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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2002 - Commission File No. 0-17196
MGP INGREDIENTS, INC.
---------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
KANSAS 48-0531200
-------------- --------------
(State or Other Jurisdiction of IRS Employer
Incorporation or Organization) Identification No.
1300 Main Street, Atchison, Kansas 66002
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(Address of Principal Executive Offices and Zip Code)
(913) 367-1480
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days.
[X] YES [__] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, no par value
8,053,894 shares outstanding
as of November 8, 2002
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Independent Accountants' Review Report......................... 1
Condensed Consolidated Balance Sheets as of
September 30, 2002 and June 30, 2002........................... 2
Condensed Consolidated Statements of Income for
the Three Months Ended September 30, 2002 and 2001............. 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended September 30, 2002 and 2001............. 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................ 14
Item 4. Controls and Procedures.................................. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 15
Item 4. Submission of Matters to a Vote of Security Holders...... 15
Item 6. Exhibits and Reports on Form 8-K......................... 15
Signatures............................................... 16
Certifications........................................... 17
Independent Accountants' Report
Board of Directors and Stockholders
MGP Ingredients, Inc.
Atchison, Kansas 66002
We have reviewed the accompanying condensed consolidated balance sheets of MGP
Ingredients, Inc. (f.k.a. Midwest Grain Products, Inc.) as of September 30, 2002
and the related condensed consolidated statements of income and cash flows for
the three-month periods ended September 30, 2002 and 2001. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
June 30, 2002 and the related consolidated statements of income, retained
earnings and cash flows for the year then ended (not presented herein), and in
our report dated August 2, 2002, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of June 30, 2002 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
BKD, LLP
Kansas City, Missouri
November 1, 2002
1
MGP Ingredients, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
ASSETS
September 30, June 30,
2002 2002
----------------------------------------
(Unaudited)
Current Assets
Cash and cash equivalents $ 22,447 $ 24,045
Investments 5,483 4,691
Receivables, net of allowance of $252 at
September 30, 2002 and June 30, 2002 19,226 24,071
Inventories 23,045 20,755
Prepaid expenses 2,049 550
Deferred income taxes 397 284
Income taxes receivable 1,266 585
--------------- --------------
Total current assets 73,913 74,981
--------------- --------------
Property and Equipment, at cost 255,515 258,501
Less accumulated depreciation 164,019 167,486
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Total property and equipment, net 91,496 91,015
--------------- --------------
Insurance Receivable 14,000 --
Other Assets 104 222
--------------- --------------
13,104 222
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$ 179,513 $ 166,218
=============== ==============
3
_______________
See Accompanying Notes to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
2002 2002
----------------------------------------
(Unaudited)
Current Liabilities
Current maturities of long-term debt $ 3,201 $ 3,201
Accounts payable 6,862 8,681
Accrued expenses 3,452 3,745
Deferred income 18,264 10,971
--------------- ---------------
Total current liabilities 31,779 26,598
--------------- ---------------
Long-Term Debt 15,927 18,433
--------------- ---------------
Post-Retirement Benefits 5,904 5,921
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Deferred Income Taxes 15,688 10,588
--------------- ---------------
Stockholders' Equity
Capital stock
Preferred, 5% cumulative, $10 par value; authorized
1,000 shares; issued and outstanding 437 shares 4 4
Common, no par; authorized 20,000,000 shares;
issued 9,765,172 shares 6,715 6,715
Additional paid-in capital 2,605 2,601
Retained earnings 116,497 110,916
Accumulated other comprehensive gain
Cash flow hedges 392 176
--------------- ---------------
126,213 120,412
Treasury stock, at cost
Common
September 30, 2002 - 1,704,278 shares
June 30, 2002 - 1,684,778 shares (15,998) (15,734)
--------------- ---------------
110,215 104,678
--------------- ---------------
Total liabilities and stockholders' equity $ 179,513 $ 166,218
=============== ===============
3
Condensed Consolidated Statements of Income
Three Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
