UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
August 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number 0-11488
Penford Corporation
(Exact name of registrant as
specified in its charter)
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Washington
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91-1221360
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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7094 S. Revere Parkway
Centennial, Colorado
(Address of principal
Executive Offices)
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80112-3932
(Zip Code)
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Registrants telephone number, including area code:
(303) 649-1900
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $1.00 par value
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The NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
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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 at least the past
90 days. Yes
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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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. (Check one):
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Large accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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(Do not check if a smaller reporting company)
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Smaller reporting
Company
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
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No
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The aggregate market value of the Registrants Common Stock
held by non-affiliates of the Registrant as of February 29,
2008, the last business day of the Registrants second
quarter of fiscal 2008, was approximately $236.8 million
based upon the last sale price reported for such date on The
NASDAQ Global Market. For purposes of making this calculation,
Registrant has assumed that all the outstanding shares were held
by non-affiliates, except for shares held by Registrants
directors and officers and by each person who owns 10% or more
of the outstanding Common Stock. However, this does not
necessarily mean that there are not other persons who may be
deemed to be affiliates of the Registrant.
The number of shares of the Registrants Common Stock (the
Registrants only outstanding class of stock) outstanding
as of November 3, 2008 was 11,252,820.
Documents Incorporated by Reference
Portions of the Registrants definitive Proxy Statement
relating to the 2009 Annual Meeting of Shareholders are
incorporated by reference into Part III of this
Form 10-K.
PENFORD
CORPORATION
FISCAL
YEAR 2008
FORM 10-K
ANNUAL REPORT
TABLE OF
CONTENTS
2
PART I
Forward-looking
Statements
This Annual Report on
Form 10-K
(Annual Report), including, but not limited, to
statements found in the Notes to Consolidated Financial
Statements and in Item 1 Business and
Item 7 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. The following factors, among others, could cause
actual results and future events to differ materially from those
set forth or contemplated in the forward-looking statements:
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competition;
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the possibility of interruption of business activities due to
equipment problems, accidents, strikes, weather or other
factors;
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product development risk;
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changes in corn and other raw material prices and
availability;
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the amount and timing of expenditures for flood restoration
costs and related insurance recoveries;
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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;
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unanticipated costs, expenses or third-party claims;
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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;
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interest rate, chemical and energy cost volatility;
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foreign currency exchange rate fluctuations;
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changes in returns on pension plan assets
and/or
assumptions used for determining employee benefit expense and
obligations;
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other unforeseen developments in the industries in which
Penford operates, or
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other factors described in Part I, Item 1A
Risk Factors.
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Description
of Business
Penford Corporation (which, together with its subsidiary
companies, is referred to herein as Penford or the
Company) is a developer, manufacturer and marketer
of specialty natural-based ingredient systems for many
industrial and food applications. The Companys
strategically-located manufacturing facilities in the United
States, Australia and New Zealand provide it with broad
geographic coverage of its target markets. Penford is a
Washington corporation originally incorporated in September
1983. The Company commenced operations as a publicly-traded
company on March 1, 1984.
3
Penford operates in three business segments, each utilizing its
carbohydrate chemistry expertise to develop starch-based
ingredients for value-added applications in several end markets
that improve the quality and performance of customers
products, including papermaking and food products. The first
two, industrial ingredients and food ingredients, are broad
categories of end-market users, primarily served by the
Companys United States operations. The third segment
consists of geographically separate operations in Australia and
New Zealand. The Australian and New Zealand operations are
engaged primarily in the food ingredients business. Financial
information about Penfords segments and geographic areas
is included in Note 17 to the Consolidated Financial
Statements.
The Company has extensive research and development capabilities,
which are used in understanding the complex chemistry of
carbohydrate-based materials and in developing applications to
address customer needs.
Penfords three business segments are:
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Industrial Ingredients North America
, which
in fiscal years 2008 and 2007 generated approximately 50% and
54%, respectively, of Penfords revenue, is a supplier of
chemically modified specialty starches to the paper and
packaging industries. Through a commitment to research and
development, Industrial Ingredients develops customized product
applications that help its customers realize improved
manufacturing efficiencies and advancements in product
performance. Industrial Ingredients has specialty processing
capabilities for a variety of modified starches. Specialty
products for industrial applications are designed to improve the
strength and performance of customers products and
efficiencies in the manufacture of coated and uncoated paper and
paper packaging products. These starches are principally
ethylated (chemically modified with ethylene oxide), oxidized
(treated with sodium hypochlorite) and cationic (carrying a
positive electrical charge). Ethylated and oxidized starches are
used in coatings and as binders, providing strength and
printability to fine white, magazine and catalog paper. Cationic
and other liquid starches are generally used in the
paper-forming process in paper production, providing strong
bonding of paper fibers and other ingredients. Several of
Industrial Ingredients products are cost-effective
alternatives to synthetic, petroleum-based ingredients.
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In May 2008, the Companys Industrial
Ingredients North America segment began commercial
production and sales of ethanol from its facility in Cedar
Rapids, Iowa. This ethanol plant gave the Company the ability to
select an additional output choice to capitalize on changing
industry conditions and selling opportunities.
On June 12, 2008, the Companys Cedar Rapids, Iowa
plant, operated by the Industrial Ingredients
North America business was temporarily shut down due to
record flooding of the Cedar River and government-ordered
mandatory evacuation of the plant and surrounding areas. The
Company resumed production of certain of its liquid starch
products in mid-July using its pilot plant facility, which was
not heavily damaged by the flood. By the end of August 2008, the
Company had begun manufacturing industrial starch in Cedar
Rapids. During September 2008, the Company also resumed the
commercial production and sale of ethanol. By the beginning of
October 2008, the Company had substantially completed the
restoration of the Cedar Rapids plant and the facilitys
processing rate had reached pre-flood levels.
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Food Ingredients North America
, which in
fiscal years 2008 and 2007 generated approximately 19% and 17%,
respectively, of Penfords revenue, is a developer and
manufacturer of specialty starches and dextrins to the food
manufacturing and food service industries. Its expertise is in
leveraging the inherent characteristics from potato, corn,
tapioca and rice to help improve its customers product
performance. Food Ingredients specialty starches produced
for food applications are used in coatings to provide crispness,
improved taste and texture, and increased product life for
products such as french fries sold in restaurants. Food-grade
starch products are also used as moisture binders to reduce fat
levels, modify texture and improve color and consistency in a
variety of foods such as canned products, sauces, whole and
processed meats, dry powdered mixes and other food and bakery
products.
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Australia/New Zealand Operations
generated approximately
31% and 29% of Penfords revenue in fiscal years 2008 and
2007, respectively. The Australia/New Zealand segment develops,
manufactures and markets ingredient systems, including specialty
starches and sweeteners for food and industrial applications.
The Company believes that it is the sole Australian producer of
maize starch products. This segments flexible
manufacturing capabilities allow the Company to manufacture
products to customer specifications and to quickly respond to
customers changing needs.
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Raw
Materials
Corn:
Penfords North American corn wet
milling plant is located in Cedar Rapids, Iowa, the middle of
the U.S. corn belt. Accordingly, the plant has
truck-delivered corn available throughout the year from a number
of suppliers at prices consistent with those available in the
major U.S. grain markets.
Penford Australias corn wet milling facilities in Lane
Cove, Australia, and Auckland, New Zealand are sourced through
truck-delivered corn at contracted prices with regional
independent farmers and merchants. The corn sourced in Australia
and New Zealand is normally contracted prior to harvest
(March June). Corn used in Australia is purchased
and stored for use in both the current and following year. The
corn sourced in New Zealand is purchased in advance for future
delivery. Corn is also purchased from Australia as necessary to
supplement the corn sourced and processed in New Zealand.
Potato Starch:
The Companys facilities
in Idaho Falls, Idaho; Richland, Washington; and Plover,
Wisconsin use starch recovered as by-products from potato
processors as the primary raw material to manufacture modified
potato starches. The Company enters into contracts typically
having durations of one to five years with potato processors in
the United States and Canada to acquire potato-based raw
materials.
Wheat Products:
Penford Australias
Tamworth facility uses wheat flour as the primary raw material
for the production of its wheat products, including wheat
starch, wheat gluten and glucose syrup. The Company is currently
negotiating with various suppliers for the supply of wheat flour
subsequent to the expiration of its current supply contract at
the end of calendar 2008.
Chemicals:
The primary chemicals used in the
manufacturing processes are readily available commodity
chemicals. The prices for these chemicals are subject to price
fluctuations due to market conditions.
Natural Gas:
The primary energy source for
most of Penfords plants is natural gas. Penford contracts
its natural gas supply with regional suppliers, generally under
short-term supply agreements, and at times uses futures
contracts to hedge the price of natural gas in North America.
Corn, potato starch, wheat flour, chemicals and natural gas are
not currently subject to availability constraints, although
drought conditions in Australia have periodically affected the
prices of corn and wheat in that area and strong demand has
substantially increased the prices of natural gas, chemicals and
agricultural raw materials. Penfords current potato starch
requirements constitute a material portion of the available
North American supply. Penford estimates that it purchases
approximately
50-55%
of
the recovered potato starch in North America. It is possible
that, in the long term, continued growth in demand for potato
starch-based ingredients and new product development could
result in capacity constraints.
Over half of the Companys manufacturing costs consist of
the costs of corn, potato starch, wheat flour, chemicals and
natural gas. The remaining portion consists of the costs of
labor, distribution, depreciation and maintenance of
manufacturing plant and equipment, and other utilities. The
prices of raw materials may fluctuate, and increases in prices
may affect Penfords business adversely. To mitigate this
risk, Penford hedges a portion of corn and gas purchases with
futures and options contracts in the U.S. and enters into
short-term supply agreements for other production requirements
in all locations.
Research
and Development
Penfords research and development efforts cover a range of
projects including technical service work focused on specific
customer support projects which require coordination with
customers research efforts to develop innovative solutions
to specific customer requirements. These projects are
supplemented with longer-term, new
5
product development and commercialization initiatives. Research
and development expenses were $7.9 million,
$6.8 million and $6.2 million for fiscal years ended
August 31, 2008, 2007 and 2006, respectively.
At the end of fiscal 2008, Penford had 33 scientists, including
six with the Ph.D. degree with expert knowledge of carbohydrate
characteristics and chemistry.
Patents,
Trademarks and Tradenames
Penford owns a number of patents, trademarks and tradenames.
Penford has approximately 220 current patents and pending patent
applications, most of which are related to technologies in
french fry coatings, coatings for the paper industry and animal
and human nutrition. Penfords issued patents expire at
various times between 2009 and 2024. The annual cost to renew
all of the Companys patents is approximately
$0.1 million. However, most of Penfords products are
currently made with technology that is broadly available to
companies that have the same level of scientific expertise and
production capabilities as Penford.
Specialty starch ingredient brand names for industrial
applications include, among others,
Penford
®
gums,
Pensize
®
binders,
Penflex
®
sizing agent,
Topcat
®
cationic additive and the
Apollo
®
starch series. Product brand names for food ingredient
applications include
PenBind
®
,
PenCling
®
,
PenPlus
®
,
CanTab
tm
,
MAPS
tm
,
Mazaca
tm
and
Fieldcleer
tm
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Quarterly
Fluctuations
Penfords revenues and operating results vary from quarter
to quarter. In particular, the Company experiences seasonality
in its Australian operations. The Company has lower sales
volumes and gross margins in Australia and
New Zealands summer months, which occur during
Penfords second fiscal quarter. This seasonal decline is
caused by the closure of some customers plants for public
holidays and maintenance during this period. Decreased
consumption of some foods which use the Companys products,
such as packaged bread, also contributes to this seasonal trend.
Sales volumes of the Food Ingredients North America
products used in french fry coatings are also generally lower
during Penfords second fiscal quarter due to decreased
consumption of french fries during the post-holiday season. The
cost of natural gas in North America is generally higher in the
winter months than the summer months.
Working
Capital
The Companys growth is funded through a combination of
cash flows from operations and short- and long-term borrowings.
For more information, see the Liquidity and Capital
Resources section under Managements Discussion
and Analysis of Financial Condition and the Results of
Operations in Item 7 and the audited consolidated
financial statements and the related notes included elsewhere in
this Annual Report on
Form 10-K.
Penford generally carries a one- to
45-day
supply of materials required for production, depending on the
lead time for specific items. Penford manufactures finished
goods to customer orders or anticipated demand. The Company is
therefore able to carry less than a
30-day
supply of most products. Terms for trade receivables and trade
payables are standard for the industry and region and generally
do not exceed
30-day
terms
except for trade receivables for export sales.
Environmental
Matters
Penfords operations are governed by various federal,
state, local and foreign environmental laws and regulations. In
the United States, these laws and regulations include the Clean
Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act, the EPA Oil Pollution Control Act, the
Occupational Safety and Health Administrations hazardous
materials regulations, the Toxic Substances Control Act, the
Comprehensive Environmental Response Compensation and Liability
Act, and the Superfund Amendments and Reauthorization Act. In
Australia, Penford is subject to the environmental requirements
of the Protection of the Environment Operations Act, the
Dangerous Goods Act, the Ozone Protection Act, the
Environmentally Hazardous Chemicals Act, and the Contaminated
Land Management Act. In New Zealand, the Company is subject to
the Resource Management Act, the Dangerous Goods Act, the
Hazardous Substances and New Organisms Act and the Ozone
Protection Act.
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Permits are required by the various environmental agencies which
regulate the Companys operations. Penford believes that it
has obtained all necessary material environmental permits
required for its operations. Penford believes that its
operations are in compliance with applicable environmental laws
and regulations in all material aspects of its business. Penford
estimates that annual compliance costs, excluding operational
costs for emission control devices, wastewater treatment or
disposal fees, are approximately $1.8 million.
Penford has adopted and implemented a comprehensive
corporate-wide environmental management program. The program is
managed by the Corporate Director of Environmental, Health and
Safety and is designed to structure the conduct of
Penfords business in a safe and fiscally responsible
manner that protects and preserves the health and safety of
employees, the communities surrounding the Companys
plants, and the environment. The Company continuously monitors
environmental legislation and regulations that may affect
Penfords operations.
During fiscal 2008, there have been no material effects on the
Companys operations that resulted from compliance with
environmental regulations. No unusual expenditures for
environmental facilities and programs are anticipated in fiscal
2009.
Principal
Customers
Penford sells to a variety of customers and has several
relatively large customers in each business segment. None of the
Companys customers constituted 10% of sales in fiscal year
2006. However, the Companys largest customer, Domtar,
Inc., represented approximately 11% and 12% of the
Companys consolidated net sales for fiscal years 2008 and
2007, respectively. Domtar, Inc. is a customer of the
Companys Industrial Ingredients
North America business.
Competition
In its primary markets, Penford competes directly with
approximately five other companies that manufacture specialty
starches for the papermaking industry and approximately six
other companies that manufacture specialty food ingredients.
Penford competes indirectly with a larger number of companies
that provide synthetic and natural-based ingredients to
industrial and food customers. Some of these competitors are
larger companies, and have greater financial and technical
resources than Penford. Application expertise, quality and
service are the major competitive advantages for Penford.
Employees
At August 31, 2008, Penford had 564 total employees. In
North America, Penford had 363 employees, of which
approximately 39% were members of a trade union. The collective
bargaining agreement covering the Cedar Rapids-based
manufacturing workforce expires in August 2012. Penford
Australia had 229 employees, of which 63% were members of
trade unions in Australia and New Zealand. The union contracts
for the Tamworth, Australia, and the New Zealand facilities have
expiration dates of September 2010 and April 2009, respectively.
The Lane Cove, Australia, union agreement expires in June 2010.
Sales and
Distribution
Sales are generated using a combination of direct sales and
distributor agreements. In many cases, Penford supports its
sales efforts with technical and advisory assistance to
customers. Penford generally ships its products upon receipt of
purchase orders from its customers and, consequently, backlog is
not significant.
Customers for industrial corn-based starch ingredients purchase
products through fixed-price contracts or formula-priced
contracts for periods covering three months to two years or on a
spot basis. In fiscal 2008, approximately 48% of these sales
were under fixed-price contracts, and the remaining 52% of the
sales were under formula-priced contracts or sold on a spot
basis.
Since Penfords customers are generally other manufacturers
and processors, most of the Companys products are
distributed via rail or truck to customer facilities in bulk,
except in Australia and New Zealand where most dry product is
packaged in 25kg bags.
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Foreign
Operations and Export Sales
Penford expanded its presence in foreign markets with its
acquisition of Penford Australia in September 2000. Penford
Australia is the primary producer of corn starch products in
Australia and New Zealand. Penford Australia manufactures
products used to enhance the quality and performance of packaged
food products, generally through providing the texture and
viscosity required by its customers for products such as sauces
and gravies. Penford Australias starch products are also
used in industrial applications including mining, paper,
corrugating and building materials. The Companys
operations in Australia and New Zealand include three
manufacturing facilities for processing specialty corn starches
and wheat-related products. Competition is mainly from imported
products, except in wheat flour based starches for which there
is one other producer in Australia. Export sales from
Penfords businesses in the U.S. and Australia/New
Zealand accounted for approximately 16%, 15% and 13% of total
sales in fiscal 2008, 2007 and 2006, respectively. See
Note 17 to the Consolidated Financial Statements in
Item 8 for sales, depreciation and amortization, income and
loss from operations, net capital expenditures and total assets
by geographic segment, which information is incorporated by
reference.
Available
Information
Penfords Internet address is
www.penx.com
. The
Company makes available, free of charge, through its Internet
site, the Companys annual reports on
Form 10-K;
quarterly reports on
Form 10-Q;
current reports on
Form 8-K;
Directors and Officers Forms 3, 4 and 5; and amendments to
those reports, as soon as reasonably practicable after
electronically filing such materials with, or furnishing them
to, the Securities and Exchange Commission (SEC).
The information found on Penfords web site will not be
considered to be part of this or any other report or other
filing filed with or furnished to the SEC. The SEC also
maintains an Internet site which contains reports, proxy and
information statements, and other information regarding issuers
that file information electronically with the SEC. The
SECs Internet address is
www.sec.gov
.
In addition, the Company makes available, through the Investor
Relations section of its Internet site, the Companys Code
of Business Conduct and Ethics and the written charters of the
Audit, Governance and Executive Compensation and Development
Committees.
Executive
Officers of the Registrant
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Name
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Age
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Title
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Thomas D. Malkoski
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52
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President and Chief Executive Officer
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Steven O. Cordier
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52
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Senior Vice President, Chief Financial Officer and Assistant
Secretary
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Russell A. Allwell
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44
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Managing Director, Australia/New Zealand Operations
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Andrew S. Dratt
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Vice President, Corporate Development
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Timothy M. Kortemeyer
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Vice President and President, Industrial Ingredients
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Wallace H. Kunerth
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60
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Vice President and Chief Science Officer
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Christopher L. Lawlor
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Vice President Human Resources, General Counsel and
Secretary
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John R. Randall
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64
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Vice President and President, Food Ingredients
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Mr. Malkoski
joined Penford Corporation as Chief
Executive Officer and was appointed to the Board of Directors in
January 2002. He was named President of Penford Corporation in
January 2003. From 1997 to 2001, he served as President and
Chief Executive Officer of Griffith Laboratories, North America,
a formulator, manufacturer and marketer of ingredient systems to
the food industry. Previously, he served in various senior
management positions, including as Vice President/Managing
Director of the Asia Pacific and South Pacific regions for
Chiquita Brands International, an international marketer and
distributor of bananas and other fresh produce.
Mr. Malkoski began his career at the Procter and Gamble
Company, a marketer of consumer brands, progressing through
major product category management responsibilities.
Mr. Malkoski holds a Masters of Business Administration
degree from the University of Michigan.
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Mr. Cordier
is Penfords Senior Vice President,
Chief Financial Officer and Assistant Secretary. He joined
Penford in July 2002 as Vice President and Chief Financial
Officer, and was promoted to Senior Vice President in November
2004. From September 2005 to April 2006, Mr. Cordier served
as the interim Managing Director of Penfords Australian
and New Zealand operations. He came to Penford from Sensient
Technologies Corporation, a manufacturer of specialty products
for the food, beverage, pharmaceutical and technology
industries, where he held a variety of senior financial
management positions.
Mr. Allwell
joined Penford as Managing Director of
its Australian and New Zealand operations in April 2006. Prior
to joining Penford, Mr. Allwell had been the General
Manager Retail Sales for George Weston Foods, a manufacturer of
baked goods and other foods, since 2003. From 1996 to 2003,
Mr. Allwell served in various senior management roles with
Berri Ltd., a beverage manufacturer, including as Director of
Strategy from 2000 to 2003, as Marketing Director from 1997 to
2003, and as General Manager New Ventures from 1996
to 1997. Prior to that, Mr. Allwell served in various
management, sales and marketing positions with Simplot
Australia, Kraft Foods, Calbecks Ltd. and Humes ARC Ltd.
Mr. Dratt
, 36, joined Penford in June 2008 as Vice
President, Corporate Development. From October 2007 to June
2008, Mr. Dratt was the Director Product
Development for Sensient Flavors and Fragrances, a division of
Sensient Technologies Corporation, a manufacturer of specialty
chemicals and food products. From October 2006 to October 2007,
Mr. Dratt was the Director Global Marketing for
Sensient Flavors and Fragrances. Mr. Dratt served as the
Director Beverage & Culinary Business
Units from 2005 to October 2006 and the Director
Marketing and Business Development from May 2002 to 2005 for
FONA International, a developer and manufacturer of flavors for
the food and beverage industries.
Mr. Kortemeyer
has served as Vice President of
Penford Corporation since October 2005 and President, Industrial
Ingredients since June 2006. He served as General Manager of
Penford Products from August 2005 to June 2006.
Mr. Kortemeyer joined Penford in 1999 and served as a Team
Leader in the manufacturing operations of Penford Products until
2001. From 2001 until 2003, he was an Operations Manager and
Quality Assurance Manager. From July 2003 to November 2004,
Mr. Kortemeyer served as the business unit manager of the
Companys co-products business, and from November 2004
until August 2005, as the director of the Companys
specialty starches product lines, responsible for sales,
marketing and business development.
Dr. Kunerth
has served as Penfords Vice
President and Chief Science Officer since 2000. From 1997 to
2000, he served in food applications research management
positions in the Consumer and Nutrition Sector at Monsanto
Company, a provider of hydrocolloids, high intensity sweeteners,
agricultural products and integrated solutions for industrial,
food and agricultural customers. Before Monsanto, he was the
Vice President of Technology at Penfords food ingredients
business from 1993 to 1997.
Mr. Lawlor
joined Penford in April 2005 as Vice
President-Human Resources, General Counsel and Secretary. From
2002 to April 2005, Mr. Lawlor served as Vice
President-Human Resources for Sensient Technologies Corporation,
a manufacturer of specialty chemicals and food products. From
2000 to 2002, he was Assistant General Counsel for Sensient.
Mr. Lawlor was Vice President-Administration, General
Counsel and Secretary for Kelley Company, Inc., a manufacturer
of material handling and safety equipment from 1997 to 2000.
Prior to joining Kelley Company, Mr. Lawlor was employed as
an attorney at a manufacturer of paper and packaging products
and in private practice with two national law firms.
Mr. Randall
is Vice President of Penford Corporation
and President, Food Ingredients. He joined Penford in February
2003 as Vice President and General Manager of Penford Food
Ingredients and was promoted to President of the Food
Ingredients division in June 2006. Prior to joining Penford,
Mr. Randall was Vice President, Research &
Development/Quality Assurance of Griffith Laboratories, USA, a
specialty foods ingredients business, from 1998 to 2003. From
1993 to 1998, Mr. Randall served in various research and
development positions with KFC Corporation, a quick-service
restaurant business, most recently as Vice President, New
Product Development. Prior to 1993, Mr. Randall served in
research and development leadership positions at Romanoff
International, Inc., a manufacturer and marketer of gourmet
specialty food products, and at Kraft/General Foods.
9
Risks
Related to Penfords Business
The
availability and cost of agricultural products Penford purchases
are vulnerable to weather and other factors beyond its control.
The Companys ability to pass through cost increases for
these products is limited by worldwide competition and other
factors.
In fiscal 2008, approximately 36% of Penfords
manufacturing costs were the costs of corn, wheat flour and
potato starch. Weather conditions, plantings, government
programs and policies, and energy costs and global supply, among
other things, have historically caused volatility in the supply
and prices of these agricultural products. For example, in 2006
and 2007, growing regions in Australia experienced significant
droughts, reducing crop yields and increasing acquisition costs
for grain raw materials. Due to local
and/or
international competition, particularly in the Australia/New
Zealand operations, the Company may not be able to pass through
the increases in the cost of agricultural raw materials to its
customers. To manage price volatility in the commodity markets,
the Company may purchase inventory in advance or enter into
exchange traded futures or options contracts. Despite these
hedging activities, the Company may not be successful in
limiting its exposure to market fluctuations in the cost of
agricultural raw materials. Increases in the cost of corn, wheat
flour and potato starch due to weather conditions or other
factors beyond Penfords control and that cannot be passed
through to customers will reduce Penfords future
profitability.
