NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise noted)
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's protein and starch food ingredients provide a host of functional, nutritional, and sensory benefits for a wide range of food products to serve the packaged goods industry. The Company's distillery products are derived from corn and other grains (including rye, barley, wheat, barley malt, and milo), and its ingredient products are derived from wheat flour. The majority of the Company’s sales are made directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries.
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. Certain amounts in the 2017 and 2018 consolidated financial statements have been reclassified to conform to the 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 demands on management's judgment, with financial reporting results relying on estimation about the effects of matters that are inherently uncertain. For all of these policies, management cautions that future events rarely develop as forecast, and estimates routinely require adjustment and may require material adjustment.
Inventory. Inventory includes finished goods, raw materials in the form of agricultural commodities used in the production process, and certain maintenance and repair items. 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)
|
10 – 30 years
|
Machinery and equipment
|
3 – 10 years
|
Office furniture and equipment
|
5 – 10 years
|
Computer equipment and software
|
3 – 5 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 2019, 2018, and 2017 is noted below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Interest costs charged to expense
|
|
$
|
1,305
|
|
|
$
|
1,168
|
|
|
$
|
1,184
|
|
Plus: Interest cost capitalized
|
|
575
|
|
|
562
|
|
|
293
|
|
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.
Fair Value of Financial Instruments. The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy is broken down into three levels based upon the observability of inputs. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability.
The Company’s short-term financial instruments include cash and cash equivalents, accounts receivable and accounts payable. The carrying value of the short-term financial instruments approximates the fair value due to their short-term nature. These financial instruments have no stated maturities or the financial instruments have short-term maturities that approximate market.
The fair value of the Company’s debt is estimated based on current market interest rates for debt with similar maturities and credit quality. The fair value of the Company’s debt was $42,534 and $32,018 at December 31, 2019 and 2018, respectively. The financial statement carrying value (including unamortized loan fees) was $41,060 and $32,014 at December 31, 2019 and 2018, respectively. These fair values are considered Level 2 under the fair value hierarchy.
Derivative 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 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 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 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 Company recording Operating lease right-of-use assets and Operating lease liabilities in its Consolidated Balance Sheet of $6,598 and $6,952, respectively, as of January 1, 2019. The standard did not impact the Company’s consolidated net earnings and also had no impact on its cash flows.
In February 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”). The Company adopted this guidance on January 1, 2019. We elected to reclassify the income tax effects of the Tax Act from accumulated other comprehensive income to retained earnings which resulted in an immaterial effect on its consolidated financial results and disclosures.
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which more closely aligns the accounting for employee and nonemployee share-based payments. The Company adopted this guidance on January 1, 2019, and it had no impact on its consolidated financial results and disclosures.
Recently Issued Accounting Pronouncement. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent updates. The accounting standard changes the methodology for measuring credit losses on financial instruments and the timing when such losses are recorded. ASU 2016-13 is effective for public companies 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, the 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 still evaluating the effect that ASU 2019-12 will have on its consolidated financial statements and related disclosures.
NOTE 2: OTHER BALANCE SHEET CAPTIONS
Inventory.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Finished goods
|
$
|
16,654
|
|
|
$
|
17,296
|
|
Barreled distillate (bourbons and whiskeys)
|
104,249
|
|
|
76,374
|
|
Raw materials
|
4,920
|
|
|
4,906
|
|
Work in process
|
1,766
|
|
|
1,550
|
|
Maintenance materials
|
8,200
|
|
|
7,541
|
|
Other
|
1,142
|
|
|
1,102
|
|
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
|
|
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
|
|
|
|
NOTE 3: REVENUE
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 4: EQUITY METHOD INVESTMENTS
As of December 31, 2019 and 2018, the Company’s equity method investments were zero.
Illinois Corn Processing ("ICP") Investment. In 2017, the Company completed the sale of its equity ownership interest in ICP to Pacific Ethanol Central, LLC ("Pacific Ethanol"), consistent with an Agreement and Plan of Merger ("Merger Agreement"). 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’s 2017 Consolidated Statement of Income. The Merger Agreement contemplated a special distribution of all of ICP’s cash and cash equivalents to equity owners prior to the closing, which
resulted in the Company receiving cash dividend distributions from ICP during June 2017 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 2017, the Company received cash dividend distributions from ICP totaling $7,430, as mentioned above.
Summary Financial Information. Condensed financial information of the Company’s equity method investment in ICP for the year ended December 31, 2017:
|
|
|
|
|
|
|
Year Ended December 31,
|
ICP’s Operating results:
|
2017
|
Sales
|
$
|
78,062
|
|
Cost of sales and expenses(a)
|
(79,224)
|
|
Net loss
|
$
|
(1,162)
|
|
(a)Includes depreciation and amortization of $1,720 for 2017.
