MGP INGREDIENTS 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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 September 30, 2019
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 | 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:
17,027,063 shares of Common Stock, no par value as of October 25, 2019
INDEX
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 September 30, | | | | Year to Date Ended September 30, | | |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
| | | | | | | | |
Sales (Note 2) | | $ | 90,685 | | | $ | 95,031 | | | $ | 270,282 | | | $ | 271,239 | |
Cost of sales | | 71,895 | | | 75,432 | | | 215,310 | | | 213,248 | |
Gross profit | | 18,790 | | | 19,599 | | | 54,972 | | | 57,991 | |
Selling, general and administrative expenses | | 7,186 | | | 7,584 | | | 23,981 | | | 24,455 | |
Operating income | | 11,604 | | | 12,015 | | | 30,991 | | | 33,536 | |
Interest expense, net | | (364) | | | (334) | | | (937) | | | (830) | |
| | | | | | | | |
Income before income taxes | | 11,240 | | | 11,681 | | | 30,054 | | | 32,706 | |
Income tax expense (Note 4) | | 3,025 | | | 2,673 | | | 4,208 | | | 7,244 | |
Net income | | 8,215 | | | 9,008 | | | 25,846 | | | 25,462 | |
| | | | | | | | |
Income attributable to participating securities | | 54 | | | 174 | | | 171 | | | 491 | |
Net income attributable to common shareholders and used in earnings per share calculation (Note 5) | | $ | 8,161 | | | $ | 8,834 | | | $ | 25,675 | | | $ | 24,971 | |
| | | | | | | | |
| | | | | | | | |
Basic and diluted weighted average common shares | | 17,027,068 | | | 16,872,091 | | | 17,006,226 | | | 16,861,700 | |
| | | | | | | | |
Basic and diluted earnings per common share | | $ | 0.48 | | | $ | 0.52 | | | $ | 1.51 | | | $ | 1.48 | |
See accompanying notes to unaudited condensed consolidated financial statements
MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | | | Year to Date Ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Net income | $ | 8,215 | | | $ | 9,008 | | | $ | 25,846 | | | $ | 25,462 | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Change in Company-sponsored post-employment benefit plan | (7) | | | 14 | | | (9) | | | 42 | |
Comprehensive income | $ | 8,208 | | | $ | 9,022 | | | $ | 25,837 | | | $ | 25,504 | |
See accompanying notes to unaudited condensed consolidated financial statements
MGP INGREDIENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
| | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
Current Assets | | | | |
Cash and cash equivalents | | $ | 4,397 | | | $ | 5,025 | |
Receivables (less allowance for doubtful accounts at September 30, 2019, and December 31, 2018 - $24) | | 40,554 | | | 38,797 | |
Inventory (Note 1) | | 126,193 | | | 108,769 | |
Prepaid expenses | | 1,646 | | | 1,320 | |
Refundable income taxes | | 2,850 | | | 712 | |
Total current assets | | 175,640 | | | 154,623 | |
| | | | |
Property, plant, and equipment | | 304,730 | | | 295,893 | |
Less accumulated depreciation and amortization | | (182,576) | | | (175,105) | |
Property, plant, and equipment, net | | 122,154 | | | 120,788 | |
Operating lease right-of-use asset, net (Note 6) | | 5,628 | | | — | |
Other assets | | 3,598 | | | 2,481 | |
Total assets | | $ | 307,020 | | | $ | 277,892 | |
| | | | |
Current Liabilities | | | | |
Current maturities of long-term debt (Note 3) | | $ | 397 | | | $ | 386 | |
Accounts payable | | 24,200 | | | 25,363 | |
Accrued expenses | | 10,528 | | | 11,714 | |
Total current liabilities | | 35,125 | | | 37,463 | |
| | | | |
Long-term debt, less current maturities (Note 3) | | 40,756 | | | 21,040 | |
Credit agreement - revolver (Note 3) | | 173 | | | 10,588 | |
Operating lease liability (Note 6) | | 3,598 | | | — | |
Deferred credits | | 1,316 | | | 1,565 | |
Accrued retirement, health, and life insurance benefits | | 2,427 | | | 2,595 | |
Other noncurrent liabilities | | 1,576 | | | 1,523 | |
