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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-16674
IMPERIAL SUGAR COMPANY
(Exact name of registrant as specified in its charter)
Texas | 74-0704500 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
One Imperial Square, P.O. Box 9, Sugar Land, Texas 77487
(Address of principal executive offices, including Zip Code)
(281) 491-9181
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
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 ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, see definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large Accelerated filer | ¨ | Accelerated Filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 31, 2010, there were 12,147,260 shares of common stock, without par value, of the registrant outstanding.
Table of Contents
Index
Page | ||||
PART I - FINANCIAL INFORMATION | ||||
Item 1. |
Financial Statements |
|||
3 | ||||
4 | ||||
5 | ||||
Consolidated Statement of Changes in Shareholders Equity (Unaudited) |
6 | |||
7 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
16 | ||
Item 3. |
21 | |||
Item 4. |
22 | |||
PART II - OTHER INFORMATION | ||||
Item 1. |
23 | |||
Item 1A. |
24 | |||
Item 6. |
24 | |||
25 |
Forward-Looking Statements
Statements regarding future market prices and margins, future refinery construction costs and timelines, future expenses and liabilities arising from the Port Wentworth refinery incident, future costs and actions regarding the Louisiana Sugar Refining, LLC venture, future import and export levels, future government and legislative action, future operating results, future availability of raw sugar, operating efficiencies, results of future investments and initiatives, future cost savings, future product innovations, future energy costs, our liquidity and ability to finance our operations and capital investment programs, future pension plan contributions and other statements that are not historical facts contained in this report on Form 10-Q are forward-looking statements that involve certain risks, uncertainties and assumptions. These risks, uncertainties and assumptions include, but are not limited to, market factors, farm and trade policy, unforeseen engineering, construction and equipment delays, our ability to realize planned cost savings and other improvements, the available supply of sugar, energy costs, the effect of weather and economic conditions, results of actuarial assumptions, actual or threatened acts of terrorism or armed hostilities, legislative, administrative and judicial actions and other factors detailed elsewhere in this report and in our other filings with the SEC. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. We identify forward-looking statements in this report by using the following words and similar expressions:
expect |
project |
estimate | ||
believe |
anticipate |
likely | ||
plan |
intend |
could | ||
should |
may |
predict | ||
budget |
possible |
Management cautions against placing undue reliance on forward-looking statements or projecting any future results based on such statements or present or future earnings levels. All forward-looking statements in this report on Form 10-Q are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report and in our other SEC filings.
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PART I - FINANCIAL INFORMATION
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 2010 |
September 30, 2009 |
|||||||
(In Thousands of Dollars) | ||||||||
ASSETS | ||||||||
Current Assets: |
||||||||
Cash and Cash Equivalents |
$ | 19,699 | $ | 115,584 | ||||
Marketable Securities |
200 | 56 | ||||||
Accounts Receivable, Net |
55,275 | 34,601 | ||||||
Inventories: |
||||||||
Finished Products |
46,138 | 18,434 | ||||||
Raw and In-Process Materials |
52,712 | 83,215 | ||||||
Supplies |
15,421 | 10,626 | ||||||
Total Inventory |
114,271 | 112,275 | ||||||
Deferred Income Taxes, Net |
| 16,215 | ||||||
Prepaid Expenses and Other Current Assets |
42,523 | 14,873 | ||||||
Total Current Assets |
231,968 | 293,604 | ||||||
Other Investments |
14,854 | 10,930 | ||||||
Property, Plant and Equipment, Net |
278,645 | 252,913 | ||||||
Deferred Income Taxes, Net |
| 55,940 | ||||||
Other Assets |
3,402 | 2,553 | ||||||
Total |
$ | 528,869 | $ | 615,940 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
Current Liabilities: |
||||||||
Accounts Payable, Trade |
$ | 80,155 | $ | 87,141 | ||||
Borrowing under Revolving Credit Line |
33,000 | 60,000 | ||||||
Deferred Income Taxes, Net |
4,563 | | ||||||
Other Current Liabilities |
63,355 | 28,390 | ||||||
Insurance Advances, Net |
| 227,475 | ||||||
Total Current Liabilities |
181,073 | 403,006 | ||||||
Deferred Employee Benefits and Other Liabilities |
121,306 | 126,500 | ||||||
Deferred Income Taxes, Net |
471 | | ||||||
Commitments and Contingencies |
||||||||
Shareholders Equity: |
||||||||
Preferred Stock, Without Par Value, Issuable in Series; 5,000,000 Shares Authorized, None Issued |
| | ||||||
Common Stock, Without Par Value; 50,000,000 Shares Authorized; 12,147,260 and 12,026,354 Shares Issued and Outstanding at June 30, 2010 and September 30, 2009 |
129,945 | 128,421 | ||||||
Retained Earnings |
166,377 | 27,922 | ||||||
Accumulated Other Comprehensive Loss |
(70,303 | ) | (69,909 | ) | ||||
Total Shareholders Equity |
226,019 | 86,434 | ||||||
Total |
$ | 528,869 | $ | 615,940 | ||||
See notes to consolidated financial statements.
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IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, |
Nine Months Ended June 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In Thousands of Dollars, Except per Share Amounts) | ||||||||||||||||
Net Sales |
$ | 260,978 | $ | 142,291 | $ | 643,620 | $ | 375,241 | ||||||||
Business Interruption Insurance Recovery |
| | 84,677 | | ||||||||||||
Cost of Sales (includes depreciation of $5,905,000 and $2,826,000 for the three months and $16,044,000 and $7,487,000 for the nine months ended June 30, 2010 and 2009, respectively) |
(259,068 | ) | (141,987 | ) | (670,157 | ) | (383,729 | ) | ||||||||
Selling, General and Administrative Expense (includes depreciation of $323,000 and $457,000 for the three months and $987,000 and $1,547,000 for the nine months ended June 30, 2010 and 2009, respectively) |
(10,466 | ) | (10,932 | ) | (30,591 | ) | (32,953 | ) | ||||||||
Refinery Explosion Related Charges, Net |
(901 | ) | (6,196 | ) | (7,805 | ) | (14,382 | ) | ||||||||
Insurance Recoveries Recognized |
| | 193,796 | | ||||||||||||
Gain on Litigation Settlement |
| | | 16,148 | ||||||||||||
Operating Income (Loss) |
(9,457 | ) | (16,824 | ) | 213,540 | (39,675 | ) | |||||||||
Interest Expense |
(565 | ) | (545 | ) | (1,307 | ) | (1,408 | ) | ||||||||
Interest Income |
6 | 55 | 48 | 379 | ||||||||||||
Other Income, Net |
1,350 | 1,059 | 4,559 | 3,027 | ||||||||||||
Income (Loss) from Continuing Operations Before Income Tax |
(8,666 | ) | (16,255 | ) | 216,840 | (37,677 | ) | |||||||||
Benefit (Provision) for Income Taxes |
2,979 | 5,774 | (77,675 | ) | 14,038 | |||||||||||
Net Income (Loss) from Continuing Operations |
(5,687 | ) | (10,481 | ) | 139,165 | (23,639 | ) | |||||||||
Income from Discontinued Operations, Net |
| | | 644 | ||||||||||||
Net Income (Loss) |
$ | (5,687 | ) | $ | (10,481 | ) | $ | 139,165 | $ | (22,995 | ) | |||||
Basic Earnings (Loss) per Share of Common Stock: |
||||||||||||||||
Income (Loss) from Continuing Operations |
$ | (0.48 | ) | $ | (0.89 | ) | $ | 11.79 | $ | (2.01 | ) | |||||
Income from Discontinued Operations |
| | | 0.05 | ||||||||||||
Net Income (Loss) |
$ | (0.48 | ) | $ | (0.89 | ) | $ | 11.79 | $ | (1.96 | ) | |||||
Diluted Earnings (Loss) per Share of Common Stock: |
||||||||||||||||
Income (Loss) from Continuing Operations |
$ | (0.48 | ) | $ | (0.89 | ) | $ | 11.53 | $ | (2.01 | ) | |||||
Income from Discontinued Operations |
| | | 0.05 | ||||||||||||
Net Income (Loss) |
$ | (0.48 | ) | $ | (0.89 | ) | $ | 11.53 | $ | (1.96 | ) | |||||
Weighted Average Shares Outstanding: |
||||||||||||||||
Basic |
11,811,540 | 11,740,261 | 11,800,372 | 11,714,370 | ||||||||||||
Diluted |
11,811,540 | 11,740,261 | 12,068,163 | 11,714,370 | ||||||||||||
See notes to consolidated financial statements.
