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MGP INGREDIENTS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands except per-share amounts)
(Edgar Glimpses Via Acquire Media NewsEdge) GENERAL
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.
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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.
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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.
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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.
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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.
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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.
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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.
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--------------------------------------------------------------------------------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.
41
--------------------------------------------------------------------------------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.
42--------------------------------------------------------------------------------SEGMENT RESULTS
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, December 31,
2011 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 4,981Pre-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,
December 31, December 31,
Income (loss) before income taxes 2011(1) 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.
43--------------------------------------------------------------------------------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.
44
--------------------------------------------------------------------------------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.
45
--------------------------------------------------------------------------------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.
46--------------------------------------------------------------------------------
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.
47
--------------------------------------------------------------------------------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.
48
--------------------------------------------------------------------------------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.
49
--------------------------------------------------------------------------------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.
50
--------------------------------------------------------------------------------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.
51--------------------------------------------------------------------------------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.
52--------------------------------------------------------------------------------
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.
53
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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.
54
--------------------------------------------------------------------------------
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.
55
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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.
56
--------------------------------------------------------------------------------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 8,738Earnings (loss) per share (diluted)(4)(8) $ 0.22 $ 0.28
$ (0.14 ) $ 0.14 $ 0.51
Net income for the second quarter of the transition
period ending December 31, 2011 includes a $13,048
(1) bargain purchase gain (net of taxes of $8,336)
related to the acquisition of LDI's Distillery
Business.
Net income for the second quarter of the transition
(2) period ending December 31, 2011 includes a $1,301
impairment loss on long-lived assets.
Net income for the first and second quarter of
(3) 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.
57--------------------------------------------------------------------------------(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.
58
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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,
December 31, December 31,
2011 2010 2011 2010 2009
(unaudited)
Depreciation and amortization $ 5,047 $ 4,083 $ 8,843 $ 8,631 $ 11,946
Capital expenditures 12,403 3,663 12,775 2,062 2,069
Cash flows from operations (9,603 ) (1,160 ) 3,139 32,667 3,158
59--------------------------------------------------------------------------------CASH FLOW INFORMATION
Summary cash flow information follows for:
Six Months Ended Year Ended June 30,
December 31, December 31,
2011 2010 2011 2010 2009
(unaudited)Cash flows provided by (used in):
Operating activities $ (9,603 ) $ (1,160 ) $ 3,139 $ 32,667 $ 3,158
Investing activities (12,324 ) (3,663 ) (12,775 ) 16,043 (1,325 )
Financing activities 14,707 (1,074 ) 10,870 (42,519 ) (1,655 )
Increase in cash and cash equivalents (7,220 ) (5,897 ) 1,234 6,191 178
Cash and cash equivalents at beginning
of year 7,603 6,369 6,369 178 -
Cash and cash equivalents at end of year $ 383 $ 472 $ 7,603 $ 6,369 $ 178
During the six month transition period ended December 31, 2011, our consolidated
cash decreased $7,220 to $383 as compared to the six months ended December 31,
2010, in which there was a $5,897 decrease. Decreased operating cash flow
resulted from lower net income (before considering the $13,084 bargain purchase
gain, net of taxes of $8,336). Contributing to decreased operating cash flows
was an increase in restricted cash and an $8,340 non-cash deduction related to
deferred income taxes, partially offset by a decrease in accounts receivable
(net of receivables purchased in our acquisition of LDI's Distillery Business)
and additional cash provided by changes in accounts payable to affiliate and
accrued expenses (net of accrued expenses assumed from acquisition of LDI's
Distillery Business). Cash outflows related to capital expenditures during the
six month transition period ended December 31, 2011 totaled $12,403 (which
includes $10,901 related to the acquisition of LDI's Distillery Business)
compared to the six months ended December 31, 2010, which totaled $3,663. During
the six month transition period ended December 31, 2011, borrowings on debt
exceeded payments on debt by $15,599 as compared to the six months ended
December 31, 2010, in which payments on debt exceeded borrowings by $262.
During the year ended June 30, 2011, our consolidated cash increased $1,234
compared to an increase of $6,191 for the year ended June 30, 2010. Operating
cash flow deteriorated compared to the year ended June 30, 2010 as a result of a
$10,051 decrease in earnings from net income of $8,738 for the year ended June
30, 2010 to a net loss of $1,313 for the year ended June 30, 2011 as well as a
net increase in our operating assets and liabilities (excluding cash) of
$7,417. Cash outflows related to capital expenditures during the year ended June
30, 2011 compared to the year ended June 30, 2010 increased from $2,062 to
$12,775, while proceeds from the disposition of property and proceeds from the
sale of an interest in ICP both decreased. During the year ended June 30, 2011,
borrowings on debt exceeded payments on debt by $11,294, as compared to the year
ended June 30, 2010 in which payments on debt exceeded borrowings by $42,485.
