Attached files
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EX-32 - EX-32 - PENFORD CORP | d72095exv32.htm |
EX-31.2 - EX-31.2 - PENFORD CORP | d72095exv31w2.htm |
EX-31.1 - EX-31.1 - PENFORD CORP | d72095exv31w1.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 February 28, 2010
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 outstanding as of April 5, 2010 was
11,363,272.
PENFORD CORPORATION AND SUBSIDIARIES
INDEX
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Table of Contents
PART I FINANCIAL INFORMATION
Item 1: Financial Statements
PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
February 28, | August 31, | |||||||
(In thousands, except per share data) | 2010 | 2009 | ||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | | $ | 5,540 | ||||
Trade accounts receivable, net |
26,486 | 32,192 | ||||||
Inventories |
20,849 | 18,155 | ||||||
Prepaid expenses |
4,049 | 5,081 | ||||||
Income tax receivable |
4,102 | 3,892 | ||||||
Other |
3,199 | 3,476 | ||||||
Current assets of discontinued operations |
3,673 | 38,486 | ||||||
Total current assets |
62,358 | 106,822 | ||||||
Property, plant and equipment, net |
115,350 | 119,049 | ||||||
Restricted cash value of life insurance |
7,860 | 9,761 | ||||||
Deferred tax assets |
12,595 | 8,277 | ||||||
Other assets |
1,223 | 2,075 | ||||||
Other intangible assets, net |
444 | 481 | ||||||
Goodwill, net |
7,897 | 7,553 | ||||||
Non-current assets of discontinued operations |
| 4,227 | ||||||
Total assets |
$ | 207,727 | $ | 258,245 | ||||
Liabilities and Shareholders equity |
||||||||
Current liabilities: |
||||||||
Cash overdraft, net |
$ | 2,896 | $ | | ||||
Current portion of long-term debt and capital lease obligations
(Note 7) |
422 | 21,241 | ||||||
Accounts payable |
12,527 | 14,745 | ||||||
Accrued liabilities |
9,005 | 8,972 | ||||||
Current liabilities of discontinued operations |
451 | 16,028 | ||||||
Total current liabilities |
25,301 | 60,986 | ||||||
Long-term debt and capital lease obligations |
55,530 | 71,141 | ||||||
Other postretirement benefits |
18,202 | 17,678 | ||||||
Pension benefit liability |
18,043 | 18,043 | ||||||
Other liabilities |
6,418 | 8,187 | ||||||
Non-current liabilities of discontinued operations |
| 2,851 | ||||||
Total liabilities |
123,494 | 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 13,190 and 13,157 shares, respectively,
including treasury shares |
13,190 | 13,157 | ||||||
Additional paid-in capital |
94,224 | 93,829 | ||||||
Retained earnings |
23,689 | 7,944 | ||||||
Treasury stock, at cost, 1,981,016 shares |
(32,757 | ) | (32,757 | ) | ||||
Accumulated other comprehensive loss |
(14,113 | ) | (2,814 | ) | ||||
Total shareholders equity |
84,233 | 79,359 | ||||||
Total liabilities and shareholders equity |
$ | 207,727 | $ | 258,245 | ||||
The accompanying notes are an integral part of these statements.
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Table of Contents
PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended | Six months ended | |||||||||||||||
February 28, | February 28, | |||||||||||||||
(In thousands, except per share data) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Sales |
$ | 62,293 | $ | 63,939 | $ | 129,363 | $ | 123,522 | ||||||||
Cost of sales |
56,231 | 66,519 | 112,673 | 120,698 | ||||||||||||
Gross margin |
6,062 | (2,580 | ) | 16,690 | 2,824 | |||||||||||
Operating expenses |
6,054 | 6,121 | 12,542 | 12,164 | ||||||||||||
Research and development expenses |
1,124 | 1,168 | 2,121 | 2,291 | ||||||||||||
Flood related costs, net of insurance proceeds |
| (3,800 | ) | | (8,034 | ) | ||||||||||
Income (loss) from operations |
(1,116 | ) | (6,069 | ) | 2,027 | (3,597 | ) | |||||||||
Interest expense |
1,621 | 1,177 | 3,420 | 2,447 | ||||||||||||
Other non-operating income (expense), net |
(27 | ) | 1,554 | 609 | 948 | |||||||||||
Loss from continuing operations before income taxes |
(2,764 | ) | (5,692 | ) | (784 | ) | (5,096 | ) | ||||||||
Income tax benefit |
(963 | ) | (1,487 | ) | (39 | ) | (1,454 | ) | ||||||||
Loss from continuing operations |
(1,801 | ) | (4,205 | ) | (745 | ) | (3,642 | ) | ||||||||
Income (loss) from discontinued operations, net of tax |
13,048 | (17,973 | ) | 16,531 | (18,905 | ) | ||||||||||
Net income (loss) |
$ | 11,247 | $ | (22,178 | ) | $ | 15,786 | $ | (22,547 | ) | ||||||
Weighted average common shares and equivalents
outstanding, basic and diluted: |
11,204 | 11,174 | 11,193 | 11,165 | ||||||||||||
Earnings (loss) per common share, basic and diluted: |
||||||||||||||||
Loss per share from continuing operations |
$ | (0.17 | ) | $ | (0.38 | ) | $ | (0.08 | ) | $ | (0.33 | ) | ||||
Earnings (loss) per share from discontinued operations |
$ | 1.16 | $ | (1.61 | ) | $ | 1.48 | $ | (1.69 | ) | ||||||
Earnings (loss) per share |
$ | 0.99 | $ | (1.99 | ) | $ | 1.40 | $ | (2.02 | ) | ||||||
Dividends declared per common share |
$ | | $ | 0.06 | $ | | $ | 0.12 |
The accompanying notes are an integral part of these statements.
