UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________________
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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| (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, 20172019
OR
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| ☐ | 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)
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| Kansas | 45-4082531 |
| (State or Other Jurisdiction | (I.R.S. Employer |
| of Incorporation or Organization) | Identification No.) |
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| 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:
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| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
| Common Stock, no par value | MGPI | 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 _X_☒ No __☐
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 (§229.405 of this chapter) 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, or an emerging growth company. See definitionthe definitions of "large accelerated filer",filer," "accelerated filer", andfiler," "smaller reporting company," and "emerging growth company": in Rule 12b-2 of the Exchange Act. (Check One):
[ ] Large accelerated filer [X] | | | | | | | | | | | |
| Large accelerated filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| (do not check if smaller reporting company) | | Emerging growth company | ☐ |
[ ] 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 checkmarkcheck mark 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 the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sales pricesold, as reported by NASDAQ on June 30, 2017,2019, was $656,675,622.$857,685,274.
The number of shares of the registrant’s common stock, no par value ("Common Stock") outstanding as of February 23, 201821, 2020 was 16,798,353.17,051,538.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference:
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(1) | Portions of the MGP Ingredients, Inc. Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2018 are incorporated by reference into Part III of this report to the extent set forth herein. |
(1)Portions of the MGP Ingredients, Inc. Proxy Statement for the Annual Meeting of Stockholders to be held on May 21, 2020 are incorporated by reference into Part III of this report to the extent set forth herein.
CONTENTS PAGE
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.
PART I
ITEM 1. BUSINESS
MGP Ingredients, Inc. was incorporated in 2011 in Kansas, continuing a business originally founded by Cloud L. Cray, Sr. in Atchison, Kansas in 1941. As used herein, the term "MGP," "Company," "we," "our," or "us" refers to MGP Ingredients, Inc. and its subsidiaries unless the context indicates otherwise. In this document, for any references to Note 1 through Note 1715 refer to the Notes to Consolidated Financial Statements in Item 8.
AVAILABLE INFORMATION
We make available through our website (www.mgpingredients.com) under "For Investors," 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.Commission ("SEC").
The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company. The address of the SEC site is http://www.sec.gov.
METHOD OF PRESENTATION
All amounts in this report, except for shares, 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.
GENERAL INFORMATION
MGP 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 ("GNS"), including vodka and gin. MGP is also a top producer of high quality industrial alcohol for use in both food and non-food applications. Our 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. Our distillery products are derived from corn and other grains, and our ingredient products are derived from wheat flour. The majority of our distillery and ingredient product sales are made directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries.
We are headquartered in Atchison, Kansas, where distilled alcohol products and food ingredients are produced at our production facility ("Atchison facility"). Premium spirits are distilled and matured at our facility in Lawrenceburg and Greendale, Indiana ("Lawrenceburg facility").
INFORMATION ABOUT SEGMENTS
As of December 31, 2017,2019, we had two reportable segments: distillery products and ingredient solutions. Additional information about our reportable segments can be found in Management’s Discussion & Analysis ("MD&A") and Note 11. Note 11 provides detail of our foreign and domestic net sales revenue and identifiable assets.
Distillery Products Segment - and Ingredient Solutions.
Distillery Products Segment. We process corn and other grains (including rye, barley, wheat, barley malt, and milo) into food grade alcohol and distillery co-products, such as distillers feed (commonly called dried distillers grain in the industry), fuel grade alcohol, and corn oil. We also provide warehouse services, including barrel put away, barrel storage, and barrel retrieval services, as well as blending services. We have certain contracts with customers to supply distilled products (or "distillate"), as well as certain contracts with customers to provide barreling and warehousing services. Contracts with customers may be monthly, annual, and multi-year with periodic reviewreviews of pricing. Sales of fuel grade alcohol are made on the spot market. Since 2015, our distillery productsDistillery Products segment includes production and sales of our own branded alcohol products, including sales under the George Remusfollowing brands: TILL®,, TILL American Wheat Vodka, George Remus®, Straight Bourbon Whiskey, Remus Repeal Reserve® Straight Bourbon Whiskey, Remus Volstead Reserve Bottled-in-Bond Straight Bourbon Whiskey, Tanner’s Creek® Blended Bourbon Whiskey, Rossville Union® Master Crafted Straight Rye Whiskey, Rossville Union Barrel Proof Straight Rye Whiskey, Rossville Union Barrel Select Straight Rye Whiskey, and Tanner's Creek®Eight & Sand Blended Bourbon Whiskey brands. During 2017,2019, our five largest distillery productsDistillery Products customers, combined, accounted for 23.522.6 percent of our consolidated net sales.
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, premium beverage alcohol, consists primarily of premium bourbon and rye whiskeys ("brown goods") and GNS, including vodka and gin.gin ("white goods"). Our premium bourbon is created by distilling grains, primarily corn. Our whiskey is made from fermented grain mash, including rye and corn. Our whiskeys are primarily sold as unaged new distillate, which are then aged by our customers from two to four years and are sold at various proof concentrations. Our GNS is sold in bulk quantities at various proof concentrations. Our gin is created by redistilling GNS together with proprietary formulations of botanicals or botanical oils.
Food grade industrial alcohol is used as an ingredient in foods (e.g., vinegar and food flavorings), personal care products (e.g., hair sprays and hand sanitizers), cleaning solutions, pharmaceuticals, and a variety of other products. We sell food grade industrial alcohol in tank truck or rail car quantities direct to a number of industrial processors.
Fuel grade alcohol - 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. We produce fuel grade alcohol as a co-product of our food grade alcohol business at our Atchison facility.
Distillers Feed and related Co-Products - The bulk alcohol co-products sales include distillers feed fuel grade alcohol, and corn oil. Distillers feed is principally derived from the mash from alcohol processing operations. The mash is dried and sold primarily to processors of animal feeds as a high protein additive. We produce fuel grade alcohol as a co-product of our food grade alcohol business at our Atchison facility. WeIn addition, we produce corn oil as a value added co-product through a corn oil extraction process.process at our Atchison facility.
Warehouse Services - Customers who purchase unaged barreled distillate may, and in most cases do, also enter into separate warehouse service agreements with us for the storage of product for aging thataging. Services under warehouse agreements 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,retrieval, as in the case of storage fees.well as blending services.
Ingredient Solutions Segment - Segment. Our ingredient solutionsIngredient Solutions segment consists primarily of specialty wheat starches, specialty wheat proteins, commodity wheat starches, and commodity wheat proteins. Contracts with ingredientsIngredient Solutions customers are generally price, volume, and term agreements, which are fixed for three or six month periods,fixed-term contracts, with very few agreements oflonger than 12 months duration or longer.in duration. During 2017,2019, our five largest ingredient solutionsIngredient Solutions customers, combined, accounted for 10.211.6 percent of our consolidated net sales.
Specialty Wheat Starches - Wheat starch is derived from 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 dry the starch in spray, flash, or drum dryers.
A substantial portion of our premium wheat starch is altered during processing to produce certain unique specialty wheat starches designed for special applications. We sell our specialty wheat starches on a global basis, primarily to food processors and distributors.
We market our specialty wheat starches under the trademarks Fibersym® Resistant Starch series, FiberRite® RW Resistant Starch, Pregel® Instant Starch series, and Midsol® Cook-up Starch series. They 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 spreadabilitytexture in frostings, mixes, glazes, and sugar coatings.
Our wheat starches, as a whole, generally compete primarily with corn starch, which dominates the United States starch market. Additionally, our wheat starches compete with potato and tapioca. However, the unique characteristics of our specialty wheat starches provide a number of advantages over corn and other starches for certain functionality in baking and otherpasta end uses.
Specialty Wheat Proteins - We have developed a number of specialty wheat proteins for food applications. Specialty wheat proteins are derived from vital wheat gluten through a variety of proprietary processes which change its molecular structure. Specialty wheat proteins for food applications include the products Arise® and Trutex®.
In June 2017, we announced the addition of newWe produce clean label ingredients tounder our Arise® line of wheat protein isolates. Along with Arise® 8000, this new series includes Arise® 8100 and Arise® 8200. Each of these ingredients is also Non-GMONon-Genetically Modified Organism ("Non-GMO") Project Verified. In September 2017, we announced additions to our extensiveWe also offer a Non-GMO Project Verified food ingredients portfolio of TruTex® 751, TruTex® 1501, TruTex® 2240, and TruTex® Redishred 65 textured specialty wheat proteins.
Our specialty wheat proteins generally compete with other ingredients and modified proteins having similar characteristics, primarily soy proteins and other wheat proteins, with differentiation being based on factors such as functionality, price, and, in the case of food applications, flavor.
Commodity Wheat Starches - As is the case with value added wheat starches, our commodity wheat starches have 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. Commodity wheat starches compete primarily with corn starches, which dominate the marketplace and prices generally track the fluctuations in the corn starch market.
Commodity Wheat Proteins - Commodity wheat protein, or vital wheat gluten, is a free-flowing light tan powder which contains approximately 70 to 80 percent protein. When we process wheat 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, and fish and poultry to improve the nutritional content, texture, strength, shape, and volume of the product. The neutral flavor and color of vital 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 bakers 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. Additionally, our wheat gluten is being used in more vegan and vegetarian food options than in years past. This is a new application and is generating additional volume opportunities in this segment.
COMPETITIVE CONDITION
While we believe that the overall market environment offers considerable growth opportunities for us in 20182020 and beyond, the markets in which our products are sold are competitive. Our products compete against similar products of many large and small companies. In our distillery productsDistillery Products segment, competition is based primarily on product innovation, product characteristics, functionality, price, service, and quality factors, such as flavor. In our ingredient solutionsIngredient Solutions segment, competition is based primarily on product innovation, product characteristics, price, name, color, flavor, or other properties that affect how the ingredient is being used.
PATENTS, TRADEMARKS, AND LICENSES
We are involved in a number of patent-related activities, primarily within our ingredient solutionsIngredient Solutions segment. We have filed patent applications to protect a range of inventions made in our research and development efforts, including inventions relating to applications for our products. Some of these patents or licenses cover significant product formulation and processes used to manufacture our products.
SEASONALITY
Our sales are generally not seasonal.
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 our products to our North American customers as well as overseas shipments to our international customers. As of December 31, 2017, we leased 223 rail cars under operating leases.
RAW MATERIALS, AND PACKAGING MATERIALS, AND FOOD GRADE ALCOHOL
Our principal distillery productsDistillery Products segment raw materials, or input costs, are corn and other grains (including rye, barley, wheat, barley malt, and milo), which are processed into food grade alcohol and distillery co-products consisting of distillers feed, fuel grade alcohol, and corn oil. Our principal ingredient solutionsIngredient Solutions segment raw material is wheat flour, which is processed into starches and proteins. The cost of grain and wheat flour has, at times, been subject to substantial fluctuation.
In 2017,2019, we purchased most of our grain requirements from two suppliers, Bunge Milling, Inc. ("Bunge") and Consolidated Grain and Barge Co. ("CGB"). Our current grain supply contracts with Bunge and CGB expire on December 31, 2021 and December 31, 2020, respectively. Through these contracts, we purchase grain for delivery into the future at negotiated prices based on several factors. We also order wheat flour for delivery into the future at negotiated prices based on several factors. We provide forpurchase most of our wheat flour requirements through a supply contract with Ardent Mills, which expires July 10, 2019.August 20, 2023. We typically enter contracts for future delivery only to protect margins on contracted alcohol sales, expected ingredient sales, and general usage.
Our principal packaging material for our distillery productsDistillery Products segment is oak barrels. Both new and used barrels are utilized for the aging of premium bourbon and rye whiskeys. We purchase oak barrels from multiple suppliers and some customers supply their own barrels.
We also source food grade alcohol from Pacific Ethanol Central, LLC ("Pacific Ethanol"), formerly Illinois Corn Processing, LLC ("ICP"), which was our 30 percent-owned joint venture until July 3, 2017 when it was divested and sold to Pacific Ethanol. Additional information related to ICP and the divestiture is in "Equity Method Investments" below,the MD&A,Ethanol (see Note 4 and Note 3.11 for additional information).
ENERGY
Natural gas is an input cost used to operate boilers to make steam heat. We procure natural gas for our facilities in the open market from various suppliers. We have a risk management program whereby we may purchase contracts for the delivery of natural gas for delivery into the future at negotiated prices based on several factors, or we can purchase futures contracts on the exchange. Depending on existing market conditions, in Atchison we use our 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.
All of our electricity needs for both our Atchison and Lawrenceburg facilities is sourced from renewable wind power. Through an agreement with a supplier, we purchase renewable energy credits. The wind energy, equal in value to the credits, will then be sourced from wind farms in Kansas and added to the overall energy grid system.
EMPLOYEES
As of December 31, 2017,2019, we had a total of 317341 employees. A collective bargaining agreement, covering 99105 employees at the Atchison facility, expiresthat was due to expire on August 31, 2019.2019 was renewed until August 31, 2024. A collective bargaining agreement, covering 6261 employees at the Lawrenceburg facility, expires on December 31, 2022. 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 ("TTB"), the Occupational Safety and Health Administration ("OSHA"), the Food and Drug Administration ("FDA"), the United States Environmental Protection Agency ("EPA"), and by various state and local authorities. Such laws and regulations cover virtually every aspect of our operations, including production and storage facilities, distillation and maturation requirements, importing ingredients, distribution of beverage alcohol products, marketing, pricing, labeling, packaging, advertising, water usage, waste water discharge, disposal of hazardous wastes and emissions, and other matters. In addition, beverage alcohol products are subject to customs, duties or excise taxation in many countries, including taxation at the federal, state, and local level in the United States.
EQUITY METHOD INVESTMENTS
Illinois Corn Processing, LLC ("ICP"). In November 2009, we completedLLC.ICP is a seriesproducer of transactions to form ICP, which produced high quality food grade alcohol, chemical intermediates and fuel.In connection with these transactions, we entered into agreements with ICP and ICP Holdings, an affiliate of SEACOR Holdings, Inc. One of the agreements was the LLC Interest Purchase Agreement under which we sold ICP Holdings 50 percent of the membership interest in ICP. This agreement also gave ICP Holdings the option to purchase up to an additional 20 percent of the membership interest in ICP, and on February 1, 2012, ICP Holdings exercised its option and purchased an additional 20 percent from us, reducing our ownership from 50 percent to 30 percent.
On July 3, 2017, we soldcompleted the sale of our 30 percent equity ownership interest in ICP, to Pacific Ethanol pursuant to an Agreement and Plan of Merger ("Merger Agreement") entered into on June 26, 2017.. Illinois Corn Processing Holdings, Inc., an affiliate of SEACOR Holdings, Inc., held the remaining equity in ICP that was also sold pursuant to the Merger Agreement (Note 3)(see Note 4 for additional information).
D.M. Ingredients GmbH ("DMI"). In 2007, we acquired a 50 percent interest in DMI, a German joint venture company that produced certain of our specialty ingredients products through a toller for distribution in the European Union ("E.U.") and elsewhere.
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 our joint venture effective June 30, 2015. On June 30, 2015, normal operations for DMI ceased and, under German law, a one year winding down process began once the registration of resolutions, appointment of liquidators, inventory count, and publication of the notice to potential creditors was complete, which occurred on October 29, 2015. On December 23, 2016, we received our portion of the remaining DMI liquidation proceeds as a return of our investment (Note 3).
INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
Our officers as of December 31, 20172019 and their ages as of March 1, 2018:
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| Name | Age | Principal Occupation and Business Experience |
| Augustus C. Griffin | 5860 | | President and Chief Executive Officer for the Company since July 2014 and member of the Board of Directors for the Company since August 2014. Executive Vice President of Marketing for Next Level Spirits from April 2013 to January 2014. Brand and Business Consultant for Nelson'sNelson’s Green Brier Distillery from November 2011 to March 2013. Senior Vice President, Global Managing Director for Brown Forman Corporation's flagship Jack Daniels business from January 2008 to April 2011. |
Thomas K. PigottBrandon M. Gall | 5338 | | Vice President, Finance and Chief Financial Officer for the Company since September 2015. Vice PresidentApril 2019. Corporate Controller for the Company from June 2018 to March 2019. Director of Supply Chain and New Business Development Finance for the Kraft Foods Group Meal Solutions Division from March 2015 to August 2015. Vice President of Finance for the Kraft Foods Group Meals and Desserts Business UnitCompany from May 2014 to March 2015. Vice PresidentMay 2018. Director of FinanceFinancial Planning and Chief Audit ExecutiveAnalysis for the Kraft Foods GroupCompany from OctoberJanuary 2012 to April 2014. Vice President of Finance for the Pizza Division at Nestle, U.S.A. from April 2010 to October 2012. |
| Stephen J. Glaser | 5759 | | Vice President, Production and Engineering for the Company since October 2015. Corporate Director of Operations for the Company from January 2014 to October 2015. Plant Manager for the Company of the Atchison facility from May 2011 to December 2013. |
| David E. Dykstra | 5456 | | Vice President, Alcohol Sales and Marketing for the Company since 2009. |
| Michael R. Buttshaw | 5557 | | Vice President, Ingredient Sales and Marketing for the Company since December 2014. Vice President of Sales for the ingredient group at Southeastern Mills, Inc. from October 2010 to November 2014. |
| David E. Rindom | 6264 | | Vice President and Chief Administrative Officer for the Company since December 2015. Vice President, Human Resources for the Company from June 2000 to December 2015. |
| Andrew P. Mansinne | 5860 | | Vice President, Brands for the Company since November 2016. Managing director at Intercontinental Beverage Capital and President of Tattico Strategies from March 2015 to October 2016. President of Aveniu Brands from May 2010 to April 2014. |
ITEM 1A. RISK FACTORS
Our business is subject to certain risks and uncertainties that could cause actual results and events to differ materially from forward looking statements. The following discussion identifies those which we consider to be most important. The following discussion of risks is not all inclusive. Additional risks not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, or results of operations.
RISKS THAT AFFECT OUR BUSINESS AS A WHOLE
An interruption of operations, a catastrophic event at our facilities, or a disruption of transportation services could negatively affect our business.
Although we maintain insurance coverage for various property damage and loss events, an interruption in or loss of operations at either of our production facilities could reduce or postpone production of our products, which could have a material adverse effect on our business, results of operations, 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 would be difficult.
Our customers store a substantial amount of barreled inventory of aged premium bourbon and rye whiskeys at our Lawrenceburg facility.facility and our nearby warehouses in Williamstown, Kentucky and Sunman, Indiana. If there was a catastrophic event were to occur at our Lawrenceburg facility or our warehouses, our customers' 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.us and a reduction of warehouse services revenue.
We also store a substantial amount of our own inventory of aged premium bourbon and rye whiskeys at our Lawrenceburg facility.facility and our nearby warehouses. If there was a catastrophic event were to occur at our Lawrenceburg facility or our warehouses, our business, financial condition, or results of operations could be adversely affected. The loss of a significant amount of our aged inventory through fire, natural disaster, or otherwise, could result in a reduction in supply of the affected product or products and could affect our long-term growth.
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, and our business, financial condition, or results of operations could be adversely affected.
Our profitability is affected by the costs of grain, wheat flour, and natural gas, or input costs, that we use in our business, the availability and costs of which are subject to weather and other factors beyond our control. We may not be able to recover the costs of commodities and energy by increasing our selling prices.
Grain and wheat flour costs are a significant portion of our costs of goods sold. Historically, the cost of such raw materials has, at times, 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 do not enter into futures and options contracts ourselves because we can purchase grain and wheat flour for delivery into the future under our grain and wheat flour supply agreements. We intend to contract for the future delivery of grain and wheat flour only to protect margins on expected sales. On the portion of volume not contracted, we attempt to recover higher commodity costs through higher selling prices, but market considerations may not always permit this result. Even where prices can be adjusted, there is likely 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 business, financial condition, or results of operations.
We have a high concentration of certain raw material and finished goods purchases from a limited number of suppliers which exposes us to risk.
We have signed supply agreements with Bunge and CGB for our grain supply (primarily corn) and with Ardent Mills for our wheat flour. The Company also procures some textured wheat proteins through a third-party toll manufacturer in the United States. If any of these companies encounters an operational or financial issue, or otherwise cannot 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, and in turn, have a material adverse effect on our business, financial condition, or results of operations.
The markets for our products are very competitive, and our business could be negatively 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. In recent years, the global beverage alcohol industry has continued to experience consolidation. Industry consolidation can have varying degrees of impact, including the creation of new and larger competitors.
We are dependent on being able to generate net sales and other operating income in excess of the costs of products sold in order to obtain margins, profits, and cash flows to meet or exceed our 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 capacity, which is impacted by competitor actions to bring online idled capacity or to build new production capacity. If market conditions make our products too expensive for use in consumer goods, our revenues could be affected. If our principal 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 products for our customers or as a result of 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.
Unsuccessful research activities or product launches could affect our business.
Research activities and product launch activities are inherently uncertain. The failure to launch a new product successfully could give rise to inventory write-offs and other costs and could 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. If we were to have unsuccessful research activities or product launches, our business, financial condition, or results of operations could be adversely affected.
Work disruptions or stoppages by our unionized workforce could cause interruptions in our operations.
As of December 31, 2017,2019, approximately 161166 of our 317341 employees were members of a union. Although our relations with our two unions are stable, and our labor contracts do not expire until August 2019 and December 2022, 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, financial condition, or results of operations and could 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 strategic plan, our system of internal controls could be impacted.
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, results of operations, and on our system of internal controls.
If we cannot attract and retain key management personnel, or if our search for qualified personnel is prolonged, our system of internal controls may be affected, which could lead to an adverse effect on our business, financial condition, or results of operations. 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 arrangements could hinder our ability to operate. Our failure to comply with covenants in our credit arrangements could result in the acceleration of the debt extended under such agreements, limit our liquidity, and trigger other rights of our lenders.
Our credit arrangements (Item 5 and Note(Note 5) contain a number of financial and other covenants that include provisions which require us, in certain circumstances, to meet certain financial tests. These covenants could hinder our ability to operate and could reduce our profitability. The lender may also terminate or accelerate our obligations under our credit arrangements upon the occurrence of various events in addition to payment defaults and other breaches. Any acceleration of our debt or termination of our credit arrangements would negatively impact our overall liquidity and might 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 arrangements, there can be no assurance that we will do so, as there are a number of external factors that affect our operations over which we have little or no control, that could have a material adverse effect on our business, financial condition, or results of operations.
Product recalls or other product liability claims could materially and negatively affect our business.
Selling products for human consumption involves inherent legal and other risks, including product contamination, spoilage, product tampering, allergens, or other adulteration. We could decide to, or be required to, recall products due to suspected or confirmed product contamination, adulteration, misbranding, tampering, or other deficiencies. Although we maintain product recall insurance, product recalls or market withdrawals could result in significant losses due to their costs, the destruction of product inventory, and lost sales due to the unavailability of the product for a period of time. We could be adversely affected if our customers lose confidence in the safety and quality of certain of our products, or if consumers lose confidence in the food and beverage safety system generally. Negative attention about these types of concerns, whether or not valid, may damage our reputation, discourage consumers from buying our products, or cause production and delivery disruptions.
We may also suffer losses if our products or operations cause injury, illness, or death. In addition, we could face claims of false or deceptive advertising or other criticism. A significant product liability or other legal judgment or a related regulatory enforcement action against us, or a significant product recall, may materially and adversely affect our reputation and profitability. Moreover, even if a product liability or other legal or regulatory claim is unsuccessful, has no merit, or is not pursued, the negative publicity surrounding assertions against our products or processes could have a material adverse effect on our business, financial condition, or results of operations.
We are subject to extensive regulation and taxation, as well as compliance with existing or future laws and regulations, which may require us to incur substantial expenditures.
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 TTB, OSHA, the FDA, the EPA, and by various state and local authorities. Such laws and regulations cover virtually every aspect of our operations, including production and storage facilities, distillation and maturation requirements, importing ingredients, distribution of beverage alcohol products, marketing, pricing, labeling, packaging, advertising, water usage, waste water discharge, disposal of hazardous wastes and emissions, and other matters. In addition, beverage alcohol products are subject to customs, duties, or excise taxation in many countries, including taxation at the federal, state, and local level in the United States.
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 with applicable laws. 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. These matters may have a material adverse effect on our business, financial condition, or results of operations.
Tariffs imposed by the U.S. and those imposed in response by other countries, as well as rapidly changing trade relations, could negatively impact our customers and have a material adverse effect on our business and results of operations.
Changes in U.S. and foreign governments' trade policies have resulted in, and may continue to result in, tariffs on imports into and exports from the U.S. The U.S. has imposed tariffs on imports from several countries, including those in the European Union. In response, the European Union has proposed or implemented their own tariffs on certain products including ours and our customers. Such retaliatory tariffs continue to remain in place and other countries may implement similar tariffs in the future. Any further deterioration of economic relations between the U.S. and other countries or any increase in existing tariffs or the imposition of additional tariffs could result in an increase in the price of our and our customer's products in those countries and could prompt consumers in those countries to seek alternative products. Any resulting impact on the continued growth on our or of our customer's business could potentially impact our financial performance and results of operations.
A failure of one or more of our key information technology ("IT") systems, networks, processes, associated sites, or service providers could have a negative impact on our business.
We rely on information technology ("IT")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 we have some offsite backup systems and a disaster recovery plan, anyAny failure of our information systems could adversely impact our ability to operate. Routine maintenance or development of new information systems may result in systems failures, which may have a material adverse effect on our business, financial condition, or results of operations.
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 cancould lead to outside parties having access to our privileged data or strategic information, our employees, or our 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 have a material adverse effect on our business, financial condition, or results of operations. 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. Although we maintain insurance coverage for various cybersecurity risks, 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 business performance.
The success of our products depends in part upon the positive image that consumers have of the third party brands that use our products. Contamination, whether arising accidentally or through deliberate third party action, or other events that harm the integrity or consumer support for our and/or our customers'customers’ products could affect the demand for our and/or our customers'customers’ products. Unfavorable media, whether accurate or not, related to our industry, to us, our products, or to the brands that use 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. Negative publicity or commentary on social media outlets could cause consumers to react rapidly by avoiding our brands or by choosing brands offered by our competitors, which could have a material adverse effect on our business, financial condition, or results of operations.
We may not be able to adequately protect our intellectual property rights or may be accused of infringing intellectual property rights of third parties.
We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and patent law, trade secret protection, and confidentiality and/or license agreements with our employees, customers, and others to protect our proprietary rights. We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. Third parties that license our proprietary rights also may take actions that diminish the value of our proprietary rights or reputation. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights.
Our intellectual property rights may not be upheld if challenged. Such claims, if they are proved, could materially and adversely affect our business and may lead to the impairment of the amounts recorded for goodwill and other intangible assets.business. If we are unable to maintain the proprietary nature of our technologies, we may lose any competitive advantage provided by our intellectual property. We and our customers and other users of our products may be subject to allegations that we or they or certain uses of our products infringe the intellectual property rights of third parties. The outcome of any litigation is inherently uncertain. Any intellectual property claims, with or without merit, could be time-consuming and expensive to resolve, could divert management attention from executing our business plan, and could require us or our customers or other users of our products to change business practices, pay monetary damages, or enter into licensing or similar arrangements. Any adverse determination related to intellectual property claims or litigation could be material to our business, financial condition, or results of operations.
Climate change, or legal, regulatory or market measures to address climate change, may negatively affect our business or operations, and water scarcity or quality could negatively impact our production costs and capacity.
Increasing concentrations of carbon dioxide and other greenhouse gases in the atmosphere may have an adverse effect on global temperatures, weather patterns, and the frequency and severity of extreme weather events and natural disasters. In the event that climate change, or legal, regulatory, or market measures enacted to address climate change, has a negative effect on agricultural productivity in the regions from which we procure agricultural products such as corn and wheat, we could be subject to decreased availability or increased prices for a such agricultural products, which could have a material adverse effect on our business, financial condition, or results of operations.
Water is the main ingredient in substantially all of our distillery products and is necessary for the production of our food ingredients. It is also a limited resource, facing unprecedented changes 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 have a material adverse effect on our business, financial condition, or results of operations.
Our business may suffer from risks related to acquisitions and potential future acquisitions.
Part of our strategic business plan is to grow our business through acquisitions, and we continue to evaluate and engage in discussions concerning potential acquisition opportunities, some of which could be material. Failure to successfully integrate or otherwise realize the anticipated benefits of these acquisitions could adversely impact our long-term competitiveness and profitability. The integration of any future acquisitions will involve a number of risks that could harm our financial condition, results of operations and competitive position. In particular:
•the integration plans for our acquisitions are based on benefits that involve assumptions as to future events, including our ability to successfully achieve anticipated synergies, leveraging our existing relationships, as well as general business and industry conditions, many of which are beyond our control and may not materialize. Unforeseen factors may offset components of our integration plans in whole or in part. As a result, our actual results may vary considerably, or be considerably delayed, compared to our estimates;
•the integration process could disrupt the activities of the businesses that are being combined. The combination of companies requires, among other things, coordination of administrative and other functions. In addition, the loss of key employees, customers or vendors of acquired businesses could materially and adversely impact the integration of the acquired businesses;
•the execution of our integration plans may divert the attention of our management from other key responsibilities;
•we may assume unanticipated liabilities and contingencies; or
•our acquisition targets could fail to perform in accordance with our expectations at the time of purchase.
Future acquisitions may be effected through the issuance of our Common Stock or securities convertible into our Common Stock, which could substantially dilute the ownership percentage of our current stockholders. In addition, shares issued in connection with future acquisitions could be publicly tradable, which could result in a material decrease in the market price of our Common Stock.
RISKS SPECIFIC TO OUR DISTILLERY PRODUCTS SEGMENT
The relationship between the price we pay for grain and the sales prices of our distillery co-products can fluctuate significantly and negatively impact our business.
Distillers feed, fuel grade alcohol, and corn oil are the principal co-products of our alcohol production process and can contribute in varying degrees to the profitability of our distillery productsDistillery Products segment. Distillers feed and corn oil are sold for prices which historically have tracked the price of corn, but certainare also susceptible to other factors. In the case of our co-products compete with similar products made fromdistillers feed, other plant feedstocks,factors could include weather, other available feedstock, and global trade relations. In the costcase of which may not have risen in unison with corn prices.oil, other factors could include soy oil and the overall level of ethanol production. We sell fuel grade alcohol, the prices for which typically, but not always, have tracked price fluctuations in gasoline prices. As a result, the profitability of these products could be adversely affected, which could be material to our business, financial condition, or results of operations.
Our strategic plan involves significant investment in the aging of barreled distillate. Decisions concerning the quantity of maturing stock of our aged distillate could materially 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 as a result of changes in consumer demand, pricing, new brand launches, changes in product cycles, increase in competitive supply, and other factors. Demand for products cancould change significantly between the time of production and the date of sale. It may be more difficult to make accurate predictions regarding new products and brands. Inaccurate decisions and/or estimations 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, our business, financial condition, or results of operations could be materially adversely affected.
If the brands we develop or acquire do not achieve consumer acceptance, our growth may be limited, which could have a material adverse impact on our business, financial condition, or results of operations.
A component of our strategic plan is to develop or acquire our own portfolio of brands, particularly whiskeys. Risks related to this strategy include:
•Because our brands, internally developed and acquired, are early in their growth cycle or have not yet been developed, they have not achieved extensive brand recognition. Accordingly, if consumers do not accept our brands, we will not be able to penetrate our markets and our growth may be limited.
•We depend, in part, on the marketing initiatives and efforts of our independent distributors in promoting our products and creating consumer demand, and we have limited, or no, control regarding their promotional initiatives or the success of their efforts.
•We depend on our independent distributors to distribute our products. The failure or inability of even a few of our independent distributors to adequately distribute our products within their territories could harm our sales and result in a decline in our results of operations.
•We compete for shelf space in retail stores and for marketing focus by our independent distributors, most of whom carry extensive product portfolios.
•The laws and regulations of several states prohibit changes of independent distributors, except under certain limited circumstances, making it difficult to terminate an independent distributor for poor performance without reasonable cause, as defined by applicable statutes. Any difficulty or inability to replace independent distributors, poor performance of our major independent distributors or our inability to collect accounts receivable from our major independent distributors could harm our business. There can be no assurance that the independent distributors and retailers we use will continue to purchase our products or provide our products with adequate levels of promotional support.
•Our brands compete with the brands of our bulk alcohol customers.
Warehouse expansion issues could negatively impact our operations and our business.
On October 21,In 2015, we announced a major expansion in warehousing capacity. The program includes both the refurbishment of existing warehouse buildings and the construction of new warehouses. The first projects included in thisfinal phases of the program were completed in late 2015, with additional projects completed in 2016 and 2017. This program isare expected to be continued intocompleted by the future.end of calendar year 2020. There is the potential risk of completion delays, including risk of delay associated with required permits and cost overruns, which could have a material adverse effect our business, financial condition, or results of operations.
We may be subject to litigation directed at the beverage alcohol industry.
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 business, financial condition, or results of operations.
A change in public opinion about alcohol could reduce demand for our products.