During the year ended June 30, 2010, our consolidated cash increased $6,191
compared to an increase of $178 during the year ended June 30, 2009. Operating
cash flow improved over the year ended June 30, 2009 primarily as a result of a
$77,861 increase in earnings from a $69,123 net loss for the year ended June 30,
2009 to net income of $8,738 for the year ended June 30, 2010. This increase was
offset by smaller reductions in accounts receivable and inventory for the year
ended June 30, 2010 compared to the year ended June 30, 2009. Investing cash
flows improved over the year ended June 30, 2009 primarily related to the sale
of 50 percent of the membership interest in ICP. Payments on our long-term debt
and our line of credit resulted in a use of cash.
60
--------------------------------------------------------------------------------
Operating Cash Flows. Summary operating cash flow information for the six month
transition period ended December 31, 2011, the six months ended 2010 (unaudited)
and for the years ended June 30, 2011, 2010 and 2009, is as follows:
Six Months Ended Year Ended June 30,
December 31, December 31,
2011 2010 2011 2010 2009
(unaudited)
Net income (loss) $ 10,635 $ 8,244 $ (1,313 ) $ 8,738 $ (69,123 )
Depreciation and amortization 5,047 4,083 8,843 8,631 11,946
Loss (gain) on sale of assets 117 322 322 (1,731 ) (285 )
Share based compensation 510 - 1,164 491 14
Bargain purchase gain, net of tax (13,048 ) - - - -
Loss on joint venture formation - - - 2,294 -
Loss on impairment of assets 1,301 - - - 10,282
Deferred income taxes (8,340 ) - - - (7,217 )
Equity in loss (earnings) of joint
ventures 551 (632 ) 1,540 2,173 114
Changes in operating assets and
liabilities, net of acquisition:
Restricted cash (6,577 ) 481 (57 ) (768 ) (200 )
Receivables, net 4,368 (3,941 ) (10,170 ) 729 15,684
Inventory (4,082 ) (2,505 ) (2,568 )) 3,184 40,703
Prepaid expenses 244 406 316 (537 ) (1,130 )
Refundable income taxes (37 ) 94 53 5,467 2,525
Accounts payable 412 (226 ) 5,907 1,439 (3,063 )
Accounts payable to affiliate, net 1 (1,189 ) 1,215 4,951 -
Accrued expenses (650 ) (3,394 ) (3,111 ) 1,871 (694 )
Change in derivatives (220 ) (1,681 ) 2,267 (418 ) 1,753
Deferred credit (303 ) (284 ) (881 ) (811 ) (846 )
Accrued retirement health and life
insurance benefits and other noncurrent
liabilities (76 ) (46 ) (659 ) (3,277 ) 4,968
Gains previously deferred in
other comprehensive income - - - - (2,149 )
Other 544 (892 ) 271 241 (124 )
Net cash provided by (used in)
operating activities $ (9,603 ) $ (1,160 ) $ 3,139 $ 32,667 $ 3,158
Cash flow from operations for the six month transition period ended December
31, 2011 decreased $8,443 to $(9,603) from $(1,160) for the six months ended
December 31, 2010. This decrease in operating cash flow was primarily the result
of a $13,048 non-cash deduction related to a bargain purchase gain (net of taxes
of $8,336), and a $8,340 non-cash deduction related to deferred income taxes
partially offset by a $2,391 increase in earnings, from net income of $8,244 for
the six months ended December 31, 2010 to net income of $10,635 for the six
month transition period ended December 31, 2011. Also contributing to decreased
operating cash flows was an increase in restricted cash of $6,577 for the six
months ended December 31, 2011 compared to a $481 decrease in restricted cash
for the six months ended December 31, 2010. The increase in the restricted cash
balance is due to a deposit required as a result of a decline in the market
value of open contract positions relative to the respective contracts at
December 31, 2011 as compared to June 30, 2011.