Increases
in energy and chemical costs may reduce Penfords
profitability.
Energy and chemicals comprised approximately 11% and 10%,
respectively, of the cost of manufacturing the Companys
products in fiscal 2008. Penford uses natural gas extensively in
its Industrial Ingredients business to dry starch products, and,
to a lesser extent, in the other business segments. The Company
uses chemicals in all of the businesses to modify starch for
specific product applications and customer requirements. The
prices of these inputs to the manufacturing process fluctuate
based on anticipated changes in supply and demand, weather and
the prices of alternative fuels, including petroleum. The
Company may use short-term purchase contracts or exchange traded
futures or option contracts to reduce the price volatility of
natural gas; however, these strategies are not available for the
chemicals the Company purchases. If the Company is unable to
pass on increases in energy and chemical costs to its customers,
margins and profitability would be adversely affected.
The
loss of a major customer could have an adverse effect on
Penfords results of operations.
In fiscal 2006, none of the Companys customers constituted
more than 10% of sales. However, the Companys largest
customer, Domtar, Inc., represented approximately 11% and 12% of
the Companys consolidated net sales for fiscal years 2008
and 2007, respectively, and sales to the top ten customers
represented 44% of consolidated net sales in both 2008 and 2007.
Generally, the Company does not have multi-year sales agreements
with its customers. Many customers place orders on an as-needed
basis and generally can change their suppliers without penalty.
If Penford lost one or more major customers, or if one or more
major customers significantly reduced its orders, sales and
results of operations would be adversely affected.
The
Company is substantially dependent on its manufacturing
facilities; any operational disruption could result in a
reduction of the Companys sales volumes and could cause it
to incur substantial losses.
Penfords revenues are and will continue to be derived from
the sale of starch-based ingredients that the Company
manufactures at its facilities. The Companys operations
may be subject to significant interruption if any of its
facilities experiences a major accident or is damaged by severe
weather or other natural disasters, as occurred as a result of
the flood of the Cedar River at the Companys Cedar Rapids,
Iowa facility in fiscal 2008. In addition, the Companys
operations may be subject to labor disruptions and unscheduled
downtime, or other operational hazards inherent in the industry,
such as equipment failures, fires, explosions, abnormal
pressures, blowouts, pipeline ruptures, transportation accidents
and natural disasters. Some of these operational hazards may
cause personal injury or loss of life, severe damage to or
destruction of property and equipment or environmental damage,
and may result in suspension of operations and the imposition of
civil or criminal penalties. The Companys
10
insurance may not be adequate to fully cover the potential
operational hazards described above or that it will be able to
renew this insurance on commercially reasonable terms or at all.
The
agreements governing the Companys debt contain various
covenants that limit its ability to take certain actions and
also require the Company to meet financial maintenance tests,
and Penfords failure to comply with any of the debt
covenants could have a material adverse effect on the
Companys business, financial condition and results of
operations.
The agreements governing Penfords outstanding debt contain
a number of significant covenants that, among other things,
limit its ability to:
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incur additional debt or liens;
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consolidate or merge with any person or transfer or sell all or
substantially all of its assets;
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make investments or acquisitions;
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pay dividends or make certain other restricted payments;
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enter into transactions with affiliates; and
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create dividend or other payment restrictions with respect to
subsidiaries.
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In addition, the Companys revolving credit facility
requires it to comply with specific financial ratios and tests,
under which it is required to achieve specific financial and
operating results. Events beyond the Companys control may
affect its ability to comply with these provisions. A breach of
any of these covenants would result in a default under the
Companys revolving credit facility. In the event of any
default that is not cured or waived, the Companys lenders
could elect to declare all amounts borrowed under the revolving
credit facility, together with accrued interest thereon, due and
payable, which could permit acceleration of other debt. If any
of the Companys debt is accelerated, there is no assurance
that the Company would have sufficient assets to repay that debt
or that it would be able to refinance that debt on commercially
reasonable terms or at all.
Changes
in interest rates may affect Penfords
profitability.
Although the Company has fixed the interest rates on a
significant portion of its outstanding debt through interest
rate swaps as of August 31, 2008, approximately
$34.3 million of its outstanding debt, including amounts
outstanding under the Australian grain inventory financing
facility, was subject to variable interest rates which move in
direct relation to the United States or Australian London
InterBank Offered Rate (LIBOR), the Australian bank
bill rate (BBSY), or the prime rate in the United
States, depending on the selection of borrowing options. Any
significant changes in these interest rates would materially
affect the Companys profitability by increasing or
decreasing its borrowing costs.
Unanticipated
changes in tax rates or exposure to additional income tax
liabilities could affect Penfords
profitability.
The Company is subject to income taxes in the United States,
Australia and New Zealand. The Companys effective tax
rates could be adversely affected by changes in the mix of
earnings in countries with differing statutory tax rates,
changes in the valuation of deferred tax assets and liabilities
or changes in tax laws. The carrying value of deferred tax
assets, which are predominantly in the United States, is
dependent on the Companys ability to generate future
taxable income in the United States. The amount of income taxes
paid is subject to interpretation of applicable tax laws in the
jurisdictions in which the Company operates. Although the
Company believes it has complied with all applicable income tax
laws, there is no assurance that a tax authority will not have a
different interpretation of the law or that any additional taxes
imposed as a result of tax audits will not have an adverse
effect on the Companys results of operations.
11
Fluctuations
in the relative value of the U.S. dollar and foreign
currencies may negatively affect Penfords revenues and
profitability.
In the ordinary course of business, the Company is subject to
risks associated with changing foreign exchange rates. The value
of the U.S. dollar against foreign currencies has been
generally in decline in recent years. In fiscal year 2008,
approximately 31% of the Companys revenue was denominated
in currencies other than the U.S. dollar. The
Companys revenues and profitability may be adversely
affected by fluctuations in exchange rates between the
U.S. dollar and other currencies.
Pension
expense and the funding of pension obligations are affected by
factors outside the Companys control, including the
performance of plan assets, interest rates, actuarial data and
experience, and changes in laws and regulations.
The future funding obligations for the Companys two
U.S. defined benefit pension plans qualified with the
Internal Revenue Service depend upon the level of benefits
provided for by the plans, the future performance of assets set
aside in trusts for these plans, the level of interest rates
used to determine funding levels, actuarial data and experience
and any changes in government laws and regulations. The pension
plans hold a significant amount of equity and fixed income
securities. When the values of these securities decline, pension
expense can increase and materially affect the Companys
results. Decreases in interest rates that are not offset by
contributions and asset returns could also increase the
Companys obligations under such plans. The Company is
legally required to make contributions to the pension plans in
the future, and those contributions could be material. The
Company expects to contribute $1.8 million to its pension
plans during fiscal 2009.
Penfords
results of operations could be adversely affected by litigation
and other contingencies.
The Company faces risks arising from litigation matters in which
various factors or developments can lead to changes in current
estimates of liabilities, such as final adverse judgments,
significant settlements or changes in applicable law. A future
adverse outcome, ruling or unfavorable development could result
in future charges that could have a material effect on the
Companys results of operations.
Penford
has foreign operations, which exposes it to the risks of doing
business abroad.
Approximately 31% of the Companys revenues are derived
from its operations in Australia and New Zealand. These foreign
operations subject the Company to a number of risks associated
with conducting business outside the United States, including
the following:
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currency fluctuations;
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transportation delays and interruptions;
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political, social and economic instability and disruptions;
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government embargoes or foreign trade restrictions;
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the imposition of duties, tariffs and other trade barriers;
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import and export controls;
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labor unrest and changing regulatory environments;
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limitations on the Companys ability to enforce legal
rights and remedies; and
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potentially adverse tax consequences.
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Although the Companys operations have not been materially
affected by any such factors to date, no assurance can be given
that its operations may not be adversely affected in the future.
Any of these events could have an adverse effect on the
Companys operations in the future by reducing the demand
for its products, decreasing the prices at which the Company can
sell its products or otherwise having an adverse effect on its
business, financial condition or results of operations.
12
The
current capital and credit market conditions may adversely
affect the Companys access to capital, cost of capital and
business operations.
Recently, the general economic and capital market conditions in
the United States and other parts of the world have deteriorated
significantly and have adversely affected access to capital and
increased the cost of capital. If these conditions continue or
become worse, the Companys future cost of debt and equity
capital and its access to capital markets could be adversely
affected. Any inability to obtain adequate financing from debt
and equity sources could force the Company to self-fund
strategic initiatives or even forgo some opportunities,
potentially harming its financial position, results of
operations and liquidity.
Economic
conditions may impair the businesses of the Companys
customers and end user markets, which could adversely affect the
Companys business operations.
As a result of the current economic downturn and macro-economic
challenges currently affecting the economy of the United States
and other parts of the world, the businesses of some of the
Companys customers may not be successful in generating
sufficient revenues. Customers may choose to delay or postpone
purchases from the Company until the economy and their
businesses strengthen. In this connection, the Companys
Industrial Ingredients business is dependent upon end markets
for paper and ethanol in North America. Paper markets have been
under competitive pressure from imports and over-capacity and
may be further stressed by an economic downturn. Ethanol markets
have been under pressure from declining oil prices and
increasing ethanol production capacity in the United States.
Decisions by current or future customers to forego or defer
purchases
and/or
customers inability to pay the Company for its products
may adversely affect the Companys earnings and cash flow.
Penford
depends on its senior management team; the loss of any member
could adversely affect its operations.
Penfords success depends on the management and leadership
skills of its senior management team. The loss of any of these
individuals, particularly Thomas D. Malkoski, the Companys
President and Chief Executive Officer, or Steven O. Cordier, the
Companys Chief Financial Officer, or the Companys
inability to attract, retain and maintain additional personnel,
could prevent it from fully implementing its business strategy.
There is no assurance that it will be able to retain its
existing senior management personnel or to attract additional
qualified personnel when needed.
Penford
is subject to stringent environmental and health and safety
laws, which may require it to incur substantial compliance and
remediation costs, thereby reducing profits.
Penford is subject to many federal, state, local and foreign
environmental and health and safety laws and regulations,
particularly with respect to the use, handling, treatment,
storage, discharge and disposal of substances and hazardous
wastes used or generated in its manufacturing processes.
Compliance with these laws and regulations is a significant
factor in the Companys business. Penford has incurred and
expects to continue to incur significant expenditures to comply
with applicable environmental laws and regulations. The
Companys failure to comply with applicable environmental
laws and regulations and permit requirements could result in
civil or criminal fines or penalties or enforcement actions,
including regulatory or judicial orders enjoining or curtailing
operations or requiring corrective measures, installation of
pollution control equipment or remedial actions.
The Company may be required to incur costs relating to the
investigation or remediation of property, including property
where it has disposed of its waste, and for addressing
environmental conditions. Some environmental laws and
regulations impose liability and responsibility on present and
former owners, operators or users of facilities and sites for
contamination at such facilities and sites without regard to
causation or knowledge of contamination. Consequently, there is
no assurance that existing or future circumstances, the
development of new facts or the failure of third parties to
address contamination at current or former facilities or
properties will not require significant expenditures by the
Company.
The Company expects to continue to be subject to increasingly
stringent environmental and health and safety laws and
regulations. It is difficult to predict the future
interpretation and development of environmental and health
13
and safety laws and regulations or their impact on the
Companys future earnings and operations. The Company
anticipates that compliance will continue to require increased
capital expenditures and operating costs. Any increase in these
costs, or unanticipated liabilities arising, for example, out of
discovery of previously unknown conditions or more aggressive
enforcement actions, could adversely affect the Companys
results of operations, and there is no assurance that they will
not have a material adverse effect on its business, financial
condition and results of operations.
Penfords
unionized workforce could cause interruptions in the
Companys provision of services.
As of August 31, 2008, approximately 39% of the
Companys 363 North American employees, and 63% of the
229 employees of Penford Australia, were members of trade
unions. Although the Companys relations with unions are
stable, there is no assurance that the Company will not
experience work disruptions or stoppages in the future, which
could have a material adverse effect on its business and results
of operations and adversely affect its relationships with its
customers.
Risk
Factors Relating to Penfords Common Stock
Penfords
stock price has fluctuated significantly; the trading price of
its common stock may fluctuate significantly in the
future.
The trading price of the Companys common stock has
fluctuated significantly. In fiscal 2008, the stock price ranged
from a low of $11.81 on July 10, 2008 to a high of $41.30
on October 11, 2007. The trading price of Penfords
common stock may fluctuate significantly in the future as a
result of a number of factors, including:
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actual and anticipated variations in the Companys
operating results;
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general economic and market conditions, including changes in
demand for the Companys products;
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interest rates;
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geopolitical conditions throughout the world;
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perceptions of the strengths and weaknesses of the
Companys industries;
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the Companys ability to pay principal and interest on its
debt when due;
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developments in the Companys relationships with its
lenders, customers
and/or
suppliers;
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announcements of alliances, mergers or other relationships by or
between the Companys competitors
and/or
its
suppliers and customers; and
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quarterly variations in the Companys results of operations
due to, among other things, seasonality in demand for products
and fluctuations in the cost of raw materials
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The stock markets in general have experienced broad fluctuations
that have often been unrelated to the operating performance of
particular companies. These broad market fluctuations may
adversely affect the trading price of the Companys common
stock. Accordingly, Penfords common stock may trade at
prices significantly below an investors cost and investors
could lose all or part of their investment in the event that
they choose to sell their shares.
Provisions
of Washington law could discourage or prevent a potential
takeover.
Washington law imposes restrictions on certain transactions
between a corporation and certain significant shareholders. The
Washington Business Corporation Act generally prohibits a
target corporation from engaging in certain
significant business transactions with an acquiring
person, which is defined as a person or group of persons
that beneficially owns 10% or more of the voting securities of
the target corporation, for a period of five years after such
acquisition, unless the transaction or acquisition of shares is
approved by a majority of the members of the target
corporations board of directors prior to the time of the
acquisition. Such prohibited transactions include, among other
things, (1) a merger or consolidation with, disposition of
assets to, or issuance or redemption of stock to or from, the
acquiring person; (2) a termination of 5% or more of the
employees of the target corporation
14
as a result of the acquiring persons acquisition of 10% or
more of the shares; and (3) allowing the acquiring person
to receive any disproportionate benefit as a shareholder. After
the five year period, a significant business
transaction may occur if it complies with fair
price provisions specified in the statute. A corporation
may not opt out of this statute.
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Item 1B:
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Unresolved
Staff Comments
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Not applicable.
Penfords facilities as of August 31, 2008 are as
follows:
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Bldg. Area
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(Approx.
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Land Area
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Owned/
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Sq. Ft.)
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(Acres)
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Leased
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Function of Facility
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North America:
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Centennial, Colorado
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25,200
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Leased
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Corporate headquarters, administrative offices and research
laboratories
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Cedar Rapids, Iowa
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759,000
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29
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Owned
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Manufacture of corn starch products, administration offices and
research laboratories
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Idaho Falls, Idaho
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30,000
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4
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Owned
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Manufacture of potato starch products
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Richland, Washington
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45,000
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Owned
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Manufacture of potato and tapioca starch Products
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9,600
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4.9
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Leased
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Administrative office and warehouse
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Plover, Wisconsin
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54,000
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10
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Owned
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Manufacture of potato starch Products
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Australia/New Zealand:
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Lane Cove, New South Wales
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75,700
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7
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Owned
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Manufacture of corn starch products, administrative offices and
research laboratories
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Tamworth, New South Wales
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94,600
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6
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Owned
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Manufacture of wheat starch and gluten Products
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477
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Owned
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Effluent dispersion
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Tamworth, New South Wales
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425
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Leased
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Agricultural and effluent dispersion
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225
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Leased
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Agricultural use
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Auckland, New Zealand
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83,250
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7
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Owned
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Manufacture of corn starch products
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3
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Leased
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Manufacture of corn starch products
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Penfords production facilities are strategically located
near sources of raw materials. The Company believes that its
facilities are maintained in good condition and that the
capacities of its plants are sufficient to meet current
production requirements. The Company invests in expansion,
improvement and maintenance of property, plant and equipment as
required.
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Item 3:
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Legal
Proceedings
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The Company is involved from time to time in various 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.
15
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Item 4:
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Submission
of Matters to a Vote of Security Holders
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No matter was submitted to a vote of shareholders during the
fourth quarter of fiscal 2008.
PART II
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Item 5:
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Market
for the Registrants Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities
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Market
Information and Holders of Common Stock
Penfords common stock, $1.00 par value, trades on The
NASDAQ Global Market under the symbol PENX. On
November 3, 2008, there were 470 shareholders of
record. The high and low closing prices of Penfords common
stock during the last two fiscal years are set forth below.
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Fiscal 2008
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Fiscal 2007
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High
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Low
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High
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Low
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Quarter Ended November 30
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$
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40.67
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$
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23.88
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$
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16.97
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$
|
14.55
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Quarter Ended February 28
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$
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29.34
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$
|
20.91
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$
|
21.88
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$
|
16.23
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Quarter Ended May 31
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$
|
24.00
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$
|
19.63
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$
|
21.25
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$
|
18.29
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Quarter Ended August 31
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$
|
21.82
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$
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11.81
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$
|
38.65
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$
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18.20
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Dividends
During each quarter of fiscal year 2008 and 2007, the Board of
Directors declared a $0.06 per share cash dividend. On
October 29, 2008, the Board of Directors declared a
dividend of $0.06 per common share payable on December 5,
2008 to shareholders of record as of November 14, 2008. On
a periodic basis, the Board of Directors reviews the
Companys dividend policy which is impacted by
Penfords earnings, financial condition, and cash and
capital requirements. Future dividend payments are at the
discretion of the Board of Directors. Penford has included the
payment of dividends in its planning for fiscal 2009.
Pursuant to its credit agreement, the Company may not declare or
pay dividends on, or make any other distributions in respect of,
its common stock in excess of $8 million in any fiscal year
or if there exists a Default or Event of Default as defined in
the credit agreement. During fiscal years 2008 and 2007, the
Company declared dividends on its common stock of totaling
$2.6 million and $2.2 million, respectively.
Issuer
Purchases of Equity Securities
None
16
Performance
Graph
The following graph compares the Companys cumulative total
shareholder return on its common stock for a
five-year
period (September 1, 2003 to August 31,
2008) with the cumulative total return of the Nasdaq Market
Index and all companies traded on the Nasdaq Stock Market
(Nasdaq) with a market capitalization of
$100 $200 million, excluding financial
institutions. The graph assumes that $100 was invested on
September 1, 2003 in the Companys common stock and in
the stated indices. The comparison assumes that all dividends
are reinvested. The Companys performance as reflected in
the graph is not indicative of the Companys future
performance.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among
Penford Corp., The NASDAQ Composite Index
And A Peer Group
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*
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$100 invested on 8/31/03 in stock & index-including
reinvestment of dividends.
Fiscal year ending August 31.
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ASSUMES
$100 INVESTED ON SEPTEMBER 1, 2003
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING AUGUST 31, 2008
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2003
|
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2004
|
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2005
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2006
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2007
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2008
|
|
PENFORD CORPORATION
|
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100.00
|
|
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128.98
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|
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111.50
|
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122.18
|
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279.11
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132.80
|
|
NASDAQ MARKET INDEX (U.S.)
|
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100.00
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|
|
103.10
|
|
|
|
|
120.73
|
|
|
|
|
125.87
|
|
|
|
|
149.70
|
|
|
|
|
135.02
|
|
NASDAQ MARKET CAP ($100-200M)
|
|
|
|
100.00
|
|
|
|
|
93.42
|
|
|
|
|
105.14
|
|
|
|
|
102.05
|
|
|
|
|
99.09
|
|
|
|
|
60.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management does not believe there is either a published index or
a group of companies whose overall business is sufficiently
similar to the business of Penford to allow a meaningful
benchmark against which the Company can be compared. The Company
sells products based on specialty carbohydrate chemistry to
several distinct markets, making overall comparisons to one of
these markets misleading with respect to the Company as a whole.
For these reasons, the Company has elected to use non-financial
companies traded on Nasdaq with a similar market capitalization
as a peer group.
17
|
|
Item 6:
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006(2)
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except share and per share data)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
345,576
|
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
|
$
|
296,763
|
|
|
$
|
279,386
|
|
Cost of sales
|
|
$
|
295,979
|
|
|
$
|
298,203
|
|
|
$
|
273,476
|
|
|
$
|
263,542
|
|
|
$
|
241,298
|
|
Gross margin percentage
|
|
|
14.4
|
%
|
|
|
17.7
|
%
|
|
|
14.1
|
%
|
|
|
11.2
|
%
|
|
|
13.6
|
%
|
Net income (loss)(3)
|
|
$
|
(12,700
|
)(1)
|
|
$
|
13,517
|
(1)
|
|
$
|
4,228
|
|
|
$
|
2,574
|
(4)
|
|
$
|
3,702
|
(5)
|
Diluted earnings per share
|
|
$
|
(1.20
|
)
|
|
$
|
1.46
|
|
|
$
|
0.47
|
|
|
$
|
0.29
|
|
|
$
|
0.42
|
|
Dividends per share
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
Average common shares and equivalents assuming
dilution
|
|
|
10,565,432
|
|
|
|
9,283,125
|
|
|
|
9,004,190
|
|
|
|
8,946,195
|
|
|
|
8,868,050
|
|
Balance Sheet Data (as of August 31):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
310,381
|
|
|
$
|
288,388
|
|
|
$
|
250,668
|
|
|
$
|
249,917
|
|
|
$
|
252,191
|
|
Capital expenditures
|
|
|
40,709
|
|
|
|
34,734
|
|
|
|
14,905
|
|
|
|
9,413
|
|
|
|
15,454
|
|
Long-term debt
|
|
|
59,860
|
|
|
|
63,403
|
|
|
|
53,171
|
|
|
|
62,107
|
|
|
|
75,551
|
|
Total debt
|
|
|
68,565
|
|
|
|
74,677
|
|
|
|
67,007
|
|
|
|
66,129
|
|
|
|
80,326
|
|
Shareholders equity
|
|
|
160,362
|
|
|
|
125,676
|
|
|
|
107,452
|
|
|
|
100,026
|
|
|
|
95,719
|
|
|
|
|
(1)
|
|
Includes pre-tax charges of $1.4 million and
$2.4 million in fiscal years 2008 and 2007, respectively,
related to the settlement of litigation. See Note 19 to the
Consolidated Financial Statements.
|
|
(2)
|
|
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 123R, Share-Based
Payment, effective at the beginning of fiscal 2006. As a
result, the results of operations for fiscal years 2008, 2007
and 2006 include incremental stock-based compensation cost in
excess of what would have been recorded had the Company
continued to account for stock-based compensation using the
intrinsic value method.
|
|
(3)
|
|
In the fourth quarter of fiscal 2008, the Companys Cedar
Rapids, Iowa manufacturing facility suffered severe flooding
which suspended production for most of the fourth quarter.
Pre-tax costs of the flooding recorded in the fourth quarter,
net of insurance recoveries, was $27.6 million. See
Note 2 to the Consolidated Financial Statements. In the
fourth quarter of fiscal 2004 and the first quarter of fiscal
2005, Penford experienced a union strike at its Cedar Rapids
facility. As a result, net income for fiscal 2004 and fiscal
2005 reflects incremental expenses due to the strike.
|
|
(4)
|
|
Includes a pre-tax gain of $1.2 million related to the sale
of land in Australia, a $0.7 million pre-tax gain related
to the sale of an investment and a $1.1 million pre-tax
write off of unamortized deferred loan costs. Includes a tax
benefit of $2.5 million related to 2001 through 2004 that
the Company recognized in 2005 when the Company determined that
it was probable that the extraterritorial income exclusion
deduction on its U.S. federal income tax returns for those years
would be sustained.
|
|
(5)
|
|
Includes pre-tax charges of $1.3 million related to the
restructuring of business operations and $0.7 million
related to a pre-tax non-operating expense for the write off of
unamortized deferred loan costs.
|
|
|
Item 7:
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
Penford generates revenues, income and cash flows by developing,
manufacturing and marketing specialty natural-based ingredient
systems for industrial and food applications. 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, potatoes, and wheat and are used principally as binders
and coatings in paper and food production.
18
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. Penford manages
its business in three segments. The first two, Industrial
Ingredients North America and Food
Ingredients North America, are broad categories of
end-market users, served by operations in the United States. The
third segment is comprised of the Companys operations in
Australia and New Zealand, which operations are engaged
primarily in the food ingredients business. See Item 1 and
Note 17 to the Consolidated Financial Statements for
additional information regarding the Companys business
segment operations.