For many years, there has been a high level of social and political attention directed at the beverage alcohol industry. The 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, higher taxes, 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 business, financial condition, or results of operations.
Changes in consumer preferences and purchases, and our ability to anticipate or react to them, could negatively affect our business results.
We compete in highly competitive markets, and our success depends on our continued ability to offer our customers and consumers appealing, high-quality products. In recent years there has been increased demand for the products we produce, including, in particular, increased demand for bourbons and rye whiskeys. Customer and consumer preferences and purchases may shift due to a host of factors, many of which are difficult to predict, including:
•demographic and social trends;
•economic conditions;
•public health policies and initiatives;
•changes in government regulation and taxation of beverage alcohol products;
•the potential expansion, of legalization of, and increased acceptance or use of, marijuana; and
•changes in travel, leisure, dining, entertaining, and beverage consumption trends.
If our customers and consumers shift away from spirits(particularly brown spirits, such as our premium bourbon and rye whiskeys), our business, financial condition, or results of operations could be adversely affected.
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 strategic plan for our ingredient solutionsIngredient 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, financial condition, and results of operations could be materially adversely affected if our customers were to reduce their new product development ("NPD") activities or cease using our unique dietary fibers, starches, and proteins in their NPD efforts.
Products competing with our Fibersym® resistant starch could lead to a decrease in sales volume or pricing, a decrease in margins and lower profitability.
Our patent rights to Fibersym® expired on June 6, 2017. We face competition with our Fibersym® resistant starch. The competition could lead to diminished returns and lower our margins. This factor could result in significant costs and could have a material adverse effect on our business, financial condition, and results of operations.
In November 2016, we announced that we filed a citizen petition with the FDA asking the agency to further confirm the status of our patented Fibersym® RW and FiberRite® RW resistant wheat starches as dietary fiber. A list of dietary fibers is currently being developed by the FDA under new food labeling rules, which were published on May 27, 2016 and had a scheduled compliance date of July 26, 2018. While our citizen petition is undergoing review, the current status of Fibersym® RW, along with FiberRite® RW, as accepted dietary fiber and a recognized fiber fortifying ingredient remains in place. A delay in confirmation by the FDA of our patented Fibersym® RW and FiberRite® RW resistant wheat starches as dietary fiber under the new food labeling rules in a timely manner could have a material adverse impact on ingredient solutions segment operating results.
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 and media attention directed to gluten, gluten intolerance, and "clean label" products. 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 business, financial condition, and results of operations.
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 our 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 our Articles of Incorporation.
We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate our stockholders' ability to sell their shares for a premium in a change of control transaction. Various provisions of our Articles of Incorporation and bylaws and of Kansas corporate law may discourage, delay or prevent a change in control or takeover attempt of our Company by a third party which our management and Board of Directors opposes.
Public stockholders who might desire to participate in such a transaction may not have the opportunity to do so. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change of control or change in our management and Board of Directors. These provisions include:
•Preferred Stock that could be issued by our Board of Directors to make it more difficult for a third party to acquire, or to discourage a third party from acquiring, a majority of our outstanding voting stock;
•non-cumulative voting directors;
•limitations on the ability of stockholders to call special meetings of stockholders; and
•advance notice requirements for nominations of candidates for election to our Board of Directors or for proposing matters that can be acted upon by our stockholders at stockholder meetings.
We are authorized to issue up to a total of 40,000,000 shares of Common Stock, potentially diluting equity ownership of current holders and the share price of our Common Stock
We believe that it is necessary to maintain a sufficient number of available authorized shares of our Common Stock in order to provide us with the flexibility to issue Common Stock for business purposes that may arise as deemed advisable by our Board. These purposes could include, among other things, (i) to declare future stock dividends or stock splits, which may increase the liquidity of our shares; (ii) the sale of stock to obtain additional capital or to acquire other companies or businesses, which could enhance our growth strategy or allow us to reduce debt if needed; (iii) use in additional stock incentive programs and (iv) other bona fide purposes. Our Board of Directors may issue the available authorized shares of Common Stock without notice to, or further action by, our stockholders, unless stockholder approval is required by law or the rules of the NASDAQ Global Select Market. The issuance of additional shares of Common Stock may significantly dilute the equity ownership of the current holders of our Common Stock. Further, over the course of time, all of the issued shares have the potential to be publicly traded, perhaps in large blocks. This may result in dilution of the market price of the Common Stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
MGP has threefour primary locations, one in Kansas, onetwo in Indiana, and one in Kentucky. Grain processing, distillery, warehousing, research and quality control laboratories, principal executive offices, and a technical innovation center are located in Atchison, Kansas on a 28.5 acre campus.campus which are utilized by both the Distillery Product and Ingredient Solutions segments. A distillery, warehousing, tank farm, quality control laboratory, and research and development facility are located on a 78 acre campus that spans portions of both Lawrenceburg and Greendale, Indiana.Indiana which are utilized by the Distillery Products segment. A warehousing facility is located on 33 acres in Williamstown, Kentucky, and a warehousing facility is not yetlocated on 36.5 acres in service.Sunman, Indiana which are utilized by the Distillery Products segment.
These facilities are generally in good operating condition and are generally suitable for the business activity conducted therein. We have existing manufacturing capacity to grow our ingredient solutions business at our Atchison facility, as needed. All of our production facilities, executive office building, and technical innovation center are owned, and all of our owned properties are subject to mortgages in favor of one or more of our lenders. We also own or lease transportation equipment and facilities and a gas pipeline as described underItem 1. Business - Transportation and Item 1. Business - Energy.pipeline.
ITEM 3. LEGAL PROCEEDINGS
None.The Company is, from time to time, a party to legal or regulatory proceedings arising in the ordinary course of its business. The discussion regarding litigation in Note 9 to the Consolidated Financial Statements included elsewhere in this report is incorporated herein by reference.
In accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), we recorded a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These liabilities are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case or proceeding. ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERS MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Equity compensation plan information is incorporated by reference from Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," of this document, should be considered an integral part of Item 5. Our Common Stock is traded on the NASDAQ Global Select Market under the ticker symbol MGPI. As of February 23, 2018,21, 2020, there were approximately 415356 holders of record of our Common Stock. According to reports received from NASDAQ, the average daily trading volume of our Common Stock (excluding block trades) ranged from 44,90037,900 to 918,3002,998,200 shares during the year ended December 31, 2017.2019.
HISTORICAL STOCK PRICES AND DIVIDENDS
The table below reflects the high and low sales prices of our Common Stock and the details of dividends and dividend equivalents per share for each quarter of 2017 and 2016:
|
| | | | | | | | | | | | | | | |
| | Stock Sales Price | | Dividend and Dividend Equivalent Information (per Share and Unit) |
| | High | | Low | | Declared | | Paid |
| 2017 | | | | | | | |
| First Quarter | $ | 56.17 |
| | $ | 41.16 |
| | $ | 0.04 |
| | $ | 0.04 |
|
| Second Quarter | 58.00 |
| | 47.64 |
| | 0.04 |
| | 0.04 |
|
| Third Quarter | 62.00 |
| | 49.58 |
| | 0.89 |
| | 0.89 |
|
| Fourth Quarter | 80.75 |
| | 60.30 |
| | 0.04 |
| | 0.04 |
|
| | |
| | |
| | $ | 1.01 |
| | $ | 1.01 |
|
| 2016 | | | | | | | |
| First Quarter | $ | 26.52 |
| | $ | 19.91 |
| | $ | 0.08 |
| | $ | — |
|
| Second Quarter | 39.50 |
| | 22.11 |
| | — |
| | 0.08 |
|
| Third Quarter | 44.25 |
| | 33.38 |
| | 0.02 |
| | 0.02 |
|
| Fourth Quarter | 53.22 |
| | 31.93 |
| | 0.02 |
| | 0.02 |
|
| | | | | | $ | 0.12 |
| | $ | 0.12 |
|
Our credit agreement with Wells Fargo Bank, National Association ("N.A.") (the "Credit Agreement") and our Note Purchase and Private Shelf Agreement (the "Note Purchase Agreement") with PGIM, Inc. ("Prudential Capital Group") (Note 5) allow for the payment of cash dividends as defined in Restricted Payments of the Credit Agreement and the Note Purchase Agreement. Restricted Payments are allowed as long as no Default exists, or will exist, after giving effect thereto on the date thereof, and on a Pro Forma Basis as if the Restricted Payment occurred on the last day of the most recently ended four-fiscal quarter period (with the terms Default and Pro Forma Basis as defined in the Credit Agreement and the Note Purchase Agreement) (Note 5).
On February 21, 2018, the Board of Directors declared a quarterly dividend payable to stockholders of record as of March 9, 2018, of our Common Stock and a dividend equivalent payable to holders of restricted stock units ("RSUs") as of March 9, 2018, of $0.08 per share and per unit. The dividend payment and dividend equivalent payment will occur on March 23, 2018.
We expect to continue our policy of paying quarterly 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.
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total return of our Common Stock for the five year period ended December 31, 2017,2019, against the cumulative total return of the S&P 500 Stock Index (broad market comparison), Russell 3000 - Beverage and Distillers (line of business comparison), and Russell 2000 - Consumer Staples (line of business comparison). The graph assumes $100 (one hundred dollars) was invested on December 31, 2012,2014, and that all dividends were reinvested.
PURCHASES OF EQUITY SECURITIES BY ISSUER
We did not sell equity securities during the quarter ended December 31, 2017.2019.
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 (b) |
| October 1, 2019 through October 31, 2019 | | — | | | | $ | — | | | — | | | $ | 25,000,000 | |
| November 1, 2019 through November 30, 2019 | | 456 | | (a) | 44.89 | | | — | | | 25,000,000 | |
| December 1, 2019 through December 31, 2019 | | 11 | | | 46.09 | | | — | | | 25,000,000 | |
| Total | | 467 | | | | | — | | | |
(a)Vested RSU awards under the 2014 Plan that were purchased to cover employee withholding taxes.
(b)On February 25, 2019, our Board of Directors approved a $25,000 share repurchase plan commencing February 27, 2019 through February 27, 2022. Under the share repurchase program, we can repurchase stock from time to time for cash in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws. This share repurchase program may be modified, suspended, or terminated by us at any time without prior notice.
|
| | | | | | | | | | | | | | | |
| | | (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, 2017 through October 31, 2017 | | — |
| | | — |
| | | — |
| | — |
|
| November 1, 2017 through November 30, 2017 | | 42,663 |
| (a) | | $ | 74.21 |
| | | — |
| | — |
|
| December 1, 2017 through December 31, 2017 | | 1,653 |
| (a) | | 72.96 |
| | | — |
| | — |
|
| Total | | 44,316 |
| | | | | | — |
| | |
| |
(a)
| Vested RSU awards under the 2004 Plan that were purchased to cover employee withholding taxes. |
ITEM 6. SELECTED FINANCIAL DATA AND SUPPLEMENTARY FINANCIAL INFORMATION |
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017(a)(e)(g)(h) | | 2016(a)(e)(f) | | 2015(a) | | 2014(a)(b) | | 2013(c) |
| Consolidated Statements of Income (Loss) Data: | | | | | | | | | |
| Net sales | $ | 347,448 |
| | $ | 318,263 |
| | $ | 327,604 |
| | $ | 313,403 |
| | $ | 323,264 |
|
Income (loss) before income taxes(d) | $ | 52,758 |
| | $ | 44,717 |
| | $ | 38,418 |
| | $ | 25,940 |
| | $ | (6,521 | ) |
| Net income (loss) | $ | 41,823 |
| | $ | 31,184 |
| | $ | 26,191 |
| | $ | 23,675 |
| | $ | (4,929 | ) |
| | | | | | | | | | |
| Basic and Diluted Earnings (Loss) Per Share ("EPS") | | | | | | | | | |
| Income (loss) from continuing operations | $ | 2.44 |
| | $ | 1.82 |
| | $ | 1.48 |
| | $ | 1.32 |
| | $ | (0.34 | ) |
| Income from discontinued operations | — |
| | — |
| | — |
| | — |
| | 0.05 |
|
| Net income (loss) | $ | 2.44 |
| | $ | 1.82 |
| | $ | 1.48 |
| | $ | 1.32 |
| | $ | (0.29 | ) |
| | | | | | | | | | |
| Dividends and Dividend Equivalents Per Common Share | $ | 1.01 |
| | $ | 0.12 |
| | $ | 0.06 |
| | $ | 0.05 |
| | $ | 0.05 |
|
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Total assets | $ | 240,328 |
| | $ | 225,336 |
| | $ | 194,310 |
| | $ | 160,215 |
| | $ | 151,329 |
|
| Long-term debt, less current maturities | $ | 24,182 |
| | $ | 31,642 |
| | $ | 30,115 |
| | $ | 7,286 |
| | $ | 21,611 |
|
| |
(a)
| During 2017, 2016, 2015, and 2014, we determined that we would more likely than not realize a portion of our deferred tax asset and reduced the valuation allowance by $578, $718, $2,385, and $7,446, respectively. |
| |
(b)
| In January 2014 and October 2014, we experienced a fire at one of our facilities. Insurance recoveries totaled $8,290 for 2014. |
| |
(c)
| In connection with the proxy contest related to our 2013 Annual Meeting of stockholders, we were involved in various proceedings with respect to MGP Ingredients, Inc. Voting Trust, the 2013 Annual Meeting, and the Special Committee of the Board of Directors and incurred $5,465 of expenses in 2013. |
| |
(d)
| In 2013 we reported discontinued operations. Accordingly, the caption for 2013 was Loss from continuing operations before income taxes. |
| |
(e)
| In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting. We elected to early adopt the ASU and, for 2017 and 2016, respectively, received a combined federal and state tax effected excess tax benefit of $4,625 and $1,571 from windfalls related to employee share-based compensation recognized as a reduction to income tax expense. Retrospective application to 2015, 2014, and 2013 was not required.
|
| |
(f)
| Net income for 2016 included a legal settlement agreement and a gain on sale of long-lived assets of $3,385 before tax. |
| |
(g)
| On July 3, 2017, we completed the sale of our 30 percent equity ownership interest in ICP to Pacific Ethanol, consistent with a Merger Agreement entered into on June 26, 2017, and, as a result, recorded a gain on sale of equity method investment of $11,381 before tax, which is included in Net income for 2017 (Note 3). |
| |
(h)
| On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the "Tax Act"), resulting in significant modifications to existing law. Following the guidance in SEC Staff Bulletin 118 ("SAB 118"), we recorded a provisional discrete net tax benefit in our Consolidated Statements of Income through net income of $3,343 in 2017. The ultimate impact may differ from the provisional amount, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we made, additional regulatory guidance that may be issued, and action we may take as a result of the Tax Act (Note 6). |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | | | |
| 2019(a)(b)(c) | | 2018(a)(c) | | 2017(a)(c)(e)(f) | | 2016(a)(c)(d) | | 2015(a) |
| Consolidated Statements of Income Data: | | | | | | | | | |
| Sales | $ | 362,745 | | | $ | 376,089 | | | $ | 347,448 | | | $ | 318,263 | | | $ | 327,604 | |
| Income before income taxes | 45,937 | | | 48,980 | | | 52,758 | | | 44,717 | | | 38,418 | |
| Net income | 38,793 | | | 37,284 | | | 41,823 | | | 31,184 | | | 26,191 | |
| Basic and Diluted Earnings Per Share ("EPS") | 2.27 | | | 2.17 | | | 2.44 | | | 1.82 | | | 1.48 | |
| Dividends and Dividend Equivalents Per Common Share | 0.40 | | | 0.32 | | | 1.01 | | | 0.12 | | | 0.06 | |
| | | | | | | | | |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Total assets | 322,597 | | | 277,892 | | | 240,328 | | | 225,336 | | | 194,310 | |
| Long-term debt, less current maturities | 40,659 | | | 31,628 | | | 24,182 | | | 31,642 | | | 30,115 | |
(a)During 2019, we determined that we would "more likely than not" realize a potion of our deferred tax asset and reduced our valuation allowance by $168. During 2018, we determined that we would not "more likely than not" realize a portion of our deferred tax asset and increased our valuation allowance by $1,304. During 2017, 2016, and 2015, we determined that we would "more likely than not" realize a portion of our deferred tax asset and reduced our valuation allowance by $578, $718, and $2,385, respectively. (see Note 6 for additional information) (b)Net income for 2019 included the Company's agreement to pay a $1,000 fine and an administrative penalty of $251 in connection with the chemical release incident in Atchison, Kansas in October 2016. (see Note 9 for additional information)
(c)In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting. For 2019, 2018, 2017, and 2016, respectively, we received a combined federal and state tax effected excess tax benefit of $3,336, $1,437, $4,625, and $1,571 from windfalls related to employee share-based compensation recognized as a reduction to income tax expense. Retrospective application to 2015 was not required.
(d)Net income for 2016 included a legal settlement agreement and a gain on sale of long-lived assets of $3,385 before tax.
(e)In 2017, we completed the sale of our equity ownership interest in ICP to Pacific Ethanol, consistent with a Merger Agreement, and, as a result, recorded a gain on sale of equity method investment of $11,381 before tax, which is included in Net income for 2017 (see Note 4 for additional information).
(f)On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the "Tax Act"), resulting in significant modifications to existing law. We recorded a provisional discrete net tax benefit in our Consolidated Statements of Income through Net income of $3,343 in 2017 (see Note 6 for additional information).
Selected Financial Information
Information. Selected quarterly financial information (unaudited) is detailed in Note 15.14.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report on Form 10-K contains forward looking statements as well as historical information. All statements, other than statements of historical facts, regarding the prospects of our industry and our prospects, plans, financial position, and strategic plan may constitute forward looking statements. 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. Forward looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from those expressed or implied in the forward looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward looking statements is included in the section titled "Risk Factors" (Item 1A of this Form 10-K). Forward looking statements are made as of the date of this report, and we undertake no obligation to update or revise publicly any forward looking statements, whether because of new information, future events or otherwise.
Management’s Discussion and Analysis ("MD&A") of Financial Condition and Results of Operations is designed to provide a reader of MGP’s consolidated financial statements with a narrative from the perspective of management. MGP’s MD&A is presented in eightseven sections:
•Results of Operations
•Distillery Products Segment
•Ingredient Solutions Segment
•Cash Flow, Financial Condition and Liquidity
•Off Balance Sheet Obligations
•New Accounting Pronouncements
OVERVIEW
MGP 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 GNS, including vodka and gin. We are also a top producer of high quality industrial alcohol for use in both food and non-food applications. Our 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. We have two reportable segments: our distillery productsDistillery Products segment and our ingredient solutionsIngredient Solutions segment.
Our Mission
Secure our future by consistently delivering superior financial results by more fully participating in all levels of the alcohol and food ingredients segments for the betterment of our shareholders, employees, partners, consumers, and communities.
Our Strategic Plan
Our strategic plan is designed to leverage our history and strengths. We have a long history in the distilling industry. Our Lawrenceburg facility, which we purchased in 2011, was founded in 1847 and our Atchison facility was opened in 1941. Through these two distilleries, we are involved in producing some of the finest whiskeys, vodkas, and gins in the world. Likewise, our history in the food ingredient business stretches back more than 6065 years.
Our 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 the successful execution of our strategy will continue to deliver strong operating income growth in 2018 and beyond.growth. Specifically, our strategic plan is built on five key growth strategies: Maximize Value, Capture Value Share, Invest for Growth,Risk Management,Operational Excellence, and Build the MGP Brand. Each of these strategies, along with related 20172019 accomplishments, isare discussed below.
Maximize Value-Value. We focus on maximizing the value of our current production volumes, particularly taking advantage of favorable macro trends in our distillery productsDistillery Products segment, such as the growth of the American whiskey category that has continued to expand over the past several years. This includes shifting sales mix to higher margin products, such as premium
bourbon and rye whiskeys, as well as extending the product range of our grain neutral spirits,GNS, including vodkas and gins. In our ingredient solutionsIngredient Solutions segment, the macro trends include growth in high fiber, high protein, plant-based proteins, and non-GMO products.
Although these macro trends are currently favorable, we have seen competition intensify as industry participants in both of our segments seek to capitalize on consumers' interest in these categories. While we believe we are well-positioned to benefit from these favorable trends, we may also be negatively affected by the increase in competition in one or both of our segments. We intend to continue to focus on opportunities that will allow us to achieve the highest value from our production facilities.
Accomplishments
•In March 2017, we announced the introduction of Non-GMO Project Verified GNSour Distillery Products segment, our focus on attracting and developing customers for our premium beverage alcohol continued in our portfolio of premium distilled spirits, which consists of vodkas, gins, bourbons, and whiskeys. Our Non-GMO Project Verified GNS is produced in compliance with the Non-GMO Project Standard. Achieving this verification assures customers who require non-GMO products that we follow stringent best practices for GMO avoidance. The Non-GMO Project, a non-profit organization, offers North America’s only third party verification and labeling for non-GMO products.
| |
• | In June 2017, we announced the addition of new clean label ingredients to our Arise® line of wheat protein isolates, and by fall 2017, our portfolio of Non-GMO Project Verified food ingredients included Arise® wheat protein isolates, HWG™ 2009 lightly hydrolyzed wheat protein, as well as TruTex® textured wheat proteins. In addition to providing protein enrichment, the Arise® protein isolates deliver a multitude of functional benefits across a wide range of bakery products and other food applications. Produced principally for use in vegetarian food applications, TruTex® develops a fibrous structure when hydrated and can be customized to take on the appearance beef, pork, poultry, and seafood.
|
Our shift2019. Some efforts included increases in sales mixforce, including adding an additional sales manager to higher marginthe international beverage alcohol team, and providing more tailored product offerings to our craft customers. As a result, we were able to add new customers throughout the year.
•In our Ingredient Solutions segment, we continue to provide outstanding customer solutions, taking advantage of our positioning within growing consumer trends. We further developed our pipeline of wheat-based protein products has contributed to support strong customer growth. Our sales of specialty wheat proteins grew 6.0 percent in 2019, and we continued to grow our specialty wheat starch sales in 2019. The FDA approved our Fibersym® RW and FiberRite® RW specialty wheat starches as dietary fiber, which removed a 17.6major barrier to the growth for this product line. Ingredient Solutions segment sales for 2019 increased 5.6 percent increase in gross profit within the distillery products segment in 2017 over the prior year.
Our shift in sales mix to higher margin products has contributed to a 8.9 percent increase in gross profit within the ingredient solutions segment in 2017 over the prior year.
See the "Distillery Products Segment" and "Ingredient Solutions Segment" discussions.
Capture Value Share - Share. We will work to develop partnerships to support brand creation, 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 beare able to realize full value for our operational capacity, quality, and commitment.
Accomplishments
| |
• | In June 2017, we re-launched George Remus® Straight Bourbon Whiskey, a complex bourbon whiskey that showcases our signature, high-rye profile distilled at our Lawrenceburg facility. Initial distribution was in Ohio, Kentucky, Indiana, Kansas, Missouri, and Wisconsin. Distribution was further expanded to Nebraska, Minnesota, and Iowa later in 2017. We acquired the George Remus whiskey label in November 2016 from Queen City Whiskey LLC and have built on the brand’s existing reputation.
|
•During 2019, we announced our distribution partnership in Texas for the introduction of TILL American Wheat Vodka®, George Remus® Straight Bourbon Whiskey, Remus Repeal Reserve® Straight Bourbon Whiskey, Rossville Union® Straight Rye Whiskey and Eight & Sand Blended Bourbon Whiskey. Additionally in October 2019, we announced partnerships with distributors in Connecticut, Maryland and the District of Columbia for the introduction of some of our brands, as we continue to expand into new markets.
| |
• | In September 2017, we announced the limited release of our first reserve bourbon. Remus® Repeal Reserve Straight Bourbon Whiskey was initially available in limited quantities in Indiana, Iowa, Kansas, Kentucky, Minnesota, Missouri, Nebraska, Ohio, Wisconsin, and Fairfield County, Connecticut. Remus® Repeal Reserve Straight Bourbon Whiskey is distilled at our Lawrenceburg facility.
|
| |
• | In November 2017, we announced the 2017 fall release of Tanner's Creek® Blended Bourbon Whiskey, named for an Indiana waterway with ties to the earliest days of American distilling. Tanner's Creek® reflects our high-rye style of bourbon and is distilled at our Lawrenceburg facility.
|
•In February 2019, we launched Eight & Sand Blended Bourbon Whiskey. Eight & Sand Blended Bourbon Whiskey celebrates the timeless journey of the American railway with a classic tribute whiskey crafted by our team in Lawrenceburg.
•In August 2019, we launched Rossville Union Barrel Select. The Rossville Union Barrel Select program allows retail customers to custom blend their own Rossville Union Rye offering. Rossville Union Barrel Select Rye comes with individually numbered bottles, each account's logo included on a specialty side label, a custom pewter label, and is bottled at 100-proof (50% ABV).
•In November 2019, we released the Remus Repeal Reserve Series III Straight Bourbon Whiskey. Produced to commemorate Prohibition Repeal Day, Series III is a limited bottling showcasing a medley of two mash bills from 2007 and 2008.
•In November 2019, we released the Remus Volstead Reserve Straight Bourbon Whiskey, a one-time rare, 14 year-old bottled-in-bond reserve Bourbon. The release coincides with the 100th anniversary of the start of Prohibition, under the Volstead Act.
| |
• | In 2017, distribution of TILL American Wheat Vodka® was expanded to Kentucky, Nebraska, Wisconsin, Minnesota, and Ohio.
|
Invest for Growth -Growth. We are committed to investing to support our growth. Components of this growth strategy include:
•Capital Expenditures: Capital expenditures focus largely on supporting innovation and product development, improving operational reliability, and strengthening our ability to support all aspects of growth in the American whiskey category.
•Select Inventories: As demand grows for American whiskeys, in both the United States and global markets, we are building our inventories of aged premium whiskeys to fully participate in this growth. This initiative helps us build strong partnerships and open new relationships with potential customers, in addition to supporting the development of our own brands.
•Selling, General, and Administrative Expenses ("SG&A"): As needed to support our long-term growth objectives, resources and capabilities are being added, particularly in sales and marketing.
Accomplishments
•Regarding our Capital Expenditures growth strategy:
In 2017,2019, we continued our warehouse expansion program as part of the implementation of our strategic plan to support the growth of the American whiskey category. The program includes both the refurbishment of existing warehouse buildings and the construction of new warehouses. We invested over $5,000$4,600 in this program in capital expenditures during 20172019 and approximately $26,000$48,400 since the program'sprogram’s inception.
•Regarding our Select Inventories growth strategy:
Given the available and anticipated barrel inventory capacity of our warehouses, weWe produce, and will continue to produce certain volumesbarrels of premium bourbon and rye whiskeys that arefor sale in addition to current customer demand.future periods. Product is barreled and included in our inventory. Our goal is to maintain inventory levels of premium bourbon and rye whiskeys sufficient to support our own brands, engage in strategic partnerships, and sell on the wholesale market.support industry growth. We increased our premium bourbon and rye whiskey inventory by $14,785,$27,875, at cost, during 2017.2019.
•Regarding our SG&A growth strategy:
We continued to invest in people and programs to support the development of our MGP brands platform.initiative and our long-term growth objectives.
Operational Excellence.We addedcontinue a key management positionsolid commitment to operational excellence across the Company by strengthening our emphasis on excellence in August 2017 whenall stages of operations, from sourcing through processing and, ultimately, delivering the finest quality products. This also means striving to de-risk all aspects of our business.
Accomplishments
•During 2019, we appointed Thomas "T.J." Lynn tocontinued our implementation of the newly created position of General Counsel and Corporate Secretary. In his previous role as a partner of Stinson Leonard Street LLP (since 2008), he led significant corporate finance and merger and acquisition transactions for a number of regional and national clients. He also has extensive experience in advising publicly-held companies,Safety Up program, including the launch of Safety Up at our Lawrenceburg facility. Safety Up is supported by the motto,It starts with us, and focuses on employee engagement, awareness, and standardization to consistently keep on-the-job safety top of mind across all areas of the Company. It is intended to move safety assurance into deeper and broader dimensions, giving each employee and teams of employees greater ability to act more swiftly on safety-related matters.
•In August 2019, attorney and environmental health and safety leader, Randy Simmons, joined the Company on compliancein the new role of corporate director of Environmental Health and Safety. He will represent the Company with securities lawsregulatory agencies and with respect to corporate governance matters.champion the employee-driven Safety Up program.
Risk Management- 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 to promote adherence to established procedures, controls, and authority levels.
Accomplishment
•In June 2017, we announced that we entered into a merger agreement with an affiliate of SEACOR Holdings, Inc. and Pacific Ethanol Central, LLC that resulted in a sale of our 30 percent equity ownership interest in ICP to Pacific Ethanol. The sale of ICP enables us to fully focus on growing our core businesses of premium beverage alcohol and specialty ingredients products. This transaction is another step in our strategic plan to realize the Company's full potential for our shareholders.
In 2017,2019, we completed a British Retail Consortium ("BRC") audit with outstanding results, again achieving a Grade AA rating for both our Atchison and Lawrenceburg facilities. Per the BRC standard, a Grade AA is awarded if five or fewer non-conformances are cited out of 256 total audit items, and our Atchison facility received zero non-conformances.items. Each year since undergoing its initial BRC audit in 2013, the Atchison facility'sfacility’s distillery has achieved BRC’s highest grade. The same is true with results of annual BRC audits that have been conducted at our Lawrenceburg facility since 2014. For the Atchison facility'sfacility’s protein and starch plant, 20172019 marked the seventhninth time in as many years that it had scored the BRC’s highest rating.
•In 2019, we awarded our Master Distiller designation to four internal candidates and named two new Master Blenders. Individuals are awarded the master designation after a robust certification process that includes education, experience, specialized training, and concludes with oral examinations by other masters and the completion of a dissertation. The art and science of fermentation, distillation and blending are the foundation of the Company's distilled spirits business, and the addition of these individuals into the Masters rank ensures that MGP has the necessary talent to continue to create exceptional products.
Build the MGP Brand- Brand.We will continue to build our brand across all stakeholders, including shareholders, employees, partners, consumers, and communities. We intend to achieveare achieving this by producing consistent growth through an understandable business model, proactively engaging with the investment community, creating a desirable organization for our employees, strengthening our relationship with our customers and vendors, increasing awareness and understanding of MGP with our consumers, and supporting the communities in which we operate.
Accomplishments
•In August 2017, we announcedFebruary 2019, MGP Ingredients family lost our longtime leader and former Chairman Cloud "Bud" Cray, Jr. Mr. Cray helped envision and implement the Company's transformation from industrial alcohol production to the distillation of more profitable beverage alcohol, specifically vodka and gin. Additionally, he was instrumental in the Company's successful completionentrance into the food ingredients business, producing specialty wheat proteins and starches. Mr. Cray was a generous resident of our headquarters community of Atchison, Kansas, where he provided countless resources to help make Atchison a new $150,000 revolving credit facility agreement with Wells Fargo Bank, N.A., and entered into a $20,000 term loan agreement with Prudential Capital Group. The new credit facility and fixed-rate term loan provides us with additional flexibilitybetter place. We continue our unbroken commitment to support our long-term growth initiatives and enhance shareholder value.communities to honor his legacy.
•In September 2017, we paid a special dividend of 85 cents per share of common stock, providing evidence of our ability to deliver strong returns to our shareholders. The successful sale of ICP, combined with our strong core cash flow generated by operations, solid balance sheet, and favorable access to credit markets gave us the financial and operational flexibility to continue to grow our business in 2017 while allowing us to provide shareholders with this special dividend.
In November 2017 we were named Supplier of the Year by a global leader in beverage alcohol, validating the success of our efforts to build strong partnerships with our customers.
In 2017,2019, we continued our unbroken commitment to support our communities by providing strong financial support and donating time and leadership talent.
◦During 2019, MGP collaborated with Farm Rescue, a nonprofit organization that provides practical assistance to help farmers and ranchers navigate crises such as natural disasters. MGP donated dried distillers grain to the farming community, who were affected by devastating Midwest floods.
◦In December 2019, we participated in our sixth year of the Boxes of Blessing program which was created by our longtime distributor partner, Ben C. Williams. MGP and other local organizations distributed 1,000 boxes of food to our community in Atchison. Each box contained nearly 45 pounds of non-perishable items, enough to feed a family of four for a week.
•During 2019, MGP elected two new Board of Directors, Lynn Jenkins and Kerry Walsh Skelly.
◦Lynn Jenkins, former U.S. Representative from Kansas, has 20 years experience in elected office assisting Kansas residents. She represented Kansas' 2nd Congressional District in the U.S. House of Representatives from 2009 until her retirement. Jenkins, a Certified Public Accountant, contributed her financial expertise as a member of the House Financial Services Committee for two years and on the House Ways and Means Committee for eight years. Prior to that, she held offices in the Kansas Senate and Kansas House of Representatives.
