MGP INGREDIENTS INC (MGPI) FY 2022 MD&A

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 of Financial Condition and Results of Operations

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 eight sections:

•Overview

•Results of Operations

•Distilling Solutions Segment

•Branded Spirits Segment

•Ingredient Solutions Segment

•Cash Flow, Financial Condition and Liquidity

•Critical Accounting Estimates

•New Accounting Pronouncements

OVERVIEW

MGP is a leading producer and supplier of premium distilled spirits, branded spirits and food ingredients. Distilled spirits include premium bourbon, rye, and other whiskeys (“brown goods”) and grain neutral spirits (“GNS”), including vodka and gin. Our distilled spirits are either sold directly or indirectly to manufacturers of other branded spirits. MGP is also a producer of high quality industrial alcohol for use in both food and non-food applications. The Company has a portfolio of our own high quality branded spirits, which we produce through our distilleries and bottling facilities and sell to distributors. Our branded spirits products account for a range of price points from value products through ultra premium brands, with a focus on high-end American whiskey, tequila and gin. 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 consumer packaged goods industry. Our ingredients products are sold directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries. During 2022, the Company changed the name of its Distillery Products segment to Distilling Solutions.

Our strategic plan is designed to leverage our history and strengths as well as to leverage the positive macro trends we see in the industries in which we compete while providing better insulation from outside factors, including swings in commodity pricing.

Distilling Solutions Segment

Our Distilling Solutions segment mission is to cultivate lasting partnerships with customers across all product categories by leveraging our strong sales and operating platform, aging whiskey inventory, and unique project development skills. The favorable macro trends benefiting our business include the expansion of the distilled spirits’ share within beverage alcohol, particularly 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 brown goods, as well as extending the product range of distilled gins and GNS, the base component for vodka. Our Distilling Solutions segment is also subject to unfavorable macro trends which include increased competition as industry participants seek to capitalize on consumer trends as well as increased commodity prices. Our strategy within the Distilling Solutions segment is to continue migrating away from industrial alcohol to white beverage alcohol, cultivate additional multi-national and craft customers for brown goods sales, enhance offerings to

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become a beverage alcohol “solution provider”, and develop an export market for our aged brown goods.

We continued to focus on attracting and developing customers for our premium beverage alcohol products during 2022 as well as shifting our focus from industrial alcohol to white beverage alcohol. Distilling Solutions segment sales for 2022 increased 22 percent over the prior year.

Branded Spirits Segment

Our Branded Spirits segment mission is to align our product offering and enhance focus on growing spirits categories and price tiers. The favorable macro industry trends benefiting our business include growth in high-end whiskey and tequila brands as well as growth across all spirit categories in the high-end price tiers. Our Branded Spirits segment is also subject to unfavorable macro trends, which include increased competition as industry participants seek to capitalize on consumer trends. Our strategy for the Branded Spirits segment is to focus on the categories, brands, price points, bottle size and market support that will maximize profit for the Company. On April 1, 2021, we completed the merger with Luxco, Inc. and its affiliates (“Luxco”)(the “Merger”). As a result of the Merger we have increased our scale and market position in the branded spirits sector and believe it has strengthened our platform for future growth of higher valued-added products. The Branded Spirits segment sales for 2022 increased 30 percent over the prior year.

Ingredient Solutions Segment

Our Ingredient Solutions segment mission is to remain a strategic business partner of choice earning meaningful relationships through collaboration, innovation, and dedication to best-in-class customer service. The favorable macro industry trends benefiting our business include growth and focus on high fiber, high protein, meat alternatives, plant-based protein, and non-GMO Products. We continue to provide outstanding customer solutions, taking advantage of our position within growing consumer trends. Our strategy within the Ingredient Solutions segment is to expand our market share of specialty wheat starch and protein product lines, expand textured plant protein capabilities within specialty wheat proteins, maximize the value of clean label starches, and optimize our customer set, route to market, and channels to drive profitability. Ingredient Solutions segment sales for 2022 increased 28 percent over the prior year.

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RESULTS OF OPERATIONS

Consolidated results

The table below details the consolidated results for 2022, 2021 and 2020:

(a) Percentage points (“pp”).

