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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-K
| (Mark One) | ||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Fiscal Year Ended August 31, 2010 | ||
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 Number 0-11488
Penford Corporation
(Exact name of registrant as specified in its charter)
(Exact name of registrant as specified in its charter)
| Washington (State or other jurisdiction of incorporation or organization) | 91-1221360 (I.R.S. Employer Identification No.) | |
| 7094 S. Revere Parkway Centennial, Colorado (Address of Principal Executive Offices) | 80112-3932 (Zip Code) |
Registrant’s telephone number, including area code:(303) 649-1900
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
| Common Stock, $1.00 par value | The NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. þ
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 definition of “accelerated filer” and “large accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one).
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant as of February 26, 2010, the last business day of the Registrant’s second quarter of fiscal 2010, was approximately $121.0 million based upon the last sale price reported for such date on The NASDAQ Global Market. For purposes of making this calculation, Registrant has assumed that all the outstanding shares were held by non-affiliates, except for shares held by Registrant’s directors and officers and by each person who owns 10% or more of the outstanding Common Stock. However, this does not necessarily mean that there are not other persons who may be deemed to be affiliates of the Registrant.
The number of shares of the Registrant’s Common Stock (the Registrant’s only outstanding class of stock) outstanding as of November 3, 2010 was 11,363,272.
Documents Incorporated by Reference
Portions of the Registrant’s definitive Proxy Statement relating to the 2011 Annual Meeting of Shareholders are incorporated by reference into Part III of thisForm 10-K.
PENFORD CORPORATION
FISCAL YEAR 2010FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
FISCAL YEAR 2010FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
| Item 1: | Business |
Description of Business
Penford Corporation (which, together with its subsidiary companies, is referred to herein as “Penford” or the “Company”) is a developer, manufacturer and marketer of specialty natural-based ingredient systems for food and industrial ingredient applications, including fuel grade ethanol. The Company’s strategically-located manufacturing facilities in the United States provide it with broad geographic coverage of its target markets. The Company has significant research and development capabilities, which are used in understanding the complex chemistry of carbohydrate-based materials and in development applications to address customer needs.
Penford is a Washington corporation originally incorporated in September 1983. The Company commenced operations as a publicly-traded company on March 1, 1984.
Penford operates in two business segments, Industrial Ingredients and Food Ingredients. Each of the Company’s businesses utilizes the Company’s carbohydrate chemistry expertise to develop starch-based ingredients for value-added applications that improve the quality and performance of customers’ products. Financial information about Penford’s segments and geographic areas is included in Note 19 to the Consolidated Financial Statements. Additional information on Penford’s two business segments follows:
| • | Industrial Ingredients, which in fiscal years 2010, 2009 and 2008 generated approximately 72%, 73% and 72%, respectively, of Penford’s revenue, is a supplier of chemically modified specialty starches to the paper and packaging industries. Through a commitment to research and development, Industrial Ingredients develops customized product applications that help its customers realize improved manufacturing efficiencies and advancements in product performance. Industrial Ingredients has specialty processing capabilities for a variety of modified starches. Specialty products for industrial applications are designed to improve the strength and performance of customers’ products and efficiencies in the manufacture of coated and uncoated paper and paper packaging products. These starches are principally ethylated (chemically modified with ethylene oxide), oxidized (treated with sodium hypochlorite) and cationic (carrying a positive electrical charge). Ethylated and oxidized starches are used in coatings and as binders, providing strength and printability to fine white, magazine and catalog paper. Cationic and other liquid starches are generally used in the paper-forming process in paper production, providing strong bonding of paper fibers and other ingredients. |
The Company’s Industrial Ingredients segment also produces and sells fuel grade ethanol from its facility in Cedar Rapids, Iowa. Ethanol production gives the Company the ability to select an additional output choice to capitalize on changing industry conditions and selling opportunities. Sales of ethanol in fiscal years 2010, 2009 and 2008 were 37%, 29% and 3%, respectively, of this segment’s reported revenue.
In June 2008, the Company’s Cedar Rapids, Iowa plant was temporarily shut down due to record flooding of the Cedar River and government-ordered mandatory evacuation of the plant and surrounding areas. See Note 3 to the Consolidated Financial Statements.
| • | Food Ingredients, which in fiscal years 2010, 2009 and 2008 generated approximately 28%, 27% and 28%, respectively, of Penford’s revenue, is a developer and manufacturer of specialty starches and dextrins to the food manufacturing and food service industries. Its expertise is in leveraging the inherent characteristics from potato, corn, tapioca and rice to help improve its customers’ product performance. Food Ingredients’ specialty starches produced for food applications are used in coatings to provide crispness, improved taste and texture, and increased product life for products such as french fries sold in restaurants. Food-grade starch products are also used as moisture binders to reduce fat levels, modify texture and improve color and consistency in a variety of foods such as canned products, sauces, whole and processed meats, dry powdered mixes and other food and bakery products. |
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Discontinued Operations
In August 2009, the Company’s Board of Directors made a determination that the Company would exit from the business conducted by the Company’s Australia/New Zealand Operations. As a result of this determination, on September 2, 2009, the Company completed the sale of its subsidiary company, Penford New Zealand Limited (“Penford New Zealand”), and on November 27, 2009, the Company completed the sale of the operating assets of another subsidiary company, Penford Australia Limited (“Penford Australia”), including its two remaining Australian plants.
The Australia/New Zealand Operations developed, manufactured and marketed ingredient systems, including specialty starches and sweeteners for food and industrial applications. Until September 2, 2009, the Company operated a corn wet milling facility in Auckland, New Zealand through Penford New Zealand. Until November 27, 2009, the Company operated a corn wet milling facility in Lane Cove, Australia and a wheat starch manufacturing facility in Tamworth, Australia through Penford Australia.
The financial data for the Australia/New Zealand Operations have been presented as discontinued operations. The financial statements have been prepared in compliance with the provisions of Financial Accounting Standards Board Accounting Standards Codification205-10, “Presentation of Financial Statements — Discontinued Operations” (“ASC205-10”). Accordingly, for all periods presented herein, the Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows have been conformed to this presentation. The Australia/New Zealand Operations was previously reported as the Company’s third operating segment. See Note 2 to the Consolidated Financial Statements for further details.
Unless otherwise indicated, all amounts, analyses and discussions in this Annual Report onForm 10-K pertain to the Company’s continuing operations.
Raw Materials
Corn: Penford’s North American corn wet milling plant is located in Cedar Rapids, Iowa, the middle of the U.S. corn belt. Accordingly, the plant has truck-delivered corn available throughout the year from a number of suppliers at prices consistent with those available in the major U.S. grain markets.
Potato Starch: The Company’s facilities in Idaho Falls, Idaho; Richland, Washington; and Plover, Wisconsin use starch recovered as by-products from potato processors as the primary raw material to manufacture modified potato starches. The Company enters into contracts typically having durations of one to three years with potato processors in the United States and Canada to acquire potato-based raw materials.
Chemicals: The primary chemicals used in the manufacturing processes are readily available commodity chemicals. The prices for these chemicals are subject to price fluctuations due to market conditions.
Natural Gas: The primary energy source for most of Penford’s plants is natural gas. Penford contracts its natural gas supply with regional suppliers, generally under short-term supply agreements, and regularly uses futures contracts to hedge the price of natural gas.
Corn, potato starch, chemicals and natural gas are not currently subject to availability constraints; however, demand for these items can significantly affect the prices. Penford’s current potato starch requirements constitute a material portion of the available North American supply. Penford estimates that it purchases approximately50-55% of the recovered potato starch in North America. It is possible that, in the long term, continued growth in demand for potato starch-based ingredients and new product development could result in capacity constraints.
Over half of the Company’s manufacturing costs consist of the costs of corn, potato starch, chemicals and natural gas. The remaining portion consists of the costs of labor, distribution, depreciation and maintenance of manufacturing plant and equipment, and other utilities. The prices of raw materials may fluctuate, and increases in costs may affect Penford’s business adversely. To mitigate this risk, Penford hedges a portion of corn and gas purchases with futures and options contracts in the U.S. and enters into short-term supply agreements for other production requirements.
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Research and Development
Penford’s research and development efforts cover a range of projects including technical service work focused on specific customer support projects which require coordination with customers’ research efforts to develop innovative solutions to specific customer requirements. These projects are supplemented with longer-term, new product development and commercialization initiatives. Research and development expenses were $4.4 million, $4.3 million and $5.7 million for fiscal years 2010, 2009 and 2008, respectively.
At the end of fiscal 2010, Penford had 23 scientists, including six with a Ph.D. degree with expert knowledge of carbohydrate characteristics and chemistry.
Patents, Trademarks and Trade Names
Penford owns a number of patents, trademarks and trade names. The Company has approximately 58 current patents and pending patent applications, most of which are related to technologies in french fry coatings, coatings for the paper industry, and animal and human nutrition. Penford’s issued patents expire at various times between 2012 and 2027. The annual cost to maintain all of the Company’s patents is not significant. Most of Penford’s products are currently made with technology that is broadly available to companies that have the same level of scientific expertise and production capabilities as Penford.
Specialty starch ingredient brand names for industrial applications include, among others, Penford® gums, Pensize® binders, Penflex® sizing agent, Topcat® cationic additive and the Apollo® starch series. Product brand names for food ingredient applications include PenBind®, PenCling® and PenPlus®.
Quarterly Fluctuations
Penford’s revenues and operating results vary from quarter to quarter. Sales volumes of the Food Ingredients products used in french fry coatings are generally lower during Penford’s second fiscal quarter due to decreased consumption of french fries during the post-holiday season. The cost of natural gas in North America is generally higher in the winter months than the summer months.
