Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐ 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	45-4082531
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)



100 Commercial Street
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	Trading Symbol	Name of each exchange on which registered
Common Stock, no par value	MGPI	NASDAQ Global Select Market

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. x Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an “emerging growth company.” See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

x Large accelerated filer ☐ Accelerated filer

☐ Non-accelerated filer (Do not check if smaller reporting company) ☐ Smaller Reporting Company

☐Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

17,024,938 shares of Common Stock, no par value as of July 25, 2019

INDEX



PART I. FINANCIAL INFORMATION			Page

	Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Statements of Income (Unaudited)		3
	Condensed Consolidated Statements of Comprehensive Income (Unaudited)		4
	Condensed Consolidated Balance Sheets (Unaudited)		5
	Condensed Consolidated Statements of Cash Flows (Unaudited)		6
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)		7
	Notes to Unaudited Condensed Consolidated Financial Statements		9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

	Item 4.	Controls and Procedures	29

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	30

	Item 1A.	Risk Factors	30

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

	Item 3.	Defaults Upon Senior Securities	30

	Item 4.	Mine Safety Disclosures	30

	Item 5.	Other Information	30

	Item 6.	Exhibits	31

METHOD OF PRESENTATION

Throughout this Report, when we refer to “the Company,” “MGP,” “we,” “us,” “our,” and words of similar import, we are referring to the combined business of MGP Ingredients, Inc. and its consolidated subsidiaries, except to the extent that the context otherwise indicates. In this document, for any references to Note 1 through Note 10, refer to the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1.

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.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share amounts)



	Quarter Ended June 30,						Year to Date Ended June 30,
	2019			2018			2019			2018
Sales (Note 2)	$	90,501		$	88,252		$	179,597		$	176,208
Cost of sales	70,979			68,811			143,415			137,816
Gross profit	19,522			19,441			36,182			38,392
Selling, general and administrative expenses	8,648			8,309			16,795			16,871
Operating income	10,874			11,132			19,387			21,521
Interest expense, net	(321		)	(289		)	(573		)	(496		)
Income before income taxes	10,553			10,843			18,814			21,025
Income tax expense (Note 4)	2,642			3,316			1,183			4,571
Net income	$	7,911		$	7,527		$	17,631		$	16,454

Income attributable to participating securities	51			148			117			323
Net income attributable to common shareholders and used in earnings per share calculation (Note 5)	$	7,860		$	7,379		$	17,514		$	16,131

Share information:
Basic and diluted weighted average common shares	17,021,599			16,869,481			16,994,864			16,856,423

Basic and diluted earnings per common share	$	0.46		$	0.44		$	1.03		$	0.96

See accompanying notes to unaudited condensed consolidated financial statements

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)



	Quarter Ended June 30,					Year to Date Ended June 30,
	2019			2018		2019			2018
Net income	$	7,911		$	7,527	$	17,631		$	16,454
Other comprehensive income (loss), net of tax:
Change in Company-sponsored post-employment benefit plan	(16		)	41		(2		)	28
Comprehensive income	$	7,895		$	7,568	$	17,629		$	16,482

See accompanying notes to unaudited condensed consolidated financial statements

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)



	June 30, 2019			December 31, 2018
Current Assets
Cash and cash equivalents	$	2,162		$	5,025
Receivables (less allowance for doubtful accounts at June 30, 2019, and December 31, 2018 - $24)	41,604			38,797
Inventory	118,007			108,769
Prepaid expenses	1,834			1,320
Refundable income taxes	5,404			712
Total current assets	169,011			154,623

Property, plant, and equipment	299,666			295,893
Less accumulated depreciation and amortization	(179,772		)	(175,105		)
Property, plant, and equipment, net	119,894			120,788
Operating lease right-of-use asset, net	6,163			—
Other assets	3,656			2,481
Total assets	$	298,724		$	277,892

Current Liabilities
Current maturities of long-term debt	$	393		$	386
Accounts payable	20,711			25,363
Accrued expenses	11,014			11,714
Total current liabilities	32,118			37,463

