UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December  30, 2007.
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                       to

 

Commission File Number:  0-17196

 

MGP INGREDIENTS, INC.
(Exact name of registrant as specified in its charter)

 

 

(913) 367-1480

(Registrant’s telephone number, including area code)

 

                Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes o No

 

                Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check One)

 

                Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
oYes x No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common stock, no par value

16,548,503 shares outstanding

as of December 30, 2007

 

 

INDEX

 

PART I.  FINANCIAL INFORMATION

 

	Item 1.		Financial Statements
		Report of Independent Registered Accounting Firm
		Condensed Consolidated Statements of Income
		Condensed Consolidated Balance Sheets
		Condensed Consolidated Statements of Cash Flows
		Notes to Condensed Consolidated Financial Statements
	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.		Quantitative and Qualitative Disclosures About Market Risk
	Item 4.		Controls and Procedures
PART II. OTHER INFORMATION
	Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.
	Item 4.		Submission of Matters to a Vote of Security Holders
	Item 5.		Other Information
	Item 6.		Exhibits

 

 

2

Report of Independent Registered Public Accounting Firm

 

Audit Committee, Board of Directors and Stockholders

MGP Ingredients, Inc.

Atchison, Kansas

 

We have reviewed the accompanying condensed consolidated balance sheets of MGP Ingredients, Inc. as of December 30, 2007 and December 31, 2006, and the related condensed consolidated statements of income for the three-month and six-month periods ended December 30, 2007 and December 31, 2006, and cash flows for the six-month periods ended December 30, 2007 and December 31, 2006.  These interim financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of July 1, 2007 and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated August 31, 2007, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of July 1, 2007 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

                                                                                                                                /s/ BKD, LLP

 

Kansas City, Missouri

February 7, 2008

 

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MGP INGREDIENTS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

		Quarter Ended								Year to Date Ended
		December 30, 2007				December 31, 2006				December 30, 2007				December 31, 2006
		Dollars in thousands except per share amounts
Net sales		$	93,995		$		87,645		$		181,972		$		172,640
Cost of sales		90,741			71,147				172,799				140,609
Gross profit		3,254			16,498				9,173				32,031
Selling, general and administrative expenses		4,815			5,108				11,094				9,967
Income (loss) from operations		(1,561		)	11,390				(1,921			)	22,064
Other income, net		(76		)	200				114				560
Gain on settlement of litigation, net of related expenses		7,046			—				7,046				—
Interest expense		(405		)	(232			)	(681			)	(451			)
Income before income taxes		5,004			11,358				4,558				22,173
Provision (benefit) for income taxes		(260		)	4,523				(388			)	8,362
Net income		5,264			6,835				4,946				13,811
Other comprehensive income (loss), net of tax:		4,284			125				5,634				(65			)
Comprehensive income		$	9,548		$		6,960		$		10,580		$		13,746
Per Share Data
Total basic earnings per common share		$	0.32		$		0.42		$		0.30		$		0.84
Total diluted earnings per common share		$	0.31		$		0.40		$		0.29		$		0.82
Dividends per common share		$	0.15		$		0.20		$		0.15		$		0.20

 

See Notes to Condensed Consolidated Financial Statements

 

 

4

MGP INGREDIENTS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		December 30, 2007			December 31, 2006			July 1, 2007
		(unaudited)			(unaudited)
		Dollars in thousands, except share and per share amounts
ASSETS
Current Assets
Cash and cash equivalents		$	—		$	10,479		$	3,900
Restricted cash		3			3,146			3,336
Receivables (less allowance for doubtful accounts:
December 30, 2007 - $223; December 31, 2006 -$320 and July 1, 2007 -$207)		34,784			35,861			34,298
Inventory		61,287			35,339			42,595
Prepaid expense		2,167			2,705			623
Deposits		3,247			551			414
Deferred income taxes		2,394			4,277			5,759
Refundable income taxes		—			—			364
Total current assets		103,882			92,358			91,289
Property and equipment, at cost		363,867			346,311			360,472
Less accumulated depreciation		(235,602		)	(221,505		)	(228,260		)
Property and equipment, net		128,265			124,806			132,212
Investment in joint venture		358			—			—
Other assets		511			205			803
Total assets		$	233,016		$	217,369		$	224,304
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current maturities of long-term debt		$	3,826		$	3,761		$	4,151
Revolving credit facility		10,000			—			7,000
Accounts payable		16,061			16,211			15,814
Accrued expenses		7,801			5,958			7,769
Income taxes payable		21			1,614			—
Deferred revenue		7,115			8,609			7,851
Total current liabilities		44,824			36,153			42,585
Long-Term debt		7,169			10,612			8,940
Postretirement and pension benefits		8,115			6,775			7,860
Deferred income taxes		16,269			16,955			16,771
Stockholders’ Equity
Capital stock
Preferred, 5% non-cumulative; $10 par value; authorized 1,000 shares; issued and outstanding 437 shares		4			4			4
Common stock
No par value; authorized 40,000,000 shares; issued 19,530,344 shares		6,715			6,715			6,715
Additional paid-in capital		9,198			9,500			9,084
Retained earnings		151,414			146,732			148,929
Accumulated other comprehensive income (loss)		4,402			(547		)	(1,232		)
		171,733			162,404			163,500
Treasury stock, at cost
Common; December 30, 2007 - 2,981,841 shares; December 31, 2006 - 3,073,884 shares and July 1, 2007 - 3,037,454 shares		(15,094		)	(15,530		)	(15,352		)
Total stockholders’ equity		156,639			146,874			148,148
Total liabilities and stockholders’ equity		$	233,016		$	217,369		$	224,304

 

See Notes to Condensed Consolidated Financial Statements

 

5

MGP INGREDIENTS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Year to Date Ended

(Unaudited)

 