◦Kerry Walsh Skelly held officer-level positions with Brown-Forman for more than 25 years until her retirement in 2018. Her last role with the Brown-Forman was as a senior vice president of Corporate Affairs-EMEA (Europe-Middle East-Africa), beginning in 2011. Her Brown-Forman career spanned countries and corporate functions including Corporate Administration, Human Resources, Marketing and Strategy. In addition to founding the Brown-Forman's Government Relations function, she was responsible for corporate affairs across more than 50 markets.
RESULTS OF OPERATIONS
Consolidated results
The table below details the year-versus-year consolidated results:results for 2019, 2018 and 2017: | | | | | | | | | | | | | | | | Year Ended December 31, | | | | % Increase (Decrease) | |
| | Year Ended December 31, | | Year-Versus-Year % Increase (Decrease) | | 2019 | | 2018 | | 2017 | | | 2019 v. 2018 | | 2018 v. 2017 | |
| | 2017 | | 2016 | | 2015 | | 2017 v. 2016 | | 2016 v. 2015 | | |
| Net sales | $ | 347,448 |
| | $ | 318,263 |
| | $ | 327,604 |
| | 9.2 | % | | (2.9 | )% | | |
| Sales | | Sales | $ | 362,745 | | | $ | 376,089 | | | $ | 347,448 | | | | (3.5) | % | | 8.2 | % | |
| Cost of sales | 271,432 |
| | 252,980 |
| | 269,071 |
| | 7.3 |
| | (6.0 | ) | | Cost of sales | 286,213 | | | 292,490 | | | 271,432 | | | | (2.1) | | | 7.8 | | |
| Gross profit | 76,016 |
| | 65,283 |
| | 58,533 |
| | 16.4 |
| | 11.5 |
| | Gross profit | 76,532 | | | 83,599 | | | 76,016 | | | | (8.5) | | | 10.0 | | |
| Gross margin % | 21.9 | % |
| 20.5 | % |
| 17.9 | % | | 1.4 |
| pp(a) | 2.6 |
| pp(a) | Gross margin % | 21.1 | % | | 22.2 | % | | 21.9 | % | | | (1.1) | | pp(a) | 0.3 | | pp(a) |
| SG&A expenses | 33,107 |
| | 26,693 |
| | 25,683 |
| | 24.0 |
| | 3.9 |
| | SG&A expenses | 29,290 | | | 33,451 | | | 33,107 | | | | (12.4) | | | 1.0 | | |
| Other operating income, net | — |
| | (3,385 | ) | | — |
| | N/A |
| | N/A |
| | |
| | Operating income | 42,909 |
| | 41,975 |
| | 32,850 |
| | 2.2 |
| | 27.8 |
| | Operating income | 47,242 | | | 50,148 | | | 42,909 | | | | (5.8) | | | 16.9 | | |
| Operating margin % | 12.3 | % |
| 13.2 | % | | 10.0 | % | | (0.9 | ) | pp | 3.2 |
| pp | Operating margin % | 13.0 | % | | 13.3 | % | | 12.3 | % | | | (0.3) | | pp | 1.0 | | pp |
| Gain on sale of equity method investment | 11,381 |
| | — |
| | — |
| | N/A |
| | N/A |
| | Gain on sale of equity method investment | — | | | — | | | 11,381 | | | | N/A | | | (100.0) | | |
| Equity method investment earnings (loss) | (348 | ) | | 4,036 |
| | 6,102 |
| | (108.6 | ) | | (33.9 | ) | | |
| Equity method investment loss | | Equity method investment loss | — | | | — | | | (348) | | | | N/A | | | 100.0 | | |
| Interest expense, net | (1,184 | ) | | (1,294 | ) | | (534 | ) | | (8.5 | ) | | 142.3 |
| | Interest expense, net | (1,305) | | | (1,168) | | | (1,184) | | | | 11.7 | | | (1.4) | | |
| Income before income taxes | 52,758 |
|
| 44,717 |
|
| 38,418 |
| | 18.0 |
| | 16.4 |
| | Income before income taxes | 45,937 | | | 48,980 | | | 52,758 | | | | (6.2) | | | (7.2) | | |
| Income tax expense | 10,935 |
| | 13,533 |
| | 12,227 |
| | (19.2 | ) | | 10.7 |
| | Income tax expense | 7,144 | | | 11,696 | | | 10,935 | | | | (38.9) | | | 7.0 | | |
| Effective tax expense rate % | 20.7 | % |
| 30.3 | % | | 31.8 | % | | (9.6 | ) | pp | (1.5 | ) | pp | Effective tax expense rate % | 15.6 | % | | 23.9 | % | | 20.7 | % | | | (8.3) | | pp | 3.2 | | pp |
| Net income | $ | 41,823 |
|
| $ | 31,184 |
|
| $ | 26,191 |
| | 34.1 | % | | 19.1 | % | | Net income | $ | 38,793 | | | $ | 37,284 | | | $ | 41,823 | | | | 4.0 | % | | (10.9) | % | |
| Net income margin % | 12.0 | % |
| 9.8 | % | | 8.0 | % | | 2.2 |
| pp | 1.8 |
| pp | Net income margin % | 10.7 | % | | 9.9 | % | | 12.0 | % | | | 0.8 | | pp | (2.1) | | pp |
| | | | | | | | | |
|
| | | | |
| Basic and diluted EPS | $ | 2.44 |
| | $ | 1.82 |
| | $ | 1.48 |
| | 34.1 | % | | 23.0 | % | | |
| Basic and diluted Earnings Per Share | | Basic and diluted Earnings Per Share | $ | 2.27 | | | $ | 2.17 | | | $ | 2.44 | | | | 4.6 | % | | (11.1) | % | |
(a)(a) Percentage points ("pp").
DiscussionSales
2019 to 2018 - Sales for 2019 were $362,745, a decrease of consolidated results (order follows above table):3.5 percent compared to 2018, which was the result of decreased sales in the Distillery Products segment, partially offset by increased sales in the Ingredient Solutions segment. Within the Distillery Products segment, sales were down 5.4 percent primarily due to a decrease in sales of brown goods within premium beverage alcohol, industrial alcohol and fuel grade alcohol, partially offset by an increase in sales of warehouse services, distillers feed and related co-products and white goods within premium beverage alcohol. Total Ingredient Solutions segment sales increased 5.6 percent due to increased sales of specialty wheat starches and proteins, and commodity wheat starches, partially offset by decreased sales of commodity wheat proteins.
Net sales
Net2018 to 2017 - Sales 2017 to 2016 - Net sales for 20172018 were $347,448,$376,089, an increase of 9.28.2 percent compared to 2016,2017, which was the result of increased net sales in both segments. Within the distilleryDistillery Solutions segment, net sales were up 9.77.9 percent. Driven by continued strong demand, net sales of higher margin premium beverage alcohol products increased 18.45.9 percent. Industrial alcohol product sales increased 5.2 percent, partially offset by a decline in industrial alcohol net sales, which resulted in a net increase in totalcontributing to an overall food grade alcohol net sales increase of 11.95.7 percent. Warehouse services revenue related to the storageSales of barreled whiskey also increased, while lower margin distillers feed and related co-products netand warehouse services revenue both increased and the gains were partially offset by a small decline in the sales declined. Withinof fuel grade alcohol products. Total Ingredient Solutions sales increased 9.9 percent. This increase was driven by higher sales across all Ingredient Solutions product categories, with the ingredient solutions segment, net sales were up 6.5 percent. Specialty wheat starches,largest increases in commodity wheat starches,proteins and specialty wheat proteins increased, while net sales of commodity wheat proteins declined (see Distillery Products Segment and Ingredient Solutions Segment sections).proteins.
Net Sales 2016Gross profit
2019 to 20152018 - Net sales Gross profit for 2016 were $318,263,2019 was $76,532, a decrease of 2.98.5 percent compared to 2015. Within the distillery segment, net sales were down 1.8 percent. Food grade alcohol net sales were down 1.1 percent, as industrial alcohol net sales declined, while net sales of higher margin premium beverage alcohol products increased 14.5 percent. Warehouse services revenue related to the storage of barreled whiskey also increased, while lower margin distillers feed and related co-products net sales declined. In the ingredient solutions segment, a net sales decline of 7.6 percent2018. The decrease was driven by reductions across all product lines (seea decrease in gross profit in both segments. The Distillery Products Segmentsegment gross profit decreased by $5,841, or 8.1 percent and the Ingredient Solutions Segment sections).segment gross profit decreased by $1,226, or 10.4 percent.
Gross profit
Gross profit2018 to 2017 to 2016 - Gross profit for 20172018 was $76,016,$83,599, an increase of 16.410.0 percent percent compared to 2016.2017. The increase was driven by an increase in gross profit in both segments. In the distillery productsDistillery Products segment, gross profit grew by $9,981,$4,976, or 17.67.4 percent. In the ingredient solutionsIngredient Solutions segment, gross profit grew by $752,$2,607, or 8.9 percent (see Distillery Products Segment and Ingredient Solutions Segment results below).28.3 percent.
Gross profit 2016 to 2015 - Gross profit for 2016 was $65,283, an increase of 11.5 percent compared to 2015. The increase was driven by a 2.6 percentage point increase in gross margin, partially offset by a decrease in net sales. The expansion in total Company gross margin was primarily driven by a continuing shift in overall product sales mix favoring higher value products, a decline in input costs, improved plant efficiencies, partially offset by a lower average selling price.
SG&A expenses
SG&A expenses 20172019 to 20162018 - SG&A expenses for 2019 were $29,290, a decrease of 12.4 percent compared to 2018. The decrease in SG&A was primarily due to lower incentive compensation expense, partially offset by increased costs related to legal matters discussed in Note 9 and investments to support our brands initiative (personnel costs).
2018 to 2017 - SG&A expenses for 2018 were $33,107,$33,451, an increase of 24.01.0 percent compared to 2016.2017. The increase in SG&A was primarily due to investments in the MGPto support our brands platforminitiative (personnel costs and advertising and promotion) and an increase in incentive compensation..
SG&A expenses 2016Operating income
| | | | | | | | | | | | | | | | | |
| | Operating income | | % Increase (Decrease) | |
| Operating income for 2017 | | $ | 42,909 | | | | |
Increase in gross profit - Distillery Products segment(a) | | 4,976 | | | 11.6 | | pp(b) |
Increase in gross profit - Ingredient Solutions segment(a) | | 2,607 | | | 6.1 | | pp | |
| Increase in SG&A expenses | | (344) | | | (0.8) | | pp | |
| Operating income for 2018 | | 50,148 | | | 16.9 | % | |
| | | | | |
Decrease in gross profit - Distillery Products segment(a) | | (5,841) | | | (11.6) | | pp(b) |
Decrease in gross profit - Ingredient Solutions segment(a) | | (1,226) | | | (2.5) | | pp | |
| Decrease in SG&A expenses | | 4,161 | | | 8.3 | | pp | |
| Operating income for 2019 | | $ | 47,242 | | | (5.8) | % | |
(a) See segment discussion.
(b) Percentage points ("pp").
2019 to 20152018 - SG&A expensesOperating income for 2016 were $26,693, an increase of 3.9 percent compared2019 decreased to 2015. The increase in SG&A was primarily$47,242 from $50,148 for 2018, due to increased advertisinggross profit declines in both our Distillery Products and promotion, increased personnel costs, and increased professional fees,Ingredient Solutions segments. These decreases were partially offset by a decrease in the accrual for incentive compensation and a decrease in severance costs.SG&A expenses.
|
| | | | | | | | | | | | | | | | | |
| | | | Operating income | | Change year-versus-year | | Operating income | | Change year-versus-year |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Operating income for 2016 and 2015 | | $ | 41,975 |
| | | | | $ | 32,850 |
| | | |
| | Increase in gross profit - distillery products segment(a) | | 9,981 |
| | 23.8 |
| pp(b) | | 6,174 |
| | 18.8 |
| pp(b) |
| | Increase in gross profit - ingredient solutions segment(a) | | 752 |
| | 1.8 |
| pp | | 576 |
| | 1.8 |
| pp |
| | Change in SG&A expenses | | (6,414 | ) | | (15.3 | ) | pp | | (1,010 | ) | | (3.1 | ) | pp |
| | Change in other operating income, net | | (3,385 | ) | | (8.1 | ) | pp | | 3,385 |
| | 10.3 |
| pp |
| Operating income for 2017 and 2016 | | $ | 42,909 |
| | 2.2 | % | | | $ | 41,975 |
|
| 27.8 | % | |
(a) See segment discussion.
(b) Percentage points ("pp").
Operating income2018 to 2017 to 2016 - Operating income for 20172018 increased to $50,148 from $42,909 from $41,975 for 2016,2017, due to gross profit growth in both our distillery productsDistillery Products and ingredient solutionsIngredient Solutions segments, partially offset by an increase in SG&A expenses and a decrease in other operating income, net (primarily income recorded related to a legal settlement agreement and a gain on sale of long-lived assets recorded in the prior year).expenses.
Operating income 2016 to 2015 - Operating income for 2016 increased to $41,975 from $32,850 for 2015, due to gross profit growth in both our distillery products segment and our ingredient solutions segment and an increase in other operating income, net, partially offset by an increase in SG&A expenses. Other operating income, net, increased over 2015, primarily due to income recorded related to a legal settlement agreement and a gain on sale of long-lived assets. Equity method investment
Gain on sale ofWe had no equity method investment transactions for the years ended December 31, 2019 and 2018 (see Note 4 for additional information).
Gain on sale of equity method investment 2017 to 2016 - On July 3,In 2017, we completed the sale of our 30 percent equity ownership interest in ICP to Pacific Ethanol, consistent with a Merger Agreement entered into on June 26, 2017.Agreement. Our total transaction proceeds from the ICP sale transaction represented a return of our investment in ICP of $22,832 (net of fees and including additional dividends), which included a gain on sale of equity method investment of $11,381 (before tax) (see Note 4 for additional information).
Equity method investment earnings (loss)
Equity method investment earnings 2017 to 2016 - Our Additionally, we recognized an equity method investment earnings decreased to a loss of $348 for 2017, from earnings of $4,036 for 2016. The decrease was due to the sale of our 30 percent equity ownership interest in ICP on July 3, 2017, resulting in the gain on sale of equity method investment described above, as well as lower operating results (Note 3).during 2017.
Equity method investment earnings 2016 to 2015 - Our equity method investment earnings decreased to $4,036 for 2016, from $6,102 for 2015. The decrease in earnings was primarily due to ICP's lower per unit average selling price compared to 2015 and a decrease in business interruption insurance proceeds, partially offset by higher sales volume, year-versus-year (Note 3). The lower per unit average selling price in 2016 reflected less favorable market conditions compared to previous recent years.
Income tax expense
2019 to 2018 -Income tax expense for 2019 was $7,144, for an effective tax rate for the year of 15.6 percent. Income tax expense for 2018 was $11,696, for an effective tax rate for the year of 23.9 percent. The principal reasons for the 8.3 percentage point decrease in the effective tax rate, year versus year, were an increase in the favorable tax impact of vested share-based awards (which may not continue in future years), a favorable tax impact related to the change in the Company's valuation allowance, higher tax credits, and a change in estimate in 2018 related to the 2017 sale of the Company's equity method investment that did not reoccur in 2019, partially offset by the tax impact of legal matters discussed in Note 9, and certain compensation being subject to 2016the deduction limit applicable to public companies.
2018 to 2017 - Income tax expense for 2018 was $11,696, for an effective tax rate for the year of 23.9 percent. Income tax expense for 2017 was $10,935, for an effective tax rate for the year of 20.7 percent. Income tax expense for 2016 was $13,533, for an effective tax rate for the year of 30.3 percent. The principal reasons for the 9.63.2 percentage point reductionincrease in the effective tax rate, year-versus-yearyear versus year, are a provisionalthe tax impact caused by the re-measurement of our deferred tax assets and liabilities directly into income tax expense from continuing operations based on Tax Act,at December 31, 2017, the reduction in the tax impact of our adoptionvested share-based awards, the loss of ASU 2016-09, Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, and state tax planning (Note 6).
On December 22, 2017, the United States enacted tax reform legislation,Domestic Production Activities Deduction as required by the Tax Act, that resulteda change in significant modificationsestimate related to existing law. Thethe sale of the Company’s equity ownership interest in ICP during 2017, an increase in the Company’s valuation allowance, and lower state income tax credits. These effects were partially offset by the 14 percent rate reduction enacted by the Tax Act, established newand by the Company not being subject to certain compensation deduction limits as updated by the Tax Act and subsequent guidance issued by the Internal Revenue Service in 2018.
Basic and diluted EPS
| | | | | | | | | | | | | | | | | |
| | Basic and Diluted EPS | | % Increase (Decrease) | |
| Basic and diluted EPS for 2017 | | $ | 2.44 | | | | |
Change in operating income(a) | | 0.27 | | | 11.1 | | pp(b) |
| | | | | |
Gain on sale of equity method investment (Note 4)(c) | | (0.44) | | | (18.0) | | pp | |
Change in equity method investment earnings(a) | | 0.01 | | | 0.4 | | pp | |
Change in income attributable to participating securities(d) | | 0.02 | | | 0.8 | | pp | |
Change in weighted average shares outstanding(d) | | (0.01) | | | (0.4) | | pp | |
| Tax: Change in share-based compensation | | (0.18) | | | (7.4) | | pp | |
Tax: Effect of Tax Act on deferred tax attributes(e) | | (0.19) | | | (7.8) | | pp | |
| Tax: Change in discrete items (excluding effect of Tax Act) | | (0.12) | | | (4.9) | | pp | |
| Tax: Change in effective tax rate (excluding tax items above) | | 0.37 | | | 15.1 | | pp | |
| Basic and diluted EPS for 2018 | | $ | 2.17 | | | (11.1) | % | |
| | | | | |
Change in operating income(a) | | (0.15) | | | (6.9) | | pp(b) |
Change in income attributable to participating securities(d) | | 0.02 | | | 0.9 | | pp | |
Change in weighted average shares outstanding(d) | | (0.03) | | | (1.3) | | pp | |
| Tax: Change in share-based compensation | | 0.12 | | | 5.5 | | pp | |
| Tax: Change in discrete items | | 0.12 | | | 5.5 | | pp | |
| Tax: Change in effective tax rate | | 0.02 | | | 0.9 | | pp | |
| Basic and diluted EPS for 2019 | | $ | 2.27 | | | 4.6 | % | |
(a)Items are net of tax laws or modified existing tax laws starting in 2018, including, but not limited to, (1) reducingbased on the federal corporate incomeeffective tax rate to a flat 21 percent rate, (2) eliminatingfor each base year, excluding the corporate alternative minimum tax, (3) repealing the domestic production activity deduction, (4) adding a new limitation on deductible interest, (5) changing the limitations on the deductibility of certain executive compensation, and (6) starting in the quarter ended September 30, 2017, changing the bonus depreciation rules to allow full expensing of qualified property.
Following guidance in SAB 118, we recorded a provisional discrete net tax benefit in our Consolidated Statements of Income through net income of $3,343 in 2017. SAB 118 provides additional clarification regarding the application of Accounting Standards Codification 740 - Income Taxes ("ASC 740") in situations where we do not have the necessary information available to complete the accounting for certain income tax effectseffect of the Tax Act forand other discrete tax items on the reporting period that includes the Tax Act’s enactment date and ending when we have the information needed in order to complete the accounting requirements, but in no circumstance should the measurement period extend beyond one year from the enactment date. In connection with our initial analysis, we recorded a provisional re-measurement2017 rate.
(b)Percentage points ("pp").
(c)Item is net of our deferred tax assets and liabilities based on the corporate rate reduction. The impact of the re-measurement was reflected in income tax expense, resulting in a reduction in our income tax expense for 2017 of $3,343. The ultimate impact may differ from the provisional amount, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we made, additional regulatory guidance that may be issued, and action we may take as a result of the Tax Act. The accounting is expected to be complete when our 2017 United States corporate income tax return is filed in 2018.
Income tax expense 2016 to 2015 - Income tax expense for 2016 was $13,533, for an effective tax rate for the yeartransaction.
(d)Income attributable to participating securities changes primarily due to the awarding and vesting of 30.3 percent. Income tax expense for 2015 was $12,227, for an effective tax rate for the year of 31.8 percent. The principal reasons for the 1.5 percentage point reduction in our effective tax expense rate year-versus-year were the impact of our adoption of ASU No. 2016-09, Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting in 2016, which provided us with a tax benefit related to our accounting for share-based compensation, the federal domestic production activities deduction no longer being limited by our net operating loss carryovers from prior years, and the effect of state tax planning, including state income tax credits, partially offset by the release of a valuation allowance in 2015 (Note 6).
Basic and diluted EPS
|
| | | | | | | | | | | | | | | |
| | | Basic and Diluted EPS | | Change year-versus-year | Basic and Diluted EPS | | Change year-versus-year |
| Basic and diluted EPS for 2016 and 2015 | | $ | 1.82 |
| | | | $ | 1.48 |
| | | |
| Change in operating income: | | | | | | | | | |
Operations(a) | | 0.17 |
| | 9.3 |
| pp(b) | 0.21 |
| | 14.2 |
| pp(b) |
Other operating income, net(a) | | (0.13 | ) | | (7.1 | ) | pp | 0.13 |
| | 8.8 |
| pp |
| Gain on sale of equity method investment | | 0.44 |
| | 24.2 |
| pp | — |
| | — |
| |
Change in equity method investment earnings (loss)(a) | | (0.17 | ) | | (9.3 | ) | pp | (0.08 | ) | | (5.4 | ) | pp |
Change in interest expense(a) | | — |
| | — |
| | (0.03 | ) | | (2.0 | ) | pp |
Change in weighted average shares outstanding(c) | | (0.02 | ) | | (1.1 | ) | pp | 0.05 |
| | 3.4 |
| pp |
Tax: Effect of Tax Act legislation(d) | | 0.19 |
| | 10.4 |
| pp | — |
| | — |
| |
| Tax: Change in valuation allowance | | — |
| | — |
| | (0.10 | ) | | (6.8 | ) | pp |
| Tax: Change in effect of implementation of ASU No. 2016-09 | | 0.11 |
| | 6.0 |
| pp | 0.09 |
| | 6.1 |
| pp |
| Tax: Change in effective tax rate (excluding tax items above) | | 0.03 |
| | 1.7 |
| pp | 0.07 |
| | 4.7 |
| pp |
| Basic and diluted EPS for 2017 and 2016 | | $ | 2.44 |
| | 34.1 | % | | $ | 1.82 |
| | 23.0 | % | |
| |
(a)
| Items are net of tax based on the effective tax rate for each base year, excluding the effect of the adoption of ASU 2016-09 in 2016 and the change in valuation allowance in 2015. |
| |
(b)
| Percentage points ("pp"). |
(c) employee RSUs that receive dividend equivalent payments. Weighted average shares outstanding change primarily due to the vesting of employee RSUs, the granting of Common Stock to directors, our purchase of vested RSUs from employees to pay withholding taxes, and our repurchases of Common Stock.
| |
(d)
| On December 22, 2017, the United States enacted tax reform legislation, the Tax Act, that resulted in significant modifications to existing law. Following guidance in SAB 118, we recorded a provisional discrete net tax benefit resulting from the revaluation of our deferred income taxes in 2017 (Note 6). |
Basic and diluted EPS(e)On December 22, 2017, the United States enacted tax reform legislation, the Tax Act, that resulted in significant modifications to 2016existing law. We recorded a discrete net tax benefit resulting from the revaluation of our deferred income taxes in 2017 (see Note 6 for additional information).
2019 to 2018 - EPS increased to $2.27 in 2019 from $2.17 in 2018, primarily due to the tax impacts of vested share-based awards and higher state tax credits in the effective tax rate. Partially offsetting these increases was a decrease in operations.
2018 to 2017 - EPS decreased to $2.17 in 2018 from $2.44 in 2017, from $1.82 in 2016, primarily due to the gain on sale of equity method investment (Note 3), the effect on tax expense of the new Tax Act legislation (Note 6), improved performance from operations, and the change in the tax effect of the implementation of ASU No. 2016-09, Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, partially offset by a decrease in equity method investment earnings (Note 3), a decline in other operating income, net (the 2016 favorable legal settlement agreement and gain on sale of long-lived assets), and an increase in weighted average shares outstanding.
Basic and diluted EPS 2016 to 2015 - EPS increased to $1.82 in 2016 from $1.48 in 2015, primarily due to performance from operations, the change in other operating income, net, (favorable legal settlement agreement and a gain on sale of long-lived assets), the decline in weighted average shares outstanding due to a repurchase of Common Stock in 2015, and tax items, net, (the change in valuation allowance, the implementation of ASU No. 2016-09, Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, and other changes in effective tax rate) (Note 6)2017 (see Note 4 for additional information), partially offset by lower equity method investment earnings and an increase in interest expense year-versus-year (Note 3).improved performance from operations.
DISTILLERY PRODUCTS SEGMENT
| | | | | | | | | | | | | | | | | | | | DISTILLERY PRODUCTS SALES | |
| | DISTILLERY PRODUCTS NET SALES | | Year Ended December 31, | | | Year-versus-Year Sales Change Increase/ (Decrease) | |
| | Year Ended December 31, | | Year-versus-Year Net Sales Change Increase/ (Decrease) | | Year-versus-Year Volume Change(a) | | 2019 | | 2018 | | $ Change | | % Change |
| | 2017 | | 2016 | | $ Change | | % Change | | % Change | |
| | Amount | | Amount | | | |
| Brown Goods | | Brown Goods | $ | 107,190 | | | $ | 125,857 | | | $ | (18,667) | | | (14.8) | % |
| White Goods | | White Goods | 62,862 | | | 62,574 | | | 288 | | | 0.5 | |
| Premium beverage alcohol | $ | 177,998 |
| | $ | 150,364 |
| | $ | 27,634 |
| | 18.4 | % | | | Premium beverage alcohol | 170,052 | | | 188,431 | | | (18,379) | | | (9.8) | |
| Industrial alcohol | 76,636 |
| | 77,290 |
| | (654 | ) | | (0.8 | ) | | | Industrial alcohol | 79,833 | | | 80,650 | | | (817) | | | (1.0) | |
Food grade alcohol(a) | 254,634 |
| | 227,654 |
| | 26,980 |
| | 11.9 |
| | | 249,885 | | | 269,081 | | | (19,196) | | | (7.1) | |
Fuel grade alcohol(a) | 6,368 |
| | 7,372 |
| | (1,004 | ) | | (13.6 | ) | | | 5,949 | | | 6,347 | | | (398) | | | (6.3) | |
| Distillers feed and related co-products | 19,332 |
| | 21,780 |
| | (2,448 | ) | | (11.2 | ) | | | Distillers feed and related co-products | 26,743 | | | 25,698 | | | 1,045 | | | 4.1 | |
| Warehouse services | 10,674 |
| | 8,437 |
| | 2,237 |
| | 26.5 |
| | | Warehouse services | 14,656 | | | 12,929 | | | 1,727 | | | 13.4 | |
| Total distillery products | $ | 291,008 |
| | $ | 265,243 |
| | $ | 25,765 |
| | 9.7 | % | | 9.2 | % | |
| Total Distillery Products | | Total Distillery Products | $ | 297,233 | | | $ | 314,055 | | | $ | (16,822) | | | (5.4) | % |
| | | | | | | | | | | | | | | | | |
(a) Volume change for alcohol products | | | | | | | | | |
| | | Change in Year-versus-Year Sales Attributed to: | | |
| | | Total | | Volume | | | Net Price/Mix | | | |
| Premium beverage alcohol | | Premium beverage alcohol | (9.8)% | | | (4.2)% | | | (5.6)% | | | |
| | | | Other Financial Information | | | | Other Financial Information | |
| | Year Ended December 31, | Year-versus-Year Increase/(Decrease) | | | | Year Ended December 31, | | Year-versus-Year Increase/(Decrease) | |
| | 2017 | | 2016 | | Change | | % Change | | | | 2019 | | 2018 | | Change | | % Change |
| Gross profit | $ | 66,817 |
| | $ | 56,836 |
| | $ | 9,981 |
| | 17.6 | % | | | Gross profit | $ | 65,952 | | | $ | 71,793 | | | $ | (5,841) | | | (8.1) | % |
| Gross margin % | 23.0 | % | | 21.4 | % | | 1.6 |
| pp(b) |
|
| | | Gross margin % | 22.2 | % | | 22.9 | % | | (0.7) | | pp(a) | | |
(b)
(a)Percentage points ("pp")
2017
2019 compared to 20162018
Driven by strong demand, netTotal sales of higher marginDistillery Products decreased year versus year by $16,822, or 5.4 percent. Sales of premium beverage alcohol productswere down due to lower volumes, predominantly in brown goods within foodpremium beverage alcohol (mix), partially offset by better pricing in both brown goods and white goods within premium beverage alcohol. Sales of brown goods, industrial alcohol and fuel grade alcohol increased 18.4 percent over 2016,decreased, while lower margin industrial alcohol product net sales decreased 0.8 percent, resulting in an overall food grade alcohol net sales increase of $26,980, or 11.9 percent. Declines in net sales of warehouse services, distillers feed and related co-products and fuel gradewhite goods increased. Sales of brown goods decreased 14.8 percent, due to lower sales volume, partially offset by higher average selling price. Industrial alcohol productsproduct sales decreased primarily driven by lower sales volume, partially offset by slightly favorable pricing. These decreases were partially offset by an increase in warehouse services sales of 13.4 percent and an increase in sales of distillers feed and related co-product of 4.1 percent, primarily due to an increase in sales volume.
Gross profit decreased year versus year by $5,841, or 8.1 percent. Gross margin for 2019 decreased to 22.2 percent from 22.9 percent for 2018. The decline in gross profit was primarily due to lower sales volume on brown goods. Industrial alcohol and white goods gross profits declined as the market remains challenged due to oversupply. This decline was partially offset by favorable average selling price on brown goods as well as increased gross profits on distillers feed and related co-products and warehouse services.
| | | | | | | | | | | | | | | | | | | | | | | |
| DISTILLERY PRODUCTS SALES | | | | | | |
| Year Ended December 31, | | | | Year-versus-Year Sales Change Increase/ (Decrease) | | |
| 2018 | | 2017 | | $ Change | | % Change |
| Brown Goods | $ | 125,857 | | | $ | 113,413 | | | $ | 12,444 | | | 11.0 | % |
| White Goods | 62,574 | | | 64,585 | | | (2,011) | | | (3.1) | |
| Premium beverage alcohol | 188,431 | | | 177,998 | | | 10,433 | | | 5.9 | |
| Industrial alcohol | 80,650 | | | 76,636 | | | 4,014 | | | 5.2 | |
| Food grade alcohol | 269,081 | | | 254,634 | | | 14,447 | | | 5.7 | |
| Fuel grade alcohol | 6,347 | | | 6,368 | | | (21) | | | (0.3) | |
| Distillers feed and related co-products | 25,698 | | | 19,332 | | | 6,366 | | | 32.9 | |
| Warehouse services | 12,929 | | | 10,674 | | | 2,255 | | | 21.1 | |
| Total Distillery Products | $ | 314,055 | | | $ | 291,008 | | | $ | 23,047 | | | 7.9 | % |
| | | | | | | |
| Change in Year-versus-Year Sales Attributed to: | | | | | | |
| Total | | Volume | | | Net Price/Mix | | | |
| Premium beverage alcohol | 5.9% | | | (0.9)% | | | 6.8% | | | |
| | | | | | | |
| | | | | | | |
| Other Financial Information | | | | | | |
| Year Ended December 31, | | | | Year-versus-Year Increase/(Decrease) | | |
| 2018 | | 2017 | | Change | | % Change |
| Gross profit | $ | 71,793 | | | $ | 66,817 | | | $ | 4,976 | | | 7.4 | % |
| Gross margin % | 22.9 | % | | 23.0 | % | | (0.1) | | pp(a) | | |
(a) Percentage points ("pp")
2018 compared to 2017
Total sales of Distillery Products increased year versus year by $23,047, or 7.9 percent. Driven by continued strong demand, sales of premium beverage alcohol products increased 5.9 percent over 2017, primarily due to an 11.0 percent increase in brown goods sales. Industrial alcohol product sales increased 5.2 percent, contributing to an overall food grade alcohol sales increase of 5.7 percent. Industrial alcohol sales growth was driven by volume as the average selling price was down due to more difficult market conditions. Sales of distillers feed and related co-products increased due to a higher average selling price reflecting improved market conditions during the year. An increase in warehouse services revenue generatedwas partially offset by increased storagea small decline in the sales of customer barrels of whiskey.fuel grade alcohol products.
