UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the quarterly period ended
February 28, 2009
OR
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission File No. 0-11488
PENFORD CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
Washington
|
|
91-1221360
|
|
|
|
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
7094 South Revere Parkway,
Centennial, Colorado
|
|
80112-3932
|
|
|
|
(Address of Principal Executive Offices)
|
|
(Zip Code)
|
Registrants telephone number, including area code:
(303) 649-1900
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated filer
o
|
|
Accelerated filer
þ
|
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
|
Smaller Reporting Company
o
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
The net number of shares of the Registrants common stock (the Registrants only outstanding class
of stock) outstanding as of April 3, 2009 was 11,265,953.
PENFORD CORPORATION AND SUBSIDIARIES
INDEX
2
PART I FINANCIAL INFORMATION
Item 1: Financial Statements
PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
August 31,
|
|
(In thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
39
|
|
|
$
|
534
|
|
Trade accounts receivable, net
|
|
|
41,002
|
|
|
|
28,752
|
|
Inventories
|
|
|
40,229
|
|
|
|
50,200
|
|
Prepaid expenses
|
|
|
4,102
|
|
|
|
4,370
|
|
Insurance recovery receivable
|
|
|
|
|
|
|
8,000
|
|
Income tax receivable
|
|
|
9,722
|
|
|
|
10,052
|
|
Other
|
|
|
5,558
|
|
|
|
3,881
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
100,652
|
|
|
|
105,789
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
153,127
|
|
|
|
169,932
|
|
Restricted cash value of life insurance
|
|
|
10,519
|
|
|
|
10,465
|
|
Deferred tax asset
|
|
|
2,051
|
|
|
|
6,293
|
|
Goodwill, net
|
|
|
5,833
|
|
|
|
26,043
|
|
Other intangible assets, net
|
|
|
665
|
|
|
|
760
|
|
Other assets
|
|
|
1,538
|
|
|
|
1,151
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
274,385
|
|
|
$
|
320,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Cash overdraft, net
|
|
$
|
6,360
|
|
|
$
|
1,301
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
10,524
|
|
|
|
8,029
|
|
Short-term borrowings
|
|
|
1,340
|
|
|
|
676
|
|
Accounts payable
|
|
|
28,572
|
|
|
|
46,475
|
|
Accrued liabilities
|
|
|
10,396
|
|
|
|
11,195
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
57,192
|
|
|
|
67,676
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations
|
|
|
70,306
|
|
|
|
59,860
|
|
Other post-retirement benefits
|
|
|
13,117
|
|
|
|
12,862
|
|
Other liabilities
|
|
|
18,890
|
|
|
|
19,673
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
159,505
|
|
|
|
160,071
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $1.00 per share, authorized 1,000 shares,
none issued
|
|
|
|
|
|
|
|
|
Common stock, par value $1.00 per share, authorized 29,000 shares,
issued 13,157 and 13,127 shares, respectively
|
|
|
13,157
|
|
|
|
13,127
|
|
Additional paid-in capital
|
|
|
92,612
|
|
|
|
91,443
|
|
Retained earnings
|
|
|
50,193
|
|
|
|
74,092
|
|
Treasury stock, at cost, 1,981 shares
|
|
|
(32,757
|
)
|
|
|
(32,757
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
(8,325
|
)
|
|
|
14,457
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
114,880
|
|
|
|
160,362
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
274,385
|
|
|
$
|
320,433
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
3
PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
February 29,
|
|
(In thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Sales
|
|
$
|
79,808
|
|
|
$
|
87,889
|
|
|
$
|
160,499
|
|
|
$
|
182,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
83,951
|
|
|
|
76,384
|
|
|
|
159,254
|
|
|
|
154,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
(4,143
|
)
|
|
|
11,505
|
|
|
|
1,245
|
|
|
|
27,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
7,267
|
|
|
|
6,666
|
|
|
|
14,534
|
|
|
|
13,906
|
|
Research and development expenses
|
|
|
1,562
|
|
|
|
2,073
|
|
|
|
3,080
|
|
|
|
4,095
|
|
Goodwill impairment
|
|
|
13,828
|
|
|
|
|
|
|
|
13,828
|
|
|
|
|
|
Flood related costs, net of
insurance proceeds
|
|
|
(3,800
|
)
|
|
|
|
|
|
|
(8,034
|
)
|
|
|
|
|
Restructure costs
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
1,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(23,000
|
)
|
|
|
2,671
|
|
|
|
(22,163
|
)
|
|
|
8,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income, net
|
|
|
1,924
|
|
|
|
791
|
|
|
|
1,714
|
|
|
|
1,254
|
|
Interest expense
|
|
|
1,349
|
|
|
|
601
|
|
|
|
2,842
|
|
|
|
1,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(22,425
|
)
|
|
|
2,861
|
|
|
|
(23,291
|
)
|
|
|
7,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
(247
|
)
|
|
|
546
|
|
|
|
(744
|
)
|
|
|
2,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(22,178
|
)
|
|
$
|
2,315
|
|
|
$
|
(22,547
|
)
|
|
$
|
5,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and
equivalents outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,174
|
|
|
|
10,857
|
|
|
|
11,165
|
|
|
|
9,988
|
|
Diluted
|
|
|
11,174
|
|
|
|
11,195
|
|
|
|
11,165
|
|
|
|
10,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.98
|
)
|
|
$
|
0.21
|
|
|
$
|
(2.02
|
)
|
|
$
|
0.55
|
|
Diluted
|
|
$
|
(1.98
|
)
|
|
$
|
0.21
|
|
|
$
|
(2.02
|
)
|
|
$
|
0.53
|
|
|
Dividends declared per common share
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
The accompanying notes are an integral part of these statements.
4
PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(22,547
|
)
|
|
$
|
5,477
|
|
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,267
|
|
|
|
7,841
|
|
Stock-based compensation
|
|
|
1,453
|
|
|
|
989
|
|
Goodwill impairment
|
|
|
13,828
|
|
|
|
|
|
Gain on sale of dextrose product line
|
|
|
(1,562
|
)
|
|
|
|
|
Deferred income taxes
|
|
|
2,480
|
|
|
|
(2,530
|
)
|
Loss on derivative transactions
|
|
|
840
|
|
|
|
4,085
|
|
Loss (gain) on foreign currency transactions
|
|
|
641
|
|
|
|
(1,015
|
)
|
Other
|
|
|
4
|
|
|
|
(12
|
)
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(15,968
|
)
|
|
|
6,295
|
|
Prepaid expenses
|
|
|
(25
|
)
|
|
|
779
|
|
Inventories
|
|
|
143
|
|
|
|
(5,095
|
)
|
Accounts payable and accrued liabilities
|
|
|
(16,448
|
)
|
|
|
(11,847
|
)
|
Income tax
|
|
|
(387
|
)
|
|
|
(1,874
|
)
|
Insurance recovery receivable
|
|
|
8,000
|
|
|
|
|
|
Other
|
|
|
2,823
|
|
|
|
(368
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(17,458
|
)
|
|
|
2,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Investment in property, plant and equipment, net
|
|
|
(3,270
|
)
|
|
|
(29,429
|
)
|
Proceeds from sale of dextrose product line
|
|
|
2,857
|
|
|
|
|
|
Other
|
|
|
(51
|
)
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(464
|
)
|
|
|
(29,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
6,902
|
|
|
|
2,424
|
|
Payments on short-term borrowings
|
|
|
(6,063
|
)
|
|
|
(8,710
|
)
|
Proceeds from revolving line of credit
|
|
|
38,476
|
|
|
|
40,529
|
|
Payments on revolving line of credit
|
|
|
(21,500
|
)
|
|
|
(25,052
|
)
|
Payments of long-term debt
|
|
|
(3,250
|
)
|
|
|
(25,625
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
69
|
|
Net proceeds from issuance of common stock
|
|
|
|
|
|
|
46,844
|
|
Payment of loan fees
|
|
|
(551
|
)
|
|
|
|
|
Increase (decrease) in cash overdraft
|
|
|
5,059
|
|
|
|
(723
|
)
|
Payment of dividends
|
|
|
(1,350
|
)
|
|
|
(1,100
|
)
|
Other
|
|
|
(140
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
17,583
|
|
|
|
28,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(156
|
)
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(495
|
)
|
|
|
1,820
|
|
Cash and cash equivalents, beginning of period
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
39
|
|
|
$
|
1,820
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
5
PENFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1BUSINESS
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 industrial and food ingredient applications, and a manufacturer of
corn-based ethanol. The Company operates manufacturing facilities in the United States, Australia
and New Zealand.
Penford operates in three business segments, each utilizing its carbohydrate chemistry
expertise to develop starch-based products for value-added applications that improve the quality
and performance of customers products. The first two segments, 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.
The Company has significant 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. In May 2008, the Companys Industrial Ingredients North America
segment began commercial production and sales of ethanol from its facility in Cedar Rapids, Iowa.
On June 12, 2008, the Companys Cedar Rapids, Iowa plant was temporarily shut down due to
record flooding of the Cedar River and government-ordered evacuation of the plant and surrounding
areas. See Note 3.
2BASIS OF PRESENTATION
Consolidation
The accompanying condensed consolidated financial statements include the accounts of Penford
and its wholly owned subsidiaries. All material intercompany transactions and balances have been
eliminated. The condensed consolidated balance sheet at February 28, 2009 and the condensed
consolidated statements of operations and cash flows for the interim periods ended February 28,
2009 and February 29, 2008 have been prepared by the Company without audit. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments, which are necessary
to present fairly the financial information, have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with U.S. generally
accepted accounting principles, have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). The results of operations for
interim periods are not necessarily indicative of the operating results of a full year or of future
operations. The accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the Companys Annual Report on
Form 10-K for the year ended August 31, 2008.
Use of Estimates
The preparation of the consolidated financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions about future events.
These estimates and underlying assumptions affect the amounts of assets and liabilities reported,
the disclosures in the financial statements and reported amounts of revenues and expenses. Such
estimates include the valuation of accounts receivable, inventories, goodwill and other long-lived
assets, and legal contingencies and assumptions used in the calculation of income taxes, pension
and other post-retirement benefits, among others. These estimates are based on managements best
estimate and judgment. Management evaluates its estimates and assumptions on an ongoing basis
using historical experience and other factors, including the current economic environment, and
adjusts such estimates and assumptions when facts and circumstances dictate. The current credit
market and volatile equity, foreign currency, commodity and energy markets have combined to
increase the uncertainty inherent in
6
managements estimates and assumptions. As future events and
their effects cannot be determined with precision, actual results may differ significantly from
these estimates.
