f10k_031312.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from July 1, 2011 to December 31, 2011
Commission file number 0-17196
MGP Ingredients, Inc.
(Exact Name of Registrant as Specified in Its Charter)
|
Kansas
|
48-0531200
|
|
(State or Other Jurisdiction
of Incorporation or Organization)
|
(I.R.S. Employer
Identification No.)
|
| |
|
|
100 Commercial Street, Box 130, Atchison, Kansas
|
66002
|
|
(Address of Principal Executive Offices)
|
(Zip Code)
|
Registrant’s telephone number, including area code (913) 367-1480
Securities registered pursuant to Section 12(b) of the Act:
|
Title of Each Class
|
Name of Each Exchange on Which Registered |
| Common Stock, no par value |
NASDAQ Global Select market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes __ No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __ No X
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to their Form 10-K. [X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer, “large accelerated filer” and smaller company: in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer ___ Accelerated filer X Non-accelerated filer __ Smaller reporting company __
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
The aggregate market value of common equity held by non-affiliates, computed by reference to the last sales price as reported by NASDAQ on June 30, 2011, was $104,215,230.
The number of shares of the registrant’s common stock outstanding as of February 29, 2012 was 18,115,965.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference:
|
|
(1)
|
Portions of the MGP Ingredients, Inc. Proxy Statement for the Annual Meeting of Stockholders to be held on May 31, 2012 are incorporated by reference into Part III of this report to the extent set forth herein.
|
CONTENTS PAGE
The calculation of the aggregate market value of the Common Stock held by non-affiliates is based on the assumption that non-affiliates do not include directors or executive officers. Such assumption does not constitute an admission by the Company or any director or executive officer that any director or executive officer is an affiliate of the Company.
This report contains forward-looking statements as well as historical information. All statements, other than statements of historical facts, included in this Annual Report on Form 10-K regarding the prospects of our industry and our prospects, plans, financial position and business strategy 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 of these terms or variations of them or similar terminology. 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. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. Important factors that could cause actual results to differ materially from our expectations include, among others: (i) disruptions in operations at our Atchison facility or Indiana Distillery, (ii) the availability and cost of grain and fluctuations in energy costs, (iii) the effectiveness of our hedging strategy, (iv) our ability to integrate the acquired operations of Lawrenceburg Distillers Indiana, LLC into our own, (v) the competitive environment and related market conditions, (vi) the ability to effectively pass raw material price increases on to customers, (vii) the profitability of the Illinois Corn Processing, LLC (“ICP”) joint venture, (viii) our ability to maintain compliance with all applicable loan agreement covenants, (ix) our ability to realize operating efficiencies, (x) actions of governments, (xi) and consumer tastes and preferences. For further information on these and other risks and uncertainties that may affect our business, see Item 1A. Risk Factors.
All amounts in this report, except for share, bushels, gallons, pounds, mmbtu, per share, per bushel and per gallon amounts, are shown in thousands.
We make available through our website (www.mgpingredients.com) under “Investors – Investor Relations,” free of charge, our annual and transition reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such material with the Securities and Exchange Commission.
Throughout this Report, when we refer to "the Company", "we", “us”, “our” and words of similar import in reference to activities that occurred prior to the "Reorganization", as defined below, on January 3, 2012, we are referring to the combined business of MGPI Processing, Inc. (formerly MGP Ingredients, Inc.) and its consolidated subsidiaries, and when we refer to "the Company", "we", “us”, “our” and words of similar import in reference to activities occurring after the Reorganization, we are referring to the combined business of MGP Ingredients, Inc. (formerly named MGPI Holdings, Inc.) and its consolidated subsidiaries , except to the extent that the context otherwise indicates.
MGP Ingredients, Inc. (formerly MGPI Holdings, Inc.)(herein "Holdings" or "Registrant") is a Kansas corporation headquartered in Atchison, Kansas. It was incorporated in 2011 and is a holding company with no operations of its own. Its principal directly-owned operating subsidiaries are MGPI Processing, Inc. (formerly named MGP Ingredients, Inc.) ("Processing"), which was incorporated in Kansas in 1957 and is the successor to a business founded in 1941 by Cloud L. Cray, Sr., and MGPI of Indiana, LLC (formerly named Firebird Acquisitions, Inc.)(“MGPII”), which on December 27, 2011 acquired substantially all the assets used by Lawrenceburg Distillers Indiana, LLC in its Lawrenceburg and Greendale, Indiana beverage distillery business.
On January 3, 2012, Processing reorganized into a holding company structure (the “Reorganization”) through a merger (the “Merger”) with MGPI Merger Sub, Inc., a Kansas corporation, which was an indirect wholly-owned subsidiary of Processing and a direct, wholly-owned subsidiary of Holdings. Holdings was formerly a direct, wholly-owned subsidiary of Processing. Each of Holdings and MGPI Merger Sub, Inc. were organized in connection with the Merger. Processing was the surviving corporation in the Merger and became a direct wholly-owned subsidiary of Holdings as a result of the Merger. Upon completion of the Reorganization, Holdings replaced Processing as the publicly held corporation, and former holders of common stock of Processing now hold the same number of shares and same ownership percentage of the Company as they held of Processing immediately prior to the Reorganization. The consolidated assets and liabilities of Holdings and its subsidiaries immediately after the Reorganization were the same as the consolidated assets and liabilities of Processing and its subsidiaries immediately before the effective time of the Merger. Holdings' articles of incorporation and bylaws are the same in all material respects as those of Processing before the Merger, and each director of Processing became a director of Holdings. Management of Holdings following the Merger is the same in all material respects as the management of Processing prior to the Merger. Processing has distributed three of its formerly directly owned subsidiaries, MGPII, D.M. Ingredients, GmbH and Midwest Grain Pipeline, Inc., to Holdings. Processing's other subsidiary, Illinois Corn Processing, LLC, remains a directly owned 30% subsidiary of Processing as of March 12, 2012 (ICP was a 50% directly owned subsidiary at December 31, 2011 - see Note 3. Investment in Joint Ventures). By engaging in the Reorganization, the Company sought to better isolate risks that might reside in one facility or operating unit from its other facilities or operating units. It also believes that a holding company structure will facilitate ramp-up and disposition of new businesses that might be developed, accommodate future growth through acquisitions and joint ventures, create tighter focus within operating units and enhance commercial activities and financing possibilities. For further discussion, see Note 22. Subsequent Events set forth in Item 8.
As previously announced, on August 25, 2011 we elected to change our fiscal year end from June 30 to December 31. We believe that this change in fiscal year will better align the reporting of our financial results with those of our joint venture partners and strengthen our ability to gauge growing and harvesting conditions for seasonal grain crops. This change also enables our strategic planning process to better synchronize with our key customers’ product development initiatives. This transition report on Form 10-K reports our financial results for the six month period of July 1, 2011 to December 31, 2011, which we refer to as the “transition period” throughout this report. Following the transition period, we will file annual reports for the twelve month period ended December 31 of each year beginning with the twelve month period ended December 31, 2012.
The Company produces certain distillery and ingredient products which are derived from corn, rye and barley, and wheat flour, respectively, primarily to serve the packaged goods industry. The Company has three reportable segments: distillery products, ingredient solutions and other. Our distillery products segment consists of food grade alcohol, along with a minimal amount of fuel grade alcohol and distillers feed, which are co-products of our distillery operations. The ingredient solutions segment products primarily consist of specialty starches, specialty proteins, commodity starches and commodity vital wheat gluten. Mill by-products, consisting primarily of mill feeds or “midds,” had also previously been included in this segment but were discontinued with the shutdown of our wheat flour milling operations at the Atchison, Kansas plant in the second quarter of fiscal 2009. Our other segment products are plant-based biopolymers and wood-based composite resins manufactured through the further processing of certain of our starches and proteins and wood particles. Prior to the sale of our Kansas City, Kansas facility described below, our other segment also included pet-related products primarily consisting of extruded plant-based resins and finished pet treats.
We purchase corn, rye and barley, which we use in our distillery operations, primarily from or through grain elevators. We purchase wheat flour, the principal raw material used in the manufacture of our protein and starch products at our Atchison facility, from ConAgra Mills. We process flour with water to extract vital wheat gluten, the basic protein component of flour, which we use primarily to process into specialty wheat proteins that possess increased protein levels and/or enhanced functional characteristics. Most wheat protein products are dried into powder and sold in packaged or bulk form. We further process the starch slurry which results after the extraction of the protein component to extract premium wheat starch, a portion of which we further process into specialty starches and a portion of which we sell as commodity starch, and all of which we dry into powder and sell in packaged or bulk form. We mix the remaining starch slurry with corn and water and then cook, ferment and distill it into alcohol. We dry the residue of the distilling operations and sell it as a high protein additive for animal feed. At our distillery located in Lawrenceburg and Greendale, Indiana (“Indiana Distillery”), we produce customized and premium grade corn and rye whiskeys, bourbon, gin, grain neutral spirits and distillers feed.
The principal location at which we made our products as of December 31, 2011 was our plant located in Atchison, Kansas. We also operate a facility in Onaga, Kansas for the production of plant-based biopolymers and wood composite resins. Our line of textured wheat proteins are currently produced through a toll manufacturing arrangement at a facility in Kansas City, Kansas, which we had previously owned and which we sold to Sergeant’s Pet Care Products, Inc. (“Sergeant’s”) on August 21, 2009. In November 2009, we entered into a joint venture with SEACOR Energy, Inc.’s affiliate, Illinois Corn Processing Holdings LLC (“ICP Holdings”), to reactivate distillery operations at our facility in Pekin, Illinois. This facility is now owned and operated by a 30% owned, non-consolidated joint venture entity named Illinois Corn Processing, LLC (“ICP”), which reactivated the plant in the third quarter of fiscal 2010 after we temporarily closed it on January 29, 2009. ICP produces food grade alcohol for beverage and industrial applications, which we purchase, and fuel grade alcohol, which SEACOR Energy, Inc. purchases. On December 27, 2011, we acquired substantially all the assets used by Lawrenceburg Distillers Indiana, LLC (“LDI”) in its beverage alcohol distillery business, and we now produce premium bourbon, corn and rye whiskeys, gin, grain neutral spirits and distillers feed at our Indiana Distillery.
Acquisition of LDI’s Distillery Business
As briefly described above, the most significant transition period development was the acquisition of LDI’s beverage alcohol distillery business. In this transaction, which closed on December 27, 2011, MGPII acquired substantially all of LDI's beverage alcohol distillery assets located in Lawrenceburg and Greendale, Indiana, which are used in the production of customized and premium grade whiskeys, gins and grain neutral spirits. The purchased assets include distillery assets, related bulk barrel storage facilities, blending operations, a tank farm, a grain elevator and certain intangible assets (“Distillery Business”). In this acquisition we also assumed certain liabilities, consisting primarily of trade payables and customer and contractual obligations, as described in the Asset Purchase Agreement dated October 20, 2011. These included commitments to supply product to three customers under contracts expiring at various times on or after December 31, 2012 but which represent approximately 43 percent of the Indiana Distillery's distillation capacity over the period expiring December 31, 2012. We did not purchase LDI’s associated assets or assume liabilities related to packaging and bottling of alcoholic beverages, which were acquired by a third party. The purchase price of the acquisition is equal to the current assets minus current liabilities as of December 27, 2011, which was estimated at closing to be $11,041. The purchase was funded through our bank revolving credit facility and is subject to post closing adjustments for working capital true-ups and other final purchase accounting adjustments for estimated liabilities associated with this transaction. For further discussion related to the accounting policy and accounting requirements for this acquisition, see Note 1. Nature of Operations and Summary of Significant Accounting Policies – Business Combination and Note 21. Business Combination set forth in Item 8.
With this acquisition, we added significant new production capacity to our food grade alcohol area and we are now able to produce premium bourbon and corn and rye whiskeys, while also increasing our gin, grain neutral spirits and distillers feed output. Since acquiring the Distillery Business, we have taken several steps to improve its profitability, including converting from the use of coal to natural gas, outsourcing certain functions and reducing headcount. Because we plan to continue to purchase our corn primarily from one supplier, we made the decision to sell the grain elevator and have classified the assets associated with the sale of the grain elevator as “Assets Held for Sale”, which is valued at $2,300. The value of this asset upon its ultimate disposition could vary significantly from the Company’s estimate. See Note 10. Assets Held for Sale.
Ownership change of ICP
On February 1, 2012, ICP Holdings exercised its option to purchase an additional 20 percent of the membership interest in ICP from Processing, as further described in Note 3. Investment in Joint Ventures and Note 22. Subsequent Events set forth in Item 8. The sales price was $9,103 and was determined in accordance with the LLC Interest Purchase Agreement. After this transaction, we own 30 percent of ICP and we are entitled to name 2 of ICP’s 6 advisory board members. The pre-tax gain on sale, to be recognized in 2012, approximated $4,000.
Water Cooling System Project
On June 10, 2010, our Board of Directors approved a major capital project designed to provide environmental benefits (see Item 3. Legal Proceedings) at our Atchison, Kansas distillery, while enhancing our alcohol production capabilities. The project involved the installation of a new, state-of-the-art water cooling system to replace older equipment used to supply water for the distillation process. This project began during the summer of fiscal 2010 and was completed during July of 2011 at a cost of approximately $10,000.
Agreement to Develop New Technologies and Products
On January 5, 2012 we announced that we are teaming up with the Kansas Alliance for Biorefining and Bioenergy (“KABB”) and four Kansas universities to develop new technologies and products that use bio-based raw materials. The three-year research and development efforts will seek to find innovative ways to produce cost-competitive bio-based foams, plastics, fuels and other materials from distillers dried grains and soluables.
Note 12. Operating Segments of our Notes to Consolidated Financial Statements set forth in Item 8 of this report, which is incorporated herein by reference, includes information about sales, depreciation and amortization, income (loss) before income taxes for the six month transition period ended December 31, 2011 and for the years ended June 30, 2011, 2010 and 2009, by reportable segment. Information about sales to external customers and assets located in foreign countries is included. Information about identifiable assets is included as of December 31, 2011, June 30, 2011 and June 30, 2010.
We seek to deliver strong profit margins and high returns on capital over time. To achieve our objectives, over the years we have restructured our business and modified our product portfolio to emphasize a greater mix of higher margin, value-added products, principally specialty food ingredients and high quality food grade alcohol. At the same time, we have taken measures to significantly reduce our production and marketing of lower and negative margin, commodity type products. Our strategy is focused on the development and marketing of wheat-based specialty protein and starch products and high quality food grade alcohol, as well as plant-based biopolymer and wood-based composite resin products for use in unique market niches. We seek to add value to our customers’ major branded packaged goods products by providing product solutions across a range of food and beverage applications, as well as certain non-food product applications, that can ultimately benefit the consumer.
Market trends from which we hope to benefit include health and wellness lifestyle trends in the food area and growing demand for natural versus synthetic products. Increased interest in bio-economy initiatives may also create opportunities for us, particularly in regard to our partially and totally degradable biopolymers.
As a component of our strategy, we have prioritized strengthening our overall operational capabilities and effectiveness through ongoing continuous improvement projects. Simultaneously, we are boosting our efforts to place greater focus on research, development and innovation initiatives, supply chain management, and customer service practices. We continue to concentrate on specific, highly functional ingredient solutions for our customers. We are concentrating our production and marketing efforts on supplying a core base of loyal customers with an array of high quality, premium ingredients that address nutritional, functional, sensory and convenience issues and that can help build value while making more efficient use of our existing capacities.
We assess the competitive landscape to identify opportunities to bolster our customer and supplier relationships, while at the same time building scale to further improve our cost position. Our goal is to invest in growth opportunities that increase long-term shareholder value by advancing our strategic position and increasing our long-term cash flows. During December 2011, we took action on this strategy with our acquisition of LDI’s Distillery Business as previously described in “- Transition Period and Recent Developments.” We believe this acquisition will strengthen our profit margins and improve returns on capital over time while also allowing us to respond to numerous requests from customers to supply them high quality whiskeys and bourbons.
We continue to be a leading company in the food grade alcohol industry and pursue efforts to maintain highly efficient alcohol production operations. We have been in the food grade alcohol business since the Company’s founding in 1941. Since early 2004, the majority of our Atchison distillery’s capacity has been dedicated to the production of high quality, high purity food grade alcohol for beverage and industrial applications, and we provide our customers with what we believe is among the highest quality, high purity alcohol in the world. We produce only a minimal amount of fuel alcohol as a co-product of our food grade production activities. The majority of our former Pekin plant’s capacity for several years had been dedicated to the production of fuel grade alcohol. The Pekin plant is now owned and operated by a joint venture, ICP, which produces food grade alcohol, which we purchase, and fuel grade alcohol, which SEACOR Energy, Inc. purchases, as elsewhere described. The Indiana Distillery’s capacity is dedicated to the production of high quality, high purity food grade alcohol.
Biopolymers continue to represent an emerging part of our business. Currently, we have two commercial products in the market. The first product comprises plant-based biopolymers in which a large percentage of petroleum-based plastic could be replaced with materials made from renewable sources, specifically wheat starch. These biopolymers, which serve as bio-based alternatives to traditional plastics, may be utilized in a wide range of products, such as disposable cutlery, cosmetic cases and a host of other items. The second product is a wood-based composite resin, which compounds wood and recycled plastic materials. This product is produced for use in the manufacture of deck boarding, toy products, furniture parts and other wood applications in which long-term durability is required. These products are sold directly to producers of finished products. We are also continuing work on the development and commercialization of a fully bio-based, fully compostable resin. As previously discussed, on January 5, 2012, we announced that we are teaming up with the KABB and four Kansas universities to develop new technologies and products that use bio-based raw materials, which centers around finding innovative ways to produce cost-competitive bio-based foams, plastics, fuels and other materials from distillers dried grains and soluables.
The following table shows our sales from continuing operations by each class of similar products during the six month transition period ended December 31, 2011 and the fiscal years ended June 30, 2011, 2010 and 2009, as well as such sales as a percent of total sales.
| |
|
PRODUCT GROUP SALES
|
|
| |
|
|
|
|
Fiscal Year Ended
|
|
| |
|
Six Months
Ended
|
|
| |
|
December 31,
2011
|
|
|
June 30,
2011
|
|
|
June 30,
2010
|
|
|
June 30,
2009
|
|
| |
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distillery Products: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food grade Alcohol
|
|
$ |
98,358 |
|
|
|
67.2 |
% |
|
$ |
157,486 |
|
|
|
63.5 |
% |
|
$ |
118,578 |
|
|
|
58.7 |
% |
|
$ |
124,199 |
|
|
|
42.6 |
% |
|
Distillers Grain and related Co-products
|
|
|
14,170 |
|
|
|
9.7 |
% |
|
|
20,642 |
|
|
|
8.3 |
% |
|
|
14,340 |
|
|
|
7.1 |
% |
|
|
33,060 |
|
|
|
11.3 |
% |
|
Fuel grade Alcohol
|
|
|
5,909 |
|
|
|
4.0 |
% |
|
|
10,865 |
|
|
|
4.4 |
% |
|
|
7,072 |
|
|
|
3.5 |
% |
|
|
47,445 |
|
|
|
16.2 |
% |
|
Total Distillery Products
|
|
$ |
118,437 |
|
|
|
80.9 |
% |
|
$ |
188,993 |
|
|
|
76.2 |
% |
|
$ |
139,990 |
|
|
|
69.3 |
% |
|
$ |
204,704 |
|
|
|
70.1 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ingredient Solutions: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Starches
|
|
$ |
15,557 |
|
|
|
10.6 |
% |
|
$ |
29,459 |
|
|
|
11.9 |
% |
|
$ |
27,978 |
|
|
|
13.9 |
% |
|
$ |
32,817 |
|
|
|
11.2 |
% |
|
Specialty Proteins
|
|
|
9,853 |
|
|
|
6.7 |
% |
|
|
20,918 |
|
|
|
8.4 |
% |
|
|
20,847 |
|
|
|
10.3 |
% |
|
|
21,936 |
|
|
|
7.5 |
% |
|
Commodity Wheat Starch
|
|
|
2,065 |
|
|
|
1.4 |
% |
|
|
7,228 |
|
|
|
2.9 |
% |
|
|
9,065 |
|
|
|
4.5 |
% |
|
|
12,629 |
|
|
|
4.3 |
% |
|
Vital Wheat Gluten
|
|
|
121 |
|
|
|
0.1 |
% |
|
|
160 |
|
|
|
0.1 |
% |
|
|
1,825 |
|
|
|
0.9 |
% |
|
|
13,684 |
|
|
|
4.8 |
% |
|
Mill By-Products
|
|
|
- |
|
|
|
0.0 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
1,061 |
|
|
|
0.4 |
% |
|
Total Ingredients
|
|
$ |
27,596 |
|
|
|
18.8 |
% |
|
$ |
57,765 |
|
|
|
23.3 |
% |
|
$ |
59,715 |
|
|
|
29.6 |
% |
|
$ |
82,127 |
|
|
|
28.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Products: (3)
|
|
$ |
444 |
|
|
|
0.3 |
% |
|
$ |
1,157 |
|
|
|
0.5 |
% |
|
$ |
2,266 |
|
|
|
1.1 |
% |
|
$ |
4,981 |
|
|
|
1.7 |
% |
|
Net Sales
|
|
$ |
146,477 |
|
|
|
100.0 |
% |
|
$ |
247,915 |
|
|
|
100.0 |
% |
|
$ |
201,971 |
|
|
|
100.0 |
% |
|
$ |
291,812 |
|
|
|
100.0 |
% |
|
(1)
|
In February 2009, we temporarily discontinued distillery operations at our former Pekin facility. We now only produce minimal quantities of fuel grade alcohol as a co-product of our food grade alcohol production at our Atchison facility. As a result, our production of distillers feed, a principal co-product of our alcohol production process, also has declined. The table includes our sales of food grade alcohol acquired from ICP but does not otherwise reflect distillery product sales of ICP, which now operates our former Pekin plant.
|
|
(2)
|
In October 2008, we shut down our Atchison wheat flour mill and began purchasing high quality flour for use as the principal raw material in our protein and starch production processes. As a result, we quit selling Mill By-Products. In November 2008, we discontinued producing protein and starch at our Pekin facility and consolidated production of value-added protein and starch products at our Atchison facility. These actions were driven by our planned reduction in the manufacturing and sales of commodity vital wheat gluten and significantly curtailed emphasis on the production and commercialization of commodity wheat starch.
|
|
(3)
|
Other products formerly included personal care products and pet products. We ceased production of personal care products in the third quarter of fiscal 2009 and sold our pet business in the first quarter of fiscal 2010.
|
Substantially all of our sales are made directly or through distributors to manufacturers and processors of finished packaged goods or bakeries. Sales to our customers purchasing food grade alcohol are made primarily on a spot, monthly, or quarterly basis with some annual contracts, depending on the customer’s needs and market conditions. Customers who purchase whiskey or bourbon may also enter into separate warehouse service agreements with us, allowing the product to age. As part of our acquisition of LDI’s Distillery Business, we assumed certain multi-year contracts to supply distilled products and certain contracts to provide barreling and warehousing services, which typically are also multi-year contracts. Sales of fuel grade alcohol are made on the spot market. Contracts with distributors may be for multi-year terms with periodic review of pricing. Contracts with ingredients customers are generally price and term agreements which are fixed for three or six month periods, with very few agreements of twelve months duration or more. During the six month transition period ended December 31, 2011, our five largest distillery products customers combined accounted for 32.9% of our consolidated revenues, and our five largest ingredients products customers combined accounted for 13.2% of our consolidated revenues.
Our Atchison plant processes corn, mixed with starch slurry from the wheat starch and protein processing operations, into food grade alcohol and distillery co-products such as fuel grade alcohol and distillers feed. Our newly acquired Indiana Distillery processes corn, rye and barley into food grade alcohol, primarily beverage alcohol, and distillers feed.