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IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended June 30, |
||||||||
2010 | 2009 | |||||||
(In Thousands of Dollars) | ||||||||
Operating Activities: |
||||||||
Net Income (Loss) |
$ | 139,165 | $ | (22,995 | ) | |||
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By Operating Activities: |
||||||||
Insurance Recoveries Recognized |
(278,473 | ) | (27,878 | ) | ||||
Advances from Insurance Carriers |
| 60,000 | ||||||
Depreciation |
17,031 | 9,034 | ||||||
Deferred Income Taxes |
77,675 | (14,321 | ) | |||||
Reclassification from Accumulated Other Comprehensive Income (Loss) to Net Income (Loss) |
847 | 5,871 | ||||||
Cash (Paid) Received on Change in Fair Value of Derivative Instruments |
(1,604 | ) | (5,068 | ) | ||||
Gain (Loss) on Sale of Assets |
| (464 | ) | |||||
Income from Discontinued Operations |
| (644 | ) | |||||
Non-Cash Portion of Stock-Based Compensation |
1,818 | 1,863 | ||||||
Equity Earnings in Unconsolidated Subsidiaries |
(3,495 | ) | (2,334 | ) | ||||
Excess Tax Benefits from Stock-Based Compensation |
89 | | ||||||
Other |
168 | 168 | ||||||
Changes in Operating Assets and Liabilities: |
||||||||
Accounts Receivable |
(20,674 | ) | (2,493 | ) | ||||
Income Tax Receivable |
| 12,704 | ||||||
Inventories |
(1,996 | ) | (14,564 | ) | ||||
Prepaid Expenses and Other Assets |
4,157 | 1,812 | ||||||
Accounts PayableTrade |
16,096 | (4,867 | ) | |||||
Other Liabilities |
(3,472 | ) | (5,011 | ) | ||||
Net Cash Used in Continuing Operations |
(52,668 | ) | (9,187 | ) | ||||
Net Cash Provided By Discontinued Operations |
| 1,015 | ||||||
Net Cash Used in Operating Activities |
(52,668 | ) | (8,172 | ) | ||||
Investing Activities: |
||||||||
Capital Expenditures |
(65,875 | ) | (98,472 | ) | ||||
Advances from Insurance Carriers |
51,000 | 40,000 | ||||||
Proceeds from Sale of Marketable Securities |
| 7,500 | ||||||
Proceeds from Sale of Assets |
| 538 | ||||||
Other |
(235 | ) | (169 | ) | ||||
Net Cash Used in Investing Activities |
(15,110 | ) | (50,603 | ) | ||||
Financing Activities: |
||||||||
Borrowing (Repayment) under Revolving Credit Line |
(27,000 | ) | 60,000 | |||||
Issuance of Common Stock |
| 79 | ||||||
Cash Dividends |
(813 | ) | (2,084 | ) | ||||
Excess Tax Benefits from Stock-Based Compensation |
(89 | ) | | |||||
Other |
(205 | ) | (11 | ) | ||||
Net Cash Provided by (Used in) Financing Activities |
(28,107 | ) | 57,984 | |||||
Decrease in Cash and Cash Equivalents |
(95,885 | ) | (791 | ) | ||||
Cash and Cash Equivalents, Beginning of Period |
115,584 | 74,723 | ||||||
Cash and Cash Equivalents, End of Period |
$ | 19,699 | $ | 73,932 | ||||
Supplemental Non-Cash Items: |
||||||||
Tax Effect of Deferred Gains and Losses |
$ | 219 | $ | 395 | ||||
Purchase of Property, Plant and Equipment on Account |
$ | 5,636 | $ | 599 | ||||
See notes to consolidated financial statements.
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IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
For the Nine Months Ended June 30, 2010
(Unaudited)
Shares of Common Stock |
Common Stock |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total | |||||||||||||
(In Thousands of Dollars, Except Share Data) | |||||||||||||||||
Balance September 30, 2009 |
12,026,354 | $ | 128,421 | $ | 27,922 | $ | (69,909 | ) | $ | 86,434 | |||||||
Comprehensive Income: |
|||||||||||||||||
Net Income |
139,165 | 139,165 | |||||||||||||||
Foreign Currency Translation Adjustment (Net of Tax of $52,000) |
93 | 93 | |||||||||||||||
Change in Derivative Fair Value (Net of Tax of $573,000) |
(1,031 | ) | (1,031 | ) | |||||||||||||
Reclassification from Accumulated Other Comprehensive Income (Loss) to Net Income (Net of Tax of $303,000) |
544 | 544 | |||||||||||||||
Total Comprehensive Income |
138,771 | ||||||||||||||||
Dividends ($0.06 per share) |
(710 | ) | (710 | ) | |||||||||||||
Restricted Stock Grants |
120,906 | 1,524 | 1,524 | ||||||||||||||
Balance June 30, 2010 |
12,147,260 | $ | 129,945 | $ | 166,377 | $ | (70,303 | ) | $ | 226,019 | |||||||
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)
1. ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and reflect, in the opinion of management, all adjustments, consisting only of normal recurring accruals, that are necessary for a fair presentation of financial position and results of operations for the interim periods presented. These financial statements include the accounts of Imperial Sugar Company and its majority-owned subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures required by accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The financial statements included herein should be read in conjunction with the financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended September 30, 2009. The Company operates its business as one domestic segmentthe production and sale of refined sugar and related products.
Cost of Sales
The Companys sugar inventories, which are accounted for on a LIFO basis, are periodically reduced at interim dates to levels below that of the beginning of the fiscal year. When such interim LIFO liquidations are expected to be restored prior to fiscal year-end, the estimated replacement cost of the liquidated layers is utilized as the basis of the cost of sugar sold from beginning of the year inventory. Accordingly, the cost of sugar utilized in the determination of cost of sales for interim periods includes estimates which may require adjustment in future fiscal periods. Sugar inventory quantities at June 30, 2010 declined below the September 30, 2009 balance resulting in the liquidation of a LIFO inventory layer with a cost approximately $4.9 million below the cost of current purchases.
Insurance Recoveries
Insurance recoveries that are deemed to be probable and reasonably estimable are recognized to the extent of the related loss. Insurance recoveries which result in gains, including recoveries under business interruption coverage, are recognized only when realized by settlement with the insurers. Advances on insurance settlements are recorded as liabilities or offsets to accrued probable recoveries. The evaluation of insurance recoveries requires estimates and judgments about future results which affect reported amounts and certain disclosures. Actual results could differ from those estimates.
Accounting Pronouncements
The FASB has issued new authoritative guidance that once effective, establishes additional accounting and disclosure requirements. Management has evaluated the effects such requirements will have on our consolidated financial statements.
In March 2008, the FASB issued authoritative guidance intended to provide users of employers financial statements with more informative disclosures about the nature and valuation of postretirement benefit plan assets. The disclosures related to plan assets are effective for fiscal years ending after December 15, 2009.
In June 2009, the FASB issued authoritative guidance which amends certain requirements to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. The guidance will be effective as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company is currently evaluating the impact, if any, that this guidance will have on its consolidated financial statements.
2. INSURANCE RECOVERIES
The Company experienced an explosion and fire on February 7, 2008, at its sugar refinery in Port Wentworth, Georgia, which is located near Savannah, Georgia. Production at the refinery, which comprises approximately 60% of the Companys capacity, was suspended until the summer of 2009 when limited bulk production was commenced. The installation of packaging lines was completed in December 2009, and the refined silo storage facilities became operational in January 2010.
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IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)(Continued)
The Company settled its property insurance claim related to the Port Wentworth accident in December 2009 for an aggregate of $345 million. Insurance recoveries aggregating $66.5 million which were deemed probable and reasonably estimable were recognized to the extent of the related loss in prior periods. The remaining $278.5 million of recoveries were recognized as gains in the quarter ended December 31, 2009, as follows (in millions):
Insurance Recovery |
Recognized Through the Year Ended September 30, 2009 |
Nine Months Ended June 30, 2010 | |||||||
Business interruption |
$ | 84.7 | | $ | 84.7 | ||||
Property replacement cost |
212.4 | $ | 23.2 | 189.2 | |||||
Payroll and other incurred costs |
47.9 | 43.3 | 4.6 | ||||||
Total |
$ | 345.0 | $ | 66.5 | $ | 278.5 | |||
Financial reporting gains recognized for replacement cost recoveries will not be recognized for tax purposes to the extent the Company made elections under the involuntary conversion rules of the Internal Revenue Code, as the insurance proceeds have been reinvested in replacement property within the required period of time. The replacement cost expenditures establish a new basis in the assets for financial reporting purposes, resulting in higher depreciation charges. The tax basis in the replaced assets will be reduced by the amount of the gain not recognized under the involuntary conversion rules.
3. CONTINGENCIES
The Company is party to a number of claims, including twenty-four remaining lawsuits brought on behalf of 18 employees or their families and 16 third parties or their families, for injuries and losses suffered as a result of the Port Wentworth refinery accident. None of the lawsuits demand a specific dollar amount of damages sought by the plaintiffs. During the third fiscal quarter, the Company settled twelve lawsuits seeking recovery of injuries and losses from the Port Wentworth accident, with the settlement payments made to these claimants being funded by the Companys insurers. Including the lawsuits settled in the third fiscal quarter, the Company has settled twenty-four of the original forty-eight lawsuits filed as a result of the Port Wentworth refinery accident.
