Attached files
file | filename |
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EX-32 - EX-32 - PENFORD CORP | d70632exv32.htm |
EX-31.1 - EX-31.1 - PENFORD CORP | d70632exv31w1.htm |
EX-31.2 - EX-31.2 - PENFORD CORP | d70632exv31w2.htm |
EX-10.16 - EX-10.16 - PENFORD CORP | d70632exv10w16.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 30, 2009
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 No. 0-11488
PENFORD CORPORATION
(Exact name of registrant as specified in its charter)
Washington | 91-1221360 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
|
7094 South Revere Parkway, | ||
Centennial, Colorado | 80112-3932 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code: (303) 649-1900
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
o
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | Accelerated Filer þ | Non-Accelerated Filer o (Do not check if a smaller reporting company) | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o No þ
The net number of shares of the Registrants common stock (the Registrants only outstanding class
of stock) outstanding as of January 6, 2010 was 11,371,272.
PENFORD CORPORATION AND SUBSIDIARIES
INDEX
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1: | Financial Statements |
PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, | August 31, | |||||||
(In thousands, except per share data) | 2009 | 2009 | ||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 19,377 | $ | 5,540 | ||||
Trade accounts receivable, net |
30,362 | 32,192 | ||||||
Inventories |
18,461 | 18,155 | ||||||
Prepaid expenses |
4,303 | 5,081 | ||||||
Income tax receivable |
3,238 | 3,892 | ||||||
Other |
3,077 | 3,476 | ||||||
Current assets of discontinued operations |
22,291 | 38,486 | ||||||
Total current assets |
101,109 | 106,822 | ||||||
Property, plant and equipment, net |
116,778 | 119,049 | ||||||
Restricted cash value of life insurance |
9,785 | 9,761 | ||||||
Deferred tax assets |
12,761 | 8,277 | ||||||
Other assets |
1,638 | 2,075 | ||||||
Other intangible assets, net |
463 | 481 | ||||||
Goodwill, net |
8,171 | 7,553 | ||||||
Non-current assets of discontinued operations |
| 4,227 | ||||||
Total assets |
$ | 250,705 | $ | 258,245 | ||||
Liabilities and shareholders equity |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt and capital
lease obligations (Note 7) |
$ | 84,879 | $ | 21,241 | ||||
Accounts payable |
15,530 | 14,745 | ||||||
Accrued liabilities |
9,651 | 8,972 | ||||||
Current liabilities of discontinued operations |
7,084 | 16,028 | ||||||
Total current liabilities |
117,144 | 60,986 | ||||||
Long-term debt and capital lease obligations |
2,442 | 71,141 | ||||||
Other postretirement benefits |
17,953 | 17,678 | ||||||
Pension benefit liability |
18,043 | 18,043 | ||||||
Other liabilities |
8,401 | 8,187 | ||||||
Non-current liabilities of discontinued operations |
| 2,851 | ||||||
Total liabilities |
163,983 | 178,886 | ||||||
Shareholders equity: |
||||||||
Preferred stock, par value $1.00 per share,
authorized 1,000 shares, none issued |
| | ||||||
Common stock, par value $1.00 per share,
authorized 29,000 shares, issued 13,175 and
13,157 shares, respectively, including treasury
shares |
13,175 | 13,157 | ||||||
Additional paid-in capital |
93,964 | 93,829 | ||||||
Retained earnings |
12,442 | 7,944 | ||||||
Treasury stock, at cost, 1,981,016 shares |
(32,757 | ) | (32,757 | ) | ||||
Accumulated other comprehensive loss |
(102 | ) | (2,814 | ) | ||||
Total shareholders equity |
86,722 | 79,359 | ||||||
Total liabilities and shareholders equity |
$ | 250,705 | $ | 258,245 | ||||
3
Table of Contents
PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Unaudited)
Three months ended | ||||||||
November 30, | November 30, | |||||||
(In thousands, except per share data) | 2009 | 2008 | ||||||
Sales |
$ | 67,070 | $ | 59,584 | ||||
Cost of sales |
56,442 | 54,179 | ||||||
Gross margin |
10,628 | 5,405 | ||||||
Operating expenses |
6,488 | 6,043 | ||||||
Research and development expenses |
998 | 1,123 | ||||||
Flood related costs, net of insurance proceeds |
| (4,234 | ) | |||||
Income from operations |
3,142 | 2,473 | ||||||
Interest expense |
1,798 | 1,270 | ||||||
Other non-operating income (expense), net |
636 | (606 | ) | |||||
Income from continuing operations before income taxes |
1,980 | 597 | ||||||
Income tax expense |
924 | 34 | ||||||
Income from continuing operations |
1,056 | 563 | ||||||
Income (loss) from discontinued operations, net of tax |
3,482 | (932 | ) | |||||
Net income (loss) |
$ | 4,538 | $ | (369 | ) | |||
Weighted average common shares and equivalents outstanding: |
||||||||
Basic |
11,183 | 11,155 | ||||||
Diluted |
11,266 | 11,299 | ||||||
Earnings (loss) per common share: |
||||||||
Basic earnings per share from continuing operations |
$ | 0.09 | $ | 0.05 | ||||
Basic earnings (loss) per share from discontinued operations |
$ | 0.31 | $ | (0.08 | ) | |||
Basic earnings (loss) per share |
$ | 0.40 | $ | (0.03 | ) | |||
Diluted earnings per share from continuing operations |
$ | 0.09 | $ | 0.05 | ||||
Diluted earnings (loss) per share from discontinued operations |
$ | 0.31 | $ | (0.08 | ) | |||
Diluted earnings (loss) per share |
$ | 0.40 | $ | (0.03 | ) | |||
Dividends declared per common share |
$ | | $ | 0.06 |
The accompanying notes are an integral part of these statements.
4
Table of Contents
PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Three Months Ended | ||||||||
November 30, | November 30, | |||||||
(In thousands) | 2009 | 2008 | ||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 4,538 | $ | (369 | ) | |||
Less: Income (loss) from discontinued operations |
3,482 | (932 | ) | |||||
Net income from continuing operations |
1,056 | 563 | ||||||
Adjustments to reconcile net income from continuing operations to net cash provided by (used in) operations: |
||||||||
Depreciation and amortization |
3,801 | 3,678 | ||||||
Stock-based compensation |
463 | 829 | ||||||
Deferred income tax (expense) benefit |
(109 | ) | 983 | |||||
Loss (gain) on derivative transactions |
976 | (6,238 | ) | |||||
Foreign currency transaction (gain) loss |
(452 | ) | 613 | |||||
Other |
| 2 | ||||||
Change in assets and liabilities: |
||||||||
Trade receivable |
1,830 | (17,693 | ) | |||||
Prepaid expenses |
778 | (233 | ) | |||||
Inventories |
539 | 11,205 | ||||||
Accounts payable and accrued liabilities |
1,390 | (6,373 | ) | |||||
Taxes payable |
629 | 3,255 | ||||||
Insurance recovery receivable |
| (525 | ) | |||||
Other |
9,933 | 1,716 | ||||||
Net cash flow provided by (used in) operating activities continuing operations |
20,834 | (8,218 | ) | |||||
Investing activities: |
||||||||
Acquisition of property, plant and equipment, net |
(1,059 | ) | (1,271 | ) | ||||
Other |
(19 | ) | (27 | ) | ||||
Net cash used in investing activities continuing operations |
(1,078 | ) | (1,298 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from revolving line of credit |
| 20,000 | ||||||
Payments on revolving line of credit |
| (12,500 | ) | |||||
Proceeds from long-term debt |
2,000 | |||||||
Payments of long-term debt |
(7,820 | ) | (1,000 | ) | ||||
Payments under capital lease obligation |
(61 | ) | (77 | ) | ||||
Increase in cash overdraft |
| 3,768 | ||||||
Payment of dividends |
| (675 | ) | |||||
Other |
(38 | ) | | |||||
Net cash (used in) provided by financing activities continuing activities |
(5,919 | ) | 9,516 | |||||
Cash flows from discontinued operations: |
||||||||
Net cash from (used in) provided by operating activities |
(9,161 | ) | 1,043 | |||||
Net cash provided by (used in) investing activities |
18,375 | (233 | ) | |||||
Net cash (used in) provided by financing activities |
(3,399 | ) | 399 | |||||
Effect of exchange rate changes on cash and cash equivalents |
55 | (55 | ) | |||||
Net cash provided by discontinued operations |
5,870 | 1,154 | ||||||
Increase in cash and cash equivalents |
19,707 | 1,154 | ||||||
Cash and cash equivalents of continuing operations, beginning of period |
5,540 | | ||||||
Cash balance of discontinued operations, beginning of period |
634 | 534 | ||||||
Cash and cash equivalents, end of period |
25,881 | 1,688 | ||||||
Less: cash balance of discontinued operations, end of period |
6,504 | 1,688 | ||||||
Cash and cash equivalents of continuing operations, end of period |
$ | 19,377 | $ | | ||||
The accompanying notes are an integral part of these statements.
5
Table of Contents
PENFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1BUSINESS
Penford Corporation (Penford or the Company) is a developer, manufacturer and marketer of
specialty natural-based ingredient systems for industrial and food ingredient applications,
including fuel grade ethanol. Penfords products provide convenient and cost-effective solutions
derived from renewable sources. Sales of the Companys products are generated using a combination
of direct sales and distributor agreements.
The Company has significant research and development capabilities, which are used in applying
the complex chemistry of carbohydrate-based materials and in developing applications to address
customer needs. In addition, the Company has specialty processing capabilities for a variety of
modified starches.
Penford manages its business in two segments: Industrial Ingredients and Food Ingredients.
These segments are based on broad categories of end-market users. The Industrial Ingredients
segment is a supplier of chemically modified specialty starches to the paper and packaging
industries and a producer of fuel grade ethanol. The Food Ingredients segment is a developer and
manufacturer of specialty starches and dextrins to the food manufacturing and food service
industries.