These factors, which served to decrease operating cash flow, were partially
offset by the following:
· for the six month transition period ended December 31, 2011, a decrease in
accounts receivable (net of receivables purchased in our acquisition of LDI's
Distillery Business) generated $4,368 of positive cash flows compared to a
$3,941 use of cash for the six months ended December 31, 2011;
61--------------------------------------------------------------------------------· for the six month transition period ended December 31, 2011, an increase in
accounts payable to affiliate generated $1 of positive cash flows compared to
a $1,189 use of cash for the six months ended December 31, 2011; and
· a smaller period-over-period decrease in accrued expenses. For the six month
transition period ended December 31, 2011, a decrease in accrued expenses (net
of accrued expenses assumed from our acquisition of LDI's Distillery Business)
used $650 of cash compared to a $3,394 use of cash for the six months ended
December 31, 2010.
Cash flow from operations for the year ended June 30, 2011, decreased $29,528
to $3,139 from $32,667 for the year ended June 30, 2010, and was impacted by
reduced earnings and the timing of cash receipts and disbursements. This
decrease in operating cash flow was primarily the result of a decrease in
earnings, increases in receivables and inventory, a decrease in accrued
expenses, and smaller year-over-year decrease in accounts payable to
affiliates. Earnings decreased by $10,051 from $8,738 of net income for the
year ended June 30, 2010 to a net loss of $1,313 for the year ended June 30,
2011. The increases in receivables and inventory relate to higher sales and
costs of production for June 2011 compared to June 2010, whereas the decrease in
accrued expenses and the smaller year-over-year decrease in accounts payable to
affiliates relate primarily to timing of payments. Receivables increased $10,170
for the year ended June 30, 2011 compared to a decrease of $729 for the year
ended June 30, 2010. Inventory increased $2,568 for the year ended June 30, 2011
compared to a decrease of $3,184 for the year ended June 30, 2010, which is
consistent with our volume of raw materials for corn and flour. Accrued expenses
decreased $3,111 for the year ended June 30, 2011 compared to an increase of
$1,871 for year ended June 30, 2010. Accounts payable to affiliates increased
$1,215 for the year ended June 30, 2011 compared to an increase of $4,951 for
the year ended June 30, 2010.
These factors, which served to decrease operating cash flow, were partially
offset by the following:
· for the year ended June 30, 2011, an increase in accounts payable generated
$5,907 of positive cash flows compared to $1,439 for the year ended June 30,
2010;
· for the year ended June 30, 2011, an increase in accrued retiree benefits used
$659 of operating cash flows compared to a use of $3,277 for the year ended
June 30, 2010; and
· for the year ended June 30, 2011, an increase in the change in derivative
valuation generated $2,267 of positive cash flows compared to a use of $418
for the year ended June 30, 2010.
Cash flow from operations for the year ended June 30, 2010 increased $29,509
to $32,667 from $3,158 for the year ended June 30, 2009. This increase in
operating cash flow was primarily the result of a $77,861 increase in earnings,
from a $69,123 net loss for the year ended June 30, 2009 to net income of $8,738
for the year ended June 30, 2010. Deferred income taxes had a $0 non-cash impact
on net income for the year ended June 30, 2010 compared to a $7,217 non-cash
reduction to net loss for the year ended June 30, 2009. Other factors resulting
in an increase in operating cash flows was a $12,018 combined increase in
accounts payables, accounts payable to affiliate, net and accrued expenses to
$8,261 for the year ended June 30, 2010 compared to ($3,757) for the year ended
June 30, 2009. The increase in accounts payable resulted from our return to
normal credit terms with suppliers as a result of our improved financial
condition. The increase in accounts payable to affiliate, net results from our
operations with ICP. The increase in accrued expenses is primarily the result of
an increase in accrued bonuses.
These factors, which served to improve operating cash flow, were partially
offset by the following:
· for the year ended June 30, 2010, inventory reductions generated positive
operating cash flow of $3,184 compared to $40,703 for the year ended June 30,
2009 when we reduced a significant inventory buildup from the prior year;
· for the year ended June 30, 2010, accounts receivable declined relatively
less, generating positive operating cash flow of $729 compared to $15,684 for
the year ended June 30, 2009;
· for the year ended June 30, 2010, accrued retiree benefits and other
non-current liabilities decreased, resulting in a use of cash of $3,277
compared to the year ended June 30, 2009, which generated positive operating
cash flow of $4,968; and
62--------------------------------------------------------------------------------· an adjustment to net loss for the year ended June 30, 2009 for a non-cash
impairment charge of $10,282.
Investing Cash Flows. Net investing cash flow for the six month transition
period ended December 31, 2011 was $(12,324) compared to $(3,663) for the six
months ended December 31, 2010. During the six month transition period ended
December 31, 2011, we made capital investments of $12,403, of which $10,901
related to our acquisition of LDI's Distillery Business. During the six months
ended December 31, 2010, we made capital investments of $3,663.