Food grade alcohol consists of beverage alcohol and industrial food grade alcohol that are distilled to remove impurities. Fuel grade alcohol is grain alcohol that has been distilled to remove all water to yield 200 proof alcohols suitable for blending with gasoline. In fiscal 2009, we decided to reduce our exposure to the fuel grade alcohol market and presently generate and sell only minimal amounts as a co-product of the food grade alcohol production process at our Atchison distillery.
In February 2009, we temporarily discontinued operations at our former Pekin facility. Historically, the Pekin plant had been principally dedicated to the production of fuel grade alcohol. On November 20, 2009, we completed a series of transactions whereby we contributed our former Pekin plant to a newly-formed company, ICP, and then sold 50% of the membership interest in this company to ICP Holdings, an affiliate of SEACOR Energy Inc., for $15,000 cash ($13,951, net of closing costs). ICP reactivated distillery operations at the Pekin facility during the quarter ended March 31, 2010. We purchase food grade alcohol products manufactured by ICP and SEACOR Energy Inc. purchases fuel grade alcohol products manufactured by ICP. On February 1, 2012, ICP Holdings exercised an option to acquire an additional 20% interest in ICP from us for $9,103.
In December 2011, we acquired substantially all the assets used by LDI in its beverage alcohol distillery business at the Indiana Distillery, where we now produce premium bourbon, corn and rye whiskeys, gin, grain neutral spirits and distillers feed. LDI owned an associated bottling business, which we did not purchase. Instead, we entered into a relationship with another company to provide this service to us. We believe that this arrangement allows us to avoid committing significant amounts of capital to fixed assets.
Both bourbon and whiskey are typically aged in wooden barrels from two to four years. Given the available capacity at our Indiana Distillery, as a part of our strategy, we will produce certain volumes of bourbon and whiskey that is in addition to current customer demand. This product will be barreled and included in our inventory. Our goal is to maintain inventory levels for whiskey and bourbon sufficient to satisfy anticipated future purchase orders in the wholesale market. Production schedules are adjusted from time to time to bring inventories into balance with established future demand.
Food Grade Alcohol. The majority of the Atchison distillery’s and the Indiana Distillery’s capacities are dedicated to the production of high quality, high purity food grade alcohol for beverage and industrial applications. New state-of-the-art equipment that was installed in 2004 has resulted in improved alcohol production efficiencies at the Atchison plant. During the six month transition period ended December 31, 2011, we generally operated at full production capacity for our food grade alcohol at the Atchison plant.
Food grade alcohol sold for beverage applications consists primarily of grain neutral spirits and gin, premium bourbon and corn and rye whiskey. Grain neutral spirits are sold in bulk quantities at various proof concentrations to bottlers and rectifiers, which further process the alcohol for sale to consumers under numerous labels. Our gin is created by redistilling grain neutral spirits together with proprietary customer formulations of botanicals or botanical oils. Our bourbon is created by distilling primarily corn and may be blended with customer formulas. Our whiskey is made from fermented grain mash, including primarily corn and rye.
We believe that in terms of net sales, we are one of the three largest merchant market sellers of food grade alcohol in the United States. Our principal competitors in the beverage alcohol market are Grain Processing Corporation of Muscatine, Iowa, Archer-Daniels-Midland Company of Decatur, Illinois and Fortune Brands, Inc. of Deerfield, Illinois.
Much consolidation in the beverage alcohol industry has occurred at the customer level over the past two decades. As these consolidations have come about, we have maintained a strong and steady presence in the market due to longstanding relationships with customers and our reputation for producing very high quality, high purity alcohol products. We believe our presence in the market and strong reputation will be improved with our acquisition of LDI’s Distillery Business.
We sell food-grade industrial alcohol for use as an ingredient in foods (e.g., vinegar and food flavorings), personal care products (e.g., hair sprays and hand sanitizers), cleaning solutions, biocides, insecticides, fungicides, pharmaceuticals, and a variety of other products. Although grain alcohol is chemically the same as petroleum-based or synthetic alcohol, certain customers prefer a natural grain-based alcohol. We sell food-grade industrial alcohol in tank truck or rail car quantities direct to a number of industrial processors.
Historically, synthetic alcohol was a highly significant component of the food grade industrial alcohol market. In recent years, however, the use of grain-based alcohol has exceeded synthetic alcohol in this market. Our principal competitors in the grain-based food grade industrial alcohol market are Grain Processing Corporation of Muscatine, Iowa, Archer-Daniels-Midland Company of Decatur, Illinois and Fortune Brands, Inc. of Deerfield, Illinois. Competition is based primarily upon price, service and quality factors.
Distillery Co-Products.
The bulk of the six month transition period ended December 31, 2011 sales of alcohol co-products consisted of distillers feed and fuel grade alcohol.
Distillers Feed. Distillers feed is principally derived from the residue of corn from alcohol processing operations. The residue is dried and sold primarily to processors of animal feeds as a high protein additive. We compete with other distillers of alcohol as well as a number of other producers of animal food additives in the sale of distillers feed. During the six month transition period ended December 31, 2011, distillers feed prices were higher on average compared to the fiscal year ended June 30, 2011 due to increased prices for corn, the basic raw material from which distillers feed is derived. Through our acquisition of LDI’s Distillery Business, we now also produce distillers feed at our Indiana Distillery.
Fuel Grade Alcohol. Fuel grade alcohol is sold primarily for blending with gasoline to increase the octane and oxygen levels of the gasoline. As an octane enhancer, fuel grade alcohol can serve as a substitute for lead and petroleum-based octane enhancers. As an oxygenate, fuel grade alcohol has been used in gasoline to meet certain environmental regulations and laws relating to air quality by reducing carbon monoxide, hydrocarbon particulates and other toxic emissions generated from the burning of gasoline (“toxics”). Because fuel grade alcohol is produced from grain, a renewable resource, it also provides a fuel alternative that tends to reduce the country’s dependence on foreign oil.
To encourage the production of fuel grade alcohol for use in gasoline, the Federal government and various states have enacted tax and other incentives designed to make fuel grade alcohol competitive with gasoline and gasoline additives. Under the internal revenue code, and until the end of the 2011 calendar year, gasoline that was blended with fuel grade alcohol provided sellers of the blend with certain credits or payments. Until the end of calendar year 2008, these amounted to $0.51 per gallon of fuel grade alcohol with a proof of 190 or greater that was mixed with the gasoline; during calendar years 2009, 2010 and 2011, they amounted to $0.45 per gallon. Although these benefits have not been directly available to us, they were intended to permit us to sell our fuel grade alcohol at prices which generally are competitive with less expensive additives and gasoline. These credits, along with the $0.54 per gallon of fuel alcohol import tariff, expired on December 31, 2011. The impact of this change on the market for fuel grade alcohol, if any, and the profitability of ICP’s operations cannot be determined at this time.
At times in the past, there has been significant volatility in corn and fuel grade alcohol markets, making incremental fuel grade alcohol production decisions difficult. In fiscal 2009, we at times encountered fuel grade alcohol prices below our production costs. With industry capacity in excess of quantities needed to meet federal mandates, it did not seem likely to us at the time that equilibrium would return to the fuel grade alcohol markets in the short term. Accordingly, we determined to substantially reduce our production of this product and now only produce fuel grade alcohol as a co-product of our food grade alcohol business at our distillery in Atchison. For the six month transition period ended December 31, 2011, fuel grade alcohol sales represented approximately 5.0 percent of total sales for the distillery products segment. Although we retain some additional exposure to the volatility of the fuel alcohol market through our investment in ICP in Pekin, Illinois, we have an opportunity to participate when the economics of that market are good, and we believe that the extent of our exposure to bad markets is significantly less than when we operated the Pekin facility ourselves.
Major market participants in the fuel grade alcohol market include Poet Biorefining, Archer-Daniels-Midland Company and Valero Energy Corporation, which together account for approximately a third of the total production capacity. We and our joint venture, ICP, compete with other producers of fuel grade alcohol on the basis of price and delivery service.
Our ingredient solutions segment consists primarily of specialty wheat starches, specialty wheat proteins, commodity wheat starch and vital wheat gluten. Through the second quarter of fiscal 2009, mill feeds, the principal by-product of the flour milling process, was also included in this segment. With the discontinuation of our wheat milling operations, we have ceased the production and sale of mill feeds. As noted above, we have substantially exited the commodity wheat gluten market and have curtailed the production of commodity wheat starches.
In recent years, our specialty wheat starches and proteins have accounted for a sizeable share of our total sales in this segment, which has been a component of our business strategy as we focus on higher margin products. The results were based, in part, on the following factors: partnerships with customers on product development, capacity to produce these products, and increased marketing efforts that have resulted in greater customer recognition. We are using an on-line Customer Relationship Management (“CRM”) solution system that was implemented in fiscal 2009 to improve our ability to develop new sales of our product lines. Our commercialization functions are focused on increasing sales growth of our specialty products to the largest and most innovative producers of consumer packaged goods in the U.S.
These factors will also be required for future growth of our higher margin products.
Specialty Wheat Starches. Wheat starch constitutes the carbohydrate-bearing portion of wheat flour. We produce a pure white premium wheat starch powder by extracting the starch from the starch slurry, substantially free of all impurities and fibers, and then drying the starch by spray, flash or drum. Premium wheat starch differs from low grade or B wheat starches, which are extracted along with impurities and fibers and are used primarily as a binding agent for industrial applications, such as the manufacture of charcoal briquettes. We do not sell low grade or B starches. Premium wheat starch differs from corn starch in its granular structure, color, granular size and name identification.
A substantial portion of our premium wheat starch is altered during processing to produce certain unique specialty wheat starches designed for special applications. Our strategy is to market our specialty wheat starches in special market niches where the unique characteristics of these starches are better suited to a customer’s requirements for a specific use. We have developed a number of different specialty wheat starches, and continue to explore the development of additional starch products with the view to increasing sales of value-added specialty starches. We produce our Fibersym® resistant starch, which has become one of our more popular specialty starches, using a patented technology referred to below under Patents. We sell our specialty starches on a nationwide basis, primarily to food processors and distributors.
Our specialty wheat starches are used primarily for food applications as an additive in a variety of food products to affect their nutritional profile, appearance, texture, tenderness, taste, palatability, cooking temperature, stability, viscosity, binding and freeze-thaw characteristics. Important physical properties contributed by wheat starch include whiteness, clean flavor, viscosity and texture. For example, our starches are used to improve the taste and mouth feel of cream puffs, éclairs, puddings, pie fillings, breading and batters; to improve the size, symmetry and taste of angel food cakes; to alter the viscosity of soups, sauces and gravies; to improve the freeze-thaw stability and shelf life of fruit pies and other frozen foods; to improve moisture retention in microwavable foods; and to add stability and to improve spreadability in frostings, mixes, glazes and sugar coatings. We also sell our specialty starches for a number of non-food applications, which include biopolymer products, and for use in the manufacture of adhesives, paper coatings, carbonless paper, and wall board.
Our wheat starches as a whole generally compete primarily with corn starch, which dominates the United States starch market. However, the unique characteristics of our specialty wheat starches provide them with a number of advantages over corn and other starches for certain baking and other end uses. Our principal competitors in the starch market are Cargill Incorporated (primarily corn and tapioca starch), Corn Products International Incorporated (corn starch), Manildra Milling Corporation (wheat starch), Penford Corporation (potato starch), Archer-Daniels-Midland Company (wheat and other grain starches) and various European companies. Competition is based upon price, name, color and differing granular characteristics which affect the food product in which the starch is used. Specialty wheat starches usually enjoy a price premium over corn starches and low grade wheat starches. Commodity wheat starch price fluctuations generally track the fluctuations in the corn starch market. The specialty wheat starch market usually permits pricing consistent with costs which affect the industry in general, including increased grain costs. However, this is not always the case; during the six month transition period ended December 31, 2011, fiscal 2011, 2006 and fiscal 2003, for example, increases in grain prices outpaced market price increases in the specialty wheat starch market.
Specialty Wheat Starches
|
·
|
Fibersym® Resistant Starch series. These starches serve as a convenient and rich source of dietary fiber. Unlike traditional fiber sources like bran, our resistant starches possess a clean, white color and neutral flavor that allow food formulators to create a wide range of both traditional and non-traditional fiber enhanced products that are savory in both appearance and taste. Applications include pan breads, pizza crust, flour tortillas, cookies, muffins, pastries and cakes.
|
|
·
|
FiberRite® RW Resistant Starch. FiberRite® RW is a product that boosts dietary fiber levels while also reducing fat and caloric content in such foods as breads, sweet goods, ice cream, yogurt, salad dressings, sandwich spreads and emulsified meats.
|
|
·
|
Pregel™ Instant Starch series. Our Pregel ™ starches perform as an instant thickener in bakery mixes, allowing fruit, nuts and other particles such as chocolate pieces to be uniformly suspended in the finished product. In coating systems, batter pick-up can be controlled for improved yield and consistent product appearance. Additionally, shelf-life can be enhanced due to improved moisture retention, allowing products to remain tender and soft over an extended storage period.
|
|
·
|
Midsol™ Cook-up Starch series. As a whole, these starches deliver increased thickening, clarity, adhesion and tolerance to high shear, temperature and acidity during food processing. Certain varieties in this line of starches can also be used to reduce sodium content in some food formulations. Such properties are important in products such as soups, sauces, gravies, salad dressings, fillings and batter systems. Processing benefits of these starches also include the ability to control expansion in extruded breakfast cereals. In addition, they provide textural enhancement and moisture management in processed foods, especially during storage under frozen and refrigerated conditions.
|
Commodity Wheat Starch. As is the case with value-added wheat starches, our commodity wheat starch has both food and non-food applications, but such applications are more limited than those of value-added wheat starches and typically sell for a lower price in the marketplace. As noted above, commodity wheat starch competes primarily with corn starches, which dominate the marketplace and prices generally track the fluctuations in the corn starch market.
Specialty Wheat Proteins. We have developed a number of specialty wheat proteins for food and non-food applications. Specialty wheat proteins are derived from vital wheat gluten through a variety of proprietary processes which change its molecular structure. Wheat proteins for food applications include products in the Arise®, Wheatex®, HWG 2009™ and FP™ series. Our specialty wheat proteins generally compete with other ingredients and modified proteins having similar characteristics, primarily soy proteins and other wheat proteins, with competition being based on factors such as functionality, price and, in the case of food applications, flavor. Our principal competitors in the specialty proteins market are Archer-Daniels-Midland Company (wheat and other grain proteins), The Solae Company (soy), Manildra Milling (gluten and wheat proteins), and various European companies. Although we are producing a number of our specialty wheat proteins on a commercial basis, some products are in the test marketing or development stage.
Specialty Wheat Proteins
|
·
|
Arise® series. Our Arise® series of products consists of specialty wheat proteins that increase the freshness and shelf life of frozen, refrigerated and fresh dough products after they are baked. Certain ingredients in this series are also sold for use in the manufacture of high protein, lower net carbohydrate products.
|
|
·
|
Wheatex® series. This series consists of texturized wheat proteins made from vital wheat gluten by changing it into a pliable substance through special processing. The resulting solid food product can be further enhanced with flavoring and coloring and reconstituted with water. Texturized wheat proteins are used for meat, poultry and fish product enhancements and/or substitutes. Wheatex® mimics the textural characteristics and appearance of meat, fish and poultry products. It is available in a variety of sizes and colors and can be easily formed into patties, links or virtually any other shape the customer requires.
|
|
·
|
FP™ series. The FP™ series of products consists of specialty wheat proteins, each tailored for use in a variety of food applications. These include proteins that can be used to form barriers to fat and moisture penetration to enhance the crispness and improve batter adhesion in fried products, effectively bond other ingredients in vegetarian patties and extended meat products, increase the softness and pliability of flour tortillas, and fortify nutritional drinks.
|
|
·
|
HWG 2009™. This is a lightly hydrolyzed wheat protein that is rich in peptide-bonded glutamine, an amino acid that counters muscle fatigue brought on by exercise and other physical activities. Applications include nutritional beverages and snack products.
|
Vital Wheat Gluten. Vital wheat gluten is a free-flowing light tan powder which contains approximately 75 to 80 percent protein. When we process flour to derive starch, we also derive vital wheat gluten. Vital wheat gluten is added by bakeries and food processors to baked goods, such as breads, and to pet foods, cereals, processed meats, fish and poultry to improve the nutritional content, texture, strength, shape and volume of the product. The neutral flavor and color of wheat gluten also enhances, but does not change, the flavor and color of food. The cohesiveness and elasticity of the gluten enables the dough in wheat and other high protein breads to rise and to support added ingredients, such as whole cracked grains, raisins and fibers. This allows the baker to make an array of different breads by varying the gluten content of the dough. Vital wheat gluten is also added to white breads, hot dog buns and hamburger buns to improve the strength and cohesiveness of the product.
Vital wheat gluten in recent years has been considered a commodity, and therefore, competition primarily has been based upon price.
In prior years, vital wheat gluten has sometimes been a principal ingredients product. However, we generally have been unable to compete with subsidized imports and now use it as a base for further processing into our specialty wheat proteins.
Our plant-based biopolymers and composite resins, which are produced from the further processing of certain of our wheat proteins and wheat starches (and other plant sources), can be used to produce a variety of eco-friendly products. We formerly manufactured plant-based resins for use primarily in pet treat applications. Our production of the pet-related products was discontinued with the sale of our pet products business and Kansas City facility in August 2009. After giving effect to the sale, our principal products in our other segment consist of our MGPI Terratek® biopolymers and composite resins. The MGPI Terratek® SC starch-based biopolymers are our environmentally-friendly biopolymers that can be molded to produce a variety of formed objects. Applications include disposable eating utensils, golf tees, food and feed containers and similar type vessels, as well as non-degradable hard plastic-like products. We also produce MGPI Terratek® WC wood-based composite resins, which can be used in the manufacture of eco-friendly decking materials, furniture parts, toys and a number of other wood-like products.
We are involved in a number of patent-related activities. We have filed patent applications to protect a range of inventions made in our expanding research and development efforts, including inventions relating to applications for our products. Our most significant patents or patent licenses are described below.
In 2003, we licensed, on an exclusive basis, certain patented technology from The Kansas State University Research Foundation relating to U. S. Patent No. 5,855,946, which describes and claims processes for making food-grade starches resistant to alpha-amylase digestion, as well as products and uses for the resistant starches. The license relates to products derived from plant-based starches and is a royalty-bearing, worldwide license whose term, subject to termination for material, uncured breaches or bankruptcy, extends until the patent rights expire in 2017. Royalties generally are based on net sales. The patent rights relate to the referenced U.S. patent and any corresponding foreign patent application, which has been filed in Australia. Under the license, we can make, have made, use, import, offer for sale, and sell licensed products within the scope of a claim of the patent rights or which are sold for a use within the scope of the patent rights and may, with approval of the licensor, grant similar rights to sublicensees. We produce and sell our resistant wheat starch under this patent. We have granted sublicenses from time to time under this patent. Under one such arrangement, we granted Cargill Incorporated a royalty bearing sublicense to use the patented process in the production of tapioca-based starches for use in food products. We also have agreements with Cargill that would apply if we determined to use the patented process to make starches derived from other plant sources (other than wheat or potato).
We hold U.S. Patent No. 5,610,277 expiring in 2015 relating to the alcohol-free wet extraction of gluten dough into gliadin and glutenin.
During the six month transition period ended December 31, 2011 we spent $954 and during the fiscal years ended June 30, 2011, 2010 and 2009, we spent $1,431, $918 and $1,416, respectively, on research and development activities, principally in the ingredient solutions and other segments.
Our sales are not seasonal.
Historically, our output has been transported to customers by truck and rail transportation equipment, most of which is provided by common carriers.
We currently lease 356 rail cars, which may be dispatched on short notice. ICP, our joint venture operation in Pekin, Illinois, also has the ability to transport by barge from its site, with barge loading facilities on the Illinois River.
We use third party transportation companies to help us manage truck and rail carriers who deliver inbound materials to us and our products to our North American customers.
Our principal raw materials are wheat flour, which is processed into our starches and proteins, and corn, which are processed into food grade alcohol and distillery co-products consisting of fuel grade alcohol and animal feed. We purchase corn throughout the year primarily from or through grain elevators. Currently we purchase most of our corn requirements from a single supplier. Our practice is to order corn for a month at a time. Subsequent to December 31, 2011, we entered a grain supply contract for the Indiana Distillery and are negotiating a new contract for our Atchison facility that will permit us to purchase corn for delivery up to 12 months in the future, at fixed prices. The pricing will be based on a formula with several factors, including corn futures prices and timing of our pricing decisions. We now expect to order corn anywhere from a month to 12 months in the future. We provide for our flour requirements through a supply contract with ConAgra Mills whose initial term, as amended, expires in October 2015. The supply contract is automatically renewable for an additional term of 5 years unless either party gives at least 180 days written notice of termination. Pricing is based on a formula that contains several factors, including wheat futures prices, mill feed prices and freight costs.
Other less significant raw materials include rye and barley used in the production of bourbons and whiskeys, and oak barrels, which are required for bourbon and whiskey aging. We purchase rye and barley throughout the year, each from a single supplier.
The cost of grain has historically been subject to substantial fluctuations, depending upon factors such as crop conditions, weather, disease, plantings, government programs and policies, purchases by foreign governments and changes in demand resulting from population growth and customer preference. Variations in grain prices have had from time to time significant adverse effects on the results of our operations in cases where we cannot recoup the cost increase in our selling prices. Fuel grade alcohol prices, which historically have tracked the cost of gasoline, do not usually adjust to rising grain costs. It generally has been difficult for us to compensate for increases in grain costs through adjustments in prices charged for our vital wheat gluten due to subsidized European Union wheat gluten, whose traditionally lower prices are not affected by such costs. We have taken steps to reduce the impact of cost fluctuations on our business, primarily by ceasing and/or significantly reducing our production and marketing of lower and negative margin commodity type products such as gluten and fuel grade alcohol, but we will continue to be affected by cost fluctuations to some degree, particularly when they are volatile.
Historically, we have engaged in the forward purchase of grain and in the purchase of commodity futures and options to hedge economic risks associated with fluctuating grain and grain products prices. Under our current hedging program, we generally purchase commodity futures and options and contract for the future delivery of grain only to protect margins on contracted, and a portion of spot market, alcohol sales. However, during the six month transition period ended December 31, 2011, we began to buy and sell derivative instruments to manage market risk associated with alcohol purchases, including ethanol futures and options contracts, in order to mitigate risks associated with our investment in ICP. As we become able to purchase corn for delivery up to 12 months in the future under new grain supply agreements, we expect to reduce the volume of our corn futures and options contracts. We intend to contract for the future delivery of flour only to protect margins on expected ingredients sales. See Item 1A – Risk Factors and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Derivative and Hedging Activities. Also see Item 7A - Quantitative and Qualitative Disclosures about Market Risk.
Because energy comprises a major cost of operations, we seek to assure the availability of fuels at competitive prices.
We use natural gas to operate boilers that we use to make steam heat. We procure natural gas for the Atchison plant and the Indiana Distillery in the open market from various suppliers. We can purchase contracts for the delivery of natural gas in the future or can purchase future contracts on the exchange. Depending on existing market conditions, at Atchison we have the ability to transport the gas through a gas pipeline owned by a wholly-owned subsidiary. Historically, prices of natural gas have been higher in the late fall and winter months than during other periods.
We have a risk management program whereby, at pre-determined prices, we may purchase a portion of our natural gas requirements for future delivery. However, we intend to enter contracts for future delivery only to protect margins on contracted alcohol sales and expected ingredients sales.