Discontinued Operations
In August 2009, the Company committed to a plan to exit from the business conducted by the
Companys Australia/New Zealand Operations. On September 2, 2009, the Company completed the sale
of Penford New Zealand Limited (Penford New Zealand). On November 27, 2009, the Company
completed the sale of the operating assets of its subsidiary company Penford Australia Limited
(Penford Australia), including its two remaining Australian plants. The financial results of the
Australia/New Zealand Operations have been classified as discontinued operations in the condensed
consolidated statement of operations for all periods presented. The remaining assets and
liabilities of this business are reflected as assets and liabilities of discontinued operations in
the condensed consolidated balance sheets for all periods presented. See Note 3 for additional
information regarding discontinued operations. Unless otherwise indicated, amounts and discussions
in these notes pertain to the Companys continuing operations.
Subsequent Events
Penford has evaluated subsequent events, as defined by Accounting Standards Codification
(ASC) 855, through the date that the financial statements were issued on January 8, 2010.
2BASIS OF PRESENTATION
Consolidation
The accompanying condensed consolidated financial statements include the accounts of Penford
and its wholly owned subsidiaries. All material intercompany transactions and balances have been
eliminated. The condensed consolidated balance sheet at November 30, 2009 and the condensed
consolidated statements of operations and cash flows for the interim periods ended November 30,
2009 and November 30, 2008 have been prepared by the Company without audit. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments, which are necessary
to present fairly the financial information, have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with U.S. generally
accepted accounting principles, have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). The results of operations for
interim periods are not necessarily indicative of the operating results of a full year or of future
operations. Certain prior period amounts have been reclassified to conform to the current period
presentation. The accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the Companys Annual Report on
Form 10-K for the year ended August 31, 2009.
6
Table of Contents
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period. Estimates are used in
accounting for, among other things, the allowance for doubtful accounts, accruals, the
determination of assumptions for pension and postretirement employee benefit costs, and the useful
lives of property and equipment. Actual results may differ from previously estimated amounts.
Accounting Changes
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162
(SFAS 168). SFAS 168 establishes the FASB Accounting Standards Codification (ASC or the
Codification) as the source of authoritative U.S. generally accepted accounting principles
recognized by the FASB. SFAS 168 was effective for financial statements issued for interim and
annual periods ending after September 15, 2009. Beginning in the first quarter of fiscal 2010, all
references made to U.S. generally accepted accounting principles will use the new Codification
numbering system prescribed by the FASB. The FASB will issue new standards in the form of
Accounting Standards Updates (ASU) which will serve to update the Codification.
In April 2009, the FASB issued new authoritative guidance requiring disclosures regarding
financial instruments for interim reporting periods of publicly traded companies. The guidance
requires that disclosures provide quantitative and qualitative information on fair value estimates
for all financial instruments not measured on the balance sheet at fair value, when practicable,
with the exception of certain financial instruments listed in ASC 825 Financial Instruments. The
Company adopted this guidance in the first quarter of fiscal 2010 and has included the required
disclosures in this Form 10-Q for the quarter ended November 30, 2009.
In December 2008, the FASB issued new authoritative guidance regarding employer disclosures
about postretirement benefit plan assets. The new guidance requires an employer to disclose
information regarding its investment policies and strategies for its categories of plan assets, its
fair value measurements of plan assets and any significant concentrations of risk in plan assets.
The new guidance, which was effective September 1, 2009 for the Company, only requires the revised
annual disclosures on a prospective basis. Accordingly, the Company will provide the additional
disclosures in its fiscal 2010 Annual Report on Form 10-K.
In June 2008, the FASB issued new authoritative guidance for determining whether unvested
share-based payment awards that contain rights to nonforfeitable dividends are participating
securities prior to vesting and, therefore, included in the computation of earnings per share
pursuant to the two-class method. The Company adopted the new guidance in the first quarter of
fiscal 2010 and was required to retrospectively adjust all prior-period earnings per share data.
The resulting impact of the adoption of the new guidance was to include unvested restricted shares
in the computation of basic earnings per share pursuant to the two-class method which did not have
a material impact on the Companys earnings per share for the three-month periods ended November
30, 2009 and 2008. See Note 14.
In February 2008, the FASB issued new authoritative guidance delaying the portions of ASC 820,
Fair Value Measurements and Disclosures, which required fair value measurements for
non-recurring, nonfinancial assets and liabilities that are recognized or disclosed at fair value
until the Companys fiscal year 2010. The adoption of this guidance on September 1, 2009 had no
effect on the Companys financial position or results of operations. See Note 12.
Recent Accounting Pronouncements
In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605) Multiple
Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 eliminates the residual method of
allocation and requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method and expands the disclosures
related to multiple-deliverable revenue arrangements. ASU 2009-
7
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13 is effective for fiscal years beginning on or after June 15, 2010 (fiscal 2011 for the
Company). The adoption of ASU 2009-13 is not expected to have any impact on the Companys
financial position or results of operations.
3 DISCONTINUED OPERATIONS
On August 27, 2009, the Company committed to a plan to exit from the business conducted by its
Australia/New Zealand Operations. As a result, the Companys financial statements reflect the
Australia/New Zealand Operations as discontinued operations for all periods presented in compliance
with the provisions of the Financial Accounting Standards Board Accounting Standards Codification
205-10, Presentation of Financial Statements Discontinued Operations (ASC 205-10). The
Australia/New Zealand Operations segment was previously reported as the Companys third operating
segment. The following tables summarize the financial information for discontinued operations
related to the Australia/New Zealand Operations. Interest expense on debt directly attributable to
the Australia/New Zealand Operations has been allocated to discontinued operations.
Penford Australia completed the sale of the shares of its wholly-owned subsidiary, Penford New
Zealand, on September 2, 2009. Proceeds from the sale, net of transaction costs, were $4.8
million. On November 27, 2009, Penford Australia completed the sale of substantially all of its
operating assets, including property, plant and equipment, intellectual property, and inventories
in two transactions to unrelated parties. Proceeds from the sales, net of estimated transaction
costs, were $15.3 million. Additionally, at November 30, 2009, the Company recorded $1.3 million
of severance costs associated with the asset sales.
Proceeds from the sales include $2.0 million in escrow to be released in four equal
installments payable at six months, ten months, twenty months and thirty months from November 27,
2009. Escrowed payments are subject to the buyers right to make warranty claims under the sale
contract. Penford Australia currently expects that all warranties will be satisfied and that it
will receive the proceeds from the escrow account as scheduled. In addition, $0.8 million (at the
Australian dollar exchange rate at November 30, 2009) is to be paid by a purchaser in six equal
monthly installments beginning December 1, 2009 as further compensation for grain inventory on hand
on the date of sale. Penford Australia has received the payments as scheduled for December 2009
and January 2010.
Quarter Ended November 30 | ||||||||
2009 | 2008 | |||||||
(In Thousands) | ||||||||
Sales |
$ | 16,963 | $ | 21,360 | ||||
Loss from operations |
$ | (1,525 | ) | $ | (1,636 | ) | ||
Interest expense |
315 | 223 | ||||||
Gain on sale of assets |
351 | | ||||||
Other non-operating income, net |
57 | 396 | ||||||
Loss from discontinued operations before taxes |
(1,432 | ) | (1,463 | ) | ||||
Income tax benefit |
(4,914 | ) | (531 | ) | ||||
Income (loss) from discontinued operations, net of tax |
$ | 3,482 | $ | (932 | ) | |||
In the first quarter of fiscal 2010, the Company determined that intercompany loans made by
its U.S. operations to its Australian subsidiaries would not be fully collectible from the proceeds
of the Australian asset sales and the liquidation of the remaining net financial assets.
Accordingly, the Company recorded an impairment charge in the U.S. of $13 million, which was
recorded in discontinued operations. The tax benefit of the impairment was also recorded in
discontinued operations.
8
Table of Contents
In fiscal years 2008 and 2009, the Companys Australian operations reported tax losses. As of
August 31, 2009, the Companys discontinued Australian operations had recorded a valuation
allowance of $14.6 million against the entire Australian net deferred tax asset because of the
uncertainty of generating sufficient future taxable income. In the quarter ended November 30,
2009, the Australian operations recorded $13 million of income related to the U.S. impairment
discussed above. Accordingly, the Company decreased its deferred tax asset related to the
carryfoward of net operating losses and reversed the corresponding tax valuation allowance. At
November 30, 2009, the valuation allowance related to the Australian net deferred tax asset was
$10.9 million.
Penford Australia retained trade receivables and payables at November 30, 2009, and is
expected to liquidate its financial assets and liabilities over the next few months.
November 30, | August 31, | |||||||
2009 | 2009 | |||||||
(Dollars in thousands) | ||||||||
ASSETS |
||||||||
Cash |
$ | 6,504 | $ | 634 | ||||
Trade accounts receivable, net |
12,689 | 14,482 | ||||||
Inventories |
| 22,129 | ||||||
Prepaid expenses |
| 595 | ||||||
Income tax receivable |
| 190 | ||||||
Other |
3,098 | 456 | ||||||
Current assets of discontinued operations |
22,291 | 38,486 | ||||||
Property, plant and equipment, net |
| 3,799 | ||||||
Other assets |
| 428 | ||||||
Non-current assets of discontinued operations |
| 4,227 | ||||||
Total assets of discontinued operations |
$ | 22,291 | $ | 42,713 | ||||
LIABILITIES |
||||||||
Short-term borrowings |
$ | | $ | 3,327 | ||||
Accounts payable |
7,084 | 10,697 | ||||||
Accrued liabilities |
| 2,004 | ||||||
Current liabilities of discontinued operations |
7,084 | 16,028 | ||||||
Other liabilities |
| 2,851 | ||||||
Non-current liabilities of discontinued operations |
| 2,851 | ||||||
Total liabilities of discontinued operations |
$ | 7,084 | $ | 18,879 | ||||
4STOCK-BASED COMPENSATION
Stock Compensation Plans
Penford maintains the 2006 Long-Term Incentive Plan (the 2006 Incentive Plan) pursuant to
which various stock-based awards may be granted to employees, directors and consultants. As of
November 30, 2009, the aggregate number of shares of the Companys common stock that were available
to be issued as awards under the 2006 Incentive Plan was 57,178. In addition, any shares
previously granted under the 1994 Stock Option Plan which are subsequently forfeited or not
exercised will be available for future grants under the 2006 Incentive Plan.