Long-term debt, less current maturities	40,851			21,040
Credit agreement - revolver	1,245			10,588
Operating lease liability	4,112			—
Deferred credits	1,399			1,565
Accrued retirement, health, and life insurance benefits	2,482			2,595
Other noncurrent liabilities	1,851			1,523
Deferred income taxes	2,224			1,677
Total liabilities	86,282			76,451

Commitments and Contingencies (Note 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 June 30, 2019 and December 31, 2018; and 17,024,924 and 16,856,414 shares outstanding at June 30, 2019 and December 31, 2018, respectively	6,715			6,715
Additional paid-in capital	13,117			15,375
Retained earnings	213,049			198,914
Accumulated other comprehensive loss	(97		)	(164		)
Treasury stock, at cost
Shares of 1,091,041 at June 30, 2019, and 1,259,551 at December 31, 2018	(20,346		)	(19,403		)
Total stockholders’ equity	212,442			201,441
Total liabilities and stockholders’ equity	$	298,724		$	277,892

See accompanying notes to unaudited condensed consolidated financial statements

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)



	Year to Date Ended June 30,
	2019			2018
Cash Flows from Operating Activities
Net income	$	17,631		$	16,454
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	5,602			5,826
Gain on sale of assets	(138		)	—
Share-based compensation	2,267			1,968
Deferred income taxes, including change in valuation allowance	547			729
Changes in operating assets and liabilities:
Receivables, net	(2,807		)	(1,411		)
Inventory	(9,238		)	(13,338		)
Prepaid expenses	(514		)	(620		)
Refundable income taxes	(4,692		)	446
Accounts payable	(2,883		)	(5,106		)
Accrued expenses	(2,750		)	(3,232		)
Deferred credits	(166		)	(362		)
Accrued retirement health, and life insurance benefits	211			(111		)
Net cash provided by operating activities	3,070			1,243
Cash Flows from Investing Activities
Additions to property, plant, and equipment	(6,192		)	(13,065		)
Deferred compensation plan investments	(1,177		)	—
Net cash used in investing activities	(7,369		)	(13,065		)
Cash Flows from Financing Activities
Payment of dividends and dividend equivalents	(3,427		)	(2,750		)
Purchase of treasury stock for tax withholding on equity-based compensation	(5,467		)	(2,073		)
Proceeds on long-term debt	20,000			—
Principal payments on long-term debt	(192		)	(185		)
Proceeds from credit agreement - revolver	12,625			16,946
Payments on credit agreement - revolver	(22,025		)	(920		)
Other	(78		)	—
Net cash provided by financing activities	1,436			11,018
Decrease in cash and cash equivalents	(2,863		)	(804		)
Cash and cash equivalents, beginning of period	5,025			3,084
Cash and cash equivalents, end of period	$	2,162		$	2,280

See accompanying notes to unaudited condensed consolidated financial statements

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR YEAR TO DATE ENDED JUNE 30, 2019

(Unaudited) (Dollars in thousands)



	Capital Stock Preferred		Issued Common		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total
Balance, December 31, 2018	$	4	$	6,715	$	15,375		$	198,914		$	(164	)	$	(19,403	)	$	201,441
Comprehensive income:
Net income	—		—		—			9,720			—			—			9,720
Other comprehensive income	—		—		—			—			14			—			14
Dividends and dividend equivalents of $.10 per common share and per restricted stock unit, net of estimated forfeitures	—		—		—			(1,714		)	—			—			(1,714		)
Share-based compensation	—		—		1,031			—			—			—			1,031
Stock shares awarded, forfeited, or vested	—		—		(3,770		)	—			—			3,864			94
Purchase of treasury stock for tax withholding on equity-based compensation	—		—		—			—			—			(5,467		)	(5,467		)
Adjustment related to Accounting Standards Update 2018-02 adoption	—		—		—			(69		)	69			—			—
Balance, March 31, 2019	$	4	$	6,715	$	12,636		$	206,851		$	(81	)	$	(21,006	)	$	205,119
Comprehensive income:
Net income	—		—		—			7,911			—			—			7,911
Other comprehensive loss	—		—		—			—			(16		)	—			(16		)
Dividends and dividend equivalents of $.10 per common share and per restricted stock unit, net of estimated forfeitures	—		—		—			(1,713		)	—			—			(1,713		)
Share-based compensation	—		—		481			—			—			—			481
Stock shares awarded, forfeited, or vested	—		—		—			—			—			660			660
Balance, June 30, 2019	$	4	$	6,715	$	13,117		$	213,049		$	(97	)	$	(20,346	)	$	212,442