The Company has workers compensation insurance which provides for coverage equal to the statutory benefits provided to workers under state law. Additionally, the Companys general liability policy provides for coverage for damages to third parties up to a policy limit of $100 million. While the Company believes it has meritorious defenses in this litigation, and that claims by employees and certain contractors are limited to benefits provided under Georgia workers compensation law, the ultimate resolution of these matters could result in liability in excess of the amount accrued. The Company believes the likelihood of the aggregate liability, including the amounts paid in the settlements discussed above, exceeding the $100 million policy limit is remote.
Following the Port Wentworth accident, the U.S. Occupational Safety Health Administration (OSHA) conducted investigations at the Companys Port Wentworth and Gramercy refineries. OSHA concluded its Port Wentworth and Gramercy investigations on July 25, 2008, and issued numerous citations with total proposed penalties of $5.1 million in Port Wentworth and $3.7 million in Gramercy. Additionally, OSHA issued requirements for certain abatement actions to be undertaken by the Company at the Port Wentworth and Gramercy facilities. The Company contested all of the citations and proposed penalties regarding the Port Wentworth and Gramercy investigations, and these matters were assigned to the Occupational Safety and Health Review Commission for a review of the merits of the citations, proposed penalties and abatement actions. On July 7, 2010, the Company settled the Port Wentworth and Gramercy citations and agreed to pay aggregate penalties of $6.05 million, which will be payable in four quarterly installments. The Company made no admission of liability in the settlements. The Company also agreed to abate the citations and to implement certain other measures related to worker and facility safety. The $6.05 million aggregate penalties, which had been provided for in prior fiscal periods, are not covered by insurance and are not deductible for federal income tax purposes.
On July 31, 2008, the Board of Directors received a letter from an attorney representing a stockholder of the Company requesting, among other things, that the Board cause an independent investigation to be made with respect to alleged mismanagement and breaches of fiduciary duty by the Companys officers, directors and employees relating to the February 7, 2008 explosion at the Companys refinery in Port Wentworth, Georgia. On October 2, 2008, the Board received a similar letter on behalf of another stockholder requesting that the Company commence legal actions against specified officers and directors. The Board of Directors established a committee of independent and disinterested directors on October 23, 2008 with full authority to investigate and address the allegations contained in the stockholder letters described above.
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IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)(Continued)
On January 16, 2009, one of such stockholders filed a derivative action in the District Court of Harris County, Texas against twelve current and former directors and officers of the Company and named the Company as a nominal defendant. The action, entitled Delaney v. Sheptor, et al., Cause No. 2009-03145 (Dist. Ct. Tex.), asserts a claim of breach of fiduciary duty against defendants in connection with the February 2008 explosion at the Port Wentworth facility and seeks unspecified damages on behalf of the Company. The action has been stayed pending completion of the investigation by the committee of independent and disinterested directors. On August 5, 2010, the plaintiff in Delaney filed a motion for preliminary approval of settlement with the District Court of Harris County, which motion is pending before the court. The terms of the proposed settlement provide for implementation by the Company of certain management and governance measures and provides for the payment of $2.65 million in attorneys fees of the derivative plaintiffs. The Company expects the $2.65 million payment to be made by its insurer. The defendants make no admission of liability in the proposed settlement.
In January 2009, the Company was notified by its workers compensation liability insurance carrier that it anticipates charging the Company for certain loss-based assessments the carrier expected to receive from the state of Georgias Subsequent Injury Trust Fund (SITF). The Companys insurance contract provides that it reimburse the carrier for such SITF assessments if and when the assessments are levied based on workers compensation claims paid during a calendar year. Based on projections of workers compensation losses arising from the 2008 Port Wentworth accident and prior assessment rates, such assessments could total $6.4 million, including $3.7 million attributable to losses paid in calendar 2008 and 2009. The Company recorded a $3.7 million charge in March 31, 2010 attributable to such past losses.
Additionally, the Company is party to litigation and claims which are normal in the course of its operations. While the results of such litigation and claims cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a materially adverse effect on its consolidated results of operations, financial position or cash flows. In connection with the sales of certain businesses, the Company made customary representations and warranties, and undertook indemnification obligations with regard to certain of these representations and warranties including financial statements, environmental and tax matters, and the conduct of the businesses prior to the sale. These indemnification obligations are subject to certain deductibles, caps and expiration dates.
In connection with the sale of a subsidiary in 2002, the buyer assumed $18.5 million of industrial revenue bonds, with final maturity in 2025. The Company remains contingently liable for repayment of the bonds under a guaranty arrangement and does not believe that a liability is probable. The Company has recorded a non-current liability for the fair value of the guarantee.
The Company, along with other sugar industry participants, was party to a lawsuit with McNeil Nutritional, which was settled in November 2008. The Company received $16.1 million in connection with the settlement and reported a gain on litigation settlement.
4. LSR VENTURE
In November 2009, the Company completed the formation and funding of a three-party joint venture with Sugar Growers and Refiners, Inc (SUGAR) and Cargill, Incorporated (Cargill) to construct and operate a new 3,100 ton-per-day cane sugar refinery in Gramercy, Louisiana adjacent to the Companys existing sugar refinery.
The venture, Louisiana Sugar Refining, LLC or LSR, is owned one-third by each member, each of which agreed to contribute $30 million in cash or assets as equity to capitalize the venture. SUGARs contribution was $30 million cash; Cargill contributed $23.5 million cash and certain equipment and intellectual property valued at $6.5 million. The Companys contribution, which will occur in three stages, consists of the existing refinery assets with a book value of approximately $22 million, including approximately 207 acres of land.
The Company will operate the existing refinery with sales and earnings for its own account until December 31, 2010, during which time the Company is obligated to complete certain improvements currently estimated to cost approximately $6 million. The equipment and personal property in the existing refinery will be contributed to LSR on January 1, 2011. After January 1, 2011, the Company will continue to operate the small bag packing facility in Gramercy, with 3.5 million cwt of refined bulk sugar purchased from LSR under a long term, supply agreement with market-based pricing provisions.
The Company contributed the footprint parcel of approximately 7 acres of land for the new refinery at the initial closing. Pursuant to the terms of the operative agreements, LSR and Imperial jointly enrolled the entire site (including the footprint) in the Voluntary Remediation Program (the VRP) of the Louisiana Department of Environmental Quality to conduct an environmental assessment of the site and complete remediation of any identified contamination. The Company is obligated to pay for the cost of remediation if the VRP uncovers contamination above the applicable industrial standard. The Company will convey the remainder of the land to LSR upon completion of the VRP and be released of future environmental liabilities to state and federal authorities.
LSR has financing agreements aggregating $145 million to provide construction and working capital financing for the project. The financing is non-recourse to LSRs members. The members have agreed to proportionately contribute additional capital to LSR if necessary to cover certain construction cost overruns and costs relating to the VRP that LSR agreed to assume. Construction costs of the new refinery are estimated at $120 million. The existing Gramercy refinery will operate during the construction and start-up phase of the new refinery, which began in December 2009 and is expected to be 18 to 24 months.
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IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)(Continued)
LSRs raw cane sugar will be supplied by SUGAR through an evergreen raw sugar supply agreement. Cargill will serve as marketer of the refined sugar produced by LSR, other than refined sugar sold to Imperial.
5. STOCK-BASED COMPENSATION
During the nine months ended June 30, 2010, the Company granted 133,446 shares of restricted stock to employees with a weighted average grant date fair value of $14.44 per share. Of these grants of restricted stock, 93,412 shares have performance and service conditions which must be met prior to vesting while the remaining 40,034 shares only have service conditions. These shares vest over a period of 34 months.
Additionally, during the nine months ended June 30, 2010, the Company granted 22,071 restricted stock units (RSUs) to non-employee directors with a weighted average grant date fair value of $14.43 per share. The RSUs vest six months following termination of board service.
During the nine months ended June 30, 2010, 50,608 shares of restricted stock vested with a fair value at vesting date of $657,000.
