distributions will be received in the future.
  

31



DMI

For the year ended December 31, 2014 and 2013, DMI had net income of $67 and $94, respectively.  As a 50 percent joint venture holder, our equity in earnings was $39 and $47 for the years ended December 31, 2014 and 2013, respectively.

On December 29, 2014, we gave notice to DMI and to our partner in DMI, C&D, to terminate the joint venture effective June 30, 2015. Under German law, commencing on June 30, 2015, normal operations for DMI will cease and a one-year winding up process will begin. DMI has been the sole source of our supply of Trutex®/Wheatex® for the past 2 years.
DISCONTINUED OPERATIONS, NET OF TAX

On February 8, 2013, we sold the assets at our bioplastics manufacturing facility in Onaga, Kansas and certain assets of our extruder bio-resin laboratory located in Atchison, Kansas.  The sales price totaled $2,797 and resulted in a net of tax gain of $878 that was recognized as discontinued operations in the year ended December 31, 2014.

INCOME TAX EXPENSE/(BENEFIT)

Income tax expense for the year ended December 31, 2014 was primarily related to our operating results for the year ended December 31, 2014 and a partial release of valuation allowance during the year. We recorded income tax expense of $2,265 for the year ended December 31, 2014. We reduced our valuation allowance by $7,618, which partially offset the income tax expense for the year ended December 31, 2014. We evaluated the potential realization of our deferred income tax assets, considering both positive and negative evidence, including cumulative income or loss for the past three years and forecasted taxable income. As a result of this evaluation, we concluded that a significant portion of the valuation allowance on our net deferred income tax assets as of December 31, 2014 was no longer required. We continue to retain a valuation allowance of $3,829 as of December 31, 2014 associated with certain capital loss carryovers, state net operating loss carryovers and state income tax credit carryovers. We will continue to assess the need for a valuation allowance in future periods. See Note 5: Income Taxes of Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for additional information.

NET INCOME/(LOSS)

As the result of the factors outlined above, we generated net income of $23,675 for the year ended December 31, 2014, compared to a net loss of $4,929 for the year ended December 31, 2013.

NON-GAAP FINANCIAL MEASURES

We measure our performance using key financial metrics that include values calculated under generally accepted accounting principles ("GAAP"), including operating income (loss) and net income (loss). We also assess our performance using other key financial metrics that are not recognized under GAAP, such as earnings (loss) per share on net income (loss) attributable to all shareholders.

We do not purport these performance measures to be alternatives to net income (loss) as a measure of operating performance or to cash flows from operating activities as a measure of liquidity.  Additionally, they are not intended to be a measure of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. 

Further, we believe it is important to adjust our key financial measures from time-to-time for certain discretionary items as determined by management. When we make those adjustments, we label the resulting value as "adjusted," and refer readers to the appropriate reconciliations below.

We believe that the presentation of GAAP financial measures alone would not provide our shareholders and potential investors with the ability to appropriately analyze our ongoing operational results, and therefore expected future results; we believe that our use of non-GAAP financial measures provides shareholders and potential investors with the same key financial performance indicators that are utilized by management to assess our operating results, evaluate the business and make operational decisions on a prospective, going-forward basis. Because not all companies use identical calculations, this presentation may not be comparable to other similarly-titled measures used by other companies.


32



RECONCILIATION OF KEY FINANCIAL METRICS FOR DISCRETIONARY ITEMS

The following table sets forth a reconciliation of certain GAAP items, operating income (loss) and net income (loss), as well as a non-GAAP item, earnings (loss) per share on net income (loss) attributable to all shareholders, to their values as "adjusted" for certain discretionary items determined by management for years ended December 31, 2014 and 2013:
 
Year Ended December 31,
 
2014
 
2013
Operating income (loss)
$
16,619

 
$
(5,199
)
Insurance recoveries
(8,290
)
 

Proxy-related expenses

 
5,465

Adjusted operating income (loss)
$
8,329

 
$
266

 
 
 
 
Net income (loss)(a)
$
23,675

 
$
(4,929
)
Insurance recoveries, net of tax
(4,915
)
 

Proxy-related expenses, net of tax

 
4,864

Change in valuation allowance
(1,319
)
 

Adjusted net income (loss)
$
17,441

 
$
(65
)
 
 
 
 
Earnings (loss) per share on net income (loss) attributable to all shareholders(b)
$
1.37

 
$
(0.29
)
Insurance recoveries, net of tax
(0.28
)
 

Proxy-related expenses, net of tax

 
0.28

Change in valuation allowance
(0.08
)
 

Adjusted earnings (loss) per share on net income (loss) attributable to all shareholders
$
1.01

 
$
(0.01
)

(a) 
Net income (loss) attributable to all shareholders (see Note 6: Equity and Earnings Per Share for additional details).
(b) 
Earnings (loss) per share on net income (loss) prior to the allocation for participating securities of 278,900 and 569,296 nonvested restricted stock for the years ended December 31, 2014 and 2013, and 413,288 and 371,502 RSUs for the years ended December 31, 2014 and 2013, respectively. Participating securities do not receive an allocation in periods when a loss is experienced (see Note 6: Equity and Earnings Per Share for additional details).
    