As of December 31, 2011, we had a total of 256 employees, of which 97 were covered by a collective bargaining agreement with one labor union. This agreement, which expires on August 31, 2014, covers employees at the Atchison Plant. As of June 30, 2011 and 2010, we had 192 and 193 employees, respectively.
Although we experienced a brief work stoppage at the Atchison plant from September 27 through October 10, 2008, we consider our relations with our personnel to generally be good. Previously, we had not experienced a work stoppage since 1978.
We are subject to a broad range of federal, state, local and foreign laws and regulations intended to protect public health and the environment. Our operations are also subject to regulation by various federal agencies, including the Alcohol and Tobacco Tax Trade Bureau, the Occupational Safety and Health Administration, the Food and Drug Administration and the Environmental Protection Agency, and by various state and local authorities. Such regulations cover virtually every aspect of our operations, including production facilities, marketing, pricing, labeling, packaging, advertising, water usage, waste water discharge, disposal of hazardous wastes and emissions and other matters.
Our alcohol business is subject to regulation by the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) and the alcoholic beverage agencies in the States of Kansas, Illinois and Indiana. Food products are also subject to regulation by the Food and Drug Administration. TTB regulation includes periodic TTB audits of all production reports, shipping documents, and licenses to assure that proper records are maintained. We are also required to file and maintain monthly reports with the TTB of alcohol inventories and shipments. Under federal regulations, bourbons and whiskeys must be aged for at least two years in charred oak barrels.
We are subject to extensive environmental regulations at the federal, state and local levels. All of our principal plants are regulated at the federal level by the U.S. Environmental Protection Agency (“USEPA”). At the state level, we are regulated in Kansas by the Division of Environment of the Kansas Department of Health and Environment (the “KDHE”) and in Indiana by the Indiana Department of Environmental Management. In Illinois, our joint venture entity, ICP, is regulated by the Illinois Environmental Protection Agency. We are required to obtain operating permits and to submit periodic reports to regulating agencies.
Recently we received a new National Pollutant Discharge Elimination System (“NPDES”) permit that extends through September 30, 2015. As a part of this renewal, the KDHE required us to install a new distillery water cooling system at the Atchison plant referred to below at a cost of approximately $10,000. The new system is designed to meet KDHE Volatile Organic Compounds (“VOC”) emission standards, while also enhancing alcohol production efficiencies. Also as a part of this renewal, we are required to submit a draft study to the KDHE by August 1, 2014 regarding the improvements needed to reduce phosphorus concentrations in the wastewater discharges at the Atchison plant. Within 180 days after KDHE comments on the draft study, we are required to submit a final study.
In January 2006, we entered a consent agreement with the KDHE resolving past allegations relating to permits, emissions levels and compliance with pollution regulations. Prior to fiscal 2010, we made approximately $14,000 in capital expenditures to comply with the consent agreement and paid $66 in civil penalties for instances of non compliance. During the second half of fiscal 2010, due to increased production activity, we anticipated that we would exceed the emissions cap imposed by the KDHE in the 2006 consent agreement and began negotiating an amendment to the consent agreement with the KDHE. This amendment, which was approved by the KDHE in May 2010, required us to complete the closed-loop, process water cooling system project described above, resulting in significant VOC reduction, in accordance with a scheduled timeline extending over an approximate seventeen month period ending on September 30, 2011. The process water cooling system was completed during July of 2011 as described elsewhere. We agreed to pay a $5 per month penalty for any month that we might exceed the rolling 12-month emissions cap imposed in the consent agreement, as well as a $1 per day penalty for each day we might fail to file monthly progress reports or exceed established completion dates for various stages of the project. During the six month transition period ended December 31, 2011, we did not exceed the emissions cap and therefore we were not subject to related penalties.
Illinois Corn Processing, LLC. On November 20, 2009, through our subsidiary MGPI Processing, Inc., we completed a series of related transactions pursuant to which we contributed our Pekin plant and certain maintenance and repair materials to a newly-formed company, Illinois Corn Processing, LLC (“ICP”), and then sold 50% of the membership interest in ICP to Illinois Corn Processing Holdings LLC (“ICP Holdings”), an affiliate of SEACOR Energy Inc., for proceeds of $15,000, less closing costs of $1,049. ICP reactivated distillery operations at the Pekin facility during the third quarter of fiscal 2010. We purchase food grade alcohol products manufactured by ICP, and SEACOR Energy Inc. purchases fuel grade alcohol products manufactured by ICP.
In connection with these transactions, we entered into various agreements with ICP and ICP Holdings, including a Contribution Agreement, an LLC Interest Purchase Agreement, a Limited Liability Company Agreement and a Marketing Agreement.
|
·
|
Pursuant to the Contribution Agreement, we contributed the Pekin plant to ICP at an agreed value of $30,000, consisting of land and fixed assets valued at $29,063 and materials and supply inventory valued at $937.
|
|
·
|
Under the LLC Interest Purchase Agreement, we sold ICP Holdings 50% of the membership interest in ICP for a purchase price of $15,000. This agreement gave ICP Holdings the option to purchase up to an additional 20% of the membership interest in ICP at any time between the second and fifth anniversary of the closing date for a price equal to the percentage of such interests times the greater of (i) four times ICP’s trailing twelve months EBITDA or (ii) $40,000, adjusted for pro rata additional capital investment, as defined in the agreement (“Option Price”). On February 1, 2012, ICP Holdings exercised its option and purchased an additional 20 percent from us for $9,103, as further described in Note 22. Subsequent Events set forth in Item 8.
|
|
·
|
Pursuant to the Limited Liability Company Agreement, control of day to day operations generally is retained by the members, acting by a majority in interest. Following ICP Holdings' exercise of its option referred to above, ICP Holdings owns 70% of ICP and generally is entitled to control its day to day operations. However, if SEACOR Energy were to default under its marketing agreement, referred to below, we could assume sole control of ICP's daily operations until the default is cured.
|
|
|
The Limited Liability Company Agreement also provides for the creation of an advisory board. As a result of ICP Holdings’ option exercise, this board consists of two advisors appointed by us and four advisors appointed by ICP Holdings. All actions of the advisory board require majority approval of the entire board, except that any transaction between ICP and ICP Holdings or its affiliates must be approved by the advisors appointed by us.
|
|
|
The Limited Liability Company Agreement generally provides for distributions to members to the extent of net cash flow, as defined, to provide for taxes attributable to allocations to them of tax items from ICP. Any distributions of net cash flow in excess of taxes may be distributed at such time as the Board of Advisors determines.
|
|
|
The Limited Liability Company Agreement gives either member certain rights to shut down the plant if it operates at a loss. Such rights are conditional in certain instances but absolute if EBITDA losses aggregate $1,500 over any three consecutive quarters or if ICP's net working capital is less than $2,500. ICP Holdings also has the right to shut down the plant if ICP is in default under its loan agreement for failure to pay principal or interest for two months.
|
|
|
The Limited Liability Company Agreement contains various buy/sell provisions and restrictions on transfer of membership interests. These include buy/sell provisions relating to a member's entire interest that may be exercised by any member at any time.
|
|
·
|
Under the Marketing Agreement, ICP manufactures and supplies food grade and industrial-use alcohol products for us and we purchase, market and sell such products for a marketing fee. The Marketing Agreement provides that we will share margin realized from the sale of the products under the agreement with ICP.
|
The Marketing Agreement has an initial term of one year but automatically renews for one year terms thereafter, subject to specified exceptions, including the following: (i) there is an uncured breach by one of the parties, (ii) we give timely notice of termination, (iii) we (or our affiliates) cease to be a member of the joint venture, or (iv) the parties are unable to mutually agree to modifications to the Marketing Agreement that are proposed in good faith by one of the parties as necessary or desirable to further the purposes of the parties' respective expectations of economic benefits to be derived under the Marketing Agreement and their interests in ICP. For six months following expiration or termination of the Marketing Agreement, ICP will provide us with reasonable assistance to transition production of the products it makes for us to another producer that we designate. SEACOR Energy Inc. has entered into a similar agreement with ICP with respect to the marketing of fuel grade alcohol.
An affiliate of SEACOR Energy, Inc. has provided funding to ICP through two loans secured by all of the assets of ICP, including the Pekin Plant. Among other matters, losses or working capital deficiencies that would entitle a member of ICP to shut down the plant are events of default under these loan agreements which, upon any requisite notice and/or lapse of time, would entitle the lender to exercise its remedies, including foreclosing on ICP’s assets and, in the case of the working capital deficiency or successive losses, enforcing the plant closure provisions in the Limited Liability Company Agreement referred to above. The loans are non-recourse to us.
D.M. Ingredients GmbH. On July 2, 2007 we acquired a 50% interest in D.M. Ingredients, GmbH, a German joint venture company which produces certain of our specialty ingredients products through a toller for distribution in the European Union (“E.U.”) and elsewhere. As of December 31, 2011 our total capital commitment to the joint venture was $750, of which we had contributed $571.
The Company’s executive officers are shown below. Each of the following persons holds the positions indicated for both MGP Ingredients, Inc. and MGPI Processing, Inc., unless otherwise noted.
|
Name
|
Age
|
Position
|
| |
|
|
|
Timothy W. Newkirk
|
43
|
President and Chief Executive Officer
|
|
Don Tracy
|
54
|
Vice President, Finance and Chief Financial Officer
|
|
Donald G. Coffey, Ph.D.
|
57
|
Executive Vice President, Research, Development and Innovation
|
|
David E. Dykstra
|
48
|
Vice President, Alcohol Sales and Marketing
|
|
Michael J. Lasater
|
43
|
National Director of Sales
|
|
Marta L. Myers
|
52
|
Corporate Secretary and Executive Assistant to the President and Board Chairman
|
|
Scott B. Phillips
|
46
|
Vice President, Supply Chain Operations
|
|
David E. Rindom
|
56
|
Vice President, Human Resources
|
|
Randy M. Schrick
|
61
|
Vice President, Engineering of MGP Ingredients, Inc.
|
The following executive officers are officers of MGPI of Indiana, LLC:
|
Name
|
Age
|
Position
|
| |
|
|
|
Timothy W. Newkirk
|
43
|
President
|
|
Don Tracy
|
54
|
Vice President and Treasurer
|
|
David E. Rindom
|
56
|
Vice President
|
|
Marta L. Myers
|
52
|
Secretary
|
Mr. Newkirk has served as President and Chief Executive Officer since March, 2008. He previously had been President and Chief Operating Officer since October, 2006 and Vice President of Operations and Chief Operating Officer since April, 2006. He first joined the Company in 1991, serving initially as a distillery shift manager and later as a process engineer, project engineer and quality control manager at the Atchison, Kansas plant. He became manager of the Company’s Pekin, Illinois plant in 1997. From 2000 to 2002, he was Vice President of Operations for the former High Plains Corporation, a fuel grade alcohol production company located in Wichita, Kansas. He became Vice President of Global Operations for Abengoa Bioenergy S.L. following that company’s acquisition of High Plains in January, 2002. He then served as Chief Operating Officer of Abengoa Bioenergy Corporation from August, 2003 until his return to the Company as Director of Operations in 2005.
Mr. Tracy has served as Vice President of Finance and Chief Financial Officer of MGP Ingredients, Inc. since November 2009. From 2007 until joining the Company, he served as Chief Financial Officer at Emery Oleochemicals, a global chemical manufacturer, and was based in Cincinnati. Prior to his position at Emery Oleochemicals, Mr. Tracy served as Chief Financial Officer at Briggs Industries, a worldwide manufacturer and distributor of kitchen and bath fixtures, at the company’s U.S. headquarters in Charleston, South Carolina, from 2005 to 2007. Before that, he spent four years with the Tenaris Corp., a global producer of steel tubes, where he began as Director of Financial Projects and subsequently was promoted to Chief Financial Officer of Tenaris, North America. Mr. Tracy’s previous experience included serving as Senior Vice President of the process improvement group of National City Corporation, Cleveland, from 1999 to 2001; as a consultant at two large consulting firms from 1993 through 1998; and various positions with the Procter & Gamble Company from 1983 to 1992. From 1979 to 1981, he served as an Auditor with Deloitte & Touche.
Dr. Coffey has served as Executive Vice President of Research, Development and Innovation since August 2010. Prior to that, he had jointly served as Executive Vice President of Research, Development and Innovation and of Sales and Marketing since June 2009. Prior to that, he had been Executive Vice President of the Company’s Ingredient Solutions segment since November 2008. He joined the Company as Vice President of Innovation in July 2007. He previously spent 22 years in commercialization and research positions with the Dow Chemical Co. For 12 years beginning in 1985, he worked in the commercial and research operations of the METHOCEL business, a global business unit within Dow’s Special Chemical Group that manufactures cellulose derivatives for a variety of food and non-food applications. He was later promoted to General Manager of Dow Food Stabilizers with responsibilities for global sales, marketing and research.
Mr. Dykstra has served as Vice President of Alcohol Sales and Marketing since 2009. He previously has been industrial alcohol sales manager since 2006. He first joined the Company in 1988 eventually serving as director of sales for both beverage and fuel grade alcohol. In 1999, he left the company to assume the role of vice president of sales and marketing for Abengoa Bio Energy, Wichita, Kansas. He remained in that position until 2003, when he joined United Bio Energy Fuels, L.L.C., in Wichita as vice president of that company’s alcohol marketing division. He returned to MGPI in 2006.
Mr. Lasater re-joined the Company in 2010 and serves as our National Sales Director. He has nearly 20 years of experience in food ingredient sales, including eight years with MGPI, where he began his career as a territorial sales manager in the company’s former wheat starch business unit in 1992. Following his initial years of employment with the Company, Mr. Lasater joined National Starch and Chemical Co. as corporate accounts manager in 2000 and was responsible for select customer accounts located mainly in major Midwestern metropolitan areas. In 2005, he left National, now a part of Corn Products International, to become a partner and sales associate with Gregg and Associates, a food ingredients brokerage business based in Excelsior, Minnesota. He remained there until his return to the Company in 2010.
Ms. Myers joined the Company in 1996. She has served as Secretary since October 1996 and as Executive Assistant to the President since 1999. Previously, she was executive secretary for Superintendent of Schools for Unified School District 409, Atchison, Kansas.
Mr. Phillips has served as Vice President of Supply Chain Operations since June 2009. For a year prior to that, he served as Corporate Director of Manufacturing for the Company’s Ingredient Solutions segment. He joined the Company as General Manager of Extrusion Technology in July 2007. He previously spent 17 years in plant supervisory and management positions with General Mills, Inc., including four years as plant manager of that company’s operations in Kansas City, Missouri, and a year as Plant Manager of the General Mills facility in Methuen, Massachusetts. From 1988 to 1990, he was employed as a production supervisor for the Quaker Oats Company.
Mr. Rindom joined the Company in 1980. He has served as Vice President, Human Resources since June 2000. He was Corporate Director of Human Relations from 1992 to June 2000, Personnel Director from 1988 to 1992, and Assistant Personnel Director from 1984 to 1988.
Mr. Schrick served as President of Illinois Corn Processing, LLC, from November 2009 to December 2011. He also has been Vice President of Engineering for the Company since June 2009. He previously had served as Corporate Director of Distillery Products Manufacturing from June 2008 to June 2009 and as Vice President, Manufacturing and Engineering from July 2002 to June 2008. He served as Vice President - Operations from 1992 until July 2002. From 1984 to 1992, he served as Vice President and General Manager of the Pekin plant. From 1982 to 1984, he was the Plant Manager of the Pekin plant subsequent to joining the Company in 1973. Prior to 1982, he was Production Manager at the Atchison plant. He was a Director of the Company from 1987 to 2008.
Our business is subject to certain risks and uncertainties. The following identifies those which we consider to be most important:
RISKS THAT AFFECT OUR BUSINESS AS A WHOLE
An interruption of operations at either our Atchison facility or our Indiana Distillery, or a disruption in supply of oak barrels, could negatively affect our business.
The bulk of our ingredient solutions business takes place at our facility in Atchison, while food grade alcohol is produced both at our Atchison plant and our Indiana Distillery. An interruption in or loss of operations at either of our facilities could reduce or postpone production of our products, which could have a material adverse effect on our business, results of operations and/or financial condition. To the extent that our value-added products rely on unique or proprietary processes or techniques, replacing lost production by purchasing from outside suppliers becomes more difficult.
As a result of our acquisition of the Indiana Distillery, we hold a substantial amount of inventory of aged products of whiskeys and bourbons. If there were a catastrophic event at our Indiana Distillery, our business could be adversely affected. The loss of a significant amount of aged inventory – through fire, natural disaster, or otherwise - could result in a significant reduction in supply of the affected product or products and could result in customer claims against us. Similarly, if we experienced a disruption in the supply of new oak barrels in which to age our whiskeys, our business could suffer.
Our profitability is affected by the cost of natural gas, ethanol and grain and flour that we use in our business, the availability and cost of which are subject to weather and other factors beyond our control. Our hedging strategy may not protect us from changes in prices of commodities and natural gas or translate to a competitive advantage in the marketplace. We may not be able to recoup cost increases in our selling prices due to the competitive environment.
Grain and flour costs are a significant portion of our costs of goods sold. Historically, the cost of such raw materials has been subject to substantial fluctuations, depending upon a number of factors which affect commodity prices in general and over which we have no control. These include crop conditions, weather, disease, plantings, government programs and policies, purchases by foreign governments, and changes in demand resulting from population growth and customer preferences. The price of natural gas, which comprised approximately 4.3 percent of cost of goods sold for the six month transition period ended December 31, 2011, 5.9 percent of our cost of goods sold in fiscal 2011, 7.1 percent of our cost of goods sold in fiscal 2010 and 11.4 percent of our cost of goods sold in fiscal 2009, also fluctuates, based on anticipated changes in supply and demand, weather and the prices of alternative fuels. Fluctuations in the price of commodities and natural gas can be sudden and volatile at times and have had, from time to time, significant adverse effects on the results of our operations.
Formerly, we engaged in the purchase of commodity and natural gas futures and options and in the forward purchases of grain and natural gas to hedge economic risks associated with fluctuating grain and natural gas prices. We no longer engage in such activities based on expected use of our facilities, and now generally purchase derivatives and enter contracts for future delivery only to protect margins on contracted, and a portion of spot market, alcohol sales and expected ingredients sales. During the six month transition period ended December 31, 2011, we began to buy and sell derivative instruments to manage market risk associated with ethanol purchases, including ethanol futures and options contracts, in order to mitigate risks associated with our investment in ICP. We intend to contract for the future delivery of flour only to protect margins on expected ingredients sales. On the portion of purchases not hedged, management will attempt to recover higher commodity costs through higher sales prices, but market considerations may not always permit this. Even where prices can be adjusted, there would likely be a lag between when we incur higher commodity or natural gas costs and when we might be able to increase prices. To the extent we do not enter such derivative contracts or engage in forward purchases and are also unable to timely pass increases in the cost of raw materials to our customers under sales contracts, we may be adversely impacted by market fluctuations in the cost of grain, natural gas and ethanol. Further, our hedging strategy may not be effective in mitigating our exposure to commodity price fluctuations and can result in losses, some of which may be material. See Item. 7A. Quantitative and Qualitative Disclosure About Market Risk.
We may not succeed in our strategies for acquisitions and dispositions.
From time to time, we may acquire additional assets or businesses. Our goal is to invest in growth opportunities that increase long-term shareholder value by advancing our strategic position and increase our long-term cash flows; however, we cannot assure that we will be able to find and purchase assets or businesses at acceptable prices and terms.
One such acquisition, which was the acquisition of LDI’s Distillery Business, was closed effective December 27, 2011. While we expect to benefit from revenue enhancements resulting from this acquisition, there is no assurance that we will be able to generate sufficient cash flow from this acquisition to service the debt that we incurred to finance the acquisition and subsequent capital expenditures. This, like any acquisition, may involve operating risks such as:
|
|
-
|
the difficulty of assimilating and integrating the acquired operations into our current business;
|
|
|
-
|
the difficulty of incorporating the former LDI employees into our corporate culture and the possible loss of key employees;
|
|
|
-
|
the diversion or dilution of management resources or focus;
|
|
|
-
|
the possibility that effective internal controls are not established and maintained at the Indiana Distillery;
|
|
|
-
|
the risks of entering new product markets with which we have limited experience;
|
|
|
-
|
the possibility that the debt and liabilities that we incurred and assumed will prove to be more burdensome that we anticipated; and
|
|
|
-
|
the possibility that the acquired operations do not perform as expected or do not increase our profits.
|
We also evaluate from time-to-time the potential disposition of assets or businesses that may no longer meet our growth, return and/or strategic objectives. In selling assets or businesses, we may not get a price or terms as favorable as we anticipated. We could also encounter difficulty in finding buyers on acceptable terms in a timely manner, which could delay our accomplishment of strategic objectives. Expected costs savings from reduced overhead related to the sold assets may not materialize, and the overhead reductions could temporarily disrupt our other business operations. Any of these outcomes could hurt our performance.
If ICP incurs losses, it could result in closure of its Pekin plant. This could result in reduced sales and impairment losses for us.
ICP’s Limited Liability Company Agreement gives us and our joint venture partner, ICP Holdings, a subsidiary of SEACOR Energy Inc., certain rights to shut down the Pekin plant if ICP operates at an EBITDA loss of $500 in any quarter. Such rights are conditional in certain instances but are absolute if losses aggregate $1,500 over any three consecutive quarters or if ICP’s net working capital is less than $2,500. For the three consecutive quarters ending both September 30, 2011 and June 30, 2011, ICP experienced an EBITDA loss in excess of the $1,500 aggregate loss threshold amount permitted over any three consecutive quarters; however, both partners have agreed to waive rights related to EBITDA losses through September 30, 2011. Losses of such nature are also events of default under ICP’s term loan and revolving credit agreements with its lender, an affiliate (sister company) of SEACOR Energy, Inc., which, upon any requisite notice and/or lapse of time, would entitle the lender to impose a default rate of interest, foreclose on ICP’s assets and, in the case of the working capital deficiency or successive losses, enforce the closure provisions referred to above. During fiscal 2011 and the six month transition period ended December 31, 2011, ICP experienced EBITDA losses in the quarters ending December 31, 2010, June 30, 2011 and September 30, 2011. A lender affiliated with SEACOR Energy, Inc. has permanently waived rights related to these EBITDA losses through September 30, 2011. However, if future losses of the requisite magnitudes occur in any quarter or over three consecutive quarters, we, ICP Holdings or ICP’s lender may elect to exercise its rights under the applicable agreement.
If ICP's lender were to foreclose on ICP's assets or force a closure of the Pekin plant, we could be forced to purchase alcohol from third parties at unfavorable prices in order to satisfy contractual commitments to customers, our sales could be reduced and the value of our investment in ICP could be impaired.
We have incurred impairment and restructuring losses in the past and may suffer such losses in the future.
We review long-lived assets for impairment at year end or if events or circumstances indicate that usage may be limited and carrying values may not be recoverable. Should events indicate the assets cannot be used as planned, the realization from alternative uses or disposal is compared to their carrying value. If an impairment loss is measured, this estimate is recognized. Considerable judgment is used in these measurements, and a change in the assumptions could result in a different determination of impairment loss and/or the amount of any impairment. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Impairment of Long-Lived Assets.
The markets for our products are very competitive, and our results could be adversely affected if we do not compete effectively.
The markets for products in which we participate are very competitive. Our principal competitors in these markets have substantial financial, marketing, and other resources, and several are much larger enterprises than us. Competition is based on such factors as product innovation, product characteristics, product quality, price, color and name. If market conditions make our specialty ingredients too expensive for use in consumer goods, our revenues could be affected. If our large competitors were to decrease their pricing, we could choose to do the same, which could adversely affect our margins and profitability. If we did not do the same, our revenues could be adversely affected due to the potential loss of sales or market share. Our revenue growth could also be adversely impacted if we are not successful in developing new ingredients products for our customers or through new product introductions by our competitors. In addition, more stringent new customer demands may require us to make internal investments to achieve or sustain competitive advantage and meet customer expectations.