----------------------------------------
(in thousands)
----------------------------------------
Net Sales $ 42,899 $ 54,294
Cost of Sales 42,722 47,304
------------- ------------
Gross Profit 177 6,990
Selling, General and Administrative 3,321 4,151
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(3,144) 2,839
Other Operating Income 1,522 1,349
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Operating Income (Loss) (1,622) 4,188
Other Income, net 13,166 246
Interest Expense (321) (394)
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Income before Income Taxes 11,223 4,040
Provision for Income Taxes 4,433 1,596
------------- ------------
Net Income 6,790 2,444
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Other Comprehensive Income 385 --
------------- ------------
Comprehensive Income $ 7,175 $ 2,444
============= ============
Basic Earnings per Common Share $ 0.84 $ 0.30
============= ============
Diluted Earnings per Common Share $ 0.83 $ 0.30
============= ============
Dividends per Common Share $ 0.15 $ 0.15
============= ============
4
_____________
See Accompanying Notes to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
Condensed Consolidated Statements of Cash Flows
Three Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
----------------------------------------
(in thousands)
----------------------------------------
Operating Activities
Net income $ 6,790 $ 2,444
Items not requiring cash
Depreciation 3,666 3,532
Deferred income taxes 4,987 (277)
Changes in
Accounts receivable 4,845 (560)
Inventories (2,074) (1,708)
Insurance receivable (13,000) --
Accounts payable (2,949) (3,490)
Deferred revenue 7,293 (1,367)
Income taxes (receivable) payable (681) 1,595
Other (1,691) (718)
------------ ------------
Net cash provided by (used in) operating activities 7,186 (549)
------------ ------------
Investing Activities
Additions to property and equipment (5,226) (2,263)
Net purchases of investments (792) --
------------ ------------
Net cash used in investing activities (6,018) (2,263)
----------- -----------
Financing Activities
Purchase of treasury stock (273) (363)
Sale of treasury stock 13 --
Net payments on long-term debt (2,506) (10,785)
Net proceeds from issuance of long-term debt -- 6,423
------------ ------------
Net cash used in financing activities (2,766) (4,725)
------------ ------------
Decrease in Cash and Cash Equivalents (1,598) (7,537)
Cash and Cash Equivalents, Beginning of Period 24,045 33,454
------------ ------------
Cash and Cash Equivalents, End of Period $ 22,447 $ 25,917
============ ============
5
_____________
See Accompanying Notes to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments that are, in the opinion of the Company's
management, necessary to fairly present the financial position, results of
operations and cash flows of the Company. Those adjustments consist only of
normal recurring adjustments. The condensed consolidated balance sheet as
of June 30, 2002 has been derived from the audited consolidated balance
sheet of the Company as of that date. Certain information and note
disclosures normally included in the Company's annual financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto in the Company's Form 10-K Annual Report for
2002 filed with the Securities and Exchange Commission. The results of
operations for the period are not necessarily indicative of the results to
be expected for the full year.
NOTE 2: INSURANCE RECOVERIES
On September 13, 2002, the Company's Atchison, Kansas distillery was shut
down as the result of an explosion at the distillery. As a result, business
interruption insurance proceeds of $530,000 were recorded as other
operating income for the quarter ended September 30, 2002. In addition, the
Company recorded an insurance receivable totaling approximately $14 million
and reflected as other income a gain of approximately $13 million resulting
from the property damage incurred. The Company and its insurer are in the
process of determining the actual damages, and the ultimate insurance
recovery could differ from the estimate recorded at September 30, 2002.
Additional costs (net of insurance recoveries) related to the interruption
of the Company's operations at the Atchison, Kansas facility will be
recognized in future periods, as they are incurred. Amounts of such future
costs (net of insurance recoveries) can not be estimated at this time but
are expected primarily to relate to inefficiencies in production and
additional shipping and handling costs resulting from the shut-down of the
Atchison distillery operation.
NOTE 3: CONTINGENCIES
There are various legal proceedings involving the Company and its
subsidiaries. Management considers that the aggregate liabilities, if any,
arising from such actions would not have a material adverse effect on the
consolidated financial position or operations of the Company.