Sales

2022 to 2021 - Sales for 2022 were $782,358, an increase of 25 percent compared to 2021, which was the result of increased sales in the Distilling Solutions, Branded Spirits, and Ingredient Solutions segments. Within the Distilling Solutions segment, sales were up 22 percent primarily due to an increase in sales of brown goods within premium beverage alcohol. Total Branded Spirits segment sales increased 30 percent, due to an increase in sales across all price tier categories. Total Ingredient Solutions segment sales increased 28 percent primarily due to increased sales of specialty wheat starches and proteins.

2021 to 2020 - Sales for 2021 were $626,720, an increase of 58 percent compared to 2020, which was the result of increased sales in the Branded Spirits, Distilling Solutions and Ingredient Solutions segments. Total Branded Spirits segment sales increased 4,324 percent, due to the additional brands acquired as part of the Merger. Within the Distillery Solutions segment, sales were up 13 percent primarily due to an increase in sales of brown goods within premium beverage alcohol. Total Ingredient Solutions segment sales increased 16 percent primarily due to increased sales of specialty wheat starches and proteins.

Gross profit

2022 to 2021 - Gross profit for 2022 was $253,306, an increase of 27 percent compared to 2021. The increase was driven by an increase in gross profit in Branded Spirits, Distilling Solutions and Ingredient Solutions segments. The Branded Spirits segment gross profit increased by $32,877 or 52 percent. The Distilling Solutions segment gross profit increased by $12,176, or 11 percent and the Ingredient Solutions segment gross profit increased by $9,288, or 42 percent.

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2021 to 2020 - Gross profit for 2021 was $198,965, an increase of 101 percent compared to 2020. The increase was driven by an increase in gross profit in Branded Spirits, Distilling Solutions and Ingredient Solutions segments. The Branded Spirits segment gross profit increased by $60,457, or 2,764 percent. The Distilling Solutions segment gross profit increased by $38,333, or 51 percent and the Ingredient Solutions segment gross profit increased by $1,369, or 7 percent.

Advertising and promotion expenses

2022 to 2021 - Advertising and promotion expenses for 2022 were $29,714, an increase of 85 percent compared to 2021. This was primarily driven by an increased advertising and promotion investment in the Branded Spirits segment, specifically in the premium plus price tiers. The increase was also driven by the assumption of Luxco’s advertising and promotion expenses for the full year of 2022.

2021 to 2020 - Advertising and promotion expenses for 2021 were $16,098, an increase of 494 percent compared to 2020. The increase in advertising and promotion expenses were primarily driven by the assumption of Luxco’s advertising and promotion expenses during 2021.

SG&A expenses

2022 to 2021 - SG&A expenses for 2022 were $74,627, an increase of 2 percent compared to 2021. The increase in SG&A was driven by the assumption of Luxco’s SG&A expenses for the full year of 2022, as well as higher personnel and incentive compensation expense, partially offset by a decrease in advisory and other transaction costs in 2021 related to the merger with Luxco that did not recur in 2022.

2021 to 2020 - SG&A expenses for 2021 were $72,829, an increase of 74 percent compared to 2020. The increase in SG&A was driven by the assumption of Luxco’s SG&A, and one-time acquisition related costs.

Insurance recoveries

2021 to 2020 - Gain on insurance recoveries for 2021 was $16,325. During November 2020, we experienced a fire at the Atchison facility. The fire damaged certain equipment in the facility’s feed drying operations and caused a temporary loss of production time. At December 31, 2021, we received a legally binding commitment from our insurance carrier for final settlement for the replacement of the damaged dryer which resulted in a gain of $16,325.

Operating income

(a) See segment discussion.

(b) Percentage points (“pp”).

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2022 to 2021 - Operating income for 2022 increased to $148,965 from $126,363 for 2021, due to increases in gross profit in the Branded Spirits, Distilling Solutions and Ingredient Solutions segments. These increases were partially offset by a decrease in insurance recoveries as well as increases in advertising and promotion expenses and SG&A expenses.

2021 to 2020 - Operating income for 2021 increased to $126,363 from $54,241 for 2020, due to increases in gross profit in the Branded Spirits, Distilling Solutions and Ingredient Solutions segments as well as the increase from the insurance recovery. These increases were partially offset by increases in SG&A expenses and advertising and promotion expenses.

Income tax expense

2022 to 2021 - Income tax expense for 2022 was $31,300, for an effective tax rate for the year of 22.3 percent. Income tax expense for 2021 was $30,279, for an effective tax rate for the year of 25.0 percent. The 2.7 percentage point decrease was primarily due to an increase in state tax credits due to capital expenditures investments.