Our unionized workforce could cause interruptions in the Company’s provision of services
As of December 31, 2011, approximately 97 of our 256 employees were members of a union. Although our relations with the relevant union are stable and our labor contract does not expire until August 2014, there is no assurance that we will not experience work disruptions or stoppages in the future, which could have a material adverse effect on our business and results of operations and adversely affect our relationships with our customers.
If we lose certain key personnel, we may not be successful.
We rely on the continued services of key personnel involved in management, finance, product development, sales, manufacturing and distribution, and, in particular, upon the efforts and abilities of our executive management team. The loss of service of any of the members of our executive management team could have a material adverse effect on our business, financial condition and results of operations. A loss of our CEO could result in the acceleration of the debt under our credit facility. We do have key personnel life insurance covering two key executives, but this may not ensure complete avoidance of loss in that circumstance.
Covenants and other provisions in our credit facility could hinder our ability to operate. Our failure to comply with covenants in our credit facility could result in the acceleration of the debt extended under such facility, limit our liquidity and trigger other rights.
Our credit agreement with Wells Fargo Bank, National Association contains a number of financial and other covenants, including provisions that require us to meet certain financial tests and that may limit or restrict our ability to:
|
·
|
incur additional indebtedness;
|
|
·
|
pay cash dividends to stockholders in excess of $2,000 any fiscal year or re-purchase our stock;
|
|
·
|
make investments that exceed $15,000 or acquisitions that exceed $5,000 (other than the acquisition of LDI) in the aggregate;
|
|
·
|
create liens on our assets;
|
|
·
|
incur operating lease expense in excess of $4,000 in any fiscal year;
|
|
·
|
pledge the fixed and real property assets of LDI’s Distillery Business
|
|
·
|
merge or consolidate; or
|
|
·
|
increase certain salaries and bonuses.
|
These covenants may hinder our ability to operate and could reduce our profitability. Other covenants 1) require adjusted net income, as of each quarter end for the 12-month period then ended, to be no less than one dollar ($1.00), 2) require us to meet, as of each quarter end for the 12-month period then ending, a minimum fixed charge coverage ratio, 3) require us to not exceed a maximum balance sheet leverage ratio, and 4) require us to hedge the input costs of 100 percent of all contracted sales of inventory and not less than 40 percent of the input costs of inventory which will be sold on the spot market. A breach of any of these covenants or requirements could result in a default under our credit agreement. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Financial Covenants.
In addition, our credit agreement permits the lender to modify or reduce the borrowing base at its sole (but reasonable) discretion and to accelerate our debt if an over-advance results. Any modification to reduce our borrowing base or termination of our credit agreement would negatively impact our overall liquidity and may require us to take other actions to preserve any remaining liquidity. Although we anticipate that we will be able to meet the covenants in our credit agreement, there can be no assurance that we will do so, as there are a number of external factors that affect our operations, such as commodity prices, over which we have little or no control. If we default on any of our covenants, and if such default is not cured or waived, Wells Fargo could, among other remedies, terminate its commitment to lend and/or accelerate any outstanding debt and declare that such debt is immediately due and payable. If Wells Fargo were to terminate our credit, or materially change our borrowing base, we may not have sufficient funds available for us to operate. If it were to accelerate our debt, we might be unable to repay such debt immediately and might not be able to borrow sufficient funds to refinance. Even if new financing were available, it may not be on terms that are acceptable to us. Acceleration could result in foreclosure on assets that we have pledged to Wells Fargo. Further, certain of our other secured debt instruments contain cross default provisions, such that an event of default under our credit agreement with Wells Fargo may result in an event of default under these other debt instruments. If our lenders were to terminate our credit or accelerate our debt, or if Wells Fargo were to materially change our borrowing base, we might not have sufficient funds to operate.
As a result of the acquisition of LDI's Distillery Business, depressed margins, raw material cost increases, and an increase in required restricted cash, our debt has increased substantially.
Since June 30, 2010, our borrowings under our credit facility increased substantially from $0 to $21,142 at December 31, 2011, primarily due to our acquisition of the LDI Distillery Business, depressed margins related primarily due to increased costs of raw materials, and an increase in restricted cash due to a deposit required as a result of a decline in the market value of open contract positions relative to the respective contracts. Although we used proceeds from the purchase, which occurred on February 1, 2012, by ICP Holdings of an additional 20 percent interest in ICP to reduce our borrowings under our credit facility, our debt service requirements are greater than in recent history and the amount of debt we have incurred may have important consequences, including the following:
|
|
· We will have to use a greater portion of our cash flows from operations to pay principal and interest on our debt, which will reduce the funds that would otherwise be available to us for our operations, capital expenditures, future business opportunities and dividends; and
|
|
|
· We will be adversely affected by increases in prevailing interest rates.
|
We may require significant cash flow to make needed capital expenditures, and our ability to make such expenditures could be limited.
Over the course of the next few years we may need to make substantial capital expenditures. See – Item 1. Business - Regulation and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Cash Flow Information – Investing Cash Flows. For example, we expect to make significant capital expenditures related to our recent acquisition of the Indiana Distillery. While our credit facility does not limit the amount of our capital expenditures, we are still limited by the size of the line and must continue to meet our other covenants. We may require additional long-term financing to meet certain of our capital expenditure requirements, but have not determined the amount, type or source of such financing. Our credit facility generally prohibits new debt from other lenders and would require the consent of Wells Fargo Bank to incur new debt. We cannot provide assurances that we will be able to obtain such consent or arrange such financing on favorable terms, if at all.
We are subject to extensive regulation and taxation, and compliance with existing or future laws and regulations, including those relating to greenhouse gases and climate change, may require us to incur substantial expenditures or require us to make product recalls.
We are subject to a broad range of federal, state, local and foreign laws and regulations intended to protect public health and the environment. Our operations are also subject to regulation by various federal agencies, including the Alcohol and Tobacco Tax Trade Bureau, the Occupational Safety and Health Administration, the Food and Drug Administration and the Environmental Protection Agency, and by various state and local authorities. Such regulations cover virtually every aspect of our operations, including production facilities, marketing, pricing, labeling, packaging, advertising, water usage, waste water discharge, disposal of hazardous wastes and emissions and other matters. Violations of any of these laws and regulations may result in administrative, civil or criminal penalties being levied against us, revocation or modification of permits, performance of environmental investigatory or remedial activities, voluntary or involuntary product recalls, or a cease and desist order against operations that are not in compliance. These laws and regulations may change in the future and we may incur material costs in our efforts to comply with current or future laws and regulations or to effect any product recalls. These matters may have a material adverse effect on our business. See Item 1. Business – Regulation, where we discuss certain environmental proceedings in which governmental agencies sought fines from us and required significant capital expenditures.
Our Atchison facility and our joint venture's facility currently produce fuel grade alcohol as a by-product and emit carbon dioxide into the atmosphere as a by-product of the fermentation process. In 2007, the U.S. Supreme Court classified carbon dioxide as an air pollutant under the Clean Air Act in a case seeking to require the EPA to regulate carbon dioxide in vehicle emissions. On February 3, 2010, the EPA released its final regulations on the Renewable Fuel Standard program (RFS2). We believe these final regulations grandfather both facilities at their current operating capacity for fuel grade alcohol, but plant expansion would need to meet a 20% threshold reduction in greenhouse gas emissions from a 2005 baseline measurement to produce fuel grade alcohol eligible for the RFS2 mandate. Additionally, legislation is pending in Congress on a comprehensive carbon dioxide regulatory scheme, such as a carbon tax or cap-and-trade system. We may be required to install carbon dioxide mitigation equipment or take other steps unknown to us at this time in order to comply with other future laws or regulations. Compliance with future laws or regulations relating to emission of carbon dioxide could be costly and may require additional capital, which may not be available, preventing us and our joint venture from operating our plants as originally designed, which may have a material adverse impact on our respective operations, cash flows and financial position.
Also, the distribution of beverage alcohol products is subject to extensive taxation in the United States and internationally (and, in the United States, at both at the federal and state government levels), and beverage alcohol products themselves are the subject of national import and excise duties in most countries around the world. This taxation has a minor effect on us; however, it has larger effects on our beverage alcohol customers, and accordingly, an increase in taxation or in import or excise duties could significantly harm our sales revenues and margins, both through the reduction of overall consumption and by encouraging consumers to switch to lower-taxed categories of beverage alcohol.
We face risk related to changes in the global economic environment.
Our business may be impacted by the weak US and global economic conditions, which are increasingly volatile. General business and economic conditions that could affect us include short-term and long-term interest rates, unemployment, inflation, fluctuations in debt markets and the strength of the US economy and the local economies in which we operate. While currently these conditions have not impaired our ability to access credit markets and finance our operations and acquisitions of LDI’s Distillery Business, there can be no assurance that there will not be a further deterioration in the financial markets.
There could be a number of other effects from these economic developments on our business, including reduced consumer demand for products; insolvency of our customers, resulting in increased provisions for credit losses; decreased customer demand, including order delays or cancellations and counterparty failures negatively impacting our operations.
RISKS SPECIFIC TO OUR DISTILLERY PRODUCTS SEGMENT
Volatile grain prices affect our profitability.
A portion of our operating income is dependent on the spreads between alcohol and corn prices. We intend to protect the margins on our alcohol contracts, but may not always be able to do so. If we are not successful in protecting our margins through hedging activities, volatility in corn prices could affect our profitability. These fluctuating prices create challenges since our customers are interested in stable prices for the distillery products they purchase from us.
The relationship between the price we pay for corn and the sales prices of our distillery co-products can fluctuate significantly and affect our results of operations.
Dried grain, or distillers feed, and fuel grade alcohol are the principal co-products of our alcohol production process and can contribute in varying degrees to the profitability of our distillery products segment. We sell fuel grade alcohol, the prices for which typically, but not always, have tracked price fluctuations in gasoline prices. Distillers feed is sold for prices which historically have tracked the price of corn. In fiscal 2009 and 2008, however, the value of these co-products lagged behind the significant and rapid increase in corn prices. In regard to distillers feed, we believe that, in part, this resulted from decreased demand in the E.U. due to the E.U.’s non-approval of several varieties of genetically modified corn commonly grown in the U.S. Further, certain of our co-products compete with similar products made from other plant feedstocks whose cost may not have risen in unison with corn prices. As a result, the profitability of these products to us could be affected.
Although we have reduced our production and sales of fuel grade alcohol and have entered into ethanol derivative contracts to mitigate market risk, we continue to have some exposure to fuel grade alcohol market price fluctuations.
Because of the continued erosion of the fuel alcohol markets, in the fiscal year 2009 we determined to substantially reduce our production of fuel alcohol and temporarily ceased production at our former Pekin facility. Subsequently, after exploring our strategic options with respect to this facility, we contributed the facility to ICP and sold a 50 percent interest in ICP to ICP Holdings. We purchase food grade alcohol products from ICP and market and sell such products, and SEACOR Energy, Inc. has a similar arrangement with respect to the fuel grade alcohol produced by ICP. Although we have reduced our exposure to the volatility of the fuel grade alcohol business through this arrangement and have sought to further mitigate our exposure by entering into ethanol derivative contracts, because we share in the profits and losses of ICP and continue to produce some fuel alcohol as a by-product at our Atchison plant, we retain some exposure to such volatility. We believe that our exposure to such volatility of fuel grade alcohol was reduced when ICP Holdings exercised its option on February 1, 2012 to purchase an additional 20 percent of ICP, reducing our share of future ICP earnings to 30 percent.
Adverse public opinion about alcohol could reduce demand for our products.
In recent years, there has been increased social and political attention directed at the beverage alcohol industry. The recent attention has focused largely on public health concerns related to alcohol abuse, including drunk driving, underage drinking, and the negative health impacts of the abuse and misuse of beverage alcohol.
Anti-alcohol groups have, in the past, advocated successfully for more stringent labeling requirements, higher taxes and other regulations designed to discourage alcohol consumption. More restrictive regulations, negative publicity regarding alcohol consumption and/or changes in consumer perceptions of the relative healthfulness or safety of beverage alcohol could decrease sales and consumption of alcohol and thus the demand for our products. This could, in turn, significantly decrease both our revenues and our revenue growth, causing a decline in our results of operations.
RISKS SPECIFIC TO OUR INGREDIENT SOLUTIONS SEGMENT
Our focus on higher margin specialty ingredients may make us more reliant on fewer, more profitable customer relationships.
Our business strategy for our ingredient solutions segment includes focusing our efforts on the sale of specialty proteins and starches to targeted domestic consumer packaged goods customers. Our major focus is directed at food ingredients, which are primarily used in foods that are developed to address consumers’ desire for healthier and more convenient products; these consist of dietary fiber, wheat protein isolates and concentrates, and textured wheat proteins The bulk of our applications technology and research and development efforts are dedicated to providing customers with specialty ingredient solutions that deliver nutritional benefits, as well as desired functional and sensory qualities to their products. Our business could be adversely affected if our customers were to determine to reduce their new product development (“NPD”) activities or cease using our unique dietary fibers, starches and proteins in their NPD efforts. In addition, our sales growth opportunities could be at risk in these areas if consumers abandon or significantly limit their interest in healthier foods, limit their interest in convenience foods, and/or adopt a widespread aversion to foods containing wheat gluten.
RISKS SPECIFIC TO OUR OTHER SEGMENT
Our plant-based biopolymers and wood-based composite resins may not prove to be profitable or commercially scalable.
Plant-based biopolymers and wood-based composite resins continue to represent an emerging area of our business. While commercialization of these products has begun, they continue to undergo further research and development as we explore additional enhancements to expand their functionality and use capabilities. To date, they have not contributed significant revenues or profit.
OTHER RISKS
Common stockholders have limited rights under our Articles of Incorporation.
Under our Articles of Incorporation, holders of our Preferred Stock are entitled to elect five of our nine directors and only holders of our Preferred Stock are entitled to vote with respect to a merger, dissolution, lease, exchange or sale of substantially all of the Company’s assets, or on an amendment to the Articles of Incorporation, unless such action would increase or decrease the authorized shares or par value of the Common or Preferred Stock, or change the powers, preferences or special rights of the Common or Preferred Stock so as to affect the holders of Common Stock adversely. Generally, the Common Stock and Preferred Stock vote as separate classes on all other matters requiring stockholder approval. A majority of the outstanding shares of our Preferred Stock is held by the MGP Ingredients Voting Trust, whose trustees are Karen Seaberg, Richard B. Cray and Laidacker M. Seaberg.
As previously described in Item 1. Business, on January 3, 2012, we reorganized into a holding company structure. In connection with the related merger that resulted in Processing becoming a subsidiary of the Company, Processing’s articles of incorporation were amended to provide that any act or transaction by or involving Processing (other than the election or removal of directors) that requires for its adoption under Kansas law or Processing's Articles of Incorporation the approval of the stockholders of Processing will also require, in addition, the approval of the stockholders of the Company, by the same vote as is required by Kansas law or by Processing's Articles of Incorporation, or both. As a result, holders of our Preferred Stock (and generally only such holders), would be entitled to vote with respect to such matters as a merger or sale of substantially all of Processing's assets.
The trading volume in our common stock fluctuates, and depending on market conditions, the sale of a substantial number of shares in the public market could depress the price of our stock and make it difficult for stockholders to sell their shares.
Our common stock is listed on the NASDAQ Stock Market. Our public float at December 31, 2011 (including non-vested restricted stock awards held by non-affiliates) was approximately 11,797,527 shares, as approximately 6,318,438 shares are held by affiliates. Over the six month transition period ended December 31, 2011, our daily trading volume as reported to us by NASDAQ has fluctuated from 9,200 to 120,842 shares (excluding block trades). When trading volumes are relatively light, significant price changes can occur even when a relatively small number of shares are being traded and an investor’s ability to quickly sell quantities of stock may be affected.
We own or lease the following principal plants, warehouses and office facilities:
|
Location
|
|
Purpose
|
|
Owned or Leased
|
|
Plant Area
(in sq. ft.)
|
|
Tract Area
(in acres)
|
|
Atchison, Kansas
|
|
Grain processing, distillery, warehousing,
and research and quality
control laboratories (Distillery Products and Ingredient Solutions)
|
|
Owned
|
|
494,640
|
|
26
|
| |
|
Principal executive office building (Corporate)
|
|
Leased
|
|
18,000
|
|
1
|
| |
|
Technical Innovation Center (Ingredient Solutions, Distillery Products and Other)
|
|
Leased
|
|
19,600
|
|
1
|
|
Lawrenceburg and Greendale, Indiana
|
|
Distillery, warehousing, tank farm and quality control facilities
|
|
Owned
|
|
1,458,143
|
|
43
|
|
Rushville, Indiana(1)
|
|
Grain elevator operations
|
|
Owned
|
|
4,560
|
|
12
|
|
Kansas City, Kansas
|
|
Specialty proteins (Ingredient Solutions)
|
|
Leased
|
|
27,400
|
|
N/A
|
|
Onaga, Kansas
|
|
Production of plant-based
polymers and
wood composites (Other)
|
|
Owned
|
|
23,040
|
|
3
|
(1) At December 31, 2011, the grain elevator was held for sale as further described in Note 10. Assets Held for Sale. We have leased the elevator to our grain supplier and are negotiating a sale with the lessee.
Our 30% owned joint venture subsidiary, ICP, owns the following facility.
|
Pekin, Illinois
|
Distillery,
warehousing and quality control
laboratories (Distillery Products)
|
Owned
|
462,926
|
49
|
The foregoing facilities are generally in good operating condition, and are generally suitable for the business activity conducted therein. We operated our Atchison distillery operations at full capacity during much of the six month transition period ended December 31, 2011; however, operations were affected during the first quarter of the transition period by production shutdowns. We have existing manufacturing capacity to grow our ingredients business at our Atchison plant if the market for our ingredients business improves. Our former Pekin distillery operation, which we shut down in February 2009, is now owned by ICP. This plant was reactivated in the third quarter of fiscal 2010 and was operating at near full capacity at the end of the transition period. Our newly acquired Indiana Distillery was operating below its rated capacity when it was acquired, which provides growth opportunities for our new distillery products.
We formerly owned an 83,200 square foot facility in Kansas City, Kansas, but sold it on August 21, 2009. We are now leasing a portion of that facility for a term ending in August 2012. We have equipment used for the production of our Wheatex® line of products at this location, which is operated by a third party under a toll manufacturing agreement with us. We have determined not to renew the lease when it expires and have taken an impairment loss of $706 at December 31, 2011 with respect to the equipment.
Except for our process water cooling system project, which is leased under a capital lease, all of the other production facilities that we or ICP utilize are owned, and all of our owned properties are subject to mortgages in favor of one or more of our lenders. ICP’s facility is subject to a mortgage in favor of its lender. The executive offices and technical innovation center in Atchison are leased from the City of Atchison pursuant to an industrial revenue bond financing. Our leasehold interest in these properties is subject to a leasehold mortgage. We also own or lease transportation equipment and facilities and a gas pipeline described under Item 1. Business – Transportation and Item 1. Business – Energy. Our loan agreements contain covenants that limit our ability to pledge our facilities to others.
ITEM 3. LEGAL PROCEEDINGS
There are various legal proceedings involving the Company and its subsidiaries. Except for the following matter, 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 overall trends in results of operations of the Company.
In 2006, we entered a Consent Agreement with the Kansas Department of Health and Environment (KDHE) which, among other matters, imposed a source-wide, rolling 12-month volatile organic compounds (VOC) emissions cap on our Atchison facility. Pursuant to a second amendment that we entered in 2010, we agreed to complete a closed-loop, process water cooling system project, resulting in significant VOC reduction, in accordance with a scheduled timeline extending over an approximate 17-month period ending on September 30, 2011. We completed this in July 2011 at a cost of approximately $10,000. We also agreed to a $5 per month penalty for any month that we might exceed the rolling 12-month cap and a $1 per day penalty for each day that we fail to submit certain monthly reports. During the six month transition period ended December 31, 2011, we were not subjected to any penalties related to the above criteria.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERS MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is traded on the NASDAQ Global Select Market. Our trading symbol is MGPI.
In connection with the Reorganization, the common shares of Registrant were deemed to commence trading on the NASDAQ Global Select Market under the symbol “MGPI” on January 4, 2012. As a result of the Reorganization, common shares of MGPI Processing, Inc. (formerly MGP Ingredients, Inc.), which previously traded on the NASDAQ Global Select Market under the symbol “MGPI”, were deemed to no longer be publicly traded. The Reorganization did not require shareholders to exchange their stock certificates.
HISTORICAL STOCK PRICES AND DIVIDENDS
The table below reflects the high and low closing prices of our common stock and dividends per share for each quarter of the transition period, fiscal 2011 and fiscal 2010:
| |
|
Sales Price
|
|
|
Dividend
|
|
| |
|
High
|
|
|
Low
|
|
|
Per Share
|
|
|
For the Transition Period from July 1, 2011 to December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended September 30, 2011
|
|
$ |
8.75 |
|
|
$ |
5.07 |
|
|
$ |
0.05 |
|
|
For the Quarter Ended December 31, 2011
|
|
|
6.82 |
|
|
|
4.27 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
$ |
0.05 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended September 30, 2010
|
|
$ |
8.15 |
|
|
$ |
6.46 |
|
|
$ |
0.05 |
|
|
For the Quarter Ended December 31, 2010
|
|
|
11.90 |
|
|
|
8.14 |
|
|
|
- |
|
|
For the Quarter Ended March 31, 2011
|
|
|
11.06 |
|
|
|
7.90 |
|
|
|
- |
|
|
For the Quarter Ended June 30, 2011
|
|
|
9.00 |
|
|
|
7.75 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
$ |
0.05 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended September 30, 2009
|
|
$ |
4.39 |
|
|
$ |
2.29 |
|
|
$ |
- |
|
|
For the Quarter Ended December 31, 2009
|
|
|
9.62 |
|
|
|
3.91 |
|
|
|
- |
|
|
For the Quarter Ended March 31, 2010
|
|
|
7.78 |
|
|
|
6.36 |
|
|
|
- |
|
|
For the Quarter Ended June 30, 2010
|
|
|
8.62 |
|
|
|
5.75 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
$ |
- |
|
Our Credit Agreement with Wells Fargo Bank, National Association restricts the amount of cash dividends that we may pay to $2,000 in any fiscal year.
We did not pay dividends in Fiscal 2009 or 2010. On August 26, 2010, the Board of Directors declared a five (5) cent dividend per share of common stock, payable to holders of record on September 15, 2010. The Company paid the $891 dividend on October 6, 2010. On August 25, 2011 the Board of Directors approved a dividend of five (5) cent per share of common stock, payable to holders of record on September 15, 2011. The Company paid the $906 dividend on October 13, 2011. On March 1, 2012, the Board of Directors declared a five (5) cent dividend per common share. The dividend will be paid on April 19, 2012 to common stockholders of record on March 22, 2012.
At February 29, 2012, there were approximately 704 holders of record of our Common Stock. We believe that the Common Stock is held by approximately 4,673 beneficial owners.
According to reports received from the NASDAQ, the average daily trading volume of our common stock (excluding block trades) ranged from 9,200 to 120,842 shares during the six month transition period ended December 31, 2011.
PURCHASES OF EQUITY SECURITIES BY ISSUER
We did not repurchase any shares of our stock during the six month transition period ended December 31, 2011.
ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands except per share amounts)
The selected financial data below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 of this Form 10-K as well as the consolidated financial statements and the related notes. See Note 20. Transition Period Comparative Data for unaudited financial information for the six months ended December 31, 2010.
| |
|
Six Months Ended
|
|
|
Fiscal Year Ended (1) (2) (3) (4) (5) (6)
|
|
| |
|
December 31,
2011(9)(10)(11)
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
146,477 |
|
|
$ |
247,915 |
|
|
$ |
201,971 |
|
|
$ |
291,812 |
|
|
$ |
412,473 |
|
|
$ |
382,306 |
|
|
Cost of sales
|
|
|
143,531 |
|
|
|
225,038 |
|
|
|
171,427 |
|
|
|
325,914 |
|
|
|
408,242 |
|
|
|
335,033 |
|
|
Gross profit (loss)
|
|
|
2,946 |
|
|
|
22,877 |
|
|
|
30,544 |
|
|
|
(34,102 |
) |
|
|
4,231 |
|
|
|
47,273 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
11,417 |
|
|
|
21,157 |
|
|
|
20,708 |
|
|
|
21,401 |
|
|
|
24,235 |
|
|
|
20,319 |
|
|
Other operating costs
|
|
|
114 |
|
|
|
1,075 |
|
|
|
287 |
|
|
|
4,694 |
|
|
|
- |
|
|
|
- |
|
|
Write-off of assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,546 |
|
|
|
- |
|
|
Impairment of long-lived assets
|
|
|
1,301 |
|
|
|
- |
|
|
|
- |
|
|
|
10,282 |
|
|
|
8,100 |
|
|
|
- |
|
|
Severance and early retirement costs
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,288 |
|
|
|
- |
|
|
|
- |
|
|
Bargain purchase gain, net of tax
|
|
|
(13,048 |
) |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Loss on joint venture formation
|
|
|
- |
|
|
|
- |
|
|
|
2,294 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Other restructuring costs
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,241 |
|
|
|
- |
|
|
|
- |
|
|
Income (loss) from operations
|
|
|
3,162 |
|
|
|
645 |
|
|
|
7,255 |
|
|
|
(79,008 |
) |
|
|
(29,650 |
) |
|
|
26,954 |
|
|
Other income, net
|
|
|
48 |
|
|
|
8 |
|
|
|
645 |
|
|
|
112 |
|
|
|
515 |
|
|
|
1,490 |
|
|
Gain on settlement of litigation, net of related expenses
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,046 |
|
|
|
- |
|
|
Interest expense
|
|
|
(330 |
) |
|
|
(358 |
) |
|
|
(1,757 |
) |
|
|
(2,901 |
) |
|
|
(1,490 |
) |
|
|
(964 |
) |
|
Equity in earnings (loss) of joint ventures
|
|
|
(551 |
) |
|
|
(1,540 |
) |
|
|
(2,173 |
) |
|
|
(114 |
) |
|
|
(14 |
) |
|
|
- |
|
|
Income (loss) before income taxes
|
|
|
2,329 |
|
|
|
(1,245 |
) |
|
|
3,970 |
|
|
|
(81,911 |
) |
|
|
(23,593 |
) |
|
|
27,480 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
|
(8,306 |
) |
|
|
68 |
|
|
|
(4,768 |
) |
|
|
(12,788 |
) |
|
|
(11,851 |
) |
|
|
9,914 |
|
|
Net income (loss)
|
|
$ |
10,635 |
|
|
$ |
(1,313 |
) |
|
$ |
8,738 |
|
|
$ |
(69,123 |
) |
|
$ |
(11,742 |
) |
|
$ |
17,566 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share(7)
|
|
$ |
0.59 |
|
|
$ |
(0.07 |
) |
|
$ |
0.52 |
|
|
$ |
(4.17 |
) |
|
$ |
(0.71 |
) |
|
$ |
1.07 |
|
|
Diluted earnings per common share(7)
|
|
$ |
0.59 |
|
|
$ |
(0.07 |
) |
|
$ |
0.51 |
|
|
$ |
(4.17 |
) |
|
$ |
(0.70 |
) |
|
$ |
1.04 |
|
|
Weighted average basic common shares outstanding(7)
|
|
|
16,875,924 |
|
|
|
16,725,756 |
|
|
|
16,655,203 |
|
|
|
16,585,361 |
|
|
|
16,531,347 |
|
|
|
16,427,959 |
|
|
Weighted average diluted common shares outstanding(7)
|
|
|
16,879,153 |
|
|
|
16,725,756 |
|
|
|
17,082,123 |
|
|
|
16,585,361 |
|
|
|
16,805,412 |
|
|
|
16,913,342 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
0.25 |
|
|
$ |
0.30 |
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
18,887 |
|
|
$ |
22,381 |
|
|
$ |
25,142 |
|
|
$ |
31,242 |
|
|
$ |
51,127 |
|
|
$ |
53,371 |
|
|
Total assets
|
|
|
169,157 |
|
|
|
136,483 |
|
|
|
121,284 |
|
|
|
145,132 |
|
|
|
223,068 |
|
|
|
221,121 |
|
|
Long-term debt, less current maturities
|
|
|
6,852 |
|
|
|
7,702 |
|
|
|
2,082 |
|
|
|
9,632 |
|
|
|
1,301 |
|
|
|
8,940 |
|
|
Stockholders’ equity
|
|
|
84,430 |
|
|
|
75,198 |
|
|
|
72,784 |
|
|
|
63,884 |
|
|
|
136,874 |
|
|
|
154,778 |
|
|
Book value per share(8)
|
|
$ |
4.66 |
|
|
$ |
4.20 |
|
|
$ |
4.37 |
|
|
$ |
3.85 |
|
|
$ |
8.28 |
|
|
$ |
9.42 |
|
|
(1)
|
Fiscal year 2006 started on July 1 and ended June 30. On June 8, 2006 the Board of Directors amended the Company’s Bylaws to effect a change in the fiscal year from a fiscal year ending June 30 to a 52/53 week fiscal year. As a result of this change, fiscal 2007 ended on July 1, 2007. On March 6, 2008, the Board of Directors amended the Company’s bylaws to effect a change in the fiscal year so that it would again end on June 30 each year.
|
|
(2)
|
Amounts for fiscal year 2008 include a write-off of assets of $1,546, a write-down of inventory of $1,300 and a loss on the impairment of assets of $8,100, partially offset by a gain on the settlement of litigation of $7,000 and the removal of a $3,000 state tax valuation allowance ($2,000 net of taxes).
|
|
(3)
|
Amounts for fiscal year 2009 include a non-cash loss on the impairment of assets of $10,282, severance and early retirement costs of $3,288, other restructuring costs of $5,241 and other operating costs related to our closed Pekin, Illinois plant of $4,694. For further discussion, see Note 9. Restructuring Costs and Loss on Impairment of Assets set forth in Item 8, and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Fiscal 2010 Compared to Fiscal 2009 – Cost of Sales.
|
|
(4)
|
Amounts for fiscal year 2010 include the impact of a correcting entry related to certain accounts payable recorded prior to fiscal 2010 that had been either duplicated or otherwise erroneously recorded. The impact of the correcting adjustment increased reported pretax income by approximately $1,351. Cost of sales was decreased by $733 and other income increased by $618. For further discussion, see Note 1. Nature of Operations and Summary of Significant Accounting Policies set forth in Item 8.
|
|
(5)
|
Amounts for fiscal year 2010 include a $2,294 charge related to the loss on joint venture formation. For further discussion, see Note 1. Nature of Operations and Summary of Significant Accounting Policies and Note 3. Investment in Joint Ventures set forth in Item 8, and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Fiscal 2010 Compared to Fiscal 2009 - Loss on Joint Venture Formation.
|
|
(6)
|
Amounts for fiscal year 2010 include the impact of a tax law change that resulted in an income tax benefit of approximately $4,700. For further discussion, see Note 5. Income Taxes set forth in Item 8 and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Fiscal 2010 Compared to Fiscal 2009 – Income Taxes.
|
|
(7)
|
We adopted Accounting Standards Codification 260 10 Earnings Per Share (formerly FSP-EITF 03-6-1) – Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities effective July 1, 2009. The impacts for the non-vested restricted shares, which constitute a separate class of stock for accounting purposes, did not have a material impact and we did not apply the two class method in fiscal 2010. Amounts allocated to participating securities prior to the six month transition period ended December 31, 2011 were immaterial.
|
|
(8)
|
In conjunction with (7) above, non-vested restricted shares are now presented as outstanding shares. The fiscal 2011 book value per share was computed by including non-vested restricted shares; the fiscal 2010 book value per share was not computed using the non-vested restricted shares as the two class method was determined to be used in fiscal 2011 prospectively.
|
|
(9)
|
On August 25, 2011, the Board of Directors amended the Company’s bylaws to effect a change in the fiscal year end from June 30 to December 31. The Company’s results for the transition period July 1, 2011 to December 31, 2011 are reported on this Form 10-K. This financial information in not comparative to the fiscal year ends 2007-2011, which include 12 months of activity. See Note 20. Transition Period Comparative Data for certain comparative data.
|
|
(10)
|
Amounts for the six month transition period ended December 31, 2011 include a $13,048 bargain purchase gain (net of taxes of $8,336) related to the acquisition of LDI’s Distillery Business, as further described in Note 21. Business Combination set forth in Item 8.
|
|
(11)
|
Amounts for the six month transition period ended December 31, 2011 include a $1,301 impairment of long lived assets, as further described in Note 9. Restructuring Costs and Loss on Impairment of Assets set forth in Item 8.
|
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands except per-share amounts)
We produce certain distillery products and ingredients and have three reportable segments: a distillery products segment, an ingredient solutions segment, and an other segment. Substantially all of our sales are made directly or through distributors to manufacturers and processors of finished goods. Sales to our customers purchasing food grade alcohol are made primarily on a spot, monthly or quarterly basis, with some annual contracts, depending on the customer’s needs and market conditions. Customers who purchase whiskey or bourbon may also enter into separate warehouse service agreements with us, allowing the product to age. As part of our acquisition of LDI’s Distillery Business, we assumed certain multi-year contracts to supply distilled products as well as certain contracts to provide barreling warehousing services, which typically are multi-year contracts. Sales of fuel grade alcohol are made on the spot market. Contracts with distributors may be for multi-year terms with periodic review of pricing. Contracts with ingredients customers are generally price and term agreements which are fixed for three or six month periods, with very few agreements of twelve months duration or more.
During the year ended June 30, 2009, we incurred impairment and restructuring costs, aggregating $18,811. Since the first quarter of fiscal 2009, we have made significant changes to our operations in alignment with strategic initiatives to support improved profitability. We have refocused our business on the production of value-added ingredients and distillery products and we have realigned our production efforts. With our temporary ceasing of alcohol production at our Pekin facility in the third quarter of fiscal 2009 and its subsequent inclusion in a joint venture, we are selling reduced quantities of fuel grade alcohol as a co-product. Sales of distillers feed also have decreased. With the shutdown of our flour mill in Atchison in the second quarter of fiscal 2009, we no longer sell mill feeds. We also ceased commodity starch and gluten production at our Pekin plant in the second quarter of fiscal 2009 and exited the personal care market in the third quarter of fiscal 2009. Products remaining within the ingredient solutions segment, all of which are produced at our Atchison facility, consist of starches, including specialty wheat starch and commodity wheat starch, and proteins, including specialty wheat proteins and commodity wheat gluten. In the first quarter of fiscal 2010, we sold our Kansas City, Kansas facility and pet-related business assets. As a result of these actions, revenues across all segments have declined from historic levels; however, we experienced an improvement in our fiscal 2010 profit performance, primarily due to our improved sales mix of value-added products, lower costs of raw materials and natural gas, and lower costs from restructuring.
In recent years, market economics for fuel grade alcohol have been volatile, and in the first calendar quarter of 2009 year we temporarily closed our Pekin plant. After exploring our strategic alternatives with respect to the plant, in November 2009 we completed a series of related transactions pursuant to which we contributed our Pekin plant to a newly-formed company, ICP, and then sold 50 percent of the membership interest in ICP to ICP Holdings, an affiliate of SEACOR Energy Inc., for $15,000 ($13,951 net of closing costs). On February 1, 2012, ICP Holdings exercised its option and purchased an additional 20 percent of ICP from us for $9,103 and now owns 70 percent of ICP, as further described in Note 3. Investment in Joint Ventures and Note 22. Subsequent Events. ICP owns and operates the facility. Under separate marketing agreements, we purchase beverage food grade alcohol products manufactured by ICP, and SEACOR Energy Inc. purchases fuel grade alcohol products manufactured by ICP. These marketing agreements provide that we and ICP Holdings will share margin realized from the sale of the products with ICP. Through June 30, 2010, we paid higher than expected prices due to the start-up activities at ICP.
By entering the joint venture arrangement with ICP Holdings, we recovered a portion of our investment in the Pekin plant and enhanced our ability to supply our food grade alcohol customers with quality product. Through ICP Holdings’ purchase of an additional 20 percent of ICP, we recovered $9,103 of our investment and further reduced our exposure to the volatile fuel grade alcohol market. We retain some exposure to the volatility to fuel grade alcohol through our remaining interest in ICP as well as from the fuel that we make as a co-product at our Atchison facility. We aim to further mitigate the risk of the fuel grade market through the purchase of derivative contracts. Through our investment in ICP, we have an opportunity to participate when the economics of that market are good, and we believe that the extent of our exposure to bad markets is significantly less than when we operated Pekin ourselves. Further, we have the ability, through the termination provisions in the ICP Limited Liability Company Agreement, to limit our operating losses by causing ICP to shut down the plant if losses reach specified amounts.
During fiscal 2011, we continued to focus on the production of valued-added ingredients and distillery products, which led to an overall increase in sales. Despite this increase in sales, our gross margins declined during the fiscal year due to significant raw material cost increases and pricing that was not commensurate with increased costs of raw materials. For the six month transition period ended December 31, 2011, our net income before income taxes totaled $2,329, of which $13,084 is attributable to a bargain purchase gain (net of taxes of $8,336) related to our acquisition of LDI’s Distillery Business.
During the six month transition period ended December 31, 2011, we continued to focus on a profitable sales mix by production of our value-added products with higher margins as well as pricing initiatives to better align our pricing with higher commodity prices. During the six month transition period ended December 31, 2011, our distillery sales increased over the six month period ended December 31, 2010, but our return on sales declined in each of the distillery and ingredient solutions segments due primarily to increased raw material costs that were not fully recovered through higher sales prices, a production interruption during September, 2011, a 10-day production shutdown of our protein and starch products in order to reduce inventory levels and the unfavorable impact of losses on open derivative commodity contracts not designated as cash flow hedges. Our joint venture, ICP, was similarly impacted by higher raw material costs, resulting in a loss from our investment in ICP for the six month transition period ended December 31, 2011. On December 27, 2011, we completed our acquisition of LDI’s Distillery Business and now produce high quality whiskeys and bourbons, while increasing our capacity for gin and grain neutral spirits. The results for the acquired business are included in our consolidated results from December 27, 2011, the acquisition date, to December 31, 2011.
Both bourbon and whiskey are typically aged in wooden barrels from two to four years. Given the available capacity at our Indiana Distillery, as a part of our strategy, we will produce certain volumes of bourbon and whiskey that is in addition to current customer demand. This product will be barreled and included in our inventory. Our goal is to maintain inventory levels for whiskey and bourbon sufficient to satisfy anticipated future purchase orders in the wholesale market. Production schedules are adjusted from time to time to bring inventories into balance with established future demand.
Our principal raw materials are corn and flour. Corn is processed into alcohol and animal feed and flour is processed into all of our products, except whiskey and bourbon. The cost of raw materials is subject to substantial fluctuations depending upon a number of factors which affect commodity prices in general, including crop conditions, weather, disease, plantings, government programs and policies, purchases by foreign governments and changes in demand resulting from population growth and customer preferences. During the transition period ended December 31, 2011 the market prices for grain increased substantially from the six months ended December 31, 2010; during fiscal 2011, the market prices for grain increased substantially from fiscal 2010; during fiscal 2010, the market prices for grain decreased substantially from fiscal 2009; and during fiscal 2009, the market prices for grain increased substantially from the prior year. While corn prices have fluctuated significantly over the past several years and the overall trend in recent prices has been up, there has been a lot of variability in corn pricing during this period. We expect corn pricing to remain volatile in the near term due to a number of factors impacting global demand and supply of this commodity. These fluctuating prices create challenges since our customers are interested in stable prices for the distillery products they purchase from us.
We entered into a supply agreement with ConAgra Mills in November 2008, whereby it supplies wheat flour for use in the production of protein and starch ingredients. As a result, we no longer purchase wheat directly. However, the price we pay ConAgra for flour is a function of the per-bushel cost of wheat and, accordingly, wheat prices continue to directly impact the cost of raw materials. We believe our focus on value-added products can reduce our risk to such price variations as larger profit margins related to such products can absorb higher levels of raw material volatility and as we may more readily seek adjustable price terms in contracts for such products. However, we will continue to be affected by commodity price fluctuations to some degree, which may be significant at times, and may not be able to recoup cost increases in our selling prices, particularly when price fluctuations are volatile.
We typically enter into cash flow hedges to cover between 70 and 80 percent of our monthly anticipated grind. Historically, in an attempt to minimize the effects of the volatility of raw material costs on operating profits, we have taken hedging positions by entering into readily marketable exchange-traded commodity futures and option contracts to reduce the risk of future grain price increases. These contracts help us fix corn prices over short periods of time, generally three to six months, which is consistent with most of the sales orders we typically enter into with our distillery customers. During fiscal 2011, we changed our risk management program related to the volatility of raw material costs, and began purchasing a larger amount of contracts for future delivery, which we typically hold until maturity, in order to protect margins on contracted, and a portion of spot market, alcohol sales and expected ingredients sales. To the extent we do not enter such cash flow hedges and are also unable to timely adjust the prices we charge under sales contracts, we may be adversely impacted by market fluctuations in the cost of grain and natural gas. This strategy led to significant volatility in earnings as a result of unrealized losses (or gains) on our open contracts. However, we believe this program poses less risk than our prior program where we hedged to reduce the risk of grain prices based on anticipated production. During the quarter ended September 30, 2011, we began to buy and sell derivative instruments to manage market risks associated with ethanol purchases, including ethanol futures and options contracts. These contracts were entered into to mitigate risks associated with our investment in ICP. Subsequent to December 31, 2011, we entered a grain supply contract for the Indiana Distillery and are negotiating a new contract for our Atchison facility that will permit us to purchase corn for delivery up to 12 months in the future, at fixed prices. The pricing will be based on a formula with several factors, including corn futures prices and timing of our pricing decisions. We now expect to order corn anywhere from a month to 12 months in the future.
During fiscal years 2009, 2010 and 2011 we did not account for derivative contracts used to economically hedge corn prices as hedges for accounting purposes. We elected to discontinue the use of hedge accounting for all commodity derivative positions effective April 1, 2008. This was primarily due to the increased record keeping and documentation requirements needed to meet these accounting standards. As a result of this decision for these contracts, changes in the fair value of open positions have been marked to fair value through our income statement and affected our reported earnings currently. See Note 15. Derivative Instruments and Fair Value Measurements and “Critical Accounting Policies and Estimates” below.
In order to reduce earnings volatility from commodity price swings, effective July 1, 2011, we elected to restart the use of hedge accounting for qualifying derivative contracts entered into on and after July 1, 2011; however, open contracts entered into prior to July 1, 2011 will continue to be marked to market through earnings until they wind down by March 2012. Under hedge accounting, on the date a derivative contract is entered into, we designate the derivative as a hedge of variable cash flows to be paid with respect to certain forecasted cash purchases of corn used in the manufacturing process (“a cash-flow hedge”). This accounting requires linking all derivatives that are designated as cash-flow hedges to specific firm commitments or forecasted transactions. For cash-flow hedging relationships entered into on or after July 1, 2011 to qualify for cash-flow hedge accounting, we must formally document the hedging relationships and our risk-management objective and strategy for undertaking the hedge transactions, the hedging instrument, the hedged item, the nature of the risk being hedged, the hedging instrument’s effectiveness in offsetting the hedged risk and a description of the method utilized to measure effectiveness. We must also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in the expected cash flows of hedged items. Changes in the fair value of contracts that qualify as cash-flow hedges that are highly effective are marked to fair value as derivative assets or derivative liabilities, with the offset recorded to other comprehensive income/(loss) (“OCI”). Gains and losses on commodity hedging contracts are reclassified from accumulated other comprehensive income (“AOCI”) to current earnings when the finished goods produced using the hedged item are sold.
The ineffective portion of the change in fair value of a derivative instrument that qualifies as a cash-flow hedge is reported in earnings. We discontinue cash-flow hedge accounting for a particular derivative instrument prospectively when (i) it is determined that the derivative is no longer considered to be highly effective in offsetting changes in the expected cash flows of the hedged item; (ii) the derivative is sold, terminated or exercised; (iii) the derivative is de-designated as a hedging instrument because it is unlikely that a forecasted transaction will occur; or (iv) management determines that designation of the derivative as a hedging instrument is no longer appropriate. When cash flow hedge accounting is discontinued, we continue to carry the derivative on the Consolidated Balance Sheet at its fair value, and gains and losses that were included in AOCI are deferred until the original hedged item affects earnings. However, if the original hedged transaction is no longer probable of occurring, the related gains and losses incurred as of discontinuation are recognized in current period earnings.
As discussed above, as we become able to purchase corn for delivery up to 12 months in the future under new grain supply agreements, we expect to reduce the volume of our corn futures and options contracts. Ultimately, our success is largely determined by our ability to recover the price from our customers of the commodities we use in our production process.
Energy represents a major cost of operations, and seasonal increases in natural gas and other utility costs can affect our profitability. Except for the six month transition period ended December 31, 2011, fiscal 2010 and fiscal 2007, in each fiscal year since fiscal 2002, energy costs have been higher than in the previous fiscal year. We sometimes try to protect ourselves from increased energy costs by entering into natural gas contracts for future delivery. In fiscal 2009, we suffered $7,642 in losses from such a contract when we no longer required the gas that we contracted for following our decision to temporarily close our Pekin plant.
We have benefited from a United States Department of Agriculture program in effect from June 1, 2001 to May 31, 2003 to support the development and production of value-added wheat proteins and starches. At December 31, 2011, June 30, 2011 and 2010, the deferred credit related to this grant was $4,195, $4,498 and $5,379, respectively. Current and prior period results reflect the recognition of revenue from this grant.
During the second quarter of fiscal 2010, we identified an out-of period adjustment related to accounts payable that favorably impacted cost of sales and other income. The impact to fiscal 2010 was an increase in reported pre-tax income for the year ended June 30, 2010 of approximately $1,351. Cost of sales was favorably impacted by $733, and other income was improved by $618. For further discussion, see Note 1. Nature of Operations and Summary of Significant Accounting Policies as set forth in Item 8.
During the quarter ended September 30, 2011, we reexamined our accounting for certain qualifying financial instruments as cash flow hedges for accounting purposes and decided to change where we record the change in fair value of derivative instruments on the balance sheet. For further discussion, see Note 1.Nature of Operations and Summary of Significant Accounting Policies – Change in Presentation to Consolidated Financial Statements set forth in Item 8.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing consolidated financial statements, management must make estimates and judgments that affect the carrying values of our assets and liabilities as well as recognition of revenue and expenses. Management’s estimates and judgments are based on our historical experience and management’s knowledge and understanding of current facts and circumstances. The policies discussed below are considered by management to be critical to an understanding of our consolidated financial statements. The application of certain of these policies places significant demands on management’s judgment, with financial reporting results relying on estimations about the effects of matters that are inherently uncertain. For all of these policies, management cautions that future events rarely develop as forecast, and estimates routinely require adjustment and may require material adjustment.