6
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited)
NOTE 4. OPERATING SEGMENTS
The Company operations are classified into two reportable segments:
ingredients and distillery products. Products within the ingredients
segment consist of starches, including commodity wheat starch and modified
and specialty wheat starches, proteins, including commodity wheat gluten,
specialty wheat, soy and other proteins, and mill feeds. Distillery
products consist of food grade alcohol, including beverage alcohol and
industrial alcohol, fuel grade alcohol, and distillers feed and carbon
dioxide, which are by-products of the Company's distillery operations. In
its Annual Report on Form 10-K, the Company referred to its ingredients
segment as its wheat-based products segment. Although substantially all of
the Company's products are wheat-based products, it also sells small
amounts of soy-based and other natural grain-based ingredients, including
oat protein products, and includes these products in the same segment as
its wheat-based products; therefore, the Company has redesignated its
former wheat-based products segment as its ingredients segment.
The operating profit for each segment is based on net sales less
identifiable operating expenses. Interest expense, investment income and
other general miscellaneous expenses have been excluded from segment
operations and classified as Corporate. Receivables, inventories and
equipment have been identified with the segments to which they relate. All
other assets are considered as Corporate.
Three Months ended September 30th
2002 2001
----------------------------------------
Sales to customers
Ingredients $ 13,092 $ 15,984
Distillery products 29,807 38,311
--------------- ---------------
$ 42,899 $ 54,294
=============== ===============
Depreciation
Ingredients $ 1,235 $ 1,272
Distillery products 2,200 2,043
Corporate 231 217
--------------- ---------------
$ 3,666 $ 3,532
=============== ===============
Income before income taxes
Ingredients $ 618 $ (914)
Distillery products 10,880 5,056
Corporate (275) (102)
--------------- ---------------
$ 11,223 $ 4,040
=============== ===============
Identifiable assets
Ingredients $ 53,403 $ 51,620
Distillery products 77,607 71,351
Corporate 48,503 43,247
--------------- ---------------
$ 179,513 $ 166,218
=============== ===============
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
This section contains forward-looking statements as well as historical
information. Forward-looking statements are identified by or are associated with
such words as "intend," "believe," "estimate," "expect," "anticipate,"
"hopeful," "should" and "could" and similar expressions. They reflect
management's current beliefs and estimates of future economic circumstances,
industry conditions, Company performance and financial results and are not
guarantees of future performance. The forward-looking statements are based on
many assumptions and factors including those relating to grain prices, energy
costs, product pricing, competitive environment and related market conditions,
operating efficiencies, access to capital and actions of governments and
insurers. Any changes in the assumptions or factors could produce materially
different results than those predicted and could impact stock values.
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Reference is made to the Company's Annual Report on Form 10K for accounting
policies which are considered by management to be critical to an understanding
of the Company's financial statements.
OPERATIONS
The Company is a fully integrated producer of certain ingredients and
distillery products and has two reportable segments, an ingredients segment and
a distillery products segment. Products included within the ingredients segment
consist of starches, including commodity wheat starch and modified and specialty
wheat starches, proteins, including commodity wheat gluten, specialty wheat, soy
and other proteins, and mill feeds. Distillery products consist of food grade
alcohol, including beverage alcohol and industrial alcohol, fuel alcohol,
commonly known as ethanol, and distillers grain and carbon dioxide, which are
by-products of the Company's distillery operations. In its Annual Report on Form
10-K for the fiscal year ended June 30, 2002, the Company referred to its
ingredients segment as its wheat-based products segment. Although substantially
all of the Company's products are wheat-based products, it also sells small
amounts of soy-based and other natural grain-based ingredients, including oat
protein products, and includes these products in the same segment as its
wheat-based products; therefore, the Company has redesignated its former
wheat-based products segment as its ingredient segment.
The Company processes its products at plants located in Atchison, Kansas
and Pekin, Illinois. The Company also operates a wheat protein and wheat starch
mixing facility in Kansas City, Kansas. Wheat is purchased directly from local
and regional farms and grain elevators and milled into flour and mill feeds. The
flour is processed with water to extract vital wheat gluten, a portion of which
is further processed into specialty wheat proteins. Vital wheat gluten and most
wheat protein products are dried into powder and sold in packaged or bulk form.