See accompanying notes to unaudited condensed consolidated financial statements

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR YEAR TO DATE ENDED JUNE 30, 2018

(Unaudited) (Dollars in thousands)



	Capital Stock Preferred		Issued Common		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total
Balance, December 31, 2017	$	4	$	6,715	$	13,912		$	167,129		$	(311	)	$	(18,719	)	$	168,730
Comprehensive income:
Net income	—		—		—			8,927			—			—			8,927
Other comprehensive loss	—		—		—			—			(13		)	—			(13		)
Dividends and dividend equivalents of $.08 per common share and per restricted stock unit, net of estimated forfeitures	—		—		—			(1,374		)	—			—			(1,374		)
Share-based compensation	—		—		1,052			—			—			—			1,052
Stock shares awarded, forfeited, or vested	—		—		(981		)	—			—			1,120			139
Purchase of treasury stock for tax withholding on equity-based compensation	—		—		—			—			—			(2,073		)	(2,073		)
Balance, March 31, 2018	$	4	$	6,715	$	13,983		$	174,682		$	(324	)	$	(19,672	)	$	175,388
Comprehensive income:
Net income	—		—		—			7,527			—			—			7,527
Other comprehensive income	—		—		—			—			41			—			41
Dividends and dividend equivalents of $.08 per common share and per restricted stock unit, net of estimated forfeitures	—		—		—			(1,374		)	—			—			(1,374		)
Share-based compensation	—		—		501			—			—			—			501
Stock shares awarded, forfeited, or vested	—		—		—			—			—			277			277
Balance, June 30, 2018	$	4	$	6,715	$	14,484		$	180,835		$	(283	)	$	(19,395	)	$	182,360

See accompanying notes to unaudited condensed consolidated financial statements

MGP INGREDIENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, unless otherwise noted)

Note 1. Accounting Policies and Basis of Presentation

The Company. MGP Ingredients, Inc. (“Company”) is a Kansas corporation headquartered in Atchison, Kansas and is a leading producer and supplier of premium distilled spirits and specialty wheat protein and starch food ingredients. Distilled spirits include premium bourbon and rye whiskeys and grain neutral spirits, including vodka and gin. MGP is also a top producer of high quality industrial alcohol for use in both food and non-food applications. The Company’s protein and starch food ingredients provide a host of functional, nutritional, and sensory benefits for a wide range of food products to serve the packaged goods industry. The Company’s distillery products are derived from corn and other grains (including rye, barley, wheat, barley malt, and milo), and its ingredient products are derived from wheat flour. The majority of the Company’s sales are made directly or through distributors to manufacturers and processors of finished packaged goods or to bakeries.

Basis of Presentation and Principles of Consolidation. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements as of and for the quarter ended June 30, 2019, should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”). The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal and recurring adjustments) necessary to fairly present the results for interim periods in accordance with U.S. generally accepted accounting principles (“GAAP”). Pursuant to the rules and regulations of the SEC, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted.

Use of Estimates. The financial reporting policies of the Company conform to GAAP. The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The application of certain of these policies places demands on management’s judgment, with financial reporting results relying on estimation 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.

Inventory. Inventory includes finished goods, raw materials in the form of agricultural commodities used in the production process and certain maintenance and repair items. Bourbon and whiskeys are normally aged in barrels for several years, following industry practice; all barreled bourbon and whiskey is classified as a current asset. The Company includes warehousing, insurance, and other carrying charges applicable to barreled whiskey in inventory costs.