9
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Stock Option Awards
A summary of the stock option activity for the three months ended November 30, 2009, is as
follows:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Number of | Average | Remaining | Aggregate | |||||||||||||
Shares | Exercise Price | Term (in years) | Intrinsic Value | |||||||||||||
Outstanding Balance, August 31, 2009 |
1,363,771 | $ | 15.18 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
| | ||||||||||||||
Cancelled |
(20,950 | ) | $ | 13.37 | ||||||||||||
Outstanding Balance, November 30, 2009 |
1,342,821 | $ | 15.21 | 4.08 | $ | 10,680 | ||||||||||
Options Exercisable at November 30, 2009 |
1,015,321 | $ | 14.54 | 3.66 | $ | 10,680 |
No stock options were granted under the 2006 Incentive Plan during the three months ended
November 30, 2009 and 2008.
The aggregate intrinsic value disclosed in the table above represents the total pretax
intrinsic value, based on the Companys closing stock price of $8.32 as of November 30, 2009 that
would have been received by the option holders had all option holders exercised on that date. No
stock options were exercised during the three months ended November 30, 2009.
As of November 30, 2009, the Company had $1.1 million of unrecognized compensation cost
related to non-vested stock option awards that is expected to be recognized over a weighted average
period of 1.5 years.
Restricted Stock Awards
The grant date fair value of each share of the Companys restricted stock awards is equal to
the fair value of Penfords common stock at the grant date. The following table summarizes the
restricted stock award activity for the three months ended November 30, 2009 as follows:
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Nonvested at August 31, 2009 |
89,582 | $ | 31.31 | |||||
Granted |
97,600 | 6.25 | ||||||
Vested |
(25,250 | ) | 35.18 | |||||
Cancelled |
(1,500 | ) | 35.18 | |||||
Nonvested at November 30, 2009 |
160,432 | $ | 15.42 |
On January 1, 2009, each non-employee director received an award of 1,976 shares of restricted
stock under the 2006 Incentive Plan at the last reported sale price of the stock on the preceding
trading day. The shares vested one year from the grant date of the award. The Company recognizes
compensation cost for restricted stock ratably over the vesting period.
As of November 30, 2009, the Company had $1.3 million of unrecognized compensation cost
related to non-vested restricted stock awards that is expected to be recognized over a weighted
average period of 1.4 years.
Compensation Expense
The Company recognizes stock-based compensation expense utilizing the accelerated multiple
option approach over the requisite service period, which equals the vesting period. The following
table summarizes the total stock-based compensation cost under SFAS No. 123R for the three months
ended November 30, 2009 and 2008 and the effect on the Companys Condensed Consolidated Statements of Operations (in thousands):
10
Table of Contents
Three Months Ended | ||||||||
November 30, | ||||||||
2009 | 2008 | |||||||
Cost of sales |
$ | 47 | $ | 89 | ||||
Operating expenses |
408 | 724 | ||||||
Research and development expenses |
8 | 16 | ||||||
Income (loss) from discontinued operations |
(25 | ) | 6 | |||||
Total stock-based compensation expense |
$ | 438 | $ | 835 | ||||
Tax benefit |
166 | 317 | ||||||
Total stock-based compensation expense, net of tax |
$ | 272 | $ | 518 | ||||
5INVENTORIES
The components of inventory are as follows:
November 30, | August 31, | |||||||
2009 | 2009 | |||||||
(In thousands) | ||||||||
Raw materials |
$ | 7,983 | $ | 7,265 | ||||
Work in progress |
1,918 | 1,921 | ||||||
Finished goods |
8,560 | 8,969 | ||||||
Total inventories |
$ | 18,461 | $ | 18,155 | ||||
6PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
November 30, | August 31, | |||||||
2009 | 2009 | |||||||
(In thousands) | ||||||||
Land |
$ | 10,243 | $ | 10,229 | ||||
Plant and equipment |
321,454 | 321,356 | ||||||
Construction in progress |
3,136 | 2,214 | ||||||
334,833 | 333,799 | |||||||
Accumulated depreciation |
(218,055 | ) | (214,750 | ) | ||||
Net property, plant and equipment |
$ | 116,778 | $ | 119,049 | ||||
7DEBT
In fiscal year 2007, Penford entered into a $145 million Second Amended and Restated Credit
Agreement (the 2007 Agreement) among the Company; Harris N.A. (which has been replaced by the
Bank of Montreal); LaSalle Bank National Association (now Bank of America); Cooperative Centrale
Raiffeisen-Boorleenbank B.A., Rabobank Nederland (New York Branch); U.S. Bank National
Association; and the Australia and New Zealand Banking Group Limited. The Companys obligations
under the 2007 Agreement are secured by substantially all of the Companys U.S. assets.
On July 9, 2009, the Company and its lenders under the 2007 Agreement executed a third
amendment to the 2007 Agreement (the Third Amendment). The Third Amendment, among other things,
amended financial covenants effective as of May 31, 2009, reduced the amounts that the Company may
borrow under the various facilities available under the 2007 Agreement, shortened the maturity
dates on borrowed funds, increased applicable interest
rates, eliminated the Companys ability to declare dividends on its stock, and adjusted the
amortization schedule and provisions regulating mandatory prepayments, additional indebtedness,
subsidiary company support, and reporting requirements.
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The Third Amendment adjusted the financial covenants in the 2007 Agreement, as amended,
effective May 31, 2009. Under the amended financial covenants, the Company must maintain a minimum
EBITDA (as defined in the Third Amendment), tangible net worth and fixed charge coverage ratio each
fiscal quarter in accordance with the revisions contained in the Third Amendment. The Third
Amendment also provides that the Company may not declare or pay dividends on, or make any other
distributions in respect of, its common stock. Annual capital expenditures are limited to $6.5
million. The availability on the $60 million revolver facility is limited to $52.5 million unless
the Company obtains the approval of the lenders holding more than 50% of the U.S. Dollar equivalent
of the sum of the total borrowing and unused commitments under the 2007 Agreement. The Third
Amendment increased the maximum commitment fee for undrawn balances by 25 basis points and the
maximum London Interbank Offering Rates (LIBOR) margin payable on outstanding debt by 150 basis
points to 5.00%. Interest rates under the 2007 Agreement are based on either the LIBOR in
Australia or the United States, or the prime rate, depending on the selection of available
borrowing options under the 2007 Agreement.
The Third Amendment adjusted the final maturity date of the term loan available under the 2007
Agreement to December 15, 2009, and the maturity date of the revolver and the capital expansion
loans to November 30, 2010. On September 30, 2009, the Company was required to being repaying the
capital expansion loans in quarterly installments of $1.0 million through December 31, 2009, and
$2.0 million thereafter. In addition to the quarterly installments on the capital expansion loan,
a one-time payment of $9.625 million is due on December 15, 2009. Any remaining amount due on the
capital expansion loans and revolver is due at final maturity.
On September 2, 2009, the Company completed the sale of Penford New Zealand Limited. Proceeds
from the sale, net of transaction costs, of approximately $4.8 million, were used to repay debt
outstanding in the first quarter of fiscal 2010.
On November 27, 2009, the Companys Australian operating subsidiary, Penford Australia
Limited, completed the sale of substantially all of its operating assets to two unrelated parties.
In accordance with the Third Amendment, the net proceeds received of $10.9 million were used to
repay outstanding debt under the 2007 Agreement. The Company prepaid the term and capital
expansion loans under the 2007 Agreement, beginning with the principal installment due on December
15, 2009 and then to the remaining principal installments on the capital expansion loans in the
inverse order of maturity. The prepayments were sufficient to cover the principal installments on
the term and capital expansion loans due on December 15, 2009. Additional cash received from the
sale will be used to repay outstanding debt upon receipt. Amounts to be received are (1) $2.0
million from an escrow account in four equal installments over thirty months from the date of sale,
and (2) $0.7 million in equal monthly installments through May 2010.
During the first quarter of fiscal 2010, the Iowa Department of Economic Development (IDED)
awarded financial assistance to the Company as a result of the temporary shutdown of the Cedar
Rapids, Iowa plant in the fourth quarter of fiscal 2008 due to record flooding of the Cedar River.
The IDED provided two five-year non interest bearing loans as follows: (1) a $1.0 million loan to
be repaid in 60 equal monthly payments of $16,667 beginning December 1, 2009, and (2) a $1.0
million loan which is forgivable if the Company maintains certain levels of employment at the Cedar
Rapids plant. The proceeds of these Iowa loans were used to repay outstanding debt under the 2007
Agreement in the first quarter of fiscal 2010.
At November 30, 2009, the Company had $46.4 million and $0.6 million outstanding,
respectively, under the revolving credit and term loan portions of the 2007 Agreement. In
addition, the Company had $37.4 million outstanding under its capital expansion credit facility on
November 30, 2009. Due to the maturity date of the loans, all debt under the 2007 Agreement is
classified under current liabilities in the condensed consolidated balance sheet. The Company was
in compliance with the covenants in the 2007 Agreement, as amended, as of November 30, 2009.
As of November 30, 2009, all of the Companys outstanding debt under the 2007 Agreement is
subject to variable interest rates. Under interest rate swap agreements with several banks, the
Company has fixed its interest rates on U.S. dollar denominated term debt of $22.0 million at 4.18%
and $6.0 million at 5.08%, plus the applicable margin under the 2007 Agreement.
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8INCOME TAXES
The Companys effective tax rates for the three-month periods ended November 30, 2009 and 2008
were 46.7% and 5.6%, respectively. The difference between the effective tax rate and the U.S.
federal statutory rate for the three months ended November 30, 2009 is due to state income taxes
and adjustments to prior years tax expense.
The difference between the effective tax rate and the U.S. federal statutory rate for the
quarter ended November 30, 2008 is due to the favorable tax benefit of a retroactive research and
development tax credit. In October 2008, the Tax Extenders and Alternative Minimum Tax Relief Act
of 2008 retroactively reinstated and extended the research and development tax credit from January
1, 2008 through December 31, 2009. The effective tax rate for the first quarter of fiscal 2009
also reflected a tax benefit of $0.2 million applicable to fiscal 2008.
In the quarter ended November 30, 2009, the amount of unrecognized tax benefits computed in
accordance with ASC 740, Income Taxes (ASC 740) increased by $75,000, including $11,000 for
interest and $23,000 for penalties. The total amount of unrecognized tax benefits at November 30,
2009 was $1.4 million, all of which, if recognized, would favorably impact the effective tax rate.