2021 to 2020 - Income tax expense for 2021 was $30,279, for an effective tax rate for the year of 25.0 percent. Income tax expense for 2020 was $12,256, for an effective tax rate for the year of 23.3 percent. The 1.7 percentage point increase was primarily due to higher income before income taxes, and its dilutive effect on favorable tax credits and deductions as it concerns our effective tax rate.

Basic and diluted EPS

(a)Items are net of tax based on the effective tax rate for each base year.

(b)Percentage points (“pp”).

(c)Income attributable to participating securities changes primarily due to the awarding and vesting of the employee RSUs that receive dividend equivalent payments.

(d)Weighted average shares outstanding change primarily due to our repurchases of Common Stock, the vesting of employee RSUs, our purchase of vested RSUs from employees to pay withholding taxes, and the granting of Common Stock to directors. Additionally, during 2021, the weighted average shares outstanding were impacted by the issuance of shares as part of the Merger consideration.

2022 to 2021 - Basic EPS increased to $4.94 in 2022 from $4.37 in 2021, primarily due to the increase in operating income, partially offset by an increase in shares outstanding as a result of shares issued as part of the consideration paid for the Merger. Diluted EPS increased to $4.92 in 2022 from $4.37 in 2021, primarily due to the above described changes in Basic EPS, partially offset by the impact of dilutive shares outstanding related to the conversion feature of the Convertible Senior Notes.

2021 to 2020 - Basic and Diluted EPS increased to $4.37 in 2021 from $2.37 in 2020, primarily due to the increase in operating income, partially offset by an increase in shares outstanding as a result of shares issued as part of the consideration paid for the Merger.

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DISTILLING SOLUTIONS SEGMENT

(a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars.

(b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars.

(c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. The product is then divided by prior period sales dollars.

(d) Percentage points (“pp”).

2022 compared to 2021

Total Distilling Solutions sales for 2022 increased by $75,974, or 22 percent compared to 2021. Sales of brown goods within premium beverage alcohol, distillers feed and related co-products, and warehouse services increased while industrial alcohol, white goods within premium beverage alcohol, and fuel grade alcohol decreased compared to 2021. The increase in sales of brown goods was driven by higher sales volume and higher average selling price. The increase in sales of distillers feed and related co-products was due to higher average selling price, partially offset by lower sales volumes, both of which primarily resulted from the previously disclosed dryer fire at our Atchison facility which occurred in 2020. Our warehouse services sales increased due to the increase in storage of our customer owned barreled whiskey and related warehouse services that we provide. These increases were partially offset by a decrease in sales of industrial alcohol and white goods, which were driven by lower sales volume, partially offset by higher average selling price.

Gross profit increased year versus year by $12,176, or 11 percent. Gross margin for 2022 decreased to 29.5 percent from 32.4 percent for 2021. The increase in gross profit was due primarily to higher average selling price and higher sales volume on brown goods. These increases were partially offset by lower gross profit in industrial alcohol, white goods, and fuel grade alcohol, all of which were driven by higher input costs. The average selling price for these products also increased, but not enough to offset the higher input costs which caused a decrease in the gross margin percentage.

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(a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars.

(b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars.

(c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. The product is then divided by prior period sales dollars.

(d) Percentage points (“pp”).

2021 compared to 2020

Total Distilling Solutions sales for 2021 increased by $39,195, or 13 percent compared to 2020. Sales of brown goods and white goods within premium beverage alcohol, fuel grade alcohol, and warehouse services increased, while sales of industrial alcohol and distillers feed and related co-products decreased compared to 2020. The increase in brown goods, white goods and fuel grade alcohol was driven by higher sales volume and higher average selling price. These increases were partially offset by a decrease in sales of industrial alcohol, which was driven by lower sales volume due to the discontinuing of the ICP third party sales and marketing services, partially offset by higher average selling price. The decrease in sales of distillers feed and related co-products was due to lower average selling price, partially offset by higher sales volume, both of which resulted from the Dryer Fire Incident and the subsequent sale of wet rather than dry distillers grains (see Note 1, Nature of Operations and Summary of Significant Accounting Policies for further details).