In May 2008, the Companys Industrial
Ingredients North America segment began commercial
production and sales of ethanol from its facility in Cedar
Rapids, Iowa. This ethanol plant gives the Company the ability
to select from multiple output choices to capitalize on changing
industry conditions and selling opportunities. This increased
flexibility will allow the Company to direct production towards
the most attractive mix of strategic and financial opportunities.
Under the terms of the Companys revolving credit facility,
which expires on December 31, 2011, the Company may borrow
up to $60 million. At August 31, 2008, the Company had
$45.7 million of unused loan commitments from its lenders
under its existing revolving credit facility to fund flood
restoration costs as discussed below and to fund other corporate
cash flow requirements.
Impact
of Cedar River Flooding
On June 12, 2008, the Companys Industrial
Ingredients North America plant in Cedar Rapids,
Iowa was temporarily shut down due to record flooding of the
Cedar River and government-ordered mandatory evacuation of the
plant and surrounding areas. The Company resumed production of
certain Liquid Natural Additive products in mid-July using its
pilot plant facility, which was not heavily damaged by the
flood. By the end of August 2008, the Company had begun
manufacturing industrial starch in Cedar Rapids. During
September 2008, the Company resumed the commercial production
and sale of ethanol, and expects that its ethanol assets will be
in a position to achieve full design production capability of
45 million gallons per year by the end of calendar year
2008. By the beginning of October 2008, the Company had
substantially completed the restoration of the Cedar Rapids
plant and the facilitys current processing rate had
reached pre-flood levels. The Company has begun to resupply its
industrial starch customers under existing contracts. The
systematic recovery and transition to resupply substantially all
of the customers contracted requirements are expected to
be completed by the end of the calendar year.
The Companys potato starch operations of its Food
Ingredients North America segment were not affected
by the flood in Cedar Rapids. Food corn starches were supplied
from other Company locations. Dextrose manufacturing, which
occurred in Cedar Rapids, was suspended at the time of the
flooding and production was restarted in September 2008.
During the fourth quarter of fiscal 2008, the Company recorded
costs of flood restoration of $27.6 million, net of
insurance recoveries of $10.5 million. See Note 2 to
the Consolidated Financial Statements for details of the
restoration costs.
The Company continues to assess damages caused by the flood and
estimates are subject to assumptions regarding the costs and
timing to replace or refurbish equipment and processes. The
Company estimates that direct costs of the flood will total
$45 million to $47 million, which include ongoing
expenses during the time the plant is shut down, but do not
include lost profits.
The Company maintains property damage and business interruption
insurance coverage applicable to the Cedar Rapids plant. The
Company intends to claim for all covered losses, including
$15 million in business interruption losses identified
through August 31, 2008. The actual amount ultimately
recovered from insurers may be materially more or less than the
Companys estimate of total losses, and, as a result, the
Company does not provide assurance as to the amount or timing of
the ultimate recoveries under its policies.
Of the total estimated recoveries discussed above, the Company
has received $10.5 million of insurance recoveries related
to its property damage insurance policies. The Company received
$8.0 million subsequent to August 31, 2008 which has
been recorded as a receivable at that date. These recoveries
have been recorded as an
19
offset in the financial statements to the losses caused by the
flooding. Insurance proceeds are recognized in the financial
statements when realization of the recoveries is deemed probable.
The effect of the flood on the financial results of the Company
on a quarter-to-quarter basis in fiscal 2009 will depend on the
timing and amount of the remaining expenditures and insurance
recoveries. The actual amounts of expenditures and insurance
recoveries may vary from the above estimates, and, as a result,
the Company does not provide assurance as to the amount or
timing of the total expenditures or ultimate recoveries under
its insurance policies.
Operations
Consolidated fiscal 2008 sales decreased 4.6% to
$345.6 million from $362.4 million in fiscal 2007 on
volume declines, primarily in the Industrial
Ingredients North America business due to the fourth
quarter production suspension discussed above and in the
Australian/New Zealand operations due to a strategic decision to
migrate product offerings to those with higher returns. The
volume decline impact on revenue of $58.3 million was
partially offset by improvements in unit pricing and product mix
worldwide of $30.7 million, and $11.5 million
resulting from stronger average foreign currency exchange rates
in fiscal 2008. Gross margin as a percent of sales declined
330 basis points from 17.7% in fiscal 2007 to 14.4% in
fiscal 2008. The margin reduction reflects reduced volumes,
including the production disruption arising from the Cedar
Rapids flood, increased manufacturing input costs, manufacturing
variances arising from processing imported raw material into
Australia, and
start-up
expenses related to the commencement of ethanol production in
May 2008.
Consolidated operating income of $23.6 million in fiscal
2007 declined to an operating loss of $20.9 million in
fiscal 2008. Consolidated operating expenses increased 3% from
last year, primarily due to stronger average foreign currency
exchange rates of $0.7 million. Research and development
expenses increased $1.1 million due to increased headcount
and new product trial expenses totaling $0.8 million and
stronger currency exchange rates of $0.3 million. In
connection with reconfiguring their operations, the
Companys Australian and New Zealand businesses implemented
workforce reductions during fiscal 2008 and $1.4 million in
employee severance costs and related benefits were charged to
operating income. In fiscal years 2008 and 2007, the Company
recorded litigation settlement costs of $1.4 million and
$2.4 million, respectively. See Note 19 to the
Consolidated Financial Statements.
Interest expense of $4.1 million in fiscal 2008 was
$1.6 million less than in fiscal 2007 due to a decline in
U.S. interest rates from a year ago and lower average debt
balances, excluding interest costs which were capitalized on
debt related to the construction of the ethanol facility.
Interest costs of $1.1 million and $0.4 million were
capitalized in fiscal years 2008 and 2007, respectively, related
to construction of the ethanol facility.
The effective tax rate for fiscal 2008 was 35%. In fiscal 2008,
the effect of lower foreign statutory tax rates was offset by
permanent differences between book and tax accounting. These
differences, consisting primarily of research and development
tax incentives in Australia and nontaxable foreign income,
increased the taxable loss for fiscal 2008 and increased the
computed effective tax rate. See Note 14 to the
Consolidated Financial Statements.
Accounting
Changes
The Company adopted the provisions of Emerging Issues Task Force
(EITF) Issue
No. 06-2,
Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43, effective
September 1, 2007. EITF Issue
No. 06-2
requires companies to accrue the costs of compensated absences
under a sabbatical or similar benefit arrangement over the
requisite service period. Upon adoption, the Company recognized
a $0.1 million charge to beginning retained earnings as a
cumulative effect of a change in accounting principle.
Effective September 1, 2007, the Company adopted FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement
No. 109 (FIN 48), which clarifies
the accounting for the uncertainty in income taxes recognized by
prescribing a recognition threshold that a tax position is
required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, interim period
accounting and disclosure. The impact of adopting FIN 48 is
discussed in Note 14 to the Condensed Consolidated
Financial Statements.
20
Results
of Operations
Fiscal
2008 Compared to Fiscal 2007
Industrial
Ingredients North America
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
173,320
|
|
|
$
|
194,957
|
|
Cost of sales
|
|
$
|
147,072
|
|
|
$
|
159,851
|
|
Gross margin
|
|
|
15.1
|
%
|
|
|
18.0
|
%
|
Income (loss) from operations
|
|
$
|
(16,541
|
)
|
|
$
|
19,251
|
|
Industrial Ingredients fiscal 2008 sales of
$173.3 million decreased $21.6 million, or 11%, from
fiscal 2007. Annual sales volume declined 18%, caused by the
severe flooding in Cedar Rapids, Iowa, which shut down
production for most of the fourth quarter. Limited production of
specialty starch products continued after the flooding on
June 12, 2008. Sales for the fourth quarter were
$14.2 million. Annual sales decreased by $34.4 million
due to reduced volumes, partially offset by $12.8 million
in improvements in average unit selling prices and product mix.
Gross margin declined $8.9 million, or 25%, from fiscal
2007 to $26.2 million, and, as a percentage of sales,
decreased to 15.1% in fiscal 2008 compared to 18.0% in fiscal
2007. The impact of improved unit pricing and product mix of
$8.1 million was more than offset by higher chemical and
corn procurement costs of $3.7 million and the effect of
lower volumes due to the flooding of $9.5 million. Also
reducing gross margin were higher repair and maintenance
expenses, lower utility yields and production inefficiencies
caused by severe weather in the Midwest in the first half of the
fiscal year and the flooding in the fourth quarter, and the
start-up
costs of ethanol production totaling $3.8 million.
Loss from operations for fiscal 2008 includes $27.6 million
of flood remediation costs incurred in the fourth quarter, net
of $10.5 million of insurance recoveries, as discussed
above. See Note 2 to the Consolidated Financial Statements
for a discussion of the costs recorded in fiscal 2008. Included
in operating results for fiscal years 2008 and 2007 are expenses
of $1.4 million and $2.4 million related to the
settlement of a lawsuit. See Note 19 to the Consolidated
Financial Statements. Operating expenses and research and
development expenses increased $0.4 million.
Food
Ingredients North America
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
66,261
|
|
|
$
|
62,987
|
|
Cost of sales
|
|
$
|
47,921
|
|
|
$
|
44,036
|
|
Gross margin
|
|
|
27.7
|
%
|
|
|
30.1
|
%
|
Income from operations
|
|
$
|
10,178
|
|
|
$
|
10,684
|
|
Sales at the Food Ingredients North America business
of $66.3 million rose $3.2 million, or 5.2%, over
fiscal 2007, driven by an 8.6% increase in average unit sales
prices. Annual volumes declined 3% from 2007. Sales of
non-coating applications grew 10% and pricing for these products
expanded 11%, with sales to the bakery, dairy/cheese, sauces and
gravies, and pet chew end markets experiencing double-digit
growth in fiscal 2008.
Income from operations declined from $10.7 million in
fiscal 2007 to $10.2 million in fiscal 2008. Gross margin
decreased by $0.6 million from fiscal 2007 to
$18.3 million. Improvements in pricing and product mix were
more than offset by higher raw material costs and a decline in
volumes. Operating expenses declined by $0.1 million due to
a reduction in employee costs.
21
Australia/New
Zealand Operations
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
107,532
|
|
|
$
|
105,244
|
|
Cost of sales
|
|
$
|
102,523
|
|
|
$
|
95,141
|
|
Gross margin
|
|
|
4.7
|
%
|
|
|
9.6
|
%
|
Income (loss) from operations
|
|
$
|
(4,556
|
)
|
|
$
|
3,269
|
|
The Australian business reported a 2.2% increase in sales in
fiscal 2008 over fiscal 2007. Volumes declined 21% from last
years levels, reflecting a planned shift to product
offerings with higher long-term return opportunities.
Improvements in average unit selling prices of 29% contributed
$12.7 million to revenue gains and stronger average foreign
currency exchange rates increased revenues by
$11.5 million. Sales in local currencies declined 10%.
Gross margin declined to 4.7% of sales in fiscal 2008 from 9.6%
in fiscal 2007 on lower volumes and higher manufacturing costs.
Manufacturing costs increased due to higher procurement and
processing charges on grain that was imported to supplement
local grain supplies. Increased raw material grain and chemical
costs were offset by higher selling prices.
Operating expenses increased $0.8 million in fiscal 2008
compared with the prior year primarily due to the strengthening
of the Australian and New Zealand dollar exchange rates which
added $0.7 million to expenses. The remainder of the
increase was due to higher employee costs. Similarly, research
and development expenses increased $0.6 million, of which
half was due to foreign currency exchange rates and the
remainder due to increased headcount, patent and consultant
costs.
The segments operating loss for fiscal 2008 included
$1.4 million of employee severance costs and related
benefits that were paid in connection with workforce reductions
implemented during the reconfiguring of the Australian and New
Zealand businesses. These costs are classified as
Restructure Costs in the Consolidated Statements of
Operations.
Corporate
Operating Expenses
Corporate operating expenses increased to $10.0 million in
fiscal 2008 from $9.6 million in fiscal 2007, primarily due
to increases in employee costs and the costs of benefits and
insurance.
Fiscal
2007 Compared to Fiscal 2006
Industrial
Ingredients North America
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
194,957
|
|
|
$
|
165,850
|
|
Cost of sales
|
|
$
|
159,851
|
|
|
$
|
144,656
|
|
Gross margin
|
|
|
18.0
|
%
|
|
|
12.8
|
%
|
Income from operations
|
|
$
|
19,251
|
|
|
$
|
9,121
|
|
Industrial Ingredients fiscal 2007 sales of
$195.0 million increased $29.1 million, or 18%, over
fiscal 2006, primarily driven by unit price increases and the
positive effects on revenue of passing through higher corn
costs. Combined, these factors added $34 million to fiscal
2007 sales. Offsetting these increases was a 6% decline in
volume due to softness in the paper market as customers closed
or temporarily shuttered plants.
Gross margin increased $13.9 million, or 66%, over fiscal
2006 to $35.1 million, and, as a percentage of sales,
expanded to 18.0% in fiscal 2007 compared to 12.8% in fiscal
2006. Approximately $12 million of the margin growth was
due to higher unit pricing and favorable product mix.
Improvements in energy unit costs of $0.3 million,
favorable corn procurement costs of $3.3 million and
reductions in manufacturing overhead of $1.2 million also
22
contributed to increased margin. These favorable effects were
partially offset by increased chemical costs of
$0.7 million and the margin effect of a volume decline of
$2.7 million.
Income from operations increased $10.1 million over fiscal
2006 due to the increase in the gross margin, partially offset
by $2.4 million related to an estimated loss contingency
for litigation. Operating expenses declined to 5.2% of sales in
fiscal 2007, compared to 5.5% of sales in fiscal 2006. Research
and development expenses remained comparable to fiscal 2006 at
1.7% of sales.
Food
Ingredients North America
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
62,987
|
|
|
$
|
57,156
|
|
Cost of sales
|
|
$
|
44,036
|
|
|
$
|
41,954
|
|
Gross margin
|
|
|
30.1
|
%
|
|
|
26.6
|
%
|
Income from operations
|
|
$
|
10,684
|
|
|
$
|
7,819
|
|
Sales at the Food Ingredients North America business
expanded 10.2% over the prior year driven by an 8.8% increase in
average unit sales prices. Volumes increased slightly, adding
120 basis points to the revenue increase. Annual sales in
the protein end market grew 17% over last year and sales of
applications for the pet chew and treats product lines rose from
$.05 million in fiscal 2006 to $2.4 million in fiscal
2007.
Gross margin improved by $3.7 million in fiscal 2007, due
to higher unit selling prices and favorable product mix, offset
by a 14% increase in the average unit cost of raw materials.
Fiscal 2007 operating income increased 37% over last year on the
expansion in gross margin partially offset by $0.5 million
in higher employee-related expenses and increased research and
development expenses of $0.1 million.
Australia/New
Zealand Operations
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
105,244
|
|
|
$
|
96,121
|
|
Cost of sales
|
|
$
|
95,141
|
|
|
$
|
87,575
|
|
Gross margin
|
|
|
9.6
|
%
|
|
|
8.9
|
%
|
Income from operations
|
|
$
|
3,269
|
|
|
$
|
1,735
|
|
The Australian business reported a 9.5% increase in sales in
fiscal 2007 over fiscal 2006. Favorable foreign currency rates
and favorable unit pricing contributed 730 basis points and
140 basis points, respectively, to the revenue increase.
Sales volumes increased less than 1% and sales in local currency
increased 2%.
Gross margin expanded to 9.6% of sales in fiscal 2007 from 8.9%
in fiscal 2006 on lower distribution costs and improved
production yields and volumes. Escalating wheat costs of
$1.6 million were fully offset by improved product pricing.
Total operating expenses for fiscal 2007 were comparable to
fiscal 2006, but declined to 4.9% of sales from 5.6% in fiscal
2006. Research and development expenses increased by
$0.2 million and, as a percent of sales, were comparable to
fiscal 2006 at 1.6%. Increases in these expenses were due to
enhancements to the segments commercial and research
capabilities. Operating expenses in fiscal 2006 included
$0.9 million of employee severance costs.
Corporate
Operating Expenses
Corporate operating expenses increased to $9.6 million in
fiscal 2007 from $9.4 million in fiscal 2006. Employee
related costs increased by $0.6 million partially offset by
declines in legal and professional fees.
23
Non-Operating
Income (Expense)
Other non-operating income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Royalty and licensing income
|
|
$
|
1,874
|
|
|
$
|
1,902
|
|
|
$
|
1,827
|
|
Gain (loss) on foreign currency transactions
|
|
|
(217
|
)
|
|
|
3
|
|
|
|
(46
|
)
|
Gain on sale of New Zealand land
|
|
|
701
|
|
|
|
|
|
|
|
|
|
Gain on cash flow hedges
|
|
|
2,890
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
186
|
|
|
|
(260
|
)
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,434
|
|
|
$
|
1,645
|
|
|
$
|
1,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2008, the Company sold a parcel of land in Auckland,
New Zealand to a third-party purchaser and recognized a gain of
approximately $0.7 million.
In fiscal 2003, the Company exclusively licensed to National
Starch and Chemical Investment Holdings Corporation
(National Starch) certain rights to its resistant
starch patent portfolio for applications in human nutrition.
Under the terms of the licensing agreement, the Company received
royalties during the years noted above.
As discussed in Note 2, in June 2008, the flooding of the
Cedar Rapids manufacturing facility shut down production for
most of the quarter. The Company had derivative instruments
designated as cash flow hedges to reduce the price volatility of
corn and natural gas used in the production of starch. Due to
the June 12, 2008 flood event, derivative positions held as
of that date that were forecasted to hedge exposures during the
period the Cedar Rapids plant was shut down were no longer
deemed to be effective cash flow hedges. The $2.9 million
gain, representing ineffectiveness on these instruments, was
reclassified from other comprehensive income and recognized as a
component of non-operating income.
Interest
expense
Interest expense was $4.1 million, $5.7 million and
$5.9 million in fiscal years 2008, 2007 and 2006,
respectively. Interest expense for fiscal 2008 declined
$1.6 million from fiscal 2007 due to a decline in
U.S. interest rates from a year ago and lower average debt
balances, excluding interest costs which were capitalized on
debt related to the construction of the ethanol facility.
Interest costs related to construction of the ethanol
manufacturing plant were capitalized until May 2008, when the
facility began commercial production. Approximately
$44.2 million of debt outstanding at August 31, 2008
was attributable to the construction of the ethanol production
plant. Interest costs of $1.1 million and $0.4 million
were capitalized in fiscal years 2008 and 2007, respectively,
related to construction of the ethanol facility.
As of August 31, 2008, all of the Companys
outstanding debt, including amounts outstanding under the
Australian grain inventory financing facility, was subject to
variable interest rates. As of August 31, 2008, under
interest rate swap agreements with several banks, the Company
has fixed its interest rates on U.S. dollar denominated
term debt of $28.0 million at 4.18% and $5.0 million
at 5.08%, plus the applicable margin under the Companys
credit facility.
Income
taxes
The effective tax rates for fiscal years 2008, 2007 and 2006
were 35%, 31% and 20%, respectively. In fiscal 2008, the effect
of lower foreign statutory tax rates was offset by permanent
differences between book and tax accounting. These differences,
consisting primarily of research and development tax incentives
in Australia and nontaxable foreign income, increased the
taxable loss for fiscal 2008 and increased the computed
effective tax rate. See Note 14 to the Consolidated
Financial Statements.
The effective tax rate for fiscal 2007 varied from the
U.S. federal statutory rate of 35% primarily due to
Australian and U.S. tax incentives related to research and
development, the favorable tax effect of domestic (U.S.)
24
production activities, and the effect of a tax settlement. The
tax benefits previously available to the Company related to the
extraterritorial income exclusion expired in December 2006. In
May 2007, the Company settled the outstanding Internal Revenue
Service (IRS) audits of the Companys
U.S. federal income tax returns for the fiscal years ended
August 31, 2001 and 2002. Under the settlement, the Company
received a cash refund of $0.3 million. In addition, in
connection with the settlement of these audits, the Company
reversed a current tax liability in the amount of
$0.7 million, which represented its estimate of the
probable loss on certain tax positions being examined.
The effective tax rate for fiscal 2006 is lower than the
statutory tax rate due to the tax benefits of the
extraterritorial income exclusion (EIE) deduction,
lower tax rates on foreign earnings and research and development
tax credits.
Liquidity
and Capital Resources
The Companys primary sources of short- and long-term
liquidity are cash flow from operations and its revolving line
of credit, which expires in 2011. The Company expects to
generate sufficient cash flow from operations and to have
sufficient borrowing capacity and ability to fund its cash
requirements during fiscal 2009. In addition, in fiscal 2009,
the Company expects to receive insurance proceeds for property
damage and business interruption in excess of $20 million
to fund flood restoration costs.
Operating
Activities
At August 31, 2008, Penford had working capital of
$37.4 million, and $66.7 million outstanding under its
credit facility. Cash flow from operations was
$8.5 million, $22.5 million and $11.4 million in
fiscal years 2008, 2007 and 2006, respectively. The decline in
cash flow in fiscal 2008 compared to fiscal 2007 is primarily
related to the fourth quarter operating loss due to the
temporary shut down of the Companys Cedar Rapids, Iowa
plant, operated by the Industrial Ingredients North
America business, due to record flooding of the Cedar River and
government-ordered mandatory evacuation of the plant and
surrounding areas. In addition, the fluctuations in working
capital balances in fiscal 2008 compared to fiscal 2007 are
primarily related to the interruption in operations due to the
flooding and additional payables at year end related to the
flood discussed above. The increase in cash flow in fiscal 2007
compared to fiscal 2006 was due to the growth in earnings in
fiscal 2007.
Investing
Activities
Capital expenditures were $40.7 million, $34.7 million
and $14.9 million in fiscal years 2008, 2007 and 2006,
respectively. Capital expenditures in fiscal years 2008, 2007
and 2006 include $26.9 million, $19.3 million and
$0.7 million, respectively, for the ethanol production
facility. Penford expects capital expenditures to be
approximately $20 million in fiscal 2009.
Financing
Activities
On October 5, 2006, Penford entered into a
$145 million Second Amended and Restated Credit Agreement
(the 2007 Agreement) among the Company; Harris N.A.;
LaSalle Bank National Association (now Bank of America);
Cooperative Centrale Raiffeisen-Boorleenbank B.A.,
Rabobank Nederland (New York Branch); U.S. Bank
National Association; and the Australia and New Zealand Banking
Group Limited.
The 2007 Agreement refinanced the Companys previous
$105 million secured term and revolving credit facilities.
Under the 2007 Agreement, the Company can borrow
$40 million in term loans and $60 million under a
revolving line of credit. The lenders revolving credit
loan commitment may be increased under certain conditions. In
addition, the 2007 Agreement provided the Company with
$45 million in capital expansion funds which were used by
the Company to finance the construction of its planned ethanol
production facility in Cedar Rapids, Iowa.
The final maturity date for the term and revolving loans under
the 2007 Agreement is December 31, 2011. Beginning on
December 31, 2006, the Company was required to begin
repaying the term loans in twenty equal quarterly installments
of $1 million, with the remaining amount due at final
maturity. The final maturity date for the capital expansion
loans is December 31, 2012. Beginning on December 31,
2008, the Company must repay the capital expansion loans in
equal quarterly installments of $1.25 million through
September 30, 2009 and
25
$2.5 million thereafter, with the remaining amount due at
final maturity. Interest rates under the 2007 Agreement are
based on either LIBOR in Australia or the United States, or the
prime rate, depending on the selection of available borrowing
options under the 2007 Agreement.
The 2007 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 2007 Agreement), shall not exceed a maximum, which varies
between 3.00 and 4.50 through the term of the 2007 Agreement. In
addition, the Company must maintain a minimum tangible net worth
of $65 million, and a Fixed Charge Coverage Ratio, as
defined in the 2007 Agreement, of not less than 1.25 in fiscal
2008 and 1.50 in fiscal 2009 and thereafter. Annual capital
expenditures, exclusive of capital expenditures incurred in
connection with the Companys ethanol production facility,
are limited to $20 million, unless the Company can maintain
a Total Funded Debt Ratio below 2.00 for each fiscal quarter
during any fiscal year, which would result in the annual capital
expenditure limit to increase to $25 million for such
fiscal year.
Due to the expected impact of the flood on results of operations
during its fourth quarter of fiscal 2008, described in
Note 2 to the Consolidated Financial Statements, the
Company sought and obtained an amendment to the 2007 Agreement
with the banks identified above. Effective July 9, 2008,
the 2007 Agreement was amended to temporarily adjust the
calculation of selected covenant formulas for the costs of the
flood damage and the associated property damage and business
interruption insurance recoveries. The Fixed Charge Coverage
Ratio was reduced to 1.25 through November 30, 2008.
