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, 2003 - 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
7,663,444 shares outstanding
as of September 30, 2003
INDEX
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PART I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Independent Accountants' Review Report................... 1
Condensed Consolidated Balance Sheets as of
September 30, 2003 and June 30, 2003..................... 2
Condensed Consolidated Statements of Income for
the Three Months Ended September 30, 2003 and 2002....... 3
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended September 30, 2003 and 2002....... 4
Notes to Condensed Consolidated Financial Statements..... 5
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
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. as of September 30, 2003 and the related condensed
consolidated statements of income and cash flows for the three-month periods
ended September 30, 2003 and 2002. 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, 2003 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 1, 2003, 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, 2003 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/BKD, LLP
Kansas City, Missouri
October 17, 2003
MGP Ingredients, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
Assets
September 30, June 30,
2003 2003
----------------------------------------
(Unaudited)
Current Assets
Cash and cash equivalents $ 12,487 $ 17,539
Receivables, net of allowance of $252 at
September 30, 2003 and June 30, 2003 24,006 20,466
Inventories 24,078 26,956
Prepaid expenses 2,758 1,578
Income taxes receivable 1,474 3,086
--------------- ---------------
Total current assets 64,803 69,625
--------------- ---------------
Property and Equipment, at cost 271,786 263,990
Less accumulated depreciation 175,841 172,186
--------------- ---------------
Total property and equipment, net 95,945 91,804
--------------- ---------------
Other
Insurance receivable 12,271 11,515
Other assets 172 186
--------------- ---------------
Total other assets 12,443 11,701
--------------- ---------------
Total assets $ 173,191 $ 173,130
=============== ===============
_______________
See Accompanying Notes to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
Liabilities and Stockholders' Equity
September 30, June 30,
2003 2003
----------------------------------------
(Unaudited)
Current Liabilities
Current maturities of long-term debt $ 3,201 $ 3,201
Accounts payable 11,264 9,729
Accrued expenses 3,583 3,604
Deferred income taxes 241 241
Deferred income 13,895 14,323
--------------- ---------------
Total current liabilities 32,184 31,098
--------------- ---------------
Long-Term Debt 12,726 15,232
--------------- ---------------
Post-Retirement Benefits 5,873 5,780
--------------- ---------------
Deferred Income Taxes 15,802 15,802
--------------- ---------------
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 2,605
Retained earnings 116,182 114,861
Accumulated other comprehensive gain (loss) -
Cash flow hedges (80) (50)
--------------- ---------------
125,426 124,135
Treasury stock, at cost
Common
September 30, 2003 - 2,086,228 shares
June 30, 2003 - 2,079,828 shares (18,820) (18,917)
--------------- ---------------
106,606 105,218
--------------- ---------------
Total liabilities and stockholders' equity $ 173,191 $ 173,130
=============== ===============
2
MGP Ingredients, Inc.
Condensed Consolidated Statements of Income
Three Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
----------------------------------------
(in thousands)
Net Sales $ 57,054 $ 42,899
Cost of Sales 55,367 42,722
--------------- ---------------
Gross Profit (Loss) 1,687 177
Selling, General and
Administrative 3,698 3,321
--------------- ---------------
(2,011) (3,144)
Other Operating Income 6,090 1,522
--------------- ---------------
Operating Income (Loss) 4,079 (1,622)
Other Income, net 281 13,166
Interest Expense (279) (321)
--------------- ---------------
Income before Income Taxes 4,081 11,223
Provision for Income Taxes 1,611 4,433
--------------- ---------------
Net Income 2,470 6,790
Other Comprehensive Income
(Loss) (30) 385
--------------- ---------------
Comprehensive Income $ 2,440 $ 7,175
=============== ===============
Basic Earnings per Common Share $ 0.32 $ 0.84
=============== ===============
Diluted Earnings per Common
Share $ 0.32 $ 0.83
=============== ===============
Dividends per Common Share $ 0.15 $ 0.15
=============== ===============
3
_______________
See Accompanying Notes to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
MGP Ingredients, Inc.