Gross profit increased year versus year by $38,333, or 51 percent. Gross margin for 2021 increased to 32.4 percent from 24.2 percent for 2020. The increase in gross profit was primarily due to higher sales volume on brown goods as well as higher average selling price on industrial, white goods and fuel grade alcohol. The increase in gross profit was partially offset by lower average selling price on distillers feed and related co-products and higher input costs of industrial alcohol, white goods and brown goods.

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BRANDED SPIRITS SEGMENT

(a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars.

(b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars.

(c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. The product is then divided by prior period sales dollars.

(d) Percentage points (“pp”).

2022 compared to 2021

Total Branded Spirits sales for 2022 increased by $54,373, or 30 percent compared to 2021. Sales across all pricing tiers increased compared to 2021, primarily due to the additional brands acquired as part of the Merger that occurred on April 1, 2021. Additionally, sales increased in the premium plus price tiers due primarily to increased sales of American whiskey brands.

Gross profit increased year versus year by $32,877, or 52 percent. Gross margin for 2022 increased to 40.1 percent compared to 34.1 percent for 2021. The increase in gross profit was primarily driven by volume associated with the additional brands acquired as part of the Merger, increased average net price and mix as well as a required step up in value of certain assets due to purchase accounting related to the Merger in 2021 that did not recur in 2022. Of the purchase accounting step ups, $2,529 was associated with marking the finished goods inventory to fair value and fully flowed through in the prior year period. Additionally, gross profit increased due to increased sales of American whiskey brands within our premium plus price tiers.

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(a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars.

(b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars.

(c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. The product is then divided by prior period sales dollars.

(d) Percentage points (“pp”).

2021 compared to 2020

Total Branded Spirits sales for 2021 increased by $179,417, or 4,324 percent compared to 2020. Sales across all price tiers increased compared to 2020, primarily due to the additional brands acquired as part of the Merger.

Gross profit increased year versus year by $60,457, or 2,764 percent. Gross margin for 2021 decreased to 34.1 percent compared to 52.7 percent for 2020. The increase in gross profit was primarily due to the additional brands acquired as part of the Merger. The decrease in gross margin was due to sales price, as the vast majority of the Company’s branded spirits sales pre-merger were in the premium plus price tiers. Gross profit was reduced during 2021, due to a required step up in value due to purchase accounting related to the Merger. Of the purchase accounting step up, $2,529 was associated with marking the finished goods inventory to fair value, which fully flowed through in the year and is not expected to recur in the future periods.

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INGREDIENT SOLUTIONS SEGMENT

(a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars.

(b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars.

(c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. The product is then divided by prior period sales dollars.

(d) Percentage points (“pp”).

2022 compared to 2021

Total Ingredient Solutions sales for 2022 increased by $25,291, or 28 percent compared to 2021. The increase in Ingredient Solutions sales was primarily driven by higher sales of specialty wheat starches and proteins primarily due to higher average selling prices and higher sales volume. Additionally, the increase in Ingredient Solutions sales was driven by higher sales of commodity wheat starches primarily due to higher average selling price. These increases were partially offset by a decrease in sales of commodity wheat proteins due to lower sales volume.

Gross profit increased year versus year by $9,288, or 42 percent. Gross margin for 2022 increased to 27.2 percent from 24.5 percent for 2021. The increase in gross profit was primarily driven by higher average selling price and higher sales volumes of specialty wheat starches and proteins. These increases were partially offset by higher input costs for all product lines within the segment.

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(a) Total sales change is calculated by taking the difference between current period sales dollars and prior period sales dollars, divided by prior period sales dollars.

(b) Volume change is calculated by taking the difference between current period sales volume and prior period sales volume, multiplied by prior period sales per unit. The product is then divided by prior period sales dollars.

(c) Price/Mix change is calculated by taking the difference between current period sales-per-unit and prior period sales-per unit, multiplied by current period sales volume. The product is then divided by prior period sales dollars.

(d) Percentage points (“pp”).

2021 compared to 2020

Total Ingredient Solutions sales for 2021 increased by $12,587, or 16 percent compared to 2020. Sales of specialty wheat starches and proteins and commodity wheat starches increased, while sales of commodity wheat proteins decreased. The increase in specialty wheat starches was primarily due to higher sales volume. The increase in specialty wheat proteins was primarily due to higher sales volume and higher average selling prices. The increase in commodity wheat starches was due to higher sales volume.