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Table of Contents
PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Six Months Ended | ||||||||
February 28, | February 28, | |||||||
(In thousands) | 2010 | 2009 | ||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 15,786 | $ | (22,547 | ) | |||
Less: Income (loss) from discontinued operations |
16,531 | (18,905 | ) | |||||
Net loss from continuing operations |
(745 | ) | (3,642 | ) | ||||
Adjustments to reconcile net income from continuing
operations to net cash provided by (used in) operations: |
||||||||
Depreciation and amortization |
7,518 | 7,337 | ||||||
Stock-based compensation |
780 | 1,443 | ||||||
Gain on sale of dextrose product line |
| (1,562 | ) | |||||
Deferred income tax expense |
79 | 1,844 | ||||||
Loss on derivative transactions |
863 | 840 | ||||||
Foreign currency transaction (gain) loss |
(417 | ) | 641 | |||||
Other |
(3 | ) | 3 | |||||
Change in assets and liabilities: |
||||||||
Trade receivable |
5,706 | (19,263 | ) | |||||
Prepaid expenses |
805 | 67 | ||||||
Inventories |
(1,758 | ) | (275 | ) | ||||
Accounts payable and accrued liabilities |
(1,861 | ) | (13,948 | ) | ||||
Taxes payable |
(245 | ) | 1,093 | |||||
Insurance recovery receivable |
| 8,000 | ||||||
Intercompany receivable |
19,852 | (2,732 | ) | |||||
Other |
891 | 3,403 | ||||||
Net cash flow provided by (used in) operating activities
continuing operations |
31,465 | (16,751 | ) | |||||
Investing activities: |
||||||||
Acquisition of property, plant and equipment, net |
(2,910 | ) | (2,798 | ) | ||||
Proceeds from sale of dextrose product line |
| 2,857 | ||||||
Other |
(40 | ) | (53 | ) | ||||
Net cash (used in) provided by investing activities
continuing operations |
(2,950 | ) | 6 | |||||
Cash flows from financing activities: |
||||||||
Proceeds from revolving line of credit |
| 38,476 | ||||||
Payments on revolving line of credit |
(17,735 | ) | (21,500 | ) | ||||
Proceeds from long-term debt |
2,000 | | ||||||
Payments of long-term debt |
(21,055 | ) | (3,250 | ) | ||||
Payments under capital lease obligation |
(123 | ) | (139 | ) | ||||
Payment of loan fees |
(38 | ) | (551 | ) | ||||
Increase in cash overdraft |
2,896 | 5,059 | ||||||
Payment of dividends |
| (1,350 | ) | |||||
Net cash (used in) provided by financing activities
continuing activities |
(34,055 | ) | 16,745 | |||||
Cash flows from discontinued operations: |
||||||||
Net cash used in operating activities |
(13,928 | ) | (708 | ) | ||||
Net cash provided by (used in) investing activities |
18,222 | (470 | ) | |||||
Net cash (used in) provided by financing activities |
(3,399 | ) | 839 | |||||
Effect of exchange rate changes on cash and cash equivalents |
(275 | ) | (156 | ) | ||||
Net cash provided by (used in) discontinued operations |
620 | (495 | ) | |||||
Decrease in cash and cash equivalents |
(4,920 | ) | (495 | ) | ||||
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 |
1,254 | 39 | ||||||
Less: cash balance of discontinued operations, end of period |
1,254 | 39 | ||||||
Cash and cash equivalents of continuing operations, end of period |
$ | | $ | | ||||
The accompanying notes are an integral part of these statements.
5
Table of Contents
PENFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 food and industrial 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 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.
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 February 28, 2010 and the condensed
consolidated statements of operations and cash flows for the interim periods ended February 28,
2010 and February 28, 2009 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.
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
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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.
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- and six-month periods ended
February 28, 2010. 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 2009-13 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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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 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, approximately $0.8
million 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 five installments and expects to receive the final installment as scheduled for May 2010.
Three Months Ended | Six Months Ended | |||||||||||||||
February 28, | February 28, | February 28, | February 28, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||
Sales |
$ | | $ | 16,068 | $ | 16,963 | $ | 37,428 | ||||||||
Loss from operations |
$ | (183 | ) | $ | (16,931 | ) | $ | (1,708 | ) | $ | (18,567 | ) | ||||
Interest expense |
133 | 172 | 448 | 395 | ||||||||||||
Gain (loss) on sale of assets |
(152 | ) | | 199 | | |||||||||||
Reclassification of currency translation
adjustments into earnings |
13,849 | | 13,420 | | ||||||||||||
Other non-operating income, net |
141 | 371 | 627 | 767 | ||||||||||||
Loss from discontinued operations before taxes |
13,522 | (16,732 | ) | 12,090 | (18,195 | ) | ||||||||||
Income tax expense (benefit) |
474 | 1,241 | (4,441 | ) | 710 | |||||||||||
Income (loss) from discontinued operations,
net of tax |
$ | 13,048 | $ | (17,973 | ) | $ | 16,531 | $ | (18,905 | ) | ||||||
During the six months ended February 28, 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 $13.6 million, which was
recorded in discontinued operations. The tax benefit of the impairment was also recorded in
discontinued operations. The liquidation of the remaining net assets of Penford Australia was
substantially completed in the second quarter of fiscal 2010 and, as a result, $13.8 of currency
translation adjustments were reclassified from accumulated other comprehensive income into second
quarter earnings.
In the second quarter of fiscal 2009, the Company recorded a $13.8 million non-cash goodwill
impairment charge, which represented all of the goodwill allocated to its Australia/New Zealand
reporting unit.
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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. During the six months ended February
28, 2010, the Australian operations recorded $13.6 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
February 28, 2010, the valuation allowance related to the Australian net deferred tax asset was
$10.8 million.
February 28, | August 31, | |||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
ASSETS |
||||||||
Cash |
$ | 1,254 | $ | 634 | ||||
Trade accounts receivable, net |
414 | 14,482 | ||||||
Inventories |
| 22,129 | ||||||
Prepaid expenses |
| 595 | ||||||
Income tax receivable |
| 190 | ||||||
Other |
2,005 | 456 | ||||||
Current assets of discontinued operations |
3,673 | 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 |
$ | 3,673 | $ | 42,713 | ||||
LIABILITIES |
||||||||
Short-term borrowings |
$ | | $ | 3,327 | ||||
Accounts payable |
451 | 10,697 | ||||||
Accrued liabilities |
| 2,004 | ||||||
Current liabilities of discontinued operations |
451 | 16,028 | ||||||
Other liabilities |
| 2,851 | ||||||
Non-current liabilities of discontinued operations |
| 2,851 | ||||||
Total liabilities of discontinued operations |
$ | 451 | $ | 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
February 28, 2010, the aggregate number of shares of the Companys common stock that were available
to be issued as awards under the 2006 Incentive Plan was 86,767. 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.
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Stock Option Awards
A summary of the stock option activity for the six months ended February 28, 2010, 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 |
(65,500 | ) | $ | 16.35 | ||||||||||||
Outstanding Balance, February 28, 2010 |
1,298,271 | $ | 15.13 | 3.83 | $ | 104,170 | ||||||||||
Options Exercisable at February 28, 2010 |
989,521 | $ | 14.53 | 3.43 | $ | 104,170 |
No stock options were granted under the 2006 Incentive Plan during the six months ended
February 28, 2010 and 2009.
The aggregate intrinsic value disclosed in the table above represents the total pretax
intrinsic value, based on the Companys closing stock price of $11.14 as of February 28, 2010 that
would have been received by the option holders had all option holders exercised on that date. No
stock options were exercised during the six months ended February 28, 2010.