Accounting Changes
Effective September 1, 2008, the Company adopted Financial Accounting Standards Board (FASB)
Statement No. 157, Fair Value Measurements (SFAS 157), for financial assets and liabilities
carried at fair value that are recognized or disclosed at fair value in the financial statements on
a recurring basis. 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. The adoption did not have a material impact on the companys financial statements.
See Note 14. Due to the issuance of FASB Staff Position No. 157-2 (FSP 157-2), the effective
date of SFAS 157 has been deferred to fiscal years beginning after November 15, 2008 (fiscal 2010
for the Company) for non-recurring, nonfinancial assets and liabilities that are recognized or
disclosed at fair value. The Company is continuing to evaluate the impact of adopting these
provisions in fiscal 2010. In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3
clarifies the application of SFAS 157 and addresses how the fair value of a financial asset is
determined when the market for that financial asset is inactive. FSP 157-3 was effective upon
issuance. The implementation of this standard did not have an impact on the Companys 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) which
allows companies the option to measure certain financial assets and financial liabilities at fair
value at specified election dates. The Company adopted SFAS 159 and elected not to measure any
additional financial instruments and other items at fair value.
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. Effective December 1, 2008, the Company adopted SFAS 161. See Note 14.
Recent Accounting Pronouncements
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 for the Company), and, except for the presentation
and disclosure requirements of SFAS 160, are to be applied prospectively.
In June 2008, the FASB issued Staff Position FSP Emerging Issues Task Force (EITF) 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether unvested share-based payment
awards that contain rights to nonforfeitable dividends are participating securities prior to
vesting and, therefore, included in the computation of earnings per share. FSP EITF 03-6-1 is
effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company). The
Company is currently evaluating the impact of adopting FSP EITF 03-6-1 on the Companys
consolidated financial statements.
In December 2008, the FASB issued Staff Position No. 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets (FSP 132(R)-1). FSP 132(R)-1 requires additional disclosures
on a prospective basis about assets held in an employers defined benefit pension or other
postretirement plan. FSP 132(R)-1 is effective for fiscal years beginning after December 15, 2008
(fiscal 2010 for the Company). The adoption of FSP 132(R)-1 will
7
not have an effect on the
Companys consolidated financial statements. The Company is currently evaluating the disclosure
requirements of this standard.
3CEDAR 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. By the end
of the first quarter of fiscal 2009, the facilitys current processing rate had reached pre-flood
levels.
During fiscal 2008 and the first six months of fiscal 2009, the Company recorded flood
restoration costs of $45.5 million, and insurance recoveries of $26.0 million, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Three months ended
|
|
Three months ended
|
|
|
|
|
August 31, 2008
|
|
November 30, 2008
|
|
February 28, 2009
|
|
Total
|
|
|
|
|
|
(In thousands)
|
Repairs of buildings and equipment
|
|
$
|
17,082
|
|
|
$
|
5,790
|
|
|
$
|
454
|
|
|
$
|
23,326
|
|
Site remediation
|
|
|
5,389
|
|
|
|
348
|
|
|
|
|
|
|
|
5,737
|
|
Write off of inventory and fixed assets
|
|
|
4,016
|
|
|
|
71
|
|
|
|
|
|
|
|
4,087
|
|
Continuing costs during production shut down
|
|
|
9,771
|
|
|
|
|
|
|
|
|
|
|
|
9,771
|
|
Other
|
|
|
1,797
|
|
|
|
577
|
|
|
|
177
|
|
|
|
2,551
|
|
|
|
|
|
|
|
38,055
|
|
|
|
6,786
|
|
|
|
631
|
|
|
|
45,472
|
|
Insurance recoveries
|
|
|
(10,500
|
)
|
|
|
(11,020
|
)
|
|
|
(4,431
|
)
|
|
|
(25,951
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net flood costs (recoveries)
|
|
$
|
27,555
|
|
|
$
|
(4,234
|
)
|
|
$
|
(3,800
|
)
|
|
$
|
19,521
|
|
|
|
|
The direct costs of the flood in the table above do not include lost profits from the
interruption of the business.
Insurance recoveries
During the second quarter and first six months of fiscal 2009, the Company recognized
insurance recoveries of $4.4 million and $15.5 million, respectively. These recoveries have been
recorded as an offset to the losses caused by the flooding. The Company will continue to process
its claims for flood losses under its insurance policies, but is unable to estimate the amount or
timing of future recoveries. The amount ultimately recovered from the Companys insurers may be
materially more or less than the Companys direct costs of the flood.
4GOODWILL
The Company tests its goodwill for impairment annually and whenever events or circumstances
make it more likely than not that an impairment may have occurred. Penford performed its annual
impairment test as of June 1, 2008 and determined that goodwill in its Australia/New Zealand and
Food Ingredients North America reporting units was not impaired at that time. During the second
quarter of fiscal 2009, the Company continued to experience a worsening demand outlook, a decline
in its sales and operating income, as well as a reduction in its expected future cash flows. In
addition, Penford experienced a sustained, significant decline in its stock price. Given these
impairment indictors, the Company determined that there was a potential for its goodwill to be
impaired.
Accordingly, the Company performed an interim impairment evaluation of its goodwill as of
February 28, 2009. The Company completed its interim goodwill impairment evaluation for both its
Australia/New Zealand and Food Ingredients North America reporting units. The estimated fair
value of the Food Ingredients North America reporting unit exceeded the carrying value of its net
assets by approximately $43 million, and the Company determined that no adjustment to the recorded
amount of goodwill of this reporting unit was required. However, during the second quarter of
fiscal 2009, the Company recorded a $13.8 million non-cash goodwill impairment charge, which
represented all of the goodwill allocated to its Australia/New Zealand reporting unit.
8
5STOCK-BASED COMPENSATION
Stock Compensation Plans
Penford maintains the 2006 Long-Term Incentive Plan (the 2006 Incentive Plan) pursuant to
which various stock-based awards may be granted to employees, directors and consultants. 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 February 28, 2009, the aggregate number of shares of the Companys
common stock that were available to be issued as awards under the 2006 Incentive Plan was 185,528.
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.
Valuation and Expense Under 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 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 option 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. No stock options were granted under the 2006 Incentive Plan during the six months ended
February 28, 2009.
Stock Option Awards
A summary of the stock option activity for the six months ended February 28, 2009, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
Number of
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
Shares
|
|
Exercise Price
|
|
Term (in years)
|
|
Intrinsic Value
|
|
|
|
Outstanding Balance, August 31, 2008
|
|
|
1,376,347
|
|
|
$
|
15.17
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance, February 28, 2009
|
|
|
1,374,866
|
|
|
$
|
15.17
|
|
|
|
4.79
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at February 28, 2009
|
|
|
858,991
|
|
|
$
|
14.08
|
|
|
|
4.05
|
|
|
$
|
|
|
The aggregate intrinsic value disclosed in the table above represents the total pretax
intrinsic value, based on the Companys closing stock price of $4.88 as of February 28, 2009 that
would have been received by the option holders had all option holders exercised on that date. The
intrinsic value of options exercised during the three months ended February 29, 2008 was $10,100.
No stock options were exercised during the six months ended February 28, 2009.
As of February 28, 2009, the Company had $2.0 million of unrecognized compensation cost
related to non-vested stock option awards that is expected to be recognized over a weighted average
period of 1.7 years.
9
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 six months ended February 28, 2009 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
Grant Date
|
|
|
Shares
|
|
Fair Value
|
|
|
|
Nonvested at August 31, 2008
|
|
|
109,365
|
|
|
$
|
34.15
|
|
Granted
|
|
|
13,832
|
|
|
|
10.12
|
|
Vested
|
|
|
(33,615
|
)
|
|
|
31.84
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at February 28, 2009
|
|
|
89,582
|
|
|
$
|
31.31
|
|
On January 1, 2009, each non-employee director received an award of 1,976 shares of restricted
stock under the 2006 Incentive Plan at the last reported sale price of the stock on the preceding
trading day, 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 February 28, 2009, the Company had $1.5 million of unrecognized compensation cost
related to non-vested restricted stock awards that is expected to be recognized over a weighted
average period of 1.5 years.
Compensation Expense
The Company recognizes stock-based compensation expense utilizing the accelerated multiple
option approach over the requisite service period, which equals the vesting period. The following
table summarizes the total stock-based compensation cost under SFAS No. 123R for the three and six
months ended February 28, 2009 and February 29, 2008 and the effect on the Companys Condensed
Consolidated Statements of Operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
February 28,
|
|
February 29,
|
|
February 28,
|
|
February 29,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
Cost of sales
|
|
$
|
74
|
|
|
$
|
48
|
|
|
$
|
164
|
|
|
$
|
86
|
|
Operating expenses
|
|
|
529
|
|
|
|
577
|
|
|
|
1,258
|
|
|
|
897
|
|
Research and development expenses
|
|
|
15
|
|
|
|
2
|
|
|
|
31
|
|
|
|
6
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
618
|
|
|
$
|
627
|
|
|
$
|
1,453
|
|
|
$
|
989
|
|
Tax benefit
|
|
|
235
|
|
|
|
238
|
|
|
|
552
|
|
|
|
376
|
|
|
|
|
Total stock-based compensation expense,
net of tax
|
|
$
|
383
|
|
|
$
|
389
|
|
|
$
|
901
|
|
|
$
|
613
|
|
|
|
|
6INVENTORIES
The components of inventory are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
August 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Raw materials
|
|
$
|
18,424
|
|
|
$
|
26,578
|
|
Work in progress
|
|
|
731
|
|
|
|
1,139
|
|
Finished goods
|
|
|
21,074
|
|
|
|
22,483
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
40,229
|
|
|
$
|
50,200
|
|
|
|
|
|
|
|
|
10
Changes in Australian and New Zealand currency exchange rates have caused a reduction in the
recorded amount of inventory in the first six months of fiscal 2009 by approximately $5.6 million.
Raw material inventory declined in the first six months of fiscal 2009 primarily due to the
consumption of on-site corn inventories and a decline in the price of corn in the Industrial
Ingredients North America business.
7PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
August 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Land
|
|
$
|
18,139
|
|
|
$
|
20,993
|
|
Plant and equipment
|
|
|
369,465
|
|
|
|
385,632
|
|
Construction in progress
|
|
|
7,800
|
|
|
|
6,808
|
|
|
|
|
|
|
|
|
|
|
|
395,404
|
|
|
|
413,433
|
|
Accumulated depreciation
|
|
|
(242,277
|
)
|
|
|
(243,501
|
)
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
$
|
153,127
|
|
|
$
|
169,932
|
|
|
|
|
|
|
|
|
Changes in Australian and New Zealand currency exchange rates have caused a reduction in the
recorded amount of net property, plant and equipment in the first six months of fiscal 2009 by
approximately $9.9 million.
8DEBT
In fiscal 2007, the Company entered into a $145 million Second Amended and Restated Credit
Agreement (the 2007 Agreement) among the Company; Harris N.A.; LaSalle Bank National Association;
Cooperative Centrale Raiffeisen-Boorleenbank B.A., (New York Branch) (Rabobank Nederland); U.S.
Bank National Association; and the Australia and New Zealand Banking Group Limited.
Due to the expected impact of the flood described in Note 3 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 and 1.50 thereafter
as defined in the 2007 Agreement.
On February 26, 2009, the Company entered into a second amendment to the 2007 Agreement (the
Second Amendment). The Second Amendment adjusts certain covenants and other provisions in the
2007 Agreement to provide additional relief from the financial impact of the flood at the Companys
Cedar Rapids, Iowa facility. The amendment provides that the Total Funded Debt Ratio, under the
2007 Agreement, which is computed as funded debt divided by EBITDA (which is, generally, earnings
before interest, taxes, depreciation and amortization, plus (minus) certain non-cash losses (gains)
and costs and insurance recoveries related to the flood in Cedar Rapids, Iowa) shall not exceed
4.00 through August 31, 2009, 3.25 for the first quarter of fiscal 2010 and 3.00 for each fiscal
quarter thereafter. In addition, the Second Amendment requires the Company to maintain a
consecutive twelve month minimum EBITDA (as defined in the Second Amendment) of $20.0 million for
each fiscal quarter through November 2009. The Second Amendment also provides that the Company may
not declare or pay dividends on, or make any other distributions in respect of, its common stock in
excess of $4 million during its 2009 fiscal year and $8 million in any fiscal year thereafter. The
Second Amendment limits the Companys annual capital expenditures to $12 million for fiscal year
2009 and $20 million thereafter as defined in the 2007 Agreement. Additionally, the Second
Amendment increased the maximum commitment fee for undrawn balances by 10 basis points and the
maximum LIBOR margin payable on outstanding debt was increased by 100 basis points. The
incremental annual interest expense from these pricing changes is estimated at $0.8 million per
annum, based on current outstanding borrowings. Pursuant to the Second Amendment, Bank of Montreal
became the Administrative agent under the 2007 Agreement, replacing Harris N.A. This description
is qualified in its entirety by reference to the Second Amendment, which is attached as Exhibit
10.1 to the Companys Form 8-K filed on March 3, 2009.
11
At February 28, 2009, the Company had $29.4 million and $7.4 million outstanding,
respectively, under the revolving credit and term loan portions of its credit facility. In
addition, the Company had $43.0 million outstanding under its capital expansion credit facility on
February 28, 2009. The Companys ability to borrow under its $60 million revolving credit facility
is subject to the Companys compliance with, and is limited by, the covenants in the 2007
Agreement.
The Companys short-term borrowings consist of an Australian variable-rate grain inventory
financing facility with an Australian bank for a maximum of $26.0 million U.S. dollars at the
exchange rate at February 28, 2009. The amount outstanding under this arrangement, which is
classified as a current liability on the balance sheet, was $1.3 million at February 28, 2009.
As of February 28, 2009, 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 debt of $25.6 million at 4.18% and $5.4 million at 5.08%, plus the
applicable margin under the 2007 Agreement. At February 28, 2009, the fair value of the interest
rate swaps was recorded on the balance sheet as a liability of $1.9 million.
9INCOME TAXES
The Companys Australian operations reported a tax loss for fiscal 2008 and for the first half
of fiscal 2009. Australian tax law provides for an unlimited carryforward period for net operating
losses but does not allow losses to be carried back to previous tax years. Due to the uncertainty
related to generating sufficient future taxable income in Australia, the Company currently believes
that it is more likely than not that the net deferred tax benefit will not be realized.
Accordingly, in the second quarter of fiscal 2009 the Company recorded a $2.1 million valuation
allowance against the entire Australian net deferred tax asset. A valuation allowance has not been
recognized on the net U.S. deferred tax asset as there is sufficient taxable income in carryback
years to realize the net deferred tax asset.
The Companys effective tax rates for the three- and six-month periods ended February 28, 2009
were 1.1% and 3.2%, respectively. The reduction in the effective tax rates from the U.S. federal
statutory rate is primarily due to (1) a $2.1 million valuation allowance recognized against the
Australian net deferred tax assets as discussed above, and (2) no recognition of a tax benefit in
connection with the Australian goodwill impairment charge of $13.8 million as this charge is not
deductible for tax purposes, and (3) an increase in the amount of unrecognized tax benefits as
discussed below.
The amount of unrecognized tax benefits determined in accordance with Financial Interpretation
No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN 48), increased by $0.7 million and $0.8 million for the three and six months ended February
28, 2009. The total amount of unrecognized tax benefits at February 28, 2009 was $1.5 million, all
of which, if recognized, would favorably impact the effective tax rate. The Company has been
notified by one state taxing jurisdiction that its fiscal 2004-2006 tax returns will be audited
beginning in the third quarter of fiscal 2009. None of the Companys other income tax returns are
under examination by taxing authorities. The Company does not believe that the total amount of
unrecognized tax benefits at February 28, 2009 will change materially in the next 12 months.
On a quarterly basis, the Company reviews its estimate of the effective income tax rate
expected to be applicable for the full fiscal year. This rate is used to calculate income tax
expense or benefit on current year-to-date pre-tax income or loss. Income tax expense or benefit
for the current interim period is the difference between the computed year-to-date income tax
amount and the tax expense or benefit reported for previous quarters. In reviewing its effective
tax rate, the Company uses estimates of the amounts of permanent differences between book and tax
accounting and projections of fiscal year pre-tax income or loss. Adjustments to the Companys
tax expense related to the prior fiscal year, amounts recorded in accordance with FIN 48, changes
in tax rates, and the effect of a change in the beginning-of-the-year valuation allowance are
treated as discrete items and are recorded in the period in which they arise.
12
10STOCKHOLDERS EQUITY
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.
11OTHER COMPREHENSIVE INCOME (LOSS) (OCI)
The components of total comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
February
|
|
|
February
|
|
|
February
|
|
|
February
|
|
|
|
28, 2009
|
|
|
29, 2008
|
|
|
28, 2009
|
|
|
29, 2008
|
|
|
|
(In thousands)
|
|
Net income (loss)
|
|
$
|
(22,178
|
)
|
|
$
|
2,315
|
|
|
$
|
(22,547
|
)
|
|
$
|
5,477
|
|
Foreign currency translation adjustments
|
|
|
(1,346
|
)
|
|
|
5,598
|
|
|
|
(20,302
|
)
|
|
|
11,069
|
|
Net unrealized gain (loss) on derivative
instruments that qualify as cash flow
hedges,
net of tax
|
|
|
(1,890
|
)
|
|
|
1,294
|
|
|
|
(2,480
|
)
|
|
|
1,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
(25,414
|
)
|
|
$
|
9,207
|
|
|
$
|
(45,329
|
)
|
|
$
|
17,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the foreign currency translation adjustments in the first six months of fiscal
2009 is due to the decline of approximately 25% in the Australian and New Zealand dollars compared
to the U.S. dollar since August 31, 2008.
12NON-OPERATING INCOME, NET
Non-operating income, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Royalty and licensing income
|
|
$
|
377
|
|
|
$
|
405
|
|
|
$
|
787
|
|
|
$
|
855
|
|
Gain on sale of dextrose product line
|
|
|
1,562
|
|
|
|
|
|
|
|
1,562
|
|
|
|
|
|
Gain (loss) on foreign currency
transactions
|
|
|
(28
|
)
|
|
|
434
|
|
|
|
(641
|
)
|
|
|
444
|
|
Other
|
|
|
13
|
|
|
|
(48
|
)
|
|
|
6
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,924
|
|
|
$
|
791
|
|
|
$
|
1,714
|
|
|
$
|
1,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2009, the Companys Food Ingredients North America business segment sold assets
related to its dextrose product line to a third-party purchaser for $2.9 million, net of
transaction costs. The Company recorded a $1.6 million gain on the sale.
During the three and six months ended February 28, 2009, the Company recognized a net foreign
currency transaction loss on Australian dollar denominated assets and liabilities as disclosed in
the table above.
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 has
recognized $11.2 million in royalty income from the inception of the agreement through February 28,
2009.
13
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 for applications not related to human nutrition. In addition, as part of the settlement
agreement, Penford became entitled to receive additional royalties under a license of rights under
the RS Patents in human nutrition applications and to receive certain other benefits, including an
acceleration and extension of royalties under its license with National Starch. At the time of the
settlement, the Company began recognizing license income of $625,000 ratably over the remaining
life of the patent license, which at the time of the settlement was estimated to be seven years.