Derivative and Hedging Activities. Effective April 1, 2008, we elected to discontinue the use of hedge accounting for all commodity derivative positions. Accordingly, during fiscal years 2009, 2010 and 2011 changes in the value of derivatives have been recorded in cost of sales in our Consolidated Statements of Operations. Additionally, derivative instruments entered into during this period had not been designated as hedges. Derivative instruments related to our hedging program have been recorded as either assets or liabilities and measured at fair value. The change in the fair value of these instruments has been recorded in cost of sales in our Consolidated Statements of Operations.
On June 30, 2011 the price of corn traded down on the Chicago Board of Trade (CBOT) and the magnitude of this downward price movement resulted in the CBOT suspending trading on this date ahead of the normal closing time since the daily pricing limit had been reached. Given the open positions we had at June 30 and the downward pricing, we were required to mark these open contracts to market and record a charge to our income statement to reflect current pricing. After careful consideration, we decided the best evidence of fair value for these contracts was the opening prices on July 1, since the markets had been closed abruptly on June 30. The opening prices on July 1 were lower than the closing prices on the prior day and we were not aware of any significant factors occurring overnight that would have impacted pricing. In our judgment, this value better represented the estimated fair value of our open positions on June 30. This downward revision in corn pricing subsequent to the June 30 closing price resulted in an increased unrealized loss in fiscal 2011 of approximately $1,447.
Effective July 1, 2011, we elected to restart the use of hedge accounting for qualifying derivative contracts entered into on or after July 1, 2011. The changes in fair value of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of the hedged items. Consistent with application of hedge accounting under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, gains and losses arising from open and closed hedging transactions are recorded as part of OCI and are recognized in costs of sales as part of product costs when the related products are sold. Any ineffective portion of a hedged transaction is immediately recognized in current earnings.
At December 31, 2011, $127 of losses on derivative contracts were recorded to accumulated other comprehensive income. Had we not restarted the use of hedge accounting, these unrealized losses would have been included in earnings during the period.
The application of hedge accounting requires significant resources, record-keeping and analytical systems.
Regardless of accounting treatment, we believe all of our commodity hedges are economic hedges.
Business Combination. We account for acquired businesses using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The difference between the total cost of the acquisition and the sum of the fair values of the acquired tangible and identifiable intangible assets less liabilities is recorded as either goodwill or bargain purchase gain, depending on whether total cost exceeds, or is less than, such net fair values. A bargain purchase gain must be recognized in earnings as of the acquisition date. Any adjustments to the fair values assigned to the assets acquired and the liabilities assumed during the measurement period, which may be up to one year from the acquisition date, has a corresponding increase or decrease to bargain purchase gain or goodwill. Transaction costs are expensed as incurred.
We completed a significant business acquisition during the transition period ended December 31, 2011 with our acquisition of LDI’s Distillery Business. In connection with this acquisition, we recognized a bargain purchase gain of $13,048 (net of taxes of $8,336) based on the difference between the purchase price ($11,041) and fair values of the assets acquired. We acquired these assets from a distressed seller. The purchase price is subject to change.
Some of the more significant estimates and assumptions used by management in valuing our acquisition of LDI’s Distillery Business and allocating purchase price include: (a) the business enterprise value, which is based on estimated future cash flows (including timing) which are estimated using the income approach and discount rates reflecting the risk inherent in the future cash flows, and (b) the values of land, buildings and equipment, which are estimated using the cost and market approaches. The determination of fair value is based on internal assumptions as well as assistance from third party valuation specialists. The estimated fair values recorded were based on unobservable inputs, which are material and represent Level 3 measures in the fair value hierarchy discussed in Note 15. Derivative Instruments and Fair Value Measurements. There are also judgments made to determine the expected useful life assigned to each class of assets acquired and the duration of liabilities assumed. The judgments made in this determination of the estimated fair value assigned to the assets acquired and liabilities assumed, as well as the estimated useful life of each asset and the duration of each liability, can materially impact the financial statements in periods after acquisition, such as through depreciation and amortization expense.
We believe the resulting bargain purchase gain of $13,048 (net of taxes of $8,336) is reasonable based on the following circumstances: (a) the seller was financially distressed, (b) LDI’s Distillery Business was not widely marketed for sales – an investment bank was hired, however efforts were initially unsuccessful, (c) the machinery and equipment are highly specialized for the industry, resulting in limited alternative uses for the property, and (d) independent property appraisals and business valuations indicated that its fair value was in excess of the purchase price. See Note 21. Business Combination.
Impairment of Long-Lived Assets. We review long-lived assets, mainly buildings and equipment assets, for impairment when events or circumstances indicate that usage may be limited and carrying values may not be recoverable.
In making such assessments, management must make estimates and judgments relating to anticipated revenues and expenses and values of our assets and liabilities. Management’s estimates and judgments are based on our historical experience and management’s knowledge and understanding of current facts and circumstances. Management derives data for its estimates from both outside appraisals and internal sources, and considers such matters as product mix, unit sales, unit prices, input costs, expected target volume levels in supply contracts and expectations about new customers as well as overall market trends. Should events indicate the assets cannot be used as planned, the realization from alternative uses or disposal is compared to the carrying value. Considerable judgment is used in these measurements, and a change in the assumptions could result in a different determination of impairment loss and/or the amount of any impairment.
We recognized non-cash impairment losses of $706 and $595 during the six month period ended December 31, 2011. In measuring the $706 impairment loss, management estimated the undiscounted future cash flows generated by the equipment that manufacture Wheatex® and determined that the estimated cash flows were less than their carrying values. Given the short duration of future cash flow stream, the undiscounted future cash flows were determined to be fair value. In conjunction with the impairment described above, management performed an impairment review of certain other equipment used to produce Wheatex®. In this review, management reviewed the timing of the anticipated business development and recent decisions to not renew leases where Wheatex® is currently produced. The carrying values of the equipment were reduced to fair value, which resulted in a charge of $595. Because of the uncertainty in estimated cash flow estimates, management estimated fair value using a third party appraisal.
We recognized a non-cash impairment loss of $10,282 during the year ended June 30, 2009. No events or conditions occurred during the years ended June 30, 2011 and 2010 that required us to record an impairment.
Defined Benefit Retirement Plans. We sponsor two funded, noncontributory qualified Defined Benefit Retirement Plans that cover substantially all our union employees at Atchison and former union employees at Pekin, who did not begin work at ICP, and thus remain our obligation. The benefits under these plans are based upon years of qualified credited service. However, benefit accruals under both plans were frozen in the second quarter of 2010. Our funding policy is to contribute annually not less than the regulatory minimum and not more than the regulatory maximum amount deductible for income tax purposes. Historically, the measurement and valuation date of the plans was June 30 of each year; however in conjunction with our change in fiscal year end, the measurement date was changed to December 31, beginning December 31, 2011. We make various assumptions in valuing the liabilities and benefits under the plan each year. We consider the rates of return on long-term, high-quality fixed income investments using the Citigroup Pension Liability Index as of December 31, 2011. Assumptions regarding employee and retiree life expectancy are based upon the RP 2000 Combined Mortality Table.
Other Post-Retirement Benefits. We also provide certain other post retirement health care and life insurance benefits to certain retired employees. Currently, the plan covers 229 participants, both active and retired. The number of participants was reduced during fiscal 2010, in part due to the transfer of employees to our newly formed joint venture, ICP, as described elsewhere. These actions caused a partial settlement and curtailment of our obligation for accrued retirement benefits.
We fund the post retirement benefit plans on a pay-as-you-go basis, and there are no assets that have been segregated and restricted to provide for post retirement benefits. We pay claims as they are submitted for the medical plan. We provide varied levels of benefits to participants depending upon the date of retirement and the location in which the employee worked. The retiree medical and life plans are available to employees who have attained the age of 62 and rendered the required five years of service. All health benefit plans provide company-paid continuation of the active medical plan until the retiree reaches age 65. At age 65, we pay a lump sum advance premium on behalf of the retiree to the MediGap carrier of the retiree’s choice. The employee retirement date determines which level of benefits is provided.
Consistent with the discussion above, our plan measurement date is now December 31. We make various assumptions in valuing the liabilities and benefits under the plan each year. We consider the rates of return on currently available, high-quality fixed income investments, using the Citigroup Pension Liability Index as of December 31 (long term rates of return are not considered because the plan has no assets). For the six month transition period ended December 31, 2011, the accumulated post retirement benefit obligation (“APBO”) decreased to $6,309 from $6,498 at June 30, 2011. A portion of the other post-retirement benefits obligation was settled for workers who were re-hired by ICP. Assumptions regarding employee and retiree life expectancy are based upon the RP 2000 Combined Mortality Table. We also consider the effects of expected long term trends in health care costs, which are based upon actual claims experience and other environmental and market factors impacting the cost of health care in the short and long-term.
Income Taxes. We account for deferred income tax assets and liabilities resulting from the effects of transactions reported in different periods for financial reporting and income tax under the liability method of accounting for income taxes. This method gives consideration to the future tax consequences of the deferred income tax items and immediately recognizes changes in income tax laws upon enactment as well as applied income tax rates when facts and circumstances warrant such changes. We establish a valuation allowance to reduce deferred tax assets when it is more likely than not that a deferred tax asset may not be realized. Additionally, we follow the provisions of FASB ASC 740, Income Taxes, related to the accounting for uncertainty in income tax positions, which requires management judgment and use of estimates in determining whether the impact of a tax position is “more likely than not” of being sustained on audit by the relevant taxing authority. We consider many factors when evaluating and estimating our tax positions, which may require periodic adjustment and which may not accurately anticipate actual outcomes.
TRANSITION PERIOD AND RECENT INITIATIVES
Acquisition of LDI’s Distillery Business
As previously described, the most significant transition period development was the acquisition of LDI’s Distillery Business on December 27, 2011. LDI produced customized and premium grade whiskeys, gins and grain neutral spirits. In this transaction, MGPII acquired substantially all of LDI's beverage alcohol distillery assets located in Indiana, which include distillery assets, related bulk barrel storage facilities, blending operations, a tank farm, a grain elevator and certain intangible assets. In this acquisition we also assumed certain liabilities, consisting primarily of trade payables and customer and contractual obligations, as described in the Asset Purchase Agreement dated October 20, 2011 filed as an exhibit hereto. These included commitments to supply product to three customers under contracts expiring at various times on or after December 31, 2012 but which represent approximately 43 percent of the Indiana Distillery's distillation capacity over the period expiring December 31, 2012. We did not purchase LDI’s assets or assume liabilities related to packaging and bottling of alcoholic beverages, which is located adjacent to the distillery operation. The purchase price of the acquisition is equal to the current assets minus current liabilities, as defined by the asset purchase agreement, as of December 27, 2011, which was estimated at closing to be $11,041. The purchase was funded through our bank revolving credit facility and is subject to post closing adjustments for working capital true-ups and other final purchase accounting adjustments for estimated liabilities associated with this transaction. For further discussion related to the accounting policy and accounting requirements for this acquisition, see Note 1. Nature of Operations and Summary of Significant Accounting Policies – Business Combination and Note 21. Business Combination.
With this acquisition, we added significant new production capacity to our food grade alcohol area and we are now able to produce premium bourbon and corn and rye whiskeys, while also increasing our gin, grain neutral spirits and distillers feed output. Since acquiring the Distillery Business, we have taken several steps to improve its profitability, including converting from the use of coal to natural gas, outsourcing certain functions and reducing headcount. Because we plan to continue to purchase our corn primarily from one supplier, we made the decision to sell the grain elevator and have classified the assets associated with the sale of the grain elevator as “Assets Held for Sale”, which is valued at $2,300. The value of this asset upon its ultimate disposition could vary significantly from the Company’s estimate. See Note 10. Assets Held for Sale.
Ownership change of ICP
On February 1, 2012, ICP Holdings exercised its option to purchase an additional 20 percent of the membership interest in ICP from us, as further described in Note 3. Investment in Joint Ventures and Note 22. Subsequent Events set forth in Item 8. The sales price was $9,103 and was determined in accordance with the LLC Interest Purchase Agreement. After this transaction, we own 30 percent of ICP and we are entitled to name 2 of ICP’s 6 advisory board members. The pre-tax gain on sale, to be recognized in 2012, approximated $4,000.
Water Cooling System Project
On June 10, 2010, our Board of Directors approved a major capital project designed to provide environmental benefits (see Item 3. Legal Proceedings) at our Atchison, Kansas distillery, while also enhancing our alcohol production capabilities. The project involved the installation of a new, state-of-the-art water cooling system to replace older equipment used to supply water for multiple components of the distillation process. This project began during the summer of fiscal 2010 and was completed during July of 2011 at a cost of approximately $10,000. A major portion of this asset was financed by U.S. Bancorp through a capital lease as further described in Note 4. Corporate Borrowings and Capital Lease Obligations.
Use of Hedge Accounting
As noted previously, effective July 1, 2011, we elected to restart the use of hedge accounting for qualifying derivative contracts entered into on and after July 1, 2011. For further discussion related to the accounting policy and accounting requirements for our derivative instruments, see General and Critical Accounting Policies and Estimates - Derivatives and Hedging Activities, above, and Note 1. Nature of Operations and Summary of Significant Accounting Policies – Derivative Instruments and Note 15. Derivative Instruments and Fair Value Measurements set forth in Item 8.
DEVELOPMENTS IN THE DISTILLERY PRODUCTS SEGMENT
As previously mentioned in General, in order to become more efficient and effective and to improve our results, we have refocused our business on the production of our value-added products.
During fiscal 2011, our results were affected by production shut-downs at our Atchison distillery during the second and fourth quarters as well as significant cost increases for raw materials. Our results for the six month transition period ended December 31, 2011 were affected by production shutdowns during the quarter ended September 30, 2011 as well as significant cost increases during the six months ended December 31, 2011, as further discussed in the “Six Month Transition Period Ended December 31, 2011 Compared to Six Months Period Ended December 31, 2010” section below.
In alignment with the strategy described above, increased production volume at our ICP joint venture during the six months ended December 31, 2011 and 2010 helped us to increase our sales of high quality food grade alcohol. Sales of food grade alcohol for the six month transition period ended December 31, 2011 and the six months ended December 31, 2010 approximated 83.0 percent and 84.6 percent of our total distillery products sales for the respective periods. Meanwhile, our sales of fuel grade alcohol approximated 5.0 percent and 5.8 percent of total distillery products sales for the same respective periods. Subsequent to December 31, 2011, we sold 20 percent of our membership interest in ICP.
DEVELOPMENTS IN THE INGREDIENT SOLUTIONS SEGMENT
During fiscal 2011, we continued to produce value-added ingredients, which led to an overall increase in sales. Despite this increase in sales, margins decreased primarily due to significant raw material cost increases and sales prices that didn’t cover these cost increases. Our results for the six month transition period ended December 31, 2011 were affected by significant cost increases as further discussed in the “Six Month Transition Period Ended December 31, 2011 Compared to Six Months Ended December 31, 2010” section below and by a 10-day production shutdown of our protein and starch products in order to reduce inventory levels. As we move forward, we continue to focus on a profitable sales mix by production of our value-added products with higher margins as well as pricing initiatives to better align our pricing with higher commodity prices.
On August 21, 2009, we sold our Kansas City, Kansas, facility; however we retained ownership of equipment that is used for the production of our Wheatex® textured wheat proteins, which are sold for use in meat extension and vegetarian product applications. This equipment is located in a separate section of the facility that we have leased for a period of three years ending August 20, 2012 and which is operated by a subsidiary of the buyer under a toll manufacturing arrangement. We have determined not to renew our lease for the portion of the facility that we use, which triggered an impairment of this equipment as further discussed in Note 9. Restructuring Costs and Loss on Impairment of Assets. In order to continue the profitable commercialization of this product, we must identify an alternate source of production.
DEVELOPMENTS IN THE OTHER SEGMENT
As discussed previously during January 2012, we announced an agreement with the KABB and four Kansas universities to develop new technologies and products that use bio-based raw materials.
The following is a summary of revenues and pre-tax income (loss) allocated to each reportable operating segment for the six month transition period ended December 31, 2011, the six months ended December 31, 2010 (unaudited) and the three fiscal years ended June 30, 2011, 2010 and 2009. See Note 12. Operating Segments set forth in Item 8 for additional information regarding our operating segments.
| |
|
Six Months Ended
|
|
|
Fiscal Year Ended June 30,
|
|
| |
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Distillery Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$ |
118,437 |
|
|
$ |
85,700 |
|
|
$ |
188,993 |
|
|
$ |
139,990 |
|
|
$ |
204,704 |
|
|
Pre-Tax Income (Loss)
|
|
|
1,234 |
|
|
|
15,426 |
|
|
|
19,720 |
|
|
|
16,713 |
|
|
|
(24,367 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ingredient Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
27,596 |
|
|
|
28,587 |
|
|
|
57,765 |
|
|
|
59,715 |
|
|
|
82,127 |
|
|
Pre-Tax Income (Loss)
|
|
|
1,044 |
|
|
|
1,863 |
|
|
|
1,828 |
|
|
|
9,731 |
|
|
|
(6,720 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
444 |
|
|
|
642 |
|
|
|
1,157 |
|
|
|
2,266 |
|
|
|
4,981 |
|
|
Pre-Tax Income (Loss)
|
|
|
(274 |
) |
|
|
(136 |
) |
|
|
(521 |
) |
|
|
145 |
|
|
|
40 |
|
The following table is a reconciliation between pre-tax income by segment and net income.
| |
|
Six Months Ended
|
|
|
Fiscal Year Ended June 30,
|
|
|
Income (loss) before income taxes
|
|
December 31,
2011(1)
|
|
|
December 31,
2010(1)
|
|
|
2011(1)
|
|
|
2010(1)
|
|
|
2009(1)
|
|
| |
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Distillery products
|
|
$ |
1,234 |
|
|
$ |
15,426 |
|
|
$ |
19,720 |
|
|
$ |
16,713 |
|
|
$ |
(24,367 |
) |
|
Ingredient solutions
|
|
|
1,044 |
|
|
|
1,863 |
|
|
|
1,828 |
|
|
|
9,731 |
|
|
|
(6,720 |
) |
|
Other
|
|
|
(274 |
) |
|
|
(136 |
) |
|
|
(521 |
) |
|
|
145 |
|
|
|
40 |
|
|
Corporate
|
|
|
(11,422 |
) |
|
|
(8,875 |
) |
|
|
(22,272 |
) |
|
|
(20,325 |
) |
|
|
(24,411 |
) |
|
Impairment of long-lived assets
|
|
|
(1,301 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(10,282 |
) |
|
Severance and early retirement costs
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,288 |
) |
|
Bargain purchase gain, net of tax
|
|
|
13,048 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Loss on joint venture formation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,294 |
) |
|
|
- |
|
|
Other restructuring costs
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,241 |
) |
|
Loss on natural gas contract
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7,642 |
) |
|
Total income (loss) before income Taxes
|
|
|
2,329 |
|
|
|
8,278 |
|
|
|
(1,245 |
) |
|
|
3,970 |
|
|
|
(81,911 |
) |
|
Provision (benefit) for income taxes
|
|
|
(8,306 |
) |
|
|
34 |
|
|
|
68 |
|
|
|
(4,768 |
) |
|
|
(12,788 |
) |
|
Net income (loss)
|
|
$ |
10,635 |
|
|
$ |
8,244 |
|
|
$ |
(1,313 |
) |
|
$ |
8,738 |
|
|
$ |
(69,123 |
) |
|
(1)
|
Non-direct selling, general and administrative, interest expense, investment income and other general miscellaneous expenses are classified as corporate. Out-of-period adjustments are classified as corporate. In addition, we do not assign or allocate special charges to our operating segments. For purposes of comparative analysis, loss on impairment of long-lived assets, severance and early retirement costs, gain (loss) on sale of assets, bargain purchase gain, loss on joint venture formation, other restructuring costs, and the loss on natural gas contract for six month transition period ended December 31, 2011, the six months ended December 31, 2010 and for the years ended June 30, 2011, 2010 and 2009 have been excluded from our segments.
|
SIX MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2011 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2010
Note that in the discussion that follows, the results for six months ended December 31, 2010 are unaudited.
GENERAL
Consolidated earnings for the six month transition period ended December 31, 2011 increased by $2,391, or 29.0 percent, compared to the same period a year ago with a net income of $10,635 on consolidated sales of $146,477 versus net income of $8,244 on consolidated sales of $114,929 for the six months ended December 31, 2010.
The increase in earnings was the result of a $13,048 bargain purchase gain (net of taxes of $8,336) associated with our acquisition of LDI’s Distillery Business, partially offset by earnings decreases in our distillery products, ingredients solutions and other segments, a $1,301 impairment on long-lived assets and a $551 loss related to our joint venture operations.
In our distillery products segment, we achieved both volume and overall pricing increases compared to the same period a year ago. In our ingredient solutions segment, we achieved pricing increases, however we experienced a decrease in volume compared to the same period a year ago. Other segment sales declined slightly. While our pricing increased across the distillery products and ingredient solutions segments, these pricing increases were outpaced by the increased costs for corn and flour. Increased raw material costs had the most significant impact in our distillery products segment, where our return on sales decreased to 1.0 percent for the six month transition period ended December 31, 2011, from 18.0 percent for the six months ended December 31, 2010. The ingredient solutions segment pricing was similarly impacted, where our return on sales decreased to 3.8 percent for the six month transition period ended December 31, 2011 from 6.5 percent for the six months ended December 31, 2010. Also contributing to our overall decrease in earnings across all segments were production interruptions at our Atchison plant during September, 2011, a 10-day production shutdown of our protein and starch products during December, 2011 and the unfavorable impact of losses on open derivative commodity contracts not designated as cash flow hedges.
DISTILLERY PRODUCTS
Total distillery products sales revenue for the six month transition period ended December 31, 2011 increased $32,737, or 38.2 percent, compared to the six months ended December 31, 2010. This increase was primarily attributable to an increase in volume of high quality food grade alcohol of 35.6 percent. The increase in high quality food grade alcohol was due to a 24.7 percent increase in per unit pricing as well as an 8.8 percent increase in volume for the same period. Also contributing to the increase in sales revenue were $5,995 and $930 increases in distillers feed revenue and fuel grade alcohol, respectively. While overall revenues for distillery products increased for the six month transition period ended December 31, 2011 as compared to the same period a year ago, return on sales decreased as previously described in “-General”. The decrease in our earnings was due to a significant increase in corn prices, partially offset by lower prices for natural gas and increased average prices for the segment as a whole. While our overall pricing has improved, corn price increases outpaced our sales price increases to our customers. For the six month transition period ended December 31, 2011, the per-bushel cost of corn averaged nearly 53.4 percent higher than the six months ended December 31, 2010. The per-million cubic foot cost of natural gas averaged nearly 8.2 percent lower than the same period a year ago. Our ICP joint venture was similarly impacted by higher corn prices, which contributed to our low margin yields for the six month transition period ended December 31, 2011 and the comparable period a year ago.
INGREDIENT SOLUTIONS
Total ingredient solutions sales revenue for the six month transition period ended December 31, 2011 decreased by $991, or 3.5 percent, compared to the six months ended December 31, 2010. Revenues for specialty proteins for the six month transition period ended December 31, 2011 decreased 11.0 percent compared to the six months ended December 31, 2010 due to a decrease in volume, partially offset by improved per unit pricing. Specialty starches saw a 0.9 percent decrease in revenues compared to the same period a year ago due to a volume decrease partially offset by an increase in per unit pricing. Given that our focus remains on the production and commercialization of specialty ingredients, we have seen revenues for commodity starches and proteins remain low as a percentage of total segment sales; they totaled 7.5 percent and 0.4 percent of total segment sales for the six months ended December 31, 2011 and 2010, respectively. In addition to the overall decrease in revenues for the ingredient solutions segment, our margins saw a slight decrease during the six month transition period ended December 31, 2011 compared to the six months ended December 31, 2010. This was principally due to our sales prices being outpaced by the cost of flour and lower volumes. During December, 2011, we had a planned production shutdown of our protein and starch products in order to stabilize production with market inventory levels. Natural gas prices averaged approximately 8.2 percent lower compared to the six months ended December 31, 2010. Flour costs, on the other hand, averaged approximately 34.0 percent higher per pound compared to the same period a year ago.