Working Capital
The Company’s growth is funded through a combination of cash flows from operations and short- and long-term borrowings. For more information, see the “Liquidity and Capital Resources” section under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and the audited consolidated financial statements and the related notes included elsewhere in this Annual Report onForm 10-K.
Penford generally carries a one- to45-day supply of materials required for production, depending on the lead time for specific items. Penford manufactures finished goods to customer orders or anticipated demand. The Company is therefore able to carry less than a30-day supply of most products. Terms for trade receivables and trade payables are standard for the industry and region and generally do not exceed30-45 day terms except for trade receivables for export sales.
Environmental Matters
Penford’s operations are governed by various federal, state, and local environmental laws and regulations. These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the EPA Oil Pollution Control Act, the Occupational Safety and Health Administration’s hazardous materials regulations, the Toxic Substances Control Act, the Comprehensive Environmental Response Compensation and Liability Act, and the Superfund Amendments and Reauthorization Act.
Permits are required by the various environmental agencies that regulate the Company’s operations. Penford believes that it has obtained all necessary material environmental permits required for its operations. Penford believes that its operations are in compliance with applicable environmental laws and regulations in all material aspects of its business. Penford estimates that annual compliance costs, excluding operational costs for emission control devices, wastewater treatment or disposal fees, are approximately $1.1 million.
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Penford has adopted and implemented a comprehensive corporate-wide environmental management program. The program is managed and designed to structure the conduct of Penford’s business in a safe and fiscally responsible manner that protects and preserves the health and safety of employees, the communities surrounding the Company’s plants, and the environment. The Company continuously monitors environmental legislation and regulations that may affect Penford’s operations.
During fiscal 2010, compliance with environmental regulations did not have a material impact on the Company’s operations. No unusual expenditures for environmental facilities and programs are anticipated in fiscal 2011.
Principal Customers
Penford sells to a variety of customers and has several relatively large customers in each business segment. The Company’s sales of ethanol to its sole ethanol customer, Eco-Energy, Inc., represented approximately 27%, 21% and 2% of the Company’s net sales for fiscal years 2010, 2009 and 2008, respectively. Eco-Energy, Inc. is a marketer and distributor of bio-fuels in the United States and Canada. The Company’s second largest customer, Domtar, Inc., represented approximately 8%, 11% and 15% of the Company’s net sales for fiscal years 2010, 2009 and 2008, respectively. Domtar, Inc. and Eco-Energy are customers of the Company’s Industrial Ingredients business.
Competition
In its primary markets, Penford competes directly with approximately five other companies that manufacture specialty starches for the papermaking industry, approximately six other companies that manufacture specialty food ingredients, and numerous producers of fuel grade ethanol. Penford competes indirectly with a larger number of companies that provide synthetic and natural-based ingredients to industrial and food customers. Some of these competitors are larger companies, and have greater financial and technical resources than Penford. Application expertise, quality and service are the major competitive advantages for Penford.
Employees
At August 31, 2010, Penford had 330 employees, of which approximately 40% were members of a trade union. The collective bargaining agreement covering the Cedar Rapids-based manufacturing workforce expires in August 2012.
Sales and Distribution
Sales are generated using a combination of direct sales and distributor agreements. In many cases, Penford supports its sales efforts with technical and advisory assistance to customers. Penford generally ships its products upon receipt of purchase orders from its customers and, consequently, backlog is not significant.
Since Penford’s customers are generally other manufacturers and processors, most of the Company’s products are distributed via rail or truck to customer facilities in bulk.
Export Sales
Export sales from Penford’s businesses in the U.S. accounted for approximately 9%, 8% and 11% of total sales in fiscal 2010, 2009 and 2008, respectively. See Note 19 to the Consolidated Financial Statements for sales by country to which the product was shipped.
Available Information
Penford’s Internet address iswww.penx.com. The Company makes available, free of charge through its Internet site, the Company’s annual reports onForm 10-K; quarterly reports onForm 10-Q; current reports onForm 8-K; Directors and Officers Forms 3, 4 and 5; and amendments to those reports, as soon as reasonably practicable after electronically filing such materials with, or furnishing them to, the Securities and Exchange Commission (“SEC”). The information found on Penford’s web site will not be considered to be part of this or any other report or other filing filed with or furnished to the SEC. The SEC also maintains an Internet site which
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contains reports, proxy and information statements, and other information regarding issuers that file information electronically with the SEC. The SEC’s Internet address iswww.sec.gov.
In addition, the Company makes available, through the Investor Relations section of its Internet site, the Company’s Code of Business Conduct and Ethics and the written charters of the Audit, Governance and Executive Compensation and Development Committees.
Executive Officers of the Registrant
Name | Age | Title | ||||
| Thomas D. Malkoski | 54 | President and Chief Executive Officer | ||||
| Steven O. Cordier | 54 | Senior Vice President, Chief Financial Officer and Assistant Secretary | ||||
| Timothy M. Kortemeyer | 44 | Vice President and President, Industrial Ingredients | ||||
| Wallace H. Kunerth | 62 | Vice President and Chief Science Officer | ||||
| Christopher L. Lawlor | 60 | Vice President — Human Resources, General Counsel and Secretary | ||||
| John R. Randall | 66 | Vice President and President, Food Ingredients | ||||
Mr. Malkoskijoined Penford Corporation as Chief Executive Officer and was appointed to the Board of Directors in January 2002. He was named President of Penford Corporation in January 2003. From 1997 to 2001, he served as President and Chief Executive Officer of Griffith Laboratories, North America, a formulator, manufacturer and marketer of ingredient systems to the food industry. Previously, he served in various senior management positions, including as Vice President/Managing Director of the Asia Pacific and South Pacific regions for Chiquita Brands International, an international marketer and distributor of bananas and other fresh produce. Mr. Malkoski began his career at the Procter and Gamble Company, a marketer of consumer brands, progressing through major product category management responsibilities. Mr. Malkoski holds a Masters of Business Administration degree from the University of Michigan.
Mr. Cordieris Penford’s Senior Vice President, Chief Financial Officer and Assistant Secretary. He joined Penford in July 2002 as Vice President and Chief Financial Officer, and was promoted to Senior Vice President in November 2004. From September 2005 to April 2006, Mr. Cordier served as the interim Managing Director of Penford’s Australian and New Zealand operations. He came to Penford from Sensient Technologies Corporation, a manufacturer of specialty products for the food, beverage, pharmaceutical and technology industries, where he held a variety of senior financial management positions.
Mr. Kortemeyerhas served as Vice President of Penford Corporation since October 2005 and President, Industrial Ingredients since June 2006. He served as General Manager of Penford Products from August 2005 to June 2006. Mr. Kortemeyer joined Penford in 1999 and served as a Team Leader in the manufacturing operations of Penford Products until 2001. From 2001 until 2003, he was an Operations Manager and Quality Assurance Manager. From July 2003 to November 2004, Mr. Kortemeyer served as the business unit manager of the Company’s co-products business, and from November 2004 until August 2005, as the director of the Company’s specialty starches product lines, responsible for sales, marketing and business development.
Dr. Kunerthhas served as Penford’s Vice President and Chief Science Officer since 2000. From 1997 to 2000, he served in food applications research management positions in the Consumer and Nutrition Sector at Monsanto Company, a provider of hydrocolloids, high intensity sweeteners, agricultural products and integrated solutions for industrial, food and agricultural customers. Before Monsanto, he was the Vice President of Technology at Penford’s food ingredients business from 1993 to 1997.
Mr. Lawlorjoined Penford in April 2005 as Vice President-Human Resources, General Counsel and Secretary. From 2002 to April 2005, Mr. Lawlor served as Vice President-Human Resources for Sensient Technologies Corporation, a manufacturer of specialty chemicals and food products. From 2000 to 2002, he was Assistant General Counsel for Sensient. Mr. Lawlor was Vice President-Administration, General Counsel and Secretary for Kelley Company, Inc., a manufacturer of material handling and safety equipment from 1997 to 2000. Prior to
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joining Kelley Company, Mr. Lawlor was employed as an attorney at a manufacturer of paper and packaging products and in private practice with two national law firms.
Mr. Randallis Vice President of Penford Corporation and President, Food Ingredients. He joined Penford in February 2003 as Vice President and General Manager of Penford Food Ingredients and was promoted to President of the Food Ingredients division in June 2006. Prior to joining Penford, Mr. Randall was Vice President, Research & Development/Quality Assurance of Griffith Laboratories, USA, a specialty foods ingredients business, from 1998 to 2003. From 1993 to 1998, Mr. Randall served in various research and development positions with KFC Corporation, a quick-service restaurant business, most recently as Vice President, New Product Development. Prior to 1993, Mr. Randall served in research and development leadership positions at Romanoff International, Inc., a manufacturer and marketer of gourmet specialty food products, and at Kraft/General Foods.
| Item 1A: | Risk Factors |
Risks Related to Penford’s Business
The availability and cost of agricultural products Penford purchases are vulnerable to weather and other factors beyond its control. The Company’s ability to pass through cost increases for these products is limited by worldwide competition and other factors.
In fiscal 2010, approximately 40% of Penford’s manufacturing costs were the costs of corn, potato starch and other agricultural raw materials. Weather conditions, plantings, government programs and policies, and energy costs and global supply, among other things, have historically caused volatility in the supply and prices of these agricultural products. Due to localand/or international competition, the Company may not be able to pass through the increases in the cost of agricultural raw materials to its customers. To manage price volatility in the commodity markets, the Company may purchase inventory in advance or enter into exchange traded futures or options contracts. Despite these hedging activities, the Company may not be successful in limiting its exposure to market fluctuations in the cost of agricultural raw materials. Increases in the cost of corn, potato starch and other agricultural raw materials due to weather conditions or other factors beyond Penford’s control and that cannot be passed through to customers will reduce Penford’s future profitability.