13 PENSION AND POST-RETIREMENT BENEFIT PLANS
The components of the net periodic pension and post-retirement benefit costs for the three and
six months ended February 28, 2009 and February 29, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
February 29,
|
|
Defined benefit pension plans
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Service cost
|
|
$
|
355
|
|
|
$
|
371
|
|
|
$
|
710
|
|
|
$
|
742
|
|
Interest cost
|
|
|
645
|
|
|
|
623
|
|
|
|
1,290
|
|
|
|
1,246
|
|
Expected return on plan assets
|
|
|
(607
|
)
|
|
|
(663
|
)
|
|
|
(1,214
|
)
|
|
|
(1,326
|
)
|
Amortization of prior service cost
|
|
|
63
|
|
|
|
63
|
|
|
|
126
|
|
|
|
126
|
|
Amortization of actuarial losses
|
|
|
53
|
|
|
|
13
|
|
|
|
106
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
509
|
|
|
$
|
407
|
|
|
$
|
1,018
|
|
|
$
|
814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
February 29,
|
|
Post-retirement health care plans
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Service cost
|
|
$
|
65
|
|
|
$
|
78
|
|
|
$
|
130
|
|
|
$
|
156
|
|
Interest cost
|
|
|
228
|
|
|
|
213
|
|
|
|
456
|
|
|
|
426
|
|
Amortization of prior service cost
|
|
|
(38
|
)
|
|
|
(38
|
)
|
|
|
(76
|
)
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
255
|
|
|
$
|
253
|
|
|
$
|
510
|
|
|
$
|
506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASURMENTS
Effective September 1, 2008, the Company adopted SFAS 157, Fair Value Measurements (SFAS
157), which defines fair value, establishes a framework for its measurement, and expands
disclosures concerning fair value measurements. The Company adopted the provisions of SFAS 157
with respect to financial assets and liabilities. In February 2008, the FASB issued Staff Position
No. 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157
for nonfinancial assets and liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis at least annually. The major categories of
assets and liabilities that are measured at fair value, for which the Company has not applied the
provisions of SFAS 157, are as follows: reporting units measured at fair value in the first step
of a goodwill impairment test under SFAS No. 142 and the initial recognition of asset retirement
obligations. The adoption of SFAS 157 did not have a material impact on the Companys results of
operations, financial position or cash flow, but did result in additional disclosures.
SFAS 157 defines fair value as the price that would be received from selling an asset or paid
to transfer a liability (an exit price) in Penfords principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date.
SFAS 157 also establishes a fair value hierarchy that requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value.
Observable inputs are inputs that reflect the assumptions market participants would use in pricing
the asset or liability developed based on market data obtain from sources outside the reporting
entity.
14
Unobservable inputs are inputs that reflect Penfords own assumptions based on market data
and on assumptions that market participants would use in pricing the asset or liability developed
based on the best information available in the circumstances. The three levels of inputs that may
be used to measure fair value are:
|
|
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the entity has the ability to access at the measurement date.
|
|
|
|
|
Level 2 inputs are other than quoted prices included within Level 1 that are observable
for assets and liabilities such as (1) quoted prices for similar assets or liabilities in
active markets, (2) quoted prices for identical or similar assets or liabilities in markets
that are not active, or (3) inputs that are derived principally or corroborated by
observable market date by correlation or other means.
|
|
|
|
|
Level 3 inputs are unobservable inputs to the valuation methodology for the assets or
liabilities.
|
Presented below are the fair values of the Companys financial instruments at February 28, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
In Active
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Instruments
|
|
Inputs
|
|
Inputs
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
|
|
(in thousands)
|
Current assets (Other Current Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
1,329
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (Accrued Liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
|
|
|
$
|
1,929
|
|
|
$
|
|
|
|
$
|
1,929
|
|
Foreign currency contracts
|
|
|
|
|
|
|
272
|
|
|
|
|
|
|
|
272
|
|
|
|
|
Total Liabilities
|
|
$
|
|
|
|
$
|
2,201
|
|
|
$
|
|
|
|
$
|
2,201
|
|
|
|
|
Derivative Instruments
Effective December 1, 2008, the Company adopted FASB 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.
Interest Rate Swap Agreements
The Company uses interest rate swaps to manage the variability of interest payments associated
with its floating-rate long-term debt obligations. The interest payable on the long-term debt
effectively becomes fixed at a certain rate and reduces the impact of future interest rate changes
on future interest expense. As of February 28, 2009, the Company had three interest rate swaps
which fixed the interest payable on $25.6 million of long-term debt at 4.18% and on $5.4 million of
long-term debt at 5.08%, plus the applicable margin under the 2007 Agreement. The notional
amounts, interest rate reset dates, underlying benchmark rates and interest payment dates match the
terms of the long-term debt. The Company has designated the swap agreements as cash flow hedges
and accounts for them pursuant to FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities. The unrealized losses on the interest rate swaps are included in
accumulated other comprehensive income (loss). The periodic settlements on the swaps are recorded
as interest expense.
Foreign Currency Contracts
The Companys Food Ingredients North America business purchases certain raw materials in a
foreign currency, the Czech koruna (CZK), the monetary unit of the Czech Republic. In order to
manage the variability in forecasted cash flows due to the foreign currency risk associated with
settlement of accounts payable denominated
15
in CZK, the Company purchases foreign currency forward
contracts. The Company has designated these contracts as cash flow hedges and accounts for them
pursuant to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
To the extent the amounts and timing of the forecasted cash flows and the forward contracts
continue to match, the unrealized losses on the foreign currency purchase contracts are included in
accumulated other comprehensive income (loss). The gain or loss on the contracts is recorded in
cost of goods sold at the time the inventory is sold. At February 28, 2009, the Company had
contracts to purchase CZK 31,420,146 at various dates between April and August 2009 at a weighted
average exchange rate of 18.63 CZK per U.S. $1.
Commodity Contracts
The Company uses forward contracts and readily marketable exchange-traded futures on corn and
natural gas to manage the price risk of those inputs to its manufacturing process. The Company has
designated these instruments as hedges and accounts for them pursuant to FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities.
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 and/or inventory
are recognized in current earnings as a component of cost of goods sold. 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. If it is determined that the
derivative instruments used are no longer effective at offsetting changes in the price of the
hedged item, then the changes in market value would be recognized in current earnings as a
component of cost of good sold or interest expense.
To reduce the price volatility of corn used in fulfilling some of its starch sales contracts,
Penford from time to time uses readily marketable exchange-traded futures as well as forward cash
corn purchases. The exchange-traded futures are not purchased or sold for trading or speculative
purposes and are designated as hedges. The changes in market value of such contracts have
historically been, and are expected to continue to be, effective in offsetting the price changes of
the hedged commodity. Penford also at times uses exchange-traded futures to hedge corn inventories
and firm corn purchase contracts. Hedged transactions are expected to occur within 12 months of
the time the hedge is established.
As of February 28, 2009, the Company had the following outstanding forward futures contracts:
|
|
|
Corn Futures
|
|
2,895,000 Bushels
|
Natural Gas Futures
|
|
1,200,000 mmbtu (millions of British thermal units)
|
Interest Rate Contracts
|
|
31,000,000 US Dollars
|
Foreign Exchange Contracts
|
|
31,420,146 CZK
|
16
The fair values of our financial assets, liabilities, and statement of derivative positions in
the scope of SFAS 161 as of February 28, 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments
|
|
Derivatives Designated as Hedging
|
|
as of the Quarter Ended February 28, 2009
|
|
Instruments under SFAS 133
|
|
(in thousands)
|
|
|
|
2009 Asset Derivatives
|
|
|
2009 Liability Derivatives
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
Location
|
|
|
Fair Value
|
|
|
Location
|
|
|
Fair Value
|
|
|
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures
|
|
Other Current Assets
|
|
$
|
235
|
|
|
Other Current Assets
|
|
|
($2,176
|
)
|
Natural Gas Futures
|
|
Other Current Assets
|
|
|
|
|
|
Other Current Assets
|
|
|
(4,902
|
)
|
Interest Rate Contracts
|
|
Other Current Assets
|
|
|
|
|
|
Accrued Liabilities
|
|
|
(1,929
|
)
|
Foreign Exchange Contracts
|
|
Other Current Assets
|
|
|
|
|
|
Accrued Liabilities
|
|
|
(272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash Flow Hedges
|
|
|
|
|
|
|
235
|
|
|
|
|
|
|
|
(9,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures
|
|
Other Current Assets
|
|
|
2,954
|
|
|
Other Current Assets
|
|
|
(339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value Hedges
|
|
|
|
|
|
|
2,954
|
|
|
|
|
|
|
|
(339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
Designated as Hedging
Instruments under SFAS
133
|
|
|
|
|
|
$
|
3,189
|
|
|
|
|
|
|
|
($9,618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in SFAS 133 Cash
|
|
The Effect of Derivative Instruments on the Statement of Financial Performance
|
|
Flow Hedging Relationships
|
|
for the Quarter Ended February 28, 2009
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or
|
|
|
|
|
|
|
|
Location of Gain or
|
|
|
Amount of Gain or
|
|
|
|
|
|
|
(Loss) Recognized
|
|
|
|
Amount of Gain or
|
|
|
(Loss) Reclassified
|
|
|
(Loss) Reclassified
|
|
|
Location of Gain or (Loss)
|
|
|
in Income on
|
|
|
|
(Loss)
|
|
|
from Accum OCI into
|
|
|
from Accum OCI into
|
|
|
Recognized in Income on
|
|
|
Derivative
|
|
|
|
Recognized in OCI
|
|
|
Income
|
|
|
Income (Effective
|
|
|
Derivative (Ineffective
|
|
|
(Ineffective
|
|
|
|
(Effective Portion)
|
|
|
(Effective Portion)
|
|
|
Portion)
|
|
|
Portion)
|
|
|
Portion)
|
|
|
|
|
|
|
|
Income Statement
|
|
|
|
|
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
|
|
Location
|
|
|
|
|
|
|
|
|
Cash Flow Hedging
Relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures
|
|
$
|
(905
|
)
|
|
Cost of goods sold
|
|
$
|
6,981
|
|
|
Cost of goods sold
|
|
$
|
618
|
|
Natural Gas Futures
|
|
|
(4,902
|
)
|
|
Cost of goods sold
|
|
|
(795
|
)
|
|
Cost of goods sold
|
|
|
|
|
Interest Rate Contracts
|
|
|
(1,929
|
)
|
|
Interest expense
|
|
|
(47
|
)
|
|
Interest Expense
|
|
|
|
|
Foreign Exchange Contracts
|
|
|
(290
|
)
|
|
Cost of goods sold
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(8,026
|
)
|
|
|
|
|
|
$
|
6,139
|
|
|
|
|
|
|
$
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in SFAS 133 Fair
|
|
The Effect of Derivative Instruments on the Statement of Financial Performance
|
|
Value Hedging Relationships
|
|
for the Quarter Ended February 28, 2009
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
Amount of Gain
|
|
|
|
|
|
|
Location of
|
|
|
Gain/(Loss)
|
|
|
|
Location of Gain /
|
|
|
/ (Loss)
|
|
|
Hedged Item in
|
|
|
Gain/(Loss)
|
|
|
Recognized in
|
|
|
|
(Loss) Recognized
|
|
|
Recognized in
|
|
|
SFAS 133 Fair
|
|
|
Recognized in
|
|
|
Income on
|
|
|
|
in Income on
|
|
|
Income on
|
|
|
Value Hedge
|
|
|
Income on Related
|
|
|
Related Hedged
|
|
|
|
Derivative
|
|
|
Derivative
|
|
|
Relationships
|
|
|
Hedged Item
|
|
|
Item
|
|
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
|
Income Statement
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
|
|
|
|
Fair Value Hedge
Relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures
|
|
Cost of goods sold
|
|
|
|
|
|
Firm Commitments/Inventory
|
|
Cost of goods sold
|
|
$
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
15RESTRUCTURING 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 quarter of fiscal 2008, the
Companys Australian business recorded a restructuring charge of $0.1 million related to a
workforce reduction implemented at its New Zealand operations. These costs are shown as
Restructure Costs in the statement of operations.