Gross profit increased year versus year by $1,369, or 7 percent. Gross margin for 2021 decreased to 24.5 percent from 26.7 percent for 2020. The increase in gross profit was primarily driven by higher sales volume of specialty wheat starches and commodity wheat starches, as well as higher sales volume and higher average selling prices of specialty wheat proteins. These increases were partially offset by higher input costs.

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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 borrowings through our Credit Agreement, Convertible Senior Notes and Note Purchase Agreement (Note 6, Corporate Borrowings) 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. Our overall liquidity 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 to be adequate to provide for budgeted capital expenditures, potential merger or acquisitions, and anticipated operating requirements for the foreseeable future.

Operating Activities. Cash provided by operating activities was $88,936 during the year ended December 31, 2022. The cash provided by operating activities during 2022 resulted primarily from net income of $108,872, adjustments for non-cash or non-operating charges of $30,382 including depreciation and amortization, share-based compensation, equity method investment loss, and by uses of cash due to changes in operating assets and liabilities of $50,318. The primary drivers of the changes in operating assets and liabilities were $44,350 use of cash related to an increase in inventories, primarily barreled distillate, and $16,786 use of cash related to an increase in receivables, partially offset by $10,626 of cash provided by an increase in accounts payable related to the timing of cash disbursements.

Cash provided by operating activities was $88,263 during the year ended December 31, 2021. The cash provided by operating activities during 2021 resulted primarily from net income of $90,817, adjustments for non-cash or non-operating charges of $16,850 including depreciation and amortization, deferred income taxes, share-based compensation, and partially offset by a gain on insurance recoveries, and by uses of cash due to changes in operating assets and liabilities of $19,404. The primary drivers of the changes in operating assets and liabilities were $14,214 use of cash related to an increase in inventories, primarily barrel distillate, $6,242 use of cash related to income taxes refundable, and $6,031 use of cash related to an increase in receivables, inclusive of insurance receivables, partially offset by $5,301 of cash provided by an increase in accounts payable related to the timing of cash disbursements.

Investing Activities. Cash used in investing activities for year ended December 31, 2022 was $47,813, which primarily resulted from additions to property, plant and equipment of $45,323 (see Capital Spending).

Cash used in investing activities for year ended December 31, 2021 was $182,619, which primarily resulted from $149,005 related to the Merger with Luxco and additions to property, plant and equipment of $47,389 (see Capital Spending), partially offset by cash proceeds of $16,325 from property insurance recoveries.

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Capital Spending. We manage capital spending to support our business growth plans. We have incurred $47,859, $51,691, and $18,646 of capital expenditures and have paid $45,323, $47,389, and $19,701 for capital expenditures for the years ended December 31, 2022, 2021 and 2020, respectively. The difference between the amount of capital expenditures incurred and amount paid is due to the change in capital expenditures in accounts payable. We expect approximately $58,000, in capital expenditures for 2023 which will be used for facility improvement and expansion, facility sustenance projects and environmental health and safety projects.

Financing Activities. Cash used in financing activities for year ended December 31, 2022 was $14,764, primarily due to payments of dividends and dividend equivalents of $10,646 (see Note 8, Equity and EPS for additional information), and principal payments on long-term debt of $3,403 (see Long-Term and Short-Term Debt).

Cash provided by financing activities for year ended December 31, 2021 was $94,287, primarily due to net debt proceeds of $192,580 (see Long-Term and Short-Term Debt), primarily resulting from the issuance of the Convertible Senior Notes, partially offset by $87,509 payment on assumed debt as part of the Merger, and payments of dividends and dividend equivalents of $10,017 (see Note 8, Equity and EPS for additional information).

Treasury Purchases. 29,376 RSUs vested and converted to common shares during year ended December 31, 2022, of which we withheld and purchased for treasury 9,031 shares valued at $715 to cover payment of associated withholding taxes.

38,079 RSUs vested and converted to common shares during year ended December 31, 2021, of which we withheld and purchased for treasury 11,887 shares valued at $767 to cover payment of associated withholding taxes.

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. The Company did not repurchase any shares during 2022 prior to the expiration of the program on February 27, 2022.