		December 30, 2007			December 31, 2006
		Dollars in thousands
Cash Flows from Operating Activities
Net income		$	4,946		$	13,811
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,644			6,993
Loss (gain) on sale of assets		10			(3		)
Deferred income taxes		2,921			1,974
Changes in working capital items:
Restricted cash		3,333			(855		)
Accounts receivable		(486		)	(3,664		)
Inventory		(13,059		)	(4,937		)
Accounts payable and accrued expenses		348			2,295
Deferred revenue		(736		)	(765		)
Income taxes payable/receivable		385			(2,596		)
Other		(4,360		)	(2,158		)
Net cash provided by operating activities		946			10,095
Cash Flows from Investing Activities
Additions to property and equipment		(3,228		)	(9,281		)
Investments in and advances to joint venture		(358		)	—
Proceeds from disposition of equipment		—			87
Net cash used in investing activities		(3,586		)	(9,194		)
Cash Flows from Financing Activities
Purchase of treasury stock		—			(1,938		)
Proceeds from stock plans		372			2,142
Principal payments on long-term debt		(2,096		)	(1,778		)
Proceeds from line of credit		11,000			—
Principal payments on line of credit		(8,000		)	—
Dividends paid		(2,536		)	(3,343		)
Net cash used in financing activities		(1,260		)	(4,917		)
Decrease in cash and cash equivalents		(3,900		)	(4,016		)
Cash and cash equivalents, beginning of year		3,900			14,495
Cash and cash equivalents, end of period		$	—		$	10,479

 

See Notes to Condensed Consolidated Financial Statements

 

 

6

MGP INGREDIENTS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.  Basis of Presentation.

 

The accompanying unaudited condensed consolidated balance sheets of MGP Ingredients, Inc. as of December 30, 2007 and December 31, 2006, condensed consolidated statements of income for the quarter and year to date periods ended December 30, 2007 and December 31, 2006 and the condensed consolidated statements of cash flow for the year to date periods ended December 30, 2007 and December 31, 2006 reflect all adjustments that are, in the opinion of the Company’s management, necessary to fairly present the financial position, results of operations and cash flows of the Company.  Those adjustments consist only of normal recurring adjustments.  The condensed consolidated balance sheet as of July 1, 2007 has been derived from the audited consolidated balance sheet of the Company as of that date.  Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  These condensed consolidated financial statements as of and for the period ended December 30, 2007 should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Form 10-K Annual Report for the fiscal year ended July 1, 2007 filed with the Securities and Exchange Commission.  The condensed consolidated balance sheet as of December 31, 2006 should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Form 10-K Annual Report for the fiscal year ended June 30, 2006 filed with the Securities and Exchange Commission.  The results of operations for the period ended December 30, 2007 are not necessarily indicative of the results to be expected for the full year.  Certain prior year amounts have been reclassified to conform to current year presentation.

 

For the quarter and year to date periods ended December 30, 2007 and December 31, 2006, the Company has reclassified other operating income into cost of sales.  Following a review of the transactions reported within other operating income, management concluded that it would be more appropriate to reclassify them within cost of sales because they  relate to amounts received from transactions involving the sale of by-products or the use of operating assets by third parties which reduce the cost of sales. As a result, for the quarter ended December 31, 2006, cost of sales and gross profit previously reported of $71,322,000 and $16,323,000 respectively, are now reported as $71,147,000 and $16,498,000 respectively.  For the year to date period ended December 31, 2006, cost of sales and gross profit previously reported of $141,380,000 and $31,260,000 respectively, are now reported as $140,609,000 and $32,031,000 respectively.

 

Note 2.  Earnings Per Share.

 

Basic earnings per share data is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period.  Potentially dilutive instruments are stock options and unvested restricted stock awards.

 

 

7

The following is a reconciliation from the weighted average shares used for the basic earnings per share computation to the shares used for the diluted earnings per share computation for the quarters and year to date periods ended December 30, 2007 and December 31, 2006, respectively.

 

		Quarter Ended				Year to Date
Weighted average shares:		December 30, 2007		December 31, 2006		December 30, 2007		December 31, 2006
Basic Shares:		16,513,162		16,440,705		16,505,755		16,374,787
Additional weighted average shares attributable to:
Stock options:		128,701		262,886		169,596		263,873
Unvested restricted stock awards:		201,191		261,948		218,973		263,924
Diluted Shares:		16,843,054		16,965,539		16,894,324		16,902,584

 

Note 3.  Segment Changes.

 

In the quarter ended September 30, 2007, the Company expanded the number of operating segments from two to three.  Following a review of the Company’s business, management concluded that it would be more appropriate and would provide the Company’s shareholders with better information if the Company were to include its pet treat resins and plant-based biopolymers in a separate segment.  These are now being reported within the other segment (“Other”).  The ingredients segment has been re-titled ingredient solutions, to better reflect the Company’s integrated approach to providing comprehensive solutions to its ingredient solutions customers.  The ingredient solutions segment continues to report vital wheat gluten, commodity starch, specialty proteins and starches as well as mill products, currently consisting of wheat flour and mill feeds sold primarily for agricultural purposes.  The distillery products segment continues to report food grade alcohol (consisting of beverage and industrial alcohol), fuel grade alcohol and distillery by-products, currently consisting of distillers grain.

 

For the quarter ended December 30, 2007, the Company further refined the methodology for assessing identifiable assets and earnings (loss) before income taxes for all segments resulting in greater allocation to operating segments of identifiable assets and earnings (loss) before income taxes versus non-allocated corporate.  Amounts previously disclosed as identifiable assets as of July 1, 2007 and earnings (loss) before income taxes for the quarter and year to date periods ended December 31, 2006 reflect this revision.

 

Note 4.  Contingencies.

 

The Company is a party to various legal proceedings, all of which are of an ordinary, routine nature and incidental to its operations. Management considers that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the consolidated financial position or operations of the Company.

 

Note 5.  Operating Segments.

 

The Company is a fully integrated producer of ingredient solutions, distillery and other products.  Products included within the ingredient solutions segment consist of vital wheat gluten, commodity wheat starch, specialty wheat starches and proteins and mill feeds.  Distillery products consist of food grade alcohol (consisting of beverage and industrial alcohol), fuel grade alcohol, commonly known as ethanol, and distillers grain and carbon dioxide, which are by-products of the Company’s distillery operations.  Other products include pet treat resins and plant-based biopolymers as well as other products.  For the

 

8

quarter and year to date periods ended December 30, 2007, revenues from products in the Other segment represent less than 2.0 percent of the Company’s consolidated revenues.

 

The operating profit for each segment is based on net sales less identifiable operating expenses.  Interest expense, investment income and other general miscellaneous expenses have been excluded from segment operations and classified as Corporate.  Receivables, inventories and equipment have been identified with the segments to which they relate.  All other assets are considered as Corporate.