The Companys obligations under the 2007 Agreement are
secured by substantially all of the Companys
U.S. assets and a majority of the shares of Penford
Holdings Pty. Ltd. (Australia). The Company was in compliance
with the covenants in the 2007 Agreement, as amended, as of
August 31, 2008. Subject to the Companys timely
receipt of expected insurance proceeds for the recovery of its
Cedar Rapids flood losses and the performance of its businesses,
the Company expects to be in compliance during fiscal 2009.
Pursuant to the terms of the 2007 Agreement, Penfords
additional borrowing ability as of August 31, 2008 was
$45.7 million under the revolving credit facility.
The Companys short-term borrowings consist of an
Australian grain inventory financing facility. In fiscal 2006,
the Companys Australian subsidiary entered into a
variable-rate revolving grain inventory financing facility with
an Australian bank for a maximum of U.S. $34.5 million
at the exchange rate at August 31, 2008. This facility,
which was renewed as of March 2008, expires on March 15,
2009 and carries an effective interest rate equal to BBSY plus
approximately 2%. Payments on this facility are due as the grain
financed is withdrawn from storage. The amount outstanding under
this arrangement, which is classified as a current liability on
the balance sheet, was $0.7 million at August 31, 2008.
In December 2007, the Company completed a public offering of
common stock resulting in the issuance of 2,000,000 additional
common shares at a price to the public of $25.00 per share. The
Company received approximately $47.2 million of net
proceeds (net of $2.8 million of expenses related to the
offering) from the sale of 2,000,000 shares and these
proceeds were used to reduce the Companys outstanding debt.
Dividends
In fiscal 2008, Penford paid dividends on its common stock
totaling $2.4 million at a quarterly rate of $0.06 per
share. On October 29, 2008, the Board of Directors declared
a dividend of $0.06 per common share payable on December 5,
2008 to shareholders of record as of November 14, 2008. On
a periodic basis, the Board of Directors reviews the
Companys dividend policy which is affected by the
Companys earnings, financial condition and cash and
capital requirements. Future dividend payments are at the
discretion of the Board of Directors. Penford has included the
continuation of quarterly dividends in its planning for fiscal
2009.
Pursuant to the 2007 Agreement, the Company may not declare or
pay dividends on, or make any other distributions in respect of,
its common stock in excess of $8 million in any fiscal year
or if there exists a Default or Event of Default as defined in
the 2007 Agreement.
26
Critical
Accounting Policies
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. 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.
Management has reviewed the accounting policies and related
disclosures with the Audit Committee of the Board of Directors.
The accounting policies that management believes are the most
important to the financial statements and that require the most
difficult, subjective and complex judgments include the
following:
|
|
|
|
|
Evaluation of the allowance for doubtful accounts receivable
|
|
|
|
Hedging activities
|
|
|
|
Benefit plans
|
|
|
|
Valuation of goodwill
|
|
|
|
Self-insurance program
|
|
|
|
Income taxes
|
|
|
|
Stock-based compensation
|
A description of each of these follows:
Evaluation
of the Allowance for Doubtful Accounts
Receivable
Management makes judgments about the Companys ability to
collect outstanding receivables and provides allowances for the
portion of receivables that the Company may not be able to
collect. Penford estimates the allowance for uncollectible
accounts based on historical experience, known troubled
accounts, industry trends, economic conditions, how recently
payments have been received, and ongoing credit evaluations of
its customers. If the estimates do not reflect the
Companys future ability to collect outstanding invoices,
Penford may experience losses in excess of the reserves
established. At August 31, 2008, the allowance for doubtful
accounts receivable was $0.7 million.
Hedging
Activities
Penford uses derivative instruments, primarily exchange traded
futures contracts, to reduce exposure to price fluctuations of
commodities used in the manufacturing processes in the United
States. The Company relies upon exchange settlement to address
the default risk exposure. Penford has elected to designate
these activities as hedges. This election allows the Company to
defer gains and losses on those derivative instruments until the
underlying commodity is used in the production process. To
reduce exposure to variable short-term interest rates, Penford
uses interest rate swap agreements. Penford uses
over-the-counter interest rate swap agreements with large
commercial banks as counterparties. The Company is unaware of
any events or circumstances that would prevent these banks from
fulfilling their obligations.
The requirements for the designation of hedges are very complex,
and require judgments and analyses to qualify as hedges as
defined by Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended
(SFAS No. 133). These judgments and
analyses include an assessment that the derivative instruments
used are effective hedges of the underlying risks. If the
Company were to fail to meet the requirements of
SFAS No. 133, or if these derivative instruments are
not designated as hedges, the Company would be required to mark
these contracts to market at each reporting date. Penford had
deferred losses, net of tax, of $(1.3) million and
$(0.6) million at August 31, 2008 and 2007,
respectively, which are reflected in
27
accumulated other comprehensive income in both years. See
Notes 1 and 3 to the Consolidated Financial Statements.
During the fourth quarter of fiscal 2008, the Company recognized
a pre-tax gain of $2.9 million representing the
ineffectiveness on cash flow hedge transactions related to the
purchase of corn and natural gas. Derivative positions held that
were forecasted to hedge commodity exposures during the time the
Cedar Rapids manufacturing facility was shut down were no longer
deemed to be effective. See Notes 1, 3 and 13 to the
Consolidated Financial Statements.
Benefit
Plans
Penford has defined benefit plans for its U.S. employees
providing retirement benefits and coverage for retiree health
care. Qualified third-party actuaries assist management in
determining the expense and funded status of these employee
benefit plans. Management makes several estimates and
assumptions in order to measure the expense and funded status,
including interest rates used to discount certain liabilities,
rates of return on plan assets, rates of compensation increases,
employee turnover rates, anticipated mortality rates, and
increases in the cost of medical care. The Company makes
judgments about these assumptions based on historical investment
results and experience as well as available historical market
data and trends. However, if these assumptions are wrong, it
could materially affect the amounts reported in the
Companys future results of operations. Disclosure about
these estimates and assumptions are included in Note 11 to
the Consolidated Financial Statements. See Defined Benefit
Plans below.
Valuation
of Goodwill
Penford is required to assess, on an annual basis, whether the
value of goodwill reported on the balance sheet has been
impaired, or more often if conditions exist that indicate that
there might be impairment. These assessments require extensive
and subjective judgments to assess the fair value of goodwill.
While the Company engages qualified valuation experts to assist
in this process, their work is based on the Companys
estimates of future operating results and allocation of goodwill
to the business units. If future operating results differ
materially from the estimates, the value of goodwill could be
adversely impacted. See Note 5 to the Consolidated
Financial Statements. Subsequent to August 31, 2008, the
Companys share price has periodically traded below book
value per share. During fiscal 2008, the Companys
Australia/New Zealand business reported lower quarterly margins
and operating income than previous years. The excess of the fair
value of the equity of the Australia/New Zealand reporting unit
over its carrying value at June 1, 2008 declined from the
prior year. The Company continues to monitor and evaluate the
financial performance of the Australia/New Zealand business as
well as the impact from recent economic events to assess the
potential for the fair value of the reporting unit to decline
below its book value.
Self-insurance
Program
The Company maintains a self-insurance program covering portions
of workers compensation and group health liability costs.
The amounts in excess of the self-insured levels are fully
insured by third-party insurers. Liabilities associated with
these risks are estimated in part by considering historical
claims experience, severity factors and other actuarial
assumptions. Projections of future losses are inherently
uncertain because of the random nature of insurance claims
occurrences and changes that could occur in actuarial
assumptions. The financial results of the Company could be
significantly affected if future claims and assumptions differ
from those used in determining these liabilities.
Income
Taxes
The determination of the Companys provision for income
taxes requires significant judgment, the use of estimates and
the interpretation and application of complex tax laws. The
Companys provision for income taxes reflects a combination
of income earned and taxed in the various U.S. federal and
state, as well as Australian and New Zealand, taxing
jurisdictions. Jurisdictional tax law changes, increases or
decreases in permanent differences between book and tax items,
accruals or adjustments of accruals for tax contingencies or
valuation allowances, and the Companys change in the mix
of earnings from these taxing jurisdictions all affect the
overall effective tax rate.
Prior to fiscal 2008, in evaluating the exposures connected with
the various tax filing positions, the Company established an
accrual, when, despite managements belief that the
Companys tax return positions are supportable,
28
management believed that certain positions may be successfully
challenged and a loss was probable. When facts and circumstances
changed, these accruals were adjusted. Beginning in fiscal 2008,
the Company adopted Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement
No. 109 (FIN 48), which changed the
accounting for uncertain tax positions. FIN 48 provides
that a tax benefit from an uncertain tax position may be
recognized when it is more likely than not that the position
will be sustained upon examination based on the technical merits
of the position. The amount recognized is measured as the
largest amount of tax benefit that has a greater than 50%
likelihood of being realized upon settlement. See Note 14
to the Consolidated Financial Statements.
The liability for unrecognized tax benefits contains
uncertainties because the Company is required to make
assumptions and to apply judgment to estimate the exposures
associated with the various tax filing positions. Management
believes that the judgments and estimates it uses in evaluating
its tax filing positions are reasonable; however, actual results
could differ, and the Company may be exposed to significant
gains and losses and the Companys effective tax rate in a
given financial statement period could be materially affected.
Stock-Based
Compensation
Beginning September 1, 2005, the Company recognizes
stock-based compensation in accordance with
SFAS No. 123R. Under the fair value recognition
provisions of this statement, share-based compensation cost is
measured at the grant date based on the fair value of the award
and is recognized as expense over the requisite service period
of the award. Determining the appropriate fair value model and
calculating the fair value of the share-based awards at the date
of grant requires judgment, including estimating stock price
volatility, forfeiture rates, the risk-free interest rate,
dividends and expected option life. See Note 10 to the
Consolidated Financial Statements.
If circumstances change, and the Company uses different
assumptions for volatility, interest, dividends and option life
in estimating the fair value of stock-based awards granted in
future periods, stock-based compensation expense may differ
significantly from the expense recorded in the current period.
SFAS No. 123R requires forfeitures to be estimated at
the date of grant and revised in subsequent periods if actual
forfeitures differ from those estimated. Therefore, if actual
forfeiture rates differ significantly from those estimated, the
Companys results of operations could be materially
impacted.
Contractual
Obligations
As more fully described in Notes 6 and 9 to the
Consolidated Financial Statements, the Company is a party to
various debt and lease agreements at August 31, 2008 that
contractually commit the Company to pay certain amounts in the
future. The purchase obligations at August 31, 2008
represent an estimate of all open purchase orders and
contractual obligations through the Companys normal course
of business for commitments to purchase goods and services for
production and inventory needs, such as raw materials, supplies,
manufacturing arrangements, capital expenditures and
maintenance. The majority of terms allow the Company or
suppliers the option to cancel or adjust the requirements based
on business needs.
The following table summarizes such contractual commitments at
August 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010-2011
|
|
|
2012-2013
|
|
|
2014 & After
|
|
|
Total
|
|
|
Long-term debt and capital lease obligations
|
|
$
|
8,029
|
|
|
$
|
24,606
|
|
|
$
|
35,254
|
|
|
$
|
|
|
|
$
|
67,889
|
|
Short-term borrowings
|
|
|
676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
676
|
|
Postretirement medical(1)
|
|
|
670
|
|
|
|
1,523
|
|
|
|
1,766
|
|
|
|
5,248
|
|
|
|
9,207
|
|
Operating lease obligations, net
|
|
|
6,128
|
|
|
|
7,921
|
|
|
|
3,994
|
|
|
|
2,726
|
|
|
|
20,769
|
|
Purchase obligations
|
|
|
100,310
|
|
|
|
4,583
|
|
|
|
434
|
|
|
|
|
|
|
|
105,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115,813
|
|
|
$
|
38,633
|
|
|
$
|
41,448
|
|
|
$
|
7,974
|
|
|
$
|
203,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Estimated contributions to the unfunded postretirement medical
plan made in amounts needed to fund benefit payments for
participants through fiscal 2018 based on actuarial assumptions.
|
29
Off-Balance
Sheet Arrangements
The Company has no off-balance sheet arrangements that have or
are reasonably likely to have a current or future material
effect on the Companys financial condition, changes in
financial conditions, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Defined
Benefit Pension and Postretirement Benefit Plans
Penford maintains defined benefit pension plans and defined
benefit postretirement health care plans in the United States.
The most significant assumptions used to determine benefit
expense and benefit obligations are the discount rate and the
expected return on assets assumption. See Note 11 to the
Consolidated Financial Statements for the assumptions used by
Penford.
The discount rate used by the Company in determining benefit
expense and benefit obligations reflects the yield of high
quality (AA or better rating by a recognized rating agency)
corporate bonds whose cash flows are expected to match the
timing and amounts of projected future benefit payments. Benefit
obligations and expense increase as the discount rate is
reduced. The discount rates to determine net periodic expense
used in 2006 (5.50%), 2007 (6.15%) and 2008 (6.51%) reflect the
changes in bond yields over the past several years. Lowering the
discount rate by 25 basis points would increase pension
expense by approximately $0.1 million and other
postretirement benefit expense by $0.01 million. During
fiscal 2008, bond yields rose and Penford has increased the
discount rate for calculating its benefit obligations at
August 31, 2008, as well as net periodic expense for fiscal
2009, to 6.92%.
The expected long-term return on assets assumption for the
pension plans represents the average rate of return to be earned
on plan assets over the period the benefits included in the
benefit obligation are to be paid. Pension expense increases as
the expected return on plan assets decreases. In developing the
expected rate of return, the Company considers long-term
historical market rates of return as well as actual returns on
the Companys plan assets, and adjusts this information to
reflect expected capital market trends. Penford also considers
forward looking return expectations by asset class, the
contribution of active management and management fees paid by
the plans. The plan assets are held in qualified trusts and
anticipated rates of return are not reduced for income taxes.
The expected long-term return on assets assumption used to
calculate net periodic pension expense was 8.0% for fiscal 2008.
A 50 basis point decrease (increase) in the expected return
on assets assumptions would increase (decrease) pension expense
by approximately $0.2 million based on plan assets at
August 31, 2008. The expected return on plan assets used in
calculating fiscal 2009 pension expense is 8%.
Unrecognized net loss amounts reflect the difference between
expected and actual returns on pension plan assets as well as
the effects of changes in actuarial assumptions. Unrecognized
net losses in excess of certain thresholds are amortized into
net periodic pension and postretirement benefit expense over the
average remaining service life of active employees. As of
August 31, 2008, unrecognized losses from all sources are
$5.7 million for the pension plans and no unrecognized
losses for the postretirement health care plan. Amortization of
unrecognized net loss amounts is expected to increase net
pension expense by approximately $0.2 million in fiscal
2009. Amortization of unrecognized net losses is not expected to
affect the net postretirement health care expense in fiscal 2009.
Penford recognized pension expense of $1.6 million,
$1.7 million and $2.4 million in fiscal years 2008,
2007 and 2006, respectively. Penford expects pension expense to
be approximately $2.0 million in fiscal 2009. The Company
contributed $1.5 million, $1.0 million and
$3.3 million to the pension plans in fiscal years 2008,
2007 and 2006, respectively. Penford estimates that it will be
required to make minimum contributions to the pension plans of
$1.9 million during fiscal 2009. Because of the recent
decline in general economic and capital market conditions, the
Company expects that pension plan funding contributions will
increase over the medium and long term. The Company estimates
that the minimum pension plan funding contribution for its 2009
plan year (calendar year 2009) will be $3.5 million
with $1.1 million to be paid in fiscal 2009,
$1.1 million to be paid in fiscal 2010 and
$1.3 million to be paid in September 2010 (fiscal 2011).
30
The Company recognized benefit expense for its postretirement
health care plan of $1.0 million, $1.0 million and
$1.2 million in fiscal years 2008, 2007 and 2006,
respectively. Penford expects to recognize approximately
$1.0 million in postretirement health care benefit expense
in fiscal 2009. The Company contributed $0.5 million,
$0.6 million, and $0.7 million in fiscal years 2008,
2007 and 2006 to the postretirement health care plans and
estimates that it will contribute $0.7 million in fiscal
2009.
Future changes in plan asset returns, assumed discount rates and
various assumptions related to the participants in the defined
benefit plans will affect future benefit expense and
liabilities. The Company cannot predict what these changes will
be.
Recent
Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework and
gives guidance regarding the methods used for measuring fair
value, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and is required to be adopted by the
Company in the first quarter of fiscal 2009. In February 2008,
the FASB issued Staff Position
No. 157-2
(FSP 157-2)
which provided a one-year delayed application of SFAS 157
for nonfinancial assets and liabilities, except for items that
are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). For those
items within the scope of
FSP 157-2,
the effective date of SFAS 157 has been deferred to fiscal
years beginning after November 15, 2008 (fiscal 2010).
While the Company is continuing to evaluate the application of
SFAS 157, as amended, the Company does not believe the
adoption of SFAS 157 will have a material impact on its
consolidated financial statements.
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities including an amendment of FASB
No. 115 (SFAS 159). SFAS 159
allows companies the option to measure financial instruments and
certain other items at fair value that are not currently
required to be measured at fair value. SFAS 159 is
effective for fiscal years beginning after November 15,
2007 and is required to be adopted by the Company in the first
quarter of fiscal 2009. While the Company is continuing to
evaluate the application of SFAS 159, the Company does not
believe the adoption of SFAS 159 will have a material
impact on its consolidated financial statements.
In December 2007, the FASB issued Statement No. 141R
(revised 2007), Business Combinations
(SFAS 141R) and Statement No. 160,
Non-Controlling Interest in Consolidated Financial
Statements, an Amendment of ARB No. 51
(SFAS 160). These new standards establish
principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, liabilities assumed, any non-controlling interests,
and goodwill acquired in a business combination. This statement
also establishes disclosure requirements to enable financial
statement users to evaluate the nature and financial effects of
the business combination. The requirements of SFAS 141R and
SFAS No. 160 are effective for fiscal years beginning
after December 15, 2008 (fiscal 2010), and, except for the
presentation and disclosure requirements of SFAS 160, are
to be applied prospectively.
In March 2008, the FASB issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB No. 133
(SFAS 161). SFAS 161 requires additional
disclosures about the objectives for using derivative
instruments and hedging activities, method of accounting for
such instruments under SFAS 133 and its related
interpretations, the effect of derivative instruments and
related hedged items on financial position, results of
operations, and cash flows, and a tabular disclosure of the fair
values of derivative instruments and their gains and losses,
SFAS 161 is effective for fiscal years and interim periods
beginning after November 15, 2008 (fiscal 2010). The
Company is currently evaluating the disclosure requirements of
this standard.
In May 2008, the FASB issued Statement No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the
sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements
that are presented in conformity with generally accepted
accounting principles in the United States. SFAS 162 will
become effective 60 days following the SECs approval
of the Public Company Accounting Oversight Board amendments to
AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.
The Company does not expect the adoption of SFAS 162 to
have a material effect on its consolidated financial statements.
31
|
|
Item 7A:
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market
Risk Sensitive Instruments and Positions
Penford is exposed to market risks that are inherent in the
financial instruments that are used in the normal course of
business. Penford may use various hedge instruments to manage or
reduce market risk, but the Company does not use derivative
financial instrument transactions for speculative purposes. The
primary market risks are discussed below.
Interest
Rate Risk
The Companys exposure to market risk for changes in
interest rates relates to its variable-rate borrowings. As of
August 31, 2008, all of the Companys outstanding
debt, including amounts outstanding under the Australian grain
inventory financing facility, is subject to variable interest
rates, which are generally set for one or three months. Under
interest rate swap agreements with several banks, the Company
has fixed its interest rates on U.S. dollar denominated
term debt of $28.0 million at 4.18% and $5.0 million
at 5.08%, plus the applicable margin under the Companys
credit facility. The market risk associated with a
100 basis point adverse change in interest rates at
August 31, 2008 is approximately $0.3 million.
Foreign
Currency Exchange Rates
The Company has
U.S.-Australian
and Australian-New Zealand dollar currency exchange rate risks
due to revenues and costs denominated in Australian and New
Zealand dollars with the Companys foreign operation,
Penford Australia. Currently, cash generated by Penford
Australias operations is used for capital investment in
Australia and payment of debt denominated in Australian dollars.
At August 31, 2008, approximately 5% of total debt was
denominated in Australian dollars.
The Company has not maintained any derivative instruments to
mitigate the
U.S.-Australian
dollar currency exchange translation exposure. This position is
reviewed periodically, and based on the Companys review,
may result in the incorporation of derivative instruments in the
Companys hedging strategy. The currency exchange rate risk
between Penfords Australian and New Zealand operations is
not significant. For the year ended August 31, 2008, a 10%
change in the foreign currency exchange rates compared with the
U.S. dollar would have affected fiscal 2008 reported net
loss by approximately $0.3 million.
From time to time, Penford enters into foreign exchange forward
contracts to manage exposure to receivables and payables
denominated in currencies different from the functional
currencies of the selling entities. As of August 31, 2008
and 2007, Penford did not have any foreign exchange forward
contracts outstanding. At August 31, 2008, the Company had
U.S. dollar denominated trade receivables of
$1.4 million at Penford Australia.
Commodities
The availability and price of corn, Penfords most
significant raw material, is subject to fluctuations due to
unpredictable factors such as weather, plantings, domestic and
foreign governmental farm programs and policies, changes in
global demand and the worldwide production of corn. To reduce
the price risk caused by market fluctuations, Penford generally
follows a policy of using exchange-traded futures and options
contracts to hedge exposure to corn price fluctuations in North
America. These futures and options contracts are designated as
hedges. The changes in market value of these contracts have
historically been, and are expected to continue to be, highly
effective in offsetting the price changes in corn. A majority of
the Companys sales contracts for corn-based industrial
starch ingredients contain a pricing methodology which allows
the Company to pass-through the majority of the changes in the
commodity price of net corn.
Penfords net corn position in the U.S. consists
primarily of inventories, purchase contracts and exchange-traded
futures and options contracts that hedge Penfords exposure
to commodity price fluctuations. The fair value of the position
is based on quoted market prices. The Company has estimated its
market risk as the potential loss in fair value resulting from a
hypothetical 10% adverse change in prices. As of August 31,
2008 and 2007, the fair value of the Companys net corn
position was approximately $1.8 million and
$1.0 million, respectively. The
32
market risk associated with a 10% adverse change in corn prices
at August 31, 2008 and 2007 is approximately $180,000 and
$104,000, respectively.
Over the past years, prices for natural gas have increased over
historic levels. Prices for natural gas fluctuate due to
anticipated changes in supply and demand and movement of prices
of related or alternative fuels. To reduce the price risk caused
by sudden market fluctuations, Penford generally enters into
short-term purchase contracts or uses exchange-traded futures
and options contracts to hedge exposure to natural gas price
fluctuations. These futures and options contracts are designated
as hedges. The changes in market value of these contracts have
historically been, and are expected to continue to be, closely
correlated with the price changes in natural gas.
Penfords exchange traded futures and options contracts
hedge production requirements. The fair value of these contracts
is based on quoted market prices. The Company has estimated its
market risk as the potential loss in fair value resulting from a
hypothetical 10% adverse change in prices. As of August 31,
2008 and 2007, the fair value of the natural gas exchange-traded
futures and options contracts was a loss of approximately
$1.2 million and a loss of approximately $1.9 million,
respectively. The market risk associated with a 10% adverse
change in natural gas prices at August 31, 2008 and 2007 is
estimated at $123,000 and $188,000, respectively.