6. EARNINGS PER SHARE
The following table presents information necessary to calculate basic and diluted earnings per share (in thousands of dollars, except per share amounts):
Three Months Ended June 30, |
Nine Months
Ended June 30, |
||||||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||||||
Income/(Loss) from Continuing Operations |
$ | (5,687 | ) | $ | (10,481 | ) | $ | 139,165 | $ | (23,639 | ) | ||||
Average Shares Outstanding |
11,811,540 | 11,740,261 | 11,800,372 | 11,714,370 | |||||||||||
Effect of Incremental Shares Issuable from Assumed Exercise of Stock Options and Nonvested Restricted Stock Under the Treasury Stock Method |
| | 267,791 | | |||||||||||
Adjusted Average Shares |
11,811,540 | 11,740,261 | 12,068,163 | 11,714,370 | |||||||||||
Diluted EPS Continuing Operations |
$ | (0.48 | ) | $ | (0.89 | ) | $ | 11.53 | $ | (2.01 | ) | ||||
Income from Discontinued Operations |
$ | | $ | | $ | | $ | 644 | |||||||
Average Shares Outstanding |
11,811,540 | 11,740,261 | 11,800,372 | 11,714,370 | |||||||||||
Effect of Incremental Shares Issuable from Assumed Exercise of Stock Options and Nonvested Restricted Stock Under the Treasury Stock Method |
| | 267,791 | | |||||||||||
Adjusted Average Shares |
11,811,540 | 11,740,261 | 12,068,163 | 11,714,370 | |||||||||||
Diluted EPS Discontinued Operations |
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.05 | |||||||
Net Income/(Loss) |
$ | (5,687 | ) | $ | (10,481 | ) | $ | 139,165 | $ | (22,995 | ) | ||||
Average Shares Outstanding |
11,811,540 | 11,740,261 | 11,800,372 | 11,714,370 | |||||||||||
Effect of Incremental Shares Issuable from Assumed Exercise of Stock Options and Nonvested Restricted Stock Under the Treasury Stock Method |
| | 267,791 | | |||||||||||
Adjusted Average Shares |
11,811,540 | 11,740,261 | 12,068,163 | 11,714,370 | |||||||||||
Diluted EPS Net Income (Loss) |
$ | (0.48 | ) | $ | (0.89 | ) | $ | 11.53 | $ | (1.96 | ) | ||||
(1) | No assumed restricted stock share issuances or option exercises were included in the computation of diluted EPS for the three months ended June 30, 2010 and the three and nine months ended June 30, 2009, because doing so would have an antidilutive effect on the computation of diluted earnings per share. Includes 223,380 shares of restricted stock and 44,411 options for the nine months ended June 30, 2010. Excludes 6,998 and 636,823 antidilutive securities for the nine months ended June 30, 2010 and 2009. |
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IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)(Continued)
7. PENSION AND OTHER POSTRETIREMENT BENEFITS
The components of net periodic benefit costs for the nine months ended June 30, 2010 and 2009 were (in thousands):
Three Months Ended June 30, |
Nine Months Ended June 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Pension Plans |
||||||||||||||||
Service Cost |
$ | 291 | $ | 269 | $ | 873 | $ | 794 | ||||||||
Interest Cost |
2,824 | 3,171 | 8,471 | 9,717 | ||||||||||||
Expected Return on Plan Assets |
(2,575 | ) | (2,977 | ) | (7,725 | ) | (8,793 | ) | ||||||||
Amortization of Prior Service Cost |
34 | 31 | 103 | 92 | ||||||||||||
Recognized Actuarial Loss |
817 | (384 | ) | 2,450 | 356 | |||||||||||
Total Net Periodic Benefit Costs |
$ | 1,391 | $ | 110 | $ | 4,172 | $ | 2,166 | ||||||||
Postretirement Benefits Other than Pension Plans |
||||||||||||||||
Service Cost |
$ | 4 | $ | 3 | $ | 14 | $ | 8 | ||||||||
Interest Cost |
113 | 140 | 339 | 437 | ||||||||||||
Amortization of Prior Service Cost |
(399 | ) | (398 | ) | (1,196 | ) | (1,195 | ) | ||||||||
Recognized Actuarial Loss |
162 | 103 | 484 | 298 | ||||||||||||
Total Net Periodic Benefit Costs (Income) |
$ | (120 | ) | $ | (152 | ) | $ | (359 | ) | $ | (452 | ) | ||||
Pension plan contributions, which are based on regulatory requirements, were $8.2 million for the nine months ended June 30, 2010 and $5.2 million for the nine months ended June 30, 2009. Contributions during the remainder of fiscal 2010 are expected to be approximately $5.4 million.
8. OTHER INCOME
Other income included the following (in thousands of dollars):
Three Months Ended June 30, |
Nine Months Ended June 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||
Equity Earnings in investment in |
||||||||||||||
Comercializadora Santos Imperial S. de R.L. de C.V. |
$ | 430 | $ | 816 | $ | 1,299 | $ | 1,589 | ||||||
Wholesome Sweeteners, Inc. |
934 | 246 | 2,196 | 745 | ||||||||||
Distributions from cost basis fuel terminal partnership |
| | | 147 | ||||||||||
Gain (loss) on securities |
| | | 388 | ||||||||||
Settlement of natural gas pricing litigation |
| | 761 | 107 | ||||||||||
Other |
(14 | ) | (3 | ) | 303 | 51 | ||||||||
Total |
$ | 1,350 | $ | 1,059 | $ | 4,559 | $ | 3,027 | ||||||
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IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)(Continued)
The Company owns a 50 percent interest in Comercializadora Santos Imperial S. de R.L. de C.V. and a 50 percent interest in Wholesome Sweeteners, Inc. The Company reports its share of earnings in these investees on the equity method. Summarized financial information for each of the Companys equity method investees for three and nine months ended June 30, 2010 and 2009 includes the following (in thousands of dollars):
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||||||
Comercializadora Santos Imperial S. de R.L. de C.V. |
Wholesome Sweeteners, Inc. | Comercializadora Santos Imperial S. de R.L. de C.V. |
Wholesome Sweeteners, Inc. | |||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||
Net Sales |
$ | 72,447 | $ | 54,092 | $ | 28,110 | $ | 17,799 | $ | 185,132 | $ | 174,227 | $ | 76,007 | $ | 52,856 | ||||||||
Gross Margin |
$ | 2,160 | $ | 2,186 | $ | 7,151 | $ | 3,728 | $ | 5,575 | $ | 5,294 | $ | 19,769 | $ | 11,006 | ||||||||
Net Income |
$ | 861 | $ | 1,631 | $ | 2,072 | $ | 579 | $ | 2,598 | $ | 3,179 | $ | 5,127 | $ | 1,970 |
9. FAIR VALUE
The Company determines the fair value of natural gas and raw sugar futures contracts and marketable securities using quoted market prices for the individual securities. The following table presents the Companys assets and liabilities measured and recognized at fair value on a recurring basis classified at the appropriate level of the fair value hierarchy as of June 30, 2010 and September 30, 2009 (in thousands of dollars):
June 30, 2010 | ||||||||||||||
Fair Value | Margin Requirements Settled in Cash |
Balance Sheet Total | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||
Current Assets: |
||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
$ | 5,743 | | | $ | (5,743 | ) | | ||||||
No. 11 World Sugar Futures Contracts |
17 | | | (17 | ) | |||||||||
Marketable Securities |
200 | | | | $ | 200 | ||||||||
Natural Gas |
14 | | | (14 | ) | |||||||||
Current Liabilities: |
||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
529 | | | (529 | ) | | ||||||||
No. 11 World Sugar Futures Contracts |
209 | | | (209 | ) | | ||||||||
Natural Gas |
555 | | | (555 | ) | | ||||||||
Non-Current Assets: |
||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
823 | | | (823 | ) | | ||||||||
Non-Current Liabilities: |
||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
| | | | | |||||||||
September 30, 2009 | ||||||||||||||
Fair Value | Margin Requirements Settled in Cash |
Balance Sheet Total | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||
Current Assets: |
||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
$ | 17,651 | | | $ | (17,651 | ) | | ||||||
No. 11 World Sugar Futures Contracts |
3,425 | | | (3,425 | ) | | ||||||||
Natural Gas |
1 | | | (1 | ) | | ||||||||
Marketable Securities |
56 | | | | $ | 56 | ||||||||
Current Liabilities: |
||||||||||||||
Natural Gas |
126 | | | (126 | ) | | ||||||||
Non-Current Assets: |
||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
468 | | | (468 | ) | | ||||||||
Non-Current Liabilities: |
||||||||||||||
Natural Gas |
13 | | | (13 | ) | |
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IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)(Continued)
Fair value hierarchy levels are as follows:
| Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| Level 2Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; |
| Level 3Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. These inputs may be used with internally developed methodologies that are used to generate managements best estimate of fair value. |
10. DERIVATIVE INSTRUMENTS
We use raw sugar futures and options in our raw sugar purchasing programs and natural gas futures and options to hedge natural gas purchases used in our manufacturing operations. Additionally, we periodically use derivatives to manage interest rate and foreign currency exchange risk. Our objective in the use of derivative instruments is to mitigate commodity price, interest rate or foreign currency exchange risk. Our derivatives hedging activity is supervised by a senior risk management committee which monitors and reports compliance with our risk management policy to the Audit Committee of the Board of Directors.