Increases in energy and chemical costs may reduce Penford’s profitability.
Energy and chemicals comprised approximately 12% and 11%, respectively, of the cost of manufacturing the Company’s products in fiscal 2010. Penford uses natural gas extensively in its Industrial Ingredients business to dry starch products, and, to a lesser extent, in the Food Ingredients business. The Company uses chemicals in all of the businesses to modify starch for specific product applications and customer requirements. The prices of these inputs to the manufacturing process fluctuate based on anticipated changes in supply and demand, weather and the prices of alternative fuels, including petroleum. The Company may use short-term purchase contracts or exchange traded futures or option contracts to reduce the price volatility of natural gas; however, these strategies are not available for the chemicals the Company purchases. If the Company is unable to pass on increases in energy and chemical costs to its customers, margins and profitability would be adversely affected.
The loss of a major customer could have an adverse effect on Penford’s results of operations.
The Company’s sales of ethanol to its sole ethanol customer, Eco-Energy, Inc., represented approximately 27%, 21% and 2% of the Company’s net sales for fiscal years 2010, 2009 and 2008, respectively. Eco-Energy, Inc. is a marketer and distributor of bio-fuels in the United States and Canada. The Company’s second largest customer, Domtar, Inc., represented approximately 8%, 11% and 15% of the Company’s net sales for fiscal years 2010, 2009 and 2008, respectively. Sales to the top ten customers represented 65%, 69% and 62% of net sales for fiscal years 2010, 2009 and 2008, respectively. Generally, the Company does not have multi-year sales agreements with its customers. Many customers place orders on an as-needed basis and generally can change their suppliers without penalty. If Penford lost one or more major customers, or if one or more major customers significantly reduced its orders, sales and results of operations would be adversely affected.
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The Company is substantially dependent on its manufacturing facilities; any operational disruption could result in a reduction of the Company’s sales volumes and could cause it to incur substantial losses.
Penford’s revenues are, and will continue to be, derived from the sale of starch-based ingredients and ethanol that the Company manufactures at its facilities. The Company’s operations may be subject to significant interruption if any of its facilities experiences a major accident or is damaged by severe weather or other natural disasters, as occurred as a result of the flood of the Cedar River at the Company’s Cedar Rapids, Iowa facility in fiscal 2008. In addition, the Company’s operations may be subject to labor disruptions and unscheduled downtime, or other operational hazards inherent in the industry, such as equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. The Company’s insurance may not be adequate to fully cover the potential operational hazards described above or that it will be able to renew this insurance on commercially reasonable terms or at all.
The agreements governing the Company’s debt contain various covenants that limit its ability to take certain actions and also require the Company to meet financial maintenance tests, and Penford’s failure to comply with any of the debt covenants could have a material adverse effect on the Company’s business, financial condition and results of operations.
The agreements governing Penford’s outstanding debt contain a number of significant covenants that, among other things, limit its ability to:
| • | incur additional debt or liens; | |
| • | consolidate or merge with any person or transfer or sell all or substantially all of its assets; | |
| • | make investments or acquisitions; | |
| • | pay dividends or make certain other restricted payments; | |
| • | enter into transactions with affiliates; and | |
| • | create dividend or other payment restrictions with respect to subsidiaries. |
In addition, the Company’s revolving credit facility requires it to comply with specific financial ratios and tests, under which it is required to achieve specific financial and operating results. Events beyond the Company’s control may affect its ability to comply with these provisions. A breach of any of these covenants would result in a default under the Company’s revolving credit facility. In the event of any default that is not cured or waived, the Company’s lenders could elect to declare all amounts borrowed under the revolving credit facility, together with accrued interest thereon, due and payable, which could permit acceleration of other debt. If any of the Company’s debt is accelerated, there is no assurance that the Company would have sufficient assets to repay that debt or that it would be able to refinance that debt on commercially reasonable terms or at all.
Changes in interest rates may affect Penford’s profitability.
As of August 31, 2010, approximately $18.9 million of its outstanding debt was subject to variable interest rates which move in direct relation to the London InterBank Offered Rate (“LIBOR”), or the prime rate in the United States, depending on the selection of borrowing options. Any significant changes in these interest rates would materially affect the Company’s profitability by increasing or decreasing its borrowing costs.
Unanticipated changes in tax rates or exposure to additional income tax liabilities could affect Penford’s profitability.
The Company is subject to income taxes in the federal and various state jurisdictions in the United States. The Company’s effective tax rates could be adversely affected by changes in the mix of earnings in tax jurisdictions with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities or changes in tax laws. The carrying value of deferred tax assets is dependent on the Company’s ability to generate future taxable income in the
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United States. The amount of income taxes paid is subject to interpretation of applicable tax laws in the jurisdictions in which the Company operates. Although the Company believes it has complied with all applicable income tax laws, there is no assurance that a tax authority will not have a different interpretation of the law or that any additional taxes imposed as a result of tax audits will not have an adverse effect on the Company’s results of operations.
Pension expense and the funding of pension obligations are affected by factors outside the Company’s control, including the performance of plan assets, interest rates, actuarial data and experience, and changes in laws and regulations.
The future funding obligations for the Company’s two U.S. defined benefit pension plans qualified with the Internal Revenue Service depend upon the level of benefits provided for by the plans, the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine funding levels, actuarial data and experience and any changes in government laws and regulations. The pension plans hold a significant amount of equity and fixed income securities. When the values of these securities decline, pension expense can increase and materially affect the Company’s results. Decreases in interest rates that are not offset by contributions and asset returns could also increase the Company’s obligations under such plans. The Company is legally required to make contributions to the pension plans in the future, and those contributions could be material. The Company expects to contribute $2.3 million to its pension plans during fiscal 2011.
The current capital and credit market conditions may adversely affect the Company’s access to capital, cost of capital and business operations.
The general economic and capital market conditions in the United States and other parts of the world have deteriorated significantly and have adversely affected access to capital and increased the cost of capital. If these conditions continue or become worse, the Company’s future cost of debt and equity capital and its access to capital markets could be adversely affected. An inability to obtain adequate financing from debt and equity sources could force the Company to self-fund strategic initiatives or even forgo some opportunities, potentially harming its financial position, results of operations and liquidity.
Economic conditions may impair the businesses of the Company’s customers and end user markets, which could adversely affect the Company’s business operations.
As a result of the current economic downturn and macro-economic challenges currently affecting the economy of the United States and other parts of the world, the businesses of some of the Company’s customers may not be successful in generating sufficient revenues. Customers may choose to delay or postpone purchases from the Company until the economy and their businesses strengthen. The Company’s Industrial Ingredients business is dependent upon end markets for paper and ethanol in North America. Paper markets have been under competitive pressure from imports and over-capacity and may be further stressed by the continuing economic downturn. Ethanol markets have been under pressure from declining oil prices and increasing ethanol production capacity in the United States. Decisions by current or future customers to forego or defer purchasesand/or customers’ inability to pay the Company for its products may adversely affect the Company’s earnings and cash flow.
Penford depends on its senior management team; the loss of any member could adversely affect its operations.
Penford’s success depends on the management and leadership skills of its senior management team. The loss of any of these individuals, particularly Thomas D. Malkoski, the Company’s President and Chief Executive Officer, or Steven O. Cordier, the Company’s Chief Financial Officer, or the Company’s inability to attract, retain and maintain additional personnel, could prevent it from fully implementing its business strategy. There is no assurance that it will be able to retain its existing senior management personnel or to attract additional qualified personnel when needed.
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Penford is subject to stringent environmental and health and safety laws, which may require it to incur substantial compliance and remediation costs, thereby reducing profits.
Penford is subject to many federal, state and local environmental and health and safety laws and regulations, particularly with respect to the use, handling, treatment, storage, discharge and disposal of substances and hazardous wastes used or generated in its manufacturing processes. Compliance with these laws and regulations is a significant factor in the Company’s business. Penford has incurred and expects to continue to incur expenditures to comply with applicable environmental laws and regulations. The Company’s failure to comply with applicable environmental laws and regulations and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial actions.
The Company may be required to incur costs relating to the investigation or remediation of property, including property where it has disposed of its waste, and for addressing environmental conditions. Some environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at such facilities and sites without regard to causation or knowledge of contamination. Consequently, there is no assurance that existing or future circumstances, the development of new facts or the failure of third parties to address contamination at current or former facilities or properties will not require significant expenditures by the Company.
The Company expects to continue to be subject to increasingly stringent environmental and health and safety laws and regulations. It is difficult to predict the future interpretation and development of environmental and health and safety laws and regulations or their impact on the Company’s future earnings and operations. The Company anticipates that compliance will continue to require increased capital expenditures and operating costs. Any increase in these costs, or unanticipated liabilities arising, for example, out of discovery of previously unknown conditions or more aggressive enforcement actions, could adversely affect the Company’s results of operations, and there is no assurance that they will not have a material adverse effect on its business, financial condition and results of operations.
Penford’s unionized workforce could cause interruptions in the Company’s provision of services.
As of August 31, 2010, approximately 40% of the Company’s 330 employees were members of a trade union. Although the Company’s relations with the relevant union are stable and the Company’s labor contract does not expire until August 2012, there is no assurance that the Company will not experience work disruptions or stoppages in the future, which could have a material adverse effect on its business and results of operations and adversely affect its relationships with its customers.