Gross profit increased year-versus-yearyear versus year by $9,981,$4,976, or 17.67.4 percent. Gross margin for 2017 increased2018 remained consistent at 22.9 percent compared to 23.0 percent from 21.4 percent for 2016.2017. The improvement in gross profit was primarily due to increased sales of brown goods products, higher margin premium beverage alcohol products, a net decline in input costs,gross profit on sales of distillers feed and related co-products, and an increase in warehouse services revenue. These gains were partially offset primarily by increased input costs and lower gross profit on distillers feed and related co-products and industrial alcohol.
|
| | | | | | | | | | | | | | | | | | |
| | DISTILLERY PRODUCTS NET SALES | |
| | Year Ended December 31, | | Year-versus-Year Net Sales Change Increase/ (Decrease) | | Year-versus-Year Volume Change(a) | |
| | 2016 | | 2015 | | $ Change | | % Change | | % Change | |
| | Amount | | Amount | | | | |
| Premium beverage alcohol | $ | 150,364 |
| | $ | 131,347 |
| | $ | 19,017 |
| | 14.5 | % | | | |
| Industrial alcohol | 77,290 |
| | 98,917 |
| | (21,627 | ) | | (21.9 | ) | | | |
Food grade alcohol(a) | 227,654 |
| | 230,264 |
| | (2,610 | ) | | (1.1 | ) | | | |
Fuel grade alcohol(a) | 7,372 |
| | 7,366 |
| | 6 |
| | 0.1 |
| | | |
| Distillers feed and related co-products | 21,780 |
| | 26,182 |
| | (4,402 | ) | | (16.8 | ) | | | |
| Warehouse services | 8,437 |
| | 6,413 |
| | 2,024 |
| | 31.6 |
| | | |
| Total distillery products | $ | 265,243 |
| | $ | 270,225 |
| | $ | (4,982 | ) | | (1.8 | )% | | (7.2 | )% | |
| | | | | | | | | | | |
(a) Volume change for alcohol products | | | | | | | | | |
| | Other Financial Information | | | |
| | Year Ended December 31, | Year-versus-Year Increase/(Decrease) | | | |
| | 2016 | | 2015 | | Change | | % Change | | | |
| Gross profit | $ | 56,836 |
| | $ | 50,662 |
| | $ | 6,174 |
| | 12.2 | % | | | |
| Gross margin % | 21.4 | % | | 18.7 | % | | 2.7 |
| pp(b) |
|
| | | |
(b)Percentage points ("pp")
2016 compared to 2015
Driven by strong demand for our premium bourbon and rye whiskeys, net sales of higher margin premium beverage alcohol products within foodwhite goods, industrial, and fuel grade alcohol increased 14.5 percent over 2015, while lower margin industrial alcohol product net sales decreased 21.9 percent, resulting in an overall food grade alcohol net sales decrease of $2,610, or 1.1 percent. A decline in net sales of distillers feed and related co-products was partially offset by an increase in warehouse services revenue, generated by increased storage of customer barrels of whiskey.products.
Gross profit increased year-versus-year by $6,174, or 12.2 percent. Gross margin for 2016 increased to 21.4 percent from 18.7 percent for 2015, which was primarily due to the continuing shift in sales mix within food grade alcohol from lower margin industrial alcohol products to higher margin premium beverage alcohol products, a decline in input costs, an increase in warehouse services revenue, partially offset by a lower average selling price.
INGREDIENT SOLUTIONS SEGMENT
| | | | | | | | | | | | | | | | | | | | | | | |
| INGREDIENT SOLUTIONS SALES | | | | | | |
| Year Ended December 31, | | | | Year-versus-Year Sales Change Increase/ (Decrease) | | |
| 2019 | | 2018 | | $ Change | | % Change |
| Specialty wheat starches | $ | 30,816 | | | $ | 28,594 | | | $ | 2,222 | | | 7.8 | % |
| Specialty wheat proteins | 22,359 | | | 21,098 | | | 1,261 | | | 6.0 | |
| Commodity wheat starches | 9,628 | | | 9,223 | | | 405 | | | 4.4 | |
| Commodity wheat proteins | 2,709 | | | 3,119 | | | (410) | | | (13.1) | |
| Total Ingredient Solutions | $ | 65,512 | | | $ | 62,034 | | | $ | 3,478 | | | 5.6 | % |
| | | | | | | |
| Change in Year-versus-Year Sales Attributed to: | | | | | | |
| Total | | Volume | | | Net Price/Mix | | | |
| Total Ingredient Solutions | 5.6% | | | 2.3% | | | 3.3% | | | |
| | | | | | | |
| | | | | | | |
| Other Financial Information | | | | | | |
| Year Ended December 31, | | | | Year-versus-year Increase/(Decrease) | | |
| 2019 | | 2018 | | Change | | % Change |
| Gross profit | $ | 10,580 | | | $ | 11,806 | | | $ | (1,226) | | | (10.4) | % |
| Gross margin % | 16.2 | % | | 19.0 | % | | (2.8) | | pp(a) | | |
|
| | | | | | | | | | | | | | | | | |
| | INGREDIENT SOLUTIONS NET SALES |
| | Year Ended December 31, | | Year-versus-Year Net Sales Change Increase/ (Decrease) | | Year-versus-Year Volume Change |
| | 2017 | | 2016 | | $ Change | | % Change | | % Change |
| | Amount | | Amount | | | |
| Specialty wheat starches | $ | 28,092 |
| | $ | 26,803 |
| | $ | 1,289 |
| | 4.8 | % | | |
| Specialty wheat proteins | 19,458 |
| | 18,211 |
| | 1,247 |
| | 6.8 |
| | |
| Commodity wheat starches | 8,288 |
| | 7,002 |
| | 1,286 |
| | 18.4 |
| | |
| Commodity wheat proteins | 602 |
| | 1,004 |
| | (402 | ) | | (40.0 | ) | | |
| Total ingredient solutions | $ | 56,440 |
| | $ | 53,020 |
| | $ | 3,420 |
| | 6.5 | % | | 13.3 | % |
| | | | | | | | | | |
| | Other Financial Information | | |
| | Year Ended December 31, | | Year-versus-year Increase/Decrease | | |
| | 2017 | | 2016 | | Change | | % Change | | |
| Gross profit | $ | 9,199 |
| | $ | 8,447 |
| | $ | 752 |
| | 8.9 | % | | |
| Gross margin % | 16.3 | % | | 15.9 | % | | 0.4 |
| pp(a) |
|
| | |
(a)Percentage points ("pp")
20172019 compared to 20162018
Total ingredient solutions netIngredient Solutions sales for 20172019 increased by $3,420,$3,478, or 6.55.6 percent, compared to 2016.2018. This increase was primarily driven by increased nethigher sales of specialty wheat starches and proteins, and commodity wheat starches, andpartially offset by a decrease in sales of commodity wheat proteins. The increase in specialty wheat starches was driven by an increase in sales volume and favorable average selling pricing. The increase in commodity wheat starches was primarily due to favorable pricing, partially offset by a decrease in sales volume. The increase in specialty wheat proteins was due to an increase in sales volume, partially offset by lower average selling price driven by the loss of a large specialty wheat protein customer. These increases were partially offset by decreased net sales of commodity wheat proteins year-versus-year.which was driven by lower sales volume.
Gross profit increased year-versus-yeardecreased year versus year by $752,$1,226, or 8.910.4 percent. Gross margin for 2017 increased2019 decreased to 16.316.2 percent from 15.919.0 percent for 2016.2018. The improvementdecrease in gross profit was primarily due to a net decline inthe above mentioned specialty wheat protein customer loss, increased production costs resulting from higher input costs, partially offset by a lower average selling price.increased gross profit of commodity wheat starches and proteins.
| | | | | | | | | | | | | | | | | | | | | | | |
| INGREDIENT SOLUTIONS SALES | | | | | | |
| Year Ended December 31, | | | | Year-versus-Year Sales Change Increase/ (Decrease) | | |
| 2018 | | 2017 | | $ Change | | % Change |
| Specialty wheat starches | $ | 28,594 | | | $ | 28,092 | | | $ | 502 | | | 1.8 | % |
| Specialty wheat proteins | 21,098 | | | 19,458 | | | 1,640 | | | 8.4 | |
| Commodity wheat starches | 9,223 | | | 8,288 | | | 935 | | | 11.3 | |
| Commodity wheat proteins | 3,119 | | | 602 | | | 2,517 | | | 418.1 | |
| Total Ingredient Solutions | $ | 62,034 | | | $ | 56,440 | | | $ | 5,594 | | | 9.9 | % |
| | | | | | | |
| Change in Year-versus-Year Sales Attributed to: | | | | | | |
| Total | | Volume | | | Net Price/Mix | | | |
| Total Ingredient Solutions | 9.9% | | | 1.7% | | | 8.2% | | | |
| | | | | | | |
| | | | | | | |
| Other Financial Information | | | | | | |
| Year Ended December 31, | | | | Year-versus-year Increase/(Decrease) | | |
| 2018 | | 2017 | | Change | | % Change |
| Gross profit | $ | 11,806 | | | $ | 9,199 | | | $ | 2,607 | | | 28.3 | % |
| Gross margin % | 19.0 | % | | 16.3 | % | | 2.7 | | pp(a) | | |
|
| | | | | | | | | | | | | | | | | |
| | INGREDIENT SOLUTIONS NET SALES |
| | Year Ended December 31, | | Year-versus-Year Net Sales Change Increase/ (Decrease) | | Year-versus-Year Volume Change |
| | 2016 | | 2015 | | $ Change | | % Change | | % Change |
| | Amount | | Amount | | | |
| Specialty wheat starches | $ | 26,803 |
| | $ | 29,989 |
| | $ | (3,186 | ) | | (10.6 | )% | | |
| Specialty wheat proteins | 18,211 |
| | 18,422 |
| | (211 | ) | | (1.1 | ) | | |
| Commodity wheat starches | 7,002 |
| | 7,079 |
| | (77 | ) | | (1.1 | ) | | |
| Commodity wheat proteins | 1,004 |
| | 1,889 |
| | (885 | ) | | (46.9 | ) | | |
| Total ingredient solutions | $ | 53,020 |
| | $ | 57,379 |
| | $ | (4,359 | ) | | (7.6 | )% | | (4.0 | )% |
| | | | | | | | | | |
| | Other Financial Information | | |
| | Year Ended December 31, | | Year-versus-year Increase/Decrease | | |
| | 2016 | | 2015 | | Change | | % Change | | |
| Gross profit | $ | 8,447 |
| | $ | 7,871 |
| | $ | 576 |
| | 7.3 | % | | |
| Gross margin % | 15.9 | % | | 13.7 | % | | 2.2 |
| pp(a) |
|
| | |
(a)Percentage points ("pp")
20162018 compared to 20152017
Total ingredient solutions netIngredient Solutions sales for 2016 decreased2018 increased by $4,359,$5,594, or 7.69.9 percent, compared to 2015.2017. This declineincrease was driven by a lower average selling pricehigher sales across all product categories, with the largest increases in commodity wheat proteins and decreased product netspecialty wheat proteins, year versus year. The increase in sales volume, due to a continuing challenging price environmentof wheat proteins was driven by strong demand for this segment.the Company’s plant-based protein products.
Gross profit increased year versus year by $576,$2,607, or 7.328.3 percent. Gross margin for 2016 was 15.92018 increased to 19.0 percent compared to 13.7from 16.3 percent for 2015,2017. The increase in gross profit was primarily due to a decline in input costshigher gross profits on specialty wheat proteins and starches and commodity wheat proteins, partially offset by lower gross profits on commodity wheat starches. Overall gross profit growth was aided by improved plant efficiencies partially offset by a lower average selling price.relative to the prior year.
CASH FLOW, FINANCIAL CONDITION AND LIQUIDITY
We believe our financial condition continues to be of high quality, as evidenced by our ability to generate adequate cash from operations while having ready access to capital at competitive rates.
Operating cash flow and debt through our Credit Agreement and Note Purchase Agreement (Note 5) provide the primary sources of cash to fund operating needs and capital expenditures. These same sources of cash are used to fund shareholder dividends and other discretionary uses. Going forward, we expect to use cash to implement our invest to grow strategy, particularly in the distillery productsDistillery Products segment. TheOur overall liquidity of the Company reflects our strong business results and an effective cash management strategy that takes into account liquidity management, economic factors, and tax considerations. We expect our sources of cash, including our Credit Agreement and Note Purchase Agreement, to be adequate to provide for budgeted capital expenditures and anticipated operating requirements.requirements for the foreseeable future.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash Flow Summary | | Year Ended December 31, | | | | | | Changes, Year versus Year-Increase / (Decrease) | | |
| | 2019 | | 2018 | | 2017 | | 2019 vs. 2018 | | 2018 vs. 2017 |
| Cash provided by operating activities: | | $ | 19,722 | | | $ | 33,481 | | | $ | 33,471 | | | (13,759) | | | 10 | |
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| Cash provided by (used in) investing activities: | | (17,931) | | | (31,046) | | | 1,777 | | | 13,115 | | | (32,823) | |
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| | | | | | | | | | |
| Cash used in financing activities: | | (3,507) | | | (494) | | | (33,733) | | | (3,013) | | | 33,239 | |
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| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Increase (decrease) in cash and cash equivalents | | $ | (1,716) | | | $ | 1,941 | | | $ | 1,515 | | | $ | (3,657) | | | $ | 426 | |
| | | | | | | | | | |
Operating Activities. Cash Flow
2017 compared to 2016
Cash flow from operations increased $13,750 to $33,471 for 2017, from $19,721 for 2016. This increase inprovided by operating cash flow was primarilyactivities were $19,722 during the result of net cash inflows related to the increases in accounts payable, inventory, net income, after giving effect to adjustments to reconcile net income to netyear ended December 31, 2019. The cash provided by operating activities (depreciationduring 2019 resulted primarily from net income of $38,793, adjustments for non-cash or non-operating charges of $15,012 including depreciation and amortization, share-based compensation, and deferred income taxes, partially offset by uses of cash due to changes in operating assets and liabilities of $34,083. The primary drivers of the changes in operating assets and liabilities were $28,162 use of cash related to an increase in inventories driven primarily by barreled distillate, $4,547 use of cash related to a decrease in accrued expenses primarily due to lower incentive compensation expense, and $2,134 use of cash related to an increase in receivables, net primarily related to the timing of sales and cash collections. Additionally, there was $2,107 provided by cash related to an increase in accounts payable related to the timing of cash disbursements.
Cash provided by operating activities were $33,481 during the year ended December 31, 2018.The cash provided by operating activities during 2018 resulted primarily from net income of $37,284, adjustments for non-cash or non-operating charges of $16,126 including depreciation and amortization, share-based compensation and deferred income taxes, partially offset by uses of cash due to change in operating assets and liabilities of $19,929. The primary drivers of the changes in operating assets and liabilities were $15,620 use of cash related to an increase in inventories driven primarily by barreled distillate and $4,450 use of cash related to an increase in receivables, net. The change in receivables, net is primarily related to the timing of sales and cash collections.
Cash provided by operating activities were $33,471 during the year ended December 31, 2017.The cash provided by operating activities during 2017 resulted primarily from net income of $41,823, adjusted for non-cash or non-operating charges of $6,621 including depreciation and amortization, distributions received from equity method investees and gain on sale of equity method investment, gain on property insurance recoveries, gain on sale of assets, share-based compensation, equity method investment (earnings) loss, distribution received from equity method investee, deferred income taxes, including change in valuation allowance, and other, net), refundable income taxes, and accrued expenses, partially offset by uses of cash due to changes in assets and liabilities of $14,973. The primary drivers of the decreaseschanges in operating assets and liabilities were $14,291 use of cash related to an increase in inventories driven primarily by barreled distillate, $8,262 use of cash related to an increase in receivables, net and $9,540 cash provided by an increase in accounts payable. The change in receivables, net is primarily related to increased sales during the year. The change in accounts payable to affiliate, net.
Increases to Operating Cash Flow - Accounts payable and accounts payable to affiliate, net, increased $6,191 for 2017 compared to a decrease of $2,120 for 2016. The $8,311 change wasis primarily due to the timing of cash disbursements related to operating expenses associated with the increased net sales in December 2017 compared to December 2016. The Accounts(the accounts payable to affiliate, net, decreased to zero when we sold our equity method investmentownership interest in ICP on July 3, 2017 (Note 3). Inventory increased $14,291 for 2017 compared to an increase of $20,106 for 2016. The resulting $5,815 change was due to inventory categories remaining flat or decreasingas detailed in 2017, except barreled distillate inventory for aging, which increased $14,785. Net income, after giving effect to adjustments to reconcile net income to net cash provided by operating activities, increased by $4,762, to $48,444 for 2017 from $43,682 for 2016. Refundable income taxes decreased $725 for 2017 compared to an increase of $3,390 in 2016. The $4,115 change was primarily due to the use of certain tax attributes, including net operating losses and the timing of estimated tax payments. Accrued expenses increased $2,278 for 2017 compared to a decrease of $1,407 for 2016. The $3,685 change was primarily due to increases in incentive compensation and personnel costs.Note 4).
Decreases to Operating Cash Flow- Receivables, net, increased $8,262 for 2017 compared to an decrease of $4,585 for 2016. The resulting $12,847 change was primarily due to higher net sales in December 2017 compared to December 2016.
2016 compared to 2015
Cash flow from operations increased $1,059 to $19,721 for 2016, from $18,662 for 2015. This increase in operating cash flow was primarily the result of net cash inflows related to increased net income, after giving effect to adjustments to reconcile net income to net cash provided by operating activities (depreciation and amortization, gain on property insurance recoveries, gain on sale of assets, share-based compensation, equity method investment earnings, distribution received from equity method investee, and deferred income taxes, including change in valuation allowance) changes in receivables, net, inventory, and accounts payable to affiliate, net, partially offset by the change in refundable income taxes, accounts payable, and accrued expenses.
Increases to Operating Cash Flow - Net income, after giving effect to adjustments to reconcile net income to net cash provided by operating activities, increased by $7,995, to $43,682 for 2016 from $35,687 for 2015. Improvements in the gross profit of the distillery products and ingredient solutions segments and the other operating income, net, items in 2016, as well as a distribution received from our equity method investee of $3,300, a decrease in equity method investment earnings of $2,066, a decrease in depreciation and amortization of $1,129, an increase in share-based compensation of $988, a gain on sale of assets of $872, and a decrease in deferred income taxes, including change in valuation allowance of $668, were the major factors that generated this net income increase. Inventory increased $20,106 for 2016, compared to an increase of $24,260 for 2015. The resulting $4,154 change was due to inventory decreases in 2016 across all categories, except barreled distillate inventory for aging, which increased. Receivables, net, decreased $4,585 for 2016 compared to a decrease of $2,002 for 2015. The resulting $2,583 change was primarily due to lower net sales in December 2016 compared to December 2015. Accounts payable to affiliate increased $1,058 for 2016 compared to a decrease of $1,042 for 2015. The resulting $2,100 change was primarily due to the timing of invoices.
Decreases to Operating Cash Flow-Accounts payable decreased $3,178 for 2016 compared to an increase of $3,653 for 2015. The $6,831 change was primarily due to the timing of cash disbursements related to operating expenses and capital expenditures. Accrued expenses decreased $1,407 for 2016 compared to an increase of $2,351 for 2015. The $3,758 change was primarily due to decreases in incentive compensation and severance accruals. Refundable income taxes increased $3,390 for 2016 compared to a decrease of $1,073 in 2015. The $4,463 change was primarily due to tax credits that were earned after estimated payments had been made.
Investing Activities. Cash Flow
2017 compared to 2016
Net cash flow provided by investing activities for 2017 was $1,777 compared to net cash flow used in investing activities of $17,683 for 2016, for a net increase of $19,460. This net increaseyear ended December 31, 2019 was $17,931, which primarily due to the sale of our 30 percent equity method investment in ICP during 2017, which resulted in a return of equity method investment of $22,832 (Note 3), as well as the decrease in cash used for the acquisition of George Remus® year-versus-year of $1,551. The net increase in cash provided by investing activities was partially offset byfrom an increase in additions to property, plant and equipment year-versus-year of $3,133, as well as a decrease$16,730 (see capital spending).
Cash used in proceedsinvesting activities for year ended December 31, 2018 was $31,046, which resulted from the sale of property and other and the return of our DMI joint venture investment year-versus-year of $1,560. Thean increase in additions to property, plant and equipment was primarily due to an increase inof $31,046 (see capital expenditures related to the warehouse expansion program.spending).
2016 compared to 2015
Net cash flow used inCash provided by investing activities for 2016year ended December 31, 2017 was $17,683 compared to net cash flow used in$1,777. Cash provided by investing activities was due to cash provided from the divestiture of $30,526our equity method investment during 2017 of $22,832 (see Note 4 for 2015, for a net decrease inadditional information), offset by cash used in investing activities of $12,843. During 2016, our additions tofor property, plant, and equipment were $12,604 less than the prior year, primarily due to a decrease in capital expenditures related to the new dryer installed at the Lawrenceburg facility and a decrease in capital expenditures related to the Lawrenceburg facility warehouse expansion program. We received proceeds from the sale of property and the return of our DMI joint venture investment in 2016 of $1,560. These receipts of cash from investing activities were partially offset by our acquisition in November 2016 of the George Remus® brand business from Queen City Whiskey LLC for cash consideration of $1,551.$21,055 (see Capital Spending).
Capital Spending.
2017 compared to 2016
We manage capital spending to support our business growth plans. Investments in plant, property plant, and equipment were $16,730, $31,046, and $21,055 for years ended December 31, 2019, 2018, and $17,922, respectively, for 2017, and 2016.respectively. Adjusted for the change in capital expenditures remaining in accounts payable for years ended December 31, 2019, 2018, and 2017 of $2,041, $(2,133), and 2016 of $158, respectively, and $2,580, respectively, total capital expenditures were $21,213$18,771, $28,913, and $20,502,$21,213, respectively. We expect approximately $22,000$19,600 in capital expenditures in 20182020 for facility improvement and expansion (including warehouse expansion), facility sustainingsustenance projects, and environmental health and safety projects.
OurAs part of our strategic plan to support the growth of the American whiskey category, we previously announced a warehouse expansion project. As of December 31, 2019, we had incurred approximately $48,400 of the total investment and expect our total warehouse expansion project investment to be approximately $49,800. The estimated project completion date is by the end of calendar year 2020.
FinancingActivities. Cash used in financing activities for year ended December 31, 2019 was $3,507, primarily due to payments of dividends and dividend equivalents of $6,856 (see Note 7 for additional information), purchases of treasury stock for tax withholding on share-based compensation of $5,489 (see Treasury Purchases), offset by net proceeds from debt of $8,914 (see Long-Term and Short-Term Debt).
Cash used in financing activities for year ended December 31, 2018 was $494, primarily due to payments of dividends and dividend equivalents of $5,500 (see Note 7 for additional information), purchases of treasury stock for tax withholding on share-based compensation of $2,324 (see Treasury Purchases), offset by net proceeds from debt of $7,330 (see Long-Term and Short-Term Debt).
Cash used in financing activities for year ended December 31, 2017 was $33,733, primarily due to payments on our credit agreement - revolver of $30,955 (see Long-Term and Short-Term Debt), payment of dividends and dividend equivalents of $17,380 (see Note 7 for additional information) and purchases of treasury stock for tax withholding on share-based compensation of $4,663 (see Treasury Purchases), partially offset by net proceeds in long-term debt $19,642 (see Long-Term and Short-Term Debt).
Treasury Purchases. 235,409 RSUs vested and converted to common shares during year ended December 31, 2019, of which we withheld and purchased for treasury 77,481 shares valued at $5,489 to cover payment of associated withholding taxes.
80,343 RSUs vested and converted to common shares during year ended December 31, 2018, of which we withheld and purchased for treasury 27,214 shares valued at $2,324 to cover payment of associated withholding taxes.
203,000 RSUs vested and converted to common shares during year ended December 31, 2017, of which we withheld and purchased for treasury 74,132 shares valued at $4,663 to cover payment of associated withholding taxes.
Share Repurchase. On February 25, 2019, the Board of Directors approved a major expansion$25,000 share repurchase authorization commencing February 27, 2019 through February 27, 2022. Under the share repurchase program, the company can repurchase stock from time to time for cash in warehousing capacity as partopen market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws. This share repurchase program may be modified, suspended, or terminated by the company at any time without prior notice. From the commencement date of the implementation of our strategic plan to growauthorization period through the whiskey category. The approved investments for the project total approximately $33,800. As ofyear ended December 31, 2017, we had incurred approximately $26,000 of this investment amount.2019, 0 shares were repurchased under the program.
Financing Cash Flow
Dividends and Dividend Equivalents. We made dividend and dividend equivalent payments of $17,380, $2,066, and $1,087 for 2017, 2016, and 2015, respectively, to our holders of Common Stock, Restricted Stock, and RSUs as detailed below. |
| | | | | | | | | | | | | | | |
| Dividend and Dividend Equivalent Information (per Share and Unit) | |
| Declaration date | | Payment date | | Declared | | Paid | | Total payment | |
| 2017 | | | | | | | | | |
| February 15, 2017 | | March 24, 2017 | | $ | 0.04 |
| | $ | 0.04 |
| | $ | 688 |
| |
| May 2, 2017 | | June 9, 2017 | | 0.04 |
| | 0.04 |
| | 688 |
| |
| August 1, 2017 | | September 8, 2017 | | 0.85 |
| | 0.85 |
| | 14,628 |
| (a) |
| August 1, 2017 | | September 11, 2017 | | 0.04 |
| | 0.04 |
| | 688 |
| |
| October 31, 2017 | | December 8, 2017 | | 0.04 |
| | 0.04 |
| | 688 |
| |
| | | | | $ | 1.01 |
| | $ | 1.01 |
| | $ | 17,380 |
| |
| 2016 | | | | | | | | | |
| March 7, 2016 | | April 14, 2016 | | $ | 0.08 |
| | $ | 0.08 |
| | $ | 1,378 |
| |
| August 1, 2016 | | September 8, 2016 | | 0.02 |
| | 0.02 |
| | 344 |
| |
| October 31, 2016 | | December 8, 2016 | | 0.02 |
| | 0.02 |
| | 344 |
| |
| | | | | $ | 0.12 |
| | $ | 0.12 |
| | $ | 2,066 |
| |
| 2015 | | | | | | | | | |
| February 27, 2015 | | April 21, 2015 | | $ | 0.06 |
| | $ | 0.06 |
| | $ | 1,087 |
| |
| |
(a)
| This was a special dividend related to the sale of our 30 percent interest in ICP to Pacific Ethanol. The transaction was completed onJuly 3, 2017.
|
Treasury Purchases. Upon their vesting, we purchased RSUs during 2017 from employees to cover associated withholding taxes. Total treasury stock purchases added 74,132 shares, or $4,663 to our treasury stock in 2017.
We purchased restricted stock during 2016 from employees to cover associated withholding taxes on vestings of share-based awards. Total purchases added 40,870 shares, or $1,518 to our treasury stock in 2016.
We purchased 1,010,135 treasury shares in 2015 for a total of $15,408. Of the purchased shares, 950,000 were from a privately negotiated transaction with an affiliate of SEACOR Holdings, Inc. on September 1, 2015, for a total settlement of $14,488. SEACOR Holdings, Inc. was the 70 percent owner of ICP, our 30 percent equity method investment until they were sold to Pacific Ethanol on July 3, 2017. Additional purchases of treasury stock in 2015 were primarily from employees to cover withholding taxes on the vesting of restricted stock and RSUs totaling 60,135 shares of stock, or $920.
Long-Term and Short-Term Debt. We maintain debt levels we consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment and financing plans (including brand development, share repurchases, and share repurchase activities)Board-approved dividends) and the overall cost of capital. Total debt was $24,554$41,060 (net of unamortized loan fees of $710)$448) at December 31, 20172019 and $36,001$32,014 (net of unamortized loan fees of $576)$580) at December 31, 2016.2018. During 2017, 2016,2019, 2018, and 2015,2017, we had net borrowings / (payments) on our Credit Agreement of $(10,700), $7,702, and $(30,955), $4,828, and $22,754. During 2017, 2016, and 2015, we had net borrowings / (payments) on our long-term debt of $19,642, $(2,346)$19,614, $(372), and $1,059 (Note 5)$19,642, respectively. Net borrowings / (payments) on all debt for 2019, 2018, and 2017 were $8,914, $7,330, and $(11,313), respectively (see Note 5 for additional information).
Dividends and Dividend Equivalents. See Note 7 for further discussion.
On February 24, 2020, the Board of Directors declared a quarterly dividend payable to stockholders of record as of March 13, 2020, of our Common Stock and a dividend equivalent payable to holders of certain RSUs as of March 13, 2020, of $0.12 per share and per unit. The dividend payment and dividend equivalent payment will occur on March 27, 2020.
Financial Condition and Liquidity
Our principal uses of cash in the ordinary course of business are for input costs used in our production processes, salaries, capital expenditures, and investments supporting our strategic plan, such as the aging of barreled distillate. As part of our strategy, as demand grows for American whiskeys, in both the United States and global markets, we are building our inventories of aged premium whiskeys to fully participate in this growth (see "Barreled distillate (bourbon and whiskey)" in Note 2). 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 Credit Agreement and Note Purchase Agreement. Under our Credit Agreement and Note Purchase Agreement, we must meet certain financial covenants and restrictions, and at December 31, 2017,2019, we met those covenants and restrictions.
At December 31, 2017,2019, our current assets exceeded our current liabilities by $93,162,$144,911, largely due to our inventories, at cost, of $93,149.$136,931. At December 31, 20172019, our cash balance was $3,084$3,309 and we have used our Credit Agreement and Note Purchase Agreement for liquidity purposes, with $146,702$149,700 remaining for additional borrowings. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We regularly assessesassess our cash needs and the available sources to fund these needs. We utilize short-term and long-term debt to fund discretionary items, such as capital investments and share repurchases.dividend payments. In addition, we have strong operating results such that financial institutions should provide sufficient credit funding to meet short-term financing requirements, if needed.
OFF BALANCE SHEET OBLIGATIONS
Operating Leases. WeIndustrial Revenue Bonds.On October 24, 2018, we closed an industrial revenue bond transaction with the City of Williamstown, Kentucky (the "City") in order to receive a 30-year real property tax abatement on our renovated and newly-constructed warehouse buildings near the City. Pursuant to this transaction, the City issued a principal amount of $10,000 of its industrial revenue bonds to us and then used the proceeds to purchase the land and warehouse from us. The City then leased the facilities back to us under a capital lease, railcars and other assets under various operating leases. For railcar leases, we are generally requiredthe 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. The bonds’ maturity date is 2047, at which time the facilities will revert to us without costs. If we were to present the bonds for cancellation prior to maturity, a nominal fee would be incurred.
We recorded the land and buildings as assets in property, plant, and equipment, net, on our Consolidated Balance Sheets. Because we own all service costs associatedoutstanding bonds, have a legal right to set-off, and intend to set-off the corresponding lease and interest payment, we have netted the capital lease obligation with the railcars. Rental payments include minimum rentals plus contingent amounts basedbond asset. No amount for our obligation under the capital lease is reflected on mileage. Rental expenses under railcar operating leases with terms longer than one month were $2,372, $2,561, and $2,283 for 2017, 2016, and 2015, respectively. Annual rental commitments under non-cancelable operating leases total $9,977our Consolidated Balance Sheet, nor do we reflect an amount for the next five years ending December 31, 2022 and ancorresponding industrial revenue bond asset (see Note 9 for additional $390 thereafter.information).
Contractual Obligations
The following table provides information on the amounts and payments of our contractual obligations at December 31, 2017:2019:
| | | | | | | | | | | | | | | | Payments due by period | |
| | Payments due by period | | Total | | 2020 | | 2021-2022 | | 2023-2024 | | After 2024 |
| | Total | | 2018 | | 2019-2020 | | 2021-2022 | | After 2022 | |
| Long term debt | $ | 25,264 |
| | $ | 372 |
| | $ | 786 |
| | $ | 8,906 |
| | $ | 15,200 |
| |
| Interest on Long term debt | 4,953 |
| | 773 |
| | 1,503 |
| | 1,336 |
| | 1,341 |
| |
| Long-term debt | | Long-term debt | $ | 41,508 | | | $ | 401 | | | $ | 5,907 | | | $ | 12,000 | | | $ | 23,200 | |
| Interest on long-term debt | | Interest on long-term debt | 8,362 | | | 1,504 | | | 2,856 | | | 2,236 | | | 1,766 | |
| Operating leases | 10,367 |
| | 3,677 |
| | 4,032 |
| | 2,268 |
| | 390 |
| Operating leases | 7,132 | | | 2,546 | | | 3,440 | | | 1,146 | | | — | |
| Post-employment benefit plan obligations | 3,439 |
| | 471 |
| | 936 |
| | 841 |
| | 1,191 |
| |
| Purchase commitments | 93,809 |
| | 89,382 |
| (a) | 4,143 |
| | 283 |
| | 1 |
| Purchase commitments | 118,947 | | | 112,888 | | (a) | | 5,251 | | | 808 | | | — | |
| Other | | Other | 2,693 | | | 441 | | | 815 | | | 661 | | | 776 | |
| Total | $ | 137,832 |
| | $ | 94,675 |
| | $ | 11,400 |
| | $ | 13,634 |
| | $ | 18,123 |
| Total | $ | 178,642 | | | $ | 117,780 | | | $ | 18,269 | | | $ | 16,851 | | | $ | 25,742 | |
(a)Includes open purchase order commitments related to raw materials and packaging used in the ordinary course of business of $82,755.$108,218.