Net investing cash outflow for the year ended June 30, 2011 was $12,775
compared to cash provided by investing activities of $16,043 for the year ended
June 30, 2010. During the year ended June 30, 2011, we made capital investments
of $12,775. During the year ended June 30, 2010, we made capital investments of
$2,062 and had proceeds from the sale of an interest in ICP of $13,951, net of
closing costs, as well as proceeds from the sale of property of $5,367, net of
closing costs.
Net investing cash flow for the year ended June 30, 2010 was $16,043 compared
to a cash outflow of $1,325 for the year ended June 30, 2009 for a net increase
of $17,368 in investing cash flows. For the year ended June 30, 2010, we
received net proceeds of $13,951 related to the sale of a 50 percent membership
interest in ICP. Proceeds from the disposition of property and equipment for the
year ended June 30, 2010 increased $4,623 to $5,367 from $744 for the year ended
June 30, 2009. These increases were partially offset by a $1,213 investment in
and advances to unconsolidated subsidiaries for the year ended June 30, 2010.
Financing Cash Flows. Net financing cash flow for the six month transition
period ended December 31, 2011 was $14,707 compared to $(1,074) for the six
months ended December 31, 2010, for a net increase in financing cash flow of
$15,781. During the six month transition period ended December 31, 2011, we had
net borrowings of $16,484 under our operating line of credit compared to net
borrowings of $86 for the six months ended December 31, 2010. This increase in
financing cash flow was partially offset by an increase in payments on long-term
debt, which totaled $885 for the six month transition period ended December 31,
2011 compared to payments on long-term debt of $348 for the six months ended
December 31, 2010.
Net financing cash flow for the year ended June 30, 2011 was $10,870 compared to
a cash outflow of $42,519 for the year ended June 30, 2010, for a net increase
in financing cash flow of $53,564. This increase in cash flow was primarily the
result of the following:
· net borrowings of $4,658 under our operating line of credit for the year ended
June 30, 2011 compared to net payments of $18,138 for the year ended June 30,
2010; and
· net borrowings on long-term debt of $6,636 for the year ended June 30, 2011
compared to net payments of $24,347 for the year ended June 30, 2010. On June
28, 2011 we entered into a capital lease for the water cooling towers and
related equipment with proceeds of $7,335.
Net financing cash outflow for the year ended June 30, 2010 was $42,519 compared
to net financing cash outflow of $1,655 for the year ended June 30, 2009 for a
net increase in cash outflow of $40,864. This increase in cash outflow was
primarily the result of the following:
· net payments on the line of credit of $18,138 for the year ended June 30,
2010, compared to net payments of $5,167 for the year ended June 30, 2009; and
· proceeds from long-term debt for the year ended June 30, 2010 decreased $5,318
to $2,032 from $7,350 for the year ended June 30, 2009; and
· principal payments on long-term debt for the year ended June 30, 2010
increased $22,603 to $26,379 from $3,776 for the year ended June 30, 2009.
63
--------------------------------------------------------------------------------CAPITAL EXPENDITURES
For the six month transition period ended December 31, 2011, we made capital
investments of $13,203, of which $12,403 was a use of cash and $800 remained
payable at December 31, 2011. The primary investments were our acquisition of
LDI's Distillery Business for $11,041 and improvements to the Atchison
facility. For the year ended June 30, 2011, we made capital investments of
approximately $14,581, of which $12,775 was a use of cash and $1,806 remained
payable at June 30, 2011. The primary investments were the flour mill site, the
SAP computer system, and the water cooling system project as further described
below. For the year ended June 30, 2010, we incurred $2,062 in capital
expenditures, primarily related to production and capacity upgrades. For the
year ended June 30, 2009, we incurred $2,069 in capital expenditures, primarily
related to production and capacity upgrades. We also made improvements to our
information technology property and data center in both years.
In fiscal 2011 we began work on a major capital project designed to provide
environmental benefits at our Atchison, Kansas distillery while also enhancing
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. It was substantially
completed as of June 30, 2011 and completed during July 2011 at a cost of
approximately $10,000.