Condensed Consolidated Statements of Cash Flows
Three Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
----------------------------------------
(in thousands)
Operating Activities
Net income $ 2,470 $ 6,790
Items not requiring cash
Depreciation 3,675 3,666
Deferred income taxes (20) 4,987
Changes in
Accounts receivable (3,540) 4,845
Inventories 2,848 (2,074)
Insurance receivable (756) (13,000)
Accounts payable and accrued expenses 1,518 (2,949)
Deferred income (428) 7,293
Income taxes (receivable) payable 1,632 (681)
Other (1,094) (1,691)
---------------- ---------------
Net cash provided by operating activities 6,305 7,186
--------------- ---------------
Investing Activities
Additions to property and equipment (8,794) (5,226)
Net purchases of investments -- (792)
--------------- ---------------
Net cash used in investing activities (8,794) (6,018)
--------------- ---------------
Financing Activities
Purchase of treasury stock (57) (273)
Sales of treasury stock -- 13
Net payments on long-term debt (2,506) (2,506)
--------------- ---------------
Net cash used in financing activities (2,563) (2,766)
--------------- ---------------
Decrease in Cash and Cash Equivalents (5,052) (1,598)
Cash and Cash Equivalents, Beginning of Period 17,539 24,045
--------------- ---------------
Cash and Cash Equivalents, End of Period $ 12,487 $ 22,447
=============== ===============
4
_______________
See Accompanying Notes to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
MGP Ingredients, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2003
(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, 2003 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 2003 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: EARNINGS PER SHARE
Earnings per common share data is based upon the weighted average number
of common shares outstanding totaling 7,666,202 and 8,026,920 in the
first quarter of 2004 and 2003, respectively, for basic earnings per
share and 7,685,737 and 8,050,682 for diluted earnings per share.
Employee stock options are the only potentially dilutive securities held
by the Company.
The Company has a stock-based employee compensation plan, which it
accounts for under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the
grant date. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
Three Months Ended
September 30
2003 2002
----------------------------------------
(in thousands, except per
share amounts)
Net income, as reported $ 2,470 $ 6,790
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes 143 170
------------ ------------
Pro forma net income $ 2,327 $ 6,620
============ ============
Earnings per share
Basic - as reported $ 0.32 $ 0.84
=========== ===========
Basic - pro forma $ 0.30 $ 0.82
=========== ===========
Diluted - as reported $ 0.32 $ 0.83
=========== ===========
Diluted - pro forma $ 0.30 $ 0.81
=========== ===========
5
MGP Ingredients, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2003
(Unaudited)
NOTE 3: 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 $5.7 million and $530,000
were recorded as other operating income for the three months ended
September 30, 2003 and 2002, respectively. In addition, the Company has
recorded insurance receivable resulting from the property damage
incurred and recognized a $13 million gain from the property damage in
other income in the three months ended September 30, 2002. As of
September 30, 2003, the Company has a $12 million receivable from the
insurance company related to this matter. The Company and its insurer
are in the process of determining the actual damages, and the ultimate
insurance recovery could differ from the estimates recorded through
September 30, 2003. Additional costs (net of insurance recoveries) will
be recognized in future periods, as they are incurred. Amounts of such
future costs (net of insurance recoveries) cannot 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 4: 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.
NOTE 5: OPERATING SEGMENTS
The Company is a fully integrated producer of ingredients and distillery
products. The operations are classified into two reportable segments:
ingredients and distillery products. Ingredients consist of specialty
ingredients, including specialty, or value-added, wheat proteins and
starches, commodity ingredients, including vital wheat gluten and
commodity wheat starch, 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.
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.