 

		Quarter Ended						Year to Date Ended
		December 30, 2007*			December 31, 2006*			December 30, 2007*			December 31, 2006*
(in thousands)
Sales to Customers
Ingredient solutions		$	24,963		$	14,665		$	47,251		$	29,089
Distillery products		67,523			71,682			131,881			140,687
Other		1,509			1,298			2,840			2,864
Total		93,995			87,645			181,972			172,640
Depreciation and amortization
Ingredient solutions		934			1,305			2,057			2,668
Distillery products		2,007			1,715			3,948			3,396
Other		388			320			777			615
Corporate		488			181			862			314
Total		3,817			3,521			7,644			6,993
Income (Loss) before Income Taxes
Ingredient solutions		(124		)	(2,757		)	187			(5,220		)
Distillery products		1,338			15,711			2,017			30,953
Other		(3,075		)	(2,570		)	(4,125		)	(3,669		)
Corporate		(181		)	974			(567		)	109
Gain on settlement of litigation, net of related expenses**		7,046			—			7,046			—
Total		$	5,004		$	11,358		$	4,558		$	22,173
					December 30, 2007*			December 31, 2006*			July 1, 2007*
Identifiable Assets
Ingredient solutions					$	77,092		$	70,298		$	77,658
Distillery products					127,047			110,306			113,915
Other					14,512			13,106			15,726
Corporate					14,365			23,659			17,005
Total					$	233,016		$	217,369		$	224,304

*		For the quarter ended December 30, 2007, the Company further refined the methodology for assessing identifiable assets and earnings (loss) before income taxes for all segments resulting in greater allocation to operating segments of identifiable assets and earnings (loss) before income taxes versus non-allocated corporate. Amounts previously disclosed as identifiable assets as of July 1, 2007 and earnings (loss) before income taxes for the quarter and year to date periods ended December 31, 2006 reflect this revision.
**		For purposes of comparative analysis, the gain on the settlement of litigation realized during the quarter ended December 30, 2007 has been excluded from the segments.

 

9

Note 6.  Pension and Post Retirement Benefit Obligations.

 

Post Retirement Benefits.  The Company and its subsidiaries provide certain post-retirement health care and life benefits to all employees.  The liability for such benefits is unfunded.  The Company uses a May 31 measurement date for the plan.

 

The components of the Net Periodic Benefit Cost for the quarter and year to date periods ended December 30, 2007 and December 31, 2006, respectively, are as follows:

 

		Quarter Ended						Year to Date
		December 30, 2007			December 31, 2006			December 30, 2007			December 31, 2006
(in thousands)
Service cost		$	61		$	61		$	122		$	122
Interest cost		117			115			234			230
Prior service cost		(9		)	(9		)	(18		)	(18		)
(Gain) loss		11			9			22			16
Total post-retirement benefit cost		$	180		$	176		$	360		$	350

 

The Company previously disclosed in its financial statements for the year ended July 1, 2007, amounts expected to be paid to plan participants.  There have been no revisions to these estimates and there have been no changes in the estimate of total employer contributions expected to be made for the fiscal year ended June 29, 2008.

 

Total employer contributions for the quarter and year to date periods ended December 30, 2007 were $142,042 and $145,749 respectively.

 

The Medicare Prescription Drug Improvement Modernization Act of 2003 (the Act) provides certain drug benefits under Medicare Part D, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide benefits at least actuarially equivalent to Medicare Part D.  The Company has been unable to conclude whether the benefits provided under the plan are actuarially equivalent to Medicare Part D.  Accordingly, the net periodic post-retirement benefit costs above do not reflect any amount associated with the subsidy.

 

Pension Benefits.  The Company and its subsidiaries also provide defined retirement benefits to certain employees covered under collective bargaining agreements.  Under the collective bargaining agreements, the Company’s pension funding contributions are a function of the wages paid and are determined as a percentage of wages paid.  The funding is divided between the defined benefit plan and a 401(k) plan.  It has been management’s policy to fund the defined benefit plan first in order to render it adequately funded.  Any remaining amounts have been used to fund the 401(k) plan.  The collective bargaining agreements allow the pension benefits defined under the agreements to be reduced if the funding as described herein is insufficient to provide for such defined benefits. The Company uses a June 30 measurement date for the plan.

 

 

10

The components of the Net Periodic Benefit Cost for the quarter and year to date periods ended December 30, 2007 and December 31, 2006, respectively, are as follows:

 

		Quarter Ended						Year to Date
		December 30, 2007			December 31, 2006			December 30, 2007			December 31, 2006
(in thousands)
Service cost		$	130		$	130		$	260		$	260
Interest cost		35			25			70			50
Expected return on plan assets		(35		)	(25		)	(70		)	(50		)
Prior service cost		6			6			12			12
(Gain) loss		(2		)	(2		)	(4		)	(4		)
Total pension benefit cost		$	134		$	134		$	268		$	268

 

The Company made employer contributions of $665,000 for the year to date period ended December 30, 2007, all of which were paid in the first quarter of fiscal 2008.

 

Note 7.  Newly Implemented Management Incentive Programs.

 

Annual Cash Incentive Plan.  Beginning in the 2008 fiscal year, the Company has implemented a new annual cash incentive plan based upon modified economic profit (“MEP”).  MEP equals income from operations, net of taxes, less the product of total capital employed in the business multiplied by the estimated cost of capital, which for purposes of the new program is 11 percent.  Total capital represents current assets (excluding cash) less current liabilities plus the book value of property, plant and equipment, plus goodwill and other long-term assets.  The Board of Directors approved a five year annual cash incentive plan whereby annual awards are based on improvements in MEP.  The Board has established a targeted annual growth rate for MEP (“Target”) of $3.15 million.   Additionally, there is a starting hypothetical bonus pool amount (“available pool amount”) of $10.5 million, which will amortize in equal increments over five years.  Although it is anticipated that the annual growth rate will be the same for each year of the program, the Company’s compensation committee may change the targeted growth rate from year to year.  The compensation committee may also determine whether any non-recurring or extraordinary items will be included in income from operations.