16SEGMENT REPORTING
Financial information for the Companys three segments is presented below. The first two
segments, Industrial IngredientsNorth America and Food IngredientsNorth America, are broad
categories of end-market users, primarily served by the Companys U.S. operations. The Industrial
Ingredients segment provides carbohydrate-based products for industrial applications, primarily in
the paper and packaging products and fuel grade ethanol industries. The Food Ingredients segment
produces specialty starches for food applications. The third segment is the Companys
geographically separate operations in Australia and New Zealand, which are engaged primarily in the
food ingredients business. A fourth item for corporate and other activity is presented to
provide reconciliation to amounts reported in the condensed 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 elimination and consolidation entries. The elimination of intercompany sales between
Australia/New Zealand operations and Food IngredientsNorth America is presented separately since
the chief operating decision maker views segment results prior to intercompany eliminations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
February
|
|
|
February
|
|
|
February
|
|
|
February
|
|
|
|
28, 2009
|
|
|
29, 2008
|
|
|
28, 2009
|
|
|
29, 2008
|
|
|
|
(In thousands)
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial IngredientsNorth America
|
|
$
|
47,315
|
|
|
$
|
49,076
|
|
|
$
|
89,157
|
|
|
$
|
98,286
|
|
Food IngredientsNorth America
|
|
|
16,623
|
|
|
|
15,642
|
|
|
|
34,365
|
|
|
|
31,718
|
|
Australia/New Zealand Operations
|
|
|
16,068
|
|
|
|
23,458
|
|
|
|
37,428
|
|
|
|
53,402
|
|
Intercompany sales
|
|
|
(198
|
)
|
|
|
(287
|
)
|
|
|
(451
|
)
|
|
|
(656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,808
|
|
|
$
|
87,889
|
|
|
$
|
160,499
|
|
|
$
|
182,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial IngredientsNorth America
|
|
$
|
(6,652
|
)
|
|
$
|
4,568
|
|
|
$
|
(4,852
|
)
|
|
$
|
10,265
|
|
Food IngredientsNorth America
|
|
|
2,813
|
|
|
|
2,207
|
|
|
|
6,211
|
|
|
|
4,859
|
|
Australia/New Zealand Operations
|
|
|
(16,787
|
)
|
|
|
(2,045
|
)
|
|
|
(18,320
|
)
|
|
|
(2,120
|
)
|
Corporate and other
|
|
|
(2,374
|
)
|
|
|
(2,059
|
)
|
|
|
(5,202
|
)
|
|
|
(4,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(23,000
|
)
|
|
$
|
2,671
|
|
|
$
|
(22,163
|
)
|
|
$
|
8,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
In the second quarter of fiscal 2009, the Company recorded a $13.8 million non-cash goodwill
impairment charge related to its Australian/New Zealand Operations. See Note 4 for further
details.
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
August 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Industrial Ingredients-North America
|
|
$
|
144,830
|
|
|
$
|
141,618
|
|
Food IngredientsNorth America
|
|
|
33,530
|
|
|
|
35,100
|
|
Australia/New Zealand Operations
|
|
|
64,192
|
|
|
|
111,255
|
|
Corporate and other
|
|
|
31,833
|
|
|
|
32,460
|
|
|
|
|
|
|
|
|
|
|
$
|
274,385
|
|
|
$
|
320,433
|
|
|
|
|
|
|
|
|
17EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share reflect only the weighted average common shares outstanding
during the period. Diluted earnings (loss) per share reflect weighted average common shares
outstanding and the effect of any dilutive common stock equivalent shares
.
Diluted earnings
(loss) per share is calculated by dividing net income (loss) by the average common shares
outstanding plus additional common shares that would have been outstanding assuming the exercise
of in-the-money stock options, using the treasury stock method. The following table presents the
computation of diluted weighted average shares outstanding for the three and six months ended
February 28, 2009 and February 29, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
February
|
|
February
|
|
February
|
|
February
|
|
|
28, 2009
|
|
29, 2008
|
|
28, 2009
|
|
29, 2008
|
|
|
(In thousands)
|
Weighted average common shares
outstanding
|
|
|
11,174
|
|
|
|
10,857
|
|
|
|
11,165
|
|
|
|
9,988
|
|
Dilutive stock options and awards
|
|
|
|
|
|
|
338
|
|
|
|
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding,
assuming dilution
|
|
|
11,174
|
|
|
|
11,195
|
|
|
|
11,165
|
|
|
|
10,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended February 28, 2009, there were 86,701 and 92,174
weighted-average restricted stock awards excluded from the calculation of diluted earnings (loss)
per share because they were antidilutive. Weighted-average restricted stock awards of 104,605 and
70,061 shares for the three and six months ended February 29, 2008, were excluded from the
calculation of diluted earnings (loss) per share because they were antidilutive. Weighted-average
stock options to purchase 1,375,788 and 1,376,069 shares of common stock for the three and six
months ended February 28, 2009, were excluded from the calculation of diluted earnings (loss) per
share because they were antidilutive. For the three and six months ended February 29, 2008, there
were no stock options excluded from the calculation of diluted earnings (loss) per share.
18LEGAL PROCEEDINGS
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.
19GUARANTEE
In February 2009, Penford Corporation entered into an agreement with a supplier of grain to
the Companys subsidiary company, Penford New Zealand Limited. Pursuant to this agreement, the
Company has guaranteed the trade payable obligations of Penford New Zealand arising from the
purchase of grain from this supplier up to a limit of 9.0 million New Zealand Dollars or the New
Zealand Dollar equivalent of $5.0 million U.S. Dollars, whichever is less. The guarantee continues
for the period during which the supplier sells grain to Penford New Zealand. As of February 28,
2009, the outstanding payable balance related to this guarantee is 2.8 million New Zealand Dollars,
which was equivalent to $1.4 million U.S. Dollars on that date. This outstanding balance is
included in accounts payable in the Condensed Consolidated Balance Sheet.
19
Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
This Quarterly Report on
Form 10-Q
(Quarterly Report), including, but not limited, to
statements found in the Notes to Consolidated Financial Statements and in Item 2 Managements
Discussion and Analysis of Financial Condition and Results of Operations, contains statements that
are forward-looking statements within the meaning of the federal securities laws. In particular,
statements pertaining to anticipated operations and business strategies contain forward-looking
statements. Likewise, statements regarding anticipated changes in the Companys business and
anticipated market conditions are forward-looking statements. Forward-looking statements involve
numerous risks and uncertainties and should not be relied upon as predictions of future events.
Forward-looking statements depend on assumptions, dates or methods that may be incorrect or
imprecise, and the Company may not be able to realize them. Forward-looking statements can be
identified by the use of forward-looking terminology such as believes, expects, may, will,
should, seeks, approximately, intends, plans, estimates, or anticipates, or the
negative use of these words and phrases or similar words or phrases. Forward-looking statements
can be identified by discussions of strategy, plans or intentions. Among the factors that could
cause actual results to differ materially are the risks and uncertainties discussed in this
Quarterly Report, including those referenced in Item 1A in this Quarterly Report, and those
described from time to time in other filings with the Securities and Exchange Commission, including
the Companys Annual Report on
Form 10-K
for the year ended August 31, 2008, which include, but
are not limited to:
|
§
|
|
competition;
|
|
|
§
|
|
the possibility of interruption of business activities due to equipment problems,
accidents, strikes, weather or other factors;
|
|
|
§
|
|
product development risk;
|
|
|
§
|
|
changes in corn and other raw material prices and availability;
|
|
|
§
|
|
the amount and timing of expenditures for flood restoration costs and related
insurance recoveries;
|
|
|
§
|
|
changes in general economic conditions or developments with respect to specific
industries or customers affecting demand for the Companys products including
unfavorable shifts in product mix;
|
|
|
§
|
|
unanticipated costs, expenses or third-party claims;
|
|
|
§
|
|
the risk that results may be affected by construction delays, cost overruns,
technical difficulties, nonperformance by contractors or changes in capital improvement
project requirements or specifications;
|
|
|
§
|
|
interest rate, chemical and energy cost volatility;
|
|
|
§
|
|
foreign currency exchange rate fluctuations;
|
|
|
§
|
|
changes in returns on pension plan assets and/or assumptions used for determining
employee benefit expense and obligations;
|
|
|
§
|
|
other unforeseen developments in the industries in which Penford operates, or
|
|
|
§
|
|
other factors described in Part I, Item 1A Risk Factors.
|
Overview
Penford generates revenues, income and cash flows by developing, manufacturing and marketing
specialty natural-based ingredient systems for industrial and food applications and for fuel grade
ethanol. The Company develops and manufactures ingredients with starch as a base, providing
value-added applications to its customers. Penfords starch products are manufactured primarily
from corn, potatoes, and wheat.
20
In analyzing business trends, management considers a variety of performance and financial
measures, including sales revenue growth, sales volume growth, gross margins and operating income
of the Companys business segments. Penford manages its business in three segments. The first
two, Industrial IngredientsNorth America and Food IngredientsNorth 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 Notes 1 and 16 to the Condensed Consolidated Financial
Statements for additional information regarding the Companys business segment operations.
Impact of Cedar Rapids Flood
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. By the end of the first quarter of fiscal
2009, the facilitys processing rate had reached pre-flood levels.
During the second quarter of fiscal 2009, the Company recorded $0.6 million of flood
restoration costs which are recognized, net of insurance recoveries of $4.4 million, in loss from
operations in the financial statements. For the six months ended February 28, 2009, the Company
recorded $7.4 million of flood restoration costs which are recognized, net of insurance recoveries
of $15.5 million, in loss from operations in the financial statements. The total direct costs of
the flood since June 2008 were $45.5 million, which included ongoing expenses during the time the
plant was shut down, but did not include lost profits. See Note 3 to the Condensed Consolidated
Financial Statements for details of the restoration costs.