The starch slurry which results after the extraction of the gluten and wheat
proteins is further processed to extract premium wheat starch, which is also
dried into powder and sold in packaged or bulk form, either as commodity wheat
starch or, after further processing, as modified or specialty wheat starch. The
remaining slurry is mixed with mill feeds, corn or milo and water and then
cooked, fermented and distilled into alcohol. The residue of the distilling
operations is dried and sold as a high protein additive for animal feed. Carbon
dioxide which is produced during the fermentation process is trapped and sold.
Mill feeds not used in the distilling process are sold to feed manufacturers.
8
On September 13, 2002, there was an explosion at the Company's Atchison
plant which caused significant damage to the Company's distillery operations at
that location. There were no fatalities and only a few minor injuries; however,
damage to the distillery was major, affected results for the quarter and is
expected to have a continuing impact throughout the year. Historically, the
Atchison distillery has produced approximately one-third of the Company's total
alcohol output, accounting for approximately 19% of its total fuel grade alcohol
production and approximately 67% of its total food grade alcohol production
during the last fiscal year. As a result of the explosion, the Company will be
unable to produce alcohol at its Atchison plant for an extended period. While
some production could resume by early December 2002, the total rebuilding
process is expected to take from nine months to a year to complete. In the
meantime, production facilities at the Pekin, Illinois facility should be
adequate to supply alcohol to regular customers; however, the Company's ability
to supply spot business at this time is substantially reduced. Because its
ingredient and alcohol production processes are integrated, the distillery
shutdown has also affected the Company's ability to produce the base proteins
and starches which are used in the production of specialty ingredients, at this
location. The Company has altered its operations to use its Illinois facility to
produce base proteins and starches, which are then shipped to the Atchison
facility as raw material for producing specialty ingredients. As a result, the
Company's ability to supply its specialty products to customers has not been
substantially affected, although production costs are higher. Operating losses
incurred as a result the distillery shutdown are being partially reduced by
business interruption insurance.
The Company is proceeding with plans to restart alcohol production in
Atchison and, as noted above, the total rebuilding process is expected to take
from nine months to a year to complete. Although a full damage assessment is yet
to be completed, the Company has made a preliminary determination of equipment
replacement needs. The Company believes insurance proceeds will be sufficient to
substantially offset rebuilding costs. The gain resulting from insurance
proceeds in excess of the net recorded costs of assets destroyed in the accident
is expected to exceed $13 million, which amount is included as other
non-operating income for the first quarter of fiscal 2003.
As a result of the distillery explosion and increased grain prices, the
Company's operating income target for the fiscal year (which excludes insurance
gains) is to break even. Actual results for fiscal 2003 might differ materially
from the goal identified in this forward-looking statement due to the factors
referred to above under "Forward Looking Statements", and especially those
identified in this paragraph. The Company may not reach its target if alcohol
selling prices, over which the Company has little or no control, do not show
modest improvement and if the Company does not experience steady increases in
sales of specialty ingredients. Increased sales of specialty ingredients depend
primarily on the Company's ability to expand its customer base, customer
acceptance of new products and competition.
The following is a summary of revenues and pre-tax profits/(loss) allocated
to each reportable operating segment for the three months ending September 30 in
fiscal 2003 and fiscal 2002:
(dollars in thousands)
2003 2002
---- ----
Ingredients
Net Sales $13,092 $15,983
Pre-Tax Income $618 ($914)
Distillery Products
Net Sales $29,807 $38,311
Pre-Tax Income $10,880 $ 5,056
9
GENERAL
The Company experienced net income of $6,790,000 in the first quarter of
fiscal 2003 compared to net income of $2,444,000 in the first quarter of fiscal
2002. This improvement was due to $13 million in non-operating income ($7.9
million after the effects of income taxes) resulting from the recognition of
expected insurance proceeds in excess of the net recorded costs of assets that
were destroyed in the distillery explosion at the Company's Atchison, Kansas
plant on September 13, 2002. This amount more than offset what otherwise would
have been a net loss of $1,110,000 that was experienced in the current year's
first quarter. The Company's operating results were adversely affected by
reduced sales of distillery products and higher prices for grain, particularly
corn, compared to a year ago. The Company also experienced a decrease in
ingredients sales due to a planned reduction in sales of commodity ingredients,
which consist of vital wheat gluten and commodity wheat starch. Meanwhile, sales
of the Company's specialty ingredients, primarily specialty wheat proteins and
starches, increased by 10 percent over the prior year's first quarter level.