Risk Factors Relating to Penford’s Common Stock
Penford’s stock price has fluctuated significantly; the trading price of its common stock may fluctuate significantly in the future.
The trading price of the Company’s common stock has fluctuated significantly. In fiscal 2010, the stock price ranged from a low of $4.83 on August 31, 2010 to a high of $12.15 on January 19, 2010. The trading price of Penford’s common stock may fluctuate significantly in the future as a result of a number of factors, including:
| • | actual and anticipated variations in the Company’s operating results; | |
| • | general economic and market conditions, including changes in demand for the Company’s products; | |
| • | interest rates; | |
| • | geopolitical conditions throughout the world; | |
| • | perceptions of the strengths and weaknesses of the Company’s industries; | |
| • | the Company’s ability to pay principal and interest on its debt when due; | |
| • | developments in the Company’s relationships with its lenders, customersand/or suppliers; |
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| • | announcements of alliances, mergers or other relationships by or between the Company’s competitorsand/or its suppliers and customers; and | |
| • | quarterly variations in the Company’s results of operations due to, among other things, seasonality in demand for products and fluctuations in the cost of raw materials |
The stock markets in general have experienced broad fluctuations that have often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of the Company’s common stock. Accordingly, Penford’s common stock may trade at prices significantly below an investor’s cost and investors could lose all or part of their investment in the event that they choose to sell their shares.
Provisions of Washington law could discourage or prevent a potential takeover.
Washington law imposes restrictions on certain transactions between a corporation and certain significant shareholders. The Washington Business Corporation Act generally prohibits a “target corporation” from engaging in certain significant business transactions with an “acquiring person,” which is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the target corporation, for a period of five years after such acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the target corporation’s board of directors prior to the time of the acquisition. Such prohibited transactions include, among other things, (1) a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person; (2) a termination of 5% or more of the employees of the target corporation as a result of the acquiring person’s acquisition of 10% or more of the shares; and (3) allowing the acquiring person to receive any disproportionate benefit as a shareholder. After the five year period, a “significant business transaction” may occur if it complies with “fair price” provisions specified in the statute. A corporation may not “opt out” of this statute.
| Item 1B: | Unresolved Staff Comments |
None.
| Item 2: | Properties |
Penford’s facilities as of August 31, 2010 are as follows:
| Bldg. Area | ||||||||||||||
| (Approx. | Land Area | Owned/ | ||||||||||||
| Sq. Ft.) | (Acres) | Leased | Function of Facility | |||||||||||
| Centennial, Colorado | 25,200 | — | Leased | Corporate headquarters, administrative offices and research laboratories | ||||||||||
| Cedar Rapids, Iowa | 759,000 | * | 29 | Owned | Manufacture of corn starch products, administration offices and research laboratories | |||||||||
| Idaho Falls, Idaho | 30,000 | 4 | Owned | Manufacture of potato starch products | ||||||||||
| Richland, Washington | 45,000 | — | Owned | Manufacture of potato and tapioca starch products | ||||||||||
| (one facility consisting of property that is partially owned and partially leased) | 9,600 | 4.9 | Leased | Administrative office and warehouse | ||||||||||
| Plover, Wisconsin | 45,000 | 9.5 | Owned | Manufacture of potato starch products | ||||||||||
| (two facilities, one of which | 3.3 | Leased | Manufacture of potato starch products | |||||||||||
| is located on leased land) | 15,000 | — | Owned | Manufacture of potato starch products | ||||||||||
| * | Approximately 119,150 square feet are subject to a long-term lease to the purchaser of the Company’s former dextrose business |
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Penford’s production facilities are strategically located near sources of raw materials. The Company believes that its facilities are maintained in good condition and that the capacities of its plants are sufficient to meet current production requirements. The Company invests in expansion, improvement and maintenance of property, plant and equipment as required.
| Item 3: | Legal Proceedings |
As previously reported, the Company filed suit on January 23, 2009, in the U.S. District Court for the Northern District of Iowa, Cedar Rapids Division, against two insurance companies, National Union Fire Insurance Company of Pittsburgh, Pennsylvania, owned by American International Group, Inc. (“AIG”), and ACE American Insurance Company (“ACE”), related to insurance coverage arising out of the flood that struck the Company’s Cedar Rapids, Iowa plant in June 2008. On January 19, 2010, the presiding judge ruled that flood coverage language contained in the applicable insurance policy was “ambiguous” and that, accordingly, the interpretation of the policy was “a question of fact reserved for a jury.” A jury trial was subsequently conducted in Cedar Rapids during mid-August 2010. After seven days of trial, the presiding judge dismissed the Company’s claims without issuing a written opinion. On September 14, 2010, the Company filed a notice of appeal with the United States Court of Appeals for the Eighth Circuit (the “Eighth Circuit”). On October 4, 2010, the Company filed a Statement of Issues with the Eighth Circuit in which it noted its intention to present for appellate review whether, among other things, the presiding judge erred in dismissing the Company’s suit. Through its appeal, the Company will continue its effort to seek additional payments from AIG and ACE for approximately $25 million for business interruption losses that occurred as a result of the flood. The Company expects the current appeal process to last through mid-2011. The Company cannot at this time determine the likelihood of any outcome of its appeal or estimate the amount of any judgment that might be awarded.
In October 2004, Penford Products Co. (“Penford Products”), a wholly-owned subsidiary of the Company, was sued by a customer in the Fourth Judicial District Court, Ouachita Parish, Louisiana. The customer sought monetary damages for Penford Products’ alleged breach of an agreement to supply the customer with certain starch products during the 2004 strike affecting Penford Products’ Cedar Rapids, Iowa plant. In May 2008, the trial judge ruled against Penford Products. In fiscal year 2008, the Company elected to satisfy the judgment and waive appeal rights by paying the customer approximately $3.8 million. The Company had previously reserved $2.4 million against this matter in fiscal year 2007.
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 obtained from the Company’s outside legal counsel, the ultimate resolution of these other matters will not materially affect the consolidated financial position, results of operations or liquidity of the Company.
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| Item 4: | Reserved |
PART II
| Item 5: | Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |
Market Information and Holders of Common Stock
Penford’s common stock, $1.00 par value, trades on The NASDAQ Global Market under the symbol “PENX.” On November 3, 2010, there were 440 shareholders of record. The high and low closing prices of Penford’s common stock during the last two fiscal years are set forth below.
| Fiscal 2010 | Fiscal 2009 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| Quarter Ended November 30 | $ | 9.63 | $ | 5.68 | $ | 19.79 | $ | 7.50 | ||||||||
| Quarter Ended February 28 | $ | 12.15 | $ | 7.94 | $ | 12.47 | $ | 4.88 | ||||||||
| Quarter Ended May 31 | $ | 11.68 | $ | 7.44 | $ | 6.72 | $ | 2.07 | ||||||||
| Quarter Ended August 31 | $ | 8.25 | $ | 4.83 | $ | 7.95 | $ | 5.19 | ||||||||
Dividends
During each quarter of the first half of fiscal year 2009, the Board of Directors declared a $0.06 per share cash dividend.
In April 2009, the Board of Directors suspended payment of dividends. The Company may not declare or pay any dividends on its common stock without first obtaining approval from the holders of a majority of the Series A Preferred Stock. See Note 7 to the Consolidated Financial Statements for further details. During fiscal year 2009, the Company declared dividends on its common stock of $1.4 million.
Issuer Purchases of Equity Securities
None
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Performance Graph
The following graph compares the Company’s cumulative total shareholder return on its common stock for a five-year period (September 1, 2005 to August 31, 2010) with the cumulative total return of the Nasdaq Market Index and all companies traded on the Nasdaq Stock Market (“Nasdaq”) with a market capitalization of $100 - $200 million, excluding financial institutions. The graph assumes that $100 was invested on September 1, 2005 in the Company’s common stock and in the stated indices. The comparison assumes that all dividends are reinvested. The Company’s performance as reflected in the graph is not indicative of the Company’s future performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among penford Corp. the NASDAQ Composite Index
and a peer Group
Among penford Corp. the NASDAQ Composite Index
and a peer Group
| * | $100 invested on 8/31/05 in stock or index, including reinvestment of dividends fiscal year ending August 31, 2010. |
ASSUMES $100 INVESTED ON SEPTEMBER 1, 2005
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING AUGUST 31, 2010
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING AUGUST 31, 2010
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||||||||
| PENFORD CORPORATION | 100.00 | 109.58 | 250.31 | 119.10 | 46.79 | 35.60 | ||||||||||||||||||||||||
| NASDAQ MARKET INDEX (U.S.) | 100.00 | 102.72 | 124.11 | 110.06 | 94.81 | 100.82 | ||||||||||||||||||||||||
| NASDAQ MARKET CAP ($100-200M) | 100.00 | 98.04 | 104.40 | 82.73 | 52.32 | 44.70 | ||||||||||||||||||||||||
Management does not believe there is either a published index or a group of companies whose overall business is sufficiently similar to the business of Penford to allow a meaningful benchmark against which the Company can be compared. The Company sells products based on specialty carbohydrate chemistry to several distinct markets, making overall comparisons to one of these markets misleading with respect to the Company as a whole. For these reasons, the Company has elected to use non-financial companies traded on Nasdaq with a similar market capitalization as a peer group.