Inventories are stated at lower of cost or net realizable value on the first-in, first-out, or FIFO, method. Inventory valuations are impacted by constantly changing prices paid for key materials, primarily corn. Inventory consists of the following:



	June 30, 2019		December 31, 2018
Finished goods	$	16,972	$	17,296
Barreled distillate (bourbons and whiskeys)	85,462		76,374
Raw materials	4,954		4,906
Work in process	1,567		1,550
Maintenance materials	7,871		7,541
Other	1,181		1,102
Total	$	118,007	$	108,769

Revenue Recognition. Revenue is recognized when control of the promised goods or services, through performance obligations by the Company, is transferred to the customer in an amount that reflects the consideration it expects to be entitled to in exchange for the performance obligations. The term between invoicing and when payment is due is not significant and the period between when the entity transfers the promised good or service to the customer and when the customer pays for that good or service is one year or less.

Excise taxes that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer are excluded from revenue. Revenue is recognized for the sale of products at the point in time finished products are delivered to the customer in accordance with shipping terms. This is a faithful depiction of the satisfaction of the performance obligation because, at the point control passes to the customer, the customer has legal title and the risk and rewards of ownership have transferred, and the customer has present obligation to pay.

The Company’s distillery products segment routinely enters into bill and hold arrangements, whereby the Company produces and sells unaged distillate to customers, and the product is subsequently barreled at the customer’s request and warehoused at a Company location for an extended period of time in accordance with directions received from the Company’s customers. Even though the unaged distillate remains in the Company’s possession, a sale is recognized at the point in time when the customer obtains control of the product. Control is transferred to the customer in bill and hold transactions when; customer acceptance specifications have been met, legal title has transferred, the customer has a present obligation to pay for the product, and the risk and rewards of ownership have transferred to the customer. Additionally, all the following bill and hold criteria have to be met in order for control to be transfered to the customer; the customer has requested the product be warehoused, the product has been identified as separately belonging to the customer, the product is currently ready for physical transfer to the customer, and the Company does not have the ability to use the product or direct it to another customer.

Warehouse services revenue is recognized over the time that warehouse services are rendered and as they are rendered. This is a faithful depiction of the satisfaction of the performance obligation because control of the aging products has already passed to the customer and there are no additional performance activities required by the Company, except as requested by the customer. The performance of the service activities, as requested, is invoiced as satisfied and revenue is concurrently recognized.

Income Taxes. The Company accounts for income taxes using an asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. A valuation allowance is recognized if it is “more likely than not” that at least some portion of the deferred tax asset will not be realized.

Earnings Per Share (“EPS”). Basic and diluted EPS are computed using the two-class method, which is an earnings allocation formula that determines net income per share for each class of Common Stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income attributable to common shareholders by the weighted average shares outstanding during the period.

Fair Value of Financial Instruments. The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy is broken down into three levels based upon the observability of inputs. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability.

The Company’s short term financial instruments include cash and cash equivalents, accounts receivables and accounts payable. The carrying value of the short term financial instruments approximates the fair value due to their short term nature. These financial instruments have no stated maturities or the financial instruments have short term maturities that approximate market.

The fair value of the Company’s debt is estimated based on current market interest rates for debt with similar maturities and credit quality. The fair value of the Company’s debt was $42,374 and $32,018 at June 30, 2019 and December 31, 2018, respectively. The financial statement carrying value of total debt was $42,489 (including unamortized loan fees) and $32,014 (including unamortized loan fees) at June 30, 2019 and December 31, 2018, respectively. These fair values are considered Level 2 under the fair value hierarchy. Fair value disclosure for deferred compensation plan investments is included in Note 8.

Recently Adopted Accounting Standard Updates. The Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), as of January 1, 2019, using the modified retrospective approach (Note 6). The modified retrospective approach provides a method for recording existing leases at adoption and using the effective date as the date of application (the “effective date method”). Under the effective date method, the comparative period reporting is unchanged. Comparative reporting periods are presented in accordance with Topic 840 (previous lease guidance), while periods subsequent to the effective date are presented in accordance with Topic 842. In addition, the Company elected the available practical expedients and implemented internal controls to enable the preparation of financial information on adoption. Adoption of the new standard resulted in the Company recording Operating lease right-of-use assets and Operating lease liabilities in its Condensed Consolidated Balance Sheet of $6,598 and $6,952, respectively, as of January 1, 2019. The standard did not impact the Company’s consolidated net earnings and also had no impact on its cash flows.