6
MGP Ingredients, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2003
(Unaudited)
Three Months Ended
September 30
2003 2002
----------------------------------------
Sales to customers
Ingredients $ 21,917 $ 13,092
Distillery products 35,137 29,807
--------------- ---------------
$ 57,054 $ 42,899
=============== ===============
Depreciation
Ingredients $ 1,461 $ 1,235
Distillery products 2,037 2,200
Corporate 177 231
--------------- ---------------
$ 3,675 $ 3,666
=============== ===============
Income before income taxes
Ingredients $ 2,571 $ 618
Distillery products 1,905 10,880
Corporate (395) (275)
--------------- ---------------
$ 4,081 $ 11,223
=============== ===============
September 30, June 30,
2003 2003
----------------------------------------
Identifiable assets
Ingredients $ 58,543 $ 59,628
Distillery products 79,250 76,704
Corporate 35,398 36,798
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 10-K 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.
The Company processes its products at plants located in Atchison, Kansas
and Pekin, Illinois. The Company also operates a wheat protein and wheat
starch further processing and extrusion facility in Kansas City, Kansas.
The Company purchases wheat directly from local and regional farms and
grain elevators and mills it 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, an explosion at the Company's Atchison plant
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, affecting operations
throughout fiscal 2003 and in the first quarter of fiscal 2004.
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 has been
unable to produce finished alcohol at its Atchison plant. The Company
has been able to produce unfinished alcohol at the Atchison location
since December 2002, most of which has been shipped to the Pekin,
Illinois facility for further processing. The Company generally has been
able to meet the needs of its regular customers through its Illinois
facility and supplemental third-party purchases, although its spot
market sales have been affected. Because the Company's ingredient and
alcohol production processes are integrated, the distillery slowdown in
Atchison also temporarily affected the Company's ability to produce the
base proteins and starches, which are used in the production of
specialty ingredients at this location. For a time, the Company altered
its operations to use its Illinois facility to produce base proteins and
starches, which were then shipped to the Atchison facility as raw
material for producing specialty ingredients. As a result, while
production costs increased, the Company was able to limit the effects of
the distillery explosion on its ability to supply specialty products to
customers. The adverse impact of the distillery slowdown on the
Company's operations has been substantially reduced by business
interruption insurance.
The Company is proceeding with plans to resume full alcohol production
in Atchison. The total distillery rebuilding process is expected to take
until late November or early December of 2003 to complete, with the
actual start-up of the new equipment scheduled to occur in early January
2004. 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 $15.4 million (pre-tax), which amount was
included as other non-operating income in fiscal 2003.
The following is a summary of revenues and pre-tax profits/(loss)
allocated to each reportable operating segment for the three months
ended September 30 in fiscal 2004 and fiscal 2003:
Three Months Ended
September 30
2003 2002
-----------------------------------
(Dollars in Thousands)
Ingredients
Net sales $ 21,917 $ 13,092
Pre-tax income 2,571 618
Distillery Products
Net sales $ 35,137 $ 29,807
Pre-tax income (loss) 1,905 10,880
GENERAL
The Company experienced net income of $2,470,000 in the first quarter of
fiscal 2004 compared to net income of $6,790,000 in the first quarter of
fiscal 2003. A nearly 100% increase in sales of specialty ingredients
was the principal contributor to the Company's net income for the
current fiscal year's first quarter. The recognition of additional
business interruption insurance proceeds to compensate
9
for the effects of a distillery explosion at the Company's Atchison,
Kansas plant on September 13, 2002 was also a factor. For the first
quarter of the prior fiscal year, the Company's net income was due to
$13 million in non-operating income ($7.9 million after the effects of
income taxes) resulting from the recognition of insurance proceeds in
excess of the net recorded costs of assets that were destroyed in the
distillery explosion.
Because of the increased sales of specialty ingredients, the Company's
total ingredients segment accounted for approximately two-thirds of the
Company's first quarter pre-tax income.
Business interruption insurance proceeds recognized in the current
year's first quarter amounted to approximately $5.7 million and were
allocated to the Company's distillery products segment. This amount
reflects anticipated payments, approximately one-third of which are
attributable to revised estimates of proceeds related to the Company's
fiscal 2003 fourth quarter. The Company additionally benefited from the
receipt of approximately $1.2 million (net of income taxes) from a
United States Department of Agriculture (USDA) program to provide cash
incentives to ethanol producers. Details on this program are provided
below.