As of February 28, 2010, the Company had $0.9 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 six months ended February 28, 2010 as follows:
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Nonvested at August 31, 2009 |
89,582 | $ | 31.31 | |||||
Granted |
113,707 | 6.60 | ||||||
Vested |
(39,082 | ) | 26.31 | |||||
Cancelled |
(9,500 | ) | 10.82 | |||||
Nonvested at February 28, 2010 |
154,707 | $ | 15.67 |
On January 1, 2010, each non-employee director received an award of 2,301 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 February 28, 2010, the Company had $1.2 million of unrecognized compensation cost
related to non-vested restricted stock awards that is expected to be recognized over a weighted
average period of 1.3 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 for the three and six months ended
February 28, 2010 and 2009 and the effect on the Companys Condensed Consolidated Statements of
Operations (in thousands):
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Three Months Ended | Six Months Ended | |||||||||||||||
February 28, | February 28, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Cost of sales |
$ | 39 | $ | 74 | $ | 86 | $ | 163 | ||||||||
Operating expenses |
269 | 524 | 679 | 1,249 | ||||||||||||
Research and development expenses |
8 | 15 | 15 | 31 | ||||||||||||
Income (loss) from discontinued operations |
| 5 | (25 | ) | 11 | |||||||||||
Total stock-based compensation expense |
$ | 316 | $ | 618 | $ | 755 | $ | 1,454 | ||||||||
Tax benefit |
120 | 235 | 287 | 553 | ||||||||||||
Total stock-based compensation expense,
net of tax |
$ | 196 | $ | 383 | $ | 468 | $ | 901 | ||||||||
5INVENTORIES
The components of inventory are as follows:
February 28, | August 31, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Raw materials |
$ | 8,796 | $ | 7,265 | ||||
Work in progress |
1,335 | 1,921 | ||||||
Finished goods |
10,718 | 8,969 | ||||||
Total inventories |
$ | 20,849 | $ | 18,155 | ||||
6PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
February 28, | August 31, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Land |
$ | 10,243 | $ | 10,229 | ||||
Plant and equipment |
322,839 | 321,356 | ||||||
Construction in progress |
3,605 | 2,214 | ||||||
336,687 | 333,799 | |||||||
Accumulated depreciation |
(221,337 | ) | (214,750 | ) | ||||
Net property, plant and equipment |
$ | 115,350 | $ | 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); Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A., Rabobank Nederland New York Branch; U.S. Bank National
Association; and the Australia and New Zealand Banking Group Limited.
Substantially
all of the Companys U.S. assets secured the 2007 Agreement. Under the
covenants of the 2007 Agreement, as amended, the Company was required
to maintain a minimum EBITDA (as defined
in the amended 2007 Agreement), tangible net worth and fixed charge coverage ratio each fiscal
quarter. The amended 2007 Agreement also provided that the Company may not declare or pay
dividends on, or make any other distributions in respect of, its common stock. Annual capital
expenditures were limited to $6.5 million.
On
April 7, 2010, the Company issued $40 million of preferred
stock and, on April 8, 2010, used the proceeds to
pay a portion of the outstanding bank debt obligations under the 2007
Agreement. Also on April 7, 2010, the Company refinanced its bank
debt. The Company entered into a
11
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$60 million Third Amended and Restated Credit Agreement (the 2010 Agreement) among the
Company; Penford Products Co.; Bank of Montreal; Bank of America
National Association; and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A.,
Rabobank Nederland New York Branch.
The 2010 Agreement is secured by substantially all of the
Companys assets, including the stock of Penford Products Co.,
the Companys principal U.S. subsidiary company, and 65% of the
stock of Penford Holdings Pty. Ltd., which owns Penford Australia.
The 2010 Agreement
refinanced the unpaid debt remaining under the 2007 Agreement. Under the 2010 Agreement, the Company may borrow $60 million in revolving lines
of credit. The lenders revolving credit loan commitment may be increased under certain
conditions. On April 8, 2010, the Company had $15.1 million
outstanding under the 2010 Agreement. Under the 2010 Agreement, there are no scheduled principal payments prior to
maturity on April 7, 2015. As a result of the refinancing, the Companys short-term debt
obligations at February 28, 2010 have been classified as long-term debt on the balance sheet. See
Note 16 to the Condensed Consolidated Financial Statements for further details on the transactions.
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 2007 Agreement, the net sale proceeds received through March 31, 2010 of
$12.3 million were used to repay outstanding debt. 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.
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 February 28, 2010, the Company had $1.9 million
outstanding related to the IDED loans.
At February 28, 2010, the Company had $28.4 million and $24.8 million outstanding,
respectively, under the revolving credit and capital expansion portions of the 2007 Agreement. The
Company was in compliance with the covenants in the 2007 Agreement, as amended, as of February 28,
2010.
As of February 28, 2010, 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 $20.8 million at 4.18%
and $6.2 million at 5.08%, plus the applicable margin under the 2007 Agreement. In connection with
the refinancing, the Company expects to record a pre-tax non-cash charge to earnings of
approximately $1.0 million in the third quarter of fiscal 2010 related to unamortized transaction
fees associated with the prior credit facility.
8INCOME TAXES
The Companys effective tax rates for the three- and six-month periods ended February 28, 2010
were 34.8% and 5.0%, respectively. The difference between the effective tax rate and the U.S.
federal statutory rate was due to state income taxes offset by adjustments to prior years tax
expense and an increase in unrecognized tax benefits of $0.1 million and $0.2 million,
respectively, for the three- and six-month periods ended February 28, 2010. The decrease in the
effective tax rate for the six-month period compared with the effective rate for the second quarter
is due to the change in the proportion of the prior year tax adjustments and increase in
unrecognized tax benefits to pretax income or loss.
The Companys effective tax rates for the three- and six-month periods ended February 28, 2009
were 26.1% and 28.5%, respectively. The difference between the effective tax rate and the U.S.
federal statutory rate for the three- and six-month periods was due to the favorable tax benefit of
a retroactive research and development tax
12
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credit offset by an increase in the amount of unrecognized tax benefits. Unrecognized tax benefits
increased by $0.7 million and $0.8 million for the three- and six-month periods ended February 28,
2009.
In the six months ended February 28, 2010, the amount of unrecognized tax benefits increased
by $0.2 million, including interest and penalties. The total amount of unrecognized tax benefits
at February 28, 2010 was $1.2 million, all of which, if recognized, would impact the effective tax
rate. At February 28, 2010, 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 February 28, 2010 will change materially in the next 12 months.
At February 28, 2010, the Company had $13.3 million of net deferred tax assets. In the first
half 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 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.
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.