The majority of our industrial channel sales and a portion of our distribution channel sales are made under fixed price, forward sales contracts. In order to mitigate price risk in raw and refined sugar commitments, we manage the volume of refined sugar sales contracted for future delivery in relation to the volume of raw cane sugar purchased for future delivery by entering into forward purchase contracts to buy raw cane sugar at fixed prices and by using raw sugar futures contracts. Historically, substantially all of our purchases of domestic raw sugar and quota raw sugar imports are priced based on the New York Board of Trade (NYBOT) Sugar No. 16 futures contract. We use these futures contracts to price our physical domestic and quota raw sugar purchase commitments. Certain of these derivative instruments qualify as cash flow hedges and are designated as hedges for accounting purposes. To the extent that derivative instruments do not qualify for hedge accounting treatment, the Company records the effect of those instruments in current earnings. Non-quota imports under the re-export program, which constitutes less than 10% of our raw sugar purchases, are priced based on the NYBOT Sugar No. 11 futures contract. We use these futures contracts to price our world raw purchase commitments, however, these derivative instruments are not designated as cash flow hedges. Additionally we receive short raw sugar futures contracts from certain raw sugar suppliers that are used as pricing mechanisms which are not designated as hedges. We have purchased domestic and world raw sugar futures contracts up to 17 months in advance of the physical purchase.
The pricing of our physical natural gas purchases generally is indexed to a spot market index and we use natural gas futures contracts traded on the New York Mercantile Exchange to hedge the cost of natural gas purchased under these physical contracts. These derivative instruments qualify as cash flow hedges and are designated as hedges for accounting purposes. Additionally, we utilize natural gas futures which are not designated as cash flow hedges to manage the remaining commodity price risk above the volume of derivatives designated as cash flow hedges. We have purchased natural gas futures contracts up to 9 months in advance of the physical purchase of natural gas.
For derivative instruments that qualify as a cash flow hedge, the effective portion of the gain or loss of the derivative is reported as a component of other comprehensive income and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses that result from the discontinuance of cash flow hedges because it is probable that the original forecasted transaction will not occur are recognized in current earnings. Gains and losses on derivatives representing hedge ineffectiveness are recognized in current earnings. Gains and losses on derivatives not designated as hedges are recognized in current earnings.
At June 30, 2010 we had the following net futures positions:
Hedge Designation |
Domestic Sugar (cwt) |
World Sugar (cwt) |
Natural Gas (mmbtu) | |||
Cash Flow |
| | 490,000 | |||
Not Designated |
3,623,600 | 171,000 | 150,000 |
All of our futures contracts are settled in cash daily with the respective futures exchanges and therefore do not contain credit-risk-related contingent features. The Company has $7.9 million recorded on the balance sheet for cash held on deposit in margin accounts at June 30, 2010 for the futures positions above. At June 30, 2010 there were no derivative positions to mitigate the risk of interest rates or foreign currency exchange. For the nine month period ended June 30, 2010, we did not engage in trading activity with derivatives.
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IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)(Continued)
The table below shows the location and amounts in the consolidated balance sheets for derivative instruments (in thousands):
As of June 30, 2010:
Hedge Designation | Fair Value |
Margin Requirements Settled in Cash |
Balance Sheet Total | ||||||||
Current Assets: |
|||||||||||
No. 16 Domestic Sugar Futures Contracts |
Not Designated | $ | 5,743 | $ | (5,743 | ) | | ||||
No. 11 World Sugar Futures Contracts |
Not Designated | 17 | (17 | ) | | ||||||
Natural Gas |
Cash Flow | 11 | (11 | ) | | ||||||
Natural Gas |
Not Designated | 3 | (3 | ) | | ||||||
Current Liabilities: |
|||||||||||
No. 16 Domestic Sugar Futures Contracts |
Not Designated | 529 | (529 | ) | | ||||||
No. 11 World Sugar Futures Contracts |
Not Designated | 209 | (209 | ) | | ||||||
Natural Gas |
Cash Flow | 525 | (525 | ) | | ||||||
Natural Gas |
Not Designated | 30 | (30 | ) | | ||||||
Non-Current Assets: |
|||||||||||
No. 16 Domestic Sugar Futures Contracts |
Not Designated | 823 | (823 | ) | | ||||||
Non-Current Liabilities: |
|||||||||||
No. 16 Domestic Sugar Futures Contracts |
Not Designated | | | |
As of September 30, 2009:
Hedge Designation | Fair Value |
Margin Requirements Settled in Cash |
Balance Sheet Total | ||||||||
Current Assets: |
|||||||||||
No. 16 Domestic Sugar Futures Contracts |
Not Designated | $ | 17,651 | $ | (17,651 | ) | | ||||
No. 11 World Sugar Futures Contracts |
Not Designated | 3,425 | (3,425 | ) | | ||||||
Natural Gas |
Cash Flow | 1 | (1 | ) | | ||||||
Current Liabilities: |
|||||||||||
Natural Gas |
Cash Flow | 95 | (95 | ) | | ||||||
Natural Gas |
Not Designated | 31 | (31 | ) | | ||||||
Non-Current Assets: |
|||||||||||
No. 16 Domestic Sugar Futures Contracts |
Not Designated | 468 | (468 | ) | | ||||||
Non-Current Liabilities: |
|||||||||||
Natural Gas |
Cash Flow | 13 | (13 | ) | |
The impact of futures contracts on the consolidated income statement for fiscal year 2010 is presented below:
Hedge Designation |
Income Statement Line Item |
Three Months Ended June 30, 2010 | Nine Months Ended June 30, 2010 | ||||||||||||||||||||
Domestic Sugar |
World Sugar |
Natural Gas |
Domestic Sugar |
World Sugar |
Natural Gas | ||||||||||||||||||
Cash Flow |
Cost of Sales(1) |
$ | | $ | | $ | 601 | $ | | $ | | $ | 1,126 | ||||||||||
Cash Flow |
Accumulated other comprehensive loss |
| | (244 | ) | | | 1,604 | |||||||||||||||
Not Designated |
Cost of Sales (credit) |
(9,723 | ) | 72 | 36 | (21,519 | ) | 8,636 | 244 |
(1) | Amounts were reclassified from accumulated other comprehensive income. |
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IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)(Continued)
There were no gains or losses recognized on cash flow hedges for ineffectiveness, nor were there any portion of derivatives excluded from the effectiveness assessment. Approximately $0.7 million of losses on cash flow hedges for natural gas is expected to be reclassified to earnings over the next twelve months.
The impact of futures contracts on the consolidated income statement for the three and nine months ended June 30, 2009 is presented below:
Hedge Designation |
Income Statement Line Item |
Three Months Ended June 30, 2009 | Nine Months Ended June 30, 2009 | ||||||||||||||||||||
Domestic Sugar |
World Sugar |
Natural Gas |
Domestic Sugar |
World Sugar |
Natural Gas | ||||||||||||||||||
Cash Flow |
Cost of Sales(1) |
$ | (204 | ) | $ | | $ | 2,068 | $ | 85 | $ | | $ | 5,785 | |||||||||
Cash Flow |
Accumulated other comprehensive loss |
(19 | ) | | 551 | 795 | | 4,273 | |||||||||||||||
Not Designated |
Cost of Sales (credit) |
(1,520 | ) | (900 | ) | 75 | 1,256 | (254 | ) | 344 |
(1) | Amounts were reclassified from accumulated other comprehensive income. |
11. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in Accumulated Other Comprehensive Income (Loss) for the nine months ended June 30, 2010 are as follows (in thousands of dollars):
Net Unrealized Gains (Losses) on Derivatives |
Net Unrealized Gains (Losses) on Pension and Other Post Retirement Medical Benefits |
Foreign Currency Translation Adjustments and Other |
Total | |||||||||||||
Balance September 30, 2009 |
$ | 25 | $ | (69,820 | ) | $ | (114 | ) | $ | (69,909 | ) | |||||
Change in Derivative Fair Value (Net of Tax of $573) |
(1,031 | ) | (1,031 | ) | ||||||||||||
Reclassification from Accumulated Other Comprehensive Income (Loss) to Net Income (Net of Tax of $303) |
544 | 544 | ||||||||||||||
Foreign Currency Translation Adjustment (Net of Tax of $52) |
93 | 93 | ||||||||||||||
Balance June 30, 2010 |
$ | (462 | ) | (69,820 | ) | (21 | ) | (70,303 | ) | |||||||
15
Table of Contents
Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This discussion should be read in conjunction with information contained in the Consolidated Financial Statements and the notes thereto and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.
Overview
We operate in a single domestic business segment, the production and sale of refined sugar and related products. Our results of operations substantially depend on market factors, including the demand for and price of refined sugar, the price of raw cane sugar and the availability and price of energy and other resources. These factors are influenced by a variety of external forces that we are unable to predict, including the number of domestic acres contracted to grow sugar cane and sugar beets, prices of competing crops, supply and price of raw cane sugar, domestic dietary trends, competing sweeteners, weather conditions, production outages at key industry facilities and the United States and Mexican farm and trade policies. The domestic sugar industry is subject to substantial influence by legislative and regulatory actions. The 2008 Farm Bill limits the importation of raw cane sugar and the marketing of domestically produced refined beet and raw cane sugar, potentially affecting refined sugar sales prices and volumes as well as the supply and cost of raw material available to our cane refineries.