Deferred income taxes | | 2,629 | | | 1,677 | |
Total liabilities | | 87,600 | | | 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 September 30, 2019 and December 31, 2018; and 17,024,938 and 16,856,414 shares outstanding at September 30, 2019 and December 31, 2018, respectively | | 6,715 | | | 6,715 | |
Additional paid-in capital | | 13,601 | | | 15,375 | |
Retained earnings | | 219,551 | | | 198,914 | |
Accumulated other comprehensive loss | | (104) | | | (164) | |
Treasury stock, at cost | | | | |
Shares of 1,091,027 at September 30, 2019, and 1,259,511 at December 31, 2018 | | (20,347) | | | (19,403) | |
Total stockholders’ equity | | 219,420 | | | 201,441 | |
Total liabilities and stockholders’ equity | | $ | 307,020 | | | $ | 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 September 30, | | |
| | 2019 | | 2018 |
Cash Flows from Operating Activities | | | | |
Net income | | $ | 25,846 | | | $ | 25,462 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 8,537 | | | 8,529 | |
Gain on sale of assets | | (138) | | | — | |
Share-based compensation | | 2,752 | | | 2,464 | |
Deferred income taxes, including change in valuation allowance | | 952 | | | 924 | |
Changes in operating assets and liabilities: | | | | |
Receivables, net | | (1,757) | | | (15,644) | |
Inventory | | (17,424) | | | (14,197) | |
Prepaid expenses | | (326) | | | 297 | |
Refundable income taxes | | (2,138) | | | (31) | |
Accounts payable | | (331) | | | (3,453) | |
Accrued expenses | | (3,236) | | | (2,623) | |
Deferred credits | | (249) | | | (464) | |
Accrued retirement health, and life insurance benefits | | (96) | | | 395 | |
Other | | 21 | | | — | |
Net cash provided by operating activities | | 12,413 | | | 1,659 | |
Cash Flows from Investing Activities | | | | |
Additions to property, plant, and equipment | | (10,375) | | | (18,870) | |
Deferred compensation plan investments | | (1,189) | | | — | |
| | | | |
Net cash used in investing activities | | (11,564) | | | (18,870) | |
Cash Flows from Financing Activities | | | | |
Payment of dividends and dividend equivalents | | (5,141) | | | (4,125) | |
Purchase of treasury stock for tax withholding on equity-based compensation | | (5,470) | | | (2,215) | |
| | | | |
Proceeds on long-term debt | | 20,000 | | | — | |
Principal payments on long-term debt | | (288) | | | (279) | |
Proceeds from credit agreement - revolver | | 14,140 | | | 22,766 | |
Payments on credit agreement - revolver | | (24,640) | | | (2,020) | |
Other | | (78) | | | — | |
Net cash provided by (used in) financing activities | | (1,477) | | | 14,127 | |
Decrease in cash and cash equivalents | | (628) | | | (3,084) | |
Cash and cash equivalents, beginning of period | | 5,025 | | | 3,084 | |
Cash and cash equivalents, end of period | | $ | 4,397 | | | $ | — | |
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 September 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 $0.10 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 $0.10 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 | |
Comprehensive income: | | | | | | | | | | | | | | |
Net income | | — | | | — | | | — | | | 8,215 | | | — | | | — | | | 8,215 | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (7) | | | — | | | (7) | |
Dividends and dividend equivalents of $0.10 per common share and per restricted stock unit, net of estimated forfeitures | | — | | | — | | | — | | | (1,713) | | | — | | | — | | | (1,713) | |
Share-based compensation | | — | | | — | | | 484 | | | — | | | — | | | — | | | 484 | |
| | | | | | | | | | | | | | |
Purchase of treasury stock for tax withholding on share-based compensation | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
Balance, September 30, 2019 | | $ | 4 | | | $ | 6,715 | | | $ | 13,601 | | | $ | 219,551 | | | $ | (104) | | | $ | (20,347) | | | $ | 219,420 | |
| | | | | | | | | | | | | | |