 

In a year in which the change in MEP from the prior year is positive yet less than the Target amount, participants will receive an incentive payment equal to the change in MEP plus 1/3 of the available pool amount, less the amortized amount.  In a year in which the change in MEP from the prior year is positive and also greater than the Target, the amount of MEP in excess of the Target amount will be added to the available pool amount and the incentive payment will equal the Target amount plus 1/3 of the available pool amount, less the amortized amount.  In a year in which the change in MEP from the prior year is negative, the available pool amount will be reduced by the amount of the negative change in MEP, not to exceed the Target amount, and the incentive payment, if any, will equal 1/3 of the remaining available pool amount, less the amortized amount.  The compensation committee must approve and may adjust any award prior to payment.

 

Restricted Stock Program.  The Company has also implemented a new restricted stock program which will be administered under the Company’s 2004 Stock Incentive Plan and under which amounts awarded will be based in part on improvements to MEP. Under the program, subject to the availability of shares under the 2004 Stock Incentive Plan, restricted stock awards will be made each year and generally will be based on a percentage (approximately 85.7 percent) of the increase in MEP over the prior year. However, the maximum grant date market value of the awards made for any year to all participants will be $4.5 million and the minimum grant date market value made in any year to all participants, including years in which the change in MEP is negative,  will be $1.5 million. The actual number of shares issued to all participants will be determined on the date the Committee certifies the increase in MEP for fiscal 2008.  Shares awarded will vest in 5 years and will pay dividends during the vesting period. Provisions for for-

 

11

feiture and accelerated and pro rata vesting generally are similar to those under the guidelines for the Company’s outstanding performance accelerated restricted stock awards.

 

Note 8.  Gain on Settlement of Litigation.

 

On December 27, 2007, the Company settled its two year patent infringement and contract litigation.  Under the terms of the settlement, the Company agreed to dismiss its lawsuit with prejudice and was paid $8 million, which was received on December 28, 2007.  In connection with the settlement, the Company also granted the other parties in the lawsuit a non-exclusive license under its U.S. Patent No. 5,665,152.  For the first and second quarters of Fiscal 2008, the Company incurred professional fees of $568,000 and $386,000 respectively, related to this litigation.  These amounts have been netted against the gross proceeds for a net amount of $7,046,000.  The Company has recorded the settlement as a separate line item below income from operations.  The Company used the proceeds from the settlement to reduce the amount outstanding under its line of credit.

 

Note 9.  FIN 48 Implementation.

 

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), clarifies the accounting for uncertainty in income taxes by defining criteria that a tax position on an individual matter must meet before that position is recognized in the financial statements.  Additionally, FIN 48 provides guidance on measurement, derecognition, balance sheet classification, interest and penalties, interim period accounting, disclosures and transition.

 

The Company adopted the provisions of FIN 48 on July 2, 2007.  In accordance with the recognition standards established by FIN 48, the Company performed a comprehensive review of potential uncertain tax positions in each jurisdiction in which the Company operates. As a result of the Company’s review, the Company adjusted the carrying amount of the liability for unrecognized tax benefits resulting in a net increase to retained earnings of $59,000.  The Company’s gross liability for unrecognized tax provision is $1.49 million as of July 2, 2007.  The Company has recorded deferred tax assets of $711,000 related to the recording of the liability for unrecognized tax benefits.

 

In accordance with FIN 48, the Company has elected to treat interest and penalties related to tax liabilities as a component of income tax expense.  As of the date of adoption, the Company had $199,000 accrued for the payment of interest, and $11,000 accrued for the payment of penalties, which was included in the $1.49 million unrecognized tax benefit liability discussed above.

 

The amount of the Company’s liability for uncertain tax benefits at July 2, 2007 that would impact the effective tax rate if recognized was $783,000.

 

During the first quarter of fiscal 2008, the Company settled an IRS exam related to its June 30, 2005 and June 30, 2006 tax years.  An assessment of $85,000 was paid as a result of this exam.  The tax and interest assessed was previously recorded as part of the adoption of FIN 48.

 

The statute of limitations for the Company’s federal income tax returns is open for fiscal years ending on or after the June 30, 2004.  The Company files in the states of Kansas, Illinois and Pennsylvania.  The statute of limitations on these state tax returns is open for fiscal years ending on or after June 30, 2004.

 

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ITEM 2.          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

FORWARD-LOOKING STATEMENTS

 

This section contains forward-looking statements as well as historical information.  All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q regarding the prospects of our industry and our prospects, plans, financial position and business strategy may constitute forward-looking statements.  In addition, forward-looking statements are usually identified by or are associated with such words as “intend,” “plan”, “believe,” “estimate,” “expect,” “anticipate,” “hopeful,” “should,” “may,” “will”, “could” and or the negatives of these terms or variations of them or similar terminology.  They reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, Company performance and financial results and are not guarantees of future performance.  All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement.  Important factors that could cause actual results to differ materially from our expectations include, among others:  (i) the availability and cost of grain, (ii) fluctuations in gasoline prices, (iii) fluctuations in energy costs, (iv) competitive environment and related market conditions, (v) our ability to realize operating efficiencies, (vi) the effectiveness of our hedging programs, (vii) access to capital and (viii) actions of governments.  For further information on these and other risks and uncertainties that may affect our business, see Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended July 1, 2007.

 

RESULTS OF OPERATIONS

 

General

 

Reference is made to Management’s Discussion and Analysis of Financial Condition and Results of Operations—General, incorporated by reference to Item 7 of our Annual Report on Form 10-K for the fiscal year ended July 1, 2007 for certain general information about our principal products and costs.

 

Critical Accounting Policies

 

Reference is made to Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies, incorporated by reference to Item 7 of our Annual Report on Form 10-K for the fiscal year ended July 1, 2007 for accounting policies which are considered by management to be critical to an understanding of the Company’s financial statements.

 

CHANGES IN SEGMENT REPORTING

 

In the quarter ended September 30, 2007, we expanded the number of our operating segments from two to three.  Following a review of our business, we concluded that it would be more appropriate and would provide our shareholders with better information if we were to include our pet treat resins and plant-based biopolymers in a separate segment.  These are now reported within the other segment (“Other”).  The ingredients segment has been re-titled ingredient solutions, to better reflect our integrated approach to providing comprehensive solutions to our ingredient solutions customers.  The ingredient solutions segment continues to report vital wheat gluten, commodity starch, specialty proteins and starches as well as mill products, currently consisting of wheat flour and mill feeds primarily sold for agricultural purposes.  The distillery products segment continues to report food grade alcohol (consisting of beverage and industrial alcohol), fuel grade alcohol and distillery by-products, currently consisting of distillers grain.