The Company experienced an industrial accident in February 2008 at its sugar refinery in Port Wentworth, Georgia, which is located near Savannah, Georgia. Production at the refinery, which comprises approximately 60% of our capacity, was suspended after the accident until we commenced limited bulk sugar production in the summer of 2009. Packaged production on certain lines began in September 2009. Installation of the remaining packaging lines was completed during the quarter ended December 31, 2009 and the refined silo storage facilities were operational in January 2010.
Results of Operations
Three and Nine Months Ended June 30, 2010 compared to Three and Nine Months Ended June 30, 2009
For the three months ended June 30, 2010, we reported a net loss from continuing operations of $5.7 million or $0.48 per diluted share, compared to a loss of $10.5 million or $0.89 per diluted share during the third fiscal quarter of the prior year. For the nine months ended June 30, 2010, we reported net income from continuing operations of $139.2 million or $11.53 per diluted share, compared to a loss of $23.6 million or $2.01 per diluted share for the nine months ended June 30, 2009. The recognition of insurance gains, derivative activity and refinery performance has had a significant impact on our reported earnings during these periods.
In December 2009 the Company settled the property insurance claim relating to the Port Wentworth accident and recorded pretax gains totaling $278.5 million ($178.2 million after tax).
Port Wentworths total production for the third fiscal quarter was above 90% of normal periods, an increase from 80% in the second fiscal quarter. However, daily production rates continue below normal capacity, necessitating additional production days, which, along with increased depreciation and spending in a number of areas, added costs to achieve these volumes.
The domestic raw sugar market has continued to trade at levels well above historical norms. Since late July 2009 the domestic raw sugar market has risen dramatically, peaking above $42 per cwt in late January 2010 before retreating to about $31 per cwt at the end of March 2010. During the current quarter domestic raw sugar prices rose again, with the nearby futures contract closing at $33.83 per cwt on June 30, 2010. This volatility has generated significant gains and losses on derivative contracts entered into to hedge raw sugar purchases relating to future periods. These gains and losses did not qualify for hedge accounting treatment and accordingly, are included in current operating results.
We discuss these and other factors in more detail below.
16
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Sugar sales comprise approximately 98% of our net sales. Sugar sales volumes and prices were:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||
Volume | Price | Volume | Price | Volume | Price | Volume | Price | |||||||||||||
(000 cwt) | (per cwt) | (000 cwt) | (per cwt) | (000 cwt) | (per cwt) | (000 cwt) | (per cwt) | |||||||||||||
Sugar Sales: |
||||||||||||||||||||
Industrial |
3,498 | $ | 36.05 | 2,047 | $ | 30.99 | 8,952 | $ | 34.53 | 5,105 | $ | 30.88 | ||||||||
Consumer |
1,300 | 45.72 | 1,163 | 37.53 | 3,669 | 45.51 | 3,306 | 37.86 | ||||||||||||
Distributor |
1,394 | 42.02 | 809 | 34.96 | 3,144 | 40.61 | 2,130 | 34.60 | ||||||||||||
Domestic Sales |
6,191 | 39.42 | 4,019 | 33.68 | 15,765 | 38.30 | 10,541 | 33.82 | ||||||||||||
World Sales |
369 | 32.67 | 139 | 25.24 | 761 | 33.93 | 365 | 24.86 | ||||||||||||
Total Sugar Sales |
6,560 | $ | 39.04 | 4,158 | $ | 33.40 | 16,526 | $ | 38.10 | 10,906 | $ | 33.52 | ||||||||
Net sales increased 83.4% for the three months and 71.5% for the nine months ended June 30, 2010, each compared to the same period in the prior year. Domestic sugar volumes increased 54.1% for the quarter and 49.6% for the nine-month period primarily due to the additional production from the Port Wentworth refinery, partially offset by lower volumes of sugar purchased from other producers. The ramp up in production volumes at the Port Wentworth refinery limited the increases in sales volumes during the current year. The refinerys production was in excess of 90% of normal periods in the third quarter and 80% for the current year. Challenges starting up certain specialty product lines delayed the reinitiation of distribution with certain customers, notably several retailers who require a full line offering of products.
Domestic sales prices increased 17.0% for the quarter and 13.2% for the nine-month period. Sugar production from the domestic sugar beet crop harvested in the fall of 2009, which is forecasted by the USDA to be 5.6% higher than the prior year, is still significantly below recent historical levels. Additionally, imports from Mexico in fiscal 2010 are forecasted to be 4.1% of U.S. annual demand as compared to 13.2% in the prior year. The combination of these factors, as well as the influence of higher raw cane sugar prices, as discussed below, has led to higher refined prices. The majority of industrial channel sales and a portion of distributor channel sales are made under fixed price contracts which generally extend up to a year, many of which are on a calendar year basis. As a result, realized sales prices tend to lag market trends.
For the three months ended June 30, 2010, gross margin as a percentage of sales increased to 0.7% compared to 0.2% in the prior year quarter. The increase in gross margin percentage is primarily due to gains on raw sugar derivatives which were entered into to hedge raw sugar purchases in later periods. Gross margin as a percent of sales for the nine months ended June 30, 2010 declined to a negative 4.1% from a negative 2.3% for the same period last year, primarily due to higher raw sugar costs partially offset by higher sales prices.
Raw sugar production shortfalls in India and poor crop conditions in Brazil have created very tight supply in the world raw sugar market, which has driven up world raw sugar prices. Rising world raw sugar prices together with restrictions on imports imposed by the 2008 Farm Bill pushed domestic raw sugar prices to 30 year highs in early calendar 2010, before prices fell 20%, but remain at much higher than historical levels. Domestic raw sugar futures prices for the nearby futures contract as quoted on the Intercontinental Exchange at recent quarter ends were as follows:
Closing Price (per cwt) | |||
September 30, 2008 |
$ | 22.58 | |
December 31, 2008 |
$ | 20.03 | |
March 31, 2009 |
$ | 20.98 | |
June 30, 2009 |
$ | 22.70 | |
September 30, 2009 |
$ | 30.50 | |
December 31, 2009 |
$ | 35.03 | |
March 31, 2010 |
$ | 31.29 | |
June 30, 2010 |
$ | 33.83 |
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The Company has attempted to offset the increase in raw sugar cost by adjusting its sales prices, however there can be no assurance that we will be successful in achieving sales price increases sufficient to offset these higher raw sugar costs. Sales price increases in the third fiscal quarter were not sufficient to offset increases in raw sugar costs, negatively affecting gross margins.
Raw sugar derivative gains and losses recognized in fiscal 2009 and fiscal 2010, which were entered into to hedge future sugar purchases were as follows:
Raw Sugar Futures Derivative Gains (Losses)
(In Millions)
Recognized In | Futures Contract Delivery Period | |||||||||||||||||||||||||||
Fiscal 2010 | Fiscal 2010 | |||||||||||||||||||||||||||
Fiscal 2009 |
Q1 | Q2 | Q3 | Q1 | Q2 | Q3 | Q4 | Fiscal 2011 | ||||||||||||||||||||
$27.9 | $ | 8.8 | $ | 10.0 | $ | 5.7 | $ | 2.9 | $ | 0.5 | ||||||||||||||||||
$ | 18.9 | 7.0 | 7.9 | 3.4 | 0.6 | |||||||||||||||||||||||
$ | (24.8 | ) | (16.1 | ) | (5.7 | ) | (3.0 | ) | ||||||||||||||||||||
$ | 10.7 | 5.7 | 5.0 | |||||||||||||||||||||||||
$ | 8.8 | $ | 17.0 | $ | (2.5 | ) | $ | 6.3 | $ | 3.1 |
The effect of recognizing derivative gains results in higher raw sugar cost in subsequent periods while the recognition of losses results in lower raw sugar costs in future periods.
Our cost of domestic raw cane sugar, excluding the effect of derivative gains and losses and a LIFO liquidation, was as follows (per cwt on a raw market basis):
Period Ended |
Three Months | Nine Months | ||||
June 30, 2009 |
$ | 21.97 | $ | 21.83 | ||
June 30, 2010 |
$ | 28.52 | $ | 28.10 |
The higher current period raw sugar cost reflects the higher raw sugar market prices. As a result of these higher domestic raw cane sugar costs, our gross margin percentage declined by 15.3% for the quarter and by 15.2% for the nine month period as compared to the same periods last year. Sugar inventory quantities at June 30, 2010 declined below the September 30, 2009 balance, resulting in the liquidation of a LIFO inventory layer with a cost approximately $4.9 million below the cost of current purchases.
Cost of sales for the third fiscal quarter includes $10.7 million of gains on raw sugar futures contracts recognized this quarter on derivatives entered into to hedge raw sugar purchases in future periods, which positively impacted gross margin by 3.5%. If the balance of our anticipated raw sugar purchases for fiscal 2010 were priced in the domestic sugar futures market on June 30, 2010, our fiscal 2010 raw sugar costs, excluding the effect of derivative gains and losses and a LIFO liquidation, would be $27.95 per cwt.