In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”). The Company adopted this guidance on January 1, 2019 and it had an immaterial effect on its financial results and disclosures.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which more closely aligns the accounting for employee and nonemployee share-based payments. The Company adopted this guidance on January 1, 2019, and it had no impact on its financial results and disclosures.

Note 2. Revenue

The following table presents the Company’s revenues by segment and major products and services:



	Quarter Ended June 30,				Year to Date Ended June 30,
	2019		2018		2019		2018
Distillery Products
Brown goods	$	27,621	$	27,736	$	52,448	$	55,937
White goods	14,691		14,464		31,873		30,334
Premium beverage alcohol	42,312		42,200		84,321		86,271
Industrial alcohol	20,636		19,295		41,079		38,639
Food grade alcohol	62,948		61,495		125,400		124,910
Fuel grade alcohol	1,398		1,567		2,899		3,430
Distillers feed and related co-products	6,181		6,663		13,276		12,887
Warehouse services	3,496		2,927		7,025		5,802
Total distillery products	$	74,023	$	72,652	$	148,600	$	147,029

Ingredient Solutions
Specialty wheat starches	$	7,210	$	7,339	$	14,090	$	14,140
Specialty wheat proteins	5,276		6,008		9,718		10,744
Commodity wheat starches	3,013		2,090		5,275		4,132
Commodity wheat proteins	979		163		1,914		163
Total ingredient solutions	$	16,478	$	15,600	$	30,997	$	29,179

Total sales	$	90,501	$	88,252	$	179,597	$	176,208

The Company generates revenues from the distillery products segment by the sale of products and by providing warehouse services related to the storage and aging of customer products. The Company generates revenues from the ingredient solutions

segment by the sale of products. Revenue related to sales of products is recognized at a point in time whereas revenue generated from warehouse services is recognized over time. Contracts with customers in both segments include a single performance obligation (either the sale of products or the provision of warehouse services).

Note 3. Corporate Borrowings

The following table presents the Company’s outstanding indebtedness:



Description^(a)	June 30, 2019			December 31, 2018
Credit Agreement - Revolver, 3.80% (variable rate) due 2022	$	1,600		$	11,000
Secured Promissory Note, 3.71% (fixed rate) due 2022	1,403			1,594
Prudential Note Purchase Agreement, 3.53% (fixed rate) due 2027	20,000			20,000
Prudential Note Purchase Agreement, 3.80% (fixed rate) due 2029	20,000			—
Total indebtedness outstanding	43,003			32,594
Less unamortized loan fees^(b)	(514		)	(580		)
Total indebtedness outstanding, net	$	42,489		$	32,014
Less current maturities of long-term debt	(393		)	(386		)
Long-term debt	$	42,096		$	31,628

(a) Interest rates are as of June 30, 2019.

(b) Loan fees are being amortized over the life of the Credit Agreement and Note Purchase Agreements.

Credit and Note Purchase Agreements. The Company’s Credit Agreement with Wells Fargo Bank, National Association, provides for a $150,000 revolving credit facility. The Company may increase the facility from time to time by an aggregate principal amount of up to $25,000 provided certain conditions are satisfied and at the discretion of the lender. The Credit Agreement matures on August 23, 2022. The Credit Agreement includes certain requirements and covenants, which the Company was in compliance with at June 30, 2019. As of June 30, 2019, the Company’s total outstanding borrowings under the Credit Agreement were $1,600 leaving $148,400 available.

The Company’s Note Purchase and Private Shelf Agreement (the “Note Purchase Agreement”) with PGIM, Inc., an affiliate of Prudential Financial, Inc., and certain affiliates of PGIM, Inc. provides for the issuance of up to $75,000 of Senior Secured Notes. During 2017, the Company issued $20,000 of Senior Secured Notes with a maturity date of August 23, 2027. On April 30, 2019, the Company issued $20,000 of additional Senior Secured Notes with a maturity date of April 30, 2029. The Note Purchase Agreement includes certain requirements and covenants, which the Company was in compliance with at June 30, 2019.

Note 4. Income Taxes

The Company’s tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the estimated annual effective tax rate is updated and a year to date adjustment is made to the provision. The Company’s quarterly effective tax rate is subject to significant change due to the effect of discrete items arising in a given quarter.