At November 30, 2009, the Company had $0.2 million of accrued interest and penalties included in
the long-term tax liability. None of the Companys income tax returns are currently under
examination by taxing authorities. The Company does not believe that the total amount of
unrecognized tax benefits at November 30, 2009 will change materially in the next 12 months.
At November 30, 2009, the Company had $13.8 million of net deferred tax assets. In the first
quarter of fiscal 2010, the Company recorded a tax benefit related to an impairment charge related
to a loan to the Companys Australian subsidiary which was considered not fully collectible (See
Note 3). A valuation allowance has not been provided on the Companys net deferred tax assets as
the Company expects to recover its tax assets through future taxable income. The Companys losses
in fiscal years 2008 and 2009, which are not expected to recur, were incurred as a result of severe
flooding in Cedar Rapids, Iowa, which shut down the Companys manufacturing facility for most of
the fourth quarter of fiscal 2008. The Companys continuing operations in the U.S. generated
income before income taxes in the fourth quarter of fiscal 2009 and the first quarter of fiscal
2010.
On a quarterly basis, the Company reviews its estimate of the effective income tax rate
expected to be applicable for the full fiscal year. This rate is used to calculate income tax
expense or benefit on current year-to-date pre-tax income or loss. Income tax expense or benefit
for the current interim period is the difference between the computed year-to-date income tax
amount and the tax expense or benefit reported for previous quarters. In reviewing its effective
tax rate, the Company uses estimates of the amounts of permanent differences between book and tax
accounting and projections of fiscal year pre-tax income or loss. Adjustments to the Companys
tax expense related to the prior fiscal year, amounts recorded to increase or decrease unrecognized
tax benefits, changes in tax rates, and the effect of a change in the beginning-of-the-year
valuation allowance are treated as discrete items and are recorded in the period in which they
arise.
9OTHER COMPREHENSIVE INCOME (LOSS) (OCI)
The components of total comprehensive income (loss) are as follows:
Three months ended | ||||||||
November 30, | November 30, | |||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Net income (loss) |
$ | 4,538 | $ | (369 | ) | |||
Foreign currency translation adjustments |
1,615 | (18,956 | ) | |||||
Net unrealized gain (loss) on derivative
instruments that qualify as cash flow hedges,
net of tax |
1,097 | (590 | ) | |||||
Total comprehensive income (loss) |
$ | 7,250 | $ | (19,915 | ) | |||
Deferred taxes have not been recognized on foreign currency translation adjustments as the
sale of the Companys foreign subsidiaries is expected to result in no tax benefit or expense.
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10NON-OPERATING INCOME (LOSS), NET
Non-operating income (loss), net consists of the following:
Three months ended | ||||||||
November 30, | November 30, | |||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Gain (loss) on foreign currency transactions |
452 | (613 | ) | |||||
Other |
184 | 7 | ||||||
Total |
$ | 636 | $ | (606 | ) | |||
During the three months ended November 30, 2009 and 2008, the Company recognized a gain (loss)
on foreign currency transactions on Australian dollar denominated assets and liabilities as
disclosed in the table above.
11 PENSION AND POST-RETIREMENT BENEFIT PLANS
The components of the net periodic pension and post-retirement benefit costs for the three
months ended November 30, 2009 and 2008 are as follows:
Three months ended | ||||||||
November 30, | November 30, | |||||||
Defined benefit pension plans | 2009 | 2008 | ||||||
(in thousands) | ||||||||
Service cost |
$ | 389 | $ | 355 | ||||
Interest cost |
641 | 645 | ||||||
Expected return on plan assets |
(506 | ) | (607 | ) | ||||
Amortization of prior service cost |
61 | 63 | ||||||
Amortization of actuarial losses |
304 | 53 | ||||||
Net periodic benefit cost |
$ | 889 | $ | 509 | ||||
Three months ended | ||||||||
November 30, | November 30, | |||||||
Post-retirement health care plans | 2009 | 2008 | ||||||
(in thousands) | ||||||||
Service cost |
$ | 88 | $ | 65 | ||||
Interest cost |
269 | 228 | ||||||
Amortization of prior service cost |
(38 | ) | (38 | ) | ||||
Amortization of actuarial losses |
74 | | ||||||
Net periodic benefit cost |
$ | 393 | $ | 255 | ||||
14
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12DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASURMENTS
Fair Value Measurements
The provisions of ASC 820, Fair Value Measurements and Disclosures (ASC 820), which
defines fair value, establishes a framework for its measurement, and expands disclosures concerning
fair value measurements, were effective as of the beginning of the second quarter of fiscal 2009
for the Companys financial assets and liabilities, as well as for other assets and liabilities
carried at fair value on a recurring basis. As of September 1, 2009, the Company adopted the
provisions of ASC 820 relating to nonrecurring fair value measurement requirements for nonfinancial
assets and liabilities. These include long-lived assets which are considered to be other than
temporarily impaired, reporting units measured at fair value in the first step of a goodwill
impairment test, and the initial recognition of asset retirement obligations. In the first quarter
of fiscal 2010, there were no required fair value measurements for assets and liabilities measured
at fair value on a nonrecurring basis.
ASC 820 defines fair value as the price that would be received from selling an asset or paid
to transfer a liability (an exit price) in Penfords principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date.
ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value.
Observable inputs are inputs that reflect the assumptions market participants would use in pricing
the asset or liability developed based on market data obtained from sources outside the reporting
entity. Unobservable inputs are inputs that reflect Penfords own assumptions based on market data
and on assumptions that market participants would use in pricing the asset or liability developed
based on the best information available in the circumstances. The three levels of inputs that may
be used to measure fair value are:
| Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. |
| Level 2 inputs are other than quoted prices included within Level 1 that are observable for assets and liabilities such as (1) quoted prices for similar assets or liabilities in active markets, (2) quoted prices for identical or similar assets or liabilities in markets that are not active, or (3) inputs that are derived principally or corroborated by observable market date by correlation or other means. |
| Level 3 inputs are unobservable inputs to the valuation methodology for the assets or liabilities. |
Quoted Prices | ||||||||||||||||
In Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Instruments | Inputs | Inputs | ||||||||||||||
As of November 30, 2009 | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
(in thousands) | ||||||||||||||||
Current assets (Other Current Assets): |
||||||||||||||||
Commodity derivatives (1) |
$ | 1,016 | $ | | $ | | $ | 1,016 | ||||||||
Current liabilities (Accrued Liabilities): |
||||||||||||||||
Interest rate swaps |
$ | | $ | 1,891 | $ | | $ | 1,891 | ||||||||
(1) | Commodity derivative assets and liabilities have been offset by cash collateral due and paid under master netting arrangements. The cash collateral offset was $2.2 million at November 30, 2009. |
15
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Quoted Prices | ||||||||||||||||
In Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Instruments | Inputs | Inputs | ||||||||||||||
As of August 31, 2009 | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
(in thousands) | ||||||||||||||||
Current assets (Other Current Assets): |
||||||||||||||||
Commodity derivatives (1) |
$ | 430 | $ | | $ | | $ | 430 | ||||||||
Current liabilities (Accrued Liabilities): |
||||||||||||||||
Interest rate swaps |
$ | | $ | 1,829 | $ | | $ | 1,829 | ||||||||
(1) | Commodity derivative assets and liabilities have been offset by cash collateral due and paid under master netting arrangements. The cash collateral offset was $0.4 million at August 31, 2009. |
Other Financial Instruments
The carrying value of cash and cash equivalents, receivables and payables approximates fair
value because of their short maturities. The Companys bank debt reprices with changes in market
interest rates and, accordingly, the carrying amount of such debt approximates fair value. During
the quarter ended November 30, 2009, the Company received two non interest bearing loans from the
State of Iowa totaling $2.0 million. The fair value of this debt at November 30, 2009 is estimated
to be $1.5 million. See Note 7.
Interest Rate Swap Agreements
The Company uses interest rate swaps to manage the variability of interest payments associated
with its floating-rate debt obligations. The interest payable on the debt effectively becomes
fixed at a certain rate and reduces the impact of future interest rate changes on future interest
expense. As of November 30, 2009, the Company had three interest rate swaps which fixed the
interest payable on $22.0 million of debt at 4.18% and on $6.0 million of debt at 5.08%, plus the
applicable margin under the Companys credit agreement, as amended. The notional amounts, interest
rate reset dates, underlying benchmark rates and interest payment dates match the terms of the
debt. The Company has designated the swap agreements as cash flow hedges and accounts for them
pursuant to ASC 815, Derivatives and Hedging (ASC 815). The unrealized losses on the interest
rate swaps are included in accumulated other comprehensive income (loss). The periodic settlements
on the swaps are recorded as interest expense.
Foreign Currency Contracts
In fiscal year 2009, the Companys Food Ingredients business purchased
certain raw materials in a foreign currency, the Czech koruna (CZK), the monetary unit of the Czech
Republic. In order to manage the
variability in forecasted cash flows due to the foreign currency risk associated with
settlement of accounts payable denominated in CZK, the Company purchased foreign currency forward
contracts. The Company designated these contracts as cash flow hedges and accounted for them
pursuant to ASC 815. To the extent the amounts and timing of the forecasted cash flows and the
forward contracts continued to match, the unrealized losses on the foreign currency purchase
contracts were included in accumulated other comprehensive income (loss). The gain or loss on the
contracts was recorded in cost of sales at the time the inventory was sold. At November 30, 2009,
the Company had no outstanding foreign currency contracts and no gains or losses remaining in other
comprehensive income (loss).
Commodity Contracts
The Company uses forward contracts and readily marketable exchange-traded futures on corn and
natural gas to manage the price risk of those inputs to its manufacturing process. The Company has
designated these instruments as hedges and accounts for them pursuant to ASC 815.
For derivative instruments designated as fair value hedges, the gain or loss on the derivative
instruments as well as the offsetting gain or loss on the hedged firm commitments and/or inventory
are recognized in current earnings as a component of cost of sales. For derivative instruments
designated as cash flow hedges, the effective portion of the gain or loss on the derivative
instruments is reported as a component of other comprehensive income (loss), net of
16
Table of Contents
applicable income taxes, and recognized in earnings when the hedged exposure affects
earnings. The Company recognizes the gain or loss on the derivative instrument as a component of
cost of sales in the period when the finished goods produced from the hedged item are sold. If it
is determined that the derivative instruments used are no longer effective at offsetting changes in
the price of the hedged item, then the changes in market value would be recognized in current
earnings as a component of cost of good sold or interest expense.