33
|
|
Item 8:
|
Financial
Statements and Supplementary Data
|
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
35
|
|
|
|
|
36
|
|
|
|
|
36
|
|
|
|
|
37
|
|
|
|
|
38
|
|
|
|
|
39
|
|
|
|
|
66
|
|
34
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
534
|
|
|
$
|
|
|
Trade accounts receivable, net
|
|
|
28,752
|
|
|
|
54,333
|
|
Inventories
|
|
|
50,200
|
|
|
|
39,537
|
|
Prepaid expenses
|
|
|
4,370
|
|
|
|
5,025
|
|
Insurance recovery receivable
|
|
|
8,000
|
|
|
|
|
|
Other
|
|
|
3,881
|
|
|
|
6,384
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
95,737
|
|
|
|
105,279
|
|
Property, plant and equipment, net
|
|
|
169,932
|
|
|
|
146,663
|
|
Restricted cash value of life insurance
|
|
|
10,465
|
|
|
|
10,366
|
|
Deferred tax asset
|
|
|
6,293
|
|
|
|
297
|
|
Other assets
|
|
|
1,151
|
|
|
|
1,428
|
|
Other intangible assets, net
|
|
|
760
|
|
|
|
878
|
|
Goodwill, net
|
|
|
26,043
|
|
|
|
23,477
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
310,381
|
|
|
$
|
288,388
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Cash overdraft, net
|
|
$
|
1,301
|
|
|
$
|
5,468
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
8,029
|
|
|
|
4,056
|
|
Short-term borrowings
|
|
|
676
|
|
|
|
7,218
|
|
Accounts payable
|
|
|
46,475
|
|
|
|
32,410
|
|
Accrued liabilities
|
|
|
1,841
|
|
|
|
17,094
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
58,322
|
|
|
|
66,246
|
|
Long-term debt and capital lease obligations
|
|
|
59,860
|
|
|
|
63,403
|
|
Other postretirement benefits
|
|
|
12,862
|
|
|
|
12,814
|
|
Deferred income taxes
|
|
|
|
|
|
|
3,140
|
|
Other liabilities
|
|
|
18,975
|
|
|
|
17,109
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
150,019
|
|
|
|
162,712
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $1.00 per share, authorized
1,000,000 shares, none issued
|
|
|
|
|
|
|
|
|
Common stock, par value $1.00 per share, authorized
29,000,000 shares, issued 13,127,369 shares in 2008
and 11,098,739 shares in 2007, including treasury shares
|
|
|
13,127
|
|
|
|
11,099
|
|
Additional paid-in capital
|
|
|
91,443
|
|
|
|
43,902
|
|
Retained earnings
|
|
|
74,092
|
|
|
|
89,486
|
|
Treasury stock, at cost, 1,981,016 shares
|
|
|
(32,757
|
)
|
|
|
(32,757
|
)
|
Accumulated other comprehensive income
|
|
|
14,457
|
|
|
|
13,946
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
160,362
|
|
|
|
125,676
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
310,381
|
|
|
$
|
288,388
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
35
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands, except
|
|
|
|
share and per share data)
|
|
|
Sales
|
|
$
|
345,576
|
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
Cost of sales
|
|
|
295,979
|
|
|
|
298,203
|
|
|
|
273,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
49,597
|
|
|
|
64,161
|
|
|
|
44,943
|
|
Operating expenses
|
|
|
32,262
|
|
|
|
31,391
|
|
|
|
29,477
|
|
Research and development expenses
|
|
|
7,933
|
|
|
|
6,812
|
|
|
|
6,198
|
|
Flood related costs, net
|
|
|
27,555
|
|
|
|
|
|
|
|
|
|
Restructure costs
|
|
|
1,356
|
|
|
|
|
|
|
|
|
|
Other costs
|
|
|
1,411
|
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(20,920
|
)
|
|
|
23,558
|
|
|
|
9,268
|
|
Interest expense
|
|
|
4,083
|
|
|
|
5,711
|
|
|
|
5,902
|
|
Other non-operating income, net
|
|
|
5,434
|
|
|
|
1,645
|
|
|
|
1,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(19,569
|
)
|
|
|
19,492
|
|
|
|
5,262
|
|
Income tax expense (benefit)
|
|
|
(6,869
|
)
|
|
|
5,975
|
|
|
|
1,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(12,700
|
)
|
|
$
|
13,517
|
|
|
$
|
4,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents outstanding,
assuming dilution
|
|
|
10,565,432
|
|
|
|
9,283,125
|
|
|
|
9,004,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.20
|
)
|
|
$
|
1.50
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(1.20
|
)
|
|
$
|
1.46
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Net income (loss)
|
|
$
|
(12,700
|
)
|
|
$
|
13,517
|
|
|
$
|
4,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives, net of tax benefit
(expense) of $1,999, $1,619 and $(271)
|
|
|
(3,261
|
)
|
|
|
(2,641
|
)
|
|
|
492
|
|
Loss (gain) from derivative transactions reclassified into
earnings from other comprehensive income, net of tax benefit
(expense) of $1,574, $950 and $(152)
|
|
|
2,568
|
|
|
|
1,550
|
|
|
|
(294
|
)
|
Foreign currency translation adjustments
|
|
|
2,041
|
|
|
|
4,690
|
|
|
|
536
|
|
(Increase) decrease in post retirement liabilities, net of
applicable income tax benefit (expense) of $513, $(864) and
$(1,530)
|
|
|
(837
|
)
|
|
|
1,409
|
|
|
|
2,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
511
|
|
|
|
5,008
|
|
|
|
3,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
(12,189
|
)
|
|
$
|
18,525
|
|
|
$
|
7,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
36
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(12,700
|
)
|
|
$
|
13,517
|
|
|
$
|
4,228
|
|
Adjustments to reconcile net income (loss) to net cash from
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
17,167
|
|
|
|
15,696
|
|
|
|
15,583
|
|
Stock-based compensation
|
|
|
2,289
|
|
|
|
1,092
|
|
|
|
1,150
|
|
Loss (gain) on sale and disposal of assets
|
|
|
3,676
|
|
|
|
325
|
|
|
|
(85
|
)
|
Gain on sale of land
|
|
|
(709
|
)
|
|
|
(60
|
)
|
|
|
(78
|
)
|
Deferred income tax benefit
|
|
|
(6,084
|
)
|
|
|
(1,771
|
)
|
|
|
(293
|
)
|
Loss (gain) on derivative transactions
|
|
|
661
|
|
|
|
(946
|
)
|
|
|
40
|
|
Foreign currency transaction loss (gain)
|
|
|
(699
|
)
|
|
|
(3
|
)
|
|
|
46
|
|
Excess tax benefit from stock-based compensation
|
|
|
(86
|
)
|
|
|
(1,001
|
)
|
|
|
(102
|
)
|
Other
|
|
|
|
|
|
|
98
|
|
|
|
(8
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
26,140
|
|
|
|
(8,537
|
)
|
|
|
(4,836
|
)
|
Inventories
|
|
|
(10,239
|
)
|
|
|
(3,136
|
)
|
|
|
(692
|
)
|
Prepaid expenses
|
|
|
733
|
|
|
|
(339
|
)
|
|
|
449
|
|
Accounts payable and accrued liabilities
|
|
|
8,925
|
|
|
|
3,148
|
|
|
|
(4,944
|
)
|
Taxes payable
|
|
|
(10,858
|
)
|
|
|
3,334
|
|
|
|
(215
|
)
|
Insurance recovery receivable
|
|
|
(8,000
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(1,695
|
)
|
|
|
1,112
|
|
|
|
1,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow from operating activities
|
|
|
8,521
|
|
|
|
22,529
|
|
|
|
11,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of property, plant and equipment, net
|
|
|
(40,709
|
)
|
|
|
(34,734
|
)
|
|
|
(14,905
|
)
|
Proceeds from sale of land
|
|
|
947
|
|
|
|
|
|
|
|
612
|
|
Other
|
|
|
(66
|
)
|
|
|
(44
|
)
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
|
(39,828
|
)
|
|
|
(34,778
|
)
|
|
|
(14,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
9,334
|
|
|
|
4,625
|
|
|
|
13,916
|
|
Payments on short-term borrowings
|
|
|
(16,498
|
)
|
|
|
(7,548
|
)
|
|
|
(4,744
|
)
|
Proceeds from revolving line of credit
|
|
|
67,529
|
|
|
|
54,454
|
|
|
|
22,920
|
|
Payments on revolving line of credit
|
|
|
(41,052
|
)
|
|
|
(45,255
|
)
|
|
|
(27,907
|
)
|
Proceeds from long-term debt
|
|
|
|
|
|
|
4,200
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(27,625
|
)
|
|
|
(4,249
|
)
|
|
|
(3,980
|
)
|
Exercise of stock options
|
|
|
350
|
|
|
|
2,572
|
|
|
|
508
|
|
Payment of loan fees
|
|
|
(63
|
)
|
|
|
(836
|
)
|
|
|
(224
|
)
|
Excess tax benefit from stock-based compensation
|
|
|
86
|
|
|
|
1,001
|
|
|
|
102
|
|
Increase (decrease) in cash overdraft
|
|
|
(4,167
|
)
|
|
|
4,507
|
|
|
|
184
|
|
Payment of dividends
|
|
|
(2,449
|
)
|
|
|
(2,163
|
)
|
|
|
(2,132
|
)
|
Net proceeds from issuance of common stock
|
|
|
46,844
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(52
|
)
|
|
|
(59
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used by) financing activities
|
|
|
32,237
|
|
|
|
11,249
|
|
|
|
(1,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(396
|
)
|
|
|
61
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
534
|
|
|
|
(939
|
)
|
|
|
(4,428
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
|
|
|
|
939
|
|
|
|
5,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
534
|
|
|
$
|
|
|
|
$
|
939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
4,601
|
|
|
$
|
5,645
|
|
|
$
|
5,240
|
|
Income taxes, net
|
|
$
|
11,413
|
|
|
$
|
5,257
|
|
|
$
|
1,342
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations incurred for certain equipment leases
|
|
$
|
1,150
|
|
|
$
|
72
|
|
|
$
|
102
|
|
The accompanying notes are an integral part of these statements.
37
Consolidated
Statements of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
11,099
|
|
|
$
|
10,909
|
|
|
$
|
10,849
|
|
Exercise of stock options
|
|
|
28
|
|
|
|
190
|
|
|
|
51
|
|
Issuance of restricted stock, net
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Issuance of common stock
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
13,127
|
|
|
|
11,099
|
|
|
|
10,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
43,902
|
|
|
|
39,427
|
|
|
|
37,728
|
|
Exercise of stock options
|
|
|
322
|
|
|
|
2,382
|
|
|
|
457
|
|
Tax benefit of stock option exercises
|
|
|
86
|
|
|
|
1,001
|
|
|
|
101
|
|
Stock based compensation
|
|
|
2,289
|
|
|
|
1,092
|
|
|
|
1,150
|
|
Issuance of restricted stock, net
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
Issuance of common stock
|
|
|
44,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
91,443
|
|
|
|
43,902
|
|
|
|
39,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
89,486
|
|
|
|
78,131
|
|
|
|
76,040
|
|
Cumulative effect of a change in accounting principle
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,368
|
|
|
|
78,131
|
|
|
|
76,040
|
|
Net income (loss)
|
|
|
(12,700
|
)
|
|
|
13,517
|
|
|
|
4,228
|
|
Dividends declared
|
|
|
(2,576
|
)
|
|
|
(2,162
|
)
|
|
|
(2,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
74,092
|
|
|
|
89,486
|
|
|
|
78,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock
|
|
|
(32,757
|
)
|
|
|
(32,757
|
)
|
|
|
(32,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
13,946
|
|
|
|
11,742
|
|
|
|
8,166
|
|
Change in fair value of derivatives, net of tax
|
|
|
(3,261
|
)
|
|
|
(2,641
|
)
|
|
|
492
|
|
Loss (gain) from derivative transactions reclassified into
earnings from other comprehensive income, net of tax
|
|
|
2,568
|
|
|
|
1,550
|
|
|
|
(294
|
)
|
Foreign currency translation adjustments
|
|
|
2,041
|
|
|
|
4,690
|
|
|
|
536
|
|
(Increase) decrease in postretirement liabilities, net of tax
|
|
|
(837
|
)
|
|
|
1,409
|
|
|
|
2,842
|
|
Adoption of SFAS No. 158 recognition provision, net of
tax
|
|
|
|
|
|
|
(2,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
14,457
|
|
|
|
13,946
|
|
|
|
11,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
160,362
|
|
|
$
|
125,676
|
|
|
$
|
107,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
38
Notes to
Consolidated Financial Statements
|
|
Note 1
|
Summary
of Significant Accounting Policies
|
Business
Penford Corporation (Penford or the
Company) is a developer, manufacturer and marketer
of specialty natural-based ingredient systems for industrial and
food ingredient applications. The Company operates manufacturing
facilities in the United States, Australia and New Zealand.
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 extensive research and development capabilities,
which are used in understanding 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 three segments. The first two,
Industrial Ingredients and Food Ingredients, are broad
categories of end-market users, primarily served by the
U.S. operations. The third segment is the geographically
separate operations in Australia and New Zealand. The Australian
and New Zealand operations are engaged primarily in the food
ingredients business.
Basis
of Presentation
The accompanying consolidated financial statements include the
accounts of Penford and its wholly owned subsidiaries. All
material intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to prior
years financial statements in order to conform to the
current year presentation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at
the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Estimates
are used in accounting for, among other things, the allowance
for doubtful accounts, accruals, the determination of
assumptions for pension and postretirement employee benefit
costs, and the useful lives of property and equipment. Actual
results may differ from previously estimated amounts.
Cash
and Cash Equivalents
Cash and cash equivalents consist of cash and temporary
investments with maturities of less than three months when
purchased. Amounts are reported in the balance sheets at cost,
which approximates fair value.
Allowance
for Doubtful Accounts and Concentration of Credit
Risk
The allowance for doubtful accounts reflects the Companys
best estimate of probable losses in the accounts receivable
balances. Penford estimates the allowance for uncollectible
accounts based on historical experience, known troubled
accounts, industry trends, economic conditions, how recently
payments have been received, and ongoing credit evaluations of
its customers. Activity in the allowance for doubtful accounts
for fiscal 2008, 2007 and 2006 is as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Deductions
|
|
|
Balance
|
|
|
|
Year
|
|
|
Expenses
|
|
|
and Other
|
|
|
End of Year
|
|
|
Year ended August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
755
|
|
|
$
|
(77
|
)
|
|
$
|
20
|
|
|
$
|
658
|
|
2007
|
|
$
|
851
|
|
|
$
|
379
|
|
|
$
|
475
|
|
|
$
|
755
|
|
2006
|
|
$
|
401
|
|
|
$
|
359
|
|
|
$
|
(91
|
)
|
|
$
|
851
|
|
39
Notes to
Consolidated Financial
Statements (Continued)
In fiscal 2006, the increase in the allowance for doubtful
accounts reflects an additional reserve of approximately
$0.5 million for a bankrupt customer in the industrial
ingredients segment.
In fiscal 2007, approximately $0.5 million was written off
from allowance for doubtful accounts related to an uncollectible
receivable of bankrupt customer in the industrial ingredients
segment.
Approximately half of the Companys sales in fiscal 2008,
2007 and 2006 were made to customers who operate in the North
American paper industry. This industry has suffered an economic
downturn, which has resulted in the closure of a number of
smaller mills.
Financial
Instruments
The carrying value of financial instruments including cash and
cash equivalents, receivables, payables and accrued liabilities
approximates fair value because of their short maturities. The
Companys bank debt re-prices with changes in market
interest rates and, accordingly, the carrying amount of such
debt approximates fair value.
Inventories
Inventory is stated at the lower of cost or market. Inventory is
valued using the
first-in,
first-out (FIFO) method, which approximates actual
cost. Capitalized costs include materials, labor and
manufacturing overhead related to the purchase and production of
inventories.
Goodwill
and Other Intangible Assets
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets, goodwill is not amortized, but instead
is tested for impairment at least annually or more frequently if
there is an indication of impairment.
Patents are amortized using the straight-line method over their
estimated period of benefit. At August 31, 2008, the
weighted average remaining amortization period for patents is
six years. Penford has no intangible assets with indefinite
lives.
Property,
Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures
for maintenance and repairs are expensed as incurred. The
Company uses the straight-line method to compute depreciation
expense assuming average useful lives of three to forty years
for financial reporting purposes. Depreciation, which includes
depreciation of assets under capital leases, of
$16.5 million, $15.4 million and $15.5 million
was recorded in fiscal years 2008, 2007 and 2006, respectively.
For income tax purposes, the Company generally uses accelerated
depreciation methods.
Interest is capitalized on major construction projects while in
progress. In fiscal 2008 and 2007, the Company capitalized
$1.1 million and $0.4 million, respectively, in
interest costs related to the ethanol facility construction. No
interest was capitalized in fiscal 2006.
Income
Taxes
The provision for income taxes includes federal, state, and
foreign taxes currently payable and deferred income taxes
arising from temporary differences between financial and income
tax reporting methods. Deferred taxes are recorded using the
liability method in recognition of these temporary differences.
Deferred taxes are not recognized on temporary differences from
undistributed earnings of foreign subsidiaries or from foreign
exchange translation gains or losses on permanent advances to
foreign subsidiaries, as these amounts are deemed to be
permanently reinvested.
40
Notes to
Consolidated Financial
Statements (Continued)
Revenue
Recognition
Revenue from sales of products and shipping and handling revenue
are recognized at the time goods are shipped, and title
transfers to the customer. Costs associated with shipping and
handling are included in cost of sales.
Research
and Development
Research and development costs are expensed as incurred, except
for costs of patents, which are capitalized and amortized over
the lives of the patents. Research and development costs
expensed were $7.9 million, $6.8 million and
$6.2 million in fiscal 2008, 2007 and 2006, respectively.
Patent costs of $54,000, $48,000 and $134,000 were capitalized
in fiscal years 2008, 2007 and 2006, respectively.
Foreign
Currency
Assets and liabilities of subsidiaries whose functional currency
is deemed to be other than the U.S. dollar are translated
at year end rates of exchange. Resulting translation adjustments
are accumulated in the currency translation adjustments
component of other comprehensive income. Statement of Operations
amounts are translated at average exchange rates prevailing
during the year. For fiscal year 2008, the net foreign currency
transaction loss recognized in earnings was $0.2 million
and for fiscal years 2007 and 2006, the net foreign currency
transaction gain (loss) was not material.
Derivatives
Penford uses derivative instruments to manage the exposures
associated with commodity prices, interest rates and energy
costs. The derivative instruments are marked-to-market and any
resulting unrealized gains and losses, representing the fair
value of the derivative instruments, are recorded in other
current assets or accounts payable in the consolidated balance
sheets. The fair value of derivative instruments included in
other current assets at August 31, 2008 was
$0.9 million. At August 31, 2008 and 2007, the Company
had natural gas purchase commitments of 780,017 mmbtu (millions
of btu) and 1,628,821 mmbtu, respectively.
For derivative instruments designated as fair value hedges, the
gain or loss on the derivative instruments as well as the
offsetting loss or gain on the hedged firm commitments are
recognized in current earnings as a component of cost of goods
sold. At August 31, 2008, derivative instruments designated
as fair value hedges are not material. 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, 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 goods sold in the period when the finished goods produced
from the hedged item are sold or, for interest rate swaps, as a
component of interest expense in the period the forecasted
transaction is reported in earnings. If it is determined that
the derivative instruments used are no longer effective at
offsetting changes in the price of the hedged item, then the
changes in market value would be recognized in current earnings
as a component of cost of good sold or interest expense. During
the fourth quarter of fiscal 2008, the Company recognized a
pre-tax gain of $2.9 million representing the
ineffectiveness on cash flow hedge transactions related to the
purchase of corn and natural gas. Derivative positions held that
were forecasted to hedge commodity exposures during the time the
Cedar Rapids manufacturing facility was shut down were no longer
deemed to be effective. Ineffectiveness related to the
Companys hedging activities related to interest rate swaps
was not material in fiscal 2008 and there was no ineffectiveness
in fiscal 2007 or 2006. At August 31, 2008, the amount in
other comprehensive income related to derivative transactions
which the Company expects to recognize in earnings in fiscal
2009 is not material.
Significant
Customer and Export Sales
The Company has several relatively large customers in each
business segment. None of the Companys customers
constituted 10% of sales in fiscal year 2006. However, the
Companys largest customer, Domtar, Inc.,
41
Notes to
Consolidated Financial
Statements (Continued)
represented approximately 11% and 12% of the Companys
consolidated net sales for fiscal years 2008 and 2007,
respectively. Domtar, Inc. is a customer of the Companys
Industrial Ingredients North America business.
Export sales accounted for approximately 16%, 15% and 13% of
consolidated sales in fiscal 2008, 2007 and 2006, respectively.
Stock-Based
Compensation
Beginning September 1, 2005, the Company began to recognize
stock-based compensation in accordance with
SFAS No. 123R, Share-Based Payment. The
Company utilizes the Black-Scholes option-pricing model to
determine the fair value of stock options on the date of grant.
This model derives the fair value of stock options based on
certain assumptions related to expected stock price volatility,
expected option life, risk-free interest rate and dividend
yield. See Note 10 for further detail.
Recent
Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework and
gives guidance regarding the methods used for measuring fair
value, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and is required to be adopted by the
Company in the first quarter of fiscal 2009. In February 2008,
the FASB issued Staff Position
No. 157-2
(FSP 157-2)
which provided a one-year delayed application of SFAS 157
for nonfinancial assets and liabilities, except for items that
are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). For those
items within the scope of
FSP 157-2,
the effective date of SFAS 157 has been deferred to fiscal
years beginning after November 15, 2008 (fiscal 2010).
While the Company is continuing to evaluate the application of
SFAS 157, as amended, the Company does not believe the
adoption of SFAS 157 will have a material impact on its
consolidated financial statements.
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities including an amendment of FASB
No. 115 (SFAS 159). SFAS 159
allows companies the option to measure financial instruments and
certain other items at fair value that are not currently
required to be measured at fair value. SFAS 159 is
effective for fiscal years beginning after November 15,
2007 and is required to be adopted by the Company in the first
quarter of fiscal 2009. While the Company is continuing to
evaluate the application of SFAS 159, the Company does not
believe the adoption of SFAS 159 will have a material
impact on its consolidated financial statements.
In December 2007, the FASB issued Statement No. 141R
(revised 2007), Business Combinations
(SFAS 141R) and Statement No. 160,
Non-Controlling Interest in Consolidated Financial
Statements, an Amendment of ARB No. 51
(SFAS 160). These new standards establish
principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, liabilities assumed, any non-controlling interests,
and goodwill acquired in a business combination. This statement
also establishes disclosure requirements to enable financial
statement users to evaluate the nature and financial effects of
the business combination. The requirements of SFAS 141R and
SFAS No. 160 are effective for fiscal years beginning
after December 15, 2008 (fiscal 2010), and, except for the
presentation and disclosure requirements of SFAS 160, are
to be applied prospectively.
In March 2008, the FASB issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB No. 133
(SFAS 161). SFAS 161 requires additional
disclosures about the objectives for using derivative
instruments and hedging activities, method of accounting for
such instruments under SFAS 133 and its related
interpretations, the effect of derivative instruments and
related hedged items on financial position, results of
operations, and cash flows, and a tabular disclosure of the fair
values of derivative instruments and their gains and losses,
SFAS 161 is effective for fiscal years and interim periods
beginning after November 15, 2008 (fiscal 2010). The
Company is currently evaluating the disclosure requirements of
this standard.
In May 2008, the FASB issued Statement No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the
sources of accounting principles and the framework for selecting
42
Notes to
Consolidated Financial
Statements (Continued)
the principles used in the preparation of financial statements
that are presented in conformity with generally accepted
accounting principles in the United States. SFAS 162 will
become effective 60 days following the SECs approval
of the Public Company Accounting Oversight Board amendments to
AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.
The Company does not expect the adoption of SFAS 162 to
have a material effect on its consolidated financial statements.
|
|
Note 2
|
Cedar
Rapids Flood
|
On June 12, 2008, the Companys Cedar Rapids, Iowa
plant, operated by the Industrial Ingredients North
America business, was temporarily shut down due to record
flooding of the Cedar River and government-ordered mandatory
evacuation of the plant and surrounding areas. The Company
resumed production of certain Liquid Natural Additive products
in mid-July using its pilot plant facility, which was not
heavily damaged by the flood. By the end of August 2008, the
Company had begun manufacturing industrial starch in Cedar
Rapids. During September 2008, the Company also resumed the
commercial production and sale of ethanol. By the beginning of
October 2008, the Company had substantially completed the
restoration of the Cedar Rapids plant and the facilitys
current processing rate had reached pre-flood levels.
Potato starch operations were not affected by the flood in Cedar
Rapids. Food corn starches were supplied from other Company
locations. Dextrose manufacturing, which occurred in Cedar
Rapids, was suspended and production was restarted in September
2008.
During the fourth quarter of fiscal 2008, the Company recorded
costs of flood restoration of $27.6 million, net of
insurance recoveries, consisting of the following:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Repairs of buildings and equipment
|
|
$
|
17,082
|
|
Site remediation
|
|
|
5,389
|
|
Write off of inventory and fixed assets
|
|
|
4,016
|
|
Continuing costs during production shut down
|
|
|
9,771
|
|
Other
|
|
|
1,797
|
|
Insurance recoveries
|
|
|
(10,500
|
)
|
|
|
|
|
|
Total
|
|
$
|
27,555
|
|
|
|
|
|
|
Site remediation began as soon as the flood waters subsided. The
Company engaged outside contractors to pump water and clean and
sanitize the facilities and grounds of the manufacturing
facility prior to access by Company personnel. The buildings and
equipment in Cedar Rapids sustained damages due to the severe
flooding. As of the end of August 2008, repairs to the
industrial starch production and dextrose manufacturing
equipment and buildings were substantially completed.