NEW ACCOUNTING PRONOUNCEMENTS
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 1.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to commodity price and interest rate market risks. We monitor and manage these exposures as part of our overall risk management program. Our risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results.
Commodity Costs
Costs. Certain commodities we use in our production process, or input costs, expose us to market price risk due to volatility in the prices for those commodities. Through our grain supply contracts for our Atchison and Lawrenceburg facilities, our wheat flour supply contract for our Atchison facility, and our natural gas contracts for both facilities, we purchase grain, wheat flour, and natural gas, respectively, for delivery from one to 24 months into the future at negotiated prices. We have determined that the firm commitments to purchase grain, wheat flour, and natural gas under the terms of our supply contracts meet the normal purchases and sales exception as defined under Accounting Standards Codification ("ASC") 815, Derivatives and Hedging, because the quantities involved are for amounts to be consumed within the normal expected production process.
Interest Rate Exposures
Exposures. Our Credit Agreement and Note Purchase Agreement (Note 5) expose us to market risks arising from adverse changes in interest rates. Established procedures and internal processes govern the management of this market risk.
Increases in market interest rates would cause interest expense to increase and earnings before income taxes to decrease. The change in interest expense and earnings before income taxes would be dependent upon the weighted average outstanding borrowings during the reporting period following an increase in market interest rates. Based on weighted average outstanding variable-rate borrowings at December 31, 2017,2019, a 100 basis point increase over the non-default rates actually in effect at such date would increase our interest expense on an annualized basis by $362.$3. Based on weighted average outstanding fixed-rate borrowings at December 31, 2017,2019, a 100 basis point increase in market rates would result in a decrease in the fair value of our outstanding fixed-rate debt of $1,147,$1,938, and a 100 basis point decrease in market rates would result in an increase in the fair value of our outstanding fixed-rate debt of $1,231.$2,062.
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.
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 2013 Framework.criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission. As a result of this assessment, management has concluded that the Company’s internal control over financial reporting as of December 31, 20172019 was effective.
KPMG, LLP, the independent registered public accounting firm that audited the Company'sCompany’s financial statements contained herein, has issued an audit report on the Company'sCompany’s internal control over financial reporting as of December 31, 2017.2019. The combined report on the consolidated financial statements of MGP Ingredients, Inc. and subsidiaries and audit report as to the effectiveness of internal control over financial reporting is included in Item 8 of this Form 10-K.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
MGP Ingredients, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of MGP Ingredients, Inc. and subsidiaries (the “Company”)Company) as of December 31, 20172019 and 2016,2018, the related consolidated statements of income, comprehensive income, cash flows, and changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017,2019, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control -– Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017,2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019 based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’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 overOver Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition under bill and hold arrangements
As discussed in Note 1 to the consolidated financial statements, the Company’s distillery products segment routinely enters into bill and hold arrangements, whereby the Company produces and sells unaged distillate to customers. A portion of brown goods premium beverage alcohol revenue, totaling $107,190 for the year ended December 31, 2019, is for bill and hold arrangements.
We identified the evaluation of revenue recognized under bill and hold arrangements as a critical audit matter because of the complexity from the additional effort required to test the incremental bill and hold revenue recognition criteria. The incremental bill and hold revenue recognition criteria include the evaluation of: 1) the customer reason for the bill and hold arrangement; 2) the identification of the product as separately belonging to the customer; 3) the product being currently ready for physical transfer to the customer; and 4) the Company’s inability to use the product or direct it to another customer.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s revenue recognition process, including controls related to bill and hold revenue recognition criteria being met. We examined a sample of bill and hold revenue transactions to assess the incremental bill and hold revenue recognition criteria. Specifically, we inspected documentation received from the customer directing the Company to warehouse distillate after production. Additionally, we observed a sample of customer owned barrels to determine they were marked with unique identifiers separating them from Company owned inventory and were ready for physical transfer to the customer upon request. Also, to evaluate that the Company does not have the ability to use the product or direct to another customer, we inspected underlying documentation for the same sample of bill and hold transactions to determine legal title to the product had transferred to the customer.
/s/ KPMG LLP
We have served as the Company’s auditor since 2008.
Kansas City, Missouri
March 1, 2018February 26, 2020
MGP INGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
|
| | | | | | | | | | | | |
| Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Sales | $ | 358,132 |
| | $ | 328,081 |
| | $ | 345,887 |
|
| Less: excise taxes | 10,684 |
| | 9,818 |
| | 18,283 |
|
| Net sales | 347,448 |
| | 318,263 |
| | 327,604 |
|
Cost of sales (a) | 271,432 |
| | 252,980 |
| | 269,071 |
|
| Gross profit | 76,016 |
| | 65,283 |
| | 58,533 |
|
| | | | | | |
| Selling, general, and administrative ("SG&A") expenses | 33,107 |
| | 26,693 |
| | 25,683 |
|
| Other operating income, net | — |
| | (3,385 | ) | | — |
|
| Operating income | 42,909 |
| 32,850 |
| 41,975 |
| | 32,850 |
|
| | | | | | |
| Gain on sale of equity method investment (Note 3) | 11,381 |
| | — |
| | — |
|
| Equity method investment earnings (loss) (Note 3) | (348 | ) | | 4,036 |
| | 6,102 |
|
| Interest expense, net | (1,184 | ) | | (1,294 | ) | | (534 | ) |
| Income before income taxes | 52,758 |
| 38,418 |
| 44,717 |
| | 38,418 |
|
| | | | | | |
| Income tax expense (Note 6) | 10,935 |
| | 13,533 |
| | 12,227 |
|
| Net income | 41,823 |
| 26,191 |
| 31,184 |
| | 26,191 |
|
| | | | |
|
|
| Income attributable to participating securities | 996 |
| | 954 |
| | 873 |
|
| Net income attributable to common shareholders and used in Earnings Per Share ("EPS") calculation (Note 7) | $ | 40,827 |
| | $ | 30,230 |
| | $ | 25,318 |
|
| | | | |
|
|
| Share information | | | | |
|
|
| Basic and diluted weighted average common shares | 16,746,731 |
| | 16,643,811 |
| | 17,123,556 |
|
| | | | | | |
| Basic and diluted EPS | $ | 2.44 |
| | $ | 1.82 |
| | $ | 1.48 |
|
| | | | |
|
|
| Dividends and dividend equivalents per common share | $ | 1.01 |
| | $ | 0.12 |
| | $ | 0.06 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| | | | | |
| | | | | |
| Sales | $ | 362,745 | | | $ | 376,089 | | | $ | 347,448 | |
Cost of sales (a) | 286,213 | | | 292,490 | | | 271,432 | |
| Gross profit | 76,532 | | | 83,599 | | | 76,016 | |
| | | | | |
| Selling, general, and administrative expenses | 29,290 | | | 33,451 | | | 33,107 | |
| | | | | |
| Operating income | 47,242 | | | 50,148 | | | 42,909 | |
| | | | | |
| Gain on sale of equity method investment | — | | | — | | | 11,381 | |
| Equity method investment loss | — | | | — | | | (348) | |
| Interest expense, net | (1,305) | | | (1,168) | | | (1,184) | |
| Income before income taxes | 45,937 | | | 48,980 | | | 52,758 | |
| | | | | |
| Income tax expense | 7,144 | | | 11,696 | | | 10,935 | |
| Net income | 38,793 | | | 37,284 | | | 41,823 | |
| | | | | |
| Income attributable to participating securities | 253 | | | 708 | | | 996 | |
| Net income attributable to common shareholders and used in Earnings Per Share calculation | $ | 38,540 | | | $ | 36,576 | | | $ | 40,827 | |
| | | | | |
| Basic and diluted weighted average common shares | 17,012,288 | | | 16,866,176 | | | 16,746,731 | |
| | | | | |
| Basic and diluted Earnings Per Share | $ | 2.27 | | | $ | 2.17 | | | $ | 2.44 | |
| | | | | |
| | | | | |
| |
(a)
| Includes related party purchases of $18,425, and $29,596, $40,206 for the years ended December 31, 2017, 2016, and 2015, respectively. |
(a)Includes related party purchases of $18,425 for the year ended December 31, 2017. There were 0 related party purchases for the years ended December 31, 2019 and 2018.
See Accompanying Notes to Consolidated Financial Statements
MGP INGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Net income | $ | 38,793 | | | $ | 37,284 | | | $ | 41,823 | |
| Other comprehensive income (loss), net of tax: | | | | | |
| Company sponsored benefit plan: | | | | | |
| Change in post-employment benefits | (151) | | | 147 | | | 66 | |
| Other | — | | | — | | | (4) | |
| Other comprehensive income (loss) | (151) | | | 147 | | | 62 | |
| Comprehensive income | $ | 38,642 | | | $ | 37,431 | | | $ | 41,885 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net income | $ | 41,823 |
| | $ | 31,184 |
| | $ | 26,191 |
|
| Other comprehensive income (loss), net of tax: | | | | |
|
|
| Company sponsored benefit plans: | | | | |
|
|
| Change in pension plans, net of tax expense, of $0, $0, and $160, respectively | — |
| | — |
| | 244 |
|
| Change in post-employment benefits, net of tax expense (benefit) of $40, $90, and ($41), respectively | 66 |
| | 134 |
| | (54 | ) |
| Other, net of tax | (4 | ) | | (7 | ) | | 42 |
|
| Other comprehensive income | 62 |
|
| 127 |
| | 232 |
|
| Comprehensive income | $ | 41,885 |
|
| $ | 31,311 |
| | $ | 26,423 |
|
See Accompanying Notes to Consolidated Financial Statements
MGP INGREDIENTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
| | | | | | | | | | | |
| December 31, | | |
| | 2019 | | 2018 |
| Current Assets | | | |
| Cash and cash equivalents | $ | 3,309 | | | $ | 5,025 | |
| Receivables (less allowance for doubtful accounts at December 31, 2019 and 2018 - $24 | 40,931 | | | 38,797 | |
| Inventory | 136,931 | | | 108,769 | |
| Prepaid expenses | 2,048 | | | 1,320 | |
| Refundable income taxes | 987 | | | 712 | |
| Total current assets | 184,206 | | | 154,623 | |
| | | |
| Property, plant, and equipment, net | 128,419 | | | 120,788 | |
| Operating lease right-of-use assets, net | 6,490 | | | — | |
| Other assets | 3,482 | | | 2,481 | |
| Total assets | $ | 322,597 | | | $ | 277,892 | |
| | | |
| Current Liabilities | | | |
| Current maturities of long-term debt | $ | 401 | | | $ | 386 | |
| Accounts payable | 29,511 | | | 25,363 | |
| Accrued expenses | 9,383 | | | 11,714 | |
| Total current liabilities | 39,295 | | | 37,463 | |
| | | |
| Long-term debt, less current maturities | 40,658 | | | 21,040 | |
| Credit agreement - revolver | 1 | | | 10,588 | |
| Long-term operating lease liabilities | 4,267 | | | — | |
| Deferred credits | 1,233 | | | 1,565 | |
| | | |
| Other noncurrent liabilities | 4,170 | | | 4,118 | |
| Deferred income taxes | 1,929 | | | 1,677 | |
| Total liabilities | 91,553 | | | 76,451 | |
| | | |
| Commitments and Contingencies – Note 9 | | | |
| Stockholders’ Equity | | | |
| Capital stock | | | |
| Preferred, 5% non-cumulative; $10 par value; authorized 1,000 shares; issued and outstanding 437 shares | 4 | | | 4 | |
| Common stock | | | |
| NaN par value; authorized 40,000,000 shares; issued 18,115,965 shares at December 31, 2019 and 2018; 17,028,125 and 16,856,414 shares outstanding at December 31, 2019 and 2018, respectively | 6,715 | | | 6,715 | |
| Additional paid-in capital | 14,029 | | | 15,375 | |
| Retained earnings | 230,784 | | | 198,914 | |
| Accumulated other comprehensive loss | (246) | | | (164) | |
| Treasury stock, at cost, 1,087,840 and 1,259,551 shares at December 31, 2019 and 2018, respectively | (20,242) | | | (19,403) | |
| Total stockholders’ equity | 231,044 | | | 201,441 | |
| Total liabilities and stockholders’ equity | $ | 322,597 | | | $ | 277,892 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Current Assets |
| | |
| Cash and cash equivalents | $ | 3,084 |
| | $ | 1,569 |
|
| Receivables (less allowance for doubtful accounts at December 31, 2017 and 2016 - $24) | 34,347 |
| | 26,085 |
|
| Inventory | 93,149 |
| | 78,858 |
|
| Prepaid expenses | 2,182 |
| | 1,684 |
|
| Refundable income taxes | 1,980 |
| | 2,705 |
|
| Total current assets | 134,742 |
| | 110,901 |
|
| | | | |
| Property, plant, and equipment, net | 103,051 |
| | 92,791 |
|
| Equity method investments | — |
| | 18,934 |
|
| Other assets | 2,535 |
| | 2,710 |
|
| Total assets | $ | 240,328 |
| | $ | 225,336 |
|
| | | | |
| Current Liabilities | | | |
| Current maturities of long-term debt | $ | 372 |
| | $ | 4,359 |
|
| Accounts payable | 30,037 |
| | 20,342 |
|
| Accounts payable to affiliate, net | — |
| | 3,349 |
|
| Accrued expenses | 11,171 |
| | 8,945 |
|
| Total current liabilities | 41,580 |
| | 36,995 |
|
| | | | |
| Long-term debt, less current maturities | 21,407 |
| | 16,218 |
|
| Revolving credit facility | 2,775 |
| | 15,424 |
|
| Deferred credits | 2,151 |
| | 2,978 |
|
| Accrued retirement, health, and life insurance benefits | 3,133 |
| | 3,604 |
|
| Other non current liabilities | 540 |
| | 393 |
|
| Deferred income taxes | 12 |
| | 3,432 |
|
| Total liabilities | 71,598 |
| | 79,044 |
|
| | | | |
| Commitments and Contingencies – Note 8 |
|
| |
|
|
| 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, 2017 and 2016; 16,797,420 and 16,658,765 shares outstanding at December 31, 2017 and 2016, respectively | 6,715 |
| | 6,715 |
|
| Additional paid-in capital | 13,912 |
| | 14,279 |
|
| Retained earnings | 167,129 |
| | 142,652 |
|
| Accumulated other comprehensive loss | (311 | ) | | (373 | ) |
| Treasury stock, at cost, 1,318,545 and 1,457,200 shares at December 31, 2017 and 2016, respectively | (18,719 | ) | | (16,985 | ) |
| Total stockholders’ equity | 168,730 |
| | 146,292 |
|
| Total liabilities and stockholders’ equity | $ | 240,328 |
| | $ | 225,336 |
|
See Accompanying Notes to Consolidated Financial Statements
MGPINGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Cash Flows from Operating Activities | | | | | |
| Net income | $ | 38,793 | | | $ | 37,284 | | | $ | 41,823 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 11,572 | | | 11,362 | | | 11,308 | |
| Gain on sale of equity method investment | — | | | — | | | (11,381) | |
| | | | | |
| | | | | |
| Share-based compensation | 3,304 | | | 3,099 | | | 2,574 | |
| Equity method investment loss | — | | | — | | | 348 | |
| Distributions received from equity method investee | — | | | — | | | 7,131 | |
| Deferred income taxes, including change in valuation allowance | 252 | | | 1,665 | | | (3,420) | |
| Other, net | (116) | | | — | | | 61 | |
| Changes in operating assets and liabilities: | | | | | |
| Receivables, net | (2,134) | | | (4,450) | | | (8,262) | |
| Inventory | (28,162) | | | (15,620) | | | (14,291) | |
| Prepaid expenses | (728) | | | 862 | | | (498) | |
| Refundable income taxes | (275) | | | 1,268 | | | 725 | |
| Accounts payable | 2,107 | | | (2,542) | | | 9,540 | |
| Accounts payable to affiliate, net | — | | | — | | | (3,349) | |
| Accrued expenses | (4,547) | | | 551 | | | 2,278 | |
| Deferred credits | (332) | | | (586) | | | (827) | |
| Other, net | (12) | | | 588 | | | (289) | |
| Net cash provided by operating activities | 19,722 | | | 33,481 | | | 33,471 | |
| | | | | |
| Cash Flows from Investing Activities | | | | | |
| Additions to property, plant, and equipment | (16,730) | | | (31,046) | | | (21,055) | |
| Divestiture of equity method investment, net | — | | | — | | | 22,832 | |
| Deferred compensation plan investments | (1,201) | | | — | | | — | |
| Net cash provided by (used in) investing activities | (17,931) | | | (31,046) | | | 1,777 | |
| | | | | |
| Cash Flows from Financing Activities | | | | | |
| Payment of dividends and dividend equivalents | (6,856) | | | (5,500) | | | (17,380) | |
| Purchase of treasury stock for tax withholding on equity-based compensation | (5,489) | | | (2,324) | | | (4,663) | |
| Loan fees incurred with borrowings | — | | | — | | | (377) | |
| Proceeds from long-term debt | 20,000 | | | — | | | 20,000 | |
| Principal payments on long-term debt | (386) | | | (372) | | | (358) | |
| Proceeds from credit agreement - revolver | 17,440 | | | 28,966 | | | 25,930 | |
| Payments on credit agreement - revolver | (28,140) | | | (21,264) | | | (56,885) | |
| Other, net | (76) | | | — | | | — | |
| Net cash used in financing activities | (3,507) | | | (494) | | | (33,733) | |
| | | | | |
| Increase (decrease) in cash and cash equivalents | (1,716) | | | 1,941 | | | 1,515 | |
| Cash and cash equivalents, beginning of year | 5,025 | | | 3,084 | | | 1,569 | |
| Cash and cash equivalents, end of year | $ | 3,309 | | | $ | 5,025 | | | $ | 3,084 | |
|
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| Cash Flows from Operating Activities | | | | | | |
| Net income | $ | 41,823 |
| | $ | 31,184 |
| | $ | 26,191 |
| |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | 11,308 |
| | 11,253 |
| | 12,382 |
| |
| Gain on sale of equity method investment | (11,381 | ) | | — |
| | — |
| |
| Gain on property insurance recoveries | — |
| | (230 | ) | | — |
| |
| Gain on sale of assets | — |
| | (872 | ) | | — |
| |
| Share-based compensation | 2,574 |
| | 2,402 |
| | 1,414 |
| |
| Equity method investment (earnings) loss | 348 |
| | (4,036 | ) | | (6,102 | ) | |
| Distribution received from equity method investee | 7,131 |
| | 3,300 |
| | — |
| |
| Deferred income taxes, including change in valuation allowance | (3,420 | ) | | 681 |
| | 1,349 |
| |
| Other, net | 61 |
| | — |
| | 453 |
| |
| Changes in operating assets and liabilities: | | | | | | |
| Receivables, net | (8,262 | ) | | 4,585 |
| | 2,002 |
| |
| Inventory | (14,291 | ) | | (20,106 | ) | | (24,260 | ) | |
| Prepaid expenses | (498 | ) | | (622 | ) | | 117 |
| |
| Refundable income taxes | 725 |
| | (3,390 | ) | | 1,073 |
| |
| Accounts payable | 9,540 |
| | (3,178 | ) | | 3,653 |
| |
| Accounts payable to affiliate, net | (3,349 | ) | | 1,058 |
| | (1,042 | ) | |
| Accrued expenses | 2,278 |
| | (1,407 | ) | | 2,351 |
| |
| Deferred credits | (827 | ) | | (424 | ) | | (697 | ) | |
| Accrued retirement, health, and life insurance benefits | (289 | ) | | (477 | ) | | (703 | ) | |
| Other, net | — |
| | — |
| | 481 |
| |
| Net cash provided by operating activities | 33,471 |
| | 19,721 |
| | 18,662 |
| |
| | | | | | | |
| Cash Flows from Investing Activities | | | | | | |
| Additions to property, plant, and equipment | (21,055 | ) | | (17,922 | ) | | (30,526 | ) | |
| Divestiture of equity method investment, net | 22,832 |
| | 351 |
| | — |
| |
| Proceeds from property insurance recoveries | — |
| | 230 |
| | — |
| |
| Proceeds from sale of property and other | — |
| | 1,209 |
| | — |
| |
Acquisition of George Remus® | — |
| | (1,551 | ) | | — |
| |
| Net cash provided by (used in) investing activities | 1,777 |
| | (17,683 | ) | | (30,526 | ) | |
| | | | | | | |
| Cash Flows from Financing Activities | | | | | | |
| Payment of dividends | (17,380 | ) | | (2,066 | ) | | (1,087 | ) | |
| Purchase of treasury stock | (4,663 | ) | | (1,518 | ) | | (15,408 | ) | |
| Loan fees incurred with borrowings | (377 | ) | | (114 | ) | | (348 | ) | |
| Principal payments on long-term debt | (358 | ) | | (2,346 | ) | | (1,641 | ) | |
| Proceeds on long-term debt | 20,000 |
| | — |
| | 2,700 |
| |
| Proceeds from credit agreement | 25,930 |
| | 27,184 |
| | 26,092 |
| |
| Principal payments on credit agreement | (56,885 | ) | | (22,356 | ) | | (3,338 | ) | |
| Net cash provided by (used in) financing activities | (33,733 | ) | | (1,216 | ) | | 6,970 |
| |
| | | | | | | |
| Increase (decrease) in cash | 1,515 |
| | 822 |
| | (4,894 | ) | |
| Cash, beginning of year | 1,569 |
| | 747 |
| | 5,641 |
| |
| Cash, end of year | $ | 3,084 |
| | $ | 1,569 |
| | $ | 747 |
| |
See Accompanying Notes to Consolidated Financial Statements
MGP INGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Capital
Stock
Preferred | | Issued
Common | | Additional
Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Treasury
Stock | | Total |
| Balance, December 31, 2016 | $ | 4 | | | $ | 6,715 | | | $ | 14,279 | | | $ | 142,652 | | | $ | (373) | | | $ | (16,985) | | | $ | 146,292 | |
| Comprehensive income: | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | 41,823 | | | — | | | — | | | 41,823 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 62 | | | — | | | 62 | |
| Dividends and dividend equivalents of $1.01 per common share and per restricted stock unit, net of estimated forfeitures | — | | | — | | | — | | | (17,346) | | | — | | | — | | | (17,346) | |
| Share-based compensation | — | | | — | | | 2,065 | | | — | | | — | | | — | | | 2,065 | |
| Stock shares awarded, forfeited or vested | | — | | | — | | | (2,432) | | | — | | | — | | | 2,929 | | | 497 | |
| Stock shares repurchased | | — | | | — | | | — | | | — | | | — | | | (4,663) | | | (4,663) | |
| Balance, December 31, 2017 | 4 | | | 6,715 | | | 13,912 | | | 167,129 | | | (311) | | | (18,719) | | | 168,730 | |
| Comprehensive income: | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | 37,284 | | | — | | | — | | | 37,284 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 147 | | | — | | | 147 | |
| Dividends and dividend equivalents of $0.32 per common share and per restricted stock unit, net of estimated forfeitures | — | | | — | | | — | | | (5,499) | | | — | | | — | | | (5,499) | |
| Share-based compensation | — | | | — | | | 2,687 | | | — | | | — | | | — | | | 2,687 | |
| Stock shares awarded, forfeited or vested | | — | | | — | | | (1,224) | | | — | | | — | | | 1,640 | | | 416 | |
| Stock shares repurchased | | — | | | — | | | — | | | — | | | — | | | (2,324) | | | (2,324) | |
| Balance, December 31, 2018 | 4 | | | 6,715 | | | 15,375 | | | 198,914 | | | (164) | | | (19,403) | | | 201,441 | |
| Comprehensive income (loss): | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | 38,793 | | | — | | | — | | | 38,793 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (151) | | | — | | | (151) | |
| Dividends and dividend equivalents of $0.40 per common share and per restricted stock unit, net of estimated forfeitures | — | | | — | | | — | | | (6,854) | | | — | | | — | | | (6,854) | |
| Share-based compensation | — | | | — | | | 2,453 | | | — | | | — | | | — | | | 2,453 | |
| Stock shares awarded, forfeited or vested | | — | | | — | | | (3,799) | | | — | | | — | | | 4,650 | | | 851 | |
| Stock shares repurchased | | — | | | — | | | — | | | — | | | — | | | (5,489) | | | (5,489) | |
| Adjustment related to Accounting Standards Update 2018-02 adoption | | — | | | — | | | — | | | (69) | | | 69 | | | — | | | — | |
| Balance, December 31, 2019 | $ | 4 | | | $ | 6,715 | | | $ | 14,029 | | | $ | 230,784 | | | $ | (246) | | | $ | (20,242) | | | $ | 231,044 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Capital Stock Preferred | | Issued Common | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total |
| Balance, December 31, 2014 | $ | 4 |
|
| $ | 6,715 |
|
| $ | 10,931 |
|
| $ | 88,427 |
|
| $ | (732 | ) |
| $ | (980 | ) |
| $ | 104,365 |
|
| Comprehensive income: | | | | | | | | | | | | | |
| Net income | — |
| | — |
| | — |
| | 26,191 |
| | — |
| | — |
| | 26,191 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 232 |
| | — |
| | 232 |
|
| Dividends and dividend equivalents, net of estimated forfeitures | — |
| | — |
| | — |
| | (1,087 | ) | | — |
| | — |
| | (1,087 | ) |
| Share-based compensation | — |
| | — |
| | 999 |
| | — |
| | — |
| | — |
| | 999 |
|
| Excess tax benefits | — |
| | — |
| | 453 |
| | — |
| | — |
| | — |
| | 453 |
|
| Stock shares awarded, forfeited or vested | — |
| | — |
| | — |
| | — |
| | — |
| | 415 |
| | 415 |
|
| Stock shares repurchased | — |
| | — |
| | — |
| | — |
| | — |
| | (15,408 | ) | | (15,408 | ) |
| Balance, December 31, 2015 | $ | 4 |
| | $ | 6,715 |
| | $ | 12,383 |
| | $ | 113,531 |
| | $ | (500 | ) | | $ | (15,973 | ) | | $ | 116,160 |
|
| Comprehensive income: | | | | | | | | | | | | | |
| Net income | — |
| | — |
| — |
| — |
| | 31,184 |
| | — |
| | — |
| | 31,184 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 127 |
| | — |
| | 127 |
|
| Dividends and dividend equivalents, net of estimated forfeitures | — |
| | — |
| | — |
| | (2,063 | ) | | — |
| | — |
| | (2,063 | ) |
| Share-based compensation | — |
| | — |
| | 1,896 |
| | — |
| | — |
| | — |
| | 1,896 |
|
| Stock shares awarded, forfeited or vested | — |
| | — |
| | — |
| | — |
| | — |
| | 506 |
| | 506 |
|
| Stock shares repurchased | — |
| | — |
| | — |
| | — |
| | — |
| | (1,518 | ) | | (1,518 | ) |
| Balance, December 31, 2016 | $ | 4 |
|
| $ | 6,715 |
|
| $ | 14,279 |
|
| $ | 142,652 |
|
| $ | (373 | ) |
| $ | (16,985 | ) |
| $ | 146,292 |
|
| Comprehensive income: | | | | | | | | | | | | | |
| Net income | — |
| | — |
| — |
| — |
| | 41,823 |
| | — |
| | — |
| | 41,823 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 62 |
| | — |
| | 62 |
|
| Dividends and dividend equivalents, net of estimated forfeitures | — |
| | — |
| | — |
| | (17,346 | ) | | — |
| | — |
| | (17,346 | ) |
| Share-based compensation | — |
| | — |
| | 2,065 |
| | — |
| | — |
| | — |
| | 2,065 |
|
| Stock shares awarded, forfeited or vested | — |
| | — |
| | (2,432 | ) | | — |
| | — |
| | 2,929 |
| | 497 |
|
| Stock shares repurchased | — |
| | — |
| | — |
| | — |
| | — |
| | (4,663 | ) | | (4,663 | ) |
| Balance, December 31, 2017 | $ | 4 |
| | $ | 6,715 |
| | $ | 13,912 |
| | $ | 167,129 |
| | $ | (311 | ) | | $ | (18,719 | ) | | $ | 168,730 |
|
See Accompanying Notes to Consolidated Financial Statements
MGP INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise noted)
|
| |
NOTE 1: | NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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’sCompany'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'sCompany’s sales are made directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries.
Principles of Consolidation.The Company has two reportable segments: distillery products and ingredient solutions. The distillery products segment consists primarily of food grade alcohol, and to a much lesser extent, fuel grade alcohol, distillers feed, and corn oil. Distillers feed, fuel grade alcohol, and corn oil are co-productsconsolidated financial statements include the accounts of the Company's distillery operations. The ingredient solutions segment products primarily consist of specialty starches, specialty proteins, commodity starches,Company and commodity wheat proteins (or commodity vital wheat gluten).
The Company sells its products on normal credit termswholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the 2017 and 2018 consolidated financial statements have been reclassified to customers in a variety of industries located primarily throughoutconform to the United States. The Company operates facilities in Atchison, Kansas and in Lawrenceburg and Greendale, Indiana.2019 presentation.
Use of Estimates. The financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America ("GAAP"). The preparation of 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 significant demands on management’smanagement'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.
Principles of Consolidation. The 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.
Cash and Cash Equivalents. Short-term liquid investments with an initial maturity of 90 days or less are considered cash equivalents. Cash equivalents are stated at cost, which approximates market value due to the relatively short maturity of these instruments.
Receivables. Receivables are stated at the amounts billed to customers. The Company provides an allowance for estimated doubtful accounts. This allowance is based upon a review of outstanding receivables, historical collection information, and an evaluation of existing economic conditions impacting the Company’s customers. Accounts receivable are ordinarily due 30 days after the issuance of the invoice. Receivables are considered delinquent after 30 days past the due date. These delinquent receivables are monitored and are charged to the allowance for doubtful accounts based upon an evaluation of individual circumstances of the customer. Account balances are written off after collection efforts have been made and potential recovery is considered remote.
Inventory. Inventory includes finished goods, raw materials in the form of agricultural commodities used in the production process, and certain maintenance and repair items. Bourbons 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 the 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.
Properties, Depreciation, and Amortization. Property, plant, and equipment are typically stated at cost. Additions, including those that increase the life or utility of an asset, are capitalized and all properties are depreciated over their estimated remaining useful lives. Depreciation and amortization are computed using the straight line method over the following estimated useful lives:
|
| | | | |
Buildings and improvements(a) | 2010 – 4030 years |
TransportationMachinery and equipment | 3 – 10 years |
| Office furniture and equipment | 5 – 610 years |
MachineryComputer equipment and equipmentsoftware | 103 – 125 years |
| Motor vehicles | 5 years |
(a)Leasehold improvements are the shorter of economic useful life or life of lease
Maintenance costs are expensed as incurred. The cost of property, plant, and equipment sold, retired, or otherwise disposed of, as well as related accumulated depreciation and amortization, are eliminated from the property accounts with related gains and losses reflected in the Consolidated Statements of Income. The Company capitalizes interest costs associated with significant construction projects. Total interest incurred for 2017, 2016,2019, 2018, and 20152017 is noted below:
| | | | | Year Ended December 31, | | Year Ended December 31, | |
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| Interest costs charged to expense | | $ | 1,184 |
| | $ | 1,294 |
| | $ | 534 |
| Interest costs charged to expense | | $ | 1,305 | | | $ | 1,168 | | | $ | 1,184 | |
| Plus: Interest cost capitalized | | 293 |
| | 198 |
| | 297 |
| Plus: Interest cost capitalized | | 575 | | | 562 | | | 293 | |
| Total | | $ | 1,477 |
|
| $ | 1,492 |
| | $ | 831 |
| Total | | $ | 1,880 | | | $ | 1,730 | | | $ | 1,477 | |
Revenue Recognition. As a result of the adoption of Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers and related amendments(Topic 606) on January 1, 2018, the Company changed its accounting policy for revenue recognition (see Note 3). 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 that 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 been 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 service 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.
EPS. Basic and diluted EPS is 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 each year or period.
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.
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. The Company considers many factors when evaluating and estimating its tax positions, which may require periodic adjustment and which may not accurately anticipate actual outcomes. It is reasonably possible that amounts reserved for potential exposure could change significantly as a result of the conclusion of tax examinations and, accordingly, materially affect the Company’s reported net income after tax.
Revenue Recognition. Except as discussed below, revenue from the sale of the Company’s products is recognized at the point in time products are delivered to customers according to shipping terms and when title and risk of loss have transferred.
The Company’s 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 the Company’s customers. This product must meet customer acceptance specifications, 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 the Company recognizing revenue for this product. Separate warehousing agreements are maintained for customers who store their product with the Company and warehouse services revenue is recognized over time as the services are provided.
Sales include customer paid freight costs billed to customers of $14,761, $13,974, and $14,498 for 2017, 2016, and 2015, respectively.