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
|
|
|
|
(a) Interest rates are as of December 31, 2019.
(b) Loan fees are being amortized over the life of the Credit Agreement and Note Purchase Agreement.
Credit Agreement and Note Purchase Agreements. On August 23, 2017, the Company entered into credit agreement (the "Credit Agreement") with Wells Fargo Bank, National 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, 2019. The Company incurred no new loan fees related to the Credit Agreement during 2019. The unamortized balance of total loan fees related to the Credit Agreement was $299 at December 31, 2019 and is being amortized over the life of the Credit Agreement.
As of December 31, 2019, the Company’s total outstanding borrowings under the Credit Agreement were $300 leaving $149,700 available. The interest rate for the borrowings of the Credit Agreement at December 31, 2019 was 3.2 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, 2019. The Company incurred no new loan fees related to the Note Purchase Agreement during 2019. The unamortized balance of total loan fees related to the Note Purchase Agreement was $149 at December 31, 2019 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
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
|
|
Income tax expense also included tax expense allocated to comprehensive income for 2019, 2018, and 2017 of $14, $73, and $37, respectively (see the Consolidated Statements of Comprehensive Income).
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Act, resulting in significant modifications to the then existing law, impacting the measurement of income taxes for the year ended December 31, 2017, and the years thereafter. The Company recorded a 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. This net benefit provided a 6.3 percent reduction in the Company’s effective tax rate for the 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 is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
"Expected" provision at federal statutory rate
|
$
|
9,654
|
|
|
$
|
10,286
|
|
|
$
|
18,465
|
|
State income taxes, net(a)
|
1,540
|
|
|
2,029
|
|
|
1,612
|
|
Change in valuation allowance
|
(168)
|
|
|
1,304
|
|
|
(578)
|
|
Domestic production activity deduction
|
—
|
|
|
—
|
|
|
(957)
|
|
Share-based compensation(a)
|
(2,877)
|
|
|
(1,201)
|
|
|
(4,254)
|
|
Compensation limits
|
148
|
|
|
—
|
|
|
931
|
|
Federal and state tax credits
|
(1,302)
|
|
|
(807)
|
|
|
(1,058)
|
|
Tax benefit from the Tax Act
|
—
|
|
|
—
|
|
|
(3,343)
|
|
Other
|
149
|
|
|
85
|
|
|
117
|
|
Income tax expense
|
$
|
7,144
|
|
|
$
|
11,696
|
|
|
$
|
10,935
|
|
Effective tax rate
|
15.6
|
%
|
|
23.9
|
%
|
|
20.7
|
%
|
(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)
|
|
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
|
|
As of December 31, 2019 and 2018, the Company’s total valuation allowance of $1,284 and $1,452, respectively, related to net operating loss carryforwards in states in which it is not "more likely than not" to create enough state taxable income to fully utilize the carryforwards before expiration of the carryforward periods, and capital loss carryforwards that 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 related valuation allowance that expired at the end of 2019.
As of December 31, 2019 and 2018, the Company had $21,918 and $21,575 in gross state net operating loss 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, the Company had gross state tax credit carryforwards of $4,049 and $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 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, the Company'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 2019, 2018, and 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
|
|
|
|
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 decrease by approximately half of its value over the next 12 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 is currently under federal income tax audit for tax year 2016. The Company does not expect this audit to result in a significant adjustment. For federal tax purpose, all tax years after 2015 remain open to adjustment. The Company is subject to examination for its state returns for year 2015, and forward, with the exception of certain net operating losses and credit carryforwards originating in years prior to 2015 that remain subject to adjustment.
NOTE 7: EQUITY AND EPS
Capital Stock. Common Stockholders are entitled to elect four of the nine members of the Board of Directors, while Preferred Stockholders are entitled to elect the remaining five 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.
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, no shares were repurchased under the program.
Dividends and Dividend Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
Operating leases
|
$
|
2,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents weighted average discount rate and remaining lease term:
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Weighted average discount rate
|
|
Operating leases
|
5.77
|
%
|
|
|
Weighted average remaining lease term
|
|
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 9: COMMITMENTS AND CONTINGENCIES
Commitments. 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 sufficient to pay principal and interest on the bonds. Because the Company owns all of 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 bond asset and, in turn, reflected no amount for the obligation or the corresponding asset on its Consolidated Balance Sheet at December 31, 2019 and 2018.
Contingencies. There are various legal and regulatory proceedings involving the Company and its subsidiaries. The Company accrues estimated costs for a contingency when management believes that a loss is probable and can be reasonably estimated.