Recent expansion projects initiated by the Company have helped meet
increased demand for the Company's specialty ingredients. In November
2002, the Company completed an expansion at its Atchison plant for the
production of specialty wheat proteins for bakery, pasta and noodle and
related food markets. This project currently is enabling the Company to
satisfy increased interest in its wheat protein isolates and wheat
protein concentrates for multiple food formulations, particularly
low-carbohydrate, high-protein formulations, as well as in refrigerated,
frozen and par-baked dough systems. Also, prior to the start of fiscal
2004, the Company completed an expansion of its bake lab facilities in
Atchison as well as enhancements to equipment it uses to produce a
number of natural proteins and starches for use in personal care
applications, including shampoos, conditioners, lotions and soaps.
A capacity expansion that was launched at the Company's facility in
Kansas City, Kansas in March 2003 has proceeded ahead of schedule. The
entire project is not slated to be completed until March 2004. However,
new equipment that was recently installed at that location is already
being operated to meet increased demand for the Company's textured wheat
proteins for use in vegetarian and meat extension applications, and its
grain-based resins, which are produced in a separate section of the
facility for use in manufacturing pet chews and related treats.
Reconstruction of the Company's Atchison distillery is rapidly nearing
completion. The rebuilding process is expected to be completed by or
before early December 2003, with the actual start-up of the new
equipment scheduled to occur one month later. When completed, the
majority of the distillery's capacity is expected to be dedicated to the
production of high quality, high purity food grade alcohol for beverage
and industrial applications. The remainder will be dedicated to the
production of fuel grade alcohol, commonly known as ethanol.
INGREDIENTS
Total ingredient sales in the first quarter of fiscal 2004 increased by
62% compared to the prior year's first quarter. This was due to a nearly
100% increase in sales of specialty ingredients, consisting primarily of
specialty wheat proteins and wheat starches, which offset a modest
decline in sales of commodity ingredients, principally vital wheat
gluten and commodity wheat starch.
The reduction in commodity wheat starch sales resulted from the
Company's decision to emphasize specialty 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
10
low priced gluten imports from the European Union and to place more
emphasis on the production and marketing of specialty proteins.
Competitive pressures from the E.U. increased following the expiration
of the three-year-long quota on wheat gluten imports in early June 2001.
DISTILLERY PRODUCTS
Sales of the Company's distillery products rose by 18% compared to the
first quarter of fiscal 2003. This increase was mainly due to an 8%
increase in sales of fuel grade alcohol and a nearly 4% increase in
sales of food grade alcohol. Additionally, sales of distillers feed, the
principal by-product of the alcohol production process, rose by 14%
compared to a year ago. Sales of unfinished alcohol produced at the
Atchison plant accounted for approximately 9% of total distillery
products sales in the current year's first quarter. No alcohol was
produced at the Atchison distillery during the prior year's first
quarter after the September 13, 2002 explosion.
The Company has been able to produce unfinished alcohol at its Atchison
plant since December 2002, most of which has been shipped to the Pekin,
Illinois facility for further processing. The Company generally has been
able to meet the needs of its regular customers through its Illinois
facility and supplemental third-party purchases, although its spot
market business has been affected.
SALES
Net sales in the first quarter of fiscal 2004 increased by approximately
$14.2 million above net sales in the first quarter of fiscal 2003. This
increase resulted mainly from a 62% jump in sales of ingredients and an
18% rise in sales of distillery products.
The increase in sales of ingredients was due to significantly improved
sales of specialty ingredients, which consist primarily of specialty
wheat proteins and starches. This improvement more than offset a modest
decline in sales of commodity ingredients, consisting of vital wheat
gluten and commodity wheat starch. Sales of vital wheat gluten dropped
due to a reduction in unit sales. Commodity wheat starch declined due to
a reduction in unit sales and a small decrease in the average selling
price. The increase in sales of specialty ingredients was due to higher
unit sales and higher average selling prices for both specialty proteins
and specialty starches.