Business interruption insurance to compensate for the effects of the
distillery explosion amounted to $530,000 in the quarter and helped reduce the
operating loss during that period. The operating loss was also reduced by a
United States Department of Agriculture (USDA) cash incentive program for
ethanol producers. Additionally, the Company benefited from approximately
$621,000 in operating net income from a USDA Commodity Credit Corporation
program to support the development of specialty wheat protein and wheat starch
products, as well from approximately $1,063,000 in net income received from a
Department of Agriculture program to provide cash incentives to ethanol
producers. Details of these programs, which are helping the Company evolve its
business in both of its operating segments, are provided below.
While the Company began experiencing some improvement in selling prices for
its alcohol products at the end of the first quarter, grain prices, particularly
corn, also rose higher.
INGREDIENTS. First quarter sales of ingredients, consisting primarily of
commodity and specialty wheat starches and proteins, decreased compared to the
same period in the prior year due to a planned reduction in sales of commodity
wheat starch and vital wheat gluten, a protein that is used mainly as an
ingredient in bread products. However, sales of specialty ingredients increased
approximately 10% over the prior year's first quarter due to higher sales of
specialty proteins. Sales of specialty starches were essentially even with a
year ago.
The jump in specialty ingredient sales mainly resulted from expanded
marketing programs and heightened customer interest. The reduction in commodity
wheat starch sales resulted from the Company's decision to emphasize specialty
and modified starch sales over commodity wheat starch sales. The reduction in
vital wheat gluten sales occurred because the Company elected to curtail
production due to pricing pressures from artificially low priced gluten imports
from the European Union. Competitive pressures from the E.U. increased following
the expiration of the three-year-long quota on wheat gluten imports in early
June 2001. Unless future conditions warrant otherwise, the Company plans to
maintain a reduced presence in the more traditional wheat gluten and commodity
wheat starch markets while continuing to expand its presence in specialty wheat
protein and starch markets.
In June 2001, the White House approved a two-year program to support the
development of specialty wheat gluten and wheat starches to assist wheat gluten
producers adjust to import competition. This program was implemented in lieu of
an extension to a three-year long gluten import quota that began in June, 1998.
Administered by the U.S. Department of Agriculture's Commodity Credit
Corporation, the program is scheduled to end May 31, 2003. Under the program,
the Company is eligible for approximately $26 million of the program total of
$40 million. On June 29, 2001, the Company received approximately $17,280,000
for the first year of the program. The Company received the balance of the award
for the second year of the program in July, 2002. The Company must submit
quarterly reports to the Commodity Credit Corporation listing costs incurred and
activities conducted to date and an annual performance report after each year of
the program explaining its activities. The Commodity Credit Corporation may ask
for a refund with interest of some or all of the funds allocated to the Company
if it determines that the Company has not made significant progress in
completing its
10
stated activities. Based on its contacts with Commodity Credit Corporation
personnel through the quarterly reporting process, the Company believes that it
is making satisfactory progress.
The funds allocated under the Commodity Credit Corporation program are to
be used for capital, research, marketing and promotional costs related to
specialty wheat protein and wheat starch products. Funds received are recognized
in income during the period in which they are expended for a permitted purpose.
However, funds that are used for capital expenditure projects will be recognized
in income over the periods during which those projects are depreciated. They are
not intended to be used to reduce production- and marketing-related costs for
commodity vital wheat gluten and wheat starches that could extend the U.S.
industry's participation in these markets.