 

 

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For the quarter ended December 30, 2007, we further refined the methodology for assessing identifiable assets and earnings (loss) before income taxes for all segments resulting in greater allocation to operating segments of identifiable assets and earnings (loss) before income taxes versus non-allocated corporate.  Amounts previously disclosed as identifiable assets as of July 1, 2007 and earnings (loss) before income taxes for the quarter and year to date periods ended December 31, 2006 reflect this revision.

 

DEVELOPMENTS IN THE INGREDIENT SOLUTIONS SEGMENT

 

The continued global consumer focus on foods providing health and wellness attributes have provided the basis for the increased demand of our specialty ingredient solutions, specifically in our specialty wheat starch and specialty protein product lines.  We expect this trend to continue for the foreseeable future and have aligned our product development and commercialization efforts around this growing demand.

 

As noted in previous quarters, the March 2007 recall of pet food products containing Chinese wheat flour misrepresented as wheat gluten has caused heightened demand for our vital wheat gluten.  We have met this increased demand with increased vital wheat gluten production from our Atchison, Kansas and Pekin, Illinois manufacturing facilities.  This increase in demand, combined with improved pricing, is also providing a significant impact on the results of our ingredient solutions operations.  We continue to believe this development to be a short-term trend only and in parallel will continue to maintain our long-term focus on the continued development and commercialization of our value-added wheat protein solutions.

 

Record high wheat prices continue to drive up the cost of sales in the ingredient solutions segment as wheat serves as the primary raw material for the majority of the products in this segment.  We expect this extreme condition to continue through the third quarter of fiscal 2008 with some weakening in wheat prices commensurate with the 2008 U.S., E.U., and Australian wheat crops, as wheat plantings are up significantly on a global basis compared to both 2006 and 2007 levels.  The magnitude of any reduction in wheat prices will be directly related to the actual harvested yields, which are primarily influenced by environmental conditions such as precipitation and temperatures.

 

DEVELOPMENTS IN THE DISTILLERY PRODUCTS SEGMENT

 

Profit margins in the distillery products segment, continue to be adversely impacted by the combined effect of higher corn prices and lower ethanol prices.  As industry-wide ethanol production capacity continues to expand, corn prices continue to reflect increased demand related to this increased ethanol production.  Our hedging program, consisting of derivatives and cash purchases, has softened the impact of rising corn prices during the quarter and year to date periods.  However, as of December 30, 2007, we had no derivative contracts in place for periods after fiscal year end, and based upon Chicago Board of Trade Futures, corn prices are expected to increase this summer.  Additionally, increased industrial ethanol production is serving to reduce ethanol pricing on an occasional basis, as increased production often paces ahead of sales. At the date of this report, however, ethanol prices are approximately 12% higher than they averaged during the second quarter. With a larger inventory than at the beginning of the year, and assuming improved production, we expect better results from our distillery operations in the second half of the fiscal year if prices do not decline from current levels. Further, the factors which served to reduce profit margins in our distillery products segment could be mitigated by new biofuel requirements contained within the energy bill signed by President Bush on December 19, 2007.   The bill, which becomes effective for the calendar year 2008, will require the blending of 9.0 billion gallons of biofuel (such as ethanol) in calendar year 2008 and 11.1 billion gallons in calendar year 2009.

 

During the year to date period ended December 30, 2007, measures implemented in fiscal 2007 to improve capacity and strengthen alcohol production efficiencies at our distillery operations in both Atchison, Kansas and Pekin, Illinois were completed and have become operational.  Additionally, during the year to date period ended December 30, 2007, an $11.1 million dryer system for the manufacture of distillers grain became fully operational.  The purpose of this dryer was to improve production efficiencies and lower energy costs as well as fulfill emission control standards.  These factors have expanded production

 

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capacity, yet we have encountered certain fermentation issues related to the alcohol production process that resulted in a production level below maximum capacity.  These were addressed and corrected during the second quarter of fiscal 2008.  Finally, we continue to evaluate options related to reducing energy costs including a potential coal boiler facility at our Pekin, Illinois plant.

 

SEGMENT RESULTS

 

The following is a summary of revenues and pre-tax profits / (loss) allocated to each reportable operating segment for the quarterly and year to date periods ended December 30, 2007 and December 31, 2006.  For additional information regarding our operating segments, see Note 5-Operating Segments included under Part 1, Item 1, Financial Statements of this Form 10-Q and incorporated herein by reference.

 

		Quarter Ended						Year to Date
		December 30, 2007			December 31, 2006			December 30, 2007			December 31, 2006
(in thousands)
Ingredient solutions
Net Sales		$	24,963		$	14,665		$	47,251		$	29,089
Pre-Tax Income (Loss)		(124		)	(2,757		)	187			(5,220		)
Distillery products
Net Sales		67,523			71,682			131,881			140,687
Pre-Tax Income (Loss)		1,338			15,711			2,017			30,953
Other
Net Sales		1,509			1,298			2,840			2,864
Pre-Tax Income (Loss)		(3,075		)	(2,570		)	(4,125		)	(3,669		)

 

GENERAL

 

Consolidated  net income for the second quarter of fiscal 2008 decreased compared to the same period in fiscal 2007 with net income of $5,264,000 on consolidated sales of $93,995,000 versus net income of $6,835,000 on consolidated sales of $87,645,000 in the second quarter of fiscal 2007.  While earnings in the ingredient solutions segment improved over the same period in fiscal 2007, earnings in our distillery products segment declined significantly due primarily to continued higher corn prices coupled with reduced ethanol prices and unit sales.  The negative earnings performance in the other segment, consisting primarily of developing business lines for pet product and plant-based biopolymer applications, was slightly improved over the same quarter for fiscal 2007.

 

Pre-tax losses of $124,000, including inventory write-downs of $938,000, were reported in the ingredient solutions segment.  Pre-tax losses of $3,075,000, including inventory write-downs of $356,000, were reported in our other segment

 

Year to date consolidated net income for fiscal 2008 also declined compared to fiscal 2007 with net income of $4,946,000 on sales of $181,972,000 compared to net income of $13,811,000 on sales of $172,640,000, principally as a result of a decline in our distillery products segment resulting from continued higher corn prices coupled with reduced ethanol prices and unit sales.  Earnings in the ingredient solutions segment improved over the same period in fiscal 2007 with a return to profitability.  A negative earnings performance in the other segment, consisting primarily of developing business lines for pet product and plant-based biopolymer applications, more than offset profitability in the ingredient solutions and distillery products segments.