During the second quarter of fiscal 2009, the Company recognized $4.4 million of insurance
recoveries. These recoveries have been recorded as an offset to the losses caused by the flooding.
The insurance recoveries recognized to date total $26.0 million.
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 Company will continue to process its claim for flood losses under its insurance
policies, but is unable to estimate the amount or timing of future recoveries. The amount
ultimately recovered from the Companys insurers may be materially more or less than the Companys
direct costs of the flood.
Goodwill
During the second quarter of fiscal 2009, the Company continued to experience a worsening
demand outlook, a decline in its sales and operating income, as well as a reduction in its expected
future cash flows. In addition, Penford experienced a sustained, significant decline in its stock
price. During the second quarter of fiscal 2009, the Company concluded that there were sufficient
indicators to perform an interim goodwill impairment analysis in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets. Based on the analysis, the Company recorded a $13.8
million non-cash goodwill impairment charge, which represented all of the goodwill allocated to its
Australia/New Zealand Operations segment. See Note 4 to the Condensed Consolidated Financial
Statements.
Accounting Changes
Effective September 1, 2008, the Company adopted FASB Statement No. 157, Fair Value
Measurements (SFAS 157), for financial assets and liabilities carried at fair value that are
recognized or disclosed at fair value in the financial statements on a recurring basis. 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. The adoption did not
have a material impact on the companys financial statements. See Note 14 to the Condensed
Consolidated Financial Statements. Due to the issuance of FASB Staff Position No. 157-2 (FSP
157-2), the effective date of SFAS 157 has been deferred to fiscal years beginning after November
15, 2008 (fiscal 2010 for the Company) for non-recurring, nonfinancial assets and liabilities that
are recognized or disclosed at fair value. The Company is continuing to evaluate the impact of
adopting these provisions in fiscal 2010. In October 2008, the FASB issued FSP FAS 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active
(FSP 157-3). FSP 157-3 clarifies the application of SFAS 157 and addresses how the fair value of
a financial asset is determined when the
21
market for that financial asset is inactive. FSP 157-3
was effective upon issuance. The implementation of this standard did not have an impact on the
Companys 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) which
allows companies the option to measure certain financial assets and financial liabilities at fair
value at specified election dates. The Company adopted SFAS 159 and elected not to measure any
additional financial instruments and other items at fair value.
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, the
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. Effective December 1, 2008, the Company adopted SFAS 161. See Note 14
to the Condensed Consolidated Financial Statements.
Results of Operations
Executive Overview
Consolidated sales for the three months ended February 28, 2009 declined 9.2% to $79.8 million
from $87.9 million in the second quarter of fiscal 2008, primarily due to a significant decline in
the demand for paper and writing products, a shift in the manufacturing mix in the Industrial
Ingredients North America business to produce ethanol which sells at lower average prices than
industrial starches, and lower foreign currency exchange rates in the Australia/New Zealand
operations. These factors were partially offset by favorable unit pricing in the Australia/New
Zealand operations and the Food Ingredients North America segments. Consolidated second quarter
gross margin declined $15.6 million to a loss of $4.1 million, primarily due to a decline in
ethanol selling prices which caused a gross margin loss at the Industrial Ingredients North
America segment, as well as lower plant utilization in the Australia/New Zealand business. Loss
from operations was $23.0 million, $25.7 million lower than the second quarter operating income of
$2.7 million for fiscal 2008 due to gross margin declines and a $13.8 million non-cash goodwill
impairment charge related to its Australian and New Zealand business segment. See Note 4 to the
Condensed Consolidated Financial Statements.
Consolidated sales for the six months ended February 28, 2009 decreased 12.2% to $160.5
million from $182.7 million in the same period last year on lower foreign currency exchange rates
and a decline in sales volumes in the Australia/New Zealand Operations, and, in the Industrial
Ingredients North America business, on lower average unit selling prices for ethanol than for
industrial starches. These factors were partially offset by higher average unit pricing in the
Australia/New Zealand and Food Ingredients North America businesses. Gross margin as a percent
of sales was 0.8%, compared to 15.2% last year, on higher grain costs in Australia and New Zealand,
revenue declines, and lower plant utilization in the Australia/New Zealand business. Operating
loss for the first half of fiscal 2009 declined to $22.2 million from operating income of $8.4
million for the first half of fiscal 2008 due to decreased gross margins and a $13.8 million
non-cash goodwill impairment charge related to its Australian and New Zealand business segment.
See Note 4 to the Condensed Consolidated Financial Statements. Included in operations for the
three- and six-month periods ended February 28, 2009 were net insurance proceeds of $3.8 million
and $8.0 million, respectively. See Note 3 to the Condensed Consolidated Financial Statements.
Operating income for the first six months of fiscal 2008 included $1.3 million of severance costs
related to reconfiguring the Australia/New Zealand business. See Note 15 to the Condensed
Consolidated Financial Statements. A discussion of segment results of operations and the effective
tax rate follows.
Industrial IngredientsNorth America
In the second quarter of fiscal 2009, U.S. economic activity contracted significantly and
demand for our customers paper and packaging products declined sharply. The paper industry
balanced manufacturing capacity with decreased demand by taking downtime or permanently closing
mills and operating rates at paper mills decreased. Declines in the prices for gasoline and other
fuels have also depressed prices for ethanol.
Second quarter fiscal 2009 sales at the Companys Industrial IngredientsNorth America
business unit declined $1.8 million, or 3.6%, to $47.3 million. Starch volumes decreased as demand
declined for paper and packaging products. Average unit selling prices improved for the core
starch product lines by 8.5% and sales and pricing for the
22
Companys specialty Liquid Natural
Additives applications improved modestly from a year ago. Sales of ethanol, which the Company
began producing in the third quarter of last fiscal year, were $14.3 million in the second quarter
of fiscal 2009. Sales for the first half of fiscal 2009 decreased 9% to $89.2 million as
double-digit improvements in unit pricing in all starch categories were not able to offset volume
declines. Sales of ethanol, which was not produced in the first half of fiscal 2008, were $24.0
million for the first six months of fiscal 2009.
Income from operations for the second quarter of fiscal 2009 at the Companys Industrial
IngredientsNorth America business unit decreased from $4.6 million a year ago to an operating loss
of $6.7 million in fiscal 2009. Second quarter fiscal 2009 gross margin was a loss of $7.4 million
compared to positive margin of $7.4 million for the second quarter of fiscal 2008. Unit margins on
ethanol are lower than industrial starch and the decline in ethanol selling prices as well as the
unfavorable mix in revenues decreased gross margin for the industrial business. Margin and
operating losses of $7.3 million and $4.9 million, respectively, for the six months ended February
28, 2009 were also driven by the increase in lower margin ethanol sales and the reduction in starch
sales to the paper markets. See Note 3 to the Condensed Consolidated Financial Statements for a
discussion of the insurance recoveries and costs associated with the flooding in the summer of
2008. The Company recorded net insurance recoveries of $3.8 million and $8.0 million for the
second quarter and first half of fiscal 2009, respectively.
Food IngredientsNorth America
Fiscal 2009 second quarter sales for the Food IngredientsNorth America segment of $16.6
million increased 6.3%, or $1.0 million, from the second quarter of fiscal 2008, due to higher
average unit pricing and improved mix with 18% growth in potato coating sales and higher sales of
pet chew and treats product lines. Sales for the six months ended February 28, 2009 rose 8.3%, or
$2.6 million, to $34.4 million over the same period last year. Sales growth was driven by
improvements in potato coatings and the pet chew and treats product lines and a 27% increase in
sales of applications for the dairy/cheese end market and higher sales in the sauces and gravies
end markets.
Income from operations for the second quarter of fiscal 2009 at the Food IngredientsNorth
America segment was $2.8 million, a 28% increase over the same period last year. Second quarter
gross margin improved 15.3% to $4.8 million on favorable pricing and product mix and lower
distribution costs, partially offset by lower volumes. Income from operations for the first half
of fiscal 2009 improved to $6.2 million, a $1.4 million increase compared to the same period of
fiscal 2008. Gross margin increased by $1.4 million, and gross margin as a percent of sales
expanded 180 basis points over last years period on improved pricing and lower distribution costs,
partially offset by lower volumes. Operating expenses and research activities were comparable to
the same period last year as higher employee-related costs were offset by lower expenditures for
product trials.
In the second quarter of fiscal 2009, the Companys Food Ingredients North America business
segment sold assets related to its dextrose product line to a third-party purchaser for $2.9
million, net of transaction costs. The Company recorded a $1.6 million gain on the sale, reflected
in Non-operating income, net in the statement of operations.
Australia/New Zealand Operations
Sales at the Australia/New Zealand operations declined 31.5%, or $7.4 million, in the second
quarter of fiscal 2009 over the same period of fiscal 2008 primarily due to the decline in the
foreign currency exchange rates compared to the U.S. dollar. Lower sales volume of 11% due to
rationalization of lower-margin products, partially offset by higher average unit pricing also
contributed to the decline in second quarter revenues. Second quarter sales in local currency
declined by 8.8% over the same quarter of fiscal 2008 and average unit pricing in local currency
increased 2.7%. Sales for the six months ended February 28, 2009 decreased 29.9% to $37.4 million
from $53.4 million last year, primarily due to a 21% decrease in the average foreign currency
exchange rate and an 18% decline in sales volumes, partially offset by higher average unit pricing.
Sales in local currency decreased 11% and average unit pricing increased 8.7% in local currency.
In the second quarter of fiscal 2009, the Company recorded a $13.8 million non-cash goodwill
impairment charge. See Note 4 to the Condensed Consolidated Financial Statements. Fiscal 2009
second quarter loss from operations at the Companys Australia/New Zealand operations was $16.8
million compared to an operating loss of $2.0 million in the same period of fiscal 2008. Second
quarter fiscal 2009 gross margin declined by $1.5 million to a loss of $1.6 million. Grain costs
in the quarter were $1.0 million higher than a year ago as the drought in the region continued.