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Manufacturing costs increased in the quarter and nine month period compared to last year and to normal production periods prior to the 2008 accident, as the Port Wentworth refinery ramped up production volume throughout fiscal 2010. Port Wentworths total production during the third quarter was in excess of 90% of normal periods, however daily throughput rates continue to lag historical rates necessitating added production days. Average daily melt rates and production days during the two fiscal years prior to the accident and the first three quarters of fiscal 2010 were as follows:
Quarterly Period |
Average Daily Melt (millions of pounds) |
Number of Production Days in Quarter | ||
Average quarter fiscal 2006 |
5.9 | 73 | ||
Average quarter fiscal 2007 |
5.9 | 65 | ||
First quarter fiscal 2010 |
3.2 | 81 | ||
Second quarter fiscal 2010 |
3.9 | 82 | ||
Third quarter fiscal 2010 |
4.7 | 82 |
The lower total production volumes and the additional production days generated higher unit cost while refining efficiency adversely impacted yields. Additionally, higher maintenance, safety, insurance, property taxes, depreciation and consulting cost impacted manufacturing costs.
Compared to fiscal 2007, the last comparable period before the Port Wentworth accident, higher manufacturing costs negatively impacted the gross margin percentage by 6.3% for the quarter and 6.5% for the nine month period. Depreciation increased $3.3 million for the quarter and $7.9 million for the nine months as a result of commencing depreciation of the reconstructed Port Wentworth facilities. Insurance, property taxes and safety costs increased $4.3 million for the quarter and $10.6 million for the nine months, compared to 2007, with approximately 55% of the increases related to Port Wentworth. Higher property taxes and insurance costs are primarily the result of the rebuilt Port Wentworth refinery. The OSHA settlement agreement includes requirements to abate the citations and to implement or continue certain safety measures regarding safety and health of our employees. While the costs associated with the Gramercy refinery will be reduced after the LSR contribution, the Port Wentworth costs described above are not expected to decline from their current levels in the near future.
We incurred $3.8 million of costs as a result of disruptions of supply to customers caused by the production challenges at the Port Wentworth refinery, which reduced the gross margin percentage by 1.5% in the quarter.
Energy costs per cwt were lower than the prior year in both the quarter and nine month periods due to a significant drop in natural gas prices and as a result gross margin improved 1.1% in the quarter and 2.0% for the nine months as compared to the prior year periods. The Gramercy refinery uses natural gas exclusively and the Port Wentworth refinery uses coal and natural gas. A supplier is not currently performing on our fixed price coal contract which expires in December 2012. We may be required to purchase coal at current market prices which are higher than the contract price.
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||
Volume | Price | Volume | Price | Volume | Price | Volume | Price | |||||||||||||
(000 mmbtu) | (per mmbtu) | (000 mmbtu) | (per mmbtu) | (000 mmbtu) | (per mmbtu) | (000 mmbtu) | (per mmbtu) | |||||||||||||
Natural Gas |
1,012 | $ | 4.80 | 580 | $ | 6.86 | 3,342 | $ | 4.99 | 1,760 | $ | 8.70 | ||||||||
Coal |
213 | 3.92 | | | 275 | 4.00 | | | ||||||||||||
Total |
1,225 | $ | 4.65 | 580 | $ | 6.86 | 3,618 | $ | 4.91 | 1,760 | $ | 8.70 | ||||||||
We have purchased or hedged approximately 93% of our expected natural gas requirements for fiscal 2010 at a price of $5.07 per mmbtu. If the balance of our anticipated natural gas purchases for the year were priced in the futures market on July 27, 2010, our natural gas costs would be $5.04 per mmbtu compared to $7.43 per mmbtu in fiscal 2009.
Transportation costs were lower in the quarter and nine month periods as customer shipments were optimized between Gramercy and Port Wentworth as compared to the longer distances required last year without the benefit of Port Wentworth production. Gross margin improved 1.6% for both the quarter and nine months as a result of these lower transportation costs.
Severance costs of $0.7 million and $0.5 million were recorded during the quarter in cost of sales and selling, general and administrative expenses, respectively, as a result of initial staffing reductions in anticipation of the transition of the Gramercy refinery into the LSR joint venture.
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Selling, general and administrative expense decreased $0.5 million for the quarter and $2.4 million for the nine months ended June 30, 2010 compared to the same periods in the prior year. The decline in both periods was due to lower professional services and computer related depreciation offset in part by increased pension expense and severance costs.
The Company settled the Port Wentworth property and business interruption insurance claim in the first fiscal quarter for $345.0 million resulting in pretax gains of $278.5 million. We incurred $0.9 million of continuing legal and consulting costs related to the refinery explosion during the current quarter as compared to $6.2 million of net charges in the prior year quarter. We incurred $4.2 million of continuing legal and consulting costs during the nine months ended June 30, 2010 as compared to $14.4 million of net charges in the prior nine month period. Details of the settlement of the insurance claim are provided in Note 2 to the Consolidated Financial Statements.
In January 2009, the Company was notified by its workers compensation liability insurance carrier that it anticipates charging the Company for certain loss-based assessments the carrier expected to receive from the state of Georgias Subsequent Injury Trust Fund (SITF). The Companys insurance contract provides that it reimburse the carrier for such SITF assessments if and when the assessments are levied based on workers compensation claims paid during a calendar year. The Company recorded a $3.7 million charge in refinery explosion related charges during the quarter ended March 31, 2010.
The Company along with other sugar industry participants was party to a lawsuit with McNeil Nutritional, which was settled in November 2008. The Company received $16.1 million in connection with the settlement which was recorded as a gain on litigation settlement in the quarter ended December 31, 2008.
Other income, which includes equity investment earnings and distributions from cost basis investments, increased significantly in the current quarter as compared to last year due to a significant improvement in Wholesome Sweeteners earnings.
We have estimated a combined federal and state income tax rate of 34.4% for the quarter and 35.8% for the nine months compared to 35.5% and 37.3% in the same periods last year.
Income from discontinued operations in fiscal 2009 is a result of the resolution of pre-disposal contingencies.
Liquidity and Capital Resources
At June 30, 2010, the Company had cash and cash equivalents of $19.7 million and $33 million of outstanding borrowings under our $100 million revolving credit agreement with Bank of America, N.A. (the Revolver). At June 30, 2010, we had the capacity under the borrowing base formula to borrow $61.1 million against inventory and receivables, after deducting outstanding letters of credit totaling $5.9 million.
We believe that our available liquidity and capital resources including cash from operations, cash balances and existing revolving credit agreement, are sufficient to meet our operating and capital needs, including remaining estimated reconstruction costs and ongoing capital improvements, through at least the next twelve months. Volatility in raw sugar prices may place additional demands on liquidity as we maintain our raw sugar purchasing and hedging program. The recent credit crisis and related turmoil in the global financial system could make the availability of borrowings for liquidity needs difficult, and the cost of such borrowings expensive.
The Revolver, which expires December 31, 2011, is secured by substantially all of our current assets, certain investments and certain property, plant and equipment. Each of our subsidiaries is either a borrower or a guarantor under the facility. Interest on borrowings under the Revolver is at LIBOR plus a margin that varies (with liquidity, as defined) from 1.00% to 1.75%, or the base rate (Bank of America prime rate) plus a margin of negative 0.25% to positive 0.25%.
The agreement contains covenants limiting our ability to, among other things:
| incur other indebtedness; |
| incur other liens; |
| undergo any fundamental changes; |
| engage in transactions with affiliates; |
| enter into sale and leaseback transactions; |
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| change our fiscal periods; |
| enter into mergers or consolidations; |
| sell assets; and |
| prepay other debt. |
In addition, in the event that our average total liquidity (defined as the average of the borrowing base, less average actual borrowings and letters of credit) falls below $20 million, the Revolver requires that we comply with a quarterly covenant which establishes a minimum level of earnings before interest, taxes, depreciation and amortization, as defined (EBITDA). The Revolver limits our ability to pay dividends or repurchase stock if our average total liquidity, after adjustment on a pro forma basis for such transaction, is less than $20 million. Average total liquidity for the quarter ended June 30, 2010 was $98 million.
The Revolver also includes customary events of default, including a change of control. Borrowings will generally be available subject to a borrowing base and to the accuracy of all representations and warranties, including the absence of a material adverse change and the absence of any default or event of default. Although the facility has a final maturity date of December 31, 2011, we classify debt under the Revolver as current, as the agreement contains a subjective acceleration clause if in the opinion of the lenders there is a material adverse effect, and provides the lenders direct access to our cash receipts.
We have rebuilt the portions of the Port Wentworth refinery and packaging operations that were damaged or destroyed in the industrial accident in February 2008. The replacement cost of the damaged facilities at the Port Wentworth refinery is estimated at $230 million and we had spent $220 million on the project through June 30, 2010. Our capital expenditures for the quarter and nine months ended June 30, 2010 were $7.6 million and $65.9 million including spending related to the Port Wentworth rebuild. Capital expenditures for the remainder of fiscal 2010 are expected to total between $10 million and $15 million, related primarily to the Port Wentworth rebuild project, safety improvements and normal equipment replacement, and includes the improvements we are obligated to complete in connection with the LSR joint venture agreements.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and estimate methodologies since the filing of our Annual Report on Form 10-K for the year ended September 30, 2009.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We use raw sugar futures and options in our raw sugar purchasing programs and natural gas futures and options to hedge natural gas purchases used in our manufacturing operations. Our derivatives hedging activity is supervised by a senior risk management committee which monitors and reports compliance with our risk management policy to the Audit Committee of the Board of Directors.