9OTHER COMPREHENSIVE INCOME (LOSS) (OCI)
The components of total comprehensive income (loss) are as follows:
Three months ended | Six months ended | |||||||||||||||
February 28, | February 28, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Net income (loss) |
$ | 11,247 | $ | (22,178 | ) | $ | 15,786 | $ | (22,547 | ) | ||||||
Foreign currency translation adjustments |
(256 | ) | (1,346 | ) | 930 | (20,302 | ) | |||||||||
Gain from foreign currency translation
reclassified into earnings |
(13,849 | ) | | (13,420 | ) | | ||||||||||
Net unrealized gain (loss) on derivative
instruments that qualify as cash flow
hedges,
net of tax |
94 | (1,890 | ) | 1,191 | (2,480 | ) | ||||||||||
Total comprehensive income (loss) |
$ | (2,764 | ) | $ | (25,414 | ) | $ | 4,487 | $ | (45,329 | ) | |||||
The liquidation of the remaining net assets of Penford Australia was substantially completed
in the second quarter of fiscal 2010 and, as a result, currency translation adjustments were
reclassified from accumulated other comprehensive income into second quarter earnings.
13
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10NON-OPERATING INCOME (LOSS), NET
Non-operating income (loss), net consists of the following:
Three months ended | Six months ended | |||||||||||||||
February 28, | February 28, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Gain on sale of dextrose product line |
$ | | $ | 1,562 | $ | | $ | 1,562 | ||||||||
Gain (loss) on foreign currency
transactions |
(35 | ) | (28 | ) | 417 | (641 | ) | |||||||||
Other |
8 | 20 | 192 | 27 | ||||||||||||
Total |
$ | (27 | ) | $ | 1,554 | $ | 609 | $ | 948 | |||||||
During the three and six months ended February 28, 2010 and 2009, the Company recognized a
gain (loss) on foreign currency transactions on Australian dollar denominated assets and
liabilities as disclosed in the table above.
In the second quarter of fiscal 2009, the Companys Food Ingredients North America business
segment sold assets related to its dextrose product line to a third-party purchaser for $2.9
million, net of transaction costs. The Company recorded a $1.6 million gain on the sale.
11 PENSION AND POST-RETIREMENT BENEFIT PLANS
The components of the net periodic pension and post-retirement benefit costs for the three and
six months ended February 28, 2010 and 2009 are as follows:
Defined benefit pension plans
Three months ended | Six months ended | |||||||||||||||
February 28, | February 28, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Service cost |
$ | 389 | $ | 355 | $ | 778 | $ | 710 | ||||||||
Interest cost |
641 | 645 | 1,282 | 1,290 | ||||||||||||
Expected return on plan assets |
(506 | ) | (607 | ) | (1,012 | ) | (1,214 | ) | ||||||||
Amortization of prior service cost |
61 | 63 | 122 | 126 | ||||||||||||
Amortization of actuarial losses |
304 | 53 | 608 | 106 | ||||||||||||
Net periodic benefit cost |
$ | 889 | $ | 509 | $ | 1,778 | $ | 1,018 | ||||||||
Post-retirement health care plans
Three months ended | Six months ended | |||||||||||||||
February 28, | February 28, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Service cost |
$ | 88 | $ | 65 | $ | 176 | $ | 130 | ||||||||
Interest cost |
269 | 228 | 538 | 456 | ||||||||||||
Amortization of prior service cost |
(38 | ) | (38 | ) | (76 | ) | (76 | ) | ||||||||
Amortization of actuarial losses |
74 | | 148 | | ||||||||||||
Net periodic benefit cost |
$ | 393 | $ | 255 | $ | 786 | $ | 510 | ||||||||
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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 three- and
six-month periods ended February 28, 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. |
As of February 28, 2010 | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
(in thousands) | ||||||||||||||||
Current assets (Other Current Assets): |
||||||||||||||||
Commodity derivatives (1) |
$ | 1,077 | $ | | $ | | $ | 1,077 | ||||||||
Current liabilities (Accrued Liabilities): |
||||||||||||||||
Interest rate swaps |
$ | | $ | 1,717 | $ | | $ | 1,717 | ||||||||
(1) | Commodity derivative assets and liabilities have been offset by cash collateral due and paid under master netting arrangements. The cash collateral offset was $1.4 million at February 28, 2010. |
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. In the
first quarter of fiscal 2010, the Company received two non interest bearing loans from the State of
Iowa totaling $2.0 million. The fair value of this debt at February 28, 2010 was estimated to be
$1.5 million. See Note 7.
Interest Rate Swap Agreements
15
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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 February 28, 2010,
the Company had three interest rate swaps which fixed the interest payable on $20.8 million of debt
at 4.18% and on $6.2 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. In the third quarter of fiscal 2010, the Company expects to terminate its interest rate
swaps and reclassify approximately $1.7 million of losses from accumulated other comprehensive
income to earnings.
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 February 28, 2010,
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 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 goods 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 February 28, 2010, Penford had purchased corn positions of 7.4 million bushels, of which
5.1 million bushels represented equivalent firm priced starch sales contract volume, resulting in
an open position of 2.3 million bushels.
As of February 28, 2010, the Company had the following outstanding forward contracts, futures
contracts and interest rate swaps:
Corn Futures
|
5,955,000 Bushels | |
Natural Gas Futures
|
1,390,000 mmbtu (millions of British thermal units) | |
Interest Rate Swap Contracts
|
27,000,000 US Dollars (Notional Amount) |
16
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The following tables provide information about the fair values of the Companys derivatives,
by contract type, as of February 28, 2010 and August 31, 2009.
Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||
Fair Value | Fair Value | |||||||||||||||||||||||
Balance Sheet | Feb. 28, | Aug. 31, | Balance Sheet | Feb. 28, | Aug. 31, | |||||||||||||||||||
In thousands | Location | 2010 | 2009 | Location | 2010 | 2009 | ||||||||||||||||||
Cash Flow Hedges: |
||||||||||||||||||||||||
Corn Futures |
Other Current Assets | $ | 402 | $ | 82 | Other Current Assets | $ | 221 | $ | 916 | ||||||||||||||
Natural Gas Futures |
Other Current Assets | | | Other Current Assets | 547 | 1,301 | ||||||||||||||||||
Interest Rate Contracts |
Other Current Assets | | | Accrued Liabilities | 1,717 | 1,829 | ||||||||||||||||||
Fair Value Hedges: |
||||||||||||||||||||||||
Corn Futures |
Other Current Assets | 351 | 1,303 | Other Current Assets | 246 | 174 | ||||||||||||||||||
Total Derivatives |
||||||||||||||||||||||||
Designated as Hedging
Instruments |
$ | 753 | $ | 1,385 | $ | 2,731 | $ | 4,220 | ||||||||||||||||
The following tables provide information about the effect of derivative instruments on
the financial performance of the Company for the three- and six-month periods ended February 28,
2010.