Nearly 75% of the funds for the two years combined are expected to be used
for capital projects, and will be reflected in earnings over the next seven to
ten years. These projects include an $8.3 million expansion project at the
Company's Atchison plant. The expansion is scheduled for completion in
mid-November, 2002 and involves the installation of additional processing and
drying equipment for the production of ingredients for bakery, pasta and noodle
and related food markets, both domestic and foreign. The remaining 25% of the
funds are being applied toward research and marketing-related costs and,
therefore, are reflected in earnings. As reported to the Commodity Credit
Corporation, during fiscal 2002, approximately $13.6 million (including funds
for capital projects that began in fiscal 2002 and are scheduled for completion
in fiscal 2003) was earmarked (of which $8.3 million was expended during the
year) for capital projects and $3.7 million was applied to research- and
marketing-related costs. In the first quarter of fiscal 2003, approximately $4.2
million was applied to capital projects, and approximately $781,000 was applied
to research- and marketing-related costs. The Company expects to apply
approximately $10.6 million for capital projects during the entire year, which
includes carry-over funds from the prior year, and $3.0 million for research and
marketing related costs.
DISTILLERY PRODUCTS. Total sales of distillery products in the first
quarter of fiscal 2003 were down substantially compared to the same period in
the prior year. This was due to lower selling prices for both food grade and
fuel grade alcohol, commonly known as ethanol, and lower unit sales resulting
from reduced production caused by the distillery explosion at the Company's
Atchison plant on September 13, 2002. The decline in selling prices for food
grade alcohol was due to increased competitive pressures during the quarter. The
decrease in selling prices for fuel grade alcohol primarily was due to increased
ethanol supplies throughout the industry, a situation which developed in the
second half of fiscal 2002. Although recently prices have begun to show some
improvement, they remain below prices experienced at the same time last year.
The Company has been participating in a program that was developed by the
U.S. Department of Agriculture and initiated in December, 2000 to provide a cash
incentive for ethanol producers who increase their grain usage over comparable
quarters to raise fuel alcohol production. Since the third quarter of fiscal
200l through the first quarter of fiscal 2003, the Company has satisfied the
program's eligibility requirements and has received payments accordingly. In the
first quarter of fiscal 2003, the Company received a payment of approximately
$l,758,000 from the program, which is included in the Company's pre-tax income
for the quarter. The program extends through September, 2006, with funding
determined annually. The Company's eligibility to participate in the program is
determined from quarter to quarter. However, due to the reduced production
resulting from the distillery shutdown in Atchison, the Company's eligibility
through the remainder of fiscal 2003 is questionable.
SALES
Net sales in the first quarter of fiscal 2003 decreased by approximately
$11.4 million from net sales in the first quarter of fiscal 2002. This decrease
resulted mainly from a 22% reduction in sales of distillery products and a 18%
reduction in sales of ingredients.
11
The decline in sales of ingredients, consisting of commodity and specialty
starches and proteins, was due to planned reductions in sales of commodity wheat
starch and vital wheat gluten. Sales of vital wheat gluten also dropped due to
reduced selling prices. Commodity wheat starch sales declined primarily due to a
reduction in unit sales. Sales of specialty ingredients, consisting primarily of
specialty wheat proteins and starches, increased in the aggregate by
approximately 10% over the prior year's first quarter. This increase was due
primarily to higher unit sales.
Distillery product sales in the first quarter were lower than the prior
year due to decreased selling prices and reduced production caused by the
September 13th distillery explosion. Lower sales of food grade alcohol resulted
from decreased selling prices in both the beverage and industrial markets. A
small increase in unit sales of beverage alcohol offset a small decrease in unit
sales of industrial alcohol. Sales of fuel grade alcohol fell compared to the
first quarter of fiscal 2002 due to decreases in both selling prices and unit
sales. Sales of distillers feeds, the principal by-product of the alcohol
production process, decreased as the result of lower production caused by the
Atchison distillery shutdown.
COST OF SALES
The cost of sales in the first quarter of fiscal 2003 decreased by
approximately $4.6 million below the cost of sales in the first quarter of the
prior fiscal year. This principally was due a decline in raw material costs
resulting from reduced production of alcohol products and commodity ingredients,
and to a lesser extent, a decrease in energy costs. In addition, the Company
received approximately $1.8 million in pre-tax income from the U.S. Department
of Agriculture's cost incentive program for ethanol producers discussed
elsewhere. The funds from this program are not included in sales, but reduce
cost of sales and, therefore, are reflected in pre-tax income.