33



SEGMENT RESULTS
 
The following is a summary of revenues and pre-tax income (loss) allocated to each reportable operating segment for the years ended December 31, 2014 and 2013. See Note 11: Operating Segments set forth in Item 8. Financial Statements and Supplementary Data for additional information regarding our operating segments. 
 
Year Ended December 31,
 
2014
 
2013
 
Distillery Products
 
 
 
 
Net Sales
$
256,561

 
$
264,098

 
Income from continuing operations before income taxes
28,701

 
11,987

 
 
 
 
 
 
Ingredient Solutions
 
 
 
 
Net Sales
56,842

 
58,967

 
Income from continuing operations before income taxes
3,939

 
4,503

 
 
 
 
 
 
Other(a)
 
 
 
 
Net Sales

 
199

 
Loss from continuing operations before income taxes

 
(90
)
 

(a) 
Assets from this segment were sold February 8, 2013 as further described in Note 11: Operating Segments.

The following table is a reconciliation between income (loss) from continuing operations before income taxes by segment and net income (loss). Non-direct selling, general and administrative expense, interest expense, earnings from equity method investments and other general miscellaneous expenses are classified as corporate. 
 
Year Ended December 31,
Income (loss) from continuing operations before income taxes
2014
 
2013
 
Distillery products
$
28,701

 
$
11,987

 
Ingredient solutions
3,939

 
4,503

 
  Other(a)

 
(90
)
 
Corporate
(6,700
)
 
(22,921
)
 
Total income (loss) from continuing operations before income taxes
25,940


(6,521
)
 
Income tax expense (benefit)
2,265

 
(714
)
 
Net income (loss) from continuing operations
23,675

 
(5,807
)
 
  Discontinued operations, net of tax

 
878

 
Net income (loss)
$
23,675

 
$
(4,929
)
 

(a) 
Assets from this segment were sold February 8, 2013 as further described in Note 11: Operating Segments.


34




DISTILLERY PRODUCTS

The following table shows selected financial information for our distillery products segment for the years ended December 31, 2014 and 2013.
 
PRODUCT GROUP NET SALES
 
Year Ended December 31,
 
Year-versus-Year Net Sales Change Increase/ (Decrease)
 
Year-versus-Year Volume Change
 
2014
 
2013
 
$ Change
 
% Change
 
% Change
 
Amount
 
Amount
 
 
 
Food grade alcohol
$
208,375

 
$
208,695

 
$
(320
)
 
(0.2)%
 
15.3
 %
Distillers feed and related co-products
30,361

 
43,513

 
(13,152
)
 
(30.2)
 
(5.0
)
Fuel grade alcohol
12,987

 
8,026

 
4,961

 
61.8
 
65.1

 Warehouse revenue
4,838

 
3,864

 
974

 
25.2
 
n/a

Total distillery products
$
256,561


$
264,098


$
(7,537
)
 
(2.9)%
 
n/a

 
 
 
 
 
 
 
 
 
 
 
Other Financial Information
 
 
 
Year Ended December 31,
 
Year-versus-Year Increase/Decrease
 
 
 
2014
 
2013
 
 Change
 
% Change
 
 
 
 
 
 
 
 
Gross profit
$
22,332

 
$
14,309

 
$
8,023

 
56.1
%
 
 
Gross margin %
8.7
%

5.4
%
 
3.3
%
 
61.1
%
 
 
Income from continuing operations before taxes
$
28,701

 
$
11,987

 
$
16,714

 
139.4
%
 
 
Return on sales
11.2
%

4.5
%
 
6.7
%
 
148.9
%
 
 

Total distillery products net sales for the year ended December 31, 2014 decreased $7,537, or 2.9 percent.  Food grade alcohol net sales decreased $320 year-versus-year, primarily due to a 15.3 percent increase in volume offset by a 13.4 percent decrease in average pricing. Distillers feed and related co-products net sales decreased $13,152 year-versus-year primarily due to lower average selling prices of 26.6 percent combined with a 5.0 decrease in volume. Fuel grade alcohol net sales increased $4,961 year-versus-year primarily due to a 65.1 increase in volume partially offset by a 2.0 percent decrease in average pricing. The 65.1 percent increase in fuel grade alcohol volume for the year ended December 31, 2014 compared to a year ago was primarily due to the temporary opportunistic production and sale of fuel grade alcohol when related margins were high in 2014, and a production mix of more premium grade alcohol, which generates more fuel grade alcohol as a by-product. Warehouse revenue increased $974 year-versus-year due to increased barrel warehouse storage fees.
Gross profit increased year-versus-year by $8,023, or 56.1 percent. The per-bushel cost of corn decreased 33.5 percent compared to a year ago. Compared to the decrease in the cost of corn, our average selling price declines were relatively small, which was a leading factor in the increases in our gross margin percentage and our return on distillery sales. Partially offsetting these improvements to our margins was the impact of the October 2014 fire at our Atchison distillery, which caused a seven-day shutdown and higher production costs. Gross margin for the year ended December 31, 2014 was 8.7 percent compared to 5.4 for the year ended December 31, 2013; return of sales was 11.2 percent for the year ended December 31, 2014 compared to 4.5 percent for the year ended December 31, 2013. Also contributing to the year-versus-year increase in return on sales was the positive earnings impact from our insurance recovery activities, which resulted in a net favorable impact of $8,598 for the year ended December 31, 2014 (see Note 17: Property and Business Interruption Insurance Claims and Recoveries).