Amount of Gain (Loss) | ||||||||||||||||||||||||
Amount of Gain (Loss) | Reclassified from | Amount of Gain (Loss) | ||||||||||||||||||||||
Recognized in OCI | AOCI into Income | Recognized in Income | ||||||||||||||||||||||
Quarter Ended February 28 | Quarter Ended February 28 | Quarter Ended February 28 | ||||||||||||||||||||||
In thousands | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
Cash Flow Hedges: |
||||||||||||||||||||||||
Corn Futures (1) |
$ | 43 | $ | (905 | ) | $ | 1,119 | $ | 6,981 | $ | (80 | ) | $ | 618 | ||||||||||
Natural Gas Futures (1) |
(547 | ) | (4,902 | ) | (241 | ) | (795 | ) | | | ||||||||||||||
Ethanol Futures (1) |
119 | | 138 | | | | ||||||||||||||||||
Interest Rate
Contracts(2) |
(108 | ) | (448 | ) | (283 | ) | (164 | ) | | | ||||||||||||||
FX Contracts (1) |
| (290 | ) | | | | | |||||||||||||||||
$ | (493 | ) | $ | (6,545 | ) | $ | 733 | $ | 6,022 | $ | (80 | ) | $ | 618 | ||||||||||
Fair Value Hedges: |
||||||||||||||||||||||||
Corn Futures (1) (3) |
$ | 27 | $ | 337 | ||||||||||||||||||||
Amount of Gain (Loss) | ||||||||||||||||||||||||
Amount of Gain (Loss) | Reclassified from | Amount of Gain (Loss) | ||||||||||||||||||||||
Recognized in OCI | AOCI into Income | Recognized in Income | ||||||||||||||||||||||
6 Months Ended February 28 | 6 Months Ended February 28 | 6 Months Ended February 28 | ||||||||||||||||||||||
In thousands | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
Cash Flow Hedges: |
||||||||||||||||||||||||
Corn Futures (1)
|
$ | 344 | $ | (2,155 | ) | $ | 1,096 | $ | 1,650 | $ | 175 | $ | (659 | ) | ||||||||||
Natural Gas Futures (1)
|
(1,243 | ) | (7,994 | ) | (1,106 | ) | (1,853 | ) | | | ||||||||||||||
Ethanol Futures (1)
|
(590 | ) | | (439 | ) | | | | ||||||||||||||||
Interest Rate
Contracts(2)
|
(457 | ) | (1,250 | ) | (569 | ) | (237 | ) | | | ||||||||||||||
FX Contracts (1)
|
| (580 | ) | (26 | ) | | | | ||||||||||||||||
$ | (1,946 | ) | $ | (11,979 | ) | $ | (1,044 | ) | $ | (440 | ) | $ | 175 | $ | (659 | ) | ||||||||
Fair Value Hedges: |
||||||||||||||||||||||||
Corn Futures (1) (3)
|
$ | 61 | $ | (891 | ) | |||||||||||||||||||
(1) | Gains and losses reported in cost of goods sold | |
(2) | Gains and losses reported in interest expense | |
(3) | Hedged items are firm commitments and inventory |
17
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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 fuel 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 | Six months ended | |||||||||||||||
February 28, | February 28, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Sales: |
||||||||||||||||
Industrial IngredientsNorth America |
||||||||||||||||
Industrial Starch |
$ | 27,983 | $ | 32,997 | $ | 60,331 | $ | 65,205 | ||||||||
Ethanol |
18,082 | 14,319 | 36,042 | 23,952 | ||||||||||||
46,065 | 47,316 | 96,373 | 89,157 | |||||||||||||
Food IngredientsNorth America |
16,228 | 16,623 | 32,990 | 34,365 | ||||||||||||
$ | 62,293 | $ | 63,939 | $ | 129,363 | $ | 123,522 | |||||||||
Income (loss) from operations: |
||||||||||||||||
Industrial IngredientsNorth America |
$ | (1,721 | ) | $ | (6,652 | ) | $ | 433 | $ | (4,852 | ) | |||||
Food IngredientsNorth America |
2,848 | 2,813 | 6,429 | 6,211 | ||||||||||||
Corporate and other |
(2,243 | ) | (2,230 | ) | (4,835 | ) | (4,956 | ) | ||||||||
$ | (1,116 | ) | $ | (6,069 | ) | $ | 2,027 | $ | (3,597 | ) | ||||||
February 28, | August 31, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Total assets: |
||||||||
Industrial Ingredients |
$ | 135,547 | $ | 139,609 | ||||
Food Ingredients |
37,531 | 37,387 | ||||||
Discontinued Operations |
3,673 | 42,713 | ||||||
Corporate and other |
30,976 | 38,536 | ||||||
$ | 207,727 | $ | 258,245 | |||||
Included in the Industrial Ingredients North America loss from operations for the three-
and six-month periods ended February 28, 2010 were $3.8 million and $8.0 million, respectively, of
insurance recoveries related to the fiscal 2008 flooding in Cedar Rapids, Iowa. 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.
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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 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 and six months ended February 28, 2010 and 2009.
Three months ended | Six months ended | |||||||||||||||
February 28, | February 28, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Numerator: |
||||||||||||||||
Loss from continuing operations |
$ | (1,801 | ) | $ | (4,205 | ) | $ | (745 | ) | $ | (3,642 | ) | ||||
Less: Allocation to participating securities |
(157 | ) | (5 | ) | (168 | ) | (10 | ) | ||||||||
Loss from continuing operations applicable
to common shares |
$ | (1,958 | ) | $ | (4,210 | ) | $ | (913 | ) | $ | (3,652 | ) | ||||
Income (loss) from discontinued operations |
$ | 13,048 | $ | (17,973 | ) | $ | 16,531 | $ | (18,905 | ) | ||||||
Less: Allocation to participating securities |
| | | | ||||||||||||
Income (loss) from discontinued operations
applicable to common shares |
$ | 13,048 | $ | (17,973 | ) | $ | 16,531 | $ | (18,905 | ) | ||||||
Net income (loss) |
$ | 11,247 | $ | (22,178 | ) | $ | 15,786 | $ | (22,547 | ) | ||||||
Less: Allocation to participating securities |
(147 | ) | (5 | ) | (162 | ) | (10 | ) | ||||||||
Net income (loss) applicable to common shares |
$ | 11,100 | $ | (22,183 | ) | $ | 15,624 | $ | (22,557 | ) | ||||||
Denominator: |
||||||||||||||||
Weighted average common shares outstanding, basic |
11,204 | 11,174 | 11,193 | 11,165 | ||||||||||||
Dilutive stock options and awards |
| | | | ||||||||||||
Weighted average common shares outstanding,
diluted |
11,204 | 11,174 | 11,193 | 11,165 | ||||||||||||
For the three and six months ended February 28, 2010, there were 159,282 and 138,508
weighted-average restricted stock awards excluded from the calculation of diluted earnings (loss)
per share because they were antidilutive. Weighted-average restricted stock awards of 86,701 and
92,174 shares for the three and six months ended February 28, 2009, were excluded from the
calculation of diluted earnings (loss) per share because they were antidilutive. Weighted-average
stock options to purchase 1,330,080 and 1,324,408 shares of common stock for the three and six
months ended February 28, 2010, were excluded from the calculation of diluted earnings (loss) per
share because they were antidilutive. Weighted-average stock options to purchase 1,375,788 and
1,376,069 shares of common stock for the three and six months ended February 28, 2009, 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 payment 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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16 SUBSEQUENT EVENT
Preferred Stock
On April 7, 2010, the Company issued $40 million of Series A 15% cumulative non-voting,
non-convertible preferred stock (Series A Preferred Stock) and 100,000 shares of Series B voting
convertible preferred stock (Series B Preferred Stock) in a private placement to Zell Credit Opportunities Master Fund, L.P.,
an investment fund managed by Equity Group Investments, a private investment firm. Proceeds from
the preferred stock issuance of $40.0 million were used to repay
bank debt on April 8, 2010.