A chemical release occurred at the Company's Atchison facility on October 21, 2016, which resulted in emissions venting into the air ("the Atchison Chemical Release"). The Company reported the event to the Environmental Protection Agency ("EPA"), the Occupational, Safety, and Health Administration ("OSHA"), and to Kansas and local authorities on that date, and has cooperated fully to investigate and ensure that all appropriate response actions 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 on August 1, 2017, that it intended 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 of $1,000, which is included as a component of Accounts payable in the 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 Atchsion Chemical Release, but the Company is currently unable to reasonably estimate the amount of any such damages that might result. The Company’s insurance is expected to provide coverage of any damages to private plaintiffs, subject to a deductible of $250, but certain regulatory fines or penalties may not be covered and there can be no assurance to the amount or timing of possible insurance recoveries if ultimately claimed by the Company.
NOTE 10: 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 for 2019, 2018, and 2017, respectively.
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, 2019, the plan covered 166 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 (23 employees) is age 62 and 5 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.
As of December 31, 2019 and 2018, total current benefit obligation recorded in Accrued expense on the Consolidated Balance Sheets was $441 and $467, respectively. As of December 31, 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 1,087,840 at December 31, 2019.
The Company currently has two 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’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 2019, 2018, and 2017 reflect total share-based compensation costs and director fees for awarded grants of $2,424, $2,612, $2,245, respectively, related to these plans.
For long-term incentive awards to be granted in the form of RSUs in 2020 based on 2019 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 2019 that the performance metrics would most likely be met, amortization of the estimated dollar pool of RSUs to be awarded based on 2019 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 2019, 2018, and 2017 reflects share-based compensation costs for grants to be awarded of $123, $821, and $491, respectively.
At the Company’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’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, 2019, 344,190 RSUs had been granted of the 1,500,000 shares approved for under the 2014 Plan.
Directors’ Plan
The Director’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, 2019, 83,683 shares were granted of the 300,000 shares approved for grants under the Directors’ Plan and all 83,683 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, 2019, no stock options and no unvested restricted stock shares (net of forfeitures) remained outstanding under the 2004 Plan. No future grants can be made under the 2004 Plan.
In 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. 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, 2019, there were no unvested RSUs under the 2004 Plan and no RSU awards were available for future grants under the 2004 Plan.
RSUs. Summary of unvested RSUs under the Company’s share-based compensation plans for 2019, 2018, and 2017:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
During 2019, 2018, and 2017, the total grant date fair value of RSU awards vested was $2,951, $1,239, and $979, respectively. As of December 31, 2019 there was $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 2.2 years.
Upon their vesting, the 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 for $4,663 in 2017.
Annual Cash Incentive Plan. The STI Plan was amended and restated as of January 1, 2019. The STI Plan is designed to motivate and retain the Company’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. Operating income for the performance metric was defined as reported GAAP operating income adjusted for certain discretionary items as determined by the Company’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 for 2019, 2018, and 2017, 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 no 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 2019, 2018, and 2017, the Company had no sales to an individual customer that accounted for more than 10 percent of consolidated sales. During the years 2019, 2018, and 2017, the Company’s ten largest customers accounted for approximately 39 percent, 40 percent, and 39 percent of consolidated 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 ten largest suppliers accounted for approximately 65 percent of consolidated purchases.
NOTE 12: OPERATING SEGMENTS
At December 31, 2019 and 2018, the Company had two segments: Distillery Products and Ingredient Solutions. The Distillery Products segment consists of food grade alcohol and distillery co-products, such as distillers feed (commonly called dried distillers grain in the industry) and fuel grade alcohol. The Distillery Products segment also includes warehouse services, including barrel put away, 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 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.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2019, 2018, and 2017, respectively, and is largely derived from Japan, Thailand, and Canada. The balance of 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 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
|
|
See Note 8 for operating lease supplemental cash flow information.
NOTE 14: QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)Quarterly EPS amounts may not add to amounts for the year because quarterly and annual EPS calculations are performed separately.
NOTE 15: SUBSEQUENT EVENTS
Dividend Declaration
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.
New Credit Agreement
On February 14, 2020, the Company entered into a new 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 time to time by an aggregate principal amount of up to $100,000 provided certain conditions are satisfied and at the discretion of the lenders. The Credit Agreement matures on February 14, 2025. The New Credit Agreement is secured by substantially all assets, excluding real property.
In connection with the Company’s entry into the Credit Agreement, on February 14, 2020, the Company entered 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 Company’s use of the revolving credit facility (and any increases thereto) pursuant to the New Credit Agreement and to make conforming amendments to certain financial and other covenants.