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| Item 6: | Selected Financial Data |
The following table sets forth certain selected financial information for the five fiscal years as of and for the period ended August 31, 2010. The amounts have been restated to reflect the reclassification of discontinued operations and should be read in conjunction with the consolidated financial statements and the notes to these statements included in Item 8.
| Year Ended August 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in thousands, except share and per share data) | ||||||||||||||||||||
| Operating Data: | ||||||||||||||||||||
| Sales | $ | 254,274 | $ | 255,556 | $ | 239,581 | $ | 257,944 | $ | 223,006 | ||||||||||
| Cost of sales | $ | 230,820 | $ | 243,265 | $ | 194,993 | $ | 203,886 | $ | 186,610 | ||||||||||
| Gross margin percentage | 9.2 | % | 4.8 | % | 18.6 | % | 21.0 | % | 16.3 | % | ||||||||||
| Income (loss) from continuing operations(2) | $ | (9,629 | ) | $ | (6,645 | ) | $ | (10,808 | )(1) | $ | 11,283 | (1) | $ | 2,966 | ||||||
| Income (loss) from discontinued operations(3) | $ | 16,312 | $ | (58,142 | ) | $ | (1,892 | ) | $ | 2,234 | $ | 1,262 | ||||||||
| Net income (loss) | $ | 6,683 | $ | (64,787 | ) | $ | (12,700 | ) | $ | 13,517 | $ | 4,228 | ||||||||
| Diluted earnings (loss) per share from continuing operations | $ | (0.84 | ) | $ | (0.59 | ) | $ | (1.02 | ) | $ | 1.22 | $ | 0.33 | |||||||
| Diluted earnings (loss) per share from discontinued operations | $ | 1.41 | $ | (5.21 | ) | $ | (0.18 | ) | $ | 0.24 | $ | 0.14 | ||||||||
| Diluted earnings (loss) per share | $ | 0.57 | $ | (5.80 | ) | $ | (1.20 | ) | $ | 1.46 | $ | 0.47 | ||||||||
| Dividends declared per common share | $ | — | $ | 0.12 | $ | 0.24 | $ | 0.24 | $ | 0.24 | ||||||||||
| Average common shares and equivalents — assuming dilution | 11,600,885 | 11,170,493 | 10,565,432 | 9,283,125 | 9,004,190 | |||||||||||||||
| Balance Sheet Data (as of August 31): | ||||||||||||||||||||
| Total assets | $ | 208,408 | $ | 258,245 | $ | 320,433 | $ | 288,388 | $ | 250,668 | ||||||||||
| Capital expenditures | 5,980 | 5,379 | 38,505 | 32,782 | 10,582 | |||||||||||||||
| Long-term debt | 21,038 | 71,141 | 59,860 | 63,403 | 53,171 | |||||||||||||||
| Total debt | 21,467 | 92,382 | 67,889 | 67,459 | 57,466 | |||||||||||||||
| Redeemable preferred stock, Series A(4) | 34,104 | — | — | — | — | |||||||||||||||
| Shareholders’ equity | 83,572 | 79,359 | 160,362 | 125,676 | 107,452 | |||||||||||||||
| (1) | Includes pre-tax charges of $1.4 million and $2.4 million in fiscal years 2008 and 2007, respectively, related to the settlement of litigation. | |
| (2) | In the third quarter of fiscal 2010, the Company refinanced its bank debt. See Note 8 to the Consolidated Financial Statements. In connection with the refinancing, the Company recorded a pre-tax non-cash charge to earnings of approximately $1.0 million related to unamortized transaction fees associated with the prior credit facility. In addition, the Company terminated its interest rate swap agreements with several banks in the third quarter of fiscal 2010 and recorded a loss of approximately $1.6 million. In the second quarter of fiscal 2009, the Company’s Food Ingredients business segment sold assets related to its dextrose product line to a third-party purchaser and recorded a $1.6 million gain on the sale. In the fourth quarter of fiscal 2008, the Company’s Cedar |
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| Rapids, Iowa manufacturing facility suffered severe flooding which suspended production for most of the fourth quarter. The Company recorded pre-tax costs of $27.6 million, net of insurance recoveries in fiscal year 2008 and net insurance recoveries of $9.1 million in fiscal 2009. See Note 3 to the Consolidated Financial Statements. | ||
| (3) | In August 2009, the Company recorded a $33.0 million non-cash asset impairment charge related to the property, plant and equipment of the Australia/New Zealand Operations. In the second quarter of fiscal 2009, the Australia/New Zealand Operations recorded a $13.8 million non-cash goodwill impairment charge. See Note 2 to the Consolidated Financial Statements. In the second quarter of fiscal 2010, the liquidation of the remaining net assets of Penford Australia was substantially complete and, as a result, $13.8 of currency translation adjustments were reclassified from accumulated other comprehensive income into earnings. Includes a pre-tax gain of $0.7 million related to the sale of land in New Zealand in fiscal year 2008. | |
| (4) | On April 7, 2010, the Company issued $40 million of Series A 15% cumulative non-voting, non-convertible preferred stock (“Series A Preferred Stock”) and 100,000 shares of Series B voting convertible preferred stock (“Series B Preferred Stock”) in a private placement to Zell Credit Opportunities Master Fund, L.P., an investment fund managed by Equity Group Investments, a private investment firm (the “Investor”). Proceeds from the preferred stock issuance of $40.0 million were used to repay bank debt on April 8, 2010. See Note 7 to the Consolidated Financial Statements. |
| Item 7: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes. The notes to the Consolidated Financial Statements referred to in this MD&A are included in Part II Item 8, “Financial Statements and Supplementary Data.” Unless otherwise noted, all amounts and analyses are based on continuing operations.
Overview
Penford generates revenues, income and cash flows by developing, manufacturing and marketing specialty natural-based ingredient systems for industrial and food applications and by producing and selling fuel grade ethanol. The Company develops and manufactures ingredients with starch as a base, providing value-added applications to its customers. Penford’s starch products are manufactured primarily from corn and potatoes and are used principally as binders and coatings in paper and food production and as an ingredient in fuel.
In analyzing business trends, management considers a variety of performance and financial measures, including sales revenue growth, sales volume growth, and gross margins and operating income of the Company’s business segments. Penford manages its business in two segments. Industrial Ingredients and Food Ingredients are broad categories of end-market users, served by operations in the United States. See Item 1 and Note 19 to the Consolidated Financial Statements for additional information regarding the Company’s business segment operations.
Recapitalization
On April 7, 2010, the Company sold $40 million of its Series A Preferred Stock in a private placement and, on April 8, 2010, used the proceeds to pay a portion of the outstanding bank debt obligations under its credit facility. Also on April 7, 2010, the Company entered into a $60 million Third Amended and Restated Credit Agreement (the “2010 Agreement”) among the Company; Penford Products Co.; Bank of Montreal; Bank of America National Association; and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland” New York Branch. Under the 2010 Agreement, the Company may borrow $60 million in revolving lines of credit and there are no scheduled principal payments prior to maturity on April 7, 2015. See Notes 7 and 8 to the Consolidated Financial Statements for details of the refinancing and preferred stock issuance.
In connection with the refinancing, the Company recorded a pre-tax non-cash charge to earnings of $1.0 million related to unamortized transaction fees associated with the prior credit facility. The Company also terminated its interest rate swaps and recorded a charge to earnings of $1.6 million related to amounts recorded in
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other comprehensive income for the interest rate swaps. See Notes 7 and 8 to the Consolidated Financial Statements.
Discontinued Operations
On August 27, 2009, the Company’s Board of Directors made a determination that the Company would exit from the business conducted by the Company’s Australia/New Zealand Operations. This determination was made upon completion of a process involving the examination of a range of strategic and operating choices for the Company’s Australia/New Zealand Operations. The process was undertaken as part of a continuing program to maximize the Company’s asset values and returns. On September 2, 2009, the Company completed the sale of Penford New Zealand Limited. On November 27, 2009, the Company’s Australian operating subsidiary, Penford Australia Limited, completed the sale of substantially all of its operating assets to two unrelated parties.
The financial data for the Australia/New Zealand Operations have been presented as discontinued operations. The financial statements have been prepared in compliance with the provisions of the Accounting Standards Codification205-10, “Presentation of Financial Statements — Discontinued Operations” (“ASC205-10”). Accordingly, the Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows have been conformed to this presentation. The Australia/New Zealand Operations was previously reported as the Company’s third operating segment. See Note 2 to the Consolidated Financial Statements for further details. At August 31, 2010, the remaining net assets of the Australia/New Zealand Operations, consisting of $0.3 million of cash and $1.3 million of other net assets, primarily a receivable from the purchaser of one of the Company’s Australian manufacturing facilities, have been reported as assets of the continuing operations of the Company.
Impact of Cedar River Flooding
On June 12, 2008, the Company’s Industrial Ingredients plant in Cedar Rapids, Iowa was temporarily shut down due to record flooding of the Cedar River and government-ordered mandatory evacuation of the plant and surrounding areas. The Company sustained substantial damage to this facility and the plant was shut down from mid-June 2008 until the end of August 2008. By the end of August 2008, the Company had begun manufacturing industrial starch in Cedar Rapids. In late September 2008, the Company resumed the commercial production and sale of ethanol.
During the fourth quarter of fiscal 2008, the Company recorded costs of flood remediation and restoration of $27.6 million, net of insurance recoveries of $10.5 million. In fiscal 2009, the Company recorded flood-related costs of $7.6 million and insurance recoveries of $16.7 million. See Note 3 to the Consolidated Financial Statements for details of the flood restoration costs.
The Company is seeking additional payments from its insurers for damages arising from the flooding in June 2008 and has filed a lawsuit against the insurers. See Note 21 to the Consolidated Financial Statements for additional information regarding this lawsuit.