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 and Board-approved dividends) and the overall cost of capital. Total debt was $230,335 (net of unamortized loan fees of $6,115) at December 31, 2022 and $233,399 (net of unamortized loan fees of $6,454) at December 31, 2021. During 2022, we had net payments on our long-term debt of $3,403. During 2021, we had net borrowings on our Convertible Senior Notes of $201,250, net payments on our long-term debt of $1,620, loan fees associated with the issuance of Convertible Senior Notes and refinancing of our credit agreement of $7,050. Net borrowings / (payments) on all debt for 2022 and 2021 were $(3,403), and $192,580, respectively (see Note 6, Corporate Borrowings for additional information).

Dividends and Dividend Equivalents. See Note 8, Equity and EPS for further discussion.

On February 23, 2023, the Board of Directors declared a quarterly dividend payable to stockholders of record as of March 10, 2023, of our Common Stock and a dividend equivalent payable to holders of certain RSUs as of March 10, 2023, of $0.12 per share and per unit.  The dividend payment and dividend equivalent payment will occur on March 24, 2023.

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 and potential mergers and acquisitions.  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 various debt agreements.  Under these agreements, we must meet certain financial covenants and restrictions, and at December 31, 2022, we met those covenants and restrictions.

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At December 31, 2022, our current assets exceeded our current liabilities by $348,787, largely due to our inventories, at cost, of $289,722. At December 31, 2022, our cash balance was $47,889 and we have used our various debt agreements for liquidity purposes, with $400,000 remaining for additional borrowings and up to $120,000 potentially available under the Note Purchase Agreement. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We regularly assess 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, dividend payments as well as potential mergers and acquisitions. Subject to market conditions, we could also fund future mergers and acquisitions through the issuance of additional shares of common stock. In addition, we have strong operating results such that we believe financial institutions should provide sufficient credit funding to meet short-term financing requirements, if needed.

Contractual Obligations

The following table provides information on the amounts and payments of our contractual obligations at December 31, 2022:

(a) Short-term obligation payments are due within 12 months from the current year end.

(b) Includes open purchase order commitments related to raw materials and packaging used in the ordinary course of business of $238,969.

Industrial Revenue Bonds

We are in various stages of financing projects with industrial revenue bond transactions for our facilities located in Kentucky. The bonds allow a 15 to 40 year real property tax abatement on our renovated and newly-constructed warehouse buildings and distilleries in Kentucky.  We have been approved for $55,500 of industrial revenue bonds with the City of Williamstown Kentucky, and have used approximately $21,000. Additionally, we have been approved for $175,000 of industrial revenue bonds with Nelson County Kentucky and have used approximately $48,000. The City of Williamstown and Nelson County issued the industrial revenue bonds to us.  The city then leased the facilities back to us under a capital lease, the terms of which provide for the payment of basic rent in an amount sufficient to pay principal and interest on the bonds.  Our obligation to pay rent under the lease is in the same amount and due on the same date as the 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.  At the bonds’ maturity the facilities will revert to us without costs. If we were to present the bonds for cancellation prior to maturity, a nominal fee could 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 outstanding 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 bond asset. No amount for our obligation under the capital lease is reflected on our Consolidated Balance Sheets, nor do we reflect an amount for the corresponding industrial revenue bond asset (see Note 10, Commitments and Contingencies for additional information).

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles 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, inclusive of effects related to the COVID-19 pandemic.  For all of these policies, management cautions that future events rarely develop as forecast, and estimates routinely require adjustment and may require material adjustment. We have identified the most critical accounting policies which involve the most complex and subjective judgments. These should be read in conjunction with the significant accounting policies discussed in Note 1, Nature of Operations and Summary of Significant Accounting Policies.

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Goodwill and Other Intangible Assets. The Company tests goodwill and indefinite-lived intangible assets for impairment at least annually, in the fourth quarter, or on an interim basis if events and circumstances occur that would indicate it is more likely than not that the fair value of a reporting unit is less than the carrying value. We have the option to evaluate qualitative factors to assess if goodwill and indefinite-lived intangible assets are impaired before quantifying the fair value of the reporting unit. Management judgment is required in the evaluation of qualitative factors, determination of reporting units, the assignment of assets and liabilities to reporting units, including goodwill, and the determination of fair value of the reporting units. To the extent that the carrying amount exceeds fair value, an impairment of goodwill is recognized and allocated to the reporting units. Based on the impairment tests performed by the Company during the fourth quarter 2022, we believe none of our goodwill or indefinite-lived intangible assets are impaired and are not currently at risk of impairment.

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, Nature of Operations and Summary of Significant Accounting Policies.