The carrying value of fixed assets and related equipment spare
parts destroyed in the flooding were written off, totaling
$2.5 million. The write-off of inventory, totaling
$1.5 million, includes the cost of raw materials,
work-in-process
and finished goods inventories that were not able to be used or
sold due to flood damage, the establishment of reserves for
estimated recoverability losses, and the costs of disposal,
including freight, for removal of damaged inventory.
During the suspension of production in the fourth quarter of
fiscal 2008, the Company incurred costs for wages, salaries and
related payroll costs, depreciation, pension expense, insurance,
rental costs and other items which continued regardless of the
level of production. Employees normally engaged in the
production of industrial starch were utilized in the
clean-up
and
repairs of the facility and equipment, assessment and recovery
of inventories and other aspects of the site restoration. These
expenses totaled $9.8 million in the fourth quarter.
At August 31, 2008, repair and restarting of equipment
related to the production of specialty starches and ethanol had
not been completed. Also, the Company had not replaced
equipment, furniture, computers and other
43
Notes to
Consolidated Financial
Statements (Continued)
fixed assets that had been destroyed by the flood. The Company
estimates that direct costs of the flood will total
$45 million to $47 million, which include ongoing
expenses during the time the plant was shut down, but do not
include lost profits.
Due to the expected impact of the flood on the Companys
results of operations, the Company sought and obtained an
amendment to its credit facility agreement. Effective
July 9, 2008, the agreement was amended to temporarily
adjust the calculation of selected covenant formulas for the
costs of the flood damage and the associated property damage and
business interruption insurance recoveries. See Note 6 to
the Consolidated Financial Statements.
Insurance
recoveries
The Company maintains property damage and business interruption
insurance coverage applicable to the Cedar Rapids plant. The
Company intends to claim for all covered losses, including
$15 million in business interruption losses identified
through August 31, 2008. The actual amount ultimately
recovered from insurers may be materially more or less than the
Companys estimate of total losses, and, as a result, the
Company does not provide assurance as to the amount or timing of
the ultimate recoveries under its policies.
Of the total estimated recoveries discussed above, the Company
has received $10.5 million of insurance recoveries related
to its property damage insurance policies. The Company received
$8.0 million subsequent to August 31, 2008 which has
been recorded as a receivable at that date. These recoveries
have been recorded as an offset to the losses caused by the
flooding. Insurance proceeds are recognized in the financial
statements when realization of the recoveries is deemed probable.
Components of inventory are as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Raw materials
|
|
$
|
26,578
|
|
|
$
|
17,438
|
|
Work in progress
|
|
|
1,139
|
|
|
|
720
|
|
Finished goods
|
|
|
22,483
|
|
|
|
21,379
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
50,200
|
|
|
$
|
39,537
|
|
|
|
|
|
|
|
|
|
|
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. As of August 31, 2008, Penford had
purchased corn positions of 4.1 million bushels, of which
2.3 million bushels represented equivalent firm priced
starch sales contract volume, resulting in an open position of
1.8 million bushels. As of August 31, 2008 and 2007,
the fair value of the Companys net corn position was
approximately $1.8 million and $1.0 million,
respectively. 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. Hedges are designated as cash flow hedges at the
time the transaction is established and are recognized in
earnings in the time period for which the hedge was established.
Hedged transactions are within 12 months of the time the
hedge is established.
As discussed in Note 2, in June 2008, the flooding of the
Cedar Rapids manufacturing facility shut down production for
most of the quarter. The Company had derivative instruments
designated as cash flow hedges to reduce the price volatility of
corn and natural gas used in the production of starch. Due to
the June 12, 2008 flood event, derivative positions held as
of that date that were forecasted to hedge exposures during the
period the Cedar Rapids plant was shut down were no longer
deemed to be effective cash flow hedges. The $2.9 million
gain,
44
Notes to
Consolidated Financial
Statements (Continued)
representing ineffectiveness on these instruments, was
reclassified from other comprehensive income and recognized as a
component of non-operating income. See Note 13.
|
|
Note 4
|
Property
and equipment
|
Components of property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Land
|
|
$
|
20,993
|
|
|
$
|
17,694
|
|
Plant and equipment
|
|
|
385,632
|
|
|
|
338,496
|
|
Construction in progress
|
|
|
6,808
|
|
|
|
27,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
413,433
|
|
|
|
383,623
|
|
Accumulated depreciation
|
|
|
(243,501
|
)
|
|
|
(236,960
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
169,932
|
|
|
$
|
146,663
|
|
|
|
|
|
|
|
|
|
|
The above table includes approximately $1.2 million and
$0.2 million of equipment under capital leases for fiscal
years 2008 and 2007, respectively. Changes in Australian and New
Zealand currency exchange rates have increased net property,
plant and equipment in fiscal 2008 by approximately
$2.1 million.
For fiscal 2008, the Company had $26.9 million of capital
expenditures related to construction of the ethanol facility. As
of August 31, 2008, the Company had a total of
$46.9 million in capital expenditures related to the
ethanol facility which includes $1.5 million in related
capitalized interest costs.
|
|
Note 5
|
Goodwill
and other intangible assets
|
Goodwill represents the excess of acquisition costs over the
fair value of the net assets of Penford Australia, which was
acquired on September 29, 2000. The Company evaluates
annually, or more frequently if certain indicators are present,
the carrying value of its goodwill under provisions of
SFAS No. 142.
In accordance with this standard, Penford does not amortize
goodwill. The Company completed the annual update as of
June 1, 2008 and determined there was no impairment to the
recorded value of goodwill. In order to identify potential
impairments, Penford compared the fair value of each of its
reporting units with its carrying amount, including goodwill.
Penford then compared the implied fair value of its reporting
units goodwill with the carrying amount of that goodwill.
The implied fair value of the reporting units was determined
using the discounted cash flow method, the implied market
capitalization method and the guideline company method. This
testing was performed on Penfords Food
Ingredients North America and the Australia/New
Zealand operations reporting units, which are the same as two of
the Companys business segments. Since there was no
indication of impairment, Penford was not required to complete
the second step of the process which would measure the amount of
any impairment. On a prospective basis, the Company is required
to continue to test its goodwill for impairment on an annual
basis, or more frequently if certain indicators arise.
The Companys goodwill of $26.0 million and
$23.5 million at August 31, 2008 and 2007,
respectively, represents the excess of acquisition costs over
the fair value of the net assets of Penford Australia. The
increase in the carrying value of goodwill since August 31,
2007 reflects the impact of exchange rate fluctuations between
the Australian and U.S. dollar on the translation of this
asset.
45
Notes to
Consolidated Financial
Statements (Continued)
Penfords intangible assets consist of patents which are
being amortized over the weighted average remaining amortization
period of six years as of August 31, 2008. There is no
residual value associated with patents. The carrying amount and
accumulated amortization of intangible assets are as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2008
|
|
|
August 31, 2007
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
2,254
|
|
|
$
|
1,494
|
|
|
$
|
2,239
|
|
|
$
|
1,361
|
|
Amortization expense related to intangible assets was
$0.1 million in each of fiscal years 2008, 2007 and 2006.
The estimated aggregate annual amortization expense for patents
is approximately $0.1 million for each of the next five
fiscal years, 2009 through 2013.
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Secured credit agreements revolving loans, 6.43%
weighted average interest rate at August 31, 2008
|
|
$
|
13,086
|
|
|
$
|
15,800
|
|
Secured credit agreements term loans, 5.74% weighted
average interest rate at August 31, 2008
|
|
|
9,375
|
|
|
|
37,000
|
|
Secured credit agreements capital expansion loans,
5.68% weighted average interest rate at August 31, 2008
|
|
|
44,200
|
|
|
|
14,500
|
|
Grain inventory financing facility revolving loan,
10.94% weighted average interest rate at August 31, 2008
|
|
|
676
|
|
|
|
7,218
|
|
Capital lease obligations
|
|
|
1,228
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,565
|
|
|
|
74,677
|
|
Less: current portion and short-term borrowings
|
|
|
8,705
|
|
|
|
11,274
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations
|
|
$
|
59,860
|
|
|
$
|
63,403
|
|
|
|
|
|
|
|
|
|
|
On October 5, 2006, Penford entered into a
$145 million Second Amended and Restated Credit Agreement
(the 2007 Agreement) among the Company; Harris N.A.;
LaSalle Bank National Association (now Bank of America);
Cooperative Centrale Raiffeisen-Boorleenbank B.A.,
Rabobank Nederland (New York Branch); U.S. Bank
National Association; and the Australia and New Zealand Banking
Group Limited.
The 2007 Agreement refinanced the Companys previous
$105 million secured term and revolving credit facilities.
Under the 2007 Agreement, the Company may borrow
$40 million in term loans and $60 million in revolving
lines of credit. The lenders revolving credit loan
commitment may be increased under certain conditions. In
addition, the 2007 Agreement provided the Company with
$45 million in new capital expansion funds which was used
by the Company to finance the construction of its ethanol
production facility in Cedar Rapids, Iowa. The capital expansion
funds were borrowed as term loans from time to time prior to
October 5, 2008.
The final maturity date for the term and revolving loans under
the 2007 Agreement is December 31, 2011. Beginning on
December 31, 2006, the Company must repay the term loans in
twenty equal quarterly installments of $1 million, with the
remaining amount due at final maturity. The final maturity date
for the capital expansion loans is December 31, 2012.
Beginning on December 31, 2008, the Company must repay the
capital expansion loans in equal quarterly installments of
$1.25 million through September 30, 2009 and
$2.5 million thereafter, with the remaining amount due at
final maturity. Interest rates under the 2007 Agreement are
based on either the London Interbank Offering Rates
(LIBOR) in Australia or the United States, or the
prime rate, depending on the selection of available borrowing
options under the 2007 Agreement.
46
Notes to
Consolidated Financial
Statements (Continued)
The 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 2007
Agreement), shall not exceed a maximum which varies between 3.00
and 4.50 through the term of the 2007 Agreement. In addition,
the Company must maintain a minimum tangible net worth of
$65 million, and a Fixed Charge Coverage Ratio, as defined
in the 2007 Agreement, of not less than 1.25 in fiscal 2008 and
1.50 in fiscal 2009 and thereafter. Annual capital expenditures,
exclusive of capital expenditures incurred in connection with
the Companys ethanol production facility, are limited to
$20 million, unless the Company can maintain a Total Funded
Debt Ratio below 2.00 for each fiscal quarter during any fiscal
year, which would result in the annual capital expenditure limit
to increase to $25 million for such fiscal year. The
Companys obligations under the 2007 Agreement are secured
by substantially all of the Companys U.S. assets.
Pursuant to the 2007 Agreement, the Company may not declare or
pay dividends on, or make any other distributions in respect of,
its common stock in excess of $8 million in any fiscal year
or if there exists a Default or Event of Default as defined in
the 2007 Agreement.
Due to the expected impact of the flood described in Note 2
on the Companys results of operations during its fourth
quarter of fiscal 2008, the Company sought and obtained an
amendment to the 2007 Agreement with the banks identified above.
Effective July 9, 2008, the 2007 Agreement was amended to
temporarily adjust the calculation of selected covenant formulas
for the costs of the flood damage and the associated property
damage and business interruption insurance recoveries. The Fixed
Charge Coverage Ratio was reduced to 1.25 through
November 30, 2008.
At August 31, 2008, the Company had $13.1 million and
$9.4 million outstanding, respectively, under the revolving
credit and term loan portions of its credit facility. In
addition, the Company has borrowed $44.2 million of the
$45 million in capital expansion loans available under the
credit facility for the construction of the ethanol facility.
Pursuant to the terms of the 2007 Agreement, Penfords
additional borrowing ability as of August 31, 2008 was
$45.7 million under the revolving credit facility. The
Company was in compliance with the covenants in the 2007
Agreement, as amended, as of August 31, 2008. Subject to
the Companys timely receipt of expected insurance proceeds
for the recovery of its Cedar Rapids flood losses and the
performance of its businesses, the Company expects to be in
compliance during fiscal 2009.
The Companys short-term borrowings consist of an
Australian revolving grain facility. In fiscal 2006, the
Companys Australian subsidiary entered into a
variable-rate revolving grain inventory financing facility with
an Australian bank for a maximum of U.S. $34.5 million
at the exchange rate at August 31, 2008. This facility,
which was renewed as of March 2008, expires on March 15,
2009 and carries an effective interest rate equal to the
Australian one-month bank bill rate (BBSY) plus
approximately 2%. Payments on this facility are due as the grain
financed is withdrawn from storage. The amount outstanding under
this arrangement, which is classified as a current liability on
the balance sheet, was $0.7 million at August 31, 2008.
As of August 31, 2008, all of the Companys
outstanding debt, including amounts outstanding under the
Australian grain inventory financing facility, is subject to
variable interest rates. Under interest rate swap agreements
with several banks, the Company has fixed its interest rates on
U.S. dollar denominated term debt of $28.0 million at
4.18% and $5.0 million at 5.08%, plus the applicable margin
under the 2007 Agreement.
As of August 31, 2008, Penford borrowed $9.4 million
in term loans, $44.2 million under the capital expansion
facility and $13.1 million under its revolving line of
credit, of which U.S. $2.6 million was denominated in
Australian dollars. The maturities of debt existing at
August 31, 2008 for the fiscal years beginning with fiscal
2009 are as follows (dollars in thousands):
|
|
|
|
|
2009
|
|
|
8,705
|
|
2010
|
|
|
12,995
|
|
2011
|
|
|
11,611
|
|
2012
|
|
|
23,318
|
|
2013
|
|
|
11,936
|
|
|
|
|
|
|
|
|
$
|
68,565
|
|
|
|
|
|
|
47
Notes to
Consolidated Financial
Statements (Continued)
Included in the Companys long-term debt at August 31,
2008 is $1,228,000 of capital lease obligations, of which
$279,000 is considered current portion of long-term debt. See
Note 9.
|
|
Note 7
|
Stockholders
Equity
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
11,098,739
|
|
|
|
10,909,153
|
|
|
|
10,849,487
|
|
Exercise of stock options
|
|
|
28,630
|
|
|
|
189,586
|
|
|
|
50,972
|
|
Issuance of restricted stock, net
|
|
|
|
|
|
|
|
|
|
|
8,694
|
|
Issuance of stock
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
13,127,369
|
|
|
|
11,098,739
|
|
|
|
10,909,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2007, the Company completed a public offering of
common stock resulting in the issuance of 2,000,000 common
shares at a price to the public of $25.00 per share. The Company
received approximately $47.2 million of net proceeds (net
of $2.8 million of expenses related to the offering) from
the sale of the shares. This transaction increased the recorded
amounts of common stock by $2.0 million and increased
additional paid-in capital by $45.2 million in the second
quarter of fiscal 2008. The Company incurred approximately
$0.4 million in professional fees related to the common
stock issuance.
Change
in Accounting Principle
The Company adopted the provisions of Emerging Issues Task Force
(EITF) Issue
No. 06-2,
Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43, effective
September 1, 2007. EITF Issue
No. 06-2
requires companies to accrue the costs of compensated absences
under a sabbatical or similar benefit arrangement over the
requisite service period. Upon adoption, the Company recognized
a $0.1 million charge to beginning retained earnings as a
cumulative effect of a change in accounting principle.
Common
Stock Purchase Rights
On June 16, 1988, Penford distributed a dividend of one
right (Right) for each outstanding share of Penford
common stock. The Rights were exercisable if a purchaser
acquired 15% of Penfords common stock or made an offer to
acquire common stock. The Rights expired on June 16, 2008.
|
|
Note 8
|
Accumulated
Other Comprehensive Income (Loss)
|
The components of accumulated other comprehensive income (loss)
is as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Net unrealized loss on derivatives, net of tax
|
|
$
|
(1,304
|
)
|
|
$
|
(611
|
)
|
Foreign currency translation adjustments
|
|
|
20,124
|
|
|
|
18,083
|
|
Minimum pension liability and SFAS No. 158, net of tax
|
|
|
(4,363
|
)
|
|
|
(3,526
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,457
|
|
|
$
|
13,946
|
|
|
|
|
|
|
|
|
|
|
The earnings associated with the Companys investment in
Penford Australia are considered to be permanently invested and
no provision for U.S. income taxes on the related
translation adjustment has been provided.
48
Notes to
Consolidated Financial
Statements (Continued)
Certain of the Companys property, plant and equipment is
leased under operating leases generally ranging from one to
twenty years with renewal options. In fiscal 2008, rental
expense under operating leases was $6.9 million, net of
sublease rental income of approximately $0.4 million.
Rental expense under operating leases for fiscal years 2007 and
2006 was $6.6 million and $6.3 million, respectively.
Future minimum lease payments for fiscal years beginning with
fiscal year 2009 for noncancelable operating and capital leases
having initial lease terms of more than one year are as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
Capital
|
|
|
Minimum Lease
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
Payments
|
|
|
Sublease
|
|
|
Net
|
|
|
2009
|
|
$
|
328
|
|
|
$
|
6,221
|
|
|
$
|
(93
|
)
|
|
$
|
6,128
|
|
2010
|
|
|
292
|
|
|
|
4,841
|
|
|
|
|
|
|
|
4,841
|
|
2011
|
|
|
267
|
|
|
|
3,080
|
|
|
|
|
|
|
|
3,080
|
|
2012
|
|
|
251
|
|
|
|
2,285
|
|
|
|
|
|
|
|
2,285
|
|
2013
|
|
|
244
|
|
|
|
1,709
|
|
|
|
|
|
|
|
1,709
|
|
Thereafter
|
|
|
|
|
|
|
2,726
|
|
|
|
|
|
|
|
2,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
1,382
|
|
|
$
|
20,862
|
|
|
$
|
(93
|
)
|
|
$
|
20,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts representing interest
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments
|
|
$
|
1,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10
|
Stock-based
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. Prior to the 2006 Incentive Plan, the Company
awarded stock options to employees and officers through the
Penford Corporation 1994 Stock Option Plan (the 1994
Plan) and to members of its Board under the Stock Option
Plan for Non-Employee Directors (the Directors
Plan). The 1994 Plan was suspended when the 2006 Plan
became effective in the second quarter of fiscal 2006. The
Directors Plan expired in August 2005. As of
August 31, 2008, the aggregate number of shares of the
Companys common stock that are available to be issued as
awards under the 2006 Incentive Plan is 206,276. In addition,
any shares previously granted under the 1994 Plan which are
subsequently forfeited or not exercised will be available for
future grants under the 2006 Incentive Plan.
Non-qualified stock options granted under the 1994 Plan
generally vest ratably over four years and expire ten years from
the date of grant. Non-qualified stock options granted under the
2006 Incentive Plan generally vest ratably over four years and
expire seven years from the date of grant.
General
Option Information
A summary of the stock option activity for the three years ended
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Option Price
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Range
|
|
|
Price
|
|
|
(in years)
|
|
|
Value
|
|
|
Outstanding Balance, August 31, 2007
|
|
|
1,033,977
|
|
|
$
|
7.59 19.77
|
|
|
$
|
14.25
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
372,000
|
|
|
|
17.07 21.73
|
|
|
|
17.48
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(28,630
|
)
|
|
|
9.83 16.34
|
|
|
|
12.30
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,000
|
)
|
|
|
16.34 16.34
|
|
|
|
16.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance, August 31, 2008
|
|
|
1,376,347
|
|
|
|
7.59 21.73
|
|
|
|
15.17
|
|
|
|
5.28
|
|
|
$
|
2,417,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at August 31, 2008
|
|
|
791,347
|
|
|
$
|
7.59 17.69
|
|
|
$
|
13.96
|
|
|
|
4.39
|
|
|
$
|
2,181,256
|
|
49
Notes to
Consolidated Financial
Statements (Continued)
The aggregate intrinsic value disclosed in the table above
represents the total pretax intrinsic value, based on the
Companys closing stock price of $16.61 per share as of
August 31, 2008 that would have been received by the option
holders had all option holders exercised on that date. The
intrinsic value of options exercised during fiscal years 2008,
2007 and 2006 was $291,800, $2,761,400 and $274,700,
respectively.
Adoption
of SFAS No. 123R
On September 1, 2005, the Company adopted
SFAS No. 123R which requires the measurement and
recognition of compensation cost for all share-based payment
awards made to employees and directors based on estimated fair
values.
The Company elected to use the modified prospective transition
method for adopting SFAS No. 123R which requires the
recognition of stock-based compensation cost on a prospective
basis. Under this method, the provisions of
SFAS No. 123R are applied to all awards granted after
the adoption date and to awards not yet vested with unrecognized
expense at the adoption date based on the estimated fair value
at grant date as determined under the original provisions of
SFAS No. 123.
Valuation
and Expense Under SFAS No. 123R
The Company utilizes the Black-Scholes option-pricing model to
determine the fair value of stock options on the date of grant.
This model derives the fair value of stock options based on
certain assumptions related to expected stock price volatility,
expected option life, risk-free interest rate and dividend
yield. The Companys expected volatility is based on the
historical volatility of the Companys stock price over the
most recent period commensurate with the expected term of the
stock option award. The estimated expected option life is based
primarily on historical employee exercise patterns and considers
whether and the extent to which the options are in-the-money.
The risk-free interest rate assumption is based upon the
U.S. Treasury yield curve appropriate for the term of the
Companys stock options awards and the selected dividend
yield assumption was determined in view of the Companys
historical and estimated dividend payout. The Company has no
reason to believe that the expected volatility of its stock
price or its option exercise patterns would differ significantly
from historical volatility or option exercises.
Under the 2006 Incentive Plan, the Company estimated the fair
value of stock options using the following assumptions and
resulting in the following weighted-average grant date fair
values:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Expected volatility
|
|
41%
|
|
45%
|
|
51%
|
Expected life (years)
|
|
5.5
|
|
5.5
|
|
5.5
|
Interest rate (percent)
|
|
2.8-3.7
|
|
4.5-4.9
|
|
4.9-5.1
|
Dividend yield
|
|
1.0%
|
|
1.5%
|
|
1.6%
|
Weighted-average fair values
|
|
$6.65
|
|
$6.88
|
|
$7.18
|
Under the 1994 Plan, the Company estimated the fair value of
stock options using the following assumptions and resulting in
the following weighted-average grant date fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Expected volatility
|
|
|
|
|
|
|
|
|
|
52%
|
Expected life (years)
|
|
|
|
|
|
|
|
|
|
5.0
|
Interest rate (percent)
|
|
|
|
|
|
|
|
|
|
4.4-4.5
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
1.7%
|
Weighted-average fair values
|
|
|
|
|
|
|
|
|
|
$6.01
|
As of August 31, 2008, the Company had $2.8 million of
unrecognized compensation costs related to non-vested stock
option awards that are expected to be recognized over a weighted
average period of 1.7 years.
50
Notes to
Consolidated Financial
Statements (Continued)
Restricted
Stock Awards
The grant date fair value 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 twelve months ended August 31,
2008 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at August 31, 2007
|
|
|
5,796
|
|
|
$
|
14.50
|
|
Granted
|
|
|
106,467
|
|
|
|
34.69
|
|
Vested
|
|
|
(2,898
|
)
|
|
|
14.50
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at August 31, 2008
|
|
|
109,365
|
|
|
$
|
34.15
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2008, each non-employee director received an
award of 781 shares of restricted stock under the 2006
Incentive Plan at the last reported sale price of the stock on
the preceding trading day, which will vest one year from grant
date of the award. The Company recognizes compensation cost for
restricted stock ratably over the vesting period.
As of August 31, 2008, the Company had $2.1 million of
unrecognized compensation costs related to non-vested restricted
stock awards that is expected to be recognized over a weighted
average period of 1.6 years.
Non-employee directors received restricted stock under the 1993
Non-Employee Director Restricted Stock Plan, which provided that
beginning September 1, 1993 and every three years
thereafter, each non-employee director shall receive $18,000
worth of common stock of the Company, based on the last reported
sale price of the stock on the preceding trading day. One-third
of the shares vest on each anniversary of the date of the award.
The Company recognized compensation cost for restricted stock
ratably over the vesting period. On September 1, 2005,
8,694 shares of restricted common stock of the Company were
granted to the non-employee directors. As of October 30,
2007, this plan has been terminated and no additional restricted
stock will be granted under this plan.