To reduce the price volatility of corn used in fulfilling some of its starch sales contracts,
Penford from time to time uses readily marketable exchange-traded futures as well as forward cash
corn purchases. The exchange-traded futures are not purchased or sold for trading or speculative
purposes and are designated as hedges. The changes in market value of such contracts have
historically been, and are expected to continue to be, effective in offsetting the price changes of
the hedged commodity. Penford also at times uses exchange-traded futures to hedge corn inventories
and firm corn purchase contracts. Hedged transactions are expected to occur within 12 months of
the time the hedge is established.
As of November 30, 2009, Penford had purchased corn positions of 7.2 million bushels, of which
5.9 million bushels represented equivalent firm priced starch sales contract volume, resulting in
an open position of 1.3 million bushels.
As of November 30, 2009, the Company had the following outstanding forward contracts, futures
contracts and interest rate swaps:
Corn Futures | 4,890,000 Bushels | |||
Natural Gas Futures | 630,000 mmbtu (millions of British thermal units) | |||
Ethanol Futures | 3,871,500 Gallons | |||
Interest Rate Swap Contracts | 28,000,000 US Dollars (Notional Amount) |
The following tables provide information about the fair values of the Companys derivatives,
by contract type, as of November 30, 2009 and August 31, 2009.
Fair Value of Derivative Instruments | ||||||||||||||||
as of November 30, 2009 | ||||||||||||||||
(in thousands) | ||||||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||||
Derivatives Designated as Hedging | Balance Sheet | Balance Sheet | ||||||||||||||
Instruments under ASC 815 | Location | Fair Value | Location | Fair Value | ||||||||||||
Cash Flow Hedges: |
||||||||||||||||
Corn Futures |
Other Current Assets | $ | 1,238 | Other Current Assets | $ | (399 | ) | |||||||||
Natural Gas Futures |
Other Current Assets | | Other Current Assets | (696 | ) | |||||||||||
Interest Rate Contracts |
Other Current Assets | | Accrued Liabilities | (1,891 | ) | |||||||||||
Ethanol Futures |
Other Current Assets | | Other Current Assets | (709 | ) | |||||||||||
Total Cash Flow Hedges |
1,238 | (3,695 | ) | |||||||||||||
Fair Value Hedges: |
||||||||||||||||
Corn Futures |
Other Current Assets | 94 | Other Current Assets | (168 | ) | |||||||||||
Total Fair Value Hedges |
94 | (168 | ) | |||||||||||||
Total Derivatives
Designated as Hedging
Instruments under ASC
815 |
$ | 1,332 | $ | (3,863 | ) | |||||||||||
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Fair Value of Derivative Instruments | ||||||||||||||||
as of August 31, 2009 | ||||||||||||||||
(in thousands) | ||||||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||||
Derivatives Designated as Hedging | Balance Sheet | Balance Sheet | ||||||||||||||
Instruments under ASC 815 | Location | Fair Value | Location | Fair Value | ||||||||||||
Cash Flow Hedges: |
||||||||||||||||
Corn Futures |
Other Current Assets | $ | 82 | Other Current Assets | $ | (916 | ) | |||||||||
Natural Gas Futures |
Other Current Assets | | Other Current Assets | (1,301 | ) | |||||||||||
Interest Rate Contracts |
Other Current Assets | | Accrued Liabilities | (1,829 | ) | |||||||||||
Foreign Exchange Contracts |
Other Current Assets | | Accrued Liabilities | | ||||||||||||
Total Cash Flow Hedges |
82 | (4,046 | ) | |||||||||||||
Fair Value Hedges: |
||||||||||||||||
Corn Futures |
Other Current Assets | 1,303 | Other Current Assets | (174 | ) | |||||||||||
Total Fair Value Hedges |
1,303 | (174 | ) | |||||||||||||
Total Derivatives
Designated as Hedging
Instruments under ASC 815 |
$ | 1,385 | $ | (4,220 | ) | |||||||||||
The Effect of Derivative Instruments on the Statement of Financial Performance | ||||||||||||||||||||
for the Quarter Ended November 30, 2009 | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Location of Gain or | ||||||||||||||||||||
(Loss) Reclassified | Location of Gain or (Loss) | Amount of Gain or | ||||||||||||||||||
from Accum OCI into | Amount of Gain or | Recognized in Income on | (Loss) Recognized | |||||||||||||||||
Amount of Gain or | Income | (Loss) Reclassified | Derivative (Ineffective | in Income on | ||||||||||||||||
(Loss) | (Effective Portion) | from Accum OCI into | Portion) | Derivative | ||||||||||||||||
Derivatives in ASC 815 Cash Flow | Recognized in OCI | Income Statement | Income (Effective | Income Statement | (Ineffective | |||||||||||||||
Hedging Relationships | (Effective Portion) | Location | Portion) | Location | Portion) | |||||||||||||||
Cash Flow Hedging Relationships: |
||||||||||||||||||||
Corn Futures |
$ | 301 | Cost of sales | $ | (23 | ) | Cost of sales | $ | 95 | |||||||||||
Natural Gas Futures |
(696 | ) | Cost of sales | (865 | ) | Cost of sales | | |||||||||||||
Ethanol Futures |
(709 | ) | Cost of Sales | (577 | ) | Cost of Sales | | |||||||||||||
Interest Rate Contracts |
(349 | ) | Interest expense | (287 | ) | Interest Expense | | |||||||||||||
Foreign Exchange Contracts |
| Cost of sales | (26 | ) | Cost of sales | | ||||||||||||||
Total |
$ | (1,453 | ) | $ | (1,778 | ) | $ | 95 | ||||||||||||
The Effect of Derivative Instruments on the Statement of Financial Performance | ||||||||||||||||||||
for the Quarter Ended November 30, 2009 | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Location of | ||||||||||||||||||||
Location of Gain / | Gain/(Loss) | |||||||||||||||||||
(Loss) Recognized | Amount of Gain / | Recognized in | Location of | |||||||||||||||||
in Income on | (Loss) | Income on Related | Gain/(Loss) | |||||||||||||||||
Derivative | Recognized | Hedged Item in ASC | Hedged Item | Recognized in | ||||||||||||||||
Derivatives in ASC 815 Fair Value | Income Statement | in Income on | 815 Fair Value | Income Statement | Income on Related | |||||||||||||||
Hedging Relationships | Location | Derivative | Hedge Relationships | Location | Hedged Item | |||||||||||||||
Fair Value Hedge Relationships: |
||||||||||||||||||||
Corn Futures |
Cost of sales | | Firm Commitments/Inventory | Cost of sales | $ | 33 | ||||||||||||||
Total |
| $ | 33 | |||||||||||||||||
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13SEGMENT REPORTING
Financial information from continuing operations for the Companys two segments, Industrial
Ingredients and Food Ingredients is presented below. Industrial
Ingredients and Food Ingredients are broad categories of
end-market users served by the Companys U.S. operations. The Industrial Ingredients segment
provides carbohydrate-based starches for industrial applications, primarily in the paper and
packaging products and ethanol industries. The Food Ingredients segment produces specialty
starches for food applications. A third item for corporate and other activity has been presented
to provide reconciliation to amounts reported in the consolidated financial statements. Corporate
and other represents the activities related to the corporate headquarters such as public company
reporting, personnel costs of the executive management team, corporate-wide professional services
and consolidation entries.
Three months ended | ||||||||
November 30, | November 30, | |||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Sales: |
||||||||
Industrial Ingredients |
$ | 50,308 | $ | 41,842 | ||||
Food Ingredients |
16,762 | 17,742 | ||||||
$ | 67,070 | $ | 59,584 | |||||
Income (loss) from operations: |
||||||||
Industrial Ingredients |
$ | 2,154 | $ | 1,799 | ||||
Food Ingredients |
3,581 | 3,398 | ||||||
Corporate and other |
(2,593 | ) | (2,724 | ) | ||||
$ | 3,142 | $ | 2,473 | |||||
November 30, | August 31, | |||||||
2009 | 2009 | |||||||
(In thousands) | ||||||||
Total assets: |
||||||||
Industrial Ingredients |
$ | 135,148 | $ | 139,609 | ||||
Food Ingredients |
37,642 | 37,387 | ||||||
Discontinued Operations |
22,291 | 42,713 | ||||||
Corporate and other |
55,624 | 38,536 | ||||||
$ | 250,705 | $ | 258,245 | |||||
Assets of discontinued operations are located in Australia and New Zealand. All other assets
are located in the United States.
14EARNINGS (LOSS) PER SHARE
Effective September 1, 2009, the Company adopted ASC 260-10-45, Participating Securities and
the Two-Class Method (ASC 260-10-45) which requires all outstanding unvested share-based payment
awards that contain rights to non-forfeitable dividends participate in undistributed earnings with
common shareholders and, therefore, are included in computing earnings per share under the
two-class method. Under the two-class method, net earnings are reduced by the amount of dividends
declared in the period for each class of common stock and participating security. The remaining
undistributed earnings are then allocated to common stock and participating securities, based on
their respective rights to receive dividends. Restricted stock awards granted to certain employees
and directors under the Companys 2006 Incentive Plan which contain non-forfeitable rights to
dividends at the same rate as common stock, are considered participating securities. The Company
has applied the provisions of ASC 260-10-45 retrospectively to all periods presented.
Basic earnings (loss) per share reflect only the weighted average common shares outstanding
during the period. Diluted earnings (loss) per share reflect weighted average common shares
outstanding and the effect of any dilutive
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common stock equivalent shares. Diluted earnings
(loss) per share is calculated by dividing net income (loss) by the average common shares
outstanding plus additional common shares that would have been outstanding assuming the exercise
of in-the-money stock options, using the treasury stock method. The following table presents the
reconciliation of income from continuing operations to income from continuing operations
applicable to common shares and the computation of diluted weighted average shares outstanding for
the three months ended November 30, 2009 and 2008.