Cost of Sales. Cost of sales is primarily comprised of the direct materials and supplies consumed in the manufacturing of product, as well as manufacturing labor, depreciation expense, and direct overhead expense necessary to acquire and convert the purchased materials and supplies into finished product. Cost of sales also includes the cost to distribute products to customers, inbound freight costs, internal transfer costs, warehousing costs, inspection costs, and other shipping and handling activity.
Excise Taxes. Certain sales of the Company are subject to excise taxes, which the Company collects from customers and remits to governmental authorities. The Company presents these excise taxes using the net method (excluded from sales). For excise taxes paid by customers directly to governmental authorities, there is no revenue or expense recognized in the Company's Consolidated Statements of Income.
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 termshort-term financial instruments include cash and cash equivalents, accounts receivable and accounts payable. The carrying value of the short termshort-term financial instruments approximates the fair value due to their short termshort-term nature. These financial instruments have no stated maturities or the financial instruments have short termshort-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 $24,838$42,534 and $37,412$32,018 at December 31, 20172019 and 2016,2018, respectively. The financial statement carrying value (including unamortized loan fees) was $24,554$41,060 and $36,001$32,014 at December 31, 20172019 and 2016,2018, respectively. These fair values are considered Level 2 under the fair value hierarchy.
Stock OptionsDerivative Instruments. Certain commodities the Company uses in its production process, or input costs, exposes it to market price risk due to volatility in the prices for those commodities. Through the Company’s grain supply contracts for its Atchison and Restricted Stock Awards.Lawrenceburg facilities, its wheat flour supply contract for the Atchison facility, and its natural gas contracts for both facilities, it purchases grain, wheat flour, and natural gas, respectively, for delivery from one to 24 months into the future at negotiated prices. The Company has share-based employee compensation plans primarilydetermined that the firm commitments to purchase grain, wheat flour, and natural gas under the terms of its supply contracts meets the normal purchases and sales exception as defined under ASC 815, Derivatives and Hedging, because the quantities involved are for amounts to be consumed within the normal expected production process.
Recently Adopted Accounting Standard Updates. The Company adopted ASU 2016-02, Leases (Topic 842) and subsequent updates, as of January 1, 2019, using the modified retrospective approach (See Note 8). 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 formCompany recording Operating lease right-of-use assets and Operating lease liabilities in its Consolidated Balance Sheet of restricted common stock$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 ("restricted stock"FASB") issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, restricted stock units ("RSUs")which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and stock options, which are described more fully in Note 9.Jobs Act (the “Tax Act”). The Company recognizesadopted this guidance on January 1, 2019. We elected to reclassify the cost of share-based payments over the vesting period based on the grant date fair valueincome tax effects of the award.Tax Act from accumulated other comprehensive income to retained earnings which resulted in an immaterial effect on its consolidated financial results and disclosures.
RecentIn June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, Pronouncements. 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 consolidated financial results and disclosures.
Recently Issued Accounting Pronouncement. In FebruaryJune 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, Leases, which aims to make leasing activities more transparentASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and comparablesubsequent updates. The accounting standard changes the methodology for measuring credit losses on financial instruments and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. Thisthe timing when such losses are recorded. ASU 2016-13 is effective for public business entities for interim and annual reporting periodscompanies in fiscal years beginning after December 15, 2019. The guidance is to be adopted using the modified retrospective approach. The Company is still evaluating the effect that ASU 2016-13 will have on the Company, however we do not expect this to have a material impact to the consolidated financial statements and related disclosures.
In August 2018, withthe FASB issued ASU 2018-13, Fair Value Measurement (Topic 820),which modifies the disclosure requirements on fair value measurements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of this update. The Company is still evaluating the effect that ASU 2018-13 will have on the Company, however we do not expect this to have a material impact to the consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which clarifies and simplifies certain aspects of accounting for income taxes. This guidance is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The Company is currentlystill evaluating the impacteffect that the adoption of ASU 2016-022019-12 will have on its consolidated financial statements and related disclosures. At December 31, 2017, the Company had various machinery and equipment operating leases, as well as operating leases for 223 rail cars and one office space.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will replace numerous requirements in GAAP, including industry specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers.
The core principle of the new standard, as well as the updates, is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company will adopt the requirements of the new standard in the first quarter of 2018 using the modified retrospective transition method.
In 2016, the Company established an implementation team consisting of internal and external representatives. The implementation team assessed the impact the new standard will have on the consolidated financial statements and is evaluating the impact of the new standard and gathering data and information for the expanded revenue disclosure required. The scoping for the assessment is complete and the testing of individual contracts is also complete. Assessment findings have been compiled and have been reviewed. In addition, the implementation team identified and will implement appropriate changes to business processes, systems, and/or controls to support recognition and disclosure under the new standard. The implementation team has reported findings and progress of the project to management and the Audit Committee on a frequent basis through the effective date. The adoption of ASU 2014-09 will not result in a difference in the timing of the recognition of costs to obtain and/or fulfill a contract; and the adoption of ASU 2014-09 will not result in a material difference in the amount and/or timing of revenue recognition.
|
| |
NOTE 2: | NOTE 2: OTHER BALANCE SHEET CAPTIONS |
Inventory.
| | | | December 31, | | December 31, | |
| | 2017 | | 2016 | | 2019 | | 2018 |
| Finished goods | $ | 13,284 |
| | $ | 14,002 |
| Finished goods | $ | 16,654 | | | $ | 17,296 | |
| Barreled distillate (bourbons and whiskeys) | 65,726 |
| | 50,941 |
| Barreled distillate (bourbons and whiskeys) | 104,249 | | | 76,374 | |
| Raw materials | 3,954 |
| | 4,274 |
| Raw materials | 4,920 | | | 4,906 | |
| Work in process | 1,935 |
| | 1,933 |
| Work in process | 1,766 | | | 1,550 | |
| Maintenance materials | 7,256 |
| | 6,231 |
| Maintenance materials | 8,200 | | | 7,541 | |
| Other | 994 |
| | 1,477 |
| Other | 1,142 | | | 1,102 | |
| Total | $ | 93,149 |
| | $ | 78,858 |
| Total | $ | 136,931 | | | $ | 108,769 | |
Property, plant, and equipment, net.
| | | | | | | | | | | |
| December 31, | | |
| | 2019 | | 2018 |
| Land, buildings, and improvements | $ | 105,257 | | | $ | 90,992 | |
| Transportation equipment | 3,317 | | | 3,308 | |
| Machinery and equipment | 190,930 | | | 184,779 | |
| Construction in progress | 14,454 | | | 16,814 | |
| Property, plant, and equipment, at cost | 313,958 | | | 295,893 | |
| Less accumulated depreciation and amortization | (185,539) | | | (175,105) | |
| Property, plant, and equipment, net | $ | 128,419 | | | $ | 120,788 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Land, buildings, and improvements | $ | 72,223 |
| | $ | 67,487 |
|
| Transportation equipment | 3,286 |
| | 3,253 |
|
| Machinery and equipment | 175,371 |
| | 164,871 |
|
| Construction in progress | 16,408 |
| | 10,608 |
|
| Property, plant, and equipment, at cost | 267,288 |
| | 246,219 |
|
| Less accumulated depreciation and amortization | (164,237 | ) | | (153,428 | ) |
| Property, plant, and equipment, net | $ | 103,051 |
| | $ | 92,791 |
|
Accrued expenses.
| | | | | | | | | | | | | |
| December 31, | | | | |
| | 2019 | | 2018 | | |
| Employee benefit plans | $ | 590 | | | $ | 1,288 | | | |
| Salaries and wages | 3,189 | | | 7,099 | | | |
| Property taxes | 1,445 | | | 1,248 | | | |
| Current operating lease liabilities | 2,244 | | | — | | | |
| Other | 1,915 | | | 2,079 | | | |
| Total | $ | 9,383 | | | $ | 11,714 | | | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Employee benefit plans | $ | 962 |
| | $ | 820 |
|
| Salaries and wages | 7,452 |
| | 5,641 |
|
| Property taxes | 1,185 |
| | 824 |
|
| Other | 1,572 |
| | 1,660 |
|
| Total | $ | 11,171 |
| | $ | 8,945 |
|
Adoption of Topic 606, Revenue From Contracts with Customers. On January 1, 2018, the Company adopted Topic 606, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Financial results for the years ended December 31, 2019 and 2018 are presented under Topic 606, while financial results for the year ended December 31, 2017 are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605, Revenue Recognition. There was no adjustment to opening retained earnings during the year ended December 31, 2018 and no differences to disclosure to reconcile financial statement activity as reported under Topic 606 to ASC 605 for the year ended December 31, 2018.
Disaggregation of Sales.
The following table presents the Company's sales disaggregated by segment and major products and services.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2019 | | 2018 | | 2017(a) |
| Distillery Products | | | | | |
| Brown Goods | $ | 107,190 | | | $ | 125,857 | | | $ | 113,413 | |
| White Goods | 62,862 | | | 62,574 | | | 64,585 | |
| Premium beverage alcohol | 170,052 | | | 188,431 | | | 177,998 | |
| Industrial alcohol | 79,833 | | | 80,650 | | | 76,636 | |
| Food grade alcohol | 249,885 | | | 269,081 | | | 254,634 | |
| Fuel grade alcohol | 5,949 | | | 6,347 | | | 6,368 | |
| Distillers feed and related co-products | 26,743 | | | 25,698 | | | 19,332 | |
| Warehouse services | 14,656 | | | 12,929 | | | 10,674 | |
| Total Distillery Products | 297,233 | | | 314,055 | | | 291,008 | |
| | | | | |
| Ingredient Solutions | | | | | |
| Specialty wheat starches | 30,816 | | | 28,594 | | | 28,092 | |
| Specialty wheat proteins | 22,359 | | | 21,098 | | | 19,458 | |
| Commodity wheat starch | 9,628 | | | 9,223 | | | 8,288 | |
| Commodity wheat protein | 2,709 | | | 3,119 | | | 602 | |
| Total Ingredient Solutions | 65,512 | | | 62,034 | | | 56,440 | |
| | | | | |
| Total sales | $ | 362,745 | | | $ | 376,089 | | | $ | 347,448 | |
(a) Prior year amounts were not adjusted upon adoption of Topic 606.
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: | NOTE 4: EQUITY METHOD INVESTMENTS |
As of December 31, 2017,2019 and 2018, the Company had no investments accounted for using theCompany’s equity method of accounting.investments were 0.
Illinois Corn Processing ("ICP") Investment
On July 3,Investment. In 2017, the Company completed the sale of its 30 percent equity ownership interest in ICP to Pacific Ethanol Central, LLC ("Pacific Ethanol"), consistent with an Agreement and Plan of Merger ("Merger Agreement") entered into on June 26, 2017.. The total transaction proceeds to the Company from the ICP sale transaction represented a return of its investment in ICP of $22,832 (net of fees and including additional dividends), which included a gain on sale of equity method investment of $11,381 (before tax), on the Company'sCompany’s 2017 Consolidated StatementsStatement of Income.
The Merger Agreement also contemplated a special distribution of all of ICP’s cash and cash equivalents to equity owners prior to the closing. Onclosing, which
resulted in the Company receiving cash dividend distributions from ICP during June 282017 totaling $7,430 that reduced its 30 percent ownership interest. The Company’s equity method investment losses for the year ended December 31, 2017 was $348.
Related Party Transactions. In 2019 and 2018, Pacific Ethanol (formerly ICP) was not a related party of the Company. During 2017, related party sales to ICP were $17,672 which were included in Sales on the Company's Consolidated Statements of Income. During 2017, related party purchases by the Company from ICP were approximately $18,425, that were included in Cost of sales on the Company’s Consolidated Statements of Income. In June 30, 2017, the Company received cash dividend distributions from ICP of $6,600 and $830, respectively, that reduced its investment in ICP.totaling $7,430, as mentioned above.
On February 26, 2016, the Company received a cash dividend distribution from ICP of $3,300 that reduced its investment in ICP as of December 31, 2016.
DMI Investment
On December 29, 2014, the Company gave notice to DMI and to the Company's partner in DMI, Crespel and Dieters GmbH & Co. KG ("C&D"), to terminate the joint venture effective June 30, 2015. On June 22, 2015, a termination agreement was executed by and between the Company, DMI, and C&D to dissolve DMI effective June 30, 2015. Commencing on June 30, 2015, normal operations for DMI ceased and a one year winding down process under German law began on October 29, 2015. On December 23, 2016, the Company received its portion of the remaining DMI liquidation proceeds, a return of its investment, in the amount of $351.
Related Party Transactions. See Note 14 for discussion of related party transactions.
Realizability of investments. No other than temporary impairments were recorded during 2017, 2016, and 2015 for the Company's equity method investments.
Summary Financial Information. Condensed financial information of the Company’s equity method investment in ICP:ICP for the year ended December 31, 2017:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| ICP’s Operating results: | 2017 | | 2016 | | 2015 |
Net sales(a) | $ | 78,062 |
| | $ | 177,401 |
| | $ | 166,905 |
|
Cost of sales and expenses(b) | (79,224 | ) | | (163,837 | ) | | (146,098 | ) |
| Net income | $ | (1,162 | ) | | $ | 13,564 |
| (c) | $ | 20,807 |
|
| | | | | |
(a)
| Includes related party sales to MGPI of $17,672, $27,675, and $38,941 for 2017, 2016, and 2015, respectively.Year Ended December 31, |
| ICP’s Operating results: | 2017 |
| Sales | $ | 78,062 | |
Cost of sales and expenses(b)(a) | Includes depreciation and amortization of $1,720, $3,030, and $2,634 for 2017, 2016, and 2015, respectively. |
| (79,224) | |
(c)
Net loss | Includes business interruption insurance proceeds of $4,112 for 2015. |
The Company’s equity method investment earnings (losses):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| ICP (30% interest) | $ | (348 | ) | | $ | 4,069 |
| | $ | 6,242 |
|
| DMI (50% interest) | — |
| | (33 | ) | | (140 | ) |
| Total | $ | (348 | ) | | $ | 4,036 |
| | $ | 6,102 |
|
The Company’s equity method investments:
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| ICP (30% interest) | $ | — |
| | $ | 18,934 |
|
|
| $ | |
NOTE 4:(1,162) | GOODWILL AND OTHER INTANGIBLE ASSETS |
Goodwill
(a)Includes depreciation and intangible assets are componentsamortization of other assetson the Consolidated Balance Sheets:$1,720 for 2017.
|
| | | | | | | | | |
| | | December 31, | |
| | | 2017 | | 2016 | |
| Goodwill | | $ | 1,500 |
| | $ | 1,500 |
| |
| Brand name (indefinite lived) | | 350 |
| | 350 |
| |
| Other intangible asset, net | | 28 |
| | — |
| |
| Balance as of December 31, 2017 | | $ | 1,878 |
| | $ | 1,850 |
| |
|
| |
NOTE 5: | NOTE 5: CORPORATE BORROWINGS |
Indebtedness Outstanding.The following table presents the Company’s outstanding indebtedness
| | | | | | | | | | | | | |
| | December 31, | | | | |
| 2019 | | 2018 | | |
Credit Agreement - Revolver, 3.19% (variable rate) due 2022(a) | $ | 300 | | | $ | 11,000 | | | |
Secured Promissory Note, 3.71% (fixed rate) due 2022(a) | 1,208 | | | 1,594 | | | |
Prudential Note Purchase Agreement, 3.53% (fixed rate) due 2027(a) | 20,000 | | | 20,000 | | | |
Prudential Note Purchase Agreement, 3.80% (fixed rate) due 2029(a) | 20,000 | | | — | | | |
| Total indebtedness outstanding | 41,508 | | | 32,594 | | | |
Less unamortized loan fees(b) | (448) | | | (580) | | | |
| Total indebtedness outstanding, net | 41,060 | | | 32,014 | | | |
| Less current maturities of long-term debt | (401) | | | (386) | | | |
| Long-term debt | $ | 40,659 | | | $ | 31,628 | | | |
|
| | | | | | | | | |
| | | December 31, | |
Description(a) | | 2017 | | 2016 | |
| Credit Agreement - Revolver, 2.935% (variable rate) due 2022 | | $ | 3,298 |
| | $ | 16,000 |
| (c) |
| Credit Agreement - Fixed Asset Sub-Line term loan (closed August 23, 2017 - see below) | | — |
| | 5,253 |
| (c) |
| Credit Agreement - Term Loan (closed August 23, 2017 - see below) | | — |
| | 13,000 |
| (c) |
| Secured Promissory Note, 3.71% (fixed rate) due 2022 | | 1,966 |
| | 2,324 |
| |
| Prudential Note Purchase Agreement, 3.53% (fixed rate) due 2027 | | 20,000 |
| | — |
| |
| Total indebtedness outstanding | | 25,264 |
| | 36,577 |
| |
Less unamortized loan fees(b) | | (710 | ) | | (576 | ) | |
| Total indebtedness outstanding, net | | 24,554 |
| | 36,001 |
| |
| Less current maturities of long-term debt | | (372 | ) | | (4,359 | ) | |
| Long-term debt | | $ | 24,182 |
| | $ | 31,642 |
| |
(a)(a) Interest rates are as of December 31, 2017.2019.
(b)(b) Loan fees are being amortized over the life of the Credit Agreement and Note Purchase Agreement.
(c) The 2016 Credit Agreement amounts relate to the Third Amended and Restated Credit Agreement detailed below.
Credit Agreement and Note Purchase Agreement.Agreements. On August 23, 2017, the Company entered into a new credit agreement (the "Credit Agreement") with Wells Fargo Bank, National Association. The Credit Agreement replaced the Company’s Third Amended and Restated Credit Agreement, which included a revolver, a fixed asset sub-line term loan, and a term loan.Association ("Wells Fargo"). The Credit Agreement 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 is secured by substantially all assets, excluding real property.
The Credit Agreement includes certain requirements and covenants, which the Company was in compliance with at December 31, 2017.2019. The Company incurred $183 of0 new loan fees related to the Credit Agreement during 2017.2019. The unamortized balance of total loan fees related to the Credit Agreement was $523$299 at December 31, 20172019 and is being amortized over the life of the Credit Agreement.
As of December 31, 2017,2019, the Company'sCompany’s total outstanding borrowings under the Credit Agreement were $3,298$300 leaving $146,702$149,700 available. The interest rate for the borrowings of the Credit Agreement at December 31, 20172019 was 2.93.2 percent.
On August 23, 2017, the Company also entered into a Note Purchase and Private Shelf Agreement (the "Note Purchase Agreement") with PGIM, Inc. ("Prudential Capital Group"), an affiliate of Prudential Financial, Inc., and certain affiliates of
PGIM, Inc. The Note Purchase Agreement provides for the issuance of up to $75,000 of Senior Secured Notes, and the Company issued $20,000 of Senior Secured Notes with a maturity date of August 23, 2027. The Senior Secured Notes bear interest at a rate of 3.5 percent per year. On April 30, 2019, the Company issued $20,000 of additional Senior Secured Notes with a maturity date of April 30, 2029. The Senior Secured Notes bear interest at a rate of 3.8 percent per year. The Note Purchase Agreement includes certain requirements and covenants, which the
Company was in compliance with at December 31, 2017.2019. The Company incurred $194 of0 new loan fees related to the Note Purchase Agreement during 2017.2019. The unamortized balance of total loan fees related to the Note Purchase Agreement was $187$149 at December 31, 20172019 and is being amortized over the life of the Note Purchase Agreement. The Note Purchase Agreement is secured by substantially all assets, excluding real property.
Debt Maturities.
Aggregate amount of maturities for long-term debt as of December 31, 2019 are as follows:
| | | | | |
| 2020 | $ | 401 | |
| 2021 | 2,016 | |
| 2022 | 3,891 | |
| 2023 | 5,600 | |
| 2024 | 6,400 | |
| Thereafter | 23,200 | |
| Total | $ | 41,508 | |
NOTE 6: INCOME TAXES
|
| | | | | |
| Year Ending December 31, | | | |
| 2018 | | $ | 372 |
| |
| 2019 | | 386 |
| |
| 2020 | | 400 |
| |
| 2021 | | 2,016 |
| |
| 2022 | | 6,890 |
| |
| Thereafter | | 15,200 |
| |
| Total | | $ | 25,264 |
| |
Income tax expense is composed of the following:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Current: | | | | | |
| Federal | $ | 6,426 | | | $ | 8,844 | | | $ | 14,020 | |
| State | 412 | | | 1,317 | | | 379 | |
| | 6,838 | | | 10,161 | | | 14,399 | |
| Deferred: | | | | | |
| Federal | 352 | | | 55 | | | (3,764) | |
| State | (46) | | | 1,480 | | | 300 | |
| | 306 | | | 1,535 | | | (3,464) | |
| Total | $ | 7,144 | | | $ | 11,696 | | | $ | 10,935 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Current: | | | | | |
| Federal | $ | 14,020 |
| | $ | 12,637 |
| | $ | 8,954 |
|
| State | 379 |
| | 342 |
| | 1,003 |
|
| | 14,399 |
| | 12,979 |
| | 9,957 |
|
| Deferred: | | | | | |
| Federal | (3,764 | ) | | (254 | ) | | 3,174 |
|
| State | 300 |
| | 808 |
| | (904 | ) |
| | (3,464 | ) | | 554 |
| | 2,270 |
|
| Total | $ | 10,935 |
| | $ | 13,533 |
| | $ | 12,227 |
|
Income tax expense also included tax expense allocated to comprehensive income for 2019, 2018, and 2017 2016,of $14, $73, and 2015, of $37, $84, and $83, respectively (see the Consolidated Statements of Comprehensive Income).
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act, (the "Tax Act"), resulting in significant modifications to the then existing law, that impactedimpacting the measurement of income taxes for 2017. The Tax Act established new tax laws or modified existing tax laws starting in 2018, including but not limited to, (1) reducing the federal corporate income tax rate to a flat 21 percent rate, (2) eliminatingyear ended December 31, 2017, and the corporate alternative minimum tax, (3) repealing the domestic production activity deduction, (4) adding a new limitation on deductible interest, (5) changing the limitations on the deductibility of certain executive compensation, and, (6) starting in the quarter ended September 30, 2017, changing the bonus depreciation rules to allow full expensing of qualified property.
The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification 740 - Income Taxes ("ASC 740"). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for the income tax effects of the Tax Act is incomplete, but it can determine a reasonable estimate, it must record a provisional estimate in the financial statements.
years thereafter. The Company following guidance in SAB 118, recorded a provisional discrete net tax benefit in its Consolidated Statement of Income through net income of $3,343 in the year ended December 31, 2017. This net benefit was driven by a re-measurement of the carrying value of its deferred tax assets and liabilities because of the corporate rate reduction. TheThis net benefit provided a 6.3 percent reduction in the Company’s accountingeffective tax rate for all of the elements of the Tax Act is not complete. However, the Company was able to make reasonable estimates and, therefore, recorded provisional estimates. The ultimate impact of the Tax Act may differ from the provisional amount, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company made, additional regulatory guidance that may issued, and action the Company may take as a result of the Tax Act. The accounting is expected to be complete when the Company's 2017 United States corporate income tax return is filed in 2018.year ended December 31, 2017.
A reconciliation of income tax expense at the normal statutory federal rate to income tax expense included in the accompanying Consolidated Statements of Income:Income is below:
| | | | Year Ended December 31, | | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| "Expected" provision at federal statutory rate | $ | 18,465 |
| | $ | 15,651 |
| | $ | 13,446 |
| "Expected" provision at federal statutory rate | $ | 9,654 | | | $ | 10,286 | | | $ | 18,465 | |
| State income taxes, net | 1,612 |
| | 1,672 |
| | 1,714 |
| |
State income taxes, net(a) | | State income taxes, net(a) | 1,540 | | | 2,029 | | | 1,612 | |
| Change in valuation allowance | (578 | ) | | (718 | ) | | (2,385 | ) | Change in valuation allowance | (168) | | | 1,304 | | | (578) | |
| Domestic production activity deduction | (957 | ) | | (1,247 | ) | | (1,002 | ) | Domestic production activity deduction | — | | | — | | | (957) | |
Share-based compensation(a) | (4,254 | ) | | (1,408 | ) | | N/A |
| Share-based compensation(a) | (2,877) | | | (1,201) | | | (4,254) | |
| Compensation limits | 931 |
| | — |
| | — |
| Compensation limits | 148 | | | — | | | 931 | |
| Federal and state tax credits | (1,058 | ) | | (1,065 | ) | | — |
| Federal and state tax credits | (1,302) | | | (807) | | | (1,058) | |
| Tax benefit from the Tax Act | (3,343 | ) | | — |
| | — |
| Tax benefit from the Tax Act | — | | | — | | | (3,343) | |
| Other | 117 |
| | 648 |
| | 454 |
| Other | 149 | | | 85 | | | 117 | |
| Income tax expense | $ | 10,935 |
| | $ | 13,533 |
| | $ | 12,227 |
| Income tax expense | $ | 7,144 | | | $ | 11,696 | | | $ | 10,935 | |
| Effective tax rate | 20.7 | % | | 30.3 | % | | 31.8 | % | Effective tax rate | 15.6 | % | | 23.9 | % | | 20.7 | % |
| |
(a)
| The Company elected to early adopt ASU No. 2016-09, Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, in the quarter ended September 30, 2016 and, due to a required change in accounting principle, beginning that quarter, all excess tax benefits and deficiencies related to employee stock compensation are recognized within income tax expense in the Consolidated Statements of Income. The Company received federal tax benefits in 2017 and 2016 of $4,254 and $1,408, respectively, and state benefits of $371 and $163, respectively, for excess tax benefits.
|
(a)The Company received federal excess tax benefits on share-based compensation awards in 2019, 2018, and 2017 of $2,877, $1,201, and $4,254, respectively, and state benefits of $459, $236 and $371, respectively, for excess tax benefits. The state benefits are part of the State income taxes, net, balances in the above table. Tax benefits from share-based compensation may be substantially less in future years, and in certain instances can create tax determinant.
The tax effects of temporary differences giving rise to deferred income taxes shown on the Consolidated Balance Sheets are as follows:
| | | | | | | | | | | |
| December 31, | | |
| | 2019 | | 2018 |
| Deferred income tax assets: | | | |
| Post-retirement liability | $ | 717 | | | $ | 770 | |
| Deferred income | 300 | | | 393 | |
| Share-based compensation | 1,238 | | | 1,581 | |
| Capital loss carryforwards | 91 | | | 379 | |
| State tax credit carryforwards | 3,198 | | | 3,245 | |
| State operating loss carryforwards | 1,529 | | | 1,505 | |
| Inventories | 1,738 | | | 1,476 | |
| Operating lease liabilities | 1,582 | | | — | |
| Other | 1,291 | | | 1,231 | |
| Gross deferred income tax assets | 11,684 | | | 10,580 | |
| Less: valuation allowance | (1,284) | | | (1,452) | |
| Net deferred income tax assets | 10,400 | | | 9,128 | |
| Deferred income tax liabilities: | | | |
| Fixed assets | (10,332) | | | (10,497) | |
| Operating lease right-of-use assets | (1,577) | | | — | |
| Other | (420) | | | (308) | |
| Gross deferred income tax liabilities | (12,329) | | | (10,805) | |
| Net deferred income tax liability | $ | (1,929) | | | $ | (1,677) | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Deferred income tax assets: | | | |
| Post-retirement liability | $ | 910 |
| | $ | 1,621 |
|
| Deferred income | 543 |
| | 1,176 |
|
| Share-based compensation | 1,158 |
| | 1,313 |
|
| Capital loss carryforwards | — |
| | 716 |
|
| State tax credit carryforwards | 3,488 |
| | 3,204 |
|
| State operating loss carryforwards | 1,434 |
| | 1,151 |
|
| Inventories | 1,346 |
| | 2,560 |
|
| Other | 766 |
| | 1,381 |
|
| Gross deferred income tax assets | $ | 9,645 |
| | $ | 13,122 |
|
| Less: valuation allowance | (148 | ) | | (726 | ) |
| Net deferred income tax assets | 9,497 |
| | 12,396 |
|
| Deferred income tax liabilities: | | | |
| Fixed assets | (9,255 | ) | | (14,313 | ) |
| Equity method investments | — |
| | (969 | ) |
| Other | (254 | ) | | (546 | ) |
| Gross deferred income tax liabilities | (9,509 | ) | | (15,828 | ) |
| Net deferred income tax liability | $ | (12 | ) | | $ | (3,432 | ) |
A schedule of the change in valuation allowance is as follows:
| | | | | |
| |
| Balance at December 31, 2017 | $ | 148 | |
| Increase | 1,304 | |
| Balance at December 31, 2018 | 1,452 | |
| Decrease | (168) | |
| Balance at December 31, 2019 | $ | 1,284 | |
|
| | | | |
| | | Valuation allowance |
| Balance at December 31, 2015 | | $ | 1,444 |
|
| Reductions | | 718 |
|
| Balance at December 31, 2016 | | $ | 726 |
|
| Reductions | | 578 |
|
| Balance at December 31, 2017 | | $ | 148 |
|
As of December 31, 2017,2019 and 2018, the Company’s total valuation allowance of $148$1,284 and $1,452, respectively, related to net operating loss carryforwards in states in which it is not more"more likely than not that it cannot" to create enough state taxable income to fully utilize the carryforwards before expiration of the carryforward periods. Due to capital gains realized from the sale of the Company's 30 percent interest in ICP during 2017, the Company was able to utilize all of its federalperiods, and capital loss carryforwards in 2017, and, therefore, reducedthat the Company is not "more likely than not" to use before they expire. The reduction of the valuation allowance year over year is due to certain capital loss carryforwards and corresponding deferred tax asset by $690. The remainder of the change in therelated valuation allowance was an increasethat expired at the end of $112 for additional net operating loss carryforwards, for a net reduction of $578.2019.
As of December 31, 2016, the Company’s total valuation allowance was $726 relating primarily to capital loss carryovers. Capital loss carryovers remaining as of December 31, 2016 were set to expire between2019 and 2018, and 2020 if not utilized. During 2016, the Company reduced its valuation allowance by $718, of which $689 related to capital loss carryovers that expired unused at the end of 2016, and the deferred tax asset and associated valuation allowance were eliminated as of December 31, 2016.
As of December 31, 2017, the Company had $19,979$21,918 and $21,575 in gross state net operating loss carryforwards. As of December 31, 2016, the Company had $23,074 in state net operating loss carryforwards.carryforwards, respectively. Due to varying state carryforward periods, the state net operating loss carryforwards will expire in varying years between calendar years 2020 and 2039. As of December 31, 2019 and 2018, and 2037. Thethe Company hashad gross state tax credit carryforwards of $4,416 as of December 31, 2017$4,049 and $4,929 as of December 31, 2016.$4,107, respectively. State credits, if not used to offset income tax expense in their respective jurisdictions, will expire in varying years between 2020 and 2032.
2035.
The Company treats accrued interest and penalties related to tax liabilities, if any, as a component of income tax expense. During 2019, 2018, and 2017, 2016, and 2015, the Company’sCompany's activity in accrued interest and penalties was not significant.
The following is a reconciliation of the total amount of unrecognized tax benefits (excluding interest and penalties) for 2017, 2016,2019, 2018, and 2015:2017:
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | |
| | 2019 | | 2018 | | 2017 | | |
| Beginning of year balance | $ | 193 | | | $ | 185 | | | $ | 43 | | | |
| Additions based on prior year tax positions | 3 | | | 2 | | | 130 | | | |
| Additions based on current year tax positions | 78 | | | 11 | | | 12 | | | |
| Reduction for prior year tax positions | (19) | | | (5) | | | — | | | |
| | | | | | | |
| End of year balance | $ | 255 | | | $ | 193 | | | $ | 185 | | | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Beginning of year balance | $ | 43 |
| | $ | 613 |
| | $ | 613 |
|
| Additions for tax positions of prior years | 130 |
| | 2 |
| | — |
|
| Additions for tax positions of the current year | 12 |
| | 21 |
| | — |
|
| Reduction for prior year tax positions | — |
| | (48 | ) | | — |
|
| Reductions for settlements | — |
| | (545 | ) | | — |
|
| End of year balance | $ | 185 |
| | $ | 43 |
|
| $ | 613 |
|
For each period presented, substantially all of the amount of unrecognized benefits (excluding interest and penalties) would impact the effective tax rate, if recognized. The Company reasonably expects that the amount of unrecognized tax benefit will not decrease by a significant amount inapproximately half of its value over the next 12 months.months due to the statute of limitations expiring for unrecognized tax benefits related to the tax year ending 2016. The recognized tax benefit related to this decrease may be less than the gross activity due to audit adjustments.
The Company has been audited for United Statesis currently under federal income tax purposes throughaudit for tax year 2013, resulting2016. The Company does not expect this audit to result in noa significant adjustments. No significant amounts of accrued interest or penalties were impacted by the adjustments throughadjustment. For federal tax year 2013. Allpurpose, all tax years after 20142015 remain open to examination.adjustment. The Company is subject to examination for its state tax returns for years 2014year 2015, and forward, with the exception of certain net operating losses and credit carryforwards originating in years prior to 20142015 that remain subject to adjustment.