35



INGREDIENT SOLUTIONS
The following table shows selected financial information for our ingredient solutions segment for the years ended December 31, 2014 and 2013.
 
PRODUCT GROUP NET SALES
 
Year Ended December 31,
 
Year-versus-Year Net Sales Change Increase/ (Decrease)
 
Year-versus-Year Volume Change
 
2014
 
2013
 
$ Change
 
% Change
 
% Change
 
Amount
 
Amount
 
 
 
Specialty wheat starches
$
28,217

 
$
27,820

 
$
397

 
1.4%
 
7.6
 %
Specialty wheat proteins
18,618

 
20,086

 
(1,468
)
 
(7.3)
 
(8.9
)
Commodity wheat starch
7,884

 
8,509

 
(625
)
 
(7.3)
 
(3.2
)
Vital wheat gluten (commodity wheat proteins)
2,123

 
2,552

 
(429
)
 
(16.8)
 
(10.6
)
Total ingredient solutions
$
56,842

 
$
58,967

 
$
(2,125
)
 
(3.6)%
 
1.2
 %
 
 
 
 
 
 
 
 
 
 
 
Other Financial Information
 
 
 
Year Ended December 31,
 
Year-versus-year Increase/Decrease
 
 
 
2014
 
2013
 
 Change
 
% Change
 
 
 
 
 
 
 
 
Gross profit
$
6,099

 
$
6,986

 
$
(887
)
 
(12.7
)%
 
 
Gross margin %
10.7
%

11.8
%
 
(1.1
)%
 
(9.3
)%
 
 
Income from continuing operations before taxes
$
3,939

 
$
4,503

 
$
(564
)
 
(12.5
)%
 
 
Return on sales
6.9
%

7.6
%
 
(0.7
)%
 
(9.2
)%
 
 

Total ingredient solutions net sales for the year ended December 31, 2014 decreased by $2,125, or 3.6 percent, compared to the year ended December 31, 2013. Net sales of specialty wheat starches increased $397 year-versus-year, primarily due to a 7.6 percent increase in volume partially offset by a 5.7 percent decrease in average selling prices. Net sales of specialty wheat proteins decreased $1,468 year-versus-year primarily due to a 8.9 percent decrease in volume partially offset by a 1.7 percent increase in average selling prices. Commodity wheat starch net sales decreased $625 year-versus-year due to declines in average selling prices and volume of 4.3 percent and 3.2 percent, respectively. Commodity wheat protein net sales decreased $429 year-versus-year primarily due to declines in volume and average selling prices of 10.6 percent and 6.9 percent, respectively. Our focus remains on the production and commercialization of specialty ingredients, which is reflected in the year-versus-year increase in our specialty product net sales as a percentage of total segment net sales of 1.2 percentage points, to 82.4 percent for the year ended December 31, 2014 from 81.2 percent for the year ended December 31, 2013.  
Gross profit decreased year-versus-year by $887, or 12.7 percent. Gross margin for the year ended December 31, 2014 was 10.7 percent compared to 11.8 for the year ended December 31, 2013. Compared to the year-versus-year 4.8 percent decrease in average selling prices, our overall product costs experienced a smaller overall percentage decrease. The cost of natural gas and certain production costs increased compared to a year ago, which was partially offset by an 11.3 decrease in the per-pound cost of flour. In October of 2014, the Atchison distillery experienced a fire that also shut down production of ingredient solutions products for seven days, resulting in higher production costs. The per-million cubic foot cost of natural gas averaged 8.5 percent higher for the year ended December 31, 2014 compared to the year ended December 31, 2013. These factors led to a decrease in return on sales from 7.6 percent for the year ended December 31, 2013 to 6.9 percent for the year ended December 31, 2014.


36



LIQUIDITY AND CAPITAL RESOURCES
 
Our principal uses of cash in the ordinary course of business are for the cost of raw materials and energy used in our production processes, salaries, and capital expenditures.   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 revolving credit facility. At December 31, 2014 and 2013, our cash balance was $5,641 and $2,857, respectively, and we have used our revolving credit facility for liquidity purposes, with $42,744 remaining for additional borrowings at December 31, 2014. Historically, we also have used cash for acquisitions and received cash from investment or asset dispositions and tax refunds.

On December 3, 2014, the ICP advisory board recommended payment of a cash distribution to its members. We received our portion of the distribution, $4,835, on December 4, 2014. This is the first distribution we have received from ICP, and there is no assurance such distributions will be received in the future.

On February 27, 2015, the Board of Directors declared a dividend payable to stockholders of record as of March 26, 2015, of the Company's Common Stock and a dividend equivalent payable to holders of RSUs as of March 26, 2015, of $0.06 per share and per unit.  The dividend payment and dividend equivalent payment will be paid on April 21, 2015.

On February 28, 2014, the Board of Directors declared a dividend payable to stockholders of record as of March 17, 2014, of the Company's Common Stock and a dividend equivalent payable to holders of RSUs as of March 17, 2014, of $0.05 per share and per unit.  The total payment of $907, comprised of dividend payments of $884 and dividend equivalent payments of $23, was paid on April 9, 2014.