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 September 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 $0.08 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 $0.08 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 | |
Comprehensive income: | | | | | | | | | | | | | | |
Net income | | — | | | — | | | — | | | 9,008 | | | — | | | — | | | 9,008 | |
Other comprehensive income | | — | | | — | | | — | | | — | | | 14 | | | — | | | 14 | |
Dividends and dividend equivalents of $0.08 per common share and per restricted stock unit, net of estimated forfeitures | | — | | | — | | | — | | | (1,374) | | | — | | | — | | | (1,374) | |
Share-based compensation | | — | | | — | | | 496 | | | — | | | — | | | — | | | 496 | |
Stock shares awarded, forfeited, or vested | | | — | | | — | | | (92) | | | — | | | — | | | 92 | | | — | |
Purchase of treasury stock for tax withholding on share-based compensation | | | — | | | — | | | — | | | — | | | — | | | (142) | | | (142) | |
Balance, September 30, 2018 | | $ | 4 | | | $ | 6,715 | | | $ | 14,888 | | | $ | 188,469 | | | $ | (269) | | | $ | (19,445) | | | $ | 190,362 | |
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. (“the Company,” and “MGP”) 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 September 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:
| | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
Finished goods | | $ | 16,200 | | | $ | 17,296 | |
Barreled distillate (bourbons and whiskeys) | | 95,164 | | | 76,374 | |
Raw materials | | 3,720 | | | 4,906 | |
Work in process | | 1,697 | | | 1,550 | |
Maintenance materials | | 8,007 | | | 7,541 | |
Other | | 1,405 | | | 1,102 | |
Total | | $ | 126,193 | | | $ | 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 transferred 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 $42,350 and $32,018 at September 30, 2019 and December 31, 2018, respectively. The financial statement carrying value of total debt was $41,326 (including unamortized loan fees) and $32,014 (including unamortized loan fees) at September 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. Sales
The following table presents the Company’s sales by segment and major products and services:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | | | Year to Date Ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Distillery Products | | | | | | | |
Brown goods | $ | 26,606 | | | $ | 32,137 | | | $ | 79,054 | | | $ | 88,074 | |
White goods | 15,359 | | | 14,727 | | | 47,232 | | | 45,061 | |
Premium beverage alcohol | 41,965 | | | 46,864 | | | 126,286 | | | 133,135 | |
Industrial alcohol | 19,525 | | | 20,661 | | | 60,604 | | | 59,300 | |
Food grade alcohol | 61,490 | | | 67,525 | | | 186,890 | | | 192,435 | |
Fuel grade alcohol | 1,438 | | | 1,576 | | | 4,337 | | | 5,006 | |
Distillers feed and related co-products | 6,630 | | | 5,898 | | | 19,906 | | | 18,785 | |
Warehouse services | 3,737 | | | 3,337 | | | 10,762 | | | 9,139 | |
Total distillery products | 73,295 | | | 78,336 | | | 221,895 | | | 225,365 | |
| | | | | | | |
Ingredient Solutions | | | | | | | |
Specialty wheat starches | 8,432 | | | 7,030 | | | 22,523 | | | 21,170 | |
Specialty wheat proteins | 6,166 | | | 5,486 | | | 15,884 | | | 16,230 | |
Commodity wheat starches | 2,300 | | | 2,793 | | | 7,575 | | | 6,926 | |
Commodity wheat proteins | 492 | | | 1,386 | | | 2,405 | | | 1,548 | |
Total ingredient solutions | 17,390 | | | 16,695 | | | 48,387 | | | 45,874 | |
| | | | | | | |
Total sales | $ | 90,685 | | | $ | 95,031 | | | $ | 270,282 | | | $ | 271,239 | |
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) | | September 30, 2019 | | December 31, 2018 |
Credit Agreement - Revolver, 3.43% (variable rate) due 2022 | | $ | 500 | | | 11,000 | |
Secured Promissory Note, 3.71% (fixed rate) due 2022 | | 1,306 | | | 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 | | | — | |
|