Income tax expense for the quarter and year to date ended June 30, 2019, was $2,642 and $1,183, respectively, for an effective tax rate of 25.0 percent and 6.3 percent, respectively. For the quarter ended June 30, 2019, the effective tax rate differed from the 21 percent federal statutory rate on pretax income, primarily due to state income taxes and certain compensation being subject to the deduction limitations applicable to public companies, partially offset by state and federal tax credits. For the year to date ended June 30, 2019, the effective tax rate differed from the 21 percent federal statutory rate on pretax income, primarily due to the tax impact of vested share-based awards, the tax impact of state and federal tax credits, partially offset by state income taxes and certain compensation being subject to the compensation deduction limitations applicable for public companies.

Income tax expense for the quarter and year to date ended June 30, 2018, was $3,316 and $4,571, respectively, for an effective tax rate of 30.6 percent and 21.7 percent, respectively. For the quarter, the effective tax rate differed from the 21 percent federal statutory rate on pretax income, primarily due to a change in estimate in 2018 related to the income tax impact on the 2017 sale of the Company’s equity method investment and a net increase in state taxes. Year to date, the effective tax rate

differed from the 21 percent federal statutory rate on pretax income, primarily due to a change in estimate related to the income tax impact on the sale of the Company’s equity method investment and a net increase in state taxes, partially offset by the impact of income tax benefits related to vested share-based awards.

Note 5. EPS

The computations of basic and diluted EPS:



	Quarter Ended June 30,				Year to Date Ended June 30,
	2019		2018		2019		2018
Operations:
Net income^(a)	$	7,911	$	7,527	$	17,631	$	16,454
Less: Income attributable to participating securities^(b)	51		148		117		323
Net income attributable to common shareholders	$	7,860	$	7,379	$	17,514	$	16,131

Share information:
Basic and diluted weighted average common shares^(c)	17,021,599		16,869,481		16,994,864		16,856,423

Basic and diluted EPS	$	0.46	$	0.44	$	1.03	$	0.96


(a)	Net income attributable to all shareholders.


(b)	Participating securities included 112,865 and 338,375 unvested restricted stock units (“RSUs”), at June 30, 2019 and 2018, respectively.


(c)	Under the two-class method, basic and diluted weighted average common shares at June 30, 2019 and 2018, exclude unvested participating securities.

Note 6. Leases

The Company has operating leases for railcars, computer equipment, an office space, and certain equipment. The Company has no finance leases. Leases with terms of twelve months or less are not recorded on the Company’s Condensed Consolidated Balance Sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. For leases beginning in 2019 and later, lease components are accounted for separately from non-lease components, such as common-area maintenance, based on the relative, observable stand-alone prices of the components.

The Company’s leases have remaining lease terms of one year to five years, some of which may include options to extend the lease. Options to renew the Company’s leases were not considered when assessing the value of the right-of-use assets because the Company was not reasonably certain that it will assert the options to renew the leases. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

The following table provides supplemental balance sheet classification information related to leases:



Leases	Balance Sheet Classification	June 30, 2019
Assets
Operating	Operating lease right-of-use-asset, net	$	6,163
Total leased assets^(a)		$	6,163

Liabilities
Current Operating	Accrued expenses	$	2,073
Noncurrent Operating	Operating lease liability	4,112
Total operating lease liability^(a)		$	6,185

(a) The Company has no finance lease assets or liabilities.

The following table presents the components of lease costs:



	Quarter Ended June 30,			Year to Date Ended June 30,
	2019			2019
Operating lease costs	$	569		$	1,158
Short-term lease costs	250			553
Sublease income	(24		)	(48		)
Net lease costs^(a)(b)	$	795		$	1,663

(a) The Company has no finance lease costs.

(b) Recorded as a component of Operating income on the Company’s Condensed Consolidated Statement of Income.

The following table presents supplemental cash flow and non-cash activity related to lease information:



	Year to Date Ended June 30,
	2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases^(a)	$	1,161

Right-of-use assets obtained in exchange for lease obligations
Operating leases^(a)	$	576

(a) The Company has no finance leases.