The holders of the Series A Preferred Stock are entitled to cash dividends of 6% on the sum of
the outstanding Series A Preferred Stock plus accrued and unpaid dividends. In addition, dividends
equal to 9% of the outstanding Series A Preferred Stock may accrue or be paid currently at
the discretion of the Company. Dividends are payable quarterly beginning May 31, 2010.
The Series A Preferred Stock is mandatorily redeemable on April 7, 2017 at a per share
redemption price equal to the original issue price plus any accrued and unpaid dividends. At any
time on or after April 7, 2012, the Company may redeem, in whole or in part, the shares of the
Series A Preferred Stock at a per share redemption price of the original issue price plus any
accrued and unpaid dividends.
The Company may not declare or pay any dividends on its common stock or incur new indebtedness
that exceeds a specified ratio without first obtaining approval from the holders of a majority of
the Series A Preferred Stock.
On April 7, 2010, the Company also issued, without proceeds, 100,000 shares of Series B
Preferred Stock to Zell Credit Opportunities
Master Fund, L.P. The holders of the Series B Preferred Stock are entitled to dividends equal to
the per share dividend declared and paid on the Companys common stock times the number of shares
of common stock into which the Series B Preferred Stock is then convertible. The Series B
Preferred Stock is not redeemable and dividends on the Series B Preferred Stock are non-cumulative.
At any time prior to April 7, 2020, at the option of the holder, the outstanding Series B
Preferred Stock may be converted into shares of the Companys common stock at a conversion rate of
ten shares of common stock per one share of Series B Preferred Stock, subject to adjustment in the
event of stock dividends, distributions, splits, reclassifications and the like. If any shares of
Series B Preferred Stock have not been converted into shares of common stock prior to April 7,
2020, the shares of Series B Preferred Stock will automatically convert into shares of common
stock. The holders of the Series B Preferred Stock shall have the right to one vote for each share
of common stock into which the Series B Preferred Stock is convertible.
In connection with this investment, the Company also agreed to register the shares of Common
Stock issuable upon conversion of the Series B Preferred Stock. The Company also granted to the
investor certain information and inspection rights and the right to elect one director to the
Companys Board of Directors while any shares of Series A Preferred Stock remain outstanding.
On April 9, 2010, the Board of Directors, upon the recommendation of
the investor, elected Matthew Zell, a Managing Director of Equity Group Investments,
to be the director designated by the holders of the Series A
Preferred Stock.
Bank Debt
On April 7, 2010, in connection with the issuance of preferred stock, the Company refinanced
its bank debt. The Company entered into a $60 million Third Amended and Restated Credit Agreement
(the 2010 Agreement) among the Company; Penford Products
Co.; Bank of Montreal; Bank of America National Association; and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., Rabobank
Nederland New York Branch.
The
2010 Agreement replaced the Companys previous $145 million secured term and revolving
credit facilities. Under the 2010 Agreement, the Company may borrow $60 million in revolving lines
of credit. The lenders revolving credit loan commitment may be increased under certain
conditions.
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The maturity date for the revolving loans under the 2010 Agreement is April 7, 2015. Interest
rates under the 2010 Agreement are based on either the London Interbank Offering Rates (LIBOR) or
the prime rate, depending on the selection of available borrowing options under the 2010 Agreement.
Pursuant to the 2010 Agreement, the interest rate margin over LIBOR ranges between 3% and 4%,
depending upon the Total Funded Debt Ratio. At April 7, 2010, the interest rate margin was 3.25%.
The 2010 Agreement provides that the Total Funded Debt Ratio, which is computed as funded debt
divided by earnings before interest, taxes, depreciation and amortization (as defined in the 2010
Agreement) shall not exceed 3.00. In addition, the Company must maintain a Fixed Charge Coverage
Ratio, as defined in the 2010 Agreement, of not less than 1.35. Annual capital expenditures would
be restricted to $15 million (excluding certain capital expenditures specified in the 2010
Agreement) if the Total Funded Debt Ratio is greater than 2.00 for two consecutive fiscal quarters.
The Companys obligations under the 2010 Agreement are secured by substantially all of the
Companys assets.
At April 8, 2010, the Company had $15.1 million outstanding pursuant to the 2010 Agreement.
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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, |
| other factors described in Part I, Item 1A Risk Factors. |
Overview
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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 and as an ingredient in fuel.
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 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 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.
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
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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- and six-month periods ended
February 28, 2010. 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 February 28, 2010 decreased 2.5%, or $1.6
million, to $62.3 million compared with $63.9 million for the three months ended February 28, 2010.
Consolidated sales in the first half of fiscal 2010 increased $5.8 million over last year to
$129.4 million. While volumes expanded during the three- and six-month periods ending February 28,
2010, the Company also experienced unfavorable product mix and mixed pricing results in both the
food ingredients and industrial ingredients businesses. Sales of divested products were $1.0
million and $1.9 million, respectively, in the second quarter and first half of fiscal 2009. See
the discussion by business segment below for details of changes in revenues.
Consolidated gross margin as a percent of sales rose to 9.7% for the quarter ended February
28, 2010 from a negative margin of 4% in the prior years second quarter. Consistent with the
second quarter results, year-to-date fiscal 2010 consolidated gross margin rose to 12.9% from 2.2%
last year. Expanded 2010 margins were due to lower raw material, chemical and energy costs and
improved manufacturing yields in the industrial ingredients business. In addition, during the
first half of fiscal 2009, the industrial business was recovering from severe flooding at its Cedar
Rapids, Iowa facility, and was phasing in the restart of production.
Consolidated loss from operations for the three months ended February 28, 2010 and 2009 was
$1.1 million and $6.1 million, respectively. Consolidated operating income for the first half of
fiscal 2010 was $2.0 million compared with an operating loss of $3.6 million in the first half of
fiscal 2009. Included in operating results for fiscal 2009 were net insurance recoveries of $3.8
million and $8.0 million, respectively, for the three- and six-month periods ended February 28,
2009.