64--------------------------------------------------------------------------------CONTRACTUAL OBLIGATIONS
Our contractual obligations at December 31, 2011 are as follows:
Fiscal Year Ending December 31,
2012 2013 2014 2015 2016 Thereafter Total
Long term debt (1) $ 303 $ 323 $ 345 $ 369 $ 34 $ - $ 1,374
Capital leases (2) 1,368 1,360 1,212 1,244 1,277 687 7,148
Operating leases 2,593 1,756 726 469 392 - 5,936Post-retirement benefits 623 563 424 401
425 2,931 5,367
Defined benefit
retirement Plan 80 - - - - - 80
Open purchase commitments
(3) 23,053 - - - - - 23,053
Total $ 28,020 $ 4,002 $ 2,707 $ 2,483 $ 2,128 $ 3,618 $ 42,958
(1) Long term debt at December 31, 2011 included the following:
(a) Union State Bank - Bank of Atchison promissory note of Processing dated July
20, 2009 in the initial principal amount of $2,000 secured by a mortgage and
security interest on our Atchison plant and related equipment. The note
bears interest at 6 percent over the three year treasury index, adjustable
quarterly, and is payable in 84 monthly installments of $32, with any
balance due on the final installment. At December 31, 2011, $1,374 was
outstanding under the note.
(b) On July 21, 2009, we entered a new revolving Credit and Security Agreement
with Wells Fargo Bank, National Association. The Credit and Security
Agreement has been amended by consents dated August 19, 2009, December 21,
2009, December 31, 2009 and February 2, 2010 as well as by a First Amendment
("First Amendment") dated June 30, 2010, a Second Amendment ("Second
Amendment") dated January 20, 2011, a Third Amendment ("Third Amendment")
dated October 20, 2011, and an Assignment and Assumption of Note and Credit
Agreement and Fourth Amendment ("Fourth Amendment") dated January 3, 2012
(as so amended, the "Credit Agreement"). The Credit Agreement, which
matures in October 2014, generally provides for a Maximum Line of Credit of
$45,000, subject to borrowing base limitations. A portion of the
availability under our Credit Agreement is available for the issuance of
letters of credit. The face amount of any outstanding letters of credit
reduces the availability under the Credit Agreement on a dollar-for-dollar
basis. At December 31, 2011, our outstanding borrowings under the Credit
Agreement were $21,142. Borrowings under the Credit Agreement bear interest,
payable monthly, at a variable rate equal to Daily One Month LIBOR plus an
applicable margin ranging from 1.50% to 2.00%, based on our Balance Sheet
Leverage Ratio. During a default period, the interest rate may be increased
to a variable rate equal to the Daily One Month LIBOR plus 6 percent at the
lender's discretion. The Credit Agreement provides for an unused line fee of
.25 percent per annum and origination fees, letter of credit fees and other
administrative fees. The Credit Agreement is secured by a security interest
in substantially all of our personal property and by mortgages or leasehold
mortgages on our facilities in Atchison and Onaga. The lender may terminate
or accelerate our obligations under the Credit Agreement upon the occurrence
of various events in addition to payment defaults and other breaches,
including such matters as over advances arising from reductions in the
borrowing base, certain changes in the Board, failure to pay taxes when due,
defaults under other material debt, lease or other contracts and our CEO
ceasing to be actively engaged in the Company's day to day business
activities and the Company shall fail to hire a successor acceptable to the
lender in 90 days.
65--------------------------------------------------------------------------------Pursuant to the Third Amendment, among other matters Well Fargo agreed to amend
the Credit Agreement in several material respects and summarized as follows:
· the maximum line of borrowings outstanding at any one time was increased from
$25,000 to $45,000;
· the Maturity Date of the loans were extended from July 20, 2012 to October 20,
2014;
· the floating interest rate applicable to outstanding borrowings was changed
from the daily three month LIBOR plus an applicable margin ranging from 1.75%
to 3.00%, based on our Debt Coverage Ratio, to an annual rate equal to the sum
of Daily One Month LIBOR plus an applicable margin ranging from 1.50% to
2.00%, based on the our balance sheet leverage ratio;
· the annual minimum interest payment and prepayment fees have been removed;
· the requirement to maintain an average availability of not less than $5,000
has been removed;
· a new provision was added that requires our balance sheet leverage ratio
(meaning total liabilities divided by tangible net worth) to be no greater
than 1.75 to 1.0 as of each December 31, March 31, June 30 and September 30;
· a new adjusted net income provision (net income, adjusted for the following if
not already accounted for in the calculation of net income: unrealized hedging
gain/(loss), non-cash joint venture gain/(loss), and gain/(loss) from the sale
or disposition of assets) has been added to replace the former stop loss
provision; this net income provision requires adjusted net income, as defined,
to be no less than one dollar ($1.00), as of each December 31, March 31, June
30 and September 30, as determined based on the 12-month period then ending;
· a new provision was added that requires the fixed charge coverage ratio (as