The following table presents weighted average discount rate and remaining lease term:



	June 30, 2019
Weighted average discount rate ^(a)
Operating leases	5.88	%

Weighted average remaining lease term^(a)
Operating leases	3.3 years

(a) The Company has no finance leases.

As of June 30, 2019, the maturities of operating lease liabilities were as follows:



Maturity of Operating Lease Liabilities^(a)	June 30, 2019
Remainder of 2019	$	1,192
2020	2,278
2021	1,684
2022	1,079
2023	496
After 2023	57
Total lease payments	$	6,786
Less interest	(601		)
Total operating lease liability	$	6,185

(a) The Company has no finance leases.

At December 31, 2018, under ASC 840, Leases, the Company’s lease disclosures were:

Operating Leases. The Company leases railcars and other assets under various operating leases. For railcar leases, which are the majority, the Company is generally required to pay all service costs associated with the railcars. Rental payments include minimum rentals, and rental expenses with terms longer than one month were $2,081, $2,372, and $2,561 for 2018, 2017, and

2016, respectively. Annual commitments under non-cancelable operating leases totaled $6,897 for the five years ending December 31, 2023, and an additional $55 thereafter.

The Company’s future minimum rental payments were $2,224, $1,858, $1,357, $977, and $481 for the years ending December 31, 2019, 2020, 2021, 2022, and 2023, respectively.



Maturity of Operating Lease Liabilities	December 31, 2018
2019	$	2,224
2020	1,858
2021	1,357
2022	977
2023	481
After 2023	55
Total lease commitments	$	6,952

Note 7. Commitments and Contingencies

There are various legal and regulatory proceedings involving the Company and its subsidiaries. The Company accrues estimated costs for a contingency when management believes that a loss is probable and can be reasonably estimated.

A chemical release occurred at the Company’s Atchison facility on October 21, 2016, which resulted in emissions venting into the air (“the Atchison Chemical Release”). The Company reported the event to the Environmental Protection Agency (“EPA”), the Occupational Safety and Health Administration (“OSHA”), and to Kansas and local authorities on that date, and has cooperated fully to investigate and ensure that all appropriate response actions were taken.

OSHA completed its investigation of the Atchison Chemical Release and, on April 19, 2017, issued its penalty to the Company in the amount of $138. Management settled this assessment with OSHA in full for $75, which was paid on May 16, 2017. A portion, or all, of the penalty amount may be covered by insurance.

The EPA informed the Company on August 1, 2017, that it intends to seek civil penalties of approximately $250 in connection with its investigation of the Atchison Chemical Release. Since the Company expects a negotiated resolution of the EPA civil case and EPA-proposed civil penalties are not material to the quarter and year to date ended June 30, 2019, the Company has not included an accrual in its results. A portion, or all, of the settled penalty amount may be covered by insurance.

On May 29, 2019, federal charges for alleged violations of the Clean Air Act related to the Atchison Chemical Release were filed against the Company, along with another unaffiliated company. If convicted, the statutory maximum penalty could result in a fine of up to $1,500. The Company intends to offer a vigorous defense against the charges. Due to the inherent uncertainty of the matter and because the potential penalties are not material to the quarter and year to date ended June 30, 2019, the Company has not included an accrual in its results.

Private plaintiffs have also initiated, and additional private plaintiffs may initiate, legal proceedings for damages resulting from the Atchison Chemical Release, but the Company is currently unable to reasonably estimate the amount of any such damages that might result. The Company’s insurance is expected to provide coverage of any damages to private plaintiffs, subject to a deductible of $250, but certain regulatory fines or penalties may not be covered and there can be no assurance to the amount or timing of possible insurance recoveries if ultimately claimed by the Company.

Note 8. Employee and Non-Employee Benefit Plans

Equity-Based Compensation Plans. The Company’s equity-based compensation plans provide for the awarding of stock options, stock appreciation rights, shares of restricted stock (“Restricted Stock”), and RSUs for senior executives and salaried employees, as well as non-employee directors. The Company has two active equity-based compensation plans: the Employee Equity Incentive Plan of 2014 (the “2014 Plan”) and the Non-Employee Director Equity Incentive Plan (the “Directors’ Plan”).