On February 28, 2013, the Board of Directors declared a dividend payable to stockholders of record as of March 18, 2013, of Common Stock and a dividend equivalent payable to holders of RSUs as of March 18, 2013, of $0.05 per share and per unit.  The total payment of $916, comprised of dividend payments of $897 and dividend equivalent payments of $19, was paid on April 10, 2013.

On February 8, 2013, we sold our bioplastics manufacturing business for $2,797.

We expect approximately $13,000 in capital expenditures over the twelve month period ending December 31, 2015 related to other improvements in and replacements of existing facilities, equipment and information technology. As of December 31, 2014, we had contracts to acquire approximately $584 of capital assets. The cost to repair or replace dryers damaged in the January 2014 fire at the Indiana facility will be in addition to this number, which is estimated to be $9,600, including the estimated cost of installation. In January 2015, we made a purchase commitment of $5,439 to replace the dryers damaged at the Indiana facility. In December 2014, we negotiated a settlement with our insurance carrier to close this claim. For the year ended December 31, 2014, we received insurance recoveries of $925 related to business interruption and $8,450 of insurance recoveries related to property damage. The permanent repairs are expected to be completed by the end of 2015. Replacement cost of new dryers is likely to exceed the cost of funds received from the insurance carrier.

As previously discussed, we had significant professional fees and severance costs related to the proxy contest accrued at December 31, 2013, of which we made cash disbursements of $2,506 in 2014.

We expect our sources of cash to be adequate to provide for budgeted capital expenditures and anticipated operating requirements.
 
The following table is presented as a summary of our liquidity and financial condition as of December 31, 2014 and 2013:
 
December 31,
 
2014
 
2013
 
Cash and cash equivalents
$
5,641

 
$
2,857

 
Working capital
51,497

 
37,736

 
Amounts available under lines of credit
42,744

 
23,920

 
Credit facility, notes payable and long-term debt
10,283

 
23,168

 
Stockholders’ equity
104,365

 
81,603

 
 

37



Certain components of our liquidity and financial results were as follows:
 
Year Ended December 31,
 
2014
 
2013
Depreciation and amortization
12,325

 
12,009

Capital expenditures
(6,953
)
 
(6,208
)
Proceeds from insurance recoveries
9,375

 

Distribution received from equity method investee
4,835

 

Cash flows from operations
15,812

 
17,300



CASH FLOW INFORMATION
 
Summary cash flow information follows for:
 
 
Year Ended December 31,
 
2014
 
2013
Cash flows provided by (used in):
 
 
 
Operating activities
$
15,812

 
$
17,300

Investing activities
1,502

 
(3,411
)
Financing activities
(14,530
)
 
(11,032
)
Increase in cash and cash equivalents
2,784


2,857

Cash and cash equivalents at beginning of year
2,857

 

Cash and cash equivalents at end of year
$
5,641

 
$
2,857

 

38



Operating Cash Flows.  Summary operating cash flow information for the years ended December 31, 2014 and 2013, is as follows:
 
Year Ended December 31,
 
2014
 
2013
 
Net income (loss)
$
23,675

 
$
(4,929
)
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:


 
 

 
Depreciation and amortization
12,325

 
12,009

 
Gain on sale of bioplastics manufacturing business

 
(1,453
)
 
Gain on property insurance recoveries
(8,290
)
 

 
Loss on sale of assets
38

 
47

 
Share based compensation
1,393

 
932

 
Equity method investment (earnings) loss
(10,137
)
 
204

 
Distribution received from equity method investee
4,835

 

 
Deferred income taxes, including change in valuation allowance
1,570

 
(152
)
 
Changes in operating assets and liabilities:
 
 
 

 
Restricted cash

 
12

 
Receivables, net
(4,851
)
 
7,511

 
Inventory
476

 
1,542

 
Prepaid expenses
(331
)
 
(129
)
 
Refundable income taxes
78

 
(224
)
 
Accounts payable
(5,928
)
 
2,571

 
Accounts payable to affiliate, net
2,129

 
(2,804
)
 
Accrued expenses
(373
)
 
3,264

 
Deferred credits
174

 
(208
)
 
Accrued retirement health and life insurance benefits, pension obligations, and other noncurrent liabilities
(699
)
 
(876
)
 
Other
(272
)
 
(17
)
 
Net cash provided by operating activities
$
15,812


$
17,300

 
Cash flow from operations decreased $1,488 to $15,812 for the year ended December 31, 2014, from $17,300 for the year ended December 31, 2013. This decrease in operating cash flow was primarily the result of net cash outflows related to changes in our receivables, inventory, accounts payable, and accrued expenses partially offset by the impact of increased net cash outflow related to net income, after giving effect to adjustments to reconcile net income (loss) to net cash provided by operating activities, along with the change in our accounts payable to affiliate activities.