 

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For the quarter and year to date period ended December 30, 2007, we realized a net gain on the settlement of our two year patent infringement and contract litigation of $7,046,000, net of related professional fees of $568,000 and $386,000, respectively, incurred during the first and second quarters of fiscal 2008.  Additionally, during the quarter ended December 30, 2007, management reassessed the need for a valuation allowance which previously offset the deferred tax asset related to certain state tax credit carryforwards.  It was determined that the valuation allowance was no longer appropriate and was therefore removed, resulting in a net tax benefit in the quarter and year to date periods ended December 30, 2007, of approximately $2.0 million.

 

INGREDIENT SOLUTIONS

 

Total ingredient solutions sales revenue for the quarter ended December 30, 2007 increased by $10.3 million or 70.2 percent, compared to the quarter ended December 31, 2006.  Revenues for specialty ingredients, consisting of specialty proteins and specialty starches, also increased during the first quarter of fiscal 2008 compared to the same quarter in fiscal 2007 by $3.8 million, or 35.1 percent.  Revenues for specialty proteins increased as a result of higher unit sales as well as increased per unit prices.  Revenues for specialty starches rose as the result of improved pricing as well as improved unit sales.  Revenues for vital wheat gluten, which increased $6.3 million, or 183 percent, were as a result of both increased sales volume as well as higher per-unit pricing.  Revenues for commodity starch decreased $115,000, or 12.3 percent, as a result of reduced sales volume consistent with the implementation of our strategy of continued development and commercialization of our value-added wheat proteins and starches.  This decrease in commodity starch unit sales was partially offset by improved per-unit pricing.   While revenues for the ingredient solutions segment improved overall, margins continued to be significantly impacted by increased cost of sales related to record high wheat prices.  The per bushel cost of wheat for the quarter ended December 30, 2007 increased by 51.3 percent over the quarter ended December 31, 2006.

 

Total ingredient solutions sales revenue for the year to date period December 30, 2007 increased by $18.2 million, or 62.4 percent, compared to the year to date period ended December 31, 2006.  Consistent with the quarter, revenues for specialty ingredients, consisting of specialty proteins and specialty starches, increased during the year to date period ended December 30, 2007 compared to the year to date period ended December 31, 2006 by $6.0 million, or 28.4 percent.  Revenues for specialty proteins increased as a result of higher unit sales as well as increased per unit prices.  Revenues for specialty starches rose as the result of improved pricing and unit sales. Revenues for vital wheat gluten, which increased $12.0 million, or 182 percent, were a result of both increased sales volume as well as higher per-unit pricing.    Revenues for commodity starch decreased $827,000, or 36.0 percent, as a result of reduced sales volume consistent with the implementation of our strategy of continued development and commercialization of our value-added wheat proteins and starches.  This decrease in commodity starch unit sales was partially offset by improved per-unit pricing.   While sales revenue for the ingredient solutions segment improved overall, margins continued to be significantly impacted by increased cost of sales related to record high wheat prices.  The per bushel cost of wheat for the year to date period ended December 30, 2007 increased by 35.8 percent over the year to date period ended December 31, 2006.

 

DISTILLERY PRODUCTS

 

Total distillery products sales revenue for the quarter ended December 30, 2007 decreased $4.2 million, or 5.8 percent, compared to the quarter ended December 31, 2006.  This decrease was due to reduced revenues for fuel grade alcohol of $8.1 million due to reduced ethanol prices as well as reduced production levels related to fermentation problems.  Decreases in revenues for fuel grade alcohol were partially offset by increased revenue from food grade alcohol of $2.3 million attributable to increased per-unit prices partially offset by a slight decline in production levels related to fermentation problems.  Distillers grain revenue for the quarter ended December 30, 2007 increased $846,000, or 11.7 percent, over the

 

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quarter ended December 31, 2006 as a result of improved pricing offset partially by reduced unit sales.   In addition to reduced revenues for distillery products for the quarter ended December 30, 2007, margins were significantly impacted by increased cost of sales related to increased corn prices compared to the quarter ended December 31, 2006.  For the quarter ended December 30, 2007, the per-bushel cost of corn, adjusted for the impact of our hedging practices, averaged nearly 37.8 percent higher than the quarter ended December 31, 2006.   These increased costs, coupled with reduced revenues, yielded a substantially reduced profit for the segment.

 

Total distillery products sales revenue for the year to date period ended December 30, 2007 decreased $8.8 million, or 6.3 percent, compared to the year to date period ended December 31, 2006.  Consistent with the quarter, this decrease was due to reduced revenues for fuel grade alcohol of $14.5 million due to reduced ethanol prices as well as reduced production levels related to fermentation problems. Decreases in revenues for fuel grade alcohol were partially offset by increased revenue from food grade alcohol of $4.3 million attributable to increased per-unit prices partially offset by a slight decline in unit sales.  Distillers grain revenue for the year to date period ended December 30, 2007 increased $2.1 million, or 14.3 percent, over the year to date period ended December 31, 2006 as a result of improved pricing offset partially by reduced unit sales.   In addition to reduced revenues for distillery products for the year to date period ended December 30, 2007, margins were significantly impacted by increased cost of sales related to increased corn prices compared to the year to date period ended December 31, 2006.  For the year to date period ended December 30, 2007, the per-bushel cost of corn, adjusted for the impact of our hedging practices, averaged nearly 49.3 percent higher than the year to date period  ended December 31, 2006.   These increased costs, coupled with reduced revenues, yielded a substantially reduced profit for the segment.

 

OTHER PRODUCTS

 

For the quarter ended December 30, 2007, revenues for other products, consisting primarily of pet products and plant-based biopolymers, increased $211,000, or 16.3 percent, compared to the quarter ended December 31, 2006, primarily as a result of improved per-unit prices related to product mix, as well as increased unit sales.

 

For the year to date period ended December 30, 2007, revenues for other products were relatively flat compared to the year to date period ended December 31, 2006 as increases in revenues related to improved pricing were relatively offset by reduced sales due to volume decreases.