The information in the table below presents our domestic and world raw sugar futures positions outstanding as of June 30, 2010.
Expected Maturity Fiscal 2010 |
Expected Maturity Fiscal 2011 |
Expected Maturity Fiscal 2012 | |||||||
Domestic Futures Contracts (long positions): |
|||||||||
Contract Volumes (cwt) |
652,000 | 2,966,000 | 5,600 | ||||||
Weighted Average Contract Price (per cwt) |
$ | 31.15 | $ | 27.24 | $ | 26.20 | |||
Contract Amount |
$ | 20,305,000 | $ | 80,796,000 | $ | 147,000 | |||
Weighted Average Fair Value (per cwt) |
$ | 33.83 | $ | 28.69 | $ | 28.50 | |||
Fair Value |
$ | 22,052,000 | $ | 85,074,000 | $ | 160,000 |
Expected Maturity Fiscal 2010 |
Expected Maturity Fiscal 2011 | |||||
World Futures Contracts (long positions): |
||||||
Contract Volumes (cwt) |
| 171,000 | ||||
Weighted Average Contract Price (per cwt) |
$ | | $ | 17.33 | ||
Contract Amount |
$ | | $ | 2,969,000 | ||
Weighted Average Fair Value (per cwt) |
$ | | $ | 16.20 | ||
Fair Value |
$ | | $ | 2,777,000 |
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The above information does not include either our physical inventory or our fixed price purchase commitments for raw sugar. At June 30, 2009, our domestic futures position was a net long position of 3,105,000 cwt at an average contract price of $22.18 and an average fair value price of $22.88. Our world futures position at June 30, 2009 was a net long position of 260,000 cwt at an average contract price of $16.88 and an average fair value price of $17.85.
The information in the table below presents our natural gas futures positions outstanding as of June 30, 2010.
Expected Maturity Fiscal 2010 |
Expected Maturity Fiscal 2011 | |||||
Futures Contracts (long positions): |
||||||
Contract Volumes (mmbtu) |
410,000 | 230,000 | ||||
Weighted Average Contract Price (per mmbtu) |
$ | 5.58 | $ | 5.67 | ||
Contract Amount |
$ | 2,289,000 | $ | 1,304,780 | ||
Weighted Average Fair Value (per mmbtu) |
$ | 4.63 | $ | 5.02 | ||
Fair Value |
$ | 1,900,000 | $ | 1,154,000 |
At June 30, 2009, our natural gas futures position was a long position of 1,820,000 mmbtu with an average contract price of $6.11 and an average fair value price of $5.32.
At June 30, 2010 and 2009, we had no interest rate derivatives which were sensitive to interest rate changes.
Item 4. | CONTROLS AND PROCEDURES |
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2010, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in our internal controls over financial reporting that occurred during the three months ended June 30, 2010, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
Item 1. | Legal Proceedings |
The Company is party to a number of claims, including twenty-four remaining lawsuits brought on behalf of 18 employees or their families and 16 third parties or their families, for injuries and losses suffered as a result of the Port Wentworth refinery accident. None of the lawsuits demand a specific dollar amount of damages sought by the plaintiffs. During the third fiscal quarter, the Company settled twelve lawsuits seeking recovery of injuries and losses from the Port Wentworth accident, with the settlement payments made to these claimants being funded by the Companys insurers. Including the lawsuits settled in the third fiscal quarter, the Company has settled twenty-four of the original forty-eight lawsuits filed as a result of the Port Wentworth refinery accident.
The Company has workers compensation insurance which provides for coverage equal to the statutory benefits provided to workers under state law. Additionally, the Companys general liability policy provides for coverage for damages to third parties up to a policy limit of $100 million. While the Company believes it has meritorious defenses in this litigation, and that claims by employees and certain contractors are limited to benefits provided under Georgia workers compensation law, the ultimate resolution of these matters could result in liability in excess of the amount accrued. The Company believes the likelihood of the aggregate liability, including the amounts paid in the settlements discussed above, exceeding the $100 million policy limit is remote.
Following the Port Wentworth accident, the U.S. Occupational Safety Health Administration (OSHA) conducted investigations at the Companys Port Wentworth and Gramercy refineries. OSHA concluded its Port Wentworth and Gramercy investigations on July 25, 2008, and issued numerous citations with total proposed penalties of $5.1 million in Port Wentworth and $3.7 million in Gramercy. Additionally, OSHA issued requirements for certain abatement actions to be undertaken by the Company at the Port Wentworth and Gramercy facilities. The Company contested all of the citations and proposed penalties regarding the Port Wentworth and Gramercy investigations, and these matters were assigned to the Occupational Safety and Health Review Commission for a review of the merits of the citations, proposed penalties and abatement actions. On July 7, 2010, the Company settled the Port Wentworth and Gramercy citations and agreed to pay aggregate penalties of $6.05 million, which will be payable in four quarterly installments. The Company made no admission of liability in the settlements. The Company also agreed to abate the citations and to implement certain other measures related to worker and facility safety. The $6.05 million aggregate penalties, which had been provided for in prior fiscal periods, are not covered by insurance and are not deductible for federal income tax purposes.
On July 31, 2008, the Board of Directors received a letter from an attorney representing a stockholder of the Company requesting, among other things, that the Board cause an independent investigation to be made with respect to alleged mismanagement and breaches of fiduciary duty by the Companys officers, directors and employees relating to the February 7, 2008 explosion at the Companys refinery in Port Wentworth, Georgia. On October 2, 2008, the Board received a similar letter on behalf of another stockholder requesting that the Company commence legal actions against specified officers and directors. The Board of Directors established a committee of independent and disinterested directors on October 23, 2008 with full authority to investigate and address the allegations contained in the stockholder letters described above.
On January 16, 2009, one of such stockholders filed a derivative action in the District Court of Harris County, Texas against twelve current and former directors and officers of the Company and named the Company as a nominal defendant. The action, entitled Delaney v. Sheptor, et al., Cause No. 2009-03145 (Dist. Ct. Tex.), asserts a claim of breach of fiduciary duty against defendants in connection with the February 2008 explosion at the Port Wentworth facility and seeks unspecified damages on behalf of the Company. The action has been stayed pending completion of the investigation by the committee of independent and disinterested directors. On August 5, 2010, the plaintiff in Delaney filed a motion for preliminary approval of settlement with the District Court of Harris County, which motion is pending before the court. The terms of the proposed settlement provide for implementation by the Company of certain management and governance measures and provides for the payment of $2.65 million in attorneys fees of the derivative plaintiffs. The Company expects the $2.65 million payment to be made by its insurer. The defendants make no admission of liability in the proposed settlement.
In January 2009, the Company was notified by its workers compensation liability insurance carrier that it anticipates charging the Company for certain loss-based assessments the carrier expected to receive from the state of Georgias Subsequent Injury Trust Fund (SITF). The Companys insurance contract provides that it reimburse the carrier for such SITF assessments if and when the assessments are levied based on workers compensation claims paid during a calendar year. Based on projections of workers compensation losses arising from the 2008 Port Wentworth accident and prior assessment rates, such assessments could total $6.4 million, including $3.7 million attributable to losses paid in calendar 2008 and 2009. The Company recorded a $3.7 million charge in the March 31, 2010 consolidated financial statements.
Additionally, the Company is party to litigation and claims which are normal in the course of its operations. While the results of such litigation and claims cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a materially adverse effect on its consolidated results of operations, financial position or cash flows. In connection with the sales of certain businesses, the Company made customary representations and warranties, and undertook indemnification obligations with regard to certain of these representations and warranties including financial statements, environmental and tax matters, and the conduct of the businesses prior to the sale. These indemnification obligations are subject to certain deductibles, caps and expiration dates.
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Item 1A. | Risk Factors |
There have been no material changes from the risk factors disclosed in Part I, Item 1A, of the Companys Annual Report on Form 10-K for the year ended September 30, 2009.
Item 6. | Exhibits |
(a) Exhibits
31.1 |
Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934. | |
31.2 |
Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934. | |
32 |
Certifications required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
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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 and in his capacity as Principal Financial Officer.
IMPERIAL SUGAR COMPANY | ||||
(Registrant) | ||||
Dated: August 5, 2010 | By: | /S/ H. P. MECHLER | ||
H. P. Mechler | ||||
Senior Vice President and Chief Financial Officer and Duly Authorized Signatory |
Exhibit Index
Exhibit No. |
Document | |
31.1 | Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934. | |
31.2 | Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934. | |
32 | Certifications required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
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