The following items resulted in decreases to our operating cash flows:
Receivables increased $4,851 for the year ended December 31, 2014 compared to a decrease
of
$7,511 for the year ended December 31, 2013. The resulting change was primarily due to
increased sales for products to customers with longer payment terms, contributing to an increase of days sales outstanding of seven, and the timing of cash receipts;
Inventory decreased $476 for the year ended December 31, 2014 compared to a decrease of $1,542 for the year ended December 31, 2013, with the resulting change primarily due to lower raw material input costs, resulting in lower finished inventory input costs, and decreased volume of ingredient solutions inventories;
Accounts payable decreased $5,928 for the year ended December 31, 2014 compared to an increase of $2,571 for the year ended December 31, 2013. The resulting change was primarily due
to the 2014 settlement of 2013 accrued expenses related to the proxy contest and the timing of cash disbursements at year end; and
Accrued expenses decreased $373 for the year ended December 31, 2014 compared to an increase
of
$3,264 for the year ended December 31, 2013. The decrease in accrued liabilities was primarily
due to the 2014 settlement of accrued severance pay.

39




The above factors which served to decrease operating cash flows, were partially offset by the following:
Net income increased, after giving effect to adjustments to reconcile net income (loss) to net cash provided by operating activities (depreciation and amortization, gains and losses, release of valuation allowance, share-based compensation and equity method investment earnings, net of distributions), by $18,751 from $6,658 for the year ended December 31, 2013 to $25,409 for the year ended December 31, 2014; and
Accounts payable to affiliate, net increased $2,129 for the year ended December 31, 2014 compared to a net decrease of $2,804 for the year ended December 31, 2013, with the resulting change primarily due to timing of payments as well as increased purchases from ICP compared to the same period a year ago.

Investing Cash Flows.  Net investing cash flow for the year ended December 31, 2014 was $1,502 compared to $(3,411) for the year ended December 31, 2013.  During the year ended December 31, 2014, we made capital investments of $6,953 and received proceeds of $8,450 related to property insurance recoveries related to the January 2014 fire at the Indiana facility. During the year ended December 31, 2013, we received proceeds of $2,797 from the sale of our bioplastics manufacturing business and we made capital investments of $6,208.   

Financing Cash Flows.  Net financing cash flow for the year ended December 31, 2014 was $(14,530) compared to $(11,032) for the year ended December 31, 2013, for a net decrease in financing cash flow of $(3,498). During the year ended December 31, 2014, we had net payments of $(11,330) to our Credit Agreement compared to net payments of $(7,893) for the year ended December 31, 2013.  Our payments on long-term debt totaled $1,555 and $1,683 for the years ended December 31, 2014 and 2013, respectively. We purchased shares of stock from terminated employees during the years ended December 31, 2014 and 2013, in the amount of the withholding taxes on the partial vesting of their restricted stock at termination. These stock purchases added 92,465 shares, or $672, to our treasury stock for the year ended December 31, 2014 and 94,605 shares, or $540, to our treasury stock for the year ended December 31, 2013. We made dividend and dividend equivalent payments of $907 and $916 for the years ended December 31, 2014 and 2013, respectively, to our holders of Common Stock, Restricted Stock, and RSUs.

CAPITAL EXPENDITURES
 
For the year ended December 31, 2014, we made $7,527 of capital investments, of which $6,953 was a use of cash and $574 remained payable at December 31, 2014.  The capital investments related primarily to facility improvements and upgrades.

For the year ended December 31, 2013, we made $7,883 of capital investments, of which $6,208 was a use of cash and $1,675 remained payable at December 31, 2013.  The capital investments related primarily to facility improvements and upgrades.

CREDIT AGREEMENT AND FINANCIAL COVENANTS
 
Credit Agreement.  This discussion should be read in light of the Second Amended and Restated Credit Agreement disclosure in Note 18: Subsequent Events.

On November 2, 2012, we entered into an Amended and Restated Credit Agreement, and ancillary documents with Wells Fargo (the "Credit Agreement").  The Credit Agreement amends our Former Credit Agreement with the lender in all material respects. Reference is made to Note 4: Corporate Borrowings and Capital Lease Obligations and above for information on our Credit Agreement. On February 12, 2014, we entered into an amendment to our Credit Agreement (the "First Amendment"). The First Amendment amended and restated the definition of the term EBITDA as further described under "- Financial Covenants" below.


40



On August 5, 2014, we entered into a second amendment to the Credit Agreement (the "Second Amendment") by and among Wells Fargo Bank, N.A. as administrative agent and sole lender and MGP Ingredients, Inc., MGPI Processing, Inc., MGPI Pipeline, Inc. and MGPI of Indiana, LLC.  The Second Amendment amended and restated the definition of the term "Fixed Asset Sub-Line" and added Thunderbird Real Estate Holdings, LLC ("Thunderbird"), a wholly-owned subsidiary of MGPI Processing, Inc. which is a wholly-owned subsidiary of the Company, to the Credit Agreement as a Loan Party, as defined in the Credit Agreement.  In connection with execution of the Second Amendment, all the equity of Thunderbird was pledged and a lien was placed on all the assets of Thunderbird  to secure the obligations of the Loan Parties (as defined in the Credit Agreement) under the Credit Agreement. With the execution of the Fixed Asset Sub-Line term loan, $7,004 of debt obligations under the Credit Agreement became debt obligations under the sub-line term loan (maturing with the Credit Agreement), resulting in a non-cash transaction during the year ended December 31, 2014. The loan fees incurred by us related to the Second Amendment for the year ended December 31, 2014 were $66 and are being amortized over the life of the Credit Agreement. The amortized portion of the loan fees incurred is included in Interest expense, net on the Consolidated Statements of Operations.