Three months ended | ||||||||
November 30, 2009 | November 30, 2008 | |||||||
(In thousands) | ||||||||
Numerator: |
||||||||
Income from continuing operations |
$ | 1,056 | $ | 563 | ||||
Less: Allocation to participating securities |
(40 | ) | (5 | ) | ||||
Income from continuing operations applicable to
common shares |
$ | 1,016 | $ | 558 | ||||
Income (loss) from discontinued operations |
$ | 3,482 | $ | (932 | ) | |||
Less: Allocation to participating securities |
| | ||||||
Income (loss) from discontinued operations
applicable to common shares |
$ | 3,482 | $ | (932 | ) | |||
Net income (loss) |
$ | 4,538 | $ | (369 | ) | |||
Less: Allocation to participating securities |
(40 | ) | (5 | ) | ||||
Net income (loss) applicable to common shares |
$ | 4,498 | $ | (374 | ) | |||
Denominator: |
||||||||
Weighted average common shares outstanding, basic |
11,183 | 11,155 | ||||||
Dilutive stock options and awards |
83 | 144 | ||||||
Weighted average common shares outstanding, diluted |
11,266 | 11,299 | ||||||
Weighted-average stock options to purchase 1,350,146 and 897,550 shares of common stock for
the three months ended November 30, 2009 and 2008, respectively, were excluded from the
calculation of diluted earnings (loss) per share because they were antidilutive.
15LEGAL PROCEEDINGS
On January 23, 2009 the Company filed suit in the U.S. District Court for the Northern
District of Iowa, Cedar Rapids Division, against two insurance companies, National Union Fire
Insurance Company of Pittsburgh, Pennsylvania and ACE American Insurance Company, related to
insurance coverage arising out of the flood that struck the Companys Cedar Rapids, Iowa plant in
June 2008. The Company is currently seeking in this litigation additional payments from the
insurers of more than $25 million for business interruption losses that occurred as a result of the
flood, as well as various damages. The Company cannot at this time determine the likelihood of any
outcome or estimate the amount of any judgment that might be awarded.
The Company is involved from time to time in various other claims and litigation arising in
the normal course of business. In the judgment of management, which relies in part on information
from the Companys outside legal counsel, the ultimate resolution of these matters will not
materially affect the consolidated financial position, results of operations or liquidity of the
Company.
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Item 2: | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Forward-looking Statements
This Quarterly Report on Form 10-Q (Quarterly Report), including, but not limited, to
statements found in the Notes to Condensed Consolidated Financial Statements and in Item 2
Managements Discussion and Analysis of Financial Condition and Results of Operations, contains
statements that are forward-looking statements within the meaning of the federal securities laws.
In particular, statements pertaining to anticipated operations and business strategies contain
forward-looking statements. Likewise, statements regarding anticipated changes in the Companys
business and anticipated market conditions are forward-looking statements. Forward-looking
statements involve numerous risks and uncertainties and should not be relied upon as predictions of
future events. Forward-looking statements depend on assumptions, dates or methods that may be
incorrect or imprecise, and the Company may not be able to realize them. Forward-looking
statements can be identified by the use of forward-looking terminology such as believes,
expects, may, will, should, seeks, approximately, intends, plans, estimates, or
anticipates, or the negative use of these words and phrases or similar words or phrases.
Forward-looking statements can be identified by discussions of strategy, plans or intentions.
Readers are cautioned not to place undue reliance on these forward-looking statements which are
based on information available as of the date of this report. The Company does not take any
obligation to publicly update or revise any forward-looking statements to reflect future events,
information or circumstances that arise after the date of the filing of this Quarterly Report.
Among the factors that could cause actual results to differ materially are the risks and
uncertainties discussed in this Quarterly Report, including those referenced in Part II Item 1A of
this Quarterly Report, and those described from time to time in other filings made with the
Securities and Exchange Commission, including the Companys Annual Report on Form 10-K for the year
ended August 31, 2009, which include, but are not limited to:
| competition; |
| the possibility of interruption of business activities due to equipment problems, accidents, strikes, weather or other factors; |
| product development risk; |
| changes in corn and other raw material prices and availability; |
| the amount and timing of flood insurance recoveries; |
| changes in general economic conditions or developments with respect to specific industries or customers affecting demand for the Companys products including unfavorable shifts in product mix; |
| unanticipated costs, expenses or third-party claims; |
| the risk that results may be affected by construction delays, cost overruns, technical difficulties, nonperformance by contractors or changes in capital improvement project requirements or specifications; |
| interest rate, chemical and energy cost volatility; |
| foreign currency exchange rate fluctuations; |
| changes in returns on pension plan assets and/or assumptions used for determining employee benefit expense and obligations; |
| other unforeseen developments in the industries in which Penford operates, |
| the Companys ability to successfully operate under and comply with the terms of its bank credit agreement, as amended; |
| the Companys ability to renew or replace its bank credit agreement for periods following the agreements November 30, 2010 maturity date; or |
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| other factors described in Part I, Item 1A Risk Factors. |
Overview
Penford generates revenues, income and cash flows by developing, manufacturing and marketing
specialty natural-based ingredient systems for industrial and food applications and by producing
and selling ethanol. The Company develops and manufactures ingredients with starch as a base,
providing value-added applications to its customers. Penfords starch products are manufactured
primarily from corn and potatoes and are used principally as binders and coatings in paper and food
production.
Penford manages its business in two segments: Industrial Ingredients and Food Ingredients.
These segments are based on broad categories of end-market users. See Note 13 to the Condensed
Consolidated Financial Statements for additional information regarding the Companys business
segment operations.
In May 2008, the Companys Industrial Ingredients segment began commercial production and
sales of ethanol from its facility in Cedar Rapids, Iowa. This ethanol plant gives the Company the
ability to select from multiple output choices to capitalize on changing industry conditions and
selling opportunities. This increased flexibility allows the Company to direct production towards
the most attractive mix of strategic and financial opportunities.
In analyzing business trends, management considers a variety of performance and financial
measures, including sales revenue growth, sales volume growth, and gross margins and operating
income of the Companys business segments.
On August 27, 2009, the Companys Board of Directors made a determination that the Company
would exit from the business conducted by the Companys Australia/New Zealand Operations. This
determination was made upon completion of a process involving the examination of a range of
strategic and operating choices for the Companys Australia/New Zealand Operations. The process
was undertaken as part of a continuing program to maximize the Companys asset values and returns.
On September 2, 2009, the Company completed the sale of Penford New Zealand Limited. On November
27, 2009, the Companys Australian operating subsidiary, Penford Australia Limited, completed the
sale of substantially all of its operating assets to two unrelated parties.
The financial data for the Australia/New Zealand Operations have been presented as
discontinued operations. The financial statements have been prepared in compliance with the
provisions of the Accounting Standards Codification 205-10, Presentation of Financial Statements
Discontinued Operations (ASC 205-10). Accordingly, for all periods presented herein, the
Condensed Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows have
been conformed to this presentation. The Australia/New Zealand Operations was previously reported
as the Companys third operating segment. See Note 3 to the Condensed Consolidated Financial
Statements for further details.
This Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) should be read in conjunction with the Companys consolidated financial statements and the
accompanying notes. The notes to the Condensed Consolidated Financial Statements referred to in
this MD&A are included in Part I Item 1, Financial Statements. Unless otherwise noted, all
amounts and analyses are based on continuing operations.
Accounting Changes
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162
(SFAS 168). SFAS 168 establishes the FASB Accounting Standards Codification (ASC or the
Codification) as the source of authoritative U.S. generally accepted accounting principles
recognized by the FASB. SFAS 168 was effective for financial statements issued for interim and
annual periods ending after September 15, 2009. Beginning in the first quarter of fiscal 2010, all
references made to U.S. generally accepted accounting principles will use the new Codification
numbering system prescribed by the FASB. The FASB will issue new standards in the form of
Accounting Standards Updates (ASU) which will serve to update the Codification.
In April 2009, the FASB issued new authoritative guidance requiring disclosures regarding
financial instruments for interim reporting periods of publicly traded companies. The guidance
requires that disclosures provide quantitative and
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qualitative information on fair value estimates for all financial instruments not
measured on the balance sheet at fair value, when practicable, with the exception of certain
financial instruments listed in ASC 825 Financial Instruments. The Company adopted this guidance
in the first quarter of fiscal 2010 and has included the required disclosures in this Form 10-Q for
the quarter ended November 30, 2009.
In December 2008, the FASB issued new authoritative guidance regarding employer disclosures
about postretirement benefit plan assets. The new guidance requires an employer to disclose
information regarding its investment policies and strategies for its categories of plan assets, its
fair value measurements of plan assets and any significant concentrations of risk in plan assets.
The new guidance, which was effective September 1, 2009 for the Company, only requires the revised
annual disclosures on a prospective basis. Accordingly, the Company will provide the additional
disclosures in its fiscal 2010 Annual Report on Form 10-K.
In June 2008, the FASB issued new authoritative guidance for determining whether unvested
share-based payment awards that contain rights to nonforfeitable dividends are participating
securities prior to vesting and, therefore, included in the computation of earnings per share
pursuant to the two-class method. The Company adopted the new guidance in the first quarter of
fiscal 2010 and was required to retrospectively adjust all prior-period earnings per share data.
The resulting impact of the adoption of the new guidance was to include unvested restricted shares
in the computation of basic earnings per share pursuant to the two-class method which did not have
a material impact on the Companys earnings per share for the three-month periods ended November
30, 2009 and 2008. See Note 14 to the Condensed Consolidated Financial Statements.
In February 2008, the FASB issued new authoritative guidance delaying the portions of ASC 820,
Fair Value Measurements and Disclosures, which required fair value measurements for
non-recurring, nonfinancial assets and liabilities that are recognized or disclosed at fair value
until the Companys fiscal year 2010. The adoption of this guidance on September 1, 2009 had no
effect on the Companys financial position or results of operations. See Note 12 to the Condensed
Consolidated Financial Statements.
Results of Operations
Executive Overview
Consolidated sales for the three months ended November 30, 2009 increased 12.6%, or $7.5
million, to $67.1 million compared with $59.6 million for the three months ended November 30, 2008.
In the first quarter of fiscal 2009, production in Cedar Rapids, Iowa was still recovering from the
severe flooding that occurred in June 2008. First quarter fiscal 2010 revenues improved primarily
due to industrial volume increases in both starch products and ethanol, partially offset by a $0.9
million reduction in food ingredients revenues as a result of the sale of the Companys dextrose
product line in February 2009.