NOTE 7: EQUITY AND EPS
Capital Stock. Common Stockholders are entitled to elect four4 of the nine9 members of the Board of Directors, while Preferred Stockholders are entitled to elect the remaining five5 members. All directors are elected annually for a one year term. Any vacancies on the Board are to be filled only by the shareholders and not by the Board. Shareholders who own 10 percent or more of the outstanding Common or Preferred Stock have the right to call a special meeting of stockholders. Common Stockholders are not 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 Common Stockholders adversely. Generally, Common Stockholders and Preferred Stockholders vote as separate classes on all other matters requiring shareholder approval.
On September 1, 2015, the Company's Board of Directors authorized the purchase of 950,000 shares of common stock for $14,488 in a privately negotiated transaction with F2 SEA, Inc., an affiliate of SEACOR Holdings, Inc., pursuant to a Stock Repurchase Agreement. SEACOR Holdings, Inc. was the 70 percent owner of ICP, the Company's 30 percent equity method investment until it was sold on July 3, 2017 (Note 3).
EPS. The computations of basic and diluted EPS:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Operations: | | | | | |
Net income(a) | $ | 38,793 | | | $ | 37,284 | | | $ | 41,823 | |
Less: Income attributable to participating securities (unvested shares and units) (b) | 253 | | | 708 | | | 996 | |
| Net income attributable to common shareholders | $ | 38,540 | | | $ | 36,576 | | | $ | 40,827 | |
| | | | | |
| Share information: | | | | | |
Basic and diluted weighted average common shares(c) | 17,012,288 | | | 16,866,176 | | | 16,746,731 | |
| | | | | |
| | | | | |
| | | | | |
| Basic and diluted EPS | $ | 2.27 | | | | $ | 2.17 | | | $ | 2.44 | |
(a)Net income attributable to all shareholders.
(b)Participating securities included RSUs of 111,365, 326,375, and 368,492 for the years ended December 31, 2019, 2018, and 2017, respectively.
(c)Under the two class method, basic weighted average common shares exclude outstanding unvested participating securities.
Share Repurchase. On February 25, 2019, the Board of Directors approved a $25,000 share repurchase authorization commencing February 27, 2019 through February 27, 2022. Under the share repurchase program, the company can repurchase stock from time to time for cash in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws. This share repurchase program may be modified, suspended, or terminated by the company at any time without prior notice. From the commencement date of the authorization period through the year ended December 31, 2019, 0 shares were repurchased under the program.
|
| | | | | | | | | | | |
| Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Operations: | | | | |
|
|
Net income(a) | $ | 41,823 |
| | $ | 31,184 |
| | $ | 26,191 |
|
Less: Income attributable to participating securities (unvested shares and units) (b) | 996 |
| | 954 |
| | 873 |
|
| Net income attributable to common shareholders | $ | 40,827 |
| | $ | 30,230 |
| | $ | 25,318 |
|
| | | | | |
| Share information: | | | | | |
Basic and diluted weighted average common shares(c)(d) | 16,746,731 |
| | 16,643,811 |
| | 17,123,556 |
|
| | | | |
|
|
Basic and diluted EPS(d) | $ | 2.44 |
|
| $ | 1.82 |
|
| $ | 1.48 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividend and Dividend Equivalent Information (per Share and Unit) | | | | | | | | | | | | | | |
| Declaration date | | Record date | | Payment date | | Declared | | Paid | | Dividend payment | | Dividend equivalent payment(a)(b) | | Total payment(b) |
| 2019 | | | | | | | | | | | | | | |
| February 25 | | March 13 | | March 29 | | $ | 0.10 | | | $ | 0.10 | | | $ | 1,701 | | | $ | 13 | | | $ | 1,714 | |
| April 29 | | May 15 | | May 31 | | 0.10 | | | 0.10 | | | 1,702 | | | 11 | | | 1,713 | |
| July 29 | | August 14 | | August 30 | | 0.10 | | | 0.10 | | | 1,703 | | | 11 | | | 1,714 | |
| October 29 | | November 14 | | November 26 | | 0.10 | | | 0.10 | | | 1,703 | | | 12 | | | 1,715 | |
| | | | | | $ | 0.40 | | | $ | 0.40 | | | $ | 6,809 | | | $ | 47 | | | $ | 6,856 | |
| 2018 | | | | | | | | | | | | | | |
| February 21 | | March 9 | | March 23 | | $ | 0.08 | | | $ | 0.08 | | | $ | 1,348 | | | $ | 27 | | | $ | 1,375 | |
| April 30 | | May 16 | | June 1 | | 0.08 | | | 0.08 | | | 1,348 | | | 27 | | | 1,375 | |
| July 31 | | August 16 | | August 31 | | 0.08 | | | 0.08 | | | 1,348 | | | 27 | | | 1,375 | |
| October 30 | | November 15 | | November 30 | | 0.08 | | | 0.08 | | | 1,349 | | | 26 | | | 1,375 | |
| | | | | | $ | 0.32 | | | $ | 0.32 | | | $ | 5,393 | | | $ | 107 | | | $ | 5,500 | |
| 2017 | | | | | | | | | | | | | | |
| February 15 | | March 1 | | March 24 | | $ | 0.04 | | | $ | 0.04 | | | $ | 668 | | | $ | 20 | | | $ | 688 | |
| May 2 | | May 15 | | June 9 | | 0.04 | | | 0.04 | | | 668 | | | 20 | | | 688 | |
| August 1 | | August 18 | | September 8 | | 0.85 | | | 0.85 | | | 14,215 | | | 413 | | | 14,628 | |
| August 1 | | August 18 | | September 11 | | 0.04 | | | 0.04 | | | 669 | | | 19 | | | 688 | |
| October 31 | | November 14 | | December 8 | | 0.04 | | | 0.04 | | | 669 | | | 19 | | | 688 | |
| | | | | | $ | 1.01 | | | $ | 1.01 | | | $ | 16,889 | | | $ | 491 | | | $ | 17,380 | |
(a)Dividend equivalent payments on unvested participating securities (see Note 10).
(b) Includes estimated forfeitures.
NOTE 8: 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 Consolidated Balance Sheets. 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 estimated incremental collateralized 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 | | December 31, 2019 |
| Assets | | | | |
| Operating | | Operating lease right-of-use-assets, net | | | $ | 6,490 | |
| Total leased assets | | | | $ | 6,490 | |
| | | | |
| Liabilities | | | | |
| Current Operating | | Accrued expenses | | | $ | 2,244 | |
| Noncurrent Operating | | Long-term operating lease liabilitites | | | 4,267 | |
| Total operating lease liability | | | | $ | 6,511 | |
The following table presents the components of lease costs:
| | | | | |
| Year Ended December 31, |
| 2019 |
| Operating lease costs | $ | 2,434 | |
| Short-term lease costs | 767 | |
| Sublease income | (247) | |
Net lease costs(a) | $ | 2,954 | |
(a) Recorded as a component of Operating income on the Company’s Consolidated Statement of Income.
The following table presents supplemental cash flow and non-cash activity related to lease information:
| | | | | |
| Year Ended December 31, |
| 2019 |
| Cash paid for amounts included in the measurement of lease liabilities | |
| Operating cash flows from operating leases | $ | 2,414 | |
| |
(a)
Right-of-use assets obtained in exchange for lease obligations | Net income attributable to all shareholders. |
| Operating leases | $ | 2,064 | |
| |
(b)
| Participating securities included unvested restricted stock of 0, 0, and 128,500 for the years ended December 31, 2017, 2016, and 2015, as well as RSUs of 368,492, 527,486, and 437,946 for the years ended December 31, 2017, 2016, and 2015, respectively.
|
| |
(c)
| Under the two class method, basic weighted average common shares exclude outstanding unvested participating securities. |
| |
(d)
| Basic and diluted weighted average common shares were affected by the September 1, 2015, purchase of 950,000 shares of common stock in a privately negotiated transaction with F2 SEA, Inc., an affiliate of SEACOR Holdings, Inc., pursuant to a Stock Repurchase Agreement. SEACOR Holdings, Inc. was the 70 percent owner of ICP, the Company's 30 percent equity method investment until it was sold on July 3, 2017 (Note 3). |
The following table presents weighted average discount rate and remaining lease term:
Accumulated Other Comprehensive Income (Loss). Changes in Accumulated Other Comprehensive Income (Loss) by Component:
|
| | | | | | | | | | | | | | | | |
|
| Pension Plan Items | (a) | Post-Employment Benefit Plan Items |
| Other |
| Total |
| Balance, December 31, 2014 | | $ | (244 | ) |
| $ | (456 | ) |
| $ | (32 | ) |
| $ | (732 | ) |
| Other comprehensive income (loss) before reclassifications | | (355 | ) | | 47 |
| | (10 | ) | | (318 | ) |
| Amounts reclassified from accumulated other comprehensive income | | 599 |
| | (101 | ) | | 52 |
| | 550 |
|
| Net 2015 other comprehensive income (loss) | | 244 |
| | (54 | ) | | 42 |
| | 232 |
|
| Balance, December 31, 2015 | | $ | — |
| | $ | (510 | ) | | $ | 10 |
| | $ | (500 | ) |
| Other comprehensive income (loss) before reclassifications | | — |
| | 113 |
| | (14 | ) | | 99 |
|
| Amounts reclassified from accumulated other comprehensive income | | — |
| | 21 |
| | 7 |
| | 28 |
|
| Net 2016 other comprehensive income (loss) | | — |
| | 134 |
| | (7 | ) | | 127 |
|
| Balance, December 31, 2016 | | $ | — |
| | $ | (376 | ) | | $ | 3 |
| | $ | (373 | ) |
| Other comprehensive income (loss) before reclassifications | | — |
| | 181 |
| | (8 | ) | | 173 |
|
| Amounts reclassified from accumulated other comprehensive income | | — |
| | (115 | ) | | 4 |
| | (111 | ) |
| Net 2017 other comprehensive income (loss) | | — |
| | 66 |
| | (4 | ) | | 62 |
|
| Balance, December 31, 2017 | | $ | — |
| | $ | (310 | ) | | $ | (1 | ) | | $ | (311 | ) |
| | | | | |
| |
(a)
| The Company's pension benefit plans were terminated in June 2015.December 31, 2019 |
Reclassifications Out of Accumulated Other Comprehensive Income (Loss) for 2017:
|
| | | | | | |
| Details about Accumulated Other Comprehensive Income Components | | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | |
| Post Employment Benefit Items: | | | | |
| Amortization of prior service cost | | $ | (339 | ) | | (a) |
| Recognized net actuarial loss | | 184 |
| | (a) |
| | | (155 | ) | | |
| | | 40 |
| | Tax expense |
| | | $ | (115 | ) | | Net of tax |
| Equity Method Investment Adjustment: | | | | |
| Accumulated postretirement benefit obligation | | $ | 7 |
| | |
| | | (3 | ) | | Tax benefit |
| | | $ | 4 |
| | Net of tax |
| Reclassifications for 2017 | | $ | (111 | ) | | Total net of tax |
| Weighted average discount rate | |
| Operating leases | 5.77 | % |
| |
(a)
Weighted average remaining lease term | These accumulated other comprehensive income components are included in the computation of net period post-employment benefit cost (Note 9). |
| Operating leases | 3.3 years |
As of December 31, 2019, the maturities of operating lease liabilities were as follows:
| | | | | | | | |
| 2020 | | $ | 2,546 | |
| 2021 | | 2,023 | |
| 2022 | | 1,417 | |
| 2023 | | 835 | |
| 2024 | | 311 | |
| Thereafter | | — | |
| Total lease payments | | 7,132 | |
| Less interest | | (621) | |
| Total operating lease liability | | $ | 6,511 | |
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 and $2,372 for 2018 and 2017, 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 8: | NOTE 9: COMMITMENTS AND CONTINGENCIES |
Commitments. The Company leases railcars and other assets under various operating leases. For railcar leases,As of October 2018, the Company carries $10,000 in industrial revenue bonds with the City of Williamstown, Kentucky (the "City") that mature in 2047, and leases back facilities owned by the City that the Company recorded as property, plant, and equipment, net, on its Consolidated Balance Sheet under a capital lease. The lease payment on the facilities is generally requiredsufficient to pay principal and interest on the bonds. Because the Company owns all service costs associatedof the outstanding bonds, has a legal right to set-off, and intends to set-off the corresponding lease and interest payment, the Company netted the capital lease obligation with the railcars. Rental payments include minimum rentals plus contingent amounts based on mileage. Rental expenses under operating leases with terms longer than one month were $2,372, $2,561,bond asset and, $2,283in turn, reflected 0 amount for the years endedobligation or the corresponding asset on its Consolidated Balance Sheet at December 31, 2017, 2016,2019 and 2015, respectively.2018.
The Company's future minimum rental payments are $3,677; $1,850; $2,182; $1,326; and $942 for the years ending December 31, 2018, 2019, 2020, 2021, and 2022, respectively.
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.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 is cooperatinghas cooperated fully to investigate and ensure that all appropriate response actions are taken. The Company has also engaged outside experts to assist the investigation and response. There was no significant damage to the Company’s Atchison plant as a result of this incident. No other MGP facilities, including the distillery in Lawrenceburg, Indiana, were affected by this incident.
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 believeson August 1, 2017, that it is probable thatintended to seek an administrative civil penalty of approximately $250 in connection with its investigation of the Atchison Chemical Release. During 2019, the Company reached a resolution on the EPA administrative civil penalty case in the amount of $251, which was included as a component of Accounts payable in the Company’s Consolidated Balance Sheet as of December 31, 2019.
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. During 2019, the Company reached a plea agreement with the Department of Justice pertaining to a negligent Clean Air Act violation pursuant to which the Company agreed, among other things, to a fine or penalty may be imposed by regulatory authorities, but itof $1,000, which is currently unable to reasonably estimateincluded as a component of Accounts payable in the amount thereof since some investigations are not complete and could take several months up to a few years to complete. Company’s Consolidated Balance Sheet as of December 31, 2019.
Private plaintiffs have initiated, and additional private plaintiffs may initiate, legal proceedings for damages resulting from the emission,Atchsion Chemical Release, but the Company is currently unable to reasonably estimate the amount of any such damages that might result. The Company'sCompany’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. There was no significant damage to the Company's Atchison plant as a result of this incident. No other MGP facilities, including the distillery in Lawrenceburg, Indiana, were affected by this incident.
OSHA completed its investigation 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.
NOTE 10: EMPLOYEE BENEFIT PLANS
The EPA informed the Company on August 1, 2017, that it intends to seek civil penalties of approximately $250 in connection with its investigation, while offering the Company the opportunity to settle the matter prior to the EPA proceeding with a formal enforcement action. The Company is seeking a negotiated settlement with the EPA, but negotiations have paused pending resolution of the EPA's criminal investigation. Since the Company expects a negotiated resolution of the EPA civil case and EPA-proposed civil penalties are not material to the year ended December 31, 2017, the Company has not included an accrual in its results. A portion, or all, of the settled penalty amount may be covered by insurance.
|
| |
NOTE 9: | EMPLOYEE BENEFIT PLANS |
401(k) Plans. The Company has established 401(k) plans covering all employees after certain eligibility requirements are met. Amounts charged to operations for employer contributions related to the plans totaled $1,603, $1,488, and $1,299 $1,097,for 2019, 2018, and $1,032 for 2017, 2016, and 2015, respectively.
Pension Benefits. The Company and its subsidiaries provided defined retirement benefits to certain employees covered under collective bargaining agreements. The benefits under these pension plans were based upon years of qualified credited service; however, benefit accruals under the defined benefit plans were frozen in 2009. In April 2015, the Company received approval from the Pension Benefit Guaranty Corporation to terminate the pension plans for employees covered under collective bargaining agreements. The funding by the Company to terminate the plans was $741 and was recognized when the pension plan settlement was fully executed during the quarter ended June 30, 2015.
Post-Employment Benefits. The Company sponsors life insurance coverage as well as medical benefits, including prescription drug coverage, to certain retired employees and their spouses. In 2014, the Company made a change to the plan to terminate post-employment health care and life insurance benefits for all union employees except for a specified grandfathered group. At December 31, 20172019, the plan covered 177166 participants, both active and retired. The post-employment health care benefit is contributory for spouses under certain circumstances. Otherwise, participant contribution premiums are not required. The health care plan contains fixed deductibles, co-pays, coinsurance, and out-of-pocket limitations. The life insurance segment of the plan is noncontributory and is available to retirees only.
The Company funds the post-employment benefit on a pay-as-you-go basis, and there are no assets that have been segregated and restricted to provide for post-employment benefits. Benefit eligibility for the current remaining grandfathered active group (25(23 employees) is age 62 and five5 years of service. The Company pays claims and premiums as they are submitted. The Company provides varied levels of benefits to participants depending upon the date of retirement and the location in which the employee worked. An older group of grandfathered retirees receives lifetime health care coverage. All other retirees receive coverage to age 65 through continuation of the Company group medical plan and a lump sum advance premium to the MediGap carrier of the retiree’s choice. Life insurance is available over the lifetime of the retiree in all cases.
The Company bases its post-employment plan valuation on The Society of Actuaries RPH-2014 Adjusted to 2006 Total Dataset Headcount-weighted Mortality with Scale MP-2017 Full Generational Improvement ("MP-2017 scale"). Based on the 2017 update, the MP-2017 scale reflects a lower level of improvement resulting in shorter assumed life spans. The impact of this change in assumed mortality on post-employment benefits liability was included in the Company's post-employment plan valuation for 2017, and using previous year scales, for 2016, and 2015.
The Company’s measurement date is December 31. The Company expects to contribute approximately $486, net of $15 of Medicare Part D subsidy receipts, to the plan in 2018.
The status of the Company’s plans at December 31, 2017, 2016, and 2015:
|
| | | | | | | | | | | | | | | | |
| | Pension Benefit Plans(a) | | Post-Employment Benefit Plan | |
| | December 31, | | December 31, | |
| | 2015 | | 2017 | | 2016 | | 2015 | |
| Change in benefit obligation: | | | | | | | | |
| Beginning of year | $ | 2,016 |
| | $ | 4,106 |
| | $ | 4,681 |
| | $ | 4,926 |
| |
| Service cost | — |
| | 25 |
| | 36 |
| | 51 |
| |
| Interest cost | 36 |
| | 122 |
| | 142 |
| | 141 |
| |
| Actuarial loss (gain) | (9 | ) | | (261 | ) | | (297 | ) | | 45 |
| |
| Benefits paid | (2,043 | ) | | (388 | ) | | (456 | ) | | (482 | ) | |
| Benefit obligation at end of year | $ | — |
| | $ | 3,604 |
| | $ | 4,106 |
|
| $ | 4,681 |
| |
(a)The Company's pension benefit plans were terminated and paid as of June 2015.
Assumptions used to determine accumulated benefit obligations as of year end:
|
| | | | |
| | Post-Employment Benefit Plan | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | |
| Discount rate | 2.96% | | 3.15% | |
| Measurement date | December 31,
2017 | | December 31,
2016 | |
Assumptions used to determine net benefit cost (benefit) for 2017, 2016, and 2015:
|
| | | | | | | | | | |
| | | Post-Employment Benefit Plan |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 | |
| Expected return on Assets | | — |
| | — |
| | — |
| |
| Discount rate | | 3.15 | % | | 3.20 | % | | 2.99 | % | |
| Average compensation increase | | N/A |
| | N/A |
| | N/A |
| |
The discount rate refers to the interest rate used to discount the estimated future benefit payments to their present value, referred to as the benefit obligation. The Company determines the discount rate using a yield curve of high quality fixed income investments whose cash flows match the timing and amount of the Company’s expected benefit payments.
Components of net benefit cost (benefit):
|
| | | | | | | | | | | | | | | | |
| | Pension Benefit Plans(a) | | Post-Employment Benefit Plan | |
| | Year Ended December 31, | | Year Ended December 31, | |
| | 2015 | | 2017 | | 2016 | | 2015 | |
| Service cost | $ | — |
| | $ | 25 |
| | $ | 36 |
| | $ | 51 |
| |
| Interest cost | 36 |
| | 122 |
| | 142 |
| | 141 |
| |
| Expected return on assets | (45 | ) | | — |
| | — |
| | — |
| |
| Amortization of prior service cost | — |
| | (339 | ) | | (338 | ) | | (338 | ) | |
| Recognized net actuarial loss | 25 |
| | 184 |
| | 269 |
| | 278 |
| |
| Settlement losses | 414 |
| | — |
| | — |
| | — |
| |
| Net benefit cost (benefit) | $ | 430 |
| | $ | (8 | ) | | $ | 109 |
|
| $ | 132 |
| |
(a)The Company's pension benefit plans were terminated and paid as of June 2015.
Changes in plan assets and benefit obligations recognized in other comprehensive income:
|
| | | | | | | | | | | | | | | |
| | Pension Benefit Plans(a) | | Post-Employment Benefit Plan |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2015 | | 2017 | | 2016 | | 2015 |
| Net actuarial (loss) gain | $ | (35 | ) | | $ | 261 |
| | $ | 293 |
| | $ | (35 | ) |
| Settlement losses | 414 |
| | — |
| | — |
| | — |
|
| Recognized net actuarial loss | 25 |
| | 184 |
| | 269 |
| | 278 |
|
| Amortization of prior service cost | — |
| | (339 | ) | | (338 | ) | | (338 | ) |
| Total other comprehensive income (loss), pre-tax | 404 |
| | 106 |
| | 224 |
|
| (95 | ) |
| Income tax expense (benefit) | 160 |
| | 40 |
| | 90 |
| | (41 | ) |
| Total other comprehensive income (loss), net of tax | $ | 244 |
|
| $ | 66 |
| | $ | 134 |
|
| $ | (54 | ) |
(a)The Company's pension benefit plans were terminated and paid as of June 2015.
Benefit obligation recognized in the Consolidated Balance Sheets:
|
| | | | | | | | |
| | Post-Employment Benefit Plan | |
| | As of December 31, | |
| Benefit obligation | 2017 | | 2016 | |
| Current | $ | (471 | ) | | $ | (502 | ) | |
| Non-Current | (3,133 | ) | | (3,604 | ) | |
| Net amount recognized | $ | (3,604 | ) | | $ | (4,106 | ) | |
The estimated amount that will be recognized from accumulated other comprehensive income (loss) into net periodic benefit cost during 2018:
|
| | | | |
| | Post-Employment Benefit Plan | |
| Actuarial net loss | $ | (92 | ) | |
| Net prior service credits | 37 |
| |
| Net amount recognized | $ | (55 | ) | |
The assumed average annual rate of increase in the per capita cost of covered benefits (health care cost trend rate):
|
| | | | | | | | | | | | | | | | | |
| | Post-Employment Benefit Plan |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| | Group Plan | | Lifetime Prescription Cost | | Medicare Supplement | | Group Plan | | Lifetime Prescription Cost | | Medicare Supplement |
| Health care cost trend rate | 7.00 | % | | 9.00 | % | | 4.50 | % | | 7.50 | % | | 9.00 | % | | 5.00 | % |
| Ultimate trend rate | 5.00 | % | | 5.00 | % | | 4.50 | % | | 5.00 | % | | 5.00 | % | | 5.00 | % |
| Year rate reaches ultimate trend rate | 2025 |
| | 2027 |
| | 2018 |
| | 2023 |
| | 2024 |
| | 2017 |
|
A one percentage point increase (decrease) in the assumed health care cost trend rate would have increased (decreased) the accumulated benefit obligation by $98 ($93) at December 31, 2017 and the service and interest cost would have increased (decreased) by $5 ($4) for the year ended December 31, 2017.
As of December 31, 2017,2019 and 2018, total current benefit obligation recorded in Accrued expense on the following expected benefit payments (net of Medicare Part D subsidiary for Post-Employment Benefit Plan Payments)Consolidated Balance Sheets was $441 and the related expected subsidy receipts that reflect expected future service, as appropriate, are expected to be paid to plan participants:
|
| | | | | | | | |
| | Post-Employment Benefit Plan | |
| | Expected Benefit Payments | | Expected Subsidy Receipts | |
| 2018 | $ | 486 |
| | $ | 15 |
| |
| 2019 | 491 |
| | 13 |
| |
| 2020 | 469 |
| | 11 |
| |
| 2021 | 443 |
| | 11 |
| |
| 2022 | 418 |
| | 9 |
| |
| 2023-2027 | 1,221 |
| | 30 |
| |
| Total | $ | 3,528 |
| | $ | 89 |
| |
Share-Based Compensation Plans.$467, respectively. As of December 31, 2017,2019 and 2018, total noncurrent benefit obligation was $2,509 and $2,595, which was recorded in Other noncurrent liabilities on the Consolidated Balance Sheets, respectively.
Share-Based Compensation Plans. As of December 31, 2019, the Company was authorized to issue 40,000,000 shares of Common Stock and had a treasury share balance of 1,318,5451,087,840 at December 31, 2017.2019.
The Company currently has two2 active share-based compensation plans: the Employee Equity Incentive Plan of 2014 (the "2014 Plan") and the Non-Employee Director Equity Incentive Plan (the "Directors' Plan"). The plans were approved by shareholders at the Company'sCompany’s annual meeting in May 2014. The 2014 Plan replaced the 2004 Plan. Detail of activities in both plans follows below.
The Company’s share-based compensation plans provide for the awarding of stock options, stock appreciation rights, and shares of restricted stock and RSUs for senior executives and salaried employees, as well as for outside directors. Compensation expense related to restricted stock awards is based on the market price of the stock on the date the Board of Directors communicates the approved award and is amortized over the vesting period of the restricted stock award. The
Consolidated Statements of Income for 2017, 2016,2019, 2018, and 20152017 reflect total share-based compensation costs and director fees for awarded grants of $2,424, $2,612, $2,245, $2,402, $1,414, respectively, related to these plans.
The Company elected to early adopt the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting in the quarter ended September 30, 2016. The provision of this ASU related to share-based compensation award forfeitures had no impact on the Company’s beginning of year retained earnings for 2016 and no impact for the year of adoption since it elected to continue to estimate forfeitures rather than account for them as they occur.
For long-term incentive awards to be granted in the form of RSUs in 20182020 based on 20172019 results, the Human Resources and Compensation Committee ("HRCC") determined that the grants would have performance conditions that would be based on the same performance metrics as the Short-Term Incentive Plan (the "STI Plan"). The performance metrics are operating income, earnings before interest, taxes, depreciation, and amortization ("EBITDA"), and EPS. Because management determined at the beginning of 20172019 that the performance metrics would most likely be met, amortization of the estimated dollar pool of RSUs to be awarded based on 20172019 results was started in the first quarter over an estimated 48 month period, including 12 months to the grant date and an additional 36 months to the vesting date. The Consolidated Statements of Income for 2017, 2016,2019, 2018, and 20152017 reflects share-based compensation costs for grants to be awarded of $491, $317,$123, $821, and $482,$491, respectively.
At the Company'sCompany’s annual meeting in May 2014, shareholders approved a new Employee Stock Purchase Plan (the "ESPP Plan") with 300,000 shares registered for employee purchase. The ESPP Plan is not active at this time. The Company'sCompany’s former employee stock purchase plan continued in use until its termination during 2017.
2014 Plan
The 2014 Plan, with 1,500,000 shares registered for future grants, provides that vesting occurs pursuant to the time period specified in the particular award agreement approved for that issuance of RSUs, which is to be not less than three years unless vesting is accelerated due to the occurrence of certain events. As of December 31, 2017, 280,0752019, 344,190 RSUs had been granted of the 1,500,000 shares approved for under the 2014 Plan.
Directors'Directors’ Plan
The Director'sDirector’s Plan, with 300,000 shares registered for future grants, provides that vesting occurs pursuant to the time period specified in the particular award agreement approved for that issuance of equity. As of December 31, 2017, 64,0352019, 83,683 shares were granted of the 300,000 shares approved for grants under the Directors'Directors’ Plan and all 64,03583,683 shares were vested.
2004 Plan
Under the 2004 Plan, as amended, the Company granted incentives (including stock options and restricted stock awards) for up to 2,680,000 shares of the Company’s Common Stock to salaried, full time employees, including executive officers. The term of each award generally was determined by the committee of the Board of Directors charged with administering the 2004 Plan. Under the terms of the 2004 Plan, any options granted were non-qualified stock options, exercisable within ten years and had an exercise price of not less than the fair value of the Company’s Common Stock on the date of the grant. As of December 31, 2017, no2019, 0 stock options and no0 unvested restricted stock shares (net of forfeitures) remained outstanding under the 2004 Plan. NoNaN future grants can be made under the 2004 Plan.
In connection with the Reorganization,2012, the 2004 Plan was amended to provide for grants in the form of RSUs. The awards entitle participants to receive shares of stock following the end of a five year vesting period. Full or pro-rata accelerated vesting generally might occur upon a "change in the ownership" of the Company or the subsidiary for which a participant performed services, a "change in effective control" of the Company or a "change in the ownership of a substantial portion of the assets" of the Company (in each case, generally as defined in the Treasury regulations under Section 409A of the Internal Revenue Code), or if employment of a participant is terminated as a result of death, disability, retirement or termination without cause. Participants have no voting of dividend rights under the awards that were granted; however, the awards provide for payment of dividend equivalents when dividends are paid to stockholders. During January 2019, the remaining 145,000 RSUs under the 2004 Plan vested. As of December 31, 2017, 145,0002019, there were 0 unvested RSUs remained under the 2004 Plan. As of December 31, 2017, noPlan and 0 RSU awards were available for future grants under the 2004 Plan.
On August 8, 2013, the Board of Directors approved modification of certain provisions related to vesting for all restricted stock and restricted unit awards that were awarded under the 2004 Plan. The modifications provided that a pro-rata portion of each restricted stock and RSU award granted under the 2004 Plan would, in addition to vesting in accordance with the terms previously provided therein, vest with respect to a pro-rata portion of such grant, upon the occurrence of the Employment Agreement Change in Control. The modification applies to all employee restricted stock awards and RSU holders, not just executive officers. The modification also provided that all restricted stock awards and RSUs previously awarded to employees shall vest, to the maximum extent provided under the terms of the prior restricted stock award and RSU award guidelines, upon the termination of employment by the Company without cause (as determined in the modification).
Restricted Stock. Summary of unvested restricted stock under the Company’s share-based compensation plans for 2016 and 2015. There was no unvested restricted stock under the Company's share-based compensation plans in 2017.
|
| | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 |
| |
Shares | | Weighted
Average
Grant-Date
Fair Value | | Shares | | Weighted Average Grant-Date Fair Value |
| Unvested balance at beginning of year | 128,500 |
| | $ | 5.85 |
| | 278,900 |
| | $ | 6.28 |
|
| Granted | — |
| | — |
| | 13,585 |
| | 17.02 |
|
| Forfeited | — |
| | — |
| | (30,800 | ) | | 6.27 |
|
| Vested | (128,500 | ) | | 5.85 |
| | (133,185 | ) | | 7.80 |
|
| Unvested balance at end of year | — |
|
| $ | — |
| | 128,500 |
| | $ | 5.85 |
|
During 2016 and 2015, the total fair value of restricted stock awards vested was $752, and $1,038, respectively. As of December 31, 2016, there was no unrecognized compensation costs related to restricted stock awards.
RSUs. Summary of unvested RSUs under the Company’s share-based compensation plans for 2017, 2016,2019, 2018, and 2015: 2017:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | | | | | | | | | | | | |
| | 2019 | | | | 2018 | | | | 2017 | | | | | | | | | |
| | Units | | Weighted Average
Grant-Date
Fair Value | | Units | | Weighted Average
Grant-Date
Fair Value | | Units | | Weighted Average
Grant-Date Fair Value | | | | | | | |
| Unvested balance at beginning of year | 329,205 | | | $ | 25.42 | | | 368,492 | | | $ | 17.20 | | | 527,486 | | | $ | 10.17 | | | | | | | | |
| Granted | 45,993 | | | 77.78 | | | 42,136 | | | 78.37 | | | 47,514 | | | 42.93 | | | | | | | | |
| Forfeited | (22,934) | | | 57.27 | | | (1,080) | | | 28.30 | | | (3,508) | | | 25.74 | | | | | | | | |
| Vested | (235,409) | | | 12.54 | | | (80,343) | | | 15.42 | | | (203,000) | | | 4.82 | | | | | | | | |
| Unvested balance at end of year | 116,855 | | | $ | 65.73 | | | 329,205 | | | $ | 25.42 | | | 368,492 | | | $ | 17.20 | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| | Units | | Weighted Average
Grant-Date Fair
Value | | Units | | Weighted Average
Grant-Date Fair
Value | |
Units |
| Weighted Average
Grant-Date Fair
Value | |
| Unvested balance at beginning of year | 527,486 |
| | $ | 10.17 |
| | 437,946 |
| | $ | 7.09 |
| | 413,288 |
| | $ | 5.09 |
| |
| Granted | 47,514 |
| | 42.93 |
| | 100,892 |
| | 23.15 |
| | 89,702 |
| | 16.63 |
| |
| Forfeited | (3,508 | ) | | 25.74 |
| | (11,352 | ) | | 11.55 |
| | (54,506 | ) | | 6.15 |
| |
| Vested | (203,000 | ) | | 4.82 |
| | — |
| | — |
| | (10,538 | ) | | 14.88 |
| |
| Unvested balance at end of year | 368,492 |
| | $ | 17.20 |
| | 527,486 |
| | $ | 10.17 |
| | 437,946 |
| | $ | 7.09 |
| |
During 2017, 2016,2019, 2018, and 2015,2017, the total grant date fair value of RSU awards vested was $979, $0,$2,951, $1,239, and $157,$979, respectively. As of December 31, 20172019 there was $3,036$2,745 of total estimated unrecognized compensation costs (net of estimated forfeitures) related to granted RSU awards. These costs are expected to be recognized over a weighted average period of approximately 1.52.2 years.