 

SALES

 

Net sales for the quarter ended December 30, 2007 increased $6.4 million, or 7.2 percent, compared to the quarter ended December 31, 2006 as a result of increased sales in the ingredient solutions segment related to improvements in unit sales as well as overall improvements in pricing for both commodity and specialty products.  These increases were partially offset by reduced revenues in the distillery products segment resulting mainly from reduced per unit prices and reduced production for fuel grade alcohol.  For fuel grade alcohol, the per-unit price declined nearly 9.9 percent and unit sales declined over 12.0 percent.  Per unit prices for food grade alcohol improved approximately 11.7 percent compared to the quarter ended December 31, 2006 while unit sales in this area declined approximately 2 percent.  Revenues for distillers grain improved as a result of increased per-unit pricing.  Net sales for our other segment increased $211,000 as a result of both improved unit sales as well as improved per-unit pricing.

 

Net sales for the year to date period ended December 30, 2007 increased $9.3 million, or 5.4 percent, compared to the year to date period ended December 31, 2006 as a result of increased sales in the ingredient solutions segment related to improvements in unit sales as well as overall improvements in pricing for

 

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both commodity and specialty products.  These increases were partially offset by reduced revenues in the distillery products segment resulting principally from reduced per unit prices and unit sales for fuel grade alcohol.  For fuel grade alcohol, the per-unit price declined nearly 10.9 percent while unit sales declined over 9.0 percent.  Per unit prices for food grade alcohol improved approximately 11.1 percent during the year to date period while unit sales declined approximately 3.2 percent.  Revenues for distillers grain improved as a result of increased per-unit pricing.  Net sales for our other segment for the year to date period ended December 30, 2007 remained relatively flat compared to the year to date period ended December 31, 2006 as the result of improved per-unit pricing being offset by lower unit sales.

 

COST OF SALES

 

For the quarter and year to date periods ended December 30, 2007, cost of sales rose $19.6 million (27.5 percent) and $32.2 million (22.9 percent), respectively compared to the quarter and year to date periods ended December 31, 2006.  For both the quarter and year to date periods, these increases were primarily the result of higher grain costs and higher costs of other inputs used in the manufacturing process.  Higher grain costs were directly the result of higher grain prices during both the quarter and year to date periods ended December 30, 2007 compared to the quarter and year to date periods ended December 31, 2006.  For the quarter ended December 30, 2007, the per-bushel cost of corn, adjusted for the impact of our hedging practices, averaged nearly 37.8 percent higher than the quarter ended December 31, 2006.  For the year to date period ended December 30, 2007, the per-bushel cost of corn, adjusted for the impact of our hedging practices, averaged nearly 49.3 percent higher than the year to date period ended December 31, 2006.   For the quarter ended December 30, 2007, the per-bushel cost of wheat averaged nearly 51.3 percent higher than the quarter ended December 31, 2006 while the average cost for natural gas declined 5.0 percent.  For the year to date period ended December 30, 2007, the per-bushel cost of wheat averaged nearly 35.8 percent higher than the year to date period ended December 31, 2006 while the average cost for natural gas rose 1.4 percent.

 

During the quarter ended December 30, 2007, we identified a portion of our inventory that we felt was either no longer aligned with our new technology platforms or in need of additional processing to meet necessary quality standards, resulting in a charge to earnings of $1.3 million.

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

Selling, general and administrative expenses for the second quarter of fiscal 2008 decreased by $293,000 to $4,815,000 from $5,108,000 for the same period in fiscal 2007.  This decline was primarily the result of the reclassification of $568,000 in professional expenses incurred in the first quarter related to the gain on settlement of litigation incurred during the 1^st quarter of fiscal 2008 to the gain on settlement of litigation from selling, general and administrative expenses.  Selling, general and administrative expenses also decreased as a result of lower compensation costs related to the Company’s management incentive programs.  This decrease was partially offset by the impact of higher compensation costs related to administrative and research and development staffing additions.  Additionally, we incurred increased costs related to the implementation of certain information technology and communication systems, increased costs related to employee health care benefits as well as increased occupancy costs related to our new administrative offices and technology center.

 

Selling, general and administrative expenses for the year to date period ended December 30, 2007 increased by $1,127,000 to $11,094,000 from $9,967,000 for the year to date period ended December 31, 2006.  This year to date increase was primarily the result of higher compensation costs related to administrative as well as  research and development staffing additions, increased costs related to the implementation of certain information technology and communication systems, increased costs related to employee health care benefits as well as increased occupancy costs related to our new administrative offices and

 

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technology center.  These factors, which led to an increase in selling, general and administrative expenses, were partially offset by reduced incentive compensation costs.  Selling, general and administrative expenses for the year to date period ended December 30, 2007 have also been adjusted by a reduction of $954,000 to reclassify first and second quarter legal and professional expenses related to the gain on settlement of litigation from selling, general and administrative to the gain on settlement of litigation.

 

We anticipate selling, general and administrative costs will continue throughout the remainder of the fiscal year at approximately the same level experienced in the year to date period ended December 30, 2007.

 

OTHER INCOME, NET

 

Other income, net, decreased $276,000 (138.0 percent) and $446,000 (79.6 percent), for the quarter and year to date periods ended December 30, 2007 respectively, compared to the quarter and year to date periods ended December 31, 2006.  These decreases were principally attributable to changes in interest capitalized as well as the effect of certain other non-recurring, non-operating revenue items.  It is our practice to credit other income for interest incurred that is capitalized.

 

GAIN ON SETTLEMENT OF LITIGATION

 

On December 27, 2007, the Company settled its two year patent infringement and contract litigation.  Under the terms of the settlement, the Company agreed to dismiss its lawsuit with prejudice and was paid $8 million, which was received on December 28, 2007.  In connection with the settlement, the Company also granted the other parties in the lawsuit a non-exclusive license under its U.S. Patent No. 5,665,152.  For the first and second quarters of Fiscal 2008, the Company incurred professional fees of $568,000 and $386,000 respectively, related to this litigation.  These amounts have been netted against the gross proceeds for a net amount of $7,046,000.  The Company has recorded the settlement as a separate line item below income from operations.  The Company used the proceeds from the settlement to reduce the amount outstanding under its line of credit.