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 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
Second quarter fiscal 2010 sales at the Companys Industrial Ingredients business unit
declined $1.3 million, or 2.6%, to $46.1 million from $47.3 million in the second quarter of fiscal
2009. Industrial starch sales of $28.0 million for the quarter ended February 28, 2010 decreased
$5.0 million from a year ago on a decline in average unit
pricing, including the effect of
a decrease in the cost of corn which is passed through to customers, partially offset
24
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by a slight
increase in sales volume. Sales of specialty industrial starches
increased 10% on an increase
in volume, offset by lower unit pricing. Sales of ethanol increased 26% from $14.3 million in the
second quarter of fiscal 2009 to $18.1 million in the second quarter of fiscal 2010.
Both sales volume and average unit pricing of ethanol rose at
double-digit rates over the prior year quarter.
Industrial sales for the first half of fiscal 2010 increased 8.1% to 96.4 million from $89.2
million in fiscal 2009. Industrial starch sales decreased $4.9 million to $60.3 million from $65.2
million in fiscal 2009 while volumes increased 10%. Average unit pricing of industrial starches
declined. Sales of specialty industrial starches for the six months ended February 28, 2010
rose 22% on volume increases, partially offset by pricing declines. First half fiscal 2010
ethanol sales expanded 51% to $36.0 million from $24.0 million a year ago on an increase in
volume and pricing improvements. Volumes in the first half of fiscal 2010 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.
The Industrial Ingredients business unit reported a loss from operations for the second
quarter of fiscal 2010 of $1.7 million compared to an operating loss of $6.7 million for the second
quarter of fiscal 2009. Included in the loss for fiscal 2009 was $3.8 million of net insurance
recoveries related to the Cedar Rapids flooding. Excluding the financial effects of the flood in
the second quarter of fiscal 2009, the Industrial Ingredients business reduced its operating loss
by $8.7 million through cost and yield improvements. Manufacturing yields contributed $6.5 million
and favorable energy, corn, chemical and other costs contributed $4.0 million to improved financial
results in the quarter ended February 28, 2010. The effect of unfavorable starch pricing and a
larger percentage of lower margin ethanol sales reduced gross margin by $1.8 million.
The Industrial Ingredients business reported income from operations of $0.4 million for the
six months ended February 28, 2010 compared to an operating loss of $4.9 million for the same
period of fiscal 2009. Net insurance recoveries of $8.0 million related to the 2008 flooding in
Cedar Rapids were recorded in the first six months of fiscal 2009. Gross margin expanded $13.5
million on improvements in manufacturing yields of $8.4 million, $8.9 million of reductions in the
costs of chemicals, corn, energy and other manufacturing inputs, and the effect of volume increases
of $2.8 million. Unfavorable starch pricing and an increase in sales of ethanol, which has a lower
margin than starch, reduced gross margin by $6.6 million.
Food Ingredients
Fiscal 2010 second quarter sales for the Food Ingredients segment of $16.2 million decreased
2.4%, or $0.4 million, from the second quarter of fiscal 2009. Sales for the six months ended
February 28, 2010 of $33.0 million decreased 4%, or $1.4 million, from last year. Sales declines
were primarily due to the sale of the dextrose product line in the second quarter of fiscal 2009.
Sales of dextrose products were $1.0 million and $1.9 million, respectively, for the three- and
six-month periods ended February 28, 2009. For the second quarter and the first half of fiscal
2010, sales of applications to growth end markets, such as protein and pet chews, improved by 29%
and 14%, respectively. Sales of potato coatings applications decreased for the
three- and six-month periods ended February 28, 2010 due to
declining same store sales at the Companys quick service
restaurant customers.
Income from operations and gross margin for the second quarter of fiscal 2010 of $2.8 million
and $4.8 million, respectively, were comparable to the same periods a year ago. Operating income
for the first half of fiscal 2010 of $6.4 million improved $0.2 million over the prior year on
lower manufacturing and raw material costs.
Corporate operating expenses
Corporate operating expenses declined $0.1 million for the second quarter of fiscal 2010 to
$2.3 million, and declined $0.4 million for the first half of fiscal 2010 to $4.8 million,
primarily due to lower professional fees and travel costs.
Interest expense
Interest expense for the three- and six-month periods ended February 28, 2010 increased $0.4
million and $1.0 million, respectively, compared to the same periods last year. 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
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the debt
increased interest expense by approximately $0.3 million and $0.7 million during the three- and
six-month periods ended February 28, 2010, respectively. The remaining increase in interest
expense is due to an increase in the applicable margin over LIBOR as a result of the third
amendment. See Note 7 to the Condensed Consolidated Financial Statements.
Income taxes
The Companys effective tax rates for the three- and six-month periods ended February 28, 2010
were 34.8% and 5.0%, respectively. The difference between the effective tax rate and the U.S.
federal statutory rate was due to state income taxes offset by adjustments to prior years tax
expense and an increase in unrecognized tax benefits of $0.1 million and $0.2 million,
respectively, for the three- and six-month periods ended February 28, 2010. The decrease in the
effective tax rate for the six-month period compared with the effective rate for the second quarter
is due to the change in the proportion of the prior year tax adjustments and increase in
unrecognized tax benefits to pretax income or loss.
The Companys effective tax rates for the three- and six-month periods ended February 28, 2009
were 26.1% and 28.5%, respectively. The difference between the effective tax rate and the U.S.
federal statutory rate for the three- and six-month periods was due to the favorable tax benefit of
a retroactive research and development tax credit offset by an increase in the amount of
unrecognized tax benefits. Unrecognized tax benefits increased by $0.7 million and $0.8 million
for the three- and six-month periods ended February 28, 2009.
At February 28, 2010, the Company had $13.3 million of net deferred tax assets. In the first
half 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 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.
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 | Six months ended | |||||||||||||||
February 28, | February 28, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Gain on sale of dextrose product line |
$ | | $ | 1,562 | $ | | $ | 1,562 | ||||||||
Gain
(loss) on foreign currency transactions |
(35 | ) | (28 | ) | 417 | (641 | ) | |||||||||
Other |
8 | 20 | 192 | 27 | ||||||||||||
Total |
$ | (27 | ) | $ | 1,554 | $ | 609 | $ | 948 | |||||||
During the three and six months ended February 28, 2010 and 2009, 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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In the second quarter of fiscal 2009, the Companys Food Ingredients North America business
segment sold assets related to its dextrose product line to a third-party purchaser for $2.9
million, net of transaction costs. The Company recorded a $1.6 million gain on the sale.