Compensation
Expense
The Company recognizes stock-based compensation expense
utilizing the accelerated multiple option approach over the
requisite service period, which equals the vesting period. The
following table summarizes the total stock-based compensation
cost under SFAS No. 123R for fiscal years 2008, 2007
and 2006 and the effect on the Companys consolidated
statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cost of sales
|
|
$
|
179
|
|
|
$
|
104
|
|
|
$
|
70
|
|
Operating expenses
|
|
|
2,083
|
|
|
|
968
|
|
|
|
1,042
|
|
Research and development expenses
|
|
|
27
|
|
|
|
20
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
2,289
|
|
|
$
|
1,092
|
|
|
$
|
1,150
|
|
Tax benefit
|
|
|
870
|
|
|
|
415
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense, net of tax
|
|
$
|
1,419
|
|
|
$
|
677
|
|
|
$
|
713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 11
|
Pensions
and Other Postretirement Benefits
|
Penford maintains two noncontributory defined benefit pension
plans that cover substantially all North American employees and
retirees.
The Company also maintains a postretirement health care benefit
plan covering its North American bargaining unit hourly retirees.
Adoption
of SFAS No. 158
In September 2006, the FASB issued Statement No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132R
(SFAS No. 158). SFAS No. 158
requires companies to recognize the funded status of defined
benefit pension and other postretirement plans as an asset or
liability in the statement of financial position and to
recognize changes in that funded status in the year in which the
changes occur through comprehensive income in shareholders
equity. In addition, a company is required to measure plan
assets and benefit obligations as of the date of its fiscal
year-end statement of financial position. The Company currently
measures its plan assets and benefit obligations as of the end
of its fiscal year. The incremental effects of adopting
SFAS No. 158 on the Companys consolidated
balance sheet as of August 31, 2007 are presented in the
following table. The adoption of SFAS No. 158 had no
effect on the Companys consolidated results of operations
for the fiscal year ended August 31, 2007, or for any prior
period presented, and it will not affect the Companys
consolidated results of operation in future periods. Prior to
the adoption of SFAS No. 158 on August 31, 2007,
the Company recognized an additional minimum pension liability
pursuant to the provisions of SFAS Nos. 87 and 106, which
is reflected in the Balance Before SFAS No. 158
Adoption column in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2007
|
|
|
|
Balance Before
|
|
|
SFAS No. 158
|
|
|
Balance After
|
|
|
|
SFAS No. 158
|
|
|
Adoption
|
|
|
SFAS No. 158
|
|
|
|
Adoption
|
|
|
Adjustments
|
|
|
Adoption
|
|
|
|
(Dollars in thousands)
|
|
|
Intangible asset
|
|
$
|
2,522
|
|
|
$
|
(2,522
|
)
|
|
$
|
|
|
Current accrued benefit liability
|
|
|
1,776
|
|
|
|
(1,180
|
)
|
|
|
596
|
|
Non-current accrued benefit liability pensions
|
|
|
1,316
|
|
|
|
4,298
|
|
|
|
5,614
|
|
Other postretirement benefits
|
|
|
13,932
|
|
|
|
(1,118
|
)
|
|
|
12,814
|
|
Accumulated other comprehensive loss, net of tax
|
|
|
722
|
|
|
|
2,804
|
|
|
|
3,526
|
|
Deferred income tax liability
|
|
|
7,095
|
|
|
|
1,719
|
|
|
|
8,814
|
|
52
Notes to
Consolidated Financial
Statements (Continued)
Obligations
and Funded Status
The following represents information summarizing the
Companys pension and other postretirement benefit plans. A
measurement date of August 31, 2008 was used for all plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at September 1
|
|
$
|
39,241
|
|
|
$
|
36,735
|
|
|
$
|
13,410
|
|
|
$
|
13,621
|
|
Service cost
|
|
|
1,485
|
|
|
|
1,467
|
|
|
|
310
|
|
|
|
309
|
|
Interest cost
|
|
|
2,491
|
|
|
|
2,207
|
|
|
|
854
|
|
|
|
818
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
159
|
|
|
|
151
|
|
Amendments
|
|
|
|
|
|
|
873
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss
|
|
|
188
|
|
|
|
(387
|
)
|
|
|
506
|
|
|
|
(1,218
|
)
|
Change in assumptions
|
|
|
(3,273
|
)
|
|
|
175
|
|
|
|
(1,062
|
)
|
|
|
529
|
|
Benefits paid
|
|
|
(1,843
|
)
|
|
|
(1,829
|
)
|
|
|
(645
|
)
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at August 31
|
|
$
|
38,289
|
|
|
$
|
39,241
|
|
|
$
|
13,532
|
|
|
$
|
13,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at September 1
|
|
$
|
33,627
|
|
|
$
|
30,521
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
(2,491
|
)
|
|
|
3,945
|
|
|
|
|
|
|
|
|
|
Company contributions
|
|
|
1,542
|
|
|
|
990
|
|
|
|
486
|
|
|
|
649
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
159
|
|
|
|
151
|
|
Benefits paid
|
|
|
(1,843
|
)
|
|
|
(1,829
|
)
|
|
|
(645
|
)
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of the plan assets at August 31
|
|
$
|
30,835
|
|
|
$
|
33,627
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability Plan assets less than projected
benefit obligation
|
|
$
|
(7,454
|
)
|
|
$
|
(5,614
|
)
|
|
$
|
(13,532
|
)
|
|
$
|
(13,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accrued benefit liability
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(670
|
)
|
|
$
|
(596
|
)
|
Non-current accrued benefit liability
|
|
|
(7,454
|
)
|
|
|
(5,614
|
)
|
|
|
(12,862
|
)
|
|
|
(12,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Amount Recognized
|
|
$
|
(7,454
|
)
|
|
$
|
(5,614
|
)
|
|
$
|
(13,532
|
)
|
|
$
|
(13,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss consists of the following
amounts that have not yet been recognized as components of net
benefit cost (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2008
|
|
|
August 31, 2007
|
|
|
|
Pension
|
|
|
Other
|
|
|
Pension
|
|
|
Other
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Unrecognized prior service cost (credit)
|
|
$
|
2,270
|
|
|
$
|
(915
|
)
|
|
$
|
2,522
|
|
|
$
|
(1,067
|
)
|
Unrecognized net actuarial loss (gain)
|
|
|
5,694
|
|
|
|
(11
|
)
|
|
|
3,687
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,964
|
|
|
$
|
(926
|
)
|
|
$
|
6,209
|
|
|
$
|
(522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
Notes to
Consolidated Financial
Statements (Continued)
Selected information related to the Companys defined
benefit pension plans that have benefit obligations in excess of
fair value of plan assets is presented below (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Projected benefit obligation
|
|
$
|
38,289
|
|
|
$
|
39,241
|
|
Accumulated benefit obligation
|
|
$
|
35,509
|
|
|
$
|
36,719
|
|
Fair value of plan assets
|
|
$
|
30,835
|
|
|
$
|
33,627
|
|
Effective August 1, 2004, the Companys postretirement
health care benefit plan covering bargaining unit hourly
employees was closed to new entrants and to any current employee
who did not meet minimum requirements as to age plus years of
service.
The defined benefit pension plans for salary and hourly
employees were closed to new participants effective
January 1, 2005 and August 1, 2004, respectively.
Net
Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,485
|
|
|
$
|
1,467
|
|
|
$
|
1,673
|
|
|
$
|
310
|
|
|
$
|
309
|
|
|
$
|
391
|
|
Interest cost
|
|
|
2,491
|
|
|
|
2,207
|
|
|
|
2,102
|
|
|
|
854
|
|
|
|
818
|
|
|
|
785
|
|
Expected return on plan assets
|
|
|
(2,652
|
)
|
|
|
(2,379
|
)
|
|
|
(2,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
253
|
|
|
|
191
|
|
|
|
187
|
|
|
|
(152
|
)
|
|
|
(152
|
)
|
|
|
(152
|
)
|
Amortization of actuarial loss
|
|
|
50
|
|
|
|
190
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit cost
|
|
$
|
1,627
|
|
|
$
|
1,676
|
|
|
$
|
2,414
|
|
|
$
|
1,012
|
|
|
$
|
975
|
|
|
$
|
1,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions
The Company assesses its benefit plan assumptions on a regular
basis. Assumptions used in determining plan information are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-average assumptions used to calculate net periodic
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.51
|
%
|
|
|
6.15
|
%
|
|
|
5.50
|
%
|
|
|
6.51
|
%
|
|
|
6.15
|
%
|
|
|
5.50
|
%
|
Expected return on plan assets
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to calculate benefit
obligations at August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.92
|
%
|
|
|
6.51
|
%
|
|
|
6.15
|
%
|
|
|
6.92
|
%
|
|
|
6.51
|
%
|
|
|
6.15
|
%
|
Expected return on plan assets
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected long-term return on assets assumption for the
pension plans represents the average rate of return to be earned
on plan assets over the period the benefits included in the
benefit obligation are to be paid. In developing the expected
rate of return, the Company considers long-term historical
market rates of return as well as
54
Notes to
Consolidated Financial
Statements (Continued)
actual returns on the Companys plan assets, and adjusts
this information to reflect expected capital market trends.
Penford also considers forward looking return expectations by
asset class, the contribution of active management and
management fees paid by the plans. The plan assets are held in
qualified trusts and anticipated rates of return are not reduced
for income taxes. The expected long-term return on assets
assumption used to calculate net periodic pension expense was
8.0% for fiscal 2008. A decrease (increase) of 50 basis
points in the expected return on assets assumptions would
increase (decrease) pension expense by approximately
$0.2 million based on the assets of the plans at
August 31, 2008. The expected return on plan assets to be
used in calculating fiscal 2009 pension expense is 8%.
The discount rate used by the Company in determining pension
expense and pension obligations reflects the yield of high
quality (AA or better rating by a recognized rating agency)
corporate bonds whose cash flows are expected to match the
timing and amounts of projected future benefit payments. The
discount rates to determine net periodic expense used in 2006
(5.50%), 2007 (6.15%) and 2008 (6.51%) reflect the change in
bond yields over the last several years. During fiscal 2008,
bond yields rose and Penford has increased the discount rate for
calculating its benefit obligations at August 31, 2008, as
well as net periodic expense for fiscal 2009, to 6.92%. Lowering
the discount rate by 25 basis points would increase pension
expense by approximately $0.2 million and other
postretirement benefit expense by $0.01 million.
Unrecognized net loss amounts reflect the difference between
expected and actual returns on pension plan assets as well as
the effects of changes in actuarial assumptions. Unrecognized
net losses in excess of certain thresholds are amortized into
net periodic pension and postretirement benefit expense over the
average remaining service life of active employees. Amortization
of unrecognized net loss amounts is expected to increase net
pension expense by approximately $0.2 million in fiscal
2009. Amortization of unrecognized net losses is not expected to
impact the net postretirement health care expense in fiscal 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Assumed health care cost trend rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current health care trend assumption
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
|
|
10.00
|
%
|
Ultimate health care trend rate
|
|
|
4.75
|
%
|
|
|
4.75
|
%
|
|
|
4.75
|
%
|
Year ultimate health care trend is reached
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2015
|
|
The assumed health care cost trend rate could have a significant
effect on the amounts reported. A one-percentage-point change in
the assumed health care cost trend rate would have the following
effects:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-
|
|
|
1-Percentage-
|
|
|
|
Point
|
|
|
Point
|
|
|
|
Increase
|
|
|
Decrease
|
|
|
|
(Dollars in thousands)
|
|
|
Effect on total of service and interest cost components in
fiscal 2008
|
|
$
|
175
|
|
|
$
|
(143
|
)
|
Effect on postretirement accumulated benefit obligation as of
August 31, 2008
|
|
$
|
1,814
|
|
|
$
|
(1,509
|
)
|
Plan
Assets
The weighted average asset allocations of the investment
portfolio for the pension plans at August 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
August 31,
|
|
|
|
Allocation
|
|
|
2008
|
|
|
2007
|
|
|
U.S. equities
|
|
|
55
|
%
|
|
|
55
|
%
|
|
|
55
|
%
|
International equities
|
|
|
15
|
%
|
|
|
14
|
%
|
|
|
15
|
%
|
Fixed income investments
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Real estate
|
|
|
5
|
%
|
|
|
6
|
%
|
|
|
5
|
%
|
55
Notes to
Consolidated Financial
Statements (Continued)
The assets of the pension plans are invested in units of common
trust funds actively managed by Russell Trust Company, a
professional fund investment manager. The investment strategy
for the defined benefit pension assets is to maintain a
diversified asset allocation in order to minimize the risk of
large losses and maximize the long-term risk-adjusted rate of
return. No plan assets are invested in Penford shares. There are
no plan assets for the Companys postretirement health care
plans.
Contributions
and Benefit Payments
The Companys funding policy for the defined benefit
pension plans is to contribute amounts sufficient to meet the
statutory funding requirements of the Employee Retirement Income
Security Act of 1974. The Company contributed $1.5 million,
$1.0 million and $3.3 million in fiscal 2008, 2007 and
2006, respectively. The Company expects to contribute
$1.9 million to its defined benefit pension plans during
fiscal 2009. Because of the recent decline in general economic
and capital market conditions, the Company expects that pension
plan funding contributions will increase over the medium and
long term. The Company estimates that the minimum pension plan
funding contribution for its 2009 plan year (calendar year
2009) will be $3.5 million with $1.1 million to
be paid in fiscal 2009, $1.1 million to be paid in fiscal
2010 and $1.3 million to be paid in September 2010 (fiscal
2011).
Penford funds the benefit payments of its postretirement health
care plans on a cash basis; therefore, the Companys
contributions to these plans in fiscal 2009 will approximate the
benefit payments below.
Expected benefit payments are based on the same assumptions used
to measure the benefit obligations and include benefits
attributable to estimate future employee service.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
(Dollars in millions)
|
|
|
2009
|
|
$
|
2.0
|
|
|
$
|
0.7
|
|
2010
|
|
|
2.0
|
|
|
|
0.7
|
|
2011
|
|
|
2.1
|
|
|
|
0.8
|
|
2012
|
|
|
2.2
|
|
|
|
0.8
|
|
2013
|
|
|
2.3
|
|
|
|
0.9
|
|
2014-2018
|
|
$
|
12.9
|
|
|
$
|
5.2
|
|
|
|
Note 12
|
Other
Employee Benefits
|
Savings
and Stock Ownership Plan
The Company has a defined contribution savings plan by which
eligible North American-based employees can elect a maximum
salary deferral of 16%. The plan provides a 100% match on the
first 3% of salary contributions and a 50% match on the next 3%
per employee. The Companys matching contributions were
$986,000, $920,000 and $882,000 for fiscal years 2008, 2007 and
2006, respectively.
Deferred
Compensation Plan
The Company provides its directors and certain employees the
opportunity to defer a portion of their salary, bonus and fees.
The deferrals earn interest based on Moodys current
Corporate Bond Yield. Deferred compensation interest of
$209,000, $180,000 and $184,000 was accrued in fiscal years
2008, 2007 and 2006, respectively.
Supplemental
Executive Retirement Plan
The Company sponsors a supplemental executive retirement plan, a
non-qualified plan, which covers certain employees. No current
executive officers participate in this plan. For fiscal 2008,
2007 and 2006, the net periodic pension expense accrued for this
plan was $330,000, $320,000 and $305,000, respectively. The
accrued obligation related to the plan was $4.2 million and
$4.0 million for fiscal years 2008 and 2007, respectively.
56
Notes to
Consolidated Financial
Statements (Continued)
Health
Care and Life Insurance Benefits
The Company offers health care and life insurance benefits to
most active North American employees. Costs incurred to provide
these benefits are charged to expense as incurred. Health care
and life insurance expense, net of employee contributions, was
$4.2 million, $4.4 million and $4.3 million in
fiscal years 2008, 2007 and 2006, respectively.
Superannuation
Fund
The Company contributes to superannuation funds on behalf of the
employees of Penford Australia. Australian law requires the
Company to contribute at least 9% of each employees
eligible pay. In New Zealand, the Company sponsors a
superannuation benefit plan whereby it contributes 7.5% and 5%
of eligible pay for salaried and hourly employees, respectively.
The Company contributions to superannuation funds were
$1.1 million, in each of fiscal years 2008, 2007 and 2006.
|
|
Note 13
|
Other
Non-operating Income
|
Other non-operating income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Royalty and licensing income
|
|
$
|
1,874
|
|
|
$
|
1,902
|
|
|
$
|
1,827
|
|
Gain (loss) on foreign currency transactions
|
|
|
(217
|
)
|
|
|
3
|
|
|
|
(46
|
)
|
Gain on sale of New Zealand land
|
|
|
701
|
|
|
|
|
|
|
|
|
|
Gain on cash flow hedges
|
|
|
2,890
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
186
|
|
|
|
(260
|
)
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,434
|
|
|
$
|
1,645
|
|
|
$
|
1,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2008, the Company sold a parcel of land in Auckland,
New Zealand to a third-party purchaser and recognized a gain of
approximately $0.7 million.
In fiscal 2003, the Company exclusively licensed to National
Starch and Chemical Investment Holdings Corporation
(National Starch) certain rights to its resistant
starch patent portfolio (the RS Patents) for
applications in human nutrition. Under the terms of the
licensing agreement, the Company received an initial licensing
fee of $2.25 million ($1.6 million net of transaction
expenses) which is being amortized over the life of the royalty
agreement. The Company recognized $1.9 million,
$1.9 million and $1.8 million in income during fiscal
2008, 2007 and 2006, respectively, related to the licensing fee
and royalties. The Company has recognized $10.4 million in
royalty income from the inception of the agreement through
August 31, 2008.
In the first quarter of fiscal 2007, in connection with the
settlement of litigation in which Penfords Australian
subsidiary companies were plaintiffs, Penford received a
one-time payment of $625,000 and granted a license to one of the
defendants in this litigation under Penfords RS Patents in
certain non-human nutrition applications. In addition, Penford
became entitled to receive additional royalties under a license
of rights under the RS Patents in human nutrition applications
granted to one of the defendants. As part of the settlement
agreement, Penford became entitled to receive certain other
benefits, including an acceleration and extension of certain
royalties under its license with National Starch. The Company is
deferring and recognizing license income of $625,000 ratably
over the remaining life of the patent license, which is
estimated to be seven years.
As discussed in Note 2, in June 2008, the flooding of the
Cedar Rapids manufacturing facility shut down production for
most of the quarter. The Company had derivative instruments
designated as cash flow hedges to reduce the price volatility of
corn and natural gas used in the production of starch. Due to
the June 12, 2008 flood event, derivative positions held as
of that date that were forecasted to hedge exposures during the
period the Cedar Rapids plant was shut down were no longer
deemed to be effective cash flow hedges. The $2.9 million
gain, representing ineffectiveness on these instruments, was
reclassified from other comprehensive income and recognized as a
component of non-operating income.
57
Notes to
Consolidated Financial
Statements (Continued)
Income (loss) before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Domestic
|
|
$
|
(15,639
|
)
|
|
$
|
16,335
|
|
|
$
|
3,502
|
|
Foreign
|
|
|
(3,930
|
)
|
|
|
3,157
|
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(19,569
|
)
|
|
$
|
19,492
|
|
|
$
|
5,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(2
|
)
|
|
$
|
4,630
|
|
|
$
|
68
|
|
State
|
|
|
(98
|
)
|
|
|
1,051
|
|
|
|
709
|
|
Foreign
|
|
|
(685
|
)
|
|
|
2,065
|
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(785
|
)
|
|
|
7,746
|
|
|
|
1,327
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(4,365
|
)
|
|
|
78
|
|
|
|
529
|
|
State
|
|
|
(654
|
)
|
|
|
(644
|
)
|
|
|
(536
|
)
|
Foreign
|
|
|
(1,065
|
)
|
|
|
(1,205
|
)
|
|
|
(286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,084
|
)
|
|
|
(1,771
|
)
|
|
|
(293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(6,869
|
)
|
|
$
|
5,975
|
|
|
$
|
1,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Comprehensive tax expense (benefit) allocable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
$
|
(6,869
|
)
|
|
$
|
5,975
|
|
|
$
|
1,034
|
|
Comprehensive income (loss)
|
|
|
(938
|
)
|
|
|
195
|
|
|
|
1,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,807
|
)
|
|
$
|
6,170
|
|
|
$
|
2,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal tax to the actual
provision (benefit) for taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Statutory tax rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
34
|
%
|
Statutory tax on income
|
|
$
|
(6,849
|
)
|
|
$
|
6,822
|
|
|
$
|
1,789
|
|
State taxes, net of federal benefit
|
|
|
(485
|
)
|
|
|
79
|
|
|
|
114
|
|
Domestic production exclusion benefit
|
|
|
|
|
|
|
(202
|
)
|
|
|
(14
|
)
|
Tax credits, including research and development credits
|
|
|
(164
|
)
|
|
|
(382
|
)
|
|
|
(136
|
)
|
Extraterritorial income exclusion benefit
|
|
|
|
|
|
|
(5
|
)
|
|
|
(546
|
)
|
Lower statutory rate on foreign earnings
|
|
|
197
|
|
|
|
(66
|
)
|
|
|
(82
|
)
|
Other
|
|
|
432
|
|
|
|
(271
|
)
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit)
|
|
$
|
(6,869
|
)
|
|
$
|
5,975
|
|
|
$
|
1,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Notes to
Consolidated Financial
Statements (Continued)
The significant components of deferred tax assets and
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Alternative minimum tax credit
|
|
$
|
252
|
|
|
$
|
|
|
Postretirement benefits
|
|
|
9,874
|
|
|
|
8,814
|
|
Provisions for accrued expenses
|
|
|
2,190
|
|
|
|
2,902
|
|
Stock-based compensation
|
|
|
1,567
|
|
|
|
735
|
|
Deferred flood losses
|
|
|
6,758
|
|
|
|
|
|
Foreign net operating loss carryforward
|
|
|
1,730
|
|
|
|
|
|
Other
|
|
|
3,994
|
|
|
|
2,627
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
26,365
|
|
|
|
15,078
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
18,302
|
|
|
|
15,502
|
|
Other
|
|
|
1,754
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
20,056
|
|
|
|
15,936
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities (assets)
|
|
$
|
(6,309
|
)
|
|
$
|
858
|
|
|
|
|
|
|
|
|
|
|
Recognized as:
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
16
|
|
|
$
|
1,985
|
|
Deferred tax asset
|
|
|
6,293
|
|
|
|
297
|
|
Long-term deferred income tax liability
|
|
|
|
|
|
|
(3,140
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax liabilities (assets)
|
|
$
|
(6,309
|
)
|
|
$
|
858
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2008, in the United States, the Company had
federal alternative minimum tax credit carryforwards of
$0.3 million, a research and development carry back of
$2,000 and a net operating loss carry back of $3.0 million.
At August 31, 2008, the Company also had $5.8 million
of foreign net operating loss carryforwards which do not expire.
The Company also has U.S. state net operating loss
carrybacks of $0.8 million and net operating loss
carryforwards of $1.3 million with various expiration dates.
Deferred taxes are not recognized on temporary differences from
undistributed earnings of foreign subsidiaries of approximately
$16.9 million and from foreign exchange translation gains
or losses on permanent advances to foreign subsidiaries of
$1.0 million, as these amounts are deemed to be permanently
reinvested. It is not practicable to determine the amount of the
unrecognized deferred tax liability associated with these
temporary differences.
The Company has not provided for U.S. federal income and
foreign withholding taxes on undistributed earnings from
non-U.S. operations
as of August 31, 2008 because the Company intends to
reinvest such earnings indefinitely outside of the United States.
In August 2005, the Company received a report from the Internal
Revenue Service (IRS) regarding the audit of the
Companys U.S. federal income tax returns for fiscal
years ended August 31, 2001 and 2002. In May 2007, the
Company settled the outstanding IRS audits of the Companys
U.S. federal income tax returns for the fiscal years ended
August 31, 2001 and 2002. Under the settlement the Company
received a cash refund of $0.3 million. In addition, in
connection with the settlement of these audits in the third
quarter of fiscal 2007, the Company reversed a current tax
liability in the amount of $0.7 million, which represented
its estimate of the probable loss on certain tax positions being
examined.
59
Notes to
Consolidated Financial
Statements (Continued)
FIN 48
Prior to fiscal 2008, in evaluating the exposures connected with
the various tax filing positions, the Company established an
accrual when, despite managements belief that the
Companys tax return positions were supportable, management
believed that certain positions may be successfully challenged
and a loss was probable. When facts and circumstances changed,
these accruals were adjusted.
On September 1, 2007, the Company adopted FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement
No. 109 (FIN 48). FIN 48
prescribes a recognition threshold that a tax position is
required to meet before being recognized in the financial
statements and provides guidance on de-recognition, measurement,
classification, interest and penalties and transition issues.
FIN 48 contains a two-step process for recognizing and
measuring uncertain tax positions. The first step is to evaluate
the tax position for recognition by determining if the available
evidence indicates that it is more likely than not that the
position will be sustained on audit, including related appeals
or litigation. The second step is to measure the tax benefit as
the largest amount that is more than 50% likely of being
realized upon ultimate settlement.