In connection with the purchase of raw materials, principally corn and
wheat, for anticipated operating requirements, the Company enters into commodity
contracts to reduce or hedge the risk of future grain price increases. During
the first quarter of fiscal 2003, the Company hedged approximately 56% of corn
processed, compared to 61% in the first quarter of fiscal 2002. Of the wheat
processed by the Company in the first quarter of fiscal 2003, 27% of wheat was
hedged compared to 0% that was hedged in the first quarter of fiscal 2002.
Additionally, the Company uses gasoline futures to hedge fuel alcohol sales made
under contracts with price terms based on gasoline futures. In the first quarter
of fiscal 2003, raw material costs included a net hedging gain of $343,000
compared to a net hedging gain of $210,000 in the prior fiscal year's first
quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in the first quarter of fiscal
2003 were approximately $830,000 lower than selling, general and administrative
expenses in the first quarter of fiscal 2002. The decrease was due to various
factors, including a nearly $300,000 decrease in bad debt expense, and
reductions in staff bonus incentives, advertising and travel costs.
OTHER OPERATING INCOME
The increase in other operating income relates to the recognition of
$530,000 in business interruption insurance. There was a decline from the prior
year in the pre-tax income recognized from the previously discussed U.S.
Department of Agriculture Commodity Credit Corporation program for specialty
wheat protein and wheat starch products.
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OTHER INCOME
The increase in other income is due to the recognition of expected
insurance proceeds in excess of the net recorded costs of assets that were
destroyed in a distillery explosion at the Company's Atchison plant in
September.
TAXES AND INFLATION
The consolidated effective income tax rate is consistent for all periods.
The general effects of inflation were minimal.
NET INCOME
As the result of the foregoing factors, the Company experienced net income
of $6,790,000 in the first quarter of fiscal 2003 compared to net income of
$2,444,000 in the first quarter of fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
The following table is presented as a measure of the Company's liquidity
and financial condition:
September 30, June 30,
2002 2002
- --------------------------------------------------------------------------------
(in thousands)
Cash and cash equivalents $ 22,447 $ 24,045
Working capital 42,134 48,676
Aounts available under lines of credit 10,000 10,000
Notes payable and long-term debt 19,128 21,634
Stockholders' equity 110,215 104,678
================================================================================
The improved cash flow generated from operations was largely the result of
the second year installment of the USDA grant received during the first quarter
of fiscal 2003.The first installment had been received prior to June 30, 2001.
Cash flow provided by operations combined with excess cash from last year was
used for equipment additions, reductions in debt and treasury stock purchases.
The Company made open market purchases of 30,000 shares of its common stock
during the quarter. These purchases were made to fund the Company's stock option
plans and for other corporate purposes. As of September 30, 2002, the Board has
authorized the purchase of an additional 237,282 shares of the Company's common
stock. During the quarter, 10,500 shares of the treasury stock were sold as
employees exercised options under the Company's stock option plans.
At September 30, 2002, exclusive of replacement of the distillery in
Atchison destroyed by the explosion, the Company had $5.4 million committed to
improvements, including completion of the expansion project relating to the
Company's specialty wheat protein products, and replacements of existing
equipment. The rebuilding costs for the Atchison distillery should be
substantially offset by insurance proceeds.
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In connection with the Company's long term loan agreements, it is required,
among other covenants, to maintain certain financial ratios, including a current
ratio (current assets to current liabilities) of 1.5 to 1, minimum consolidated
tangible net worth (shareholders' equity less intangible assets) of
approximately $84 million, debt to tangible net worth not to exceed 2.5 to 1,
and debt service coverage ratio (generally, the ratio of (i) the sum of (a) net
income (adjusted to exclude gains or losses from the sale or other disposition
of capital assets and other matters) plus (b) provision for taxes plus (c) fixed
charges, to (ii) fixed charges) for the period of the four consecutive fiscal
quarters ended as of the measurement date of 1.5 to 1. The Company's line of
credit agreement contains similar provisions. As of September 30, 2002, the
Company was in compliance with the financial and other covenants in its loan and
line of credit agreements. However, as stated elsewhere in this report, the
Company is targeting only a break-even year for operating income purposes, and,
because of uncertainty relating to the treatment of insurance proceeds, there
may be a question in future periods as to the Company's compliance with the debt
service coverage ratio covenants. Although it has not discussed this matter with
its lenders, because it intends to rebuild its distillery, the Company believes
that gain resulting from property damage should be treated as net income for
purposes of calculating the debt service coverage ratio and not excluded from
the calculation as gain from the sale or other disposition of assets.