The rise in distillery products sales was mainly attributable to higher
selling prices for both fuel grade alcohol and food grade alcohol for
beverage applications. The Company also experienced a slight increase in
unit sales of fuel grade alcohol and improved sales of distillers' feed,
the principal by-product of the alcohol production process. The increase
in distillers' feed sales resulted from higher unit sales and higher
selling prices compared to a year ago. The improved selling prices for
beverage alcohol offset a decline in unit sales of this product.
Meanwhile, sales of food grade alcohol for industrial applications
declined, as an increase in the average selling price for this product
was not enough to offset reduced unit sales. In addition to the above
factors, the Company realized sales of unfinished alcohol produced at
the Atchison plant in the first quarter of fiscal 2004. No alcohol was
produced at the Atchison distillery in the prior year's first quarter
after the September 13, 2002 explosion.
COST OF SALES
The cost of sales in the first quarter of fiscal 2004 increased by
approximately $12.6 million above the cost of sales in the first quarter
of the prior fiscal year. This principally was due to higher energy
costs and higher raw material costs for grain, as well as costs
associated with increased sales of the Company's products. The increased
energy costs resulted from a 65% rise in natural gas prices
11
compared to the first quarter of fiscal 2003. The increase in grain
costs was caused by a 4% jump in average wheat prices. Corn prices for
the quarter were approximately even with corn prices experienced during
the same period the prior year.
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 2004, no corn was hedged
compared to 56% in the first quarter of fiscal 2003. Of the wheat
processed by the Company, 43% was hedged in the first quarter of fiscal
2004 compared to 27% in the prior year's first quarter. The Company also
uses gasoline futures to hedge fuel alcohol sales made under contracts
with price terms based on gasoline futures. In the first quarter of
fiscal 2004, raw material costs included a net hedging loss of $84,000
compared to a net hedging gain of $343,000 in the prior fiscal year's
first quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in the first quarter of
fiscal 2004 were approximately $379,000 higher than selling, general and
administrative expenses in the first quarter of fiscal 2003. The
increase was mainly due to various factors associated with strengthened
sales and marketing initiatives and fees associated with outside
professional and consulting services. The increase was partially offset
by reductions in staff bonus incentives, and lower fees and commissions
related to sales by outside third parties.
OTHER OPERATING INCOME
The increase in other operating income relates to the recognition of
approximately $5.7 million (pre-tax) in business interruption insurance.
OTHER INCOME
The decrease in other income relates primarily to the recognition of
approximately $13 million in property damage insurance proceeds during
the quarter ended September 30, 2002.
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 $2,470,000 in the first quarter of fiscal 2004 compared to net
income of $6,790,000 in the first quarter of fiscal 2003.
12
LIQUIDITY AND CAPITAL RESOURCES
The following table is presented as a measure of the Company's liquidity
and financial condition:
September 30, June 30,
2003 2003
(unaudited)
----------------------------------------
(Dollars in Thousands)
Cash and cash equivalents $ 12,487 $ 17,539
Working capital 32,619 38,527
Amounts available under lines of credit 12,500 12,500
Notes payable and long-term debt 15,927 18,433
Stockholders' equity 106,606 105,218
Cash flow from operations decreased by approximately $900,000 during the
first quarter of fiscal 2004 compared to the first quarter of fiscal
2003. This decrease resulted from a combination of a number of factors
including a $4.3 million reduction in net income. In the prior year, the
explosion at the Atchison distillery plant resulted in recognizing a
$13.4 million estimated gain on insurance recoveries that was recognized
in pretax income but did not provide cash flow from operations. Such
reduction was partially offset by the second year installment of the
USDA grant received during the first quarter of fiscal 2003 totaling
$8.4 million. The grant proceeds received in 2003 were the final
installment due under the USDA grant. Neither of these items reoccurred
in the first quarter of 2004. Other factors contributing to the change
in operating cash flows include a decrease in inventories of $2.8
million in the current period compared to a $2.1 million increase in
inventories in the same period of the prior year. Also, accounts
receivable and accounts payable in the first quarter of 2004 increased
by $3.5 million and $1.5 million, respectively, compared to a decrease
of $4.8 million and $2.9 million, respectively, in the same period of
2003. 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 6,400 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, 2003, the Board has authorized the purchase of an
additional 830,532 shares of the Company's common stock.