 

INTEREST EXPENSE

 

Interest expense for the second quarter of fiscal 2008 increased $173,000 compared to the second quarter of fiscal 2007.  For the year to date period ended December 30, 2007, interest expense increased $230,000 compared to the year to date period ended December 31, 2006.  These increases were the result of higher balances on our outstanding line of credit compared to the same periods in the prior year.  These increases were partially offset by reduced balances on our long-term notes payable.

 

INCOME TAXES

 

For the quarter ended December 31, 2007, our income tax benefit was $260,000 for an effective rate of (5.2) percent compared to a provision of $4.5 million for the quarter ended December 31, 2006 for an effective rate of 39.8 percent.  For the year-to-date period ended December 31, 2007, our income tax benefit was $388,000 for an effective rate of (8.5) percent compared to a provision of $8.4 million for the year-to-date period ended December 31, 2006 for an effective rate of 37.7 percent.  Excluding certain one-time discrete items applicable to this quarter (discussed below), our effective rate was 34.0 percent.

 

As of December 31, 2007, we had approximately $3.0 million in unused Kansas State Income Tax Credits (“tax credits”) related to capital investments we have made at our Atchison, Kansas facility.  During the quarter, management reassessed the need for a valuation allowance which previously offset the deferred tax asset related to the credit carryforwards.  It was determined that the valuation allowance was no longer appropriate and was therefore removed, resulting in a new tax benefit in the quarter of approximately $2.0

 

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million.  The tax credit carryforwards will expire as follows: $1.7 million generated in fiscal year 2005 will expire in fiscal year 2014; $1.3 million generated in fiscal year 2006 will expire in fiscal year 2015.

 

NET INCOME

 

As the result of the foregoing factors, we experienced net income of $5,264,000 in the quarter ended December 30, 2007 compared to net income of $6,835,000 in the quarter ended December 31, 2006.  For the year to date period ended December 30, 2007, we experienced net income of $4,946,000 compared to $13,811,000 for the year to date period ended December 31, 2006.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The following table is presented as a measure of our liquidity and financial condition:

(Dollars in thousands)

 

		December 30, 2007			July 1, 2007
Cash and cash equivalents		$	—		$	3,900
Working capital		59,058			48,704
Amounts available under lines of credit		10,000			13,000
Notes payable and long-term debt		20,995			20,091
Stockholders’ equity		156,639			148,148
		Year to Date Ended
		December 30, 2007			December 31, 2006
Depreciation and amortization		7,644			6,993
Capital expenditures		3,228			9,281
EBITDA(1)		12,883			29,617

(1)   EBITDA equals earnings before interest, taxes, depreciation and amortization.

 

EBITDA

 

We have included EBITDA because we believe it provides investors with additional information to measure our performance and liquidity.  EBITDA is not a recognized term under generally accepted accounting principles (“GAAP”) and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity.  Additionally, it is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements.  Because not all companies use identical calculations, this presentation may not be comparable to other similarly titled measures of other companies.

 

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The following table sets forth a reconciliation of net income to EBITDA for the year to date periods ended December 30, 2007 and December 31, 2006 (in thousands):

 

		Year to Date Ended
		December 30, 2007			December 31, 2006
Net income		$	4,946		$	13,811
Provision (benefit) for income taxes		(388		)	8,362
Interest expense		681			451
Depreciation		7,644			6,993
EBITDA		$	12,883		$	29,617

 

The following table sets forth a reconciliation of EBITDA  to cash flows from operations for the year to date periods ended December 30, 2007 and December 31, 2006 (in thousands):

 

		Year to Date Ended
		December 30, 2007			December 31, 2006
EBITDA		$	12,883		$	29,617
Benefit (provision) for income taxes		388			(8,362		)
Interest expense		(681		)	(451		)
Non-cash charges against (credits to) net income:
Deferred income taxes		2,921			1,974
Loss (gain) on sale of assets		10			(3		)
Changes in operating assets and liabilities		(14,575		)	(12,680		)
Cash flow from operations		$	946		$	10,095

 

 

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CASH FLOW INFORMATION

 

Summary cash flow information follows for the year-to-date periods ended December 30, 2007 and December 31, 2006, respectively:  (Dollars in thousands)

 

		Year-to-Date Ended
		December 30, 2007			December 31, 2006
Cash flows provided by (used for):
Operating activities		$	946		$	10,095
Investing activities		(3,586		)	(9,194		)
Financing activities		(1,260		)	(4,917		)
Increase (decrease) in cash and cash equivalents		(3,900		)	(4,016		)
Cash and cash equivalents at beginning of year		3,900			14,495
Cash and cash equivalents at end of year		$	—		$	10,479

 

During the year-to-date period ended December 30, 2007, our consolidated cash decreased $3,900,000 compared to a decrease of $4,016,000 during the year-to-date period ended December 31, 2006.  The current year’s decrease was primarily a result of reduced operating cash flow resulting from an increase in inventory carrying costs, other current assets and reduced net income from $13,811,000 to $4,946,000 (including the net gain on settlement of litigation of $7,046,000).  The impact of reduced operating cash flow was partially offset by reduced cash outflows related to capital expenditures during the year-to-date ended December 30, 2007 compared to the year-to-date ended December 31, 2006.  Additionally, net proceeds from our line of credit provided a source of cash.  Historically, the principal sources of cash are operating cash flow, proceeds from stock plans and the issuance of long-term debt.  Principal uses of cash are capital expenditures, payment of debt and the payment of dividends.

 

Operating Cash Flows.  Summary operating cash flow information for the year-to-date periods ended December 30, 2007 and December 31, 2006, respectively, is as follows:  (Dollars in thousands):

 

		Year-to-Date Ended
		December 30, 2007			December 31, 2006
Net income		$	4,946		$	13,811
Depreciation		7,644			6,993
Loss (gain) on sale of assets		10			(3		)
Deferred income taxes		2,921			1,974
Changes in working capital items:
Restricted cash		3,333			(855		)
Accounts receivable		(486		)	(3,664		)
Inventory		(13,059		)	(4,937		)
Accounts payable and accrued expenses		348			2,295
Deferred revenue		(736		)	(765		)
Income taxes payable/receivable		385			(2,596		)
Other		(4,360		)	(2,158		)
Net cash provided by operating activities		$	946		$	10,095

 

 

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