defined below) to not be less than 2.00 to 1.00, as of each December 31, March
31, June 30 and September 30, as determined based on the 12-month period then
ending. The ratio is calculated as follows:
(a) the sum of:
(i) net profit
(ii) plus taxes
(iii) plus interest expense
(iv) plus depreciation and amortization expense
(v) minus dividends
(vi) minus non-cash joint venture gain/(loss)
(vii) minus non-cash unrealized hedging gain/(loss)
(viii) minus cash contributions to Joint Ventures
(ix) minus $7,000 in deemed per annum maintenance capital expenditures
divided by
(b) the sum of:
66--------------------------------------------------------------------------------(i) current maturities of long term debt
(ii) plus capitalized lease payments and interest expense
· the provision that requires the debt coverage ratio to not be less than 1.25
to 1.0 as of each December 31, March 31, June 30 and September 30, has been
removed;
· the provision restricting the payment of dividends was modified to provide we
will not declare or pay any dividends (other than dividends payable solely in
stock of the Company) on any class of its stock in any fiscal year in an
amount in excess of $2,000;
· the $8,000 limit on annual capital expenditures, which excludes capital
expenditures made for the replacement and or upgrade of the water cooling
system, has been removed;
· a new provision was added to restrict operating lease expenses in any fiscal
year to not exceed $4,000;
· a new provision was added that requires 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 new provision was added to restrict us from pledging the fixed and real
property assets to be acquired under the LDI transaction described above; and
· a new provision was added whereby we agreed not to undertake an acquisition
unless the aggregate cash and non-cash consideration to be paid, excluding the
acquisition described above, does not exceed $5,000 in the aggregate for all
such permitted acquisitions. In all cases, after giving effect to any
acquisition, including after the acquisition described above, we must have
Availability (as defined in the Credit Agreement) of at least $10,000.
Pursuant to the Fourth Amendment, Holdings assumed Processing's obligations and
indebtedness under the Credit Agreement. The Fourth Amendment provides that
Holdings and its more than 50%-held subsidiaries, which includes Processing and
MGPII, are deemed to be one consolidated entity and, thus, Holdings, Processing
and MGPII are generally subject to the representations and warranties and the
covenants in the Credit Agreement as a single, consolidated entity. In
connection with the Fourth Amendment, Processing executed a Continuing Guaranty,
whereby it agreed to guarantee the obligations of Holdings under the Credit
Agreement and a Third Party Security Agreement giving the bank a security
interest in Processing's assets as security for its obligations under the
Continuing Guaranty.
MGPII has guaranteed the Company's debt under the credit facility.
(2) Capital lease obligations at December 31, 2011 include the following
obligations of
Processing:
(a) In connection with improvements made to the Company's data center, $1,200 in
costs incurred during development of the system have been funded by Winthrop
Resources Corporation and CSI Leasing, Inc., of which one capital lease
agreement remains outstanding at December 31, 2011. This unsecured capital
lease has a 0.61 percent rate and matures October, 2013.
67--------------------------------------------------------------------------------(b) On June 28, 2011, we sold a major portion of the new process water cooling
towers and related equipment being installed at our Atchison facility to
U.S. Bancorp Equipment Finance, Inc. for approximately $7,335 and leased
them from U.S Bancorp pursuant to a Master Lease Agreement and related
Schedule. Monthly rentals under the lease are $110 (plus applicable
sales/use taxes, if any) and continue for 72 months, with interest at a rate
of 2.61%. We may purchase the leased property after 60 months for
approximately $1,328 and at the end of the term for fair market value.
Under the terms of the Master Lease, we are responsible for property taxes
and assume responsibility for insuring and all risk of loss or damage to the
property. Given this continuing involvement, we treated this as a financing
transaction. The lessor may, at its option, extend the lease for specified
periods after the end of the term if we fail to exercise our purchase
option.
Obligations under the Master Lease may be accelerated if an event of default
occurs and continues for 10 days. In addition to payment defaults and breaches
of representations and covenants, events of default include defaults under any
other agreement with lessor or payment default under any obligation. In such
event, among other matters, lessor may cancel the Master Lease, take possession
of the property and seek to recover the present value of future rentals, the
residual value of the property and the value of lost tax benefits.
Lenders having liens on the Atchison facility, including its revolving credit
lender, Wells Fargo Bank, National Association, entered into mortgagee's waivers
with respect to the leased property.
(3) Purchase Commitments at December 31, 2011 included the following:
(a) Commitments ($4,763) to purchase corn to be used in our operations during
the first four weeks of January 2012.