In the first quarter of fiscal 2010, consolidated gross margin as a percent of sales rose to
15.8% from 9.1% in the prior years first quarter, due to the favorable effect of higher industrial
volumes on production costs and lower manufacturing unit costs in both the industrial and food
ingredients businesses. Consolidated income from operations for the quarter ended November 30,
2009 increased $0.7 million due to higher gross margins. Fiscal 2009 first quarter operating
income included $4.2 million of net insurance recoveries.
On June 12, 2008, the Companys Industrial Ingredients plant in Cedar Rapids,
Iowa was temporarily shut down due to record flooding of the Cedar River and government-ordered
mandatory evacuation of the plant and surrounding areas. The Company sustained substantial damage
to this facility and the plant was shut down from mid-June 2008 until the end of August 2008. By
the end of August 2008, the Company began manufacturing industrial starch in Cedar Rapids. In late
September 2008, the Company resumed the commercial production and sale of ethanol.
The Company maintains property damage and business interruption insurance coverage applicable
to the Cedar Rapids plant. The Company is seeking additional payments from its insurers for
damages arising from the flooding that occurred in June 2008 and has filed a lawsuit against the
insurers. The Company does not provide assurance as to any amount or timing of the potential
recoveries under its insurance policies. The effect of the flood on the financial results of the
Company on a quarter-to-quarter basis in fiscal 2010 will depend on the timing and amount of
additional
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insurance proceeds received, if any, which the Company is currently unable to estimate. The amount
ultimately recovered from the Companys insurers may be materially more or less than the Companys
direct costs of the flood.
Industrial Ingredients
First
quarter fiscal 2010 sales at the Companys Industrial Ingredients
business unit rose $8.5 million, or 20.2%, to $50.3 million from $41.8 million in the first quarter
of fiscal 2009. Industrial starch sales of $32.3 million for the quarter ended November 30, 2009
were comparable to the prior years first quarter sales as an 18% increase in volume was offset by
a decline in average unit pricing. Sales of ethanol increased 86% from $9.6 million in the first
quarter of fiscal 2009 to $18.0 million in the first quarter of fiscal 2010. Ethanol volumes
increased 95%, partially offset by a decline in average unit pricing. Quarterly volumes of both
industrial starches and ethanol increased over the prior year as the Company was still recovering
from the June 2008 flooding in Cedar Rapids, Iowa in the first quarter of fiscal 2009. Ethanol
production was not restarted until the end of September 2008.
Income from operations for the first quarter of fiscal 2010 at the Companys Industrial
Ingredients business unit increased to $2.2 million from $1.8 million a year ago on
an increase in gross margin of $4.9 million, a decrease in net insurance recoveries of $4.2
million, and an increase in operating and research and development expenses of $0.3 million. First
quarter fiscal 2010 gross margin improved due to higher volumes and lower unit energy and chemical
costs. In the first quarter of fiscal 2009, the Company recorded $6.8 million of costs associated
with flood restoration offset by $11.0 million of insurance recoveries. No insurance recoveries
were recorded in the first quarter of fiscal 2010.
Food
Ingredients
Fiscal
2010 first quarter sales for the Food Ingredients segment of $16.8
million decreased 5.5%, or $1.0 million, from the first quarter of fiscal 2009 due to the sale of
the dextrose product line in the second quarter of fiscal 2009. First quarter fiscal 2009 dextrose
sales were $0.9 million.
Income from operations for the first quarter of fiscal 2010 at the Food Ingredients
segment was $3.6 million, a 5.4% increase over last years $3.4 million due to gross margin
improvements. First quarter gross margin improved 6.9% from $5.3 million last year to $5.6 million
on lower manufacturing and raw material costs.
Corporate operating expenses
Corporate operating expenses for the first quarter of fiscal 2010 were $2.5 million, a $0.3
million decrease compared to the same quarter last year, primarily due to lower professional fees
and travel costs.
Interest expense
Interest expense for the three months ended November 30, 2009 increased $0.5 million compared
to the same period last year due to higher average debt balances. In connection with the third
amendment to the Companys credit agreement in the fourth quarter of fiscal 2009, the Company paid
additional arrangement and commitment fees to its lenders of $1.0 million. The amortization of
these costs and existing deferred loan fees over the shortened maturity of the debt increased
interest expense by approximately $0.4 million in the first quarter of fiscal 2010 compared to the
same period last year. The remaining increase in interest expense is due to higher average debt
balances. See Note 7 to the Condensed Consolidated Financial Statements.
Income taxes
The Companys effective tax rates for the three-month periods ended November 30, 2009 and 2008
were 46.7% and 5.6%, respectively. The difference between the effective tax rate and the U.S.
federal statutory rate for the three months ended November 30, 2009 is due to state income taxes
and adjustments to prior years tax expense.
The difference between the effective tax rate and the U.S. federal statutory rate for the
quarter ended November 30, 2008 is due to the favorable tax benefit of a retroactive research and
development tax credit. In October 2008, the Tax Extenders and Alternative Minimum Tax Relief Act
of 2008 retroactively reinstated and extended the research and
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development tax credit from January 1, 2008 through December 31, 2009. The effective tax rate
for the first quarter of fiscal 2009 also reflected a tax benefit of $0.2 million applicable to
fiscal 2008.
At November 30, 2009, the Company had $13.8 million of net deferred tax assets. In the first
quarter of fiscal 2010, the Company recorded a tax benefit related to an impairment charge related
to a loan to the Companys Australian subsidiary which was considered not fully collectible. See
Note 3 to the Condensed Consolidated Financial Statements. A valuation allowance has not been
provided on the net deferred tax assets as the Company expects to recover its tax assets through
future taxable income. The Companys losses in fiscal years 2008 and 2009, which are not expected
to recur, were incurred as a result of severe flooding in Cedar Rapids, Iowa, which shut down the
Companys manufacturing facility for most of the fourth quarter of fiscal 2008. The Companys
continuing operations in the U.S. generated income before income taxes in the fourth quarter of
fiscal 2009 and the first quarter of fiscal 2010.
On a quarterly basis, the Company reviews its estimate of the effective income tax rate
expected to be applicable for the full fiscal year. This rate is used to calculate income tax
expense or benefit on current year-to-date pre-tax income or loss. Income tax expense or benefit
for the current interim period is the difference between the computed year-to-date income tax
amount and the tax expense or benefit reported for previous quarters. The determination of the
annual effective tax rate applied to current year income or loss before income tax is based upon a
number of estimates and judgments, including the estimated annual pretax income of the Company in
each tax jurisdiction and the amounts of permanent differences between the book and tax accounting
for various items. The Companys interim tax expense can be impacted by changes in tax rates or
laws, the finalization of tax audits, judgments regarding uncertain tax positions and other items
that cannot be estimated with any certainty. Therefore, there can be significant volatility in the
interim provision for income tax expense.
Non-operating income (loss), net
Non-operating income (loss), net consists of the following:
Three months ended | ||||||||
November 30, 2009 | November 30, 2008 | |||||||
(In thousands) | ||||||||
Gain (loss) on foreign currency
transactions |
452 | (613 | ) | |||||
Other |
184 | 7 | ||||||
Total |
$ | 636 | $ | (606 | ) | |||
During the three months ended November 30, 2009 and 2008, the Company recognized a gain (loss)
on foreign currency transactions on Australian dollar denominated assets and liabilities as
disclosed in the table above.
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Results of Discontinued Operations
Quarter Ended | ||||||||
November 30 | ||||||||
2009 | 2008 | |||||||
Sales |
$ | 16,963 | $ | 21,360 | ||||
Cost of sales |
15,877 | $ | 21,376 | |||||
Gross margin |
1,086 | (16 | ) | |||||
Operating expenses |
2,326 | 1,224 | ||||||
Research and development expenses |
285 | 396 | ||||||
Loss from operations |
(1,525 | ) | (1,636 | ) | ||||
Non-operating income |
57 | 396 | ||||||
Interest expense |
315 | 223 | ||||||
Gain on sale of assets |
351 | | ||||||
Loss on discontinued operations before income taxes |
(1,432 | ) | (1,463 | ) | ||||
Income tax benefit |
(4,914 | ) | (531 | ) | ||||
Income (loss) on discontinued operations |
$ | 3,482 | $ | (932 | ) | |||
On August 27, 2009, the Companys Board of Directors made a determination that the Company
would exit from the business conducted by the Companys Australia/New Zealand Operations. On
September 2, 2009, the Company completed the sale of Penford New Zealand Limited. On November 27,
2009, the Companys Australian operating subsidiary, Penford Australia Limited, completed the sale
of substantially all of its operating assets to two unrelated parties. The Australia/New Zealand
Operations was previously reported in the consolidated financial statements as an operating
segment. See Note 3 to the Condensed Consolidated Financial Statements.
The Australian business reported first quarter fiscal 2010 sales of $17.0 million, a decrease
of $4.4 million from the prior year sales, primarily due to the sale of Penford New Zealand at the
beginning of the quarter. Gross margin expanded $1.1 million on the cessation of recording
depreciation expense, which contributed $0.8 million to the gross margin improvement, and
reductions in the cost of wheat. Depreciation expense was not recorded on the long-lived assets
which were classified as held for sale at August 31, 2009. Operating expenses increased in
fiscal 2010 by $1.1 million due to employee severance costs.
In the first quarter of fiscal 2010, the Company determined that intercompany loans made by
its U.S. operations to its Australian subsidiaries would not be fully collectible from the proceeds
of the Australian asset sales and the liquidation of the remaining net financial assets.
Accordingly, the Company recorded an impairment charge in the U.S. of $13 million, which was
recorded in discontinued operations. The tax benefit of the impairment was also recorded in
discontinued operations.
In fiscal years 2008 and 2009, the Companys Australian operations reported tax losses. As of
August 31, 2009, the Companys discontinued Australian operations had recorded a valuation
allowance of $14.6 million against the entire Australian net deferred tax asset because of the
uncertainty of generating sufficient future taxable income. In the quarter ended November 30,
2009, the Australian operations recorded $13 million of income related to the U.S. impairment
discussed above. Accordingly, the Company decreased its deferred tax asset related to the
carryfoward of net operating losses and reversed the corresponding tax valuation allowance. At
November 30, 2009, the valuation allowance related to the Australian net deferred tax asset was
$10.9 million.