Consolidated Results of Operations
Consolidated fiscal 2010 sales were comparable to the prior year, decreasing less than one percent to $254.3 million. Volume improvements in both the industrial ingredients and food ingredients businesses were offset by unfavorable pricing and product mix. Although average unit pricing for ethanol improved during fiscal 2010, the market for industrial starch remained highly price competitive.
Fiscal 2010 consolidated gross margin increased to $23.5 million, or 9.2% of sales, from $12.3 million, or 4.8% of sales, in fiscal 2009. Consolidated gross margin expanded primarily due to improvements in gross margin at the Industrial Ingredients business through increased volumes, favorable ethanol pricing and improved manufacturing yields and efficiencies. Consolidated operating loss was $4.9 million in fiscal 2010 compared to an operating loss of $6.4 million in fiscal 2009. The fiscal 2009 operating loss included $9.1 million of net insurance recoveries. The reduction in the operating loss in fiscal 2010 is due to the improvement in gross margin.
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Interest expense in fiscal 2010 was $7.5 million compared with $5.6 million in fiscal 2009. Interest expense increased in fiscal 2010 due to the increase in the dividend rate on the Series A Preferred Stock issued in April 2010 over the interest rate for the Company’s bank debt plus the accretion of the discount on the Series A Preferred Stock.
The effective tax rate for fiscal 2010 was 33%. In fiscal 2010, the effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to federal tax incentives for the production of ethanol offset by nondeductible dividends, discount accretion on the Company’s preferred stock, and the effect of state taxes. See Note 17 to the Consolidated Financial Statements.
Accounting Changes
In December 2008, the Financial Accounting Standards Board (“FASB”) issued new authoritative guidance regarding employer disclosures about postretirement benefit plan assets. The new guidance requires an employer to disclose information regarding its investment policies and strategies for its categories of plan assets, its fair value measurements of plan assets and any significant concentrations of risk in plan assets. The new guidance, which was effective September 1, 2009 for the Company, only requires the revised annual disclosures on a prospective basis. See Note 13 to the Consolidated Financial Statements for the additional disclosures.
In June 2008, the FASB issued new authoritative guidance for determining whether unvested share-based payment awards that contain rights to nonforfeitable dividends are participating securities prior to vesting and, therefore, included in the computation of earnings per share pursuant to the two-class method. The Company adopted the new guidance in the first quarter of fiscal 2010 and was required to retrospectively adjust all prior-period earnings per share data. The resulting impact of the adoption of the new guidance was to include unvested restricted shares in the computation of basic earnings per share pursuant to the two-class method which did not have a material impact on the Company’s earnings per share for the years ending August 31, 2010, 2009 and 2008. See Note 18 to the Consolidated Financial Statements.
In February 2008, the FASB issued new authoritative guidance delaying the portions of Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” which required fair value measurements for non-recurring, nonfinancial assets and liabilities that are recognized or disclosed at fair value until the Company’s fiscal year 2010. The adoption of this guidance on September 1, 2009 had no effect on the Company’s financial position or results of operations. See Note 15 to the Consolidated Financial Statements.
Results of Operations
Fiscal 2010 Compared to Fiscal 2009
Industrial Ingredients
| Year Ended August 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
| Sales — industrial starch | $ | 115,681 | $ | 131,709 | ||||
| Sales — ethanol | 68,335 | 54,817 | ||||||
| Total sales | $ | 184,016 | $ | 186,526 | ||||
| Gross margin | $ | 461 | $ | (9,327 | ) | |||
| Loss from operations | $ | (11,512 | ) | $ | (11,154 | ) | ||
Industrial Ingredients fiscal 2010 sales of $184.0 million declined $2.5 million, or 1.3%, from fiscal 2009. Industrial starch sales of $115.7 million declined 12% from fiscal 2009 sales of $131.7 million on competitive pricing and lower pass through of corn costs to customers, offset by volume increases of 5%. The industrial starch business continued to be impacted by weak demand for printing and writing paper products. Sales of the Company’s Liquid Natural Additives products, included in the industrial starch sales amount, improved 28% driven by volume increases. During fiscal 2010, the Industrial Ingredients business shifted more of its manufacturing mix to the production of ethanol. Sales of ethanol expanded 25% to $68.3 million from $54.8 million in fiscal 2009 as both volume and pricing improved.
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Gross margin improved to $0.5 million in fiscal 2010 from a negative margin of $9.3 million in fiscal 2009. Margins improved due to the impact of increased volumes of both industrial starch and ethanol of $4.6 million, favorable ethanol pricing of $2.0 million, improved manufacturing yields and efficiencies of $9.0 million, favorable energy costs and yields of $6.7 million and reduced distribution costs of $2.4 million, offset by unfavorable industrial starch pricing and mix of $14.7 million.
The loss from operations for fiscal 2010 increased $0.4 million to $11.5 million; however, the operating loss for fiscal 2009 of $11.2 million included $9.1 million of net insurance recoveries related to the Cedar Rapids flooding in fiscal 2008. Excluding the impact of the net insurance recoveries, operating income increased by $8.8 million driven by the increase in gross margin. Operating expenses increased by $1.2 million primarily due to increased legal costs related to the litigation against the Company’s insurance carriers (see Note 21 to the Consolidated Financial Statements). Research and development expenses of $2.4 million were comparable to last year.
Food Ingredients
| Year Ended August 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
| Sales | $ | 70,258 | $ | 69,030 | ||||
| Gross margin | $ | 22,993 | $ | 21,618 | ||||
| Income from operations | $ | 15,145 | $ | 13,512 | ||||
Sales of $70.3 million for the year ended August 31, 2010, increased 1.8%, or $1.2 million, on volume growth of 8% partially offset by unfavorable product mix and pricing. In the second quarter of fiscal 2009, the Company sold its dextrose product line which generated $1.9 million in sales for fiscal 2009. Excluding dextrose product sales in fiscal 2009, the Food Ingredients sales for fiscal 2010 increased $3.2 million, or 4.7%. Sales of applications to growth end markets, protein, bakery and pet chews, grew 16%.
Gross margin improved $1.4 million on lower raw material, distribution and energy costs. Income from operations grew 12% on an increase in gross margin. Operating expenses declined $0.4 million to $5.9 million compared to fiscal 2009 and research and development expenses increased $0.1 million to $1.9 million.
Corporate Operating Expenses
Corporate operating expenses decreased to $8.4 million in fiscal 2010 from $9.3 million in fiscal 2009, primarily due to a decrease in professional fees and employee related costs.
Fiscal 2009 Compared to Fiscal 2008
Industrial Ingredients
| Year Ended August 31, | ||||||||
| 2009 | 2008 | |||||||
| (Dollars in thousands) | ||||||||
| Sales — industrial starch | $ | 131,709 | $ | 167,365 | ||||
| Sales — ethanol | 54,817 | 5,955 | ||||||
| Total sales | $ | 186,526 | $ | 173,320 | ||||
| Gross margin | $ | (9,327 | ) | $ | 26,248 | |||
| Loss from operations | $ | (11,154 | ) | $ | (16,541 | ) | ||
Industrial Ingredients fiscal 2009 sales of $186.5 million increased $13.2 million, or 7.6%, from fiscal 2008. Annual sales volume of industrial starches declined 22.8%. The business suffered severe flood damage to its Cedar Rapids, Iowa manufacturing facility in June 2008 which shut down production for most of the fourth quarter of fiscal 2008. Limited production of starch products resumed in August 2008 and customer shipments were phased in during the first quarter of fiscal 2009 as the business restarted manufacturing processes. During the remainder of
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fiscal 2009, the Industrial Ingredients starch business was significantly impacted by weak demand for printing and writing paper products. Paper industry customers reacted to the demand decline by implementing extended downtime, closing mills and reducing inventory levels.
As starch demand decreased, the Industrial Ingredients business shifted more of its manufacturing mix to the production of ethanol. In May 2008, the Company began commercial production of ethanol, which was also suspended in June 2008 due to the impact of the Cedar Rapids flood. Ethanol production was restarted on a limited basis in late September 2008. Sales of ethanol in fiscal 2009 were $54.8 million compared to $6.0 million in fiscal 2008.
Gross margin declined from $26.2 million in fiscal 2008 to a loss of $9.3 million in fiscal 2009, a reduction of $35.6 million. Gross margin decreased primarily due to the shift in the manufacturing mix to ethanol production and a fall in ethanol selling prices. Ethanol has a lower unit selling price than industrial starch. The effect of lower industrial starch pricing of $5.1 million, higher depreciation on the ethanol facility of $2.2 million, higher distribution costs of $2.4 million, and $3.3 million of lower yields on corn and corn by-products also contributed to the margin decline.
Loss from operations for fiscal 2009 included $9.1 million of net insurance recoveries related to the Cedar Rapids flooding in fiscal 2008. See Note 3 to the Consolidated Financial Statements for details of the costs and recoveries. Operating expenses decreased to $8.3 million in fiscal 2009 from $11.6 million in fiscal 2008 on lower employee costs. Fiscal 2008 operating expenses included $1.4 million related to the settlement of a lawsuit. Research and development expenses decreased $1.0 million primarily due to lower employee costs.
Food Ingredients
| Year Ended August 31, | ||||||||
| 2009 | 2008 | |||||||
| (Dollars in thousands) | ||||||||
| Sales | $ | 69,030 | $ | 66,261 | ||||
| Gross margin | $ | 21,618 | $ | 18,340 | ||||
| Income from operations | $ | 13,512 | $ | 10,178 | ||||
Sales at the Food Ingredients business of $69.0 million rose $2.8 million, or 4.2%, over fiscal 2008, driven by improvements in average unit selling prices. The annual volume declined 7% from 2008, approximately half of which was due to the sale of the dextrose business in the second quarter of fiscal 2009. Sales of non-coating applications, excluding dextrose applications, grew 3.5% and sales of coating applications rose 11%.