Key terms of the amended agreement are as follows:

The Credit Agreement matures on November 2, 2017 and provides for letters of credit and revolving loans with a Maximum Revolver Commitment of $55,000, subject to borrowing base limitations, generally based on the value of eligible inventory, as defined in the Credit Agreement, and accounts receivable owned by the Borrowers.  Borrowings under the Credit Agreement may bear interest either on a Base Rate model or a LIBOR Rate model.  For LIBOR Rate Loans, the interest rate is equal to the per annum LIBOR Rate (based on  1, 2, 3 or 6 months) plus 2.00 – 2.50 percent (depending upon the average Excess Availability, as described below).  For Base Rate Loans, the interest rate shall be the greatest of (a) 1.00 percent, (b) the Federal Funds Rate plus 0.50 percent, (c) one-month LIBOR Rate plus 1.00 percent, and (d) Wells Fargo’s "prime rate" as announced from time to time.  The weighted average rate in effect at December 31, 2014 and 2013, was 2.54 percent and 2.52 percent, respectively.  The Credit Agreement provides for an unused line fee equal to 0.375 percent per annum multiplied by the difference of the total revolving loan commitment less the average outstanding revolving loans for the given period, as well as customary field examination and appraisal fees, letter of credit fees and other administrative fees.
 
The amount of borrowings which we may make is subject to borrowing base limitations adjusted for the Fixed Asset Sub-Line collateral.  As of December 31, 2014, our total outstanding borrowings under the credit facility were $6,670, comprised of $0 of revolver borrowing and $6,670 of Fixed Asset Sub-Line term loan borrowing, leaving $42,744 available for additional borrowings.

On February 27, 2015, we entered into a five year, $80,000 revolving loan pursuant to a Second Amended and Restated Credit Agreement with Wells Fargo Bank, National Association, as Administrative Agent (see Note 18: Subsequent Events for additional details). 

Financial Covenants.  Under the Credit Agreement, we must comply with the following covenants:
 
Financial Covenants.  For all periods in which the Excess Availability (which is the total availability for loans, less the Company’s and its subsidiaries’ trade payables aged in excess of historical levels and book overdrafts) is less than $9,625, we are required to have a Fixed Charge Coverage Ratio ("FCCR")
 
FCCR means, with respect to any fiscal period and with respect to the Company determined on a consolidated basis in accordance with GAAP, the ratio of (i) EBITDA(1) for such period minus unfinanced Capital Expenditures made (to the extent not already incurred in a prior period) or incurred during such period, to (ii) Fixed Charges for such period.

(1) On February 12, 2014, we entered into the First Amendment, which amended and restated the definition of the term EBITDA to add back (to the Company's consolidated net earnings (or loss)) governance expenses relating to shareholder litigation incurred prior to December 31, 2013, in an aggregate amount not in excess of $5,500. For the years ended December 31, 2014 and 2013, we incurred $0 and $5,465 of such expenses. Had the Company not entered into the First Amendment, the Company still would have been in compliance with its FCCR covenant at December 31, 2013.
 
measured on a month end trailing basis, of at least 1.10:1.00 (a) for each month-end until October 31, 2013, the trailing months from November 1, 2012 through such date, and (b) as of each month-end commencing November 30, 2013 using a trailing twelve-month measure.  Moreover, we are required to maintain Excess Availability on a consolidated basis of at least $4,000 at all times prior to the later of (x) November 2, 2013 and (y) the last day of the first twelve month period for which Borrowers have maintained a Fixed Charge Coverage Ratio of at least 1.10:1.00.

41



 
Other Restrictions.  If we do not maintain Excess Availability of at least $9,625 and a Fixed Charge Coverage Ratio for the most recently ended twelve months of at least  1.20:1.00, then certain restrictions and payment limitations apply, including payment of dividends and distributions.  We are also generally prohibited from incurring any liabilities, or acquiring any assets, except for certain ordinary holding company activities as further described in the Credit Agreement.  Wells Fargo has significant lending discretion under the Credit Agreement, and may modify borrowing base and advance rates, the effect of which may limit the amount of loans that we may have outstanding at any given time.  Wells Fargo may also terminate or accelerate our obligations under the Credit Agreement upon the occurrence of various events in addition to payment defaults and other breaches, including such matters as a change of control of the Company, defaults under other material contracts with third parties, and ERISA (Employee Retirement Income Security Act of 1974) violations.

We were in compliance with our Credit Agreement’s financial covenants at December 31, 2014 and 2013.


42



OFF BALANCE SHEET OBLIGATIONS
 
Arrangement with Cargill.  We have entered a business alliance with Cargill, Incorporated for the production and marketing of a new resistant starch derived from high amylose corn. We sold only an insignificant amount of the product, and the agreement with Cargill does not appear to be significant at this time.  If we terminate the arrangement before the expiration of 18 months following certain force majeure events affecting Cargill, or if Cargill terminates the arrangement because of a breach by us of our obligations, we will be required to pay a portion (up to 50 percent) of the book value of capital expenditures, if any, made by Cargill to enable it to produce the product. This amount will not exceed $2,500 without our consent. Upon the occurrence of any such event, we also will be required to give Cargill a non-exclusive sublicense to use the patented process for the life of the patent in the production of high amylose corn-based starches for use in food products. The sublicense would be royalty bearing, provided we were not also then making the high amylose corn-based starch.