As a result of the implementation of FIN 48 on
September 1, 2007, Penford reclassified $0.9 million
of previously recorded tax reserves from a current income tax
liability to a long-term liability for unrecognized tax
benefits. The Company reclassified unrecognized tax benefits for
which it does not anticipate the payment or receipt of cash
within one year. The Company historically classified
unrecognized tax benefits in current income taxes payable. There
was no change in retained earnings resulting from the adoption
of FIN 48. The Companys policy is to recognize
interest and penalty expense associated with uncertain tax
positions as a component of income tax expense in the
consolidated statements of operations. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as
follows (in thousands):
|
|
|
|
|
|
|
2008
|
|
|
Unrecognized tax benefits at beginning of year
|
|
|
936
|
|
Additions for tax positions related to prior years
|
|
|
158
|
|
Reductions for tax positions related to prior years
|
|
|
(147
|
)
|
Additions for tax positions related to current year
|
|
|
153
|
|
Reductions for tax positions related to current year
|
|
|
|
|
Reductions due to lapse of applicable statute of limitations
|
|
|
(402
|
)
|
|
|
|
|
|
Unrecognized tax benefits at end of year
|
|
|
698
|
|
|
|
|
|
|
As of August 31, 2008, the Company had $0.1 million of
accrued interest and penalties included in the long-term tax
liability. During fiscal 2008, the Company reduced the liability
for unrecognized tax benefits by $61,000 for interest and
$13,000 for penalties. At August 31, 2008, the liability
for unrecognized tax benefits was $0.7 million, all of
which would affect the effective tax rate if realized.
The Company files tax returns in the U.S. federal
jurisdiction, various U.S. state jurisdictions, and the
federal jurisdictions in Australia and New Zealand, and is
subject to examination by taxing authorities in all of those
jurisdictions. From time to time, the Companys tax returns
are reviewed or audited by various U.S. state taxing
authorities. The Company believes that adjustments, if any,
resulting from these reviews or audits would not be material,
individually or in the aggregate, to the Companys
financial position, results of operations or liquidity. It is
reasonably possible that the amount of unrecognized tax benefits
related to certain of the Companys tax positions will
increase or decrease in the next twelve months as audits or
reviews are initiated and settled. At this time, an estimate of
the range of a reasonably possible change cannot be made. With
few exceptions, the Company is not subject to income tax
examinations by U.S. federal or state jurisdictions for
fiscal years prior to 2005 and by foreign jurisdictions prior to
2004.
60
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 15
|
Earnings
per Common Share
|
The following table presents the computation of basic and
diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Net income (loss)
|
|
$
|
(12,700
|
)
|
|
$
|
13,517
|
|
|
$
|
4,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
10,565,432
|
|
|
|
8,986,413
|
|
|
|
8,899,999
|
|
Net effect of dilutive stock options
|
|
|
|
|
|
|
296,712
|
|
|
|
104,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents outstanding,
assuming dilution
|
|
|
10,565,432
|
|
|
|
9,283,125
|
|
|
|
9,004,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.20
|
)
|
|
$
|
1.50
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(1.20
|
)
|
|
$
|
1.46
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average restricted stock awards of 88,363 for fiscal
2008 were excluded from the calculation of diluted earnings per
share because they were antidilutive. Weighted-average stock
options omitted from the denominator of the earnings per share
calculation because they were antidilutive were 1,036,474,
57,159 and 536,775 for 2008, 2007 and 2006, respectively.
|
|
Note 16
|
Restructuring
Costs
|
In the first quarter of fiscal 2008, in connection with
reconfiguring the Companys Australian business, a
workforce reduction was implemented in the Companys two
Australian operating facilities. In connection therewith,
$1.2 million in employee severance costs and related
benefits were charged to operating income in the first quarter.
In the second and third quarters of fiscal 2008, the
Companys Australian business recorded restructure charges
totaling $0.2 million related to workforce reductions
implemented at its New Zealand operations. As of August 31,
2008, all severance and related costs had been paid. These costs
are shown as Restructure Costs in the statement of
operations.
61
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 17
|
Segment
Reporting
|
Financial information for the Companys three segments is
presented below. The first two segments, Industrial
Ingredients North America and Food
Ingredients North America, 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
industries. The Food Ingredients segment produces specialty
starches for food applications. The third segment is the
geographically separate operations in Australia and New Zealand.
The Australian and New Zealand operations produce specialty
starches used primarily in the food ingredients business. See
Part 1, Item 1, Business, for a
description of the products for each segment. A fourth 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. The elimination of intercompany sales between
Australia/New Zealand operations and Food
Ingredients North America is presented separately
since the chief operating decision maker views segment results
prior to intercompany eliminations. The accounting policies of
the reportable segments are the same as those described in
Note 1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients North America
|
|
$
|
173,320
|
|
|
$
|
194,957
|
|
|
$
|
165,850
|
|
Food ingredients North America
|
|
|
66,261
|
|
|
|
62,987
|
|
|
|
57,156
|
|
Australia/New Zealand operations
|
|
|
107,532
|
|
|
|
105,244
|
|
|
|
96,121
|
|
Corporate and other
|
|
|
(1,537
|
)
|
|
|
(824
|
)
|
|
|
(708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
345,576
|
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients North America
|
|
$
|
9,073
|
|
|
$
|
7,830
|
|
|
$
|
7,812
|
|
Food ingredients North America
|
|
|
2,693
|
|
|
|
2,944
|
|
|
|
3,301
|
|
Australia/New Zealand operations
|
|
|
5,101
|
|
|
|
4,605
|
|
|
|
4,199
|
|
Corporate and other
|
|
|
300
|
|
|
|
317
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,167
|
|
|
$
|
15,696
|
|
|
$
|
15,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients North America
|
|
$
|
(16,541
|
)
|
|
$
|
19,251
|
|
|
$
|
9,121
|
|
Food ingredients North America
|
|
|
10,178
|
|
|
|
10,684
|
|
|
|
7,819
|
|
Australia/New Zealand operations
|
|
|
(4,556
|
)
|
|
|
3,269
|
|
|
|
1,735
|
|
Corporate and other
|
|
|
(10,001
|
)
|
|
|
(9,646
|
)
|
|
|
(9,407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(20,920
|
)
|
|
$
|
23,558
|
|
|
$
|
9,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients North America
|
|
$
|
35,415
|
|
|
$
|
30,492
|
|
|
$
|
8,858
|
|
Food ingredients North America
|
|
|
3,089
|
|
|
|
2,477
|
|
|
|
1,651
|
|
Australia/New Zealand operations
|
|
|
2,205
|
|
|
|
1,952
|
|
|
|
4,323
|
|
Corporate and other
|
|
|
|
|
|
|
(187
|
)
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,709
|
|
|
$
|
34,734
|
|
|
$
|
14,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
Industrial ingredients North America
|
|
$
|
141,618
|
|
|
$
|
133,187
|
|
Food ingredients North America
|
|
|
35,100
|
|
|
|
33,684
|
|
Australia/New Zealand operations
|
|
|
111,255
|
|
|
|
108,084
|
|
Corporate and other
|
|
|
22,408
|
|
|
|
13,433
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
310,381
|
|
|
$
|
288,388
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of total income (loss) from operations for the
Companys segments to income (loss) before income taxes as
reported in the consolidated financial statements follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Income (loss) from operations
|
|
$
|
(20,920
|
)
|
|
$
|
23,558
|
|
|
$
|
9,268
|
|
Other non-operating income
|
|
|
5,434
|
|
|
|
1,645
|
|
|
|
1,896
|
|
Interest expense
|
|
|
(4,083
|
)
|
|
|
(5,711
|
)
|
|
|
(5,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
(19,569
|
)
|
|
$
|
19,492
|
|
|
$
|
5,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, attributed to the point of origin, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
238,044
|
|
|
$
|
257,120
|
|
|
$
|
222,298
|
|
Australia/New Zealand
|
|
|
107,532
|
|
|
|
105,244
|
|
|
|
96,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
345,576
|
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, attributed to the area to which the product was shipped,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
United States
|
|
$
|
214,401
|
|
|
$
|
227,438
|
|
|
$
|
198,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia/New Zealand
|
|
|
77,099
|
|
|
|
79,647
|
|
|
|
79,919
|
|
Japan
|
|
|
21,828
|
|
|
|
18,636
|
|
|
|
18,334
|
|
Canada
|
|
|
11,839
|
|
|
|
12,654
|
|
|
|
11,718
|
|
Mexico
|
|
|
7,795
|
|
|
|
10,358
|
|
|
|
5,761
|
|
Other
|
|
|
12,614
|
|
|
|
13,631
|
|
|
|
4,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-United
States
|
|
|
131,175
|
|
|
|
134,926
|
|
|
|
119,980
|
|
Total
|
|
$
|
345,576
|
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Long-lived assets, net
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
128,194
|
|
|
$
|
103,942
|
|
Australia/New Zealand
|
|
|
67,781
|
|
|
|
66,198
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
195,975
|
|
|
$
|
170,140
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 18
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
Fiscal 2008
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Sales
|
|
$
|
94,862
|
|
|
$
|
87,889
|
|
|
$
|
102,799
|
|
|
$
|
60,026
|
|
|
$
|
345,576
|
|
Cost of sales
|
|
|
78,608
|
|
|
|
76,384
|
|
|
|
87,260
|
|
|
|
53,727
|
|
|
|
295,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
16,254
|
|
|
|
11,505
|
|
|
|
15,539
|
|
|
|
6,299
|
|
|
|
49,597
|
|
Net income (loss)
|
|
|
3,164
|
|
|
|
2,315
|
|
|
|
2,704
|
|
|
|
(20,883
|
)
|
|
|
(12,700
|
)
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
|
$
|
0.21
|
|
|
$
|
0.24
|
|
|
$
|
(1.87
|
)
|
|
$
|
(1.20
|
)
|
Diluted
|
|
$
|
0.33
|
|
|
$
|
0.21
|
|
|
$
|
0.24
|
|
|
$
|
(1.87
|
)
|
|
$
|
(1.20
|
)
|
Dividends declared
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
Fiscal 2007
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Sales
|
|
$
|
85,500
|
|
|
$
|
85,241
|
|
|
$
|
95,406
|
|
|
$
|
96,217
|
|
|
$
|
362,364
|
|
Cost of sales
|
|
|
72,306
|
|
|
|
72,839
|
|
|
|
76,838
|
|
|
|
76,220
|
|
|
|
298,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
13,194
|
|
|
|
12,402
|
|
|
|
18,568
|
|
|
|
19,997
|
|
|
|
64,161
|
|
Net income
|
|
|
2,573
|
|
|
|
1,706
|
|
|
|
4,955
|
|
|
|
4,283
|
|
|
|
13,517
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.19
|
|
|
$
|
0.55
|
|
|
$
|
0.47
|
|
|
$
|
1.50
|
|
Diluted
|
|
$
|
0.28
|
|
|
$
|
0.19
|
|
|
$
|
0.54
|
|
|
$
|
0.45
|
|
|
$
|
1.46
|
|
Dividends declared
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.24
|
|
In the fourth quarter of fiscal 2008, the Companys Cedar
Rapids, Iowa plant was temporarily shut down due to record
flooding of the Cedar River and government-ordered mandatory
evacuation of the plant and surrounding areas. The Company
recorded costs of approximately $27.6 million, net of
insurance recoveries of $10.5 million. See Note 2.
64
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 19
|
Legal
Proceedings
|
In October 2004, Penford Products Co. (Penford
Products), a wholly-owned subsidiary of the Company, was
sued by Graphic Packaging International, Inc.
(Graphic) in the Fourth Judicial District Court,
Ouachita Parish, Louisiana. Graphic sought monetary damages for
Penford Products alleged breach of an agreement to supply
Graphic with certain starch products during the 2004 strike
affecting the Penford Products Cedar Rapids, Iowa plant. The
case was tried before a judge of the above-noted court in
October 2007. On May 5, 2008, the Company received notice
the trial judge ruled in favor of Graphic and found Penford
Products liable for alleged damages in the amount of $3,242,302,
as well as pre-and post-judgment interest and costs that were
alleged to be in an amount in excess of $810,000. After
evaluating its options, the Company elected to satisfy the
judgment and waive appeal rights by paying Graphic the sum of
$3,810,837. The Company had previously reserved
$2.4 million against this matter in fiscal 2007.
The Company is involved from time to time in various 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.
65
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Penford Corporation
We have audited the accompanying consolidated balance sheets of
Penford Corporation as of August 31, 2008 and 2007, and the
related consolidated statements of operations, comprehensive
income, shareholders equity, and cash flows for each of
the three years in the period ended August 31, 2008. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Penford Corporation at August 31,
2008 and 2007, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended August 31, 2008, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 14 to the consolidated financial
statements, in fiscal 2008 Penford Corporation changed its
method for accounting for Uncertainty in Income Taxes in
accordance with Financial Accounting Standards Board
Interpretation No. 48.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Penford Corporations internal control over financial
reporting as of August 31, 2008, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated November 12, 2008
expressed an unqualified opinion thereon.
Denver, Colorado
November 12, 2008
66
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Penford Corporation
We have audited Penford Corporations internal control over
financial reporting as of August 31, 2008, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Penford
Corporations management is responsible for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying Report of
Management on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Penford Corporation maintained, in all material
respects, effective internal control over financial reporting as
of August 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Penford Corporation as of
August 31, 2008 and 2007, and the related consolidated
statements of operations, comprehensive income,
shareholders equity, and cash flows for each of the three
years in the period ended August 31, 2008 of Penford
Corporation and our report dated November 12, 2008
expressed an unqualified opinion thereon.
Denver, Colorado
November 12, 2008
67
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures.
|
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 Exchange Act
Rule 13a-15(b)
as of the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that these disclosure controls and
procedures are effective to ensure that information required to
be disclosed by the Company in the reports that it files or
submits under the Exchange Act is accumulated and communicated
to its management, including its principal executive and
principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding
required disclosure. Managements report on internal
control over financial reporting and the related report of the
Companys registered independent public accounting firm are
included below and at the end of Item 8 above. There were
no changes in the Companys internal control over financial
reporting during the quarter ended August 31, 2008 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
REPORT OF
MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting for the
Company. Internal control over financial reporting is a process
to provide reasonable assurance regarding the reliability of our
financial reporting for external purposes in accordance with
accounting principles generally accepted in the United States of
America. Internal control over financial reporting includes
maintaining records that in reasonable detail accurately and
fairly reflect the Companys transactions; providing
reasonable assurance that transactions are recorded as necessary
for preparation of the Companys financial statements;
providing reasonable assurance that receipts and expenditures of
the Companys assets are made in accordance with
managements authorization; and providing reasonable
assurance that unauthorized acquisition, use or disposition of
the Companys assets that could have a material effect on
the financial statements would be prevented or detected on a
timely basis. Because of its inherent limitations, internal
control over financial reporting is not intended to provide
absolute assurance that a misstatement of the Companys
financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of the
Companys internal controls over financial reporting based
on the framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this evaluation, management
concluded that the Companys internal control over
financial reporting was effective as of August 31, 2008.
|
|
Item 9B.
|
Other
Information.
|
Not applicable.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
The applicable information set forth under the headings
Election of Directors, Information About the
Board and Its Committees, and Section 16(a)
Beneficial Ownership Reporting Compliance in the
definitive Proxy Statement for the 2009 Annual Meeting of
Shareholders (the 2009 Proxy Statement), to be filed
not later than 120 days after the end of the fiscal year
covered by this report, is incorporated herein by reference.
Information regarding the Executive Officers of the Registrant
is set forth in Part I, Item 1.
The Company has adopted a Code of Business Conduct and Ethics
(the Code) that is applicable to all employees,
consultants and members of the Board of Directors, including the
Chief Executive Officer, Chief
68
Financial Officer and Corporate Controller. This Code embodies
the commitment of the Company and its subsidiaries to conduct
business in accordance with the highest ethical standards and
applicable laws, rules and regulations. The Code is available on
the Companys Internet site ate
www.penx.com
under
the Investor Relations section.
|
|
Item 11.
|
Executive
Compensation.
|
The applicable information set forth under the headings
Executive Compensation, Director
Compensation and Information About the Board and Its
Committees in the 2009 Proxy Statement is incorporated
herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The applicable information set forth under the heading
Security Ownership of Certain Beneficial Owners and
Management in the 2009 Proxy Statement is incorporated
herein by reference.
Securities
Authorized for Issuance under Equity Compensation
Plans
The following table provides information regarding
Penfords equity compensation plans at August 31,
2008. The Company has no equity compensation plans that have not
been approved by security holders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
Number of
|
|
|
|
|
|
for Future Issuance
|
|
|
|
Securities to be
|
|
|
|
|
|
Under Equity
|
|
|
|
Issued Upon
|
|
|
Weighted-Average
|
|
|
Compensation Plans
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
(Excluding
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Securities
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
Reflected in Column
|
|
Plan Category
|
|
and Rights
|
|
|
and Rights
|
|
|
(a))
|
|
|
Equity compensation plans approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
1994 Stock Option Plan(1)
|
|
|
690,050
|
|
|
$
|
14.28
|
|
|
|
|
|
2006 Long-Term Incentive Plan(2)
|
|
|
591,250
|
|
|
$
|
16.97
|
|
|
|
206,276
|
|
Stock Option Plan for Non-Employee Directors(3)
|
|
|
95,047
|
|
|
$
|
10.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,376,347
|
|
|
$
|
15.17
|
|
|
|
206,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
This plan has been terminated and no additional options are
available for grant. The options which are subsequently
forfeited or not exercised are available for issuance under the
2006 Long-Term Incentive Plan.
|
|
(2)
|
|
Shares available for issuance under the 2006 Long-Term Incentive
Plan can be granted pursuant to stock options, stock
appreciation rights, restricted stock or units or performance
based cash awards. Does not include 109,365 issued but unvested
shares of common stock at August 31, 2008.
|
|
(3)
|
|
This plan has been terminated and no additional options will be
granted under this plan.
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The applicable information relating to certain relationships and
related transactions of the Company is set forth under the
heading Transactions with Related Persons in the
2009 Proxy Statement and is incorporated herein by reference.
Information related to director independence is set forth under
the heading of Information About the Board and Its
Committees in the 2009 Proxy Statement and is incorporated
herein by reference.
69
|
|
Item 14.
|
Principal
Accountant Fees and Services.
|
The applicable information concerning principal accountant fees
and services appears under the heading Fees Paid to
Ernst & Young LLP in the 2009 Proxy Statement
and is incorporated herein by reference.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules.
|
(a)(1)
Financial Statements
The consolidated balance sheets as of August 31, 2008 and
2007 and the related consolidated statements of operations,
comprehensive income, cash flows and shareholders equity
for each of the three years in the period ended August 31,
2008 and the reports of the independent registered public
accounting firm are included in Part II, Item 8.
(2)
Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are omitted because they are not applicable or the information
is included in the Consolidated Financial Statements in
Part II, Item 8.
(3)
Exhibits
See index to Exhibits on page 72.
(b)
Exhibits
See Item 15(a)(3), above.
(c)
Financial Statement Schedules
None
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 14th day of November
2008.
PENFORD CORPORATION
Thomas D. Malkoski
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated
below on November 14, 2008.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Thomas
D. Malkoski
Thomas
D. Malkoski
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
/s/ Steven
O. Cordier
Steven
O. Cordier
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
/s/ Paul
H. Hatfield
Paul
H. Hatfield
|
|
Chairman of the Board of Directors
|
|
|
|
/s/ William
E. Buchholz
William
E. Buchholz
|
|
Director
|
|
|
|
/s/ Jeffrey
T. Cook
Jeffrey
T. Cook
|
|
Director
|
|
|
|
/s/ R.
Randolph Devening
R.
Randolph Devening
|
|
Director
|
|
|
|
/s/ John
C. Hunter III
John
C. Hunter III
|
|
Director
|
|
|
|
/s/ Sally
G. Narodick
Sally
G. Narodick
|
|
Director
|
|
|
|
/s/ James
E. Warjone
James
E. Warjone
|
|
Director
|
71
INDEX TO
EXHIBITS
Exhibits identified in parentheses below, on file with the
Securities and Exchange Commission, are incorporated by
reference. Copies of exhibits can be obtained at no cost by
writing to Penford Corporation, 7094 S. Revere
Parkway, Centennial, Colorado 80112.
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Item
|
|
|
2
|
.1
|
|
Starch Australasia Share Sale Agreement completed as of
September 29, 2000 among Penford Holdings Pty. Limited, a
wholly owned subsidiary of Registrant, and Goodman Fielder
Limited (filed as an exhibit to Registrants File
No. 000-11488,
Form 8-K/A
dated September 29, 2000, filed December 12, 2000)
|
|
3
|
.1
|
|
Restated and Amended Articles of Incorporation, as amended
(filed as an exhibit to Registrants
File No. 000-11488,
Form 10-K
for the fiscal year ended August 31, 2006)
|
|
3
|
.2
|
|
Bylaws of Registrant as amended and restated as of
October 29, 2008 (filed as an exhibit to Registrants
File
No. 000-11488,
Current Report on
Form 8-K
filed October 31, 2008)
|
|
10
|
.1
|
|
Penford Corporation Deferred Compensation Plan, amended and
restated as of January 1, 2005 (filed as an exhibit to
Registrants File
No. 000-11488,
Form 10-K
for the year ended August 31, 2007, filed November 9,
2007)*
|
|
10
|
.2
|
|
Form of Change of Control Agreement and Annexes between Penford
Corporation and Messrs. Kortemeyer, Cordier, Kunerth,
Malkoski and Randall and certain other key employees
(a representative copy of these agreements is filed as an
exhibit to Registrants File
No. 000-11488,
Form 10-Q
for the quarter ended February 28, 2006, filed
April 10, 2006)*
|
|
10
|
.3
|
|
Penford Corporation 1993 Non-Employee Director Restricted Stock
Plan (filed as an exhibit to Registrants File
No. 000-11488,
Form 10-Q
for the quarter ended November 30, 1993)*
|
|
10
|
.4
|
|
Penford Corporation 1994 Stock Option Plan as amended and
restated as of January 8, 2002 (filed as an exhibit to
Registrants File
No. 000-11488,
Proxy Statement filed with the Commission on January 18,
2002)*
|
|
10
|
.5
|
|
Penford Corporation Stock Option Plan for Non-Employee Directors
(filed as a exhibit to Registrants
File No. 000-11488,
Form 10-Q
for the quarter ended May 31, 1996, filed July 15,
1996)*
|
|
10
|
.6
|
|
Penford Corporation 2006 Long-Term Incentive Plan (incorporated
by reference to Appendix A to Registrants File
No. 000-11488,
Proxy Statement filed December 20, 2005)*
|
|
10
|
.7
|
|
Form of Penford Corporations 2006 Long-Term Incentive Plan
Stock Option Grant Notice, including the Stock Option Agreement
and Notice of Exercise (incorporated by reference to the
exhibits to the Registrants File
No. 000-11488,
Current Report on
Form 8-K
filed February 21, 2006)*
|
|
10
|
.8
|
|
Form of Penford Corporation 2006 Long-Term Incentive Plan
Restricted Stock Award Notice and Agreement (filed as an exhibit
to Registrants File
No. 000-11488,
Form 10-K
for the year ended August 31, 2007, filed November 9,
2007)*
|
|
10
|
.9
|
|
Second Amended and Restated Credit Agreement dated as of
October 5, 2006 (filed as an exhibit to Registrants
File
No. 000-11488,
Form 8-K
dated October 5, 2006, filed October 10, 2006)
|
|
10
|
.10
|
|
First Amendment to Second Amended and Restated Credit Agreement
(filed as an exhibit to Registrants File
No. 000-11488,
Form 10-Q
for the quarter ended May 31, 2008, filed July 10,
2008)
|
|
10
|
.11
|
|
Director Special Assignments Policy dated August 26, 2005
(filed as an exhibit to Registrants
File No. 000-11488,
Form 8-K
dated August 26, 2005, filed September 1, 2005)*
|
|
10
|
.12
|
|
Non-Employee Director Compensation Term Sheet (filed as an
exhibit to Registrants File
No. 000-11488,
Form 10-K
for the year ended August 31, 2007, filed November 9,
2007)*
|
|
21
|
|
|
Subsidiaries of the Registrant
|
|
23
|
|
|
Consent of Independent Registered Public Accounting Firm
|
|
24
|
|
|
Power of Attorney
|
|
31
|
.1
|
|
Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
Certifications 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 Section 906 of the Sarbanes-Oxley act
of 2002
|
|
|
|
*
|
|
Denotes management contract or compensatory plan or arrangement
|
72
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