Unit manufacturing costs rose on lower manufacturing throughput due to product rationalization as
well as lower yields and
23
supply interruptions on non-local grain as the Company shifts to grain
produced in northern Australia. Operating loss for the six months ended February 28, 2009 was
$18.3 million, compared to an operating loss of $2.1 million for the same period last year. First
half 2009 gross margin declined $4.6 million from last year, from positive margin of $3.0 million
to a loss of $1.6 million as raw material grain costs rose $5.4 million and unit manufacturing
costs rose $2.7 million. Favorable average unit pricing of $3.4 million partially offset the
increased input and production costs. Operating expenses, excluding restructuring costs, decreased
$0.9 million over the second half of fiscal 2008 primarily due to the effect of a lower foreign
currency exchange rate. Included in the segments operating loss for the first half of fiscal 2008
were restructuring costs of $1.3 million. See Note 15 to the Condensed Consolidated Financial
Statements.
Corporate operating expenses
Corporate operating expenses for the second quarter of fiscal 2009 were $2.4 million, a $0.3
million increase compared to the same quarter last year, primarily due to higher employee-related
costs. For the six months ended February 28, 2009, corporate operating expenses increased $0.6
million to $5.2 million over the same period a year ago due to an increase in professional fees and
employee-related costs.
Interest expense
Interest expense for the three and six months ended February 28 2009 increased $0.7 million
and $1.0 million, respectively, compared to the same periods last year due to higher average debt
balances. In addition, interest costs related to construction of the ethanol manufacturing plant
were capitalized until May 2008, when the facility began commercial production. Interest costs
capitalized were $0.5 million and $0.8 million for the three and six months ended February 29,
2008. In February 2009, the Company entered into the Second Amendment to the 2007 Agreement.
This amendment adjusts certain covenants and other provisions in the 2007 Agreement to provide
additional relief from the financial impact of the flood at the Companys Cedar Rapids, Iowa
facility. Additionally, the maximum commitment fee for undrawn balances will increase by 10 basis
points. The maximum LIBOR margin payable on outstanding debt will increase by 100 basis points.
The incremental annual interest expense from these pricing changes is estimated at $0.8 million per
annum, based on current outstanding borrowings. See Note 8 to the Condensed Consolidated Financial
Statements.
Income taxes
The Companys Australian operations reported a tax loss for fiscal 2008 and for the first half
of fiscal 2009. Australian tax law provides for an unlimited carryforward period for net operating
losses but does not allow losses to be carried back to previous tax years. Due to the uncertainty
related to generating sufficient future taxable income in Australia, the Company currently believes
that it is more likely than not that the net deferred tax benefit will not be realized.
Accordingly, in the second quarter of fiscal 2009 the Company recorded a $2.1 million valuation
allowance against the entire Australian net deferred tax asset. A valuation allowance has not been
recognized on the net U.S. deferred tax asset as there is sufficient taxable income in carryback
years to realize the net deferred tax asset.
The Companys effective tax rates for the three- and six-month periods ended February 28, 2009
were 1.1% and 3.2%, respectively. The reduction in the effective tax rates from the U.S. federal
statutory rate is primarily due to (1) a $2.1 million valuation allowance recognized against the
Australian net deferred tax assets as discussed above, and (2) no recognition of a tax benefit in
connection with the Australian goodwill impairment charge of $13.8 million as this charge is not
deductible for tax purposes, and (3) an increase in the amount of unrecognized tax benefits as
discussed below.
The amount of unrecognized tax benefits determined in accordance with Financial Interpretation
No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN 48), increased by $0.7 million and $0.8 million for the three and six months ended February
28, 2009. The total amount of unrecognized tax benefits at February 28, 2009 was $1.5 million, all
of which, if recognized, would favorably impact the effective tax rate. The Company has been
notified by one state taxing jurisdiction that its tax return will be audited beginning in the
third quarter of fiscal 2009. None of the Companys other income tax returns are under examination
by taxing authorities. The Company does not believe that the total amount of unrecognized tax
benefits at February 28, 2009 will change materially in the next 12 months.
On a quarterly basis, the Company reviews its estimate of the effective income tax rate
expected to be applicable for the full fiscal year. This rate is used to calculate income tax
expense or benefit on current year-to-date pre-tax income or
24
loss. Income tax expense or benefit for the current interim period is the difference between
the computed year-to-date income tax amount and the tax expense or benefit reported for previous
quarters. In reviewing its effective tax rate, the Company uses estimates of the amounts of
permanent differences between book and tax accounting and projections of fiscal year pre-tax income
or loss. Adjustments to the Companys tax expense related to the prior fiscal year, amounts
recorded in accordance with FIN 48 and changes in tax rates are treated as discrete items and are
recorded in the period in which they arise.
The determination of the annual effective tax rate applied to current year income or loss
before income tax is based upon a number of estimates and judgments, including the estimated annual
pretax income of the Company in each tax jurisdiction and the amounts of permanent differences
between the book and tax accounting for various items. The Companys interim tax expense can be
impacted by changes in tax rates or laws, the finalization of tax audits, judgments regarding
uncertain tax positions and other items that cannot be estimated with any certainty. Therefore,
there can be significant volatility in the interim provision for income tax expense.
Non-operating income, net
Non-operating income, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Royalty and licensing income
|
|
$
|
377
|
|
|
$
|
405
|
|
|
$
|
787
|
|
|
$
|
855
|
|
Gain on sale of dextrose product line
|
|
|
1,562
|
|
|
|
|
|
|
|
1,562
|
|
|
|
|
|
Gain (loss) on foreign currency transactions
|
|
|
(28
|
)
|
|
|
434
|
|
|
|
(641
|
)
|
|
|
444
|
|
Other
|
|
|
13
|
|
|
|
(48
|
)
|
|
|
6
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,924
|
|
|
$
|
791
|
|
|
$
|
1,714
|
|
|
$
|
1,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2009, the Companys Food Ingredients North America business segment sold assets
related to its dextrose product line to a third-party purchaser for $2.9 million, net of
transaction costs. The Company recorded a $1.6 million gain on the sale.
During the three and six months ended February 28, 2009, the Company recognized a net foreign
currency transaction loss on Australian dollar denominated assets and liabilities as disclosed in
the table above. See Note 12 to the Condensed Consolidated Financial Statements for information on
the Companys royalty and licensing income.
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. In the first half of fiscal 2009, the
Company received $15.5 million of insurance proceeds related to the damages sustained in the
flooding in Cedar Rapids, Iowa in June 2008. Costs incurred in the same period associated with the
flood recovery were $7.4 million. See the Overview section of this Part I, Item 2 and Note 3 to
the Condensed Consolidated Financial Statements for a discussion of the impact of the flooding on
the Companys liquidity. The Company also sold its assets related to its dextrose product line in
the second quarter of fiscal 2009 for cash proceeds of $2.9 million. In February and March 2009,
the Companys Industrial Ingredients business reduced its workforce by nearly 20%.
Penford had working capital of $43.5 million and $38.1 million at February 28, 2009 and August
31, 2008, respectively. Cash used in operations was $17.5 million for the six months ended
February 28, 2009 compared to cash provided by operations of $2.7 million for the six months ended
February 29, 2008. The decline in cash flow from operations is primarily due to a decrease in
earnings over the same period last year and the impact of higher working capital balances. Trade
receivables expanded as the Companys Industrial Ingredients sales recovered after operations were
restarted in the first quarter of fiscal 2009 and accounts payable and accrued liabilities declined
during the six months ended February 28, 2009 as a result of payments for flood restoration
services accrued for in the fourth quarter of fiscal 2008.
25
In fiscal 2007, the Company entered into a $145 million Second Amended and Restated Credit
Agreement (the 2007 Agreement). See Note 8 to the Condensed Consolidated Financial Statements.
At February 28, 2009, the Company had $29.4 million and $7.4 million outstanding, respectively,
under the revolving credit and term loan portions of its credit facility. In addition, the Company
had $43.0 million outstanding on February 28, 2009 under its capital expansion credit facility
related to the construction of the ethanol facility. During the six months ended February 28,
2009, debt, including the effects of foreign currency exchange rates, expanded by $13.6 million to
fund flood restoration costs and other working capital requirements. The Companys ability to
borrow under its $60 million revolving credit facility is subject to the Companys compliance with,
and is limited by, the covenants in the 2007 Agreement, as amended.
During the fourth quarter of fiscal 2008, the Company sought and obtained an amendment to the
2007 Agreement to address the impact of the Cedar Rapids flood. 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 (as defined in the 2007 Agreement, as amended) was
reduced to 1.25 through November 30, 2008 and 1.50 thereafter.
The Company entered into the Second Amendment to the 2007 Agreement dated February 26, 2009.
This amendment adjusts certain covenants and other provisions in the 2007 Agreement to provide
additional relief from the financial impact of the flood at the Companys Cedar Rapids, Iowa
facility. The amendment provides that the Total Funded Debt Ratio, which is computed as funded debt
divided by earnings before interest, taxes, depreciation and amortization, plus (minus) certain
non-cash losses (gains) and costs and insurance recoveries related to the flood in Cedar Rapids,
Iowa (EBITDA as defined in the Second Amendment) shall not exceed 4.00 through August 31, 2009,
3.25 for the first quarter of fiscal 2010 and 3.00 for each fiscal quarter thereafter. In
addition, the Company is required to maintain a consecutive twelve month minimum EBITDA (as defined
in the Second Amendment) of $20.0 million for each fiscal quarter through November 2009 and limit
its annual capital expenditures to $12 million for fiscal year 2009 and $20 million thereafter as
defined in the 2007 Agreement. There is no assurance that the Company will be able to obtain any
additional amendments of the 2007 Agreement should the Company make any such request in the future.
The Companys short-term borrowings consist of an Australian variable-rate grain inventory
financing facility with an Australian bank for a maximum of $26.0 million U.S. dollars at the
exchange rate at February 28, 2009. The amount outstanding under this arrangement, which is
classified as a current liability on the balance sheet, was $1.3 million at February 28, 2009.
As of February 28, 2009, 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 debt of $25.6 million at 4.18% and $5.4 million at 5.08%, plus the
applicable margin under the 2007 Agreement. At February 28, 2009, the fair value of the interest
rate swaps was recorded in the balance sheet as a liability of $1.9 million.