The Company's line of credit for $10 million extends to November 2003.
While working capital declined approximately $6.5 million during the
quarter from the addition of property and equipment and the reduction in
long-term debt, the Company has maintained its normally strong equity and
working capital positions while continuing to generate positive earnings before
interest, taxes, and depreciation. Management believes the Company is well
positioned to effectively expand its production of specialty products as well as
supply customer needs for all its other products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company produces its products from wheat, corn and milo and, as such,
is sensitive to changes in commodity prices. Grain futures and/or options are
used as a hedge to protect against fluctuations in the market. The information
regarding inventories and futures contracts at June 30, 2002, as presented in
the annual report, is not significantly different from September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer,
after evaluating the effectiveness of the Company's disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14(c)
and 15d-14(c)) as of a date within 90 days of the filing date of this
Form 10-Q Quarterly Report (the "Evaluation Date"), have concluded
that as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and effective to ensure that material
information relating to the Company would be made known to them by
others within the Company, particularly during the period in which
this Form 10-Q Quarterly Report was being prepared.
(b) Changes in internal controls.
There were no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent
to the date of the most recent evaluation, nor any significant
deficiencies or material weaknesses in such internal controls
requiring corrective actions. As a result, no corrective actions were
taken.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K for the year
ended June 30, 2002 for information regarding certain legal proceedings to which
the Company's Illinois subsidiary is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on October 10,
2002. The following actions were taken at the meeting:
1. Michael R. Haverty was elected to the office of Group A Director for a term
expiring in 2005 with 7,588,548 common share votes for his election and
26,153 votes withheld.
2. Randall M. Schrick was elected to the office of Group B Director for a term
expiring in 2005 with 418 preferred share votes for his election and no
votes withheld.
3. Laidacker M. Seaberg was elected to the office of Group B Director for a
term expiring in 2005 with 418 preferred share votes for his election and
no votes withheld.
In addition, the terms of, Linda E. Miller, Daryl R.Schaller, Ph.D., and
James A. Schlindwein as Group A Directors continued after the annual meeting and
the terms of Michael Braude, Cloud L.Cray, Jr. and Robert J. Reintjes as Group B
Directors continued after the annual meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3 Amended and Restated Articles of Incorporation of the Company, as
amended.
15.1 Letter from independent public accountants pursuant to paragraph
(d) of Rule 10-01 of Regulation S-X (incorporated by reference to
Independent Accountants' Review Report at page 1 hereof).
15.2 Letter from independent public accountants concerning the use of
its Review Report in the Company's Registration Statement No.
333-51849.
99.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
The Company filed reports on Form 8-K under Item 9 on August 7, August 12,
August 27, August 28 and September 17, 2002 and a report on Form 8-K under Item
5 on September 13, 2002.
15
SIGNATURES
Pursuant to the requirements on the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MGP INGREDIENTS, INC.
Date: November 13, 2002 By: /s/ Ladd M. Seaberg
Ladd M. Seaberg, President
and Chief Executive Officer
Date: November 13, 2002 By: /s/ Brian T.Cahill
Brian T. Cahill, Vice President
and Chief Financial Officer
16
CERTIFICATIONS
I, Ladd M. Seaberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MGP Ingredients,
Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Ladd M. Seaberg
Ladd M. Seaberg
President and
Chief Executive Officer
17
CERTIFICATIONS
I, Brian T. Cahill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MGP Ingredients,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Brian T. Cahill
Brian T.Cahill
Vice President,
Chief Financial Officer
18