Results of Discontinued Operations
Three Months Ended | Six Months Ended | |||||||||||||||
February 28, | February 28, | February 28, | February 28, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||
Sales |
$ | | $ | 16,068 | $ | 16,963 | $ | 37,428 | ||||||||
Loss from operations |
$ | (183 | ) | $ | (16,931 | ) | $ | (1,708 | ) | $ | (18,567 | ) | ||||
Interest expense |
133 | 172 | 448 | 395 | ||||||||||||
Gain (loss) on sale of assets |
(152 | ) | | 199 | | |||||||||||
Reclassification of currency translation
adjustments into earnings |
13,849 | | 13,420 | | ||||||||||||
Other non-operating income, net |
141 | 371 | 627 | 767 | ||||||||||||
Loss from discontinued operations before taxes |
13,522 | (16,732 | ) | 12,090 | (18,195 | ) | ||||||||||
Income tax expense (benefit) |
474 | 1,241 | (4,441 | ) | 710 | |||||||||||
Income (loss) from discontinued operations,
net of tax |
$ | 13,048 | $ | (17,973 | ) | $ | 16,531 | $ | (18,905 | ) | ||||||
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.
During the six months ended February 28, 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 $13.6 million, which was
recorded in discontinued operations. The tax benefit of the impairment was also recorded in
discontinued operations. The liquidation of the remaining net assets of Penford Australia was
substantially completed in the second quarter of fiscal 2010 and, as a result, $13.8 of currency
translation adjustments were reclassified from accumulated other comprehensive income into second
quarter earnings.
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 six months ended February 28,
2010, the Australian operations recorded $13.6 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
February 28, 2010, the valuation allowance related to the Australian net deferred tax asset was
$10.8 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.
At February 28, 2010, the Company had $28.4 million and $24.8 million outstanding,
respectively, under the revolving credit and capital expansion portions of its credit facility.
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On
April 7, 2010, the Company issued $40 million of preferred
stock and, on April 8, 2010, used the proceeds to
pay a portion of the outstanding bank debt obligations under the 2007
Agreement. Also on April 7, 2010, the Company entered into a $60 million Third Amended and Restated Credit Agreement (the 2010
Agreement) among the Company; Penford Products
Co.; Bank of Montreal; Bank of America National Association; and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., Rabobank
Nederland New York Branch. See Note 16 to the Condensed
Consolidated Financial Statements for details of the refinancing and preferred stock issuance.
The
2010 Agreement replaced the Companys previous $145 million secured term and revolving
credit facilities. Under the 2010 Agreement, the Company may borrow $60 million in revolving lines
of credit. The lenders revolving credit loan commitment may be increased under certain
conditions. On April 8, 2010, the Company had $15.1 million outstanding under its new $60 million
credit facility. Under the 2010 Agreement, there are no scheduled principal payments prior to
maturity on April 7, 2015. In connection with the refinancing, the Company expects to record a
pre-tax non-cash charge to earnings of approximately $1.0 million in the third quarter of fiscal
2010 related to unamortized transaction fees associated with the prior credit facility.
The Company may not declare or pay any dividends on its common stock without first obtaining
approval from the holders of the preferred stock. The holders of the Series A Preferred Stock are
entitled to cash dividends of 6% on the sum of the outstanding Series A Preferred Stock plus
accrued and unpaid dividends. In addition, dividends equal to 9% of the outstanding Series A
Preferred Stock will be accrued or may be paid currently at the discretion of the Company.
Dividends are payable quarterly beginning May 31, 2010.
As of February 28, 2010, all of the Companys outstanding debt under its credit facility was
subject to variable interest rates. Under interest rate swap agreements with several banks, the
Company had fixed its interest rates on U.S. dollar denominated term debt of $20.8 million at 4.18%
and $6.2 million at 5.08%, plus the applicable margin pursuant to its credit agreement. In the
third quarter of fiscal 2010, the Company expects to terminate its interest rate swaps and
reclassify approximately $1.7 million of losses from accumulated other comprehensive income to
earnings.
Cash provided by continuing operations was $31.5 million for the six months ended February 28,
2010 compared with cash used in continuing operations of $16.8 million for the first quarter last
year. The improvement in operating cash flow was primarily due to changes in working capital and
intercompany cash receipts related to sale of Penford New Zealand Limited and substantially all of
Penford Australias operating assets. During the first six months of fiscal 2009, trade
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 six-month period as a result of payments for flood
restoration services.
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 then current credit facility, the net proceeds received through
March 31, 2010 of $12.3 million were used to repay outstanding debt. Additional proceeds from the
sale 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) the final monthly installment in May 2010 of
approximately $0.14 million as further compensation for grain inventory on hand on the date of
sale.
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 February 28, 2010, the Company had $1.9 million outstanding related to the IDED loans.
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Contractual Obligations
The Company is a party to various debt and lease agreements at February 28, 2010 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 February 28, 2010, there
have been no material changes in the Companys contractual obligations since August 31, 2009,
except for the change in principal payments pursuant to the new credit agreement discussed above.
The 2010 Agreement does not require principal payments until maturity
on April 7, 2015.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements at February 28, 2010.
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.
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
The Company maintains disclosure controls and procedures that are designed to ensure that
material information required to be disclosed in the Companys periodic reports filed or submitted
under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the Securities and Exchange
Commission. The Companys disclosure controls and procedures are also designed to ensure that
information required to be disclosed in the reports the Company files or submits under the Exchange
Act is accumulated and communicated to the Companys management, including its principal executive
and principal financial officers, or persons performing similar functions, as appropriate, to allow
timely decisions regarding required disclosure.
Under the supervision and with the participation of management, including the Chief Executive
Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure
controls and procedures pursuant to
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Exchange Act Rule 13a-15(b) as of February 28, 2010. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures were effective as of February 28, 2010.
Changes in Internal Control over Financial Reporting
There were no changes 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 February 28, 2010
that materially affected, or are 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 payment 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.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
None
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Item 4: Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on January 26, 2010. The first item voted
upon at the meeting was the election of directors. The results of the election are shown below.
Director | Votes For | Votes Withheld | ||||||
Jeffrey T. Cook |
3,728,003 | 4,207,677 | ||||||
Thomas D. Malkoski |
7,493,112 | 442,568 | ||||||
Sally G. Narodick |
7,476,471 | 459,209 |
Directors not elected at this meeting and whose term of office continued after the meeting are
William E. Buchholz, R. Randolph Devening, Paul H. Hatfield, John C. Hunter III and James E.
Warjone. Edward F. Ryan was subsequently elected to the Board on
March 4, 2010.
The second item voted upon at the meeting was the ratification of Ernst & Young LLP as the
Companys independent registered public accounting firm. The results of the voting on the proposal
are as follows:
Votes | ||||
Votes For | Against | Abstain | ||
9,519,629
|
258,688 | 1,135 |
Item 6: Exhibits.
(d) Exhibits
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) | ||||
April 9, 2010 | /s/ Steven O. Cordier | |||
Steven O. Cordier | ||||
Senior Vice President and Chief Financial Officer |
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EXHIBIT INDEX
Exhibit No. | Description | |
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 |
34