Liquidity and Capital Resources
The Companys primary sources of short- and long-term liquidity are cash flow from operations
and its revolving line of credit, which expires on November 30, 2010, the last day of the first
quarter of fiscal 2011.
Cash provided by continuing operations was $20.8 million for the three months ended November
30, 2009 compared with cash used in continuing operations of $8.2 million for the first quarter
last year. The improvement in operating cash flow was primarily due to changes in working capital.
In the first quarter of fiscal 2009, trade and insurance receivables expanded as the Companys
Industrial Ingredients business restarted production and recovered from the flooding that occurred in Iowa in June 2008. Also, accounts payable and accrued liabilities declined during
last years first quarter as a result of payments for flood restoration services.
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On September 2, 2009, the Company completed the sale of Penford New Zealand Limited. Proceeds
from the sale, net of transaction costs, of approximately $4.8 million, were used to repay debt
outstanding in the first quarter of fiscal 2010.
On November 27, 2009, the Companys Australian operating subsidiary, Penford Australia
Limited, completed the sale of substantially all of its operating assets to two unrelated parties.
In accordance with the Companys credit facility, in December 2009, the net proceeds received of
$10.9 million were used to repay outstanding debt. Additional cash to be received from the sale
will be used to repay outstanding debt upon receipt. Amounts to be received are (1) $2.0 million
payable from an escrow account in four equal installments over thirty months from the date of sale,
and (2) $0.7 million payable in equal monthly installments through May 2010.
During the first quarter of fiscal 2010, the Iowa Department of Economic Development (IDED)
awarded financial assistance to the Company as a result of the temporary shutdown of the Cedar
Rapids, Iowa plant in the fourth quarter of fiscal 2008 caused by record flooding of the Cedar
River. The IDED provided two five-year non interest bearing loans as follows: (1) a $1.0 million
loan to be repaid in 60 equal monthly payments of $16,667 beginning December 1, 2009, and (2) a
$1.0 million loan which is forgivable if the Company maintains certain levels of employment. The
proceeds of these Iowa loans were used to repay outstanding debt in the first quarter of fiscal
2010.
At November 30, 2009, the Company had $46.4 million and $0.6 million outstanding,
respectively, under the revolving credit and term loan portions of its credit facility. In
addition, the Company had $37.4 million outstanding under its capital expansion credit facility on
November 30, 2009. Due to the maturity date of the loans, all debt under the credit facility is
classified as current liabilities on the condensed consolidated balance sheet. The Company was in
compliance with the covenants in its credit agreement, as amended, as of November 30, 2009. The
Companys ability to borrow under its revolving credit facility is subject to the Companys
compliance with, and is limited by, the covenants in its credit agreement, as amended. See Note 7
to the Condensed Consolidated Financial Statements for details of the Companys credit agreement.
As of November 30, 2009, all of the Companys outstanding debt under its credit facility is
subject to variable interest rates. Under interest rate swap agreements with several banks, the
Company has fixed its interest rates on U.S. dollar denominated term debt of $22.0 million at 4.18%
and $6.0 million at 5.08%, plus the applicable margin pursuant to its credit agreement.
The Company is a party to various debt and lease agreements at November 30, 2009 that
contractually commit the Company to pay certain amounts in the future. The Company also has open
purchase orders entered into in the ordinary course of business for raw materials, capital projects
and other items, for which significant terms have been confirmed. As of November 30, 2009, there
have been no material changes in the Companys contractual obligations since August 31, 2009.
Off-Balance Sheet Arrangements
The
Company had no off-balance sheet arrangements at November 30, 2009.
Recent Accounting Pronouncements
In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605) Multiple
Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 eliminates the residual method of
allocation and requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method and expands the disclosures
related to multiple-deliverable revenue arrangements. ASU 2009-13 is effective for fiscal years
beginning on or after June 15, 2010 (fiscal 2011 for the Company). The adoption of ASU 2009-13 is
not expected to have any impact on the Companys financial position or results of operations.
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Critical Accounting Policies and Estimates
The Companys consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The process of preparing financial statements
requires management to make estimates, judgments and assumptions that affect the Companys
financial position and results of operations. These estimates, judgments and assumptions are based
on the Companys historical experience and managements knowledge and understanding of the current
facts and circumstances. Note 1 to the Consolidated Financial Statements in the Annual Report on
Form 10-K for the fiscal year ended August 31, 2009 describes the significant accounting policies
and methods used in the preparation of the consolidated financial statements. Management believes
that its estimates, judgments and assumptions are reasonable based upon information available at
the time this report was prepared. To the extent there are material differences between estimates,
judgments and assumptions and the actual results, the financial statements will be affected.
Item 3: Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to market risks from adverse changes in interest rates, foreign
currency exchange rates and commodity prices. There have been no material changes in the Companys
exposure to market risks from the disclosure in the Companys Annual Report on Form 10-K for the
year ended August 31, 2009.
Item 4: Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Penfords management, with the participation of its chief executive officer and chief
financial officer, evaluated the effectiveness of the Companys disclosure controls and procedures
as of November 30, 2009. Based on managements evaluation, the chief executive officer and chief
financial officer have concluded that the Companys disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) are effective to ensure that information required to be disclosed by the Company
in reports filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commission rules and
forms and is accumulated and communicated to management, including the chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in the Companys internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended November 30, 2009
that has materially affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.
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PART II OTHER INFORMATION
Item 1: Legal Proceedings
On January 23, 2009 the Company filed suit in the U.S. District Court for the Northern
District of Iowa, Cedar Rapids Division, against two insurance companies, National Union Fire
Insurance Company of Pittsburgh, Pennsylvania and ACE American Insurance Company, related to
insurance coverage arising out of the flood that struck the Companys Cedar Rapids, Iowa plant in
June 2008. The Company is currently seeking in this litigation additional payments from the
insurers of more than $25 million for business interruption losses that occurred as a result of the
flood, as well as various damages. The Company cannot at this time determine the likelihood of any
outcome or estimate the amount of any judgment that might be awarded.
The Company is involved from time to time in various other claims and litigation arising in
the normal course of business. In the judgment of management, which relies in part on information
from the Companys outside legal counsel, the ultimate resolution of these matters will not
materially affect the consolidated financial position, results of operations or liquidity of the
Company.
Item 1A: Risk Factors
The information set forth in this report should be read in conjunction with the risk factors
discussed in Part I, Item 1A of the Companys Annual Report on Form 10-K for the year ended August
31, 2009, which could materially impact the Companys business, financial condition and future
results. The risks described in the Annual Report on Form 10-K and in this Item IA are not the
only risks facing the Company. Additional risks and uncertainties not currently known by the
Company or that the Company currently deems to be immaterial also may materially adversely affect
the Companys business, financial condition and/or operating results.
The
Companys bank credit agreement matures on November 30, 2010, at which time the debt outstanding under
the agreement must be repaid, refinanced or extended.
The
Companys bank credit agreement matures on November 30, 2010, and must be repaid, refinanced or
extended at that time. The Company may not be able to extend the debt at the maturity date, and
equity or debt financing may not be available to the Company to replace some or all of the maturing
debt on acceptable terms, if at all. The Companys inability to
replace or renew its bank credit
agreement or to obtain other adequate replacement financing from debt or equity sources, would have
a material adverse effect on the Companys financial position, results of operations and liquidity.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
a. | None | ||
b. | None | ||
c. | Issuer Purchases of Equity Securities |
Total Number of | ||||||||||||||||
Shares Purchased as | Maximum Number of | |||||||||||||||
Total Number of | Part of Publicly | Shares that May Yet Be | ||||||||||||||
Shares | Average Price Paid | Announced Plans or | Purchased Under the | |||||||||||||
Purchased (1) | per Share | Programs | Plans or Programs | |||||||||||||
November 1 - November 30, 2009 |
6,888 | $ | 5.90 | | | |||||||||||
October 1 - October 31, 2009 |
| | | | ||||||||||||
September 1 - September 30, 2009 |
| | | | ||||||||||||
Total |
6,888 | $ | 5.90 | | |
(1) | Represents shares repurchased to satisfy tax withholding obligations on vesting shares of restricted stock awards. |
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Item 5: Other Information.
In January 2010, the Companys Executive Compensation and
Development Committee approved a Form of Performance Based Cash Award Agreement in connection with
awards under the Companys 2006 Long-Term Incentive Plan. The Form of Performance Based Cash Award
Agreement that was approved is attached as Exhibit 10.16.
Item 6: Exhibits.
(d) Exhibits
10.16
|
Form of Performance Based Cash Award Agreement under the 2006 Long-Term Incentive Plan | |
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32
|
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Penford Corporation | ||||
(Registrant) | ||||
January 8, 2010 | /s/ Steven O. Cordier | |||
Steven O. Cordier | ||||
Senior Vice President and Chief Financial Officer |
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EXHIBIT INDEX
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please
note that they are included to provide information regarding their terms and are not intended to
provide any other factual or disclosure information about Penford or the other parties to the
agreements. The agreements may contain representations and warranties by each of the parties to
the applicable agreement. These representations and warranties have been made solely for the
benefit of the other party or parties to the applicable agreement and:
| should not in all instances be treated as categorical statements of fact, but rather as a means of allocating the risk to one of the parties if those statements prove to be inaccurate; | ||
| may have been qualified by disclosures that were made to the other party or parties in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; | ||
| may apply standards of materiality in a manner that is different from what may be viewed as material to investors; and | ||
| were made only as of the date of the applicable agreement or other date or dates that may be specified in the agreement and are subject to more recent developments. |
Accordingly, the representations and warranties may not describe the actual state of affairs
as of the date they were made or at any other time. Additional information about Penford may be
found elsewhere in this Quarterly Report on Form 10-Q, Penfords Annual Report on Form 10-K for the
year ended August 31, 2009 and in Penfords other public filings, which are available without
charge through the Securities and Exchange Commissions website at http://sec.gov.
Exhibit No. | Description | |
10.16
|
Form of Performance Based Cash Award Agreement under the 2006 Long-Term Incentive Plan | |
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32
|
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32