At September 30, 2003, the Company had $17.0 million committed to
improvements and replacements of existing equipment, of which
approximately $8.1 million relates to the rebuilding costs for the
Atchison distillery. A substantial portion of the funding for the
rebuilding of the distillery will be paid from the remaining insurance
proceeds not yet received.
In connection with the Company's long-term loan and capital lease
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
(stockholders' equity less intangible assets) of $84 million, debt to
tangible net worth not to exceed 2.5 to 1, and a fixed charge 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. As of
September 30, 2003, the Company believes it was in compliance with the
financial and other covenants in its loan, capital lease and
line-of-credit agreements, although there may be uncertainty as to the
Company's compliance with the fixed
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charge coverage ratio covenants related to the treatment of gain
resulting from the recognition of expected insurance proceeds. Although
it has not discussed this matter with its lenders, because it is
rebuilding its distillery the Company believes that the gain resulting
from property damage should be treated as net income for purposes of
calculating the fixed charge 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, available for general
corporate purposes, extends through November 2003. A smaller line of
credit for $2.5 million expires on October 31, 2004 and is also
available for general corporate purposes. The Company is in the process
of seeking the renewal of its $10 million line of credit. There were no
amounts outstanding under these lines of credit at September 30, 2003.
While working capital declined approximately $5.9 million during the
year from the addition of property and equipment and the reduction on
long-term debt, the Company has maintained its normally strong equity
and working capital positions while continuing to generate strong cash
flow from operations.
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, 2003, as presented in the annual report, is not significantly
different from September 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer, after
evaluating the design and effectiveness of the Company's disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) or
15d-15(e)) as of the end of the period covered by this report (the
"Evaluation Date"), have concluded that as of the Evaluation Date, the
Company's disclosure controls and procedures were adequately designed
and operating effectively 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 has been no change in the Company's internal control over
financial reporting during its most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, its
internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Item 3. Legal Proceedings in the Company's Annual
Report on Form 10-K for the year ended June 30, 2003 for information regarding
certain legal proceedings to which the Company or its Illinois subsidiary are
subject.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of the Company was held on October 9, 2003.
The following actions were taken at the meeting:
1. Linda E. Miller was elected to the office of Group A Director for a term
expiring in 2006 with 7,089,672 common share votes for her election, zero
votes withheld and 67,215.8 broker non-votes.
2. Daryl R. Schaller, Ph.D. was elected to the office of Group A Director for
a term expiring in 2006 with 7,095,468 common share votes for his election,
zero votes withheld and 61,419.8 broker non-votes.
3. Michael Braude was elected to the office of Group B Director for a term
expiring in 2006 with 418 preferred share votes for his election and no
votes withheld.
In addition, the terms of Michael R. Haverty and James A. Schlindwein
as Group A Directors continued after the annual meeting and the terms of Cloud
R. Cray, Jr., Robert J. Reintjes, Randall M. Schrick and Laidacker M. Seaberg as
Group B Directors continued after the annual meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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.
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Acts of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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(b) Reports on Form 8-K
The Company filed a report on Form 8-K under Items 9 and 12 on August
7, 2003 and a reports on Form 8-K under Item 9 on July 30, 2003 and
August 27, 2003.
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 12, 2003 By /s/ Ladd M. Seaberg
Ladd M. Seaberg, President
and Chief Executive Officer
Date: November 12, 2003 By /s/ Brian T. Cahill
Brian T. Cahill, Vice President
and Chief Financial Officer
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