The Company paid dividends of $1.4 million during the six months ended February 28, 2009,
which represents a quarterly rate of $0.06 per share. On January 26, 2009, the Board of Directors
declared a dividend of $0.06 per common share payable on March 6, 2009 to shareholders of record as
of February 13, 2009. Any future dividends will be paid at the discretion of the Companys board
of directors and will depend upon, among other things, earnings, financial condition, cash
requirements and availability, and contractual requirements. Pursuant to the Second Amendment 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 $4 million during the 2009 fiscal year
or if there exists a default or event of default as defined in the 2007 Agreement and $8 million in
any fiscal year thereafter.
Guaranteed Obligations
In February 2009, Penford Corporation entered into an agreement with a supplier of grain to
the Companys subsidiary company, Penford New Zealand Limited. Pursuant to this agreement, the
Company has guaranteed the trade payable obligations of Penford New Zealand arising from the
purchase of grain from this supplier up to a limit of 9.0 million New Zealand Dollars or the New
Zealand Dollar equivalent of $5.0 million U.S. Dollars, whichever is less. The guarantee continues
for the period during which the supplier sells grain to Penford New Zealand. As of February 28,
2009, the outstanding payable balance related to this guarantee is 2.8 million New Zealand Dollars,
which was equivalent to $1.4 million U.S. Dollars on that date. This outstanding balance is
included in accounts payable in the Condensed Consolidated Balance Sheet.
26
Contractual Obligations
The Company is a party to various debt and lease agreements at February 28, 2009 that
contractually commit the Company to pay certain amounts in the future. The Company also has open
purchase orders entered into in the ordinary course of business for raw materials, capital projects
and other items, for which significant terms have been confirmed. As of February 28, 2009, there
have been no material changes in the Companys contractual obligations disclosed in the Companys
Annual Report on Form 10-K for the year ended August 31, 2008.
Pension Contributions
In light of the temporary pension funding relief provided by the Worker, Retiree and Employer
Recovery Act of 2008 (the Act), which was enacted in December 2008, the Company currently
estimates that the minimum funding contributions to its defined benefit pension plans for plan year
2009 (calendar year 2009) will be $2.4 million and that the minimum contributions for 2009 will be
paid as follows: $0.6 million in each of fiscal years 2009 and 2010 and $1.2 million in fiscal year
2011. The amount and timing of contributions will depend on the funding and cost elections allowed
under the Act and selected by the Company.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements at February 28, 2009.
Recent Accounting Pronouncements
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 for the Company), and, except for the presentation
and disclosure requirements of SFAS 160, are to be applied prospectively.
In June 2008, the FASB issued Staff Position FSP Emerging Issues Task Force (EITF) 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether unvested share-based payment
awards that contain rights to nonforfeitable dividends are participating securities prior to
vesting and, therefore, included in the computation of earnings per share. FSP EITF 03-6-1 is
effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company). The
Company is currently evaluating the impact of adopting FSP EITF 03-6-1 on the Companys
consolidated financial statements.
In December 2008, the FASB issued Staff Position No. 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets (FSP 132(R)-1). FSP 132(R)-1 requires additional disclosures
on a prospective basis about assets held in an employers defined benefit pension or other
postretirement plan. FSP 132(R)-1 is effective for fiscal years beginning after December 15, 2008
(fiscal 2010 for the Company). The Company does not expect the adoption of FSP 132(R)-1 to have a
material effect on its consolidated financial statements.
Critical Accounting Policies and Estimates
The Companys consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The process of preparing financial statements
requires management to make estimates, judgments and assumptions that affect the Companys
financial position and results of operations. These estimates, judgments and assumptions are based
on the Companys historical experience and managements knowledge and understanding of the current
facts and circumstances. Note 1 to the Consolidated Financial Statements in the Annual Report on
Form 10-K for the fiscal year ended August 31, 2008 describes the significant accounting policies
and methods used in the preparation of the consolidated financial statements. Management believes
that its estimates, judgments and assumptions are reasonable based upon information available at
the time this report was prepared. To the
27
extent there are material differences between estimates,
judgments and assumptions and the actual results, the financial statements will be affected.
Item 3: Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risks from adverse changes in interest rates, foreign
currency exchange rates and commodity prices. There have been no material changes in the Companys
exposure to market risks from the disclosure in the Companys Annual Report on Form 10-K for the
year ended August 31, 2008.
Item 4: Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Penfords management, with the participation of its chief executive officer and chief
financial officer, evaluated the effectiveness of the Companys disclosure controls and procedures
as of February 28, 2009. Based on managements evaluation, the chief executive officer and chief
financial officer have concluded that the Companys disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) are effective to ensure that information required to be disclosed by the Company
in reports filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms
and is accumulated and communicated to management, including the chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in the Companys internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended February 28, 2009
that has materially affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.
28
PART II OTHER INFORMATION
Item 1: Legal Proceedings
On January 23, 2009 the Company filed suit in the United States District Court for the
Northern District of Iowa, Cedar Rapids Division, against two insurance companies, National Union
Fire Insurance Company of Pittsburgh, Pennsylvania and ACE American Insurance Company. This is an
insurance coverage suit that arises out of the flood that struck the Companys Cedar Rapids, Iowa
plant in June 2008. The Company seeks additional payments from the insurers of more than $30
million for property damage, time element and various other exposures due to costs and losses
incurred as a result of the flood. The litigation is at an early stage and the Company cannot at
this time determine the likelihood of any outcome or estimate any damages that might be awarded.
On August 28, 2008, the Company filed an arbitration demand with the American Arbitration
Association alleging breach of contract and negligence by C.J. Schneider Engineering Co. (CJS) in
connection with engineering design work that CJS performed with respect to the Companys ethanol
plant, which was completed in mid-2008. The Company is seeking recovery of costs and damages
arising from alleged errors and delays in the performance of the work. Subsequent to the
initiation of this proceeding and as a result of it, on March 9, 2009, the Company filed suit in
the United States District Court for the Northern District of Iowa against CJSs unrelated
subcontractor, Schneider Structural Engineering, Inc. (SSE), seeking an order to compel
arbitration of the Companys claims against SSE or to recover damages and restitution arising from
SSEs acts and omissions in the design of the ethanol plant. In the arbitration involving CJS and
the litigation against SSE the Company is seeking to recover losses of approximately $10 million.
The arbitration and the litigation are at early stages and the Company cannot at this time
determine the likelihood of any outcome or estimate any damages that might be awarded.
The Company is involved from time to time in various other claims and litigation arising in
the normal course of business. In the judgment of management, which relies in part on information
from the Companys outside legal counsel, the ultimate resolution of these matters will not
materially affect the consolidated financial position, results of operations or liquidity of the
Company.
Item 1A: Risk Factors
The information set forth in this report should be read in conjunction with the risk factors
discussed in Item 1A of the Companys Annual Report on Form 10-K for the year ended August 31,
2008, which could materially impact the Companys business, financial condition and future results.
The risks described in the Annual Report on Form 10-K are not the only risks facing the Company.
Additional risks and uncertainties not currently known by the Company or that the Company currently
deems to be immaterial also may materially adversely affect the Companys business, financial
condition and/or operating results.
Item 4: Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on January 26, 2009. The first item voted
upon at the meeting was the election of directors. The results of the election are shown below.
|
|
|
|
|
|
|
|
|
Director
|
|
Votes For
|
|
Votes Withheld
|
R. Randolph Devening
|
|
|
7,883,117
|
|
|
|
2,391,745
|
|
Paul H. Hatfield
|
|
|
8,779,781
|
|
|
|
1,495,081
|
|
Directors not elected at this meeting and whose term of office continued after the meeting are
William E. Buchholz, Jeffrey T. Cook, John C. Hunter III, Thomas D. Malkoski and Sally G. Narodick
and James E. Warjone.
The second item voted upon at the meeting was the ratification of Ernst & Young LLP as the
Companys independent registered public accounting firm. The results of the voting on the proposal
are as follows:
|
|
|
|
|
|
|
Votes
|
|
|
Votes For
|
|
Against
|
|
Abstain
|
10,017,888
|
|
256,974
|
|
0
|
Item 6: Exhibits.
(d) Exhibits
|
|
|
10.1
|
|
Second Amendment to Second Amended and Restated Credit, Resignation of Agent and Appointment of
Successor Agent dated as of February 26, 2009 (filed as an exhibit to Registrants File No.
000-11488, Form 8-K dated February 26, 2009, filed March 3, 2009)
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32
|
|
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
Penford Corporation
|
|
|
(Registrant)
|
|
|
April 9, 2009
|
/s/ Steven O. Cordier
|
|
|
Steven O. Cordier
|
|
|
Senior Vice President and Chief Financial Officer
|
|
|
30
EXHIBIT INDEX
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please
note that they are included to provide information regarding their terms and are not
intended to provide any other factual or disclosure information about Penford or the other parties
to the agreements. The agreements may contain representations and warranties by each of the
parties to the applicable agreement. These representations and warranties have been made solely
for the benefit of the other party or parties to the applicable agreement and:
|
|
|
should not in all instances be treated as categorical statements of fact, but rather as
a means of allocating the risk to one of the parties if those statements prove to be
inaccurate;
|
|
|
|
|
may have been qualified by disclosures that were made to the other party or parties in
connection with the negotiation of the applicable agreement, which disclosures are not
necessarily reflected in the agreement;
|
|
|
|
|
may apply standards of materiality in a manner that is different from what may be
viewed as material to investors; and
|
|
|
|
|
were made only as of the date of the applicable agreement or other date or dates that
may be specified in the agreement and are subject to more recent developments.
|
Accordingly, the representations and warranties may not describe the actual state of affairs
as of the date they were made or at any other time. Additional information about Penford may be
found elsewhere in this Quarterly Report on Form 10-Q, Penfords Annual Report on Form 10-K for the
year ended August 31, 2008 and in Penfords other public filings, which are available without
charge through the Securities and Exchange Commissions website at http://sec.gov.
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
10.1
|
|
|
Second Amendment to Second Amended and Restated Credit,
Resignation of Agent and Appointment of Successor Agent dated
as of February 26, 2009 (filed as an exhibit to Registrants
File No. 000-11488, Form 8-K dated February 26, 2009, filed
March 3, 2009)
|
|
|
|
|
|
|
31.1
|
|
|
Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
31.2
|
|
|
Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
32
|
|
|
Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
31
(MM) (NASDAQ:PENX)
Historical Stock Chart
From Sep 2024 to Oct 2024
(MM) (NASDAQ:PENX)
Historical Stock Chart
From Oct 2023 to Oct 2024