NET SALES
Net sales for the six month transition period ended December 31, 2011 increased $31,548, or 27.4 percent, compared to the six months ended December 31, 2010. The increase was attributable to increased net sales in the distillery products segment. Net sales in the distillery products segment as a whole increased primarily as a result of higher volumes of food grade alcohol along with higher average selling prices for the segment as a whole. We saw a decrease in net sales in the ingredient solutions segment, driven primarily by decreased volume of specialty proteins partially offset by higher segment average selling prices. Net sales for our other segment decreased due to a lower volumes of our plant-based biopolymer products.
COST OF SALES
For the six month transition period ended December 31, 2011, cost of sales increased $47,748, or 49.9 percent, compared to the six months ended December 31, 2010. Our higher overall costs were directly the result of higher corn and flour prices, the unfavorable impact of losses on open derivative commodity contracts not designated as cash flow hedges, and increased transportation costs related to a flood in Atchison, Kansas. We saw increases in the per-bushel cost of corn and the per-pound cost of flour, which averaged nearly 53.4 percent and 34.0 percent higher, respectively, than the six months ended December 31, 2010. For the six month transition period ended December 31, 2011, cost of sales was 98.0 percent of net sales, which generated a gross profit margin of 2.0 percent. For the six months ended December 31, 2010, cost of sales was 83.3 percent of net sales, which generated a gross margin of 16.7 percent.
Cost of sales was also impacted by changes in the fair value of open derivatives contracts not designated as cash flow hedges. For the six month transition period ended December 31, 2011, our open derivative commodity contracts not designated as cash flow hedges had a $634 unfavorable impact to cost of sales, compared to a $1,694 favorable impact for the six months ended December 31, 2010. These cost increases were partially offset by a decrease in the per-million cubic foot cost of natural gas, which decreased 8.2 percent compared to the same period a year ago.
We restarted hedge accounting for qualifying derivative contracts entered into on and after July 1, 2011 as further discussed in “-General and Critical Accounting Policies and Estimates, Derivatives and Hedging Activities and Transition Period and Ongoing Initiatives” above and in Note 1.Nature of Operations and Summary of Significant Accounting Policies set forth in Item 8, Financial Statements and Supplementary Data of this Form 10-K and incorporated herein by reference. For derivatives that qualify as hedges for accounting purposes, the change in fair value has no net impact on earnings, to the extent the derivative is considered effective, until the hedged transaction affects earnings. For derivatives that are not designated as hedging instruments for accounting purposes, or for the ineffective portion of a hedging instrument, the change in fair value affects current period net earnings. Had we not used hedge accounting for qualifying derivatives entered into on or after July 1, 2011, we would have recognized an additional $127 of losses in current period earnings.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six month transition period ended December 31, 2011 increased $830, or 7.8 percent compared to the six months ended December 31, 2010, due primarily to an increase in acquisition costs related to the purchase of LDI’s Distillery Business and general compensation increases.
OTHER OPERATING COSTS
Other operating cost for the six month transition period ended December 31, 2011 decreased $536, or 82.5 percent, compared to the six months ended December 31, 2010. The decrease was primarily due to the reduction in the loss on sale of assets, which was $117 for the six month transition period ended December 31, 2011 compared to $322 for the six months ended December 31, 2010. Also contributing to this decrease is a $274 expense reduction recorded during the six month transition period ended December 31, 2011 related to our lease termination restructuring accrual as further described in Note 9. Restructuring Costs and Loss on Impairment of Assets.
BARGAIN PURCHASE GAIN (NET OF TAX)
A bargain purchase gain of $13,048 (net of taxes of $8,336) was recorded during the six month transition period ended December 31, 2011 based on the excess of the fair value of the net assets acquired in the acquisition of LDI’s Distillery Business over the purchase price. The final purchase price adjustment may change the recorded gain. Any final adjustments are not expected to be material. There was no bargain purchase gain for the six months ended December 31, 2010.
OTHER INCOME, NET
Other income, net, increased $45 for the six month transition period ended December 31, 2011 compared to the six months ended December 31, 2010. This increase was principally attributable to changes in interest capitalized as well as to the effect of certain other non-recurring, non-operating revenue items.
INTEREST EXPENSE
Interest expense for the six month transition period ended December 31, 2011 increased $64, or 24.1 percent, compared to the six months ended December 31, 2010. This increase was the result of an increase in the average daily balance compared to the same period in the prior year, partially offset by a lower average interest rate on our credit facility.
EQUITY IN EARNINGS (LOSS) OF JOINT VENTURES
ICP
On November 20, 2009, we completed a series of transactions whereby we contributed our Pekin plant to a newly-formed company, ICP, and then sold 50 percent of the membership interest in ICP to ICP Holdings, an affiliate of SEACOR Energy Inc., as further described in Note 3. Investment in Joint Ventures set forth in Item 8.
For the six month transition period ended December 31, 2011, ICP had a loss of $1,240. As a 50 percent joint venture member during the transition period, our portion of the net loss was $620. ICP incurred a loss due to raw material price increases and unrealized losses on open derivative contracts. For the six months ended December 31, 2010, ICP had earnings of $1,328. As a 50 percent joint venture member for the six months ended December 31, 2010, our portion of the earnings was $664.
As further described in Note 3. Investment in Joint Ventures, ICP’s Limited Liability Company Agreement gives us and our joint venture partner, ICP Holdings, a subsidiary of SEACOR Energy Inc., certain rights to shut down the Pekin plant if ICP operates at an EBITDA loss of $500 in any quarter. Such rights are conditional in certain instances but are absolute if EBITDA losses aggregate $1,500 over any three consecutive quarters or if ICP’s net working capital is less than $2,500. ICP experienced EBITDA losses in excess of $500 in the quarters ended December 31, 2009, March 31, 2010, December 31, 2010, June 30, 2011 and September 30, 2011. For the three consecutive quarters ending both September 30, 2011 and June 30, 2011, ICP experienced an EBITDA loss in excess of the $1,500 aggregate loss threshold amount permitted over any three consecutive quarters. Losses of such nature are also events of default under ICP’s term loan and revolving credit facility. Both SEACOR Energy Inc. and ICP’s lender, an affiliate of SEACOR Energy, Inc., permanently waived rights for covenant violations through September 30, 2011.
D.M. Ingredients, GmbH (“DMI”)
On July 17, 2007, we completed a transaction with Crespel and Dieters GmbH & Co. KG for the formation and financing of a joint venture, DMI, located in Ibbenburen, Germany. DMI’s primary operation is the production of specialty ingredients for marketing by MGPI domestically and, through our partner and third parties, internationally. We own a 50 percent interest in DMI, and account for it using the equity method of accounting. As of December 31, 2011, we had invested $571 in DMI since July 2007.
For the six month transition period ended December 31, 2011, DMI had earnings of $138. As a 50 percent joint venture member, our portion of the earnings was $69 for the six month transition period ended December 31, 2011. For the six months ended December 31, 2010, DMI incurred a net loss of $64. As a 50 percent joint venture member, our equity in this loss was $32 for the six months ended December 31, 2010.
DMI’s functional currency is the European Union Euro. Accordingly, changes in the holding value of the Company’s investment in DMI resulting from changes in the exchange rate between the U.S. Dollar and the European Union Euro are recorded in other comprehensive income as a translation adjustment on unconsolidated foreign subsidiary net of deferred taxes.
INCOME TAXES
For the six month transition period ended December 31, 2011 and for the six month period ended December 31, 2010, the effective tax rate was (358.2) percent and 0.4 percent, respectively. For the six month transition period ended December 31, 2011, the effective rate differs from our statutory rate primarily due to the bargain purchase gain transaction and a change in the valuation allowance maintained against deferred tax assets. We believe it is more likely than not that we will be able to utilize additional income tax benefits from our existing deferred tax assets that were previously offset by a valuation allowance. For the six month ended December 31, 2010, tax expense was negligible due to the use of net operating loss carryforwards previously reserved for. For further discussion on the deferred income tax valuation allowance, see Note 5. Income Taxes set forth in Item 8.
NET INCOME
As the result of the factors outlined above, we experienced net income of $10,635 on net sales of $146,477 for the six month transition period ended December 31, 2011 compared to net income of $8,244 on net sales of $114,929 for the six months ended December 31, 2010.
FISCAL 2011 COMPARED TO FISCAL 2010
GENERAL
For the year ended June 30, 2011, we experienced a net loss of $1,313 on consolidated sales of $247,915 versus net income of $8,738 on consolidated sales of $201,971 for the year ended June 30, 2010. The decrease in earnings was primarily due to significantly increased costs for corn, flour and natural gas compared to fiscal 2010, a fourth quarter lag in the adjustment of our alcohol selling prices in step with higher corn prices and unrealized losses on our open commodity derivatives contracts in the fourth quarter. Our 50 percent owned joint venture, ICP, was similarly impacted by higher raw material costs and unrealized losses on open commodity derivative contracts, of which our share was 50 percent. Shut-downs at the Atchison distillery during the second and fourth quarters of fiscal 2011 also negatively impacted our results. The second quarter fiscal 2011 shut-down was related to a water supply disruption, equipment repairs and upgrades. This caused our production for the month of December 2010 to be below normal. The fourth quarter fiscal 2011 shut-down resulted from a one-week outage related to installing the new distillery water cooling system at the Atchison plant. This caused production for the month of May 2011 to be below normal.
DISTILLERY PRODUCTS
Total distillery products sales revenue for the year ended June 30, 2011 increased $49,003, or 35.0 percent, compared to the year ended June 30, 2010. This increase was primarily attributable to an increase in volume of high quality food grade alcohol of 30.4 percent. Also contributing to the overall increase in the distillery products segment were increases of $6,302 and $3,793 in distillers feed and fuel grade alcohol, respectively, for the year ended June 30, 2011 compared to the year ended June 30, 2010. Our gross margin percentage decreased to 10.6 percent for the year ended June 30, 2011 from 12.3 percent for the year ended June 30, 2010 due primarily to significant year-over year increases in corn and natural gas prices, a fourth quarter lag in the adjustment of our alcohol selling prices in step with higher corn prices and fourth quarter unrealized losses on our hedging activities, partially offset by year-over-year increased average prices. For the year ended June 30, 2011, the per-bushel cost of corn and per-million cubic foot cost of natural gas averaged nearly 54.5 percent and 8.0 percent higher, respectively, than the year ended June 30, 2010.
INGREDIENT SOLUTIONS
Total ingredient solutions sales revenue for the year ended June 30, 2011 decreased by $1,950, or 3.3 percent, compared to the year ended June 30, 2010. Specialty starches saw a 5.8 percent increase in revenues compared to fiscal 2010 due to an increase in volume partially offset by a decrease in unit pricing. Revenues for specialty proteins for the year ended June 30, 2011 increased 0.3 percent from the year ended June 30, 2011, as a result improved unit sales partially offset by a slight decrease in unit pricing. With our focus on the production and commercialization of specialty ingredients, revenues for commodity proteins and commodity starch decreased by 91.2 and 20.3 percent, respectively, for the year ended June 30, 2011 compared to the year ended June 30, 2010. In addition to the overall decline in revenues for the ingredient solutions segment, our margins saw a decline during the year ended June 30, 2011 compared to the year ended June 30, 2010. This was principally due to lower volume output, higher raw material costs, increased energy costs related to higher natural gas prices, and lower overall pricing which was not commensurate with our raw material price increases. Our protein and starch production was unfavorably impacted at various times throughout fiscal 2011 due to temporary production interruptions to accommodate a series of planned facility and process improvements. These factors were partially offset by improved average selling prices for commodity proteins. Flour prices and natural gas prices averaged approximately 17.0 and 8.0 percent higher, respectively, compared to fiscal 2010.
OTHER PRODUCTS
For the year ended June 30, 2011, revenues for other products, consisting primarily of plant-based biopolymers and resins, decreased $1,109, or 48.9 percent, compared to the year ended June 30, 2010. The decline in other segment sales revenue was primarily due to lower unit sales of our plant-based biopolymers and resins. Also contributing to the decrease in sales for the year ended June 30, 2011 was the divestiture of our pet products business. As described in Note 10. Assets Held for Sale set forth in Item 8., we sold the assets related to our pet products during the first quarter of fiscal 2010. Plant-based biopolymer and resin sales decreased 44.5 percent compared to the fiscal 2010. The decrease in sales of plant-based biopolymers and resins was due to a 41.9 percent decline in unit sales for the year ended June 30, 2011 compared to a year ago. For the year ended June 30, 2011, lower per unit pricing also contributed to the overall decrease in sales. The other segment experienced a loss for the year ended June 30, 2011 due to the lower unit sales discussed above as well as higher production costs.
NET SALES
Net sales for the year ended June 30, 2011 increased $45,944, or 22.7 percent, compared to the year ended June 30, 2010. The increase was attributable to increased net sales in the distillery products segment partially offset by declines in the ingredient solutions and other segments. Net sales in the distillery products segment, as a whole, increased primarily as a result of higher volumes of food grade alcohol and higher average prices for the segment overall. Net sales in the ingredient solutions segment decreased due to lower volumes and pricing. Net sales for our other segment decreased mainly as the result of reduced sales of plant-based biopolymer products and, to a lesser extent, eliminating the pet products line of business.
COST OF SALES
For the year ended June 30, 2011, cost of sales increased $53,611, or 31.3 percent, compared to the year to date period ended June 30, 2010. Our higher overall costs were directly the result of temporary production interruptions, production increases related to distillery products as well as higher corn, natural gas, and flour prices, and by the unfavorable impact of losses on open derivative commodity contracts. We saw increases in the per-bushel cost of corn, the per-pound cost of flour, and the per-million cubic foot cost of natural gas, which averaged nearly 54.4 percent, 17.0 percent, and 8.0 percent higher, respectively, than the year ended June 30, 2010. Cost of sales was also impacted by changes in the fair value of open derivatives contracts. For the year ended June 30, 2011, our open derivative commodity contracts had a $2,254 unfavorable impact to cost of sales, virtually all of which occurred in the last two days of the fiscal year, compared to $14 favorable impact for the year ended June 30, 2010. For the year ended June 30, 2011, cost of sales was 90.8 percent of net sales, which generated a gross profit margin of 9.2 percent. For the year ended June 30, 2010, cost of sales was 84.9 percent of net sales, which generated a gross margin of 15.1 percent.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended June 30, 2011 increased $449, or 2.2 percent, compared to the year ended June 30, 2010. This increase was primarily due to increased consulting costs as well as general compensation increases.
OTHER OPERATING COSTS
Other operating costs for the year ended June 30, 2011 increased $788, or 274.6 percent, compared to the year ended June 30, 2010. This increase was primarily due to a year-over-year net earnings decrease related to gains (losses) on sale of assets partially offset by a reduction in costs associated with maintaining the Pekin facility while it was idle. Loss on sale of assets for the year ended June 30, 2011 was $322 compared to a $1,731 gain for the year ended June 30, 2010. The components of the fiscal 2011 loss related to disposition of certain machinery and equipment. The components of the fiscal 2010 gain includes a $917 gain related to the sale of protein and starch equipment from the Pekin facility, a $671 gain related to the sale of certain flour mill assets, a $100 gain on the sale of transport equipment and a $43 gain on other equipment.
LOSS ON JOINT VENTURE FORMATION
For the year ended June 30, 2011, there was no loss on joint venture formation. Loss on joint venture formation for the year ended June 30, 2010 was $2,294. The components included $1,245 to adjust the book value of the Pekin plant balance sheet assets contributed to the joint venture to the implied value and $1,049 for professional fees associated with the transactions. We reduced this loss by $753 during the fourth quarter of fiscal 2010 related to the loss on joint venture formation when we recorded a settlement for the portion of the other post-retirement benefits obligation related to workers re-hired by ICP.
OTHER INCOME, NET
Other income, net, decreased $637, or 98.8 percent, for the year ended June 30, 2011 compared to the year ended June 30, 2010. This decrease was primarily attributable to a fiscal 2010 non recurring reversal of account payable balances related to a prior period totaling $618, as further described in Note 1. Nature of Operations and Summary of Significant Accounting Policies set forth in Item 8.
INTEREST EXPENSE
Interest expense for the year ended June 30, 2011 decreased $1,399 compared to the year ended June 30, 2010. This decrease was the result of lower loan balances on long-term debt as well as the reduced average daily balance and interest rate on our credit facility compared to the prior year.
EQUITY IN LOSS OF JOINT VENTURES
ICP
On November 20, 2009, we completed a series of transactions whereby we contributed our Pekin plant to a newly-formed company, ICP, and then sold 50 percent of the membership interest in ICP to ICP Holdings, an affiliate of SEACOR Energy Inc., for a purchase price of $15,000 ($13,951 net of closing costs) as further described in Note 3. Investment in Joint Ventures set forth in Item 8.
For the year ended June 30, 2011, ICP reported a net loss of $3,139. As a 50 percent joint venture member, our portion of the net loss was $1,570. ICP incurred a loss due to raw material prices increases, a two-week plant shut-down and unrealized losses on open derivative contracts. For the period from November 20, 2009 to June 30, 2010, ICP incurred a net loss of $4,051, primarily related to costs incurred as part of the initial implementation of operations. As a 50 percent joint venture holder, our portion of the loss was $2,026.
As further describe in Note 3. Investment in Joint Ventures, ICP’s Limited Liability Company Agreement gives us and our joint venture partner, ICP Holdings, a subsidiary of SEACOR Energy Inc., certain rights to shut down the Pekin plant if ICP operates at an EBITDA loss of $500 in any quarter. Such rights are conditional in certain instances but are absolute if losses aggregate $1,500 over any three consecutive quarters or if ICP’s net working capital is less than $2,500. ICP experienced EBITDA losses in excess of $500 in the quarters ended December 31, 2009, March 31, 2010, December 31, 2010 and June 30, 2011. For the three consecutive quarters ending June 30, 2011, ICP experienced a loss in excess of the $1,500 aggregate loss threshold amount permitted over any three consecutive quarters. Losses of such nature are also events of default under ICP’s term loan and revolving credit facility. An affiliate of SEACOR Energy, Inc. which provides financing for ICP waived these covenant violations.
D.M. Ingredients, GmbH (“DMI”)
On July 17, 2007, we completed a transaction with Crespel and Deiters GmbH & Co. KG for the formation and financing of a joint venture, DMI, located in Ibbenburen, Germany. DMI’s primary operation is the production of specialty ingredients for marketing by MGPI domestically and, through our partner and third parties, internationally. Currently, the joint venture is utilizing a third party toller in the Netherlands to produce the products. We own a 50 percent interest in DMI, and account for it using the equity method of accounting. As of June 30, 2011, we had invested $571 in DMI since July 2007.
For the years ended June 30, 2011 and 2010, DMI incurred earnings (losses) of $60 and ($293). The loss for the year ended June 30, 2010 was related to costs incurred as part of the initial implementation of operations. No sales revenue was reported for the year ended June 30, 2010. As a 50 percent joint venture member, our equity in earnings (loss) was $30 and ($147) for fiscal 2011 and 2010, respectively.
DMI’s functional currency is the European Union Euro. Accordingly, changes in the holding value of our investment in DMI resulting from changes in the exchange rate between the U.S. Dollar and the European Union Euro are recorded in other comprehensive income as a translation adjustment on unconsolidated foreign subsidiary net of deferred taxes.
INCOME TAXES
For the years ended June 30, 2011 and 2010, the effective tax rate was (5.5) percent and (120.1) percent, respectively. For the year ended June 30, 2011, the effective rate differs from the Company’s statutory rate primarily due to changes in the federal and state valuation allowance recorded against deferred tax assets and the expense recorded due to a state tax law change that occurred during the quarter ended March 31, 2011. For the year ended June 30, 2010, the effective rate differs from the Company’s statutory rate primarily due to changes in the federal and state valuation allowance and the benefit of a tax law change occurring during fiscal 2010. Under the Worker, Homeownership, and Business Assistance Act of 2009, which was enacted during the second quarter of fiscal 2010, we became eligible to carry back net operating losses generated in our fiscal year ended June 30, 2009 to our five preceding tax years, instead of the two years allowed under previous tax law. We filed a claim to carry an additional $11,900 of net operating loss back. An income tax benefit of approximately $4,700 was recognized during the second quarter of fiscal 2010 related to this carry-back claim. The cash refund associated with the carry-back claim was received during January 2010. For further discussion on the deferred income tax valuation allowance, see Note 5. Income Taxes set forth in Item 8.
NET INCOME (LOSS)
As the result of the factors outlined above, we experienced a net loss of $1,313 for the year ended June 30, 2011, compared to net income of $8,738 for the year ended June 30, 2010.
FISCAL 2010 COMPARED TO FISCAL 2009
GENERAL
Consolidated earnings for the year ended June 30, 2010 increased compared to the year ended June 30, 2009 with earnings of $8,738 on consolidated sales of $201,971 versus a net loss of $69,123 on consolidated sales of $291,812 for the year ended June 30, 2009. This increase in net earnings was primarily the result of our improved sales mix of value-added products, significantly decreased cost of sales resulting primarily from lower grain costs, and the absence of impairment, severance and restructuring costs that were recognized during the year ended June 30, 2009. Along with the significant improvements we made in operating results, our fiscal 2010 net income benefitted from gains on the sale of assets previously written off, out of period adjustments, an income tax refund and reductions in our accrued pension and post-retirement liabilities, which aggregated $8,400. These gains were largely offset by charges and costs associated with the formation and start-up of the ICP joint venture, as well as various costs related to restructuring and realignment, aggregating $6,700. Restructuring costs related to the impairment of long lived assets, severance and other restructuring of $10,282, $3,288 and $5,241, respectively, were incurred for the year ended June 30, 2009. Additionally, we incurred $7,642 in losses on a natural gas contract for our Pekin, Illinois production facility for the year ended June 30, 2009.
Earnings in the ingredients solutions segment increased over the same period in fiscal 2009 primarily due to an improved sales mix of value-added proteins and starches. Lower wheat flour prices for our protein and starch processes were also a factor in our ingredient solutions segment performance.
DISTILLERY PRODUCTS
Total distillery products sales revenue for the year ended June 30, 2010 decreased $64,714, or 31.6 percent, compared to the year ended June 30, 2009. The majority of the decrease was attributable to the reduced production of fuel grade alcohol as a result of our decision to focus on food grade alcohol, which consistently has experienced more stable prices. The decrease in revenues related to fuel grade alcohol was $40,373, or 85.1 percent, compared to the year ended June 30, 2009. Distillers feed saw a decline in revenues of $18,720, or 56.6 percent, over the year ended June 30, 2009. The decrease was largely due to the decrease in production of 38.0 percent compared to the year ended June 30, 2009, primarily resulting from the temporary shutdown of the Pekin facility and slightly lower unit pricing. Also contributing to this decrease in revenue was food grade alcohol, which experienced a $5,621, or 4.5 percent, reduction in revenue from the year ended June 30, 2009. The decrease was primarily attributable to lower per-unit pricing, which followed the decrease in corn prices during the year ended June 30, 2010. While revenues for distillery products declined for the year ended June 30, 2010 as compared to a year ago, margins improved due to a significant reduction in sales of lower margin fuel grade alcohol, along with a significant reduction in corn and natural gas prices. For the year ended June 30, 2010, the per-bushel cost of corn and the per-million cubic foot cost of natural gas averaged nearly 24.1 percent and 51.0 percent lower, respectively, than the year ended June 30, 2009. These lower costs contributed to the fiscal 2010 profit for the segment.