(b) Commitments ($8,373) to purchase natural gas through November, 2012.
(c) Commitments ($8,784) to purchase flour through December , 2012
(d) Commitments ($1,133) related to capital expenditures.
LINE OF CREDIT
Reference is made to Note 4. Corporate Borrowings and Capital Lease Obligations
and above for information on our Credit Agreement. On October 20, 2011 we
entered a Third Amendment ("Third Amendment") to the Credit and Security
Agreement with Wells Fargo Bank National Association (as amended, the "Credit
Agreement"). The Third Amendment affected various provisions of our Credit
Agreement, including those related to interest, amount of borrowings that we can
make and covenants that we must meet.
Subsequent to year end, the Credit Agreement was amended by a Fourth Amendment
("Fourth Amendment") dated January 3, 2012 as further described above in
"-Contractual Obligations" and in Note 22. Subsequent Events.
The amount of borrowings which we may make is subject to borrowing base
limitations. As of December 31, 2011, our outstanding borrowings under this
facility were $21,142, leaving $23,358 available for additional borrowings after
giving effect to outstanding letters of credit. The borrowing base is the lesser
of the maximum line amount or an amount based on specified percentages of
eligible accounts receivable and inventories less specified reserves. The lender
has discretion under the Credit Agreement to change the manner in which the
borrowing base is determined, such as altering the advance rates applicable to
accounts receivable and inventory or changing reserve amounts.
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On February 1, 2012, we sold a 20 percent interest in ICP to ICP Holdings for
$9,103. The proceeds from the sale were used to reduce our outstanding
borrowings under this facility. As of February 29, 2012, our availability was
$19,177.
FINANCIAL COVENANTS
Under the Credit Agreement, we must report adjusted net income each period.
Adjusted net income as defined must not be less than one dollar ($1.00) as of
each quarter end for the 12 month period then ending. The Credit Agreement
defines adjusted net income as net income from continuing operations (which is
inclusive of the bargain purchase gain and related tax effects), including
extraordinary losses and excluding extraordinary gains, adjusted for unrealized
gains and losses from hedging activities, non cash income or losses from equity
method investments and gains or losses from the sale or disposition of assets.
The Company's results for periods ending December 31, 2011 included material
unrealized losses from hedging activities, material non-cash losses from equity
method investments, and a material non-cash bargain purchase gain. Adjusted net
income exceeded the $1.00 requirement, and we were in compliance with this
covenant at December 31, 2011. We must also meet the following ratios.
Fixed Charge Coverage Ratio of not less than 2.00 to 1.00 (measured at each
quarter end for the 12-months then ended), calculated as follows:
(a) the sum of:
(i) net profit
(ii) plus taxes
(iii) plus interest expense
(iv) plus depreciation and amortization expense
(v) minus dividends
(vi) minus non-cash joint venture gain/(loss)
(vii) minus non-cash unrealized hedging gain/(loss)
(viii) minus cash contributions to Joint Ventures (ix) minus $7,000 in deemed per annum maintenance capital expenditures
divided by
(b) the sum of:
(i) current maturities of long term debt
(ii) plus capitalized lease payments and interest expense
Balance Sheet Leverage Ratio (meaning total liabilities divided by tangible net
worth) not to exceed 1.75 to 1.00 (measured as of each quarter end).
The Credit Agreement also includes provisions that limit or restrict our ability
to:
· incur additional indebtedness;
· pay cash dividends to stockholders in excess of $2,000 during 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;
· dispose of assets;
· 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
For the 12-month period ended December 31, 2011, we were not in compliance with
our minimum fixed charge coverage ratio of not less than 2.00 to 1.00. We
obtained a waiver from our primary lender for this default. We also obtained a
waiver from our primary lender for noncompliance related to an administrative
matter that requires submission of specified information to the lender within
120 days of year end for the fiscal years ending June 30, 2011 and 2010.
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The lender has significant lending discretion under the Credit Agreement; it may
modify our borrowing base and various components thereof in its reasonable
discretion, thereby affecting the amount of credit available to us. The lender
may terminate or accelerate our obligations under the Credit Agreement upon the
occurrence of various events in addition to payment defaults and other breaches,
including such matters as over advances arising from reductions in the borrowing
base, certain changes in the Board, failure to pay taxes when due, defaults
under other material debt, lease or other contracts and our CEO ceasing to be
actively engaged in our day to day business activities if we fail to hire a
successor acceptable to the lender within 90 days.