Income from operations grew 32.8% from $10.2 million in fiscal 2008 to $13.5 million in fiscal 2009 on an increase in gross margin. Improvements in average unit pricing and product mix more than offset raw material increases of $2.4 million and the effect of volume declines of $1.4 million.
Corporate Operating Expenses
Corporate operating expenses decreased to $9.3 million in fiscal 2009 from $10.0 million in fiscal 2008, primarily due to a decrease in employee incentive costs and an increase in the cash value of the Company-owned life insurance policies.
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Non-Operating Income (Expense)
Other non-operating income (expense) consists of the following:
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Loss on extinguishment of debt | $ | (1,049 | ) | $ | — | $ | — | |||||
| Loss on interest rate swap termination | (1,562 | ) | — | — | ||||||||
| Gain on sale of dextrose product line | — | 1,562 | — | |||||||||
| Gain (loss) on foreign currency transactions | 419 | 127 | (217 | ) | ||||||||
| Gain on cash flow hedges | — | — | 2,890 | |||||||||
| Other | 271 | 226 | 87 | |||||||||
| $ | (1,921 | ) | $ | 1,915 | $ | 2,760 | ||||||
On April 7, 2010, the Company refinanced its bank debt. See Note 8 to the Consolidated Financial Statements. In connection with the refinancing, the Company recorded a pre-tax non-cash charge to earnings of approximately $1.0 million in the third quarter of fiscal 2010 related to unamortized transaction fees associated with the prior credit facility. In addition, the Company terminated its interest rate swap agreements with several banks and recorded a loss of approximately $1.6 million.
In the second quarter of fiscal 2009, the Company’s Food Ingredients 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.
The Company recognized a gain (loss) on foreign currency transactions on Australian dollar denominated assets and liabilities as disclosed in the table above.
As discussed in Note 3 to the Consolidated Financial Statements, in June 2008, the flooding of the Cedar Rapids manufacturing facility shut down production for most of the quarter. The Company had derivative instruments designated as cash flow hedges to reduce the price volatility of corn and natural gas used in the production of starch. Due to the June 12, 2008 flood event, derivative positions held as of that date that were forecasted to hedge exposures during the period the Cedar Rapids plant was shut down were no longer deemed to be effective cash flow hedges. The $2.9 million gain, representing ineffectiveness on these instruments, was reclassified from other comprehensive income and recognized as a component of non-operating income.
Interest expense
Interest expense was $7.5 million, $5.6 million and $3.1 million in fiscal years 2010, 2009 and 2008, respectively. Interest expense for the year ended August 31, 2010 increased primarily due to the increase in the dividend rate on the Series A Preferred Stock issued in April 2010 over the interest rate for the Company’s bank debt plus the accretion of the discount on the Series A Preferred Stock. On April 7, 2010, the Company issued $40 million of preferred stock at a dividend rate of 15%, the proceeds of which were used to repay outstanding bank debt. Prior to the $40 million repayment, the Company paid interest at LIBOR (London Interbank Offered Rate) plus 5%. See Notes 7 and 8 to the Consolidated Financial Statements.
Interest expense for fiscal 2009 increased $2.5 million over the prior year’s expense due to a $1.1 million decrease in the interest costs capitalized in connection with the construction of the ethanol facility, an increase in average debt balances, and an increase in the applicable margin over LIBOR beginning July 2009.
Income taxes
The effective tax rates for fiscal years 2010, 2009 and 2008 were 33%, 34% and 33%, respectively. The effective tax rate for fiscal 2010 is lower than the U.S. federal statutory rate of 35% primarily due to tax incentives for the production of ethanol, offset by dividends and discount accretion on the preferred stock which are recorded as interest expense for financial reporting purposes but are not deductible in the computation of taxable income, and
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the effect of state taxes. In fiscal 2009 and 2008, the effective tax rate is lower than the U.S. federal statutory rate of 35% primarily due to adjustments to the unrecognized tax benefits and adjustments resulting from filing current and amended tax returns, offset by state income taxes. See Note 17 to the Consolidated Financial Statements.
At August 31, 2010, the Company had $17.8 million of net deferred tax assets. A valuation allowance has not been provided on the net U.S. deferred tax assets as of August 31, 2010. The determination of the need for a valuation allowance requires significant judgment and estimates. The Company evaluates the requirement for a valuation allowance each quarter as the Company incurred losses in fiscal 2008, 2009 and 2010. The Company’s losses in fiscal years 2008 and 2009 were incurred as a result of severe flooding in Cedar Rapids, Iowa, which shut down the Company’s manufacturing facility for most of the fourth quarter of fiscal 2008. The tax benefits of operating losses incurred in fiscal 2008 and 2009 have been carried back to offset taxable income in prior years. The Company expects to recover its deferred tax assets through future taxable income; however, there can be no assurance that management’s current plans will be achieved or that a valuation allowance will not be required in the future.
Results of Discontinued Operations
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Sales | $ | 16,992 | $ | 78,030 | $ | 107,532 | ||||||
| Loss from operations | (1,848 | ) | (57,754 | ) | (5,145 | ) | ||||||
| Interest expense | 444 | 973 | 993 | |||||||||
| Gain on sale of assets | 199 | — | — | |||||||||
| Reclassification of currency translation adjustments into earnings | 13,420 | — | — | |||||||||
| Other non-operating income (loss), net | 490 | 1,734 | 2,675 | |||||||||
| Income (loss) on discontinued operations before income taxes | 11,817 | (56,993 | ) | (3,463 | ) | |||||||
| Income tax expense (benefit) | (4,495 | ) | 1,149 | (1,571 | ) | |||||||
| Income (loss) on discontinued operations | $ | 16,312 | $ | (58,142 | ) | $ | (1,892 | ) | ||||
Fiscal 2010
Penford Australia completed the sale of the shares of its wholly-owned subsidiary, Penford New Zealand, on September 2, 2009. Proceeds from the sale, net of transaction costs, were $4.8 million. On November 27, 2009, Penford Australia completed the sale of substantially all of its operating assets, including property, plant and equipment, intellectual property, and inventories in two transactions to unrelated parties. Proceeds from the sales, net of transaction costs, were $15.3 million.
Proceeds from the sales included $2.0 million in escrow to be released in four equal installments payable at six months, ten months, twenty months and thirty months from November 27, 2009. Penford Australia received the first two installments of $0.5 million each in May 2010 and September 2010. The remaining escrowed payments are subject to the buyer’s right to make warranty claims under the sale contract. Penford Australia currently expects that all warranties will be satisfied and that it will receive the proceeds from the escrow account as scheduled. The $1.5 million receivable at August 31, 2010 is included in other current assets in the Consolidated Balance Sheets.
During the first six months of fiscal 2010, the Company determined that intercompany loans made by its U.S. operations to its Australian subsidiaries would not be fully collectible from the proceeds of the Australian asset sales and the liquidation of the remaining net financial assets. Accordingly, the Company recorded an impairment charge in the U.S. of $13.6 million, which was classified in discontinued operations for financial reporting purposes. The impairment charge was offset against $13.6 million of income in the Australian operations discussed below. The U.S. tax benefit of the impairment was also recorded in discontinued operations.
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In fiscal years 2008 and 2009, the Company’s Australian operations reported tax losses. As of August 31, 2009, the Company’s discontinued Australian operations had recorded a valuation allowance of $14.6 million against the entire Australian net deferred tax asset because of the uncertainty of generating sufficient future taxable income. In fiscal 2010, the Australian operations recorded $13.6 million of income related to the U.S. impairment discussed above. Accordingly, the Company decreased its deferred tax asset related to the carryfoward of net operating losses and reversed the corresponding tax valuation allowance. At August 31, 2010, the valuation allowance related to the Australian net deferred tax asset was $10.9 million.
The liquidation of the remaining net assets of Penford Australia was substantially completed in fiscal 2010 and, as a result, $13.8 of currency translation adjustments were reclassified from accumulated other comprehensive income into earnings.
At August 31, 2010, the remaining net assets of the Australia/New Zealand Operations, consisting of $0.3 million of cash and $1.3 million of other net assets, primarily a receivable from the purchaser of one of the Company’s Australian manufacturing facilities, have been reported as assets of the continuing operations of the Company.
Fiscal 2009
In 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.
At August 31, 2009, in accordance with the accounting guidance regarding assets held for sale, the Company recorded the long-lived assets of the Australia/New Zealand Operations at the lower of their carrying values or fair value less costs to sell. The Company recorded a non-cash asset impairment charge of $33.0 million in fiscal 2009 to reduce the carrying value of the long-lived assets of the Australia/New Zealand Operations to estimated fair value less costs to sell.
Liquidity and Capital Resources
The Company’s primary sources of short- and long-term liquidity are cash flow from operations and its revolving line of credit, which expires on April 7, 2015. The Company expects to generate sufficient cash flow from operations and to have sufficient borrowing capacity and ability to fund its cash requirements during fiscal 2011.
Operating Activities
At August 31, 2010, Penford had working capital from continuing operations of $35.1 million, and $18.9 million outstanding under its credit facility. Cash flow generated from continuing operations was $10.1 million in fiscal 2010 compared with cash used in operations of $11.2 million and $1.4 million in fiscal years 2009 and 2008, respectively. Cash flow generated by operations in fiscal 2010 grew as working capital requirements, which had increased in fiscal 2009 during the flood recovery, stabilized during the year. The change in cash flow in fiscal 2009 from fiscal 2008 was primarily due to an increase in trade receivables of $20.1 million as sales of the Industrial Ingredients business grew after the Cedar Rapids flooding in fiscal 2008 and reduction in payables of $16.0 million.