INGREDIENT SOLUTIONS
Total ingredient solutions sales revenue for the year ended June 30, 2010 decreased by $22,412, or 27.3 percent, compared to the year ended June 30, 2009. Revenues for commodity proteins and commodity starch decreased by $11,859 and $3,564, respectively, during this period. Commodity proteins and starch products with lower margins were significantly reduced as a part of management’s strategy to focus on higher-margin, value-added products. Revenues for specialty starches for the year ended June 30, 2010 decreased overall $4,839, or 14.7 percent, compared to the year ended June 30, 2009, as a result of lower unit sales, partially offset by increased unit pricing. However, sales of our fiber-enhancing resistant wheat starch and textured wheat proteins showed year-over-year increases. Revenues for specialty proteins for the year ended June 30, 2010 decreased $1,089, or 5.0 percent, over the year ended June 30, 2009, as a result of lower unit sales. While revenues for the ingredient solutions segment declined overall, margins improved during the year ended June 30, 2010 as a result of improved sales mix by reducing our emphasis on unprofitable product lines along with lower flour costs attributable to lower wheat prices.
Beginning in the quarter ended December 31, 2008, we entered into a supply contract for flour with ConAgra Mills whereby it is supplying our wheat flour requirements for use in the production of protein and starch ingredients. As a result, we no longer purchase wheat directly. The price we pay ConAgra for flour is a function of the per-bushel cost of wheat and so accordingly, wheat prices continue to directly impact the cost of raw materials for our ingredient solutions segment. For the year ended June 30, 2010, the per-pound cost of flour decreased by 28.5 percent compared to the year ended June 30, 2009.
OTHER PRODUCTS
For the year ended June 30, 2010, revenues for other products, consisting primarily of pet products and plant-based biopolymers, decreased $2,715, or 54.5 percent, compared to the year ended June 30, 2009. The decline in other segment sales revenue was primarily the result of decreased unit sales of 92.7 percent for our pet products for the year ended June 30, 2010, compared to the prior fiscal year, offset by a slight increase in unit sales of our plant-based biopolymer products. Although the sales performance in this segment declined compared to the prior year, the gross margins in this segment as a percent of sales improved substantially due to a reduction of pet product sales and increased focus on improving cost efficiencies in our eco-friendly biopolymer area. We sold the assets related to our pet products during the first quarter of fiscal 2010, as further described Note 10. Assets Held for Sale as set forth in Item 8.
NET SALES
Net Sales for the year ended June 30, 2010 decreased $89,841, or 30.8 percent, compared to the year ended June 30, 2009 as a result of decreased sales in all segments. The decrease is primarily the result of our strategy to reduce sales of low and negative margin products across all operating segments and also partially to the adverse weather experienced during portions of the winter months of fiscal 2010. Decreased sales in the ingredient solutions segment were related primarily to our exit from low margin commodity proteins and starch products. While unit pricing increased from a year ago for specialty starches and specialty proteins, lower unit sales of specialty starches and specialty proteins led to decreased sales in this segment. Sales in the distillery products segment as a whole decreased primarily as a result of reduced volumes of fuel grade alcohol. Revenues for food grade alcohol also declined as a result of unit pricing and decreased unit sales. Revenues for distillers feed also declined as a result of lower unit sales. Sales for our other segment decreased as the result of a decline in unit sales of pet products, which was partially offset by an increase in unit sales of biopolymer products.
COST OF SALES
For the year ended June 30, 2010, cost of sales decreased $154,487, or 47.4 percent, while sales decreased 30.8 percent compared to the year ended June 30, 2009. This decrease in cost of sales was primarily the result of a fiscal 2009 charge taken to settle natural gas commitments, the change in operations at the Pekin plant, and reduced grain and energy costs. The per-bushel cost of corn and the per-million cubic foot cost of natural gas averaged nearly 24.1 percent and 51.0 percent lower, respectively, than the year ended June 30, 2009. The per pound cost of wheat flour for the year ended June 30, 2010 decreased by 28.5 percent compared to the year ended June 30, 2009. For the year ended June 30, 2010, cost of sales was 84.9 percent of net sales, which generated a gross profit margin of 15.1 percent. For the year ended June 30, 2009, cost of sales was 111.7 percent of net sales, which generated a gross margin of negative 11.7 percent. Beginning in quarter ended December 31, 2008, we ceased purchasing and processing wheat into flour in favor of directly purchasing flour at a lower cost than our own manufacturing cost. Cost of sales was favorably impacted $733 by an out-of-period adjustment.
With the shutdown of protein and starch operations and the reduction and temporary idling of distillery operations at our Pekin plant, commitments for the purchase of natural gas through the remainder of the fiscal year 2009 under a single contract for our Pekin plant were in excess of projected consumption after adjusting for such reduced production. We recorded a charge of $7,642 to cost of sales for unrealized losses for the year ended June 30, 2009 to cost of sales for losses realized upon settlement of this contract.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended June 30, 2010 decreased $693, or 3.2 percent, compared to the year ended June 30, 2009. This decrease was primarily due to the reduction in the Company’s workforce which was a result of the restructuring along with other cost savings initiatives, partially offset by an increase in incentive compensation.
OTHER OPERATING COSTS
Other operating costs for the year ended June 30, 2010 decreased $4,407, or 93.9 percent, compared to the year ended June 30, 2009. This decrease is primarily due to the reduction in costs associated with maintaining idle facilities and a year-over-year net earnings increase related to gains on sale of assets. Gain on sale of assets for the year ended June 30, 2010 was $1,731 compared to $285 for the year ended June 30, 2009. The components include a $917 gain related to the sale of protein and starch equipment from the Pekin facility, a $671 gain related to the sale of certain flour mill assets, a $100 gain on the sale of transport equipment and a $43 gain on other equipment.
IMPAIRMENT OF LONG LIVED ASSETS
For the year ended June 30, 2010, there were no impairments of long lived assets. In fiscal 2009 material impairment charges were recorded in response to the losses incurred during the first quarter of fiscal 2009. We took actions to return to profitability and included significant changes to operations as discussed below.
Ingredient Solutions Segment. On October 20, 2008 we announced that we had signed a non-binding letter of intent to acquire our flour requirements from a third party, were ceasing operations at our flour mill in Atchison, Kansas and were reducing our workforce by approximately 44 persons. The workforce reduction consisted of a combination of temporary lay-offs and early retirement offers. On November 6, we announced that the anticipated supply contract for flour had been signed, and the layoffs became permanent. Our decision to close our flour mill was due to the fact that we could no longer produce flour for our own use at costs that were competitive with those of third party producers. As a result of this action, we performed an impairment analysis and recorded a $2,831 non-cash impairment charge in the Consolidated Statements of Operations in the second quarter of 2009 related to the flour mill assets.
On November 5, 2008 we announced plans to significantly reduce production of commodity wheat proteins and starches by ceasing protein and starch production operations at our Pekin, Illinois plant, effective November 12, 2008. The majority of the Pekin facility’s protein and starch production consisted of gluten and commodity starches. The action resulted in an additional work force reduction of approximately 80 persons, consisting of a combination of lay-offs and early retirement offers. As a result of the shutdown, we performed an impairment analysis and in the second quarter recorded a $4,960 non-cash impairment charge in the Consolidated Statements of Operations related to the Pekin protein and starch assets. On January 29, 2009, we determined to cease the manufacture and sale of personal care ingredients products at our Atchison facility. We completed the exit of the personal care line of products after fulfilling all obligations with respect to our personal care customers, completing all production and liquidating all remaining inventory. As a result of this action, in the second quarter of fiscal 2009 we incurred a non-cash impairment charge of $329 in the Consolidated Statements of Operation related to the write down of equipment used in the production of personal care products.
In measuring for impairment of assets at our flour mill and our Pekin facility’s protein and starch production facility, management assumed no sales or other disposition but instead adjusted net values of these assets to zero as no further cash flow related to these assets was anticipated.
Distillery Segment. In November of 2008, we determined to curtail fuel alcohol production at Pekin to approximately 30 million gallons annually until market conditions became more favorable. Subsequent to December 31, 2008, we determined that we could further adjust our production process at Pekin in a way that permitted us to produce only minor quantities of fuel grade alcohol as a by-product of the production of food grade alcohol and determined to otherwise terminate the production of fuel grade alcohol. Subsequently, we determined to shut down food grade production at the plant for a temporary period. On March 31, 2009, we announced that we were considering strategic options for the Pekin plant. We performed an impairment analysis of our other long lived assets and determined no further impairment charges were necessary as a result of these activities.
Other Segment. At the end of the third quarter of fiscal 2008, we concluded that our pet business assets in the other segment and certain of our ingredient solutions segment assets in a mixed use facility in Kansas City, Kansas at which our pet treat resins are made were impaired. At that time, we recorded an impairment charge of $8,100, of which $4,700 related to assets allocated to the Company’s other segment. During the quarter ended December 31, 2008, management performed another test for impairment of these assets as a result of an appraisal resulting in a further charge of $811. As part of our closing process for the quarter ended June 30, 2009, we performed an additional impairment test based upon then ongoing negotiations for the sale of the Kansas City facility and recorded an additional impairment charge of $1,351. On August 21, 2009, we completed the sale of our Kansas City, Kansas facility for $3,585.
SEVERANCE AND EARLY RETIREMENT COSTS
For the year ended June 30, 2010, no severance and early retirement costs were incurred. In connection with the production changes and impairment of long-lived assets described above and in Note 9. Restructuring Costs and Loss on Impairment of Assets, we also incurred $3,288 in severance related charges associated with early retirements and job eliminations during the year ended June 30, 2009. These charges have been presented in the Company’s Consolidated Statements of Operations as “Severance and early retirement costs.”
LOSS ON JOINT VENTURE FORMATION
Loss on joint venture formation for the year ended June 30, 2010 was $2,294 compared to $0 for the year ended June 30, 2009. The components included $1,245 to adjust the book value of the Pekin plant balance sheet assets contributed to the joint venture to the implied value and $1,049 for professional fees associated with the transactions. We reduced our loss by $753 during the fourth quarter of fiscal 2010 related to the loss on joint venture formation when we recorded a settlement for the portion of the other post-retirement benefits obligation related to workers re-hired by ICP.
OTHER RESTRUCTURING COSTS
For the year ended June 30, 2010, other restructuring costs decreased $5,241, or 100.0 percent. In connection with the production changes and impairment of long-lived assets described in Note 9. Restructuring Costs and Loss on Impairment of Assets set forth in Item 8, we incurred a $2,185 net loss during the quarter ended December 31, 2008, which is net of approximately $1,109 in realized gains previously recorded in accumulated other comprehensive income.
In addition, during fiscal 2009 we recognized $2,925 in lease termination costs which we expected to incur with respect to rail cars which we formerly used to transport flour and whose leases expire through 2013. We recognized this expense because we no longer utilized these cars in our business. Expected payments accrued reflect the net present value of the remaining obligation for unused cars net of units which were estimated to be returned to the lessor sooner than the lease termination date. The discount rate used was 6.4 percent, which was consistent with the rate provided by our actuary. We estimated that the remaining railcars would be returned to the lessor or assigned to other third parties over the course of four years.
During fiscal 2010, 53 railcars were returned to the lessor. We expect the remaining 68 railcars will be returned during fiscal 2014. Activity related to the liability for restructuring is further described in Note 9. Restructuring Costs and Loss on Impairment of Assets set forth in Item 8.
OTHER INCOME, NET
Other income, net, increased $533, or 475.9 percent, for the year ended June 30, 2010 compared to the year ended June 30, 2009. This increase was primarily attributable to a non recurring reversal of account payable balances related to a prior period totaling $618, as further described in Note 1. Nature of Operations and Summary of Significant Accounting Policies set forth in Item 8. This increase was partially offset by changes in interest capitalized as well as the effect of certain other non-recurring revenue items.
INTEREST EXPENSE
Interest expense for the year ended June 30, 2010 decreased $1,144 compared to the year ended June 30, 2009. This decrease arose from lower line of credit balances and other corporate borrowings compared to the same periods in the prior year, as a result of improvements in operating cash flow, proceeds from asset sales and income tax refunds.
EQUITY IN LOSS OF JOINT VENTURES
ICP
On November 20, 2009, we completed a series of transactions whereby we contributed our Pekin plant to a newly-formed company, ICP, and then sold 50 percent of the membership interest in ICP to ICP Holdings, an affiliate of SEACOR Energy Inc., for a purchase price of $15,000 ($13,951 net of closing costs) as further described in Note 3. Investment in Joint Ventures set forth in Item 8.
For the period from November 20, 2009 to June 30, 2010, ICP incurred a net loss of $4,051, primarily related to costs incurred as part of the initial implementation of operations. As a 50 percent joint venture member, our portion of the loss was $2,026.
D.M. Ingredients, GmbH (“DMI”)
On July 17, 2007, we completed a transaction with Crespel and Deiters GmbH & Co. KG for the formation and financing of a joint venture, DMI, located in Ibbenburen, Germany. DMI’s primary operation is the production of specialty ingredients for marketing by MGPI domestically and, through our partner and third parties, internationally. Currently, the joint venture is utilizing a third party toller in the Netherlands to produce the products. We own a 50 percent interest in DMI, and account for it using the equity method of accounting. As of June 30, 2010, we had invested $571 in DMI since July 2007.
For the year ended June 30, 2010, DMI incurred a net loss of $293 related to costs incurred as part of the initial implementation of operations. No sales revenue was reported. As a 50 percent joint venture member, our equity in this loss was $147 and $114 for fiscal 2010 and 2009, respectively.
DMI’s functional currency is the European Union Euro. Accordingly, changes in the holding value of the Company’s investment in DMI resulting from changes in the exchange rate between the U.S. Dollar and the European Union Euro are recorded in other comprehensive income as a translation adjustment on unconsolidated foreign subsidiary net of deferred taxes.
INCOME TAXES
For the year ended June 30, 2010, we had an income tax benefit of $4,768, resulting in an effective rate of negative 120.1 percent. For the year ended June 30, 2009, our income tax benefit was $12,788, for an effective rate of 15.6 percent.
For the year ended June 30, 2010, the effective rate differs from our statutory rate primarily due to changes in the federal and state valuation allowance and the benefit of a tax law change occurring during fiscal 2010. Under the Worker, Homeownership, and Business Assistance Act of 2009, which was enacted during the second quarter of fiscal 2010, we became eligible to carry back net operating losses generated in our fiscal year ended June 30, 2009 to our five preceding tax years, instead of the two years allowed under previous tax law. We filed a claim to carry an additional $11,900 of net operating loss back. An income tax benefit of approximately $4,700 was recognized during the second quarter of fiscal 2010 related to this carry-back claim. The cash refund associated with the carry-back claim was received during January 2010. For further discussion on the deferred income tax valuation allowance, see Note 5. Income Taxes set forth in Item 8.
NET INCOME
As the result of the factors outlined above, we experienced net income of $8,738 for the year ended June 30, 2010, compared to a net loss of $69,123 for the year ended June 30, 2009.
QUARTERLY FINANCIAL INFORMATION
Our sales have not been seasonal during the six month transition period ended December 31, 2011 or during fiscal years 2011 and 2010. The table below shows quarterly information for the six month transition period ended December 31, 2011 and the fiscal years ended June 30, 2011 and 2010.
|
Quarter
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, 2011(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
76,138 |
|
|
$ |
70,339 |
|
|
|
n/a |
|
|
|
n/a |
|
|
$ |
146,477 |
|
|
Gross profit (loss)
|
|
|
2,791 |
|
|
|
155 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
2,946 |
|
|
Net income (loss)
|
|
|
(5,509 |
) |
|
|
16,144 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
10,635 |
|
|
Earnings (loss) per share (diluted)(8)
|
|
|
(0.31 |
) |
|
|
0.89 |
|
|
|
n/a |
|
|
|
n/a |
|
|
$ |
0.59 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
56,978 |
|
|
$ |
57,951 |
|
|
$ |
64,188 |
|
|
$ |
68,798 |
|
|
$ |
247,915 |
|
|
Gross profit (loss)
|
|
|
10,354 |
|
|
|
8,792 |
|
|
|
6,519 |
|
|
|
(2,788 |
) |
|
|
22,877 |
|
|
Net income (loss)
|
|
|
5,002 |
|
|
|
3,242 |
|
|
|
701 |
|
|
|
(10,258 |
) |
|
|
(1,313 |
) |
|
Earnings (loss) per share (diluted)(4)(8)
|
|
$ |
0.28 |
|
|
$ |
0.18 |
|
|
$ |
0.04 |
|
|
$ |
(0.58 |
) |
|
$ |
(0.07 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010 (4)(5)(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
50,249 |
|
|
$ |
48,094 |
|
|
$ |
49,269 |
|
|
$ |
54,359 |
|
|
$ |
201,971 |
|
|
Gross profit (loss)
|
|
|
9,837 |
|
|
|
8,510 |
|
|
|
4,967 |
|
|
|
7,230 |
|
|
|
30,544 |
|
|
Net income (loss)
|
|
|
3,738 |
|
|
|
4,778 |
|
|
|
(2,254 |
) |
|
|
2,476 |
|
|
|
8,738 |
|
|
Earnings (loss) per share (diluted)(4)(8)
|
|
$ |
0.22 |
|
|
$ |
0.28 |
|
|
$ |
(0.14 |
) |
|
$ |
0.14 |
|
|
$ |
0.51 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Net income for the second quarter of the transition period ending December 31, 2011 includes a $13,048 bargain purchase gain (net of taxes of $8,336) related to the acquisition of LDI’s Distillery Business.
|
| (2) |
Net income for the second quarter of the transition period ending December 31, 2011 includes a $1,301 impairment loss on long-lived assets.
|
| (3) |
Net income for the first and second quarter of fiscal 2011 includes losses of $289 and $33, respectively, related to the disposition of certain machinery and equipment.
|
| (4) |
We adopted ASC 260 10 Earnings Per Share (formerly FSP-EITF 03-6-1) – Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities effective July 1, 2009. The impacts for the non-vested restricted shares, which constitute a separate class of stock for accounting purposes, did not have a material impact and we did not apply the two class method in fiscal 2010. In conjunction with the declaration of the dividend in the first quarter of fiscal 2011, we reassessed our earnings per share calculation policy and determined to present the two-class method prospectively. Amounts allocated to participating securities for fiscal 2010 were immaterial.
|
| (5) |
Net income for the first quarter of fiscal 2010 includes a $200 gain on the sale of certain flour mill assets and transport equipment.
|
| (6) |
Net income for the second quarter of fiscal 2010 includes a $3,047 charge related to the loss on joint venture formation and a $500 gain on the sale of certain flour mill assets. The second quarter of fiscal 2010 also included an out-of period adjustment related to a reduction of accounts payable that increased pretax income by $1,351. See (7) below related to the $3,047 charge.
|
| (7) |
Net income for the fourth quarter of fiscal 2010 includes a $753 out-of-period adjustment related to a partial settlement and a curtailment of the other post-retirement plan which was a favorable impact to pretax income. Had this adjustment been recorded in the proper quarter, pretax income would have been favorably impacted by $753 for the second quarter of fiscal 2010. This adjustment reduced the loss on joint venture formation recorded during the second quarter of fiscal 2010 from $3,047 to $2,294.
|
| (8) |
Earnings (loss) per share per quarter does not sum to total earnings (loss) per share due to rounding.
|
LIQUIDITY AND CAPITAL RESOURCES
Our principal uses of cash in the ordinary course are for the cost of raw materials and energy used in our production processes, salaries, debt service obligations on our borrowings, and capital expenditures. Our principal sources of cash are revenues from the products we make and our revolving credit facility. We also have used cash for acquisitions and received cash from investment or asset dispositions and tax refunds.
On February 1, 2012, we sold a 20 percent interest in ICP to ICP Holdings for $9,103. The sale resulted when ICP Holdings exercised an option it acquired from Processing when ICP Holdings purchased its existing interest in ICP in 2009.
On December 27, 2011, we closed our acquisition of LDI’s Distillery Business. The purchase price of the acquisition is equal to the current assets minus current liabilities as of December 27, 2011, which was estimated at closing to be $11,041. The purchase price was funded through our bank revolving credit facility and is subject to post closing adjustments for working capital true-ups. An escrow account of $3,852 has been set up to fund working capital true-ups and possible future indemnification claims.
On June 28, 2011, we financed a major portion of the new water cooling towers and related equipment being installed at our Atchison facility to U.S. Bancorp Equipment Finance, Inc. for proceeds of $7,335. The proceeds are included in cash as of June 30, 2011. Processing entered into a lease with U.S. Bancorp for this same equipment and we will make monthly payments under the lease of approximately $110 for 72 months are treated as proceeds from issuance of long term debt. See “- Contractual Obligations” and Note 4. Corporate Borrowings and Capital Lease Obligations set forth in Item 8 further discussion of this arrangement.
Under agreements that Processing made in March 2011 with a third party logistics company that contracts with transportation companies, fees are billed to us semiannually, on January 1st and July 1st of each calendar year, for the previous six months. We have five business days to pay in full these transportation fees. We paid $7,770 for our second billing under this agreement on January 6, 2012.
On March 1, 2012, the Board of Directors declared a five (5) cent dividend per common share. The dividend will be paid on April 19, 2012 to common stockholders of record on March 22, 2012.
On August 25, 2011 the Board of Directors declared a five (5) cent dividend per share of common stock, payable to holders of record on September 15, 2011. The $906 dividend was paid on October 13, 2011.
On August 26, 2010, the Board of Directors declared a five (5) cent dividend per share of common stock, payable to holders of record on September 15, 2010. The $891 dividend was paid October 6, 2010.
On August 25, 2009, we were required to make a deposit of approximately $1,600 to our surety bond carrier. This deposit secured our obligations under surety bonds maintained to meet regulatory requirements for distillery operations. Funds for this deposit were borrowed under the terms of the Credit Agreement. Also in August 2009, we received $325 as a deposit refund from a vendor.
As a result of losses incurred during fiscal year 2009, we received a tax refund of approximately $5,500 during October 2009, which was applied to a $11,614 note to an energy supplier. During January 2010 we received an additional tax refund of approximately $4,700 resulting from changes in tax laws that enabled us to carry back losses to periods previously unavailable. For further information, see Note 5. Income Taxes set forth in Item 8.
We have budgeted $6,000 in routine capital expenditures over the next twelve months related to other improvements in and replacements of existing plant and equipment and information technology. As of December 31, 2011, we had contracts to acquire capital assets of approximately $1,133.
We expect our sources of cash to be adequate to provide for budgeted capital expenditures and anticipated operating requirements. As we become able to purchase corn for delivery up to 12 months in the future under new grain supply agreements, we expect our need for restricted cash to decrease as we expect to reduce the volume of our corn futures and options contracts.
The following table is presented as a measure of our liquidity and financial condition as of December 31, 2011, June 30, 2011 and June 30, 2010:
| |
|
December 31
|
|
|
June 30
|
|
| |
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
Cash and cash equivalents
|
|
$ |
383 |
|
|
$ |
7,603 |
|
|
$ |
6,369 |
|
|
Working capital
|
|
|
18,887 |
|
|
|
22,381 |
|
|
|
25,142 |
|
|
Amounts available under lines of credit
|
|
|
23,358 |
|
|
|
20,342 |
|
|
|
20,174 |
|
|
Credit facility, notes payable and long-term debt
|
|
|
29,664 |
|
|
|
14,065 |
|
|
|
2,771 |
|
|
Stockholders’ equity
|
|
|
84,430 |
|
|
|
75,198 |
|
|
|
72,784 |
|
Certain components of our liquidity and financial results were as follows:
| |
|
Six Months Ended
|
|
|
Year Ended June 30,
|
|
| |