OFF BALANCE SHEET OBLIGATIONS
Arrangement with Cargill. We have entered a business alliance with Cargill,
Incorporated for the production and marketing of a new resistant starch derived
from high amylose corn. We sold only an insignificant amount of the product, and
the agreement with Cargill does not appear to be significant at this time. If we
terminate the arrangement before the expiration of 18 months following certain
force majeure events affecting Cargill, or if Cargill terminates the arrangement
because of a breach by us of our obligations, Processing will be required to pay
a portion (up to 50 percent) of the book value of capital expenditures, if any,
made by Cargill to enable it to produce the product. This amount will not exceed
$2,500 without our consent. Upon the occurrence of any such event, Processing
also will be required to give Cargill a non-exclusive sublicense to use the
patented process for the life of the patent in the production of high amylose
corn-based starches for use in food products. The sublicense would be royalty
bearing, provided we were not also then making the high amylose corn-based
starch.
Arrangements with Grain Supplier. We purchase most of our grain requirements
through a single elevator company. The elevator company may terminate if we fail
to purchase the specified minimums, in which case we would be obligated to pay
the elevator company $260 plus the costs incurred by the elevator company in
contracting with a different customer for the delivery of corn purchased for us
pursuant to our previously issued delivery orders. Our practice has been to only
order corn for a month at a time. We expect our purchases under this contract
will exceed the minimum requirement. We have leased a grain elevator to this
supplier under which we have generally agreed to indemnify the supplier for
damages arising from environmental conditions or our non-compliance with
environmental laws, in each case existing or occurring on or prior to the
commencement date of the lease or occurring thereafter as a result of our
actions.
Industrial Revenue Bond. On December 28, 2006, we engaged in an industrial
revenue bond transaction with the City of Atchison, Kansas in order to receive
ten-year real property tax abatement on our newly constructed office building
and technical center in Atchison, Kansas. At the time of this transaction, the
facilities were substantially completed and had been financed with internally
generated cash flow. We recorded the office building and technical center assets
into property and equipment on the consolidated balance sheets. Pursuant to this
transaction, the City issued $7,000 principal amount of its industrial revenue
bonds to us and then used the proceeds to purchase the office building and
technical center from us. The City then leased the facilities back to Processing
under a capital lease, the terms of which provide for the payment of basic rent
in an amount sufficient to pay principal and interest on the bonds. Processing's
obligation to pay rent under the lease is in the same amount and due on the same
date as the City's obligation to pay debt service on the bonds which we hold.
The lease permits us to present the bonds at any time for cancellation, upon
which our obligation to pay basic rent would be cancelled. We do not intend to
do this until their maturity date in 2016, at which time we may elect to
purchase the facilities for $100. Because we own all outstanding bonds,
management considers the debt de-facto cancelled and, accordingly, no amount for
our obligations under the capital lease is reflected on our balance sheet. In
connection with this transaction, we agreed to pay the city an administrative
fee of $50, which is payable over 10 years. If we were to present the bonds for
cancellation prior to maturity, the $50 fee would be accelerated.
70
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Indemnification Arrangement with ICP and ICP Holdings. Processing's Contribution
Agreement with ICP and the LLC Interest Purchase Agreement with ICP Holdings
require it to indemnify ICP and ICP Holdings from and against any damages or
liabilities arising from a breach of its representations and warranties in the
Contribution Agreement and the LLC Interest Purchase Agreement and also with
respect to certain environmental damages or liabilities related to the
recommencement of production at the Pekin plant or to operations at the Pekin
plant prior to the closing of the LLC Interest Purchase Agreement. The amount of
damages, with the exception of taxes and environmental matters, is limited to a
maximum of $30,000.
ICP Steam Facility. On January 29, 2010, ICP acquired the steam facility that
services the Pekin plant for $5,000, of which $2,000 remains payable at December
31, 2011. Subsequent to December 31, 2011, $1,000 was paid, equally by the
Company and SEACOR Energy Inc., leaving $1,000 payable. The Company and ICP
Holdings each remain committed to equally fund the remaining balance of $1,000.
Indemnification Arrangement with LDI. MGPII's Asset Purchase Agreement with LDI
and Angostura US Holdings Limited, a Delaware Corporation, requires it to
indemnify LDI from and against any damages or liabilities arising from a breach
of representations and warranties in the Asset Purchase Agreement and also with
respect to certain assumed liabilities.
NEW ACCOUNTING PRONOUNCEMENTS
For information with respect to recent accounting pronouncements and the impact
of these pronouncements on our consolidated financial statements, see Note 18.
Recently Issued Accounting Pronouncements set forth in Item 8.
71--------------------------------------------------------------------------------
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