As of June 30, 2019, 344,555 RSUs had been granted of the 1,500,000 shares approved under the 2014 Plan, and 81,558 shares had been granted of the 300,000 shares approved under the Directors’ Plan. As of June 30, 2019, there were 118,775 unvested RSUs under the Company’s long-term incentive plans and 112,865 were participating securities (Note 5).

Deferred Compensation Plan. The Company established an unfunded Executive Deferred Compensation Plan (“EDC Plan”) effective as of June 30, 2018, with a purpose to attract and retain highly-compensated key employees by providing participants with an opportunity to defer receipt of a portion of their salary, bonus, and other specified compensation. The Company’s obligations under this plan will change in conjunction with the performance of the participants’ investments, along with contributions to and withdrawals from the plan. Realized and unrealized gains (losses) on deferred compensation plan investments were insignificant and were included as a component of Operating income in the Company’s Condensed Consolidated Statements of Income for the quarter and year to date ended June 30, 2019, because the Company’s deferred compensation investments consist of mutual funds that are considered trading securities.

Plan investments are classified as Level 1 in the fair value hierarchy since the investments trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis. From plan inception through December 31, 2018, participants were able to direct the deferral of a portion of their 2018 Short-term incentive plan (“STI Plan”) amounts that were paid during first quarter 2019. At the time of payment, the amounts elected for deferral were deposited into the EDC Plan by the Company and allocated by participants among Company-determined investment options.

For 2019, participants are able to direct the deferral of a portion of their 2019 base salary and a portion of their estimated, accrued 2019 STI Plan amount. Base salary amounts elected for deferral are deposited into the EDC Plan by the Company on a weekly basis and allocated by participants among Company-determined investment options. At June 30, 2019, the EDC Plan investments were $1,257 and were recorded in Other assets on the Company’s Condensed Consolidated Balance Sheet. The EDC Plan liability for base pay and the 2019 STI Plan was $1,755. The current portion of the liability is comprised of estimated amounts to be paid to participants within one year. At June 30, 2019, $180 of the EDC Plan liability was considered current which was included in Accrued expenses in the Company’s Condensed Consolidated Balance Sheet, and $1,575 was considered non-current and was included in Other noncurrent liabilities on the Company’s Condensed Consolidated Balance Sheet.

Note 9. Operating Segments

At June 30, 2019 and 2018, the Company had two segments: distillery products and ingredient solutions. The distillery products segment consists of food grade alcohol and distillery co-products, such as distillers feed (commonly called dried distillers grain in the industry) and fuel grade alcohol. The distillery products segment also includes warehouse services, including barrel put away, storage, retrieval, and blending services. Ingredient solutions segment consists of specialty starches and proteins and commodity starches and proteins.

Operating profit for each segment is based on sales less identifiable operating expenses. Non-direct SG&A, interest expense, other special charges, and other general miscellaneous expenses are excluded from segment operations and are classified as Corporate. Receivables, inventories, and equipment have been identified with the segments to which they relate. All other assets are considered as Corporate.



	Quarter Ended June 30,						Year to Date Ended June 30,
	2019			2018			2019			2018
Sales to Customers
Distillery products	$	74,023		$	72,652		$	148,600		$	147,029
Ingredient solutions	16,478			15,600			30,997			29,179
Total	90,501			88,252			179,597			176,208
Gross Profit
Distillery products	16,503			16,680			31,742			32,550
Ingredient solutions	3,019			2,761			4,440			5,842
Total	19,522			19,441			36,182			38,392
Depreciation and Amortization
Distillery products	2,185			2,257			4,354			4,498
Ingredient solutions	367			379			739			813
Corporate	240			261			509			515
Total	2,792			2,897			5,602			5,826
Income (loss) before Income Taxes
Distillery products	14,866			14,777			28,301			28,954
Ingredient solutions	2,325			2,142			3,100			4,566
Corporate	(6,638		)	(6,076		)	(12,587		)	(12,495		)
Total	$	10,553		$	10,843		$	18,814		$	21,025

The following table allocates assets to each segment as of:



	June 30, 2019		December 31, 2018
Identifiable Assets
Distillery products	$	242,518	$	223,890
Ingredient solutions	33,264		35,147
Corporate