Industrial Revenue Bond.  On December 28, 2006, we engaged in an industrial revenue bond transaction with the City of Atchison, Kansas in order to receive a 10-year real property tax abatement on our newly constructed office building and technical innovation center in Atchison, Kansas. We recorded the office building and technical center assets into property and equipment on the consolidated balance sheets.  Pursuant to this transaction, the City issued $7,000 principal amount of its industrial revenue bonds to us and then used the proceeds to purchase the office building and technical innovation center from us.  The City then leased the facilities back to us under a capital lease, the terms of which provide for the payment of basic rent in an amount sufficient to pay principal and interest on the bonds.  Our obligation to pay rent under the lease is in the same amount and due on the same date as the City’s obligation to pay debt service on the bonds which we hold. The lease permits us to present the bonds at any time for cancellation, upon which our obligation to pay basic rent would be canceled.  We do not intend to do this until their maturity date in 2016, at which time we may elect to purchase the facilities for $100 (one hundred dollars).  Because we own all outstanding bonds, management considers the debt canceled and, accordingly, no amount for our obligations under the capital lease is reflected on our balance sheet.  In connection with this transaction, we agreed to pay the city an administrative fee of $50, which is payable over 10 years.  If we were to present the bonds for cancellation prior to maturity, the $50 fee would be accelerated.
 
Indemnification Arrangement with ICP and ICP Holdings.  Our Contribution Agreement with ICP and the LLC Interest Purchase Agreement with ICP Holdings require us to indemnify ICP and ICP Holdings until the end of the applicable statute of limitations from and against any damages or liabilities arising from a breach of certain environmental and tax representations and warranties in the Contribution Agreement and the LLC Interest Purchase Agreement and also with respect to certain environmental damages or liabilities related to the recommencement of production at the Pekin facility or to operations at the Pekin facility prior to November 20, 2009.
 
Operating Leases. We lease railcars and other assets under various operating leases.  For railcar leases, we are generally required to pay all service costs associated with the railcars.  Rental payments include minimum rentals plus contingent amounts based on mileage.  Rental expenses under railcar operating leases with terms longer than one month were $2,241 and $2,844 for the years ended December 31, 2014 and 2013, respectively. Annual rental commitments under non-cancelable operating leases total $8,119 for the next five years ending December 31, 2019 and an additional $1,304 thereafter. See Note 4: Corporate Borrowing and Capital Lease Obligations for a listing of commitments, by year.

NEW ACCOUNTING PRONOUNCEMENTS
 
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 15: Recently Issued Accounting Pronouncements set forth in Item 8. Financial Statements and Supplementary Data.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable.
 

43



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
The management of MGP Ingredients, Inc. (the "Company")  is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f).  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

In May 2013, the Committee of Sponsoring Organizations ("COSO") issued its Internal Control - Integrated Framework (the "2013 Framework"). While the 2013 Framework's internal control components are the same as those in the framework and criteria established in the "Internal Control - Integrated Framework" issued by COSO in 1992 (the "1992 Framework"), the new framework requires companies to assess whether 17 principles are present and functioning in determining whether their system of internal control is effective. The Company expects to adopt the 2013 Framework during the year ending December 31, 2015.
 
With the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 1992 framework. As a result of this assessment, management has concluded that the Company’s internal control over financial reporting as of December 31, 2014 was effective.


44



Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
MGP Ingredients, Inc.:
 
We have audited the accompanying consolidated balance sheets of MGP Ingredients, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years then ended. We also have audited MGP Ingredients, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). MGP Ingredients, Inc.’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on MGP Ingredients, Inc.’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MGP Ingredients, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows the years then ended, in conformity with U.S. generally accepted accounting principles. Also in our opinion, MGP Ingredients, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.


 
/s/ KPMG LLP
 
Kansas City, Missouri
March 12, 2015


45



MGP INGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
 

Year Ended December 31,
 
 
2014

2013
 
Sales
$
338,352


$
334,070

 
Less: excise taxes
24,949


10,806

 
Net sales
313,403


323,264

 
Cost of sales (a)
284,972


302,025

 
Gross profit
28,431


21,239

 






 
Selling, general and administrative expenses
20,101


26,202

 
Insurance recoveries (Note 17)
(8,290
)
 

 
Other operating costs and losses on sale of assets
1


236

 
Operating income (loss)
16,619


(5,199
)
 






 
Equity method investment earnings (loss) (Note 3)
10,137

 
(204
)
 
Interest expense
(816
)

(1,118
)
 
Income (loss) from continuing operations before income taxes
25,940


(6,521
)
 






 
Income tax expense (benefit) (Note 5)
2,265


(714
)
 
Net income (loss) from continuing operations
23,675


(5,807
)
 






 
Discontinued operations, net of tax (Note 11)


878

 
        Net income (loss)
$
23,675


$
(4,929
)
 






 
Basic and diluted earnings (loss) per share



 

 
Operating income (loss)
$
1.32


$
(0.34
)
 
Income from discontinued operations


0.05

 
Net income (loss)
$
1.32


$
(0.29
)
 






 
Dividends per common share
$
0.05


$
0.05

 
 
(a) 
Includes related party purchases of $37,500 and $9,988 for the years ended December 31, 2014 and 2013, respectively.