Upon their vesting, wethe Company purchased restricted stock and RSUs from employees to cover associated withholding taxes. Total treasury stock purchases added 77,481 shares for $5,489 in 2019; 27,214 shares for $2,324 in 2018; and 74,132 shares orfor $4,663 in 2017; 40,870 shares or $1,518 in 2016; and 60,135 shares or $920 in 2015.2017.
Annual Cash Incentive Plan. EffectiveThe STI Plan was amended and restated as of January 1, 2014, the Company adopted a new STI Plan to replace its 2012 Cash Incentive Program.2019. The STI Plan is designed to motivate and retain the Company'sCompany’s officers and employees and tie short-term incentive compensation to achievement of certain profitability goals by the Company. Pursuant to the STI Plan, short-term incentive compensation is dependent on the achievement of certain performance metrics by the Company, established by the Board of Directors. Each performance metric is calculated in accordance with the rules approved by the HRCC, which may adjust the results to eliminate unusual items. For 2019, 2018, and 2017, the performance metrics were operating income, EBITDA, and EPS. For 2016, the performance metrics were operating income, EBITDA, and EPS. For 2015, the performance metrics were operating income, barreled distillate put away, and ICP equity income. Operating income for the performance metric was defined as reported GAAP operating income adjusted for certain discretionary items as determined by the Company'sCompany’s management, if applicable ("adjusted operating income"). The HRCC determines the officers and employees eligible to participate under the STI Plan for the plan year as well as the target annual incentive compensation for each participant for each plan year.
Amounts expensed under the STI Plan totaled $461, $5,581, and $5,150 $3,394,for 2019, 2018, and $4,964 for 2017, 2016, and 2015, respectively.
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 Consolidated Statements of Income, 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 only able to direct the deferral of a portion of their 2018 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 were 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.
The current portion of deferred compensation plan deferrals is comprised of estimated amounts to be paid within one year depending on timing of planned disbursements. At December 31, 2019, the EDC Plan investments were $1,185 which were recorded in Other assets on the Company's Consolidated Balance Sheet. There were 0 Plan assets at December 31, 2018. The
EDC Plan liabilities were $1,337 and $1,176 as of December 31, 2019 and 2018, respectively, which were recorded in Other non-current liabilities on the Company's Consolidated Balance Sheet.
NOTE 11: CONCENTRATIONS
Significant customers. For 2017, 2016,2019, 2018, and 2015,2017, the Company had no sales to an individual customer that accounted for more than 10 percent of consolidated net sales. During the years 2017, 2016,2019, 2018, and 2015,2017, the Company’s ten largest customers accounted for approximately 39 percent, 3640 percent, and 4239 percent of consolidated net sales, respectively.
Significant suppliers. For 2019, the Company had purchases from two grain suppliers that approximated 31 percent of consolidated purchases. In addition, the Company’s ten largest suppliers, accounted for approximately 66 percent of consolidated purchases.
For 2018, the Company had purchases from two grain suppliers that approximated 29 percentof consolidated purchases. The Company also purchased food grade alcohol from Pacific Ethanol of approximately 12 percent of consolidated purchases. In addition, the Company’s ten largest suppliers, including these three suppliers, accounted for approximately 68 percent of consolidated purchases.
For 2017, the Company had purchases from two grain suppliers that approximated 29 percent of consolidated purchases. In addition, the Company's 10Company’s ten largest suppliers accounted for approximately 65 percent of consolidated purchases.
For 2016,
NOTE 12: OPERATING SEGMENTS
At December 31, 2019 and 2018, the Company had purchases2 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, barrel storage, and barrel retrieval 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, earnings from two grain suppliers that approximated 31 percent of consolidated purchases. In addition, the Company's 10 largest suppliers accounted for approximately 63 percent of consolidated purchases.
For 2015, the Company had purchases from two grain suppliers that approximated 31 percent of consolidated purchases. In addition, the Company’s 10 largest suppliers accountedequity method investments until sold on July 3, 2017, 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.
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | |
| | 2019 | | 2018 | | 2017 | | |
| Sales to customers: | | | | | | | |
| Distillery Products | $ | 297,233 | | | $ | 314,055 | | | $ | 291,008 | | | |
| Ingredient Solutions | 65,512 | | | 62,034 | | | 56,440 | | | |
Total(a) | $ | 362,745 | | | $ | 376,089 | | | $ | 347,448 | | | |
| | | | | | | |
| Gross profit: | | | | | | | |
| Distillery Products | $ | 65,952 | | | $ | 71,793 | | | $ | 66,817 | | | |
| Ingredient Solutions | 10,580 | | | 11,806 | | | 9,199 | | | |
| Total | $ | 76,532 | | | $ | 83,599 | | | $ | 76,016 | | | |
| | | | | | | |
| Depreciation and amortization: | | | | | | | |
| Distillery Products | $ | 8,974 | | | $ | 8,739 | | | $ | 8,490 | | | |
| Ingredient Solutions | 1,554 | | | 1,567 | | | 1,660 | | | |
| Corporate | 1,044 | | | 1,056 | | | 1,158 | | | |
| Total | $ | 11,572 | | | $ | 11,362 | | | $ | 11,308 | | | |
| | | | | | | |
| Income (loss) before income taxes: | | | | | | | |
| Distillery Products | $ | 59,309 | | | $ | 64,791 | | | $ | 60,424 | | | |
| Ingredient Solutions | 8,051 | | | 9,336 | | | 6,613 | | | |
| Corporate | (21,423) | | | (25,147) | | | (14,279) | | | |
| Total | $ | 45,937 | | | $ | 48,980 | | | $ | 52,758 | | | |
(a)Sales revenue from foreign sources totaled $19,372, $19,782, and $22,870 for approximately 75 percent2019, 2018, and 2017, respectively, and is largely derived from Japan, Thailand, and Canada. The balance of consolidated purchases.total sales revenue is from domestic sources.
| | | | | | | | | | | |
| | December 31, | | |
| | 2019 | | 2018 |
| Identifiable Assets | | | |
| Distillery Products | $ | 271,766 | | | $ | 223,890 | |
| Ingredient Solutions | 30,802 | | | 35,147 | |
| Corporate | 20,029 | | | 18,855 | |
Total(a) | $ | 322,597 | | | $ | 277,892 | |
(a)The Company has no assets located in foreign countries.
|
| |
NOTE 11: | OPERATING SEGMENTS |
NOTE 13: SUPPLEMENTAL CASH FLOW INFORMATION
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Non-cash investing and financing activities: | | | | | |
| Purchase of property, plant, and equipment in accounts payable | $ | 4,430 | | | $ | 2,389 | | | $ | 4,522 | |
| Additional cash payment information: | | | | | |
| Interest paid | 1,611 | | | 1,578 | | | 1,489 | |
| Income taxes paid | 7,111 | | | 8,818 | | | 13,526 | |
At December 31, 2017 and 2016, 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, barrel storage, and barrel retrieval services. Ingredient solutions consists of specialty starches and proteins and commodity starches and proteins.
See Note 8 for operating lease supplemental cash flow information.
Operating profit for each segment is based on net sales less identifiable operating expenses. Non-direct SG&A, interest expense, earnings from the Company's equity method investments until sold on July 3, 2017, 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.
|
| | | | | | | | | | | |
| Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net sales to customers: | | | | |
|
| Distillery products | $ | 291,008 |
| | $ | 265,243 |
| | $ | 270,225 |
|
| Ingredient solutions | 56,440 |
| | 53,020 |
| | 57,379 |
|
Total(a) | $ | 347,448 |
| | $ | 318,263 |
| | $ | 327,604 |
|
| | | | |
|
|
| Gross profit: | | | | | |
| Distillery products | $ | 66,817 |
| | $ | 56,836 |
| | $ | 50,662 |
|
| Ingredient solutions | 9,199 |
| | 8,447 |
| | 7,871 |
|
| Total | $ | 76,016 |
| | $ | 65,283 |
| | $ | 58,533 |
|
| | | | | | |
| Depreciation and amortization: | | | | |
|
|
| Distillery products | $ | 8,490 |
| | $ | 8,371 |
| | $ | 8,900 |
|
| Ingredient solutions | 1,660 |
| | 1,655 |
| | 2,111 |
|
| Corporate | 1,158 |
| | 1,227 |
| | 1,371 |
|
| Total | $ | 11,308 |
| | $ | 11,253 |
| | $ | 12,382 |
|
| | | | |
|
|
| Income (loss) before income taxes: | | | | |
|
|
| Distillery products | $ | 60,424 |
| | $ | 53,583 |
| | $ | 49,097 |
|
| Ingredient solutions | 6,613 |
| | 5,836 |
| | 5,636 |
|
| Corporate | (14,279 | ) | | (14,702 | ) | | (16,315 | ) |
| Total | $ | 52,758 |
| | $ | 44,717 |
| | $ | 38,418 |
|
| |
(a)
| Net sales revenue from foreign sources totaled $22,870, $22,422, and$18,772 for 2017, 2016, and 2015, respectively, and is largely derived from Japan, Thailand, and Canada. The balance of total net sales revenue is from domestic sources.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 | | | | | | |
| | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter |
| Sales | $ | 92,463 | | | $ | 90,685 | | | $ | 90,501 | | | $ | 89,096 | |
| Cost of sales | 70,903 | | | 71,895 | | | 70,979 | | | 72,436 | |
| Gross profit | 21,560 | | | 18,790 | | | 19,522 | | | 16,660 | |
| SG&A expenses | 5,309 | | | 7,186 | | | 8,648 | | | 8,147 | |
| Operating income | 16,251 | | | 11,604 | | | 10,874 | | | 8,513 | |
| Interest expense, net | (368) | | | (364) | | | (321) | | | (252) | |
| Income before income taxes | 15,883 | | | 11,240 | | | 10,553 | | | 8,261 | |
| Income tax expense | 2,936 | | | 3,025 | | | 2,642 | | | (1,459) | |
| Net income | $ | 12,947 | | | $ | 8,215 | | | $ | 7,911 | | | $ | 9,720 | |
| | | | | | | |
Basic and diluted EPS data(a) | $ | 0.76 | | | $ | 0.48 | | | $ | 0.46 | | | $ | 0.57 | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 | | | | | | |
| | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter |
| Sales | $ | 104,850 | | | $ | 95,031 | | | $ | 88,252 | | | $ | 87,956 | |
| Cost of sales | 79,242 | | | 75,432 | | | 68,811 | | | 69,005 | |
| Gross profit | 25,608 | | | 19,599 | | | 19,441 | | | 18,951 | |
| SG&A expenses | 8,996 | | | 7,584 | | | 8,309 | | | 8,562 | |
| Operating income | 16,612 | | | 12,015 | | | 11,132 | | | 10,389 | |
| Interest expense, net | (338) | | | (334) | | | (289) | | | (207) | |
| Income before income taxes | 16,274 | | | 11,681 | | | 10,843 | | | 10,182 | |
| Income tax expense (benefit) | 4,452 | | | 2,673 | | | 3,316 | | | 1,255 | |
| Net income | $ | 11,822 | | | $ | 9,008 | | | $ | 7,527 | | | $ | 8,927 | |
| | | | | | | |
Basic and diluted EPS data(a) | $ | 0.69 | | | $ | 0.52 | | | $ | 0.44 | | | $ | 0.52 | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Identifiable Assets | | | |
| Distillery products | $ | 191,321 |
| | $ | 161,059 |
|
| Ingredient solutions | 28,950 |
| | 27,109 |
|
| Corporate | 20,057 |
| (a) | 37,168 |
|
Total(b) | $ | 240,328 |
|
| $ | 225,336 |
|
| |
(a)
| Reflects the 2017 sale of ICP, the Company's equity method investment (Note 3). |
| |
(b)
| The Company has no assets located in foreign countries. |
|
| |
NOTE 12: | SUPPLEMENTAL CASH FLOW INFORMATION |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Non-cash investing and financing activities: | | | | | |
| Purchase of property, plant, and equipment in accounts payable | $ | 4,522 |
| | $ | 4,364 |
| | $ | 1,784 |
|
| Additional cash payment information: | | | | | |
| Interest paid | 1,489 |
| | 1,467 |
| | 818 |
|
| Income taxes paid | 13,526 |
| | 16,409 |
| | 9,393 |
|
|
| |
NOTE 13: | DERIVATIVE INSTRUMENTS |
Certain commodities the Company uses in its production process, or input costs, exposes it(a)Quarterly EPS amounts may not add to market price risk due to volatility in the prices for those commodities. Through the Company's grain supply contracts for its Atchison and Lawrenceburg facilities, its wheat flour supply contractamounts for the Atchison facility,year because quarterly and its natural gas contracts for both facilities, it purchases grain, wheat flour, and natural gas, respectively, for delivery from one to 24 months into the future at negotiated prices. The Company has determined that the firm commitments to purchase grain, wheat flour, and natural gas under the terms of its supply contracts meets the normal purchases and sales exception as defined under Accounting Standards Codification ("ASC") 815, Derivatives and Hedging, because the quantities involvedannual EPS calculations are for amounts to be consumed within the normal expected production process.performed separately.
NOTE 15: SUBSEQUENT EVENTS |
| |
NOTE 14: | RELATED PARTY TRANSACTIONS |
Dividend Declaration
Information related to the Company’s related party transactions:
Transactions with ICP and ICP Holdings. On July 3, 2017, the Company completed the sale of its 30 percent equity ownership interest in ICP to Pacific Ethanol (Note 3).
As of December 31, 2017 and 2016, the Company recorded $0 and $3,349, respectively, of amounts due to ICP that were included in accounts payable to affiliate, net, on the accompanying Consolidated Balance Sheets and purchased approximately $18,425, $29,596, and $39,738, respectively, of product from ICP during 2017, 2016, and 2015, respectively, included in cost of sales on the Consolidated Statements of Income.
On June 28, 2017, the Company received a cash dividend distribution form ICP of $6,600, which was its 30 percent ownership share of the total distribution. The Company also received a distribution of $830 on June 30, 2017, which was its 30 percent ownership share of an additional distribution (Note 3).
On February 26, 2016,24, 2020, the Board of Directors declared a quarterly dividend payable to stockholders of record as of March 13, 2020, of our Common Stock and a dividend equivalent payable to holders of certain RSUs as of March 13, 2020, of $0.12 per share and per unit. The dividend payment and dividend equivalent payment will occur on March 27, 2020.
New Credit Agreement
On February 14, 2020, the Company receivedentered into a cash dividend distributionnew credit agreement (the "New Credit Agreement") with Wells Fargo. The New Credit Agreement replaces the Company's existing Credit Agreement with Wells Fargo. The New Credit Agreement provides for a $300,000 revolving credit facility. The Company may increase the facility from ICPtime to time by an aggregate principal amount of $3,300, which was its 30 percent ownership shareup to $100,000 provided certain conditions are satisfied and at the discretion of the total distribution.lenders. The Credit Agreement matures on February 14, 2025. The New Credit Agreement is secured by substantially all assets, excluding real property.
|
| |
NOTE 15: | QUARTERLY FINANCIAL DATA (UNAUDITED) |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter |
| Sales | $ | 91,043 |
| | $ | 87,852 |
| | $ | 87,892 |
| | $ | 91,345 |
|
| Less: excise tax | 2,850 |
| | 1,519 |
| | 2,139 |
| | 4,176 |
|
| Net sales | 88,193 |
| | 86,333 |
| | 85,753 |
| | 87,169 |
|
| Cost of sales | 68,668 |
| | 67,708 |
| | 66,928 |
| | 68,128 |
|
| Gross profit | 19,525 |
| | 18,625 |
| | 18,825 |
| | 19,041 |
|
| SG&A expenses | 8,993 |
| | 8,154 |
| | 8,311 |
| | 7,649 |
|
| Operating income | 10,532 |
| | 10,471 |
| | 10,514 |
| | 11,392 |
|
Gain on sale of equity method investment (Note 3)(a) | — |
| | 11,381 |
| | — |
| | — |
|
| Equity method investment earnings (loss) (Note 3) | — |
| | — |
| | (819 | ) | | 471 |
|
| Interest expense, net | (250 | ) | | (224 | ) | | (379 | ) | | (331 | ) |
| Income before income taxes | 10,282 |
| | 21,628 |
| | 9,316 |
| | 11,532 |
|
Income tax expense (benefit) (Note 6)(b) | (2,357 | ) | | 7,491 |
| | 2,947 |
| | 2,854 |
|
| Net income | $ | 12,639 |
| | $ | 14,137 |
| | $ | 6,369 |
| | $ | 8,678 |
|
| | | | | | | | |
| Basic and diluted EPS data | $ | 0.74 |
| | $ | 0.82 |
| | $ | 0.37 |
| | $ | 0.50 |
|
| | | | | | | | |
| Dividends and dividend equivalents per common share and per unit | $ | 0.04 |
| | $ | 0.89 |
| | $ | 0.04 |
| | $ | 0.04 |
|
| |
(a)
| Net income was positively impacted during the third quarter of 2017 by a gain on sale of equity method investment of $11,381 related to the sale of the Company's 30 percent interest in ICP to Pacific Ethanol on July 3, 2017 (Note 3). |
| |
(b)
| Net income was positively impacted during the fourth quarter of 2017 by a provisional income tax benefit of $3,343 related to the Tax Act enacted on December 22, 2017 (Note 6).
|
| |
(c)
| Quarterly EPS amounts may not add to amounts for the year because quarterly and annual EPS calculations are performed separately. |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016(a) (b) |
| | Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter |
| Sales | $ | 85,005 |
| | $ | 83,711 |
| | $ | 82,174 |
| | $ | 77,191 |
|
| Less: excise tax | 3,860 |
| | 3,820 |
| | 1,782 |
| | 356 |
|
| Net sales | 81,145 |
| | 79,891 |
| | 80,392 |
| | 76,835 |
|
| Cost of sales | 63,560 |
| | 64,770 |
| | 64,861 |
| | 59,789 |
|
| Gross profit | 17,585 |
| | 15,121 |
| | 15,531 |
| | 17,046 |
|
| SG&A | 6,987 |
| | 6,981 |
| | 6,404 |
| | 6,321 |
|
| Other operating income, net | — |
| | (3,385 | ) | | — |
| | — |
|
| Operating income | 10,598 |
| | 11,525 |
| | 9,127 |
| | 10,725 |
|
| Equity method investment earnings (Note 3) | 1,776 |
| | 664 |
| | 1,079 |
| | 517 |
|
| Interest expense | (314 | ) | | (341 | ) | | (328 | ) | | (311 | ) |
| Income before income taxes | 12,060 |
| | 11,848 |
| | 9,878 |
| | 10,931 |
|
| Income tax expense (Note 6) | 3,775 |
| | 2,316 |
| | 3,570 |
| | 3,872 |
|
| Net income | $ | 8,285 |
| | $ | 9,532 |
| | $ | 6,308 |
| | $ | 7,059 |
|
| | | | | | | | |
| Basic and diluted EPS data | $ | 0.48 |
| | $ | 0.55 |
| | $ | 0.37 |
| | $ | 0.41 |
|
| | | | | | | | |
| Dividends and dividend equivalents per common share and per unit | $ | 0.02 |
| | $ | 0.02 |
| | $ | — |
| | $ | 0.08 |
|
| |
(a)
| Net income was positively impacted during the third quarter of 2016 by other operating income, net, of $3,385 related to a legal settlement agreement and a gain on sale of long-lived assets and by a lower effective income tax rate related to the implementation of ASU No. 2016-09, Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting.
|
| |
(b)
| Quarterly EPS amounts may not add to amounts for the year because quarterly and annual EPS calculations are performed separately. |
On November 7, 2016,In connection with the Company’s entry into the Credit Agreement, on February 14, 2020, the Company acquired 100% controlling interestentered into an amendment to the Note Purchase and Private Shelf Agreement, dated as of August 23, 2017, made by the Company, as issuer, and Prudential Capital Group, as purchasers in order to permit the George Remus® brand business from Queen City Whiskey LLC in a taxable purchase transaction. The resultsCompany’s use of the George Remus® brand business since that date have been included inrevolving credit facility (and any increases thereto) pursuant to the Company's consolidatedNew Credit Agreement and to make conforming amendments to certain financial statements. As a result of the acquisition, the Company is expected to expand the distribution of the George Remus® brand products. It also expects to reduce costs through economies of scale. The goodwill and other intangible asset of $1,850 arising from the acquisition relates to the synergies and those cost reductions. The aggregate noncontingent portion of the purchase price was $1,551 and was paid in cash. The purchase price also included a contingent consideration arrangement with a fair value of $350. This fair value was based on significant inputs that are not observable and are referred to as Level 3 inputs. The contingent consideration to be paid is calculated on the excess sales over a base level through 2020 and is not limited in amount.covenants.
Summary of the consideration paid for the George Remus® brand business and the estimated fair value of the assets acquired at the acquisition date:
|
| | | |
| Consideration: | |
| Cash | $ | 1,551 |
|
Contingent consideration arrangement (included in Other non-current liabilities on the Consolidated Balance Sheets) | 350 |
|
| Fair value of total consideration transferred | $ | 1,901 |
|
| | |
| Recognized amounts of identifiable assets acquired: | |
| Inventory | $ | 51 |
|
| Total identifiable net assets assumed | $ | 51 |
|
Goodwill and Brand name (indefinite lived) (included in Other assets on the Consolidated Balance Sheets) (Note 4) | 1,850 |
|
| Total | $ | 1,901 |
|
|
| |
NOTE 17: | SUBSEQUENT EVENTS |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Dividend DeclarationNot applicable.
On February 21, 2018, the Board of Directors declared a quarterly dividend payable to stockholders of record as of March 9, 2018, of our Common Stock and a dividend equivalent payable to holders of RSUs as of March 9, 2018, of $0.08 per share and per unit. The dividend payment and dividend equivalent payment will occur on March 23, 2018.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the fiscal year, our Chief Executive Officer and Chief Financial Officer have each reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have each concluded that our current disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange CommissionSEC rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
REPORT ON INTERNAL CONTROLS
Management’s Annual Report on Internal Control Over Financial Reporting and our independent registered public accounting firm’s attestation report on our internal control over financial reporting can be found under Item 8. Financial Statements and Supplementary Data.
CHANGES IN INTERNAL CONTROLS
There has been no change in the Company’s internal control over financial reporting required by Exchange Act Rule 13a-15 that occurred during 20172019 that has materially affected, or is reasonably likely to materially affect MGP Ingredients, Inc.’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference to the information under Election of Directors,Corporate Governance and Committee Reports - The Board; Standing Committees; Meetings; Independence,Corporate Governance and Committee Reports - Audit Committee, and Delinquent Section 16(a) Beneficial Ownership Reporting ComplianceReports of the Proxy Statement. If no delinquencies to report the Delinquent Section 16(a) Reports of the Proxy Statement may be excluded altogether.
The Company has adopted a code of conduct (ethics) that applies to all its employees, including the principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. A current copy is filed on the Company'sCompany’s website at www.mgpingredients.com. The Company intends to disclose any changes in, or waivers from, this code of conduct by posting such information on the same website or by filing a Current Report on Form 8-K, in each case to the extent such disclosure is required by applicable rules.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the information in Executive Compensation and Other Information, Corporate Governance and Committee Reports - The Board; Standing Committees; Meetings; Independence and Corporate Governance and Committee Reports - Compensation Committee Interlocks and Insider Participation of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated by reference to the information under Principal Stockholders of the Proxy Statement.
The following is a summary of securities authorized for issuance under equity compensation plans as of December 31, 2017:2019:
| | | | | | | | | | | | | | | | | |
| |
(1) Number of shares to be issued upon exercise of outstanding options, warrants, and rights | |
(2) Weighted average of exercise price of outstanding options, warrants, and rights | |
(3) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (1)) |
| Equity compensation plans approved by security holders | 116,855 | | | $ | 65.73 | | | 1,372,127 | |
| Equity compensation plans not approved by security holders | — | | | — | | | — | |
| Total | 116,855 | | | $ | 65.73 | | | 1,372,127 | |
|
| | | | | | | | | |
| |
(1) Number of shares to be issued upon exercise of outstanding options, warrants, and rights | |
(2) Weighted average of exercise price of outstanding options, warrants, and rights | |
(3) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (1)) |
| Equity compensation plans approved by security holders | 368,492 |
| | $ | 17.20 |
| | 1,455,890 |
|
| Equity compensation plans not approved by security holders | — |
| | — |
| | — |
|
| Total | 368,492 |
| | $ | 17.20 |
| | 1,455,890 |
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference to the information under Corporate Governance and Committee Reports – The Board; Standing Committees; Meetings; Independence and to the information under Related Transactions of the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference to the information under Audit and Certain Other Fees Paid Accountants of the Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following financial statements are filed as part of this report:
Management's
•Management’s Report on Internal Control over Financial Reporting.
| |
▪ | Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements and Internal Control over Financial Reporting. |
| |
▪ | Consolidated Statements of Income – for the Years Ended December 31, 2017, 2016, and 2015. |
•Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements and Internal Control over Financial Reporting.
•Consolidated Statements of Income – Years Ended December 31, 2019, 2018, and 2017.
•Consolidated Statements of Comprehensive Income – for the Years Ended December 31, 2017, 2016,2019, 2018, and 2015. 2017.
•Consolidated Balance Sheets at- December 31, 20172019 and 2016. 2018.
•Consolidated Statements of Cash Flows – for the Years Ended December 31, 2017, 2016,2019, 2018, and 2015.2017.
| |
▪ | Consolidated Statements of Changes in Stockholders’ Equity – for the Years Ended December 31, 2017, 2016, and 2015. |
| |
▪ | Notes to Consolidated Financial Statements. |
•Consolidated Statements of Changes in Stockholders’ Equity – Years Ended December 31, 2019, 2018, and 2017.
•Notes to Consolidated Financial Statements - Years Ended December 31, 2019, 2018, and 2017.
(b) Financial Statement Schedules:
We have omitted all other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange CommissionSEC either because they are not required under the related instructions, because the information required is included in the consolidated financial statements and notes thereto, or because they do not apply.
(c) The exhibits required by Item 601 of Regulation S-K are set forth in the Exhibit Index below.
EXHIBIT LIST
|
| | | | |
| 2.1 | | Agreement of Merger and Plan of Reorganization, dated as of January 3, 2012, by and among MGPI Processing, Inc. (formerly MGP Ingredients, Inc.), MGP Ingredients, Inc. (formerly MGPI Holdings, Inc.) and MGPI Merger Sub, Inc. (Incorporated by reference to Exhibit 2 of the Company’s Current Report on Form 8-K filed January 5, 2012 (File number 000-17196)) |
2.2 | |
2.3 | Agreement and Plan of Merger, dated June 26, 2017, by and among Pacific Ethanol Central, LLC, ICP Merger Sub, LLC, Illinois Corn Processing, LLC, Illinois Corn Processing Holdings Inc., and MGPI Processing, Inc. (Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed June 27, 2017 (File Number 000-17196)) |
| 3.1.1 | |
3.1.2 | |
3.1.33.1.2 | |
| 3.2 | |
| 4.1 | Third Amended and Restated Credit Agreement, dated March 21, 2016, by and among MGPI Processing, Inc., MGPI Pipeline, Inc. and MGPI of Indiana, LLC as Borrowers, MGP Ingredients, Inc., Wells Fargo Bank, National Association, as Administrative Agent, and the Lenders party thereto (Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on March 25, 2016 (File number 000-17196)) |
4.1.1 | Amendment No. 1 to Third Amended and Restated Credit Agreement, dated November 8, 2016, by and among MGPI Processing, Inc., MGPI Pipeline, Inc. and MGPI of Indiana, LLC as Borrowers, MGP Ingredients, Inc., Wells Fargo Bank, National Association, as Administrative Agent, and the Lenders party thereto (Incorporated by reference to Exhibit 4.1.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (File number 000-17196)) |
4.1.2 | Reaffirmation of Loan Documents and Amendment No. 2 to Guaranty and Security Agreement, dated March 21, 2016, by and among MGP Ingredients, Inc., MGPI Processing, Inc., MGPI Pipeline, Inc., MGPI of Indiana, LLC, and Thunderbird Real Estate Holdings, LLC, as Grantors, and Wells Fargo Bank, National Association, as Administrative Agent (Incorporated by reference to Exhibit 4.1.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (File number 000-17196)) |
4.2 | |
4.34.2 | | |
4.44.3 | | |
10.14.4** | |
10.2*10.1* | |
10.3.1* | |
10.3.2*10.2* | |
10.4*10.3* | |
|
| |
10.5*10.4* | |
10.6*10.5* | |
10.7* | |
10.8* | |
10.9* | |
10.10* | |
10.11* | |
10.12*10.6* | | |
10.13* | |
10.14* | |
10.15 | |
10.16* | |
21**10.7* | | |
| 21** | | |
| 23.1** | |
| 24 | |
| 31.1** | |
| 31.2** | |
| 32.1** | |
| 32.2** | |
101**101 | The following financial information from MGP Ingredients, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017,2019, formatted in XBRL (ExtensibleiXBRL (Inline Extensible Business Reporting Language) includes: (i) Consolidated Balance Sheets as of December 31, 20172019 and December 31, 2016,2018, and (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows (and in the case of (ii), (iii), (iv) and (v)) for the years ended December 31, 2017,2019, December 31, 2016,2018, and December 31, 2015,2017, and (vi) the Notes to the Consolidated Financial Statements. |
| 104 | Cover Page Interactive Data File - formatted in iXBRL (Inline Extensible Business Reporting Language) and contained in Exhibit 101 |
* Management contract or compensatory plan or arrangement **
** Filed herewith
ITEM 16. FORM 10-K SUMMARY
None.
None.
SIGNATURES
Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Atchison, State of Kansas, on this 1st26th day of March, 2018.February, 2019.
|
| | | | | | | |
| MGP INGREDIENTS, INC. | |
| | |
| By | /s/ Augustus C. Griffin |
| | Augustus C. Griffin, President and Chief Executive Officer (Principal Executive Officer) |
| | |
| By | /s/ Thomas K. PigottBrandon M. Gall |
| | Thomas K. Pigott,Brandon M. Gall, Vice President, Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS,Know all people by these presents, that each person whose signature appears below constitutes and appoints Augustus C. Griffin and Thomas K. PigottBrandon M. Gall, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution,resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, and to sign any and all, reports of the Registrantamendments to this annual report on Form 10-K, and to sign any, and all, amendments to such reports and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities &and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite orand necessary to be done in and about the premises, as fully and to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or anyeither of them, or theirhis or histheir substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the RegistrantCompany and in the capacities indicated on the dates indicatedFebruary 26, 2020.
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| | | | | | | |
| Name | Title | Date |
| /s/Augustus C. Griffin | | |
| Augustus C. Griffin | President and Chief Executive Officer (Principal Executive Officer) and Director | March 1, 2018February 26, 2020 |
/s/ Thomas K. PigottBrandon M. Gall | | |
Thomas K. PigottBrandon M. Gall | Vice President, Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | March 1, 2018February 26, 2020 |
| /s/ James L. Bareuther | | |
| James L. Bareuther | Director | March 1, 2018February 26, 2020 |
| /s/ David J. Colo | | |
| David J. Colo | Director | March 1, 2018February 26, 2020 |
| /s/ Terrence P. Dunn | | |
| Terrence P. Dunn | Director | March 1, 2018February 26, 2020 |
| /s/ Anthony P. Foglio | | |
| Anthony P. Foglio | Director | March 1, 2018February 26, 2020 |
/s/ George W. Page, Jr. | | |
George W. Page, Jr. | Director | March 1, 2018 |
/s/ Daryl R. Schaller | | |
Daryl R. Schaller | Director | March 1, 2018 |
| /s/ Karen Seaberg | | |
| Karen Seaberg | Director | March 1, 2018February 26, 2020 |
| /s/ M. Jeannine Strandjord | | |
| M. Jeannine Strandjord | Director | March 1, 2018February 26, 2020 |
| /s/ Lynn Jenkins | | |
| Lynn Jenkins | Director | February 26, 2020 |
| /s/ Kerry Walsh Skelly | | |
| Kerry Walsh Skelly | Director | February 26, 2020 |