See Accompanying Notes to Consolidated Financial Statements

46



MGP INGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)

 
Year Ended December 31,
 
 
2014
 
2013
 
Net income (loss)
$
23,675

 
$
(4,929
)
 
Other comprehensive income (loss), net of tax:


 
 

 
Company sponsored benefit  plans:


 
 

 
Change in pension plans, net of tax expense (benefit) of $(155) and $166, respectively
133

 
250

 
Change in post-employment benefits, net of tax benefit of $6 and $22, respectively
(846
)
 
(39
)
 
Change in translation adjustment and post-employment benefits of equity method investments, net of tax benefit of $37 and $8, respectively
(15
)
 
18

 
Other comprehensive income (loss)
(728
)
 
229

 
Comprehensive income (loss)
$
22,947

 
$
(4,700
)
 




































See Accompanying Notes to Consolidated Financial Statements

47



MGP INGREDIENTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)

 
December 31,
 
 
2014
 
2013
 
Current Assets
 
 
 
 
Cash and cash equivalents
$
5,641

 
$
2,857

 
Receivables (less allowance for doubtful accounts: December 31, 2014 - $12; December 31, 2013 - $18)
32,672

 
27,821

 
Inventory
34,441

 
34,917

 
Prepaid expenses
1,179

 
848

 
Deferred income taxes
7,924

 
4,977

 
Refundable income taxes
388

 
466

 
Total current assets
82,245

 
71,886

 
 
 
 
 
 
Property and equipment, net of accumulated depreciation and amortization
63,881

 
70,244

 
Equity method investments
12,373

 
7,123

 
Other assets
2,100

 
2,076

 
Total assets
$
160,599

 
$
151,329

 
 
 
 
 
 
Current Liabilities
 
 
 

 
Current maturities of long-term debt
$
2,613

 
$
1,557

 
Accounts payable
16,076

 
23,107

 
Accounts payable to affiliate, net
3,333

 
1,204

 
Accrued expenses
8,010

 
8,282

 
Other current liabilities
716

 

 
Total current liabilities
30,748

 
34,150

 
 
 
 
 
 
Long-term debt, less current maturities
7,670

 
3,611

 
Revolving credit facility

 
18,000

 
Deferred credits
4,099

 
3,925

 
Accrued retirement health and life insurance benefits
4,420

 
4,423

 
Other non current liabilities

 
640

 
Deferred income taxes
9,297

 
4,977

 
Total liabilities
56,234

 
69,726

 
 
 
 
 
 
Commitments and Contingencies – See Notes 4 and 7


 


 
Stockholders’ Equity


 
 

 
Capital stock


 
 

 
Preferred, 5% non-cumulative; $10 par value; authorized 1,000 shares; issued and outstanding 437 shares
4

 
4

 
Common stock


 
 

 
No par value; authorized 40,000,000 shares; issued 18,115,965 shares at December 31, 2014 and 2013; 17,674,559 and 17,750,421 shares outstanding at December 31, 2014 and 2013, respectively
6,715

 
6,715

 
Additional paid-in capital
9,904

 
8,728

 
Retained earnings
89,454

 
66,686

 
Accumulated other comprehensive loss
(732
)
 
(4
)
 
Treasury stock, at cost 441,406 and 365,544 shares at December 31, 2014 and 2013, respectively
(980
)
 
(526
)
 
Total stockholders’ equity
104,365

 
81,603

 
Total liabilities and stockholders’ equity
$
160,599

 
$
151,329

 





 See Accompanying Notes to Consolidated Financial Statements

48



           MGP INGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

 
Year Ended December 31,
 
 
2014
 
2013
 
Cash Flows from Operating Activities
 
 
 
 
Net income (loss)
$
23,675

 
$
(4,929
)
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 

 
Depreciation and amortization
12,325

 
12,009

 
Gain on sale of bioplastics manufacturing business

 
(1,453
)
 
Gain on property insurance recoveries
(8,290
)
 

 
Loss on sale of assets
38

 
47

 
Share based compensation
1,393

 
932

 
Equity method investment (earnings) loss
(10,137
)
 
204

 
Distribution received from equity method investee
4,835

 

 
Deferred income taxes, including change in valuation allowance
1,570

 
(152
)
 
Changes in operating assets and liabilities:


 
 

 
Restricted cash

 
12

 
Receivables, net
(4,851
)
 
7,511

 
Inventory
476

 
1,542

 
Prepaid expenses
(331
)
 
(129
)
 
Refundable income taxes
78

 
(224
)
 
Accounts payable
(5,928
)
 
2,571

 
Accounts payable to affiliate, net
2,129

 
(2,804
)
 
Accrued expenses
(373
)
 
3,264

 
Deferred credits
174

 
(208
)
 
Accrued retirement health and life insurance benefits, pension obligations, and other noncurrent liabilities
(699
)
 
(876
)
 
Other
(272
)
 
(17
)
 
Net cash provided by operating activities
15,812

 
17,300

 
 
 
 
 
 
Cash Flows from Investing Activities
 
 
 

 
Additions to property and equipment
(6,953
)
 
(6,208
)
 
Proceeds from sale of bioplastics manufacturing business

 
2,797

 
Proceeds from property insurance recoveries
8,450