Investing Activities
Capital expenditures were $6.0 million, $5.4 million and $38.5 million in fiscal years 2010, 2009 and 2008, respectively. Capital expenditures in fiscal 2008 included $26.9 million for construction of the ethanol production facility in Cedar Rapids, Iowa. Penford expects capital expenditures to be approximately $9.5 million in fiscal 2011. In fiscal 2009, the Company’s Food Ingredients business segment sold assets related to its dextrose product line to a third-party purchaser for $2.9 million, net of transaction costs.
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Financing Activities
Bank Debt
In fiscal year 2007, Penford entered into a $145 million Second Amended and Restated Credit Agreement (the “2007 Agreement”) among the Company; Harris N.A. (which has been replaced by the Bank of Montreal); LaSalle Bank National Association (now Bank of America); Cooperative Centrale Raiffeisen-Boorleenbank B.A., “Rabobank Nederland” (New York Branch); U.S. Bank National Association; and the Australia and New Zealand Banking Group Limited. Substantially all of the Company’s U.S. assets secured the 2007 Agreement.
On April 7, 2010, the Company issued $40 million of preferred stock and, on April 8, 2010, used the proceeds to pay a portion of the outstanding bank debt obligations under the 2007 Agreement. Also on April 7, 2010, the Company refinanced its bank debt. The Company entered into a $60 million Third Amended and Restated Credit Agreement (the “2010 Agreement”) among the Company; Penford Products Co.; Bank of Montreal; Bank of America National Association; and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland” New York Branch.
The 2010 Agreement refinanced the unpaid debt remaining under the 2007 Agreement. Under the 2010 Agreement, the Company may borrow $60 million in revolving lines of credit. The lenders’ revolving credit loan commitment may be increased under certain conditions. On August 31, 2010, the Company had $18.9 million outstanding under the 2010 Agreement. Under the 2010 Agreement, there are no scheduled principal payments prior to maturity on April 7, 2015. As of August 31, 2010, all of the Company’s outstanding bank debt was subject to variable interest rates.
Interest rates under the 2010 Agreement are based on either the London Interbank Offering Rates (“LIBOR”) or the prime rate, depending on the selection of available borrowing options under the 2010 Agreement. The Company may choose a borrowing rate of1-month,3-month or6-month LIBOR. Pursuant to the 2010 Agreement, the interest rate margin over LIBOR ranges between 3% and 4%, depending upon the Total Funded Debt Ratio (as defined).
The 2010 Agreement provides that the Total Funded Debt Ratio, which is computed as funded debt divided by earnings before interest, taxes, depreciation and amortization (as defined in the 2010 Agreement) shall not exceed 3.00. In addition, the Company must maintain a Fixed Charge Coverage Ratio, as defined in the 2010 Agreement, of not less than 1.35. Annual capital expenditures are restricted to $15 million (excluding certain capital expenditures specified in the 2010 Agreement) if the Total Funded Debt Ratio is greater than 2.00 for two consecutive fiscal quarters. The Company’s obligations under the 2010 Agreement are secured by substantially all of the Company’s assets. The Company was in compliance with the covenants in the 2010 Agreement as of August 31, 2010.
During the first quarter of fiscal 2010, the Iowa Department of Economic Development (“IDED”) awarded financial assistance to the Company as a result of the temporary shutdown of the Cedar Rapids, Iowa plant in the fourth quarter of fiscal 2008 due to record flooding of the Cedar River. The IDED provided two five-year non interest bearing loans as follows: (1) a $1.0 million loan to be repaid in 60 equal monthly payments of $16,667 beginning December 1, 2009, and (2) a $1.0 million loan which is forgivable if the Company maintains certain levels of employment at the Cedar Rapids plant. The proceeds of these Iowa loans were used to repay outstanding debt under the 2007 Agreement in the first quarter of fiscal 2010. At August 31, 2010, the Company had $1.8 million outstanding related to the IDED loans.
In connection with the refinancing, the Company recorded a pre-tax non-cash charge to earnings of $1.0 million in the third quarter of fiscal 2010 related to unamortized transaction fees associated with the prior credit facility. The Company also terminated its interest rate swaps in the third quarter of fiscal 2010 and recorded a charge to earnings of $1.6 million.
Preferred Stock
On April 7, 2010, the Company issued $40 million of Series A 15% cumulative non-voting, non-convertible preferred stock (“Series A Preferred Stock”) and 100,000 shares of Series B voting convertible preferred stock (“Series B Preferred Stock”) in a private placement to Zell Credit Opportunities Master Fund, L.P., an investment
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fund managed by Equity Group Investments, a private investment firm (the “Investor”). Proceeds from the preferred stock issuance of $40.0 million were used to repay bank debt on April 8, 2010. See Note 7 to the Consolidated Financial Statements.
The Company recorded the Series A Preferred Stock and the Series B Preferred Stock at their relative fair values at the time of issuance. The Series A Preferred Stock of $32.3 million was recorded as a long-term liability due to its mandatory redemption feature and the Series B Preferred Stock of $7.7 million was recorded as equity. The discount on the Series A Preferred Stock is being amortized into income using the effective interest method over the contractual life of seven years. At August 31, 2010, the carrying value of the Series A Preferred Stock liability of $34.1 million includes $1.5 million of accrued dividends, and $0.4 million of discount accretion for the period from the date of issuance to August 31, 2010. The accrued dividends represent the 9% dividends that may be paid or accrued at the option of the Company. Dividends on the Series A Preferred Stock and the discount accretion are recorded as interest expense in the consolidated statements of operations.
The holders of the Series A Preferred Stock are entitled to cash dividends of 6% on the sum of the outstanding Series A Preferred Stock plus accrued and unpaid dividends. In addition, dividends equal to 9% of the outstanding Series A Preferred Stock may accrue or be paid currently at the discretion of the Company. Dividends are payable quarterly beginning May 31, 2010.
Dividends
During each quarter of the first half of fiscal year 2009, the Board of Directors declared a $0.06 per share cash dividend on common stock.
In April 2009, the Board of Directors suspended payment of dividends. The Company may not declare or pay any dividends on its common stock without first obtaining approval from the holders of a majority of the Series A Preferred Stock. See Note 7 to the Consolidated Financial Statements for further details. During fiscal year 2009, the Company declared dividends on its common stock of $1.4 million.
Critical Accounting Estimates
The Company’s 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 Company’s financial position and results of operations. These estimates, judgments and assumptions are based on the Company’s historical experience and management’s knowledge and understanding of the current facts and circumstances. Management believes that its estimates, judgments and assumptions are reasonable based upon information available at the time this report was prepared. To the extent there are material differences between estimates, judgments and assumptions and the actual results, the financial statements will be affected.
Management has reviewed the accounting estimates and related disclosures with the Audit Committee of the Board of Directors. The estimates that management believes are the most important to the financial statements and that require the most difficult, subjective and complex judgments include the following:
| • | Evaluation of the allowance for doubtful accounts receivable | |
| • | Hedging activities | |
| • | Benefit plans | |
| • | Long-lived Assets | |
| • | Valuation of goodwill | |
| • | Self-insurance program | |
| • | Income taxes | |
| • | Stock-based compensation |
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A description of each of these follows:
Evaluation of the Allowance for Doubtful Accounts Receivable
Management makes judgments about the Company’s ability to collect outstanding receivables and provides allowances for the portion of receivables that the Company may not be able to collect. Penford estimates the allowance for uncollectible accounts based on historical experience, known troubled accounts, industry trends, economic conditions, how recently payments have been received, and ongoing credit evaluations of its customers. If the estimates do not reflect the Company’s future ability to collect outstanding invoices, Penford may experience losses in excess of the reserves established. At August 31, 2010, the allowance for doubtful accounts receivable was $0.4 million.
Hedging Activities
Penford uses derivative instruments, primarily exchange traded futures contracts, to reduce exposure to price fluctuations of commodities used in the manufacturing processes in the United States. The Company relies upon exchange settlement to address the default risk exposure. Penford has elected to designate these activities as hedges. This election allows the Company to defer gains and losses on those derivative instruments until the underlying commodity is used in the production process.
The requirements for the designation of hedges are very complex, and require judgments and analyses to qualify as hedges as defined by generally accepted accounting principles in the United States. These judgments and analyses include an assessment that the derivative instruments used are effective hedges of the underlying risks. If the Company were to fail to meet the requirements to qualify for derivative accounting, or if these derivative instruments are not designated as hedges, the Company would be required to mark these contracts to market at each reporting date. See Note 15 to the Consolidated Financial Statements.
Benefit Plans
Penford has defined benefit plans for its U.S. employees providing retirement benefits and coverage for retiree health care. Qualified third-party actuaries assist management in determining the expense and funded status of these employee benefit plans. Management makes several estimates and assumptions in order to measure the expense and funded status, including interest rates used to discount certain liabilities, rates of return on plan assets, rates of compensation increases, employee turnover rates, anticipated mortality rates, and increases in the cost of medical care. The Company makes judgments about these assumptions based on historical investment results and experience as well as available historical market data and trends. However, if these assumptions are wrong, it could materially affect the amounts reported in the Company’s future results of operations. Disclosure about these estimates and assumptions are included in Note 13 to the Consolidated Financial Statements. See “Defined Benefit Pension and Postretirement Benefit Plans” below.
Long-lived Assets
The Company reviews long-lived assets for impairment when events or circumstances indicate that the carrying values may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows from the operation and disposition of the asset group are less than the carrying amount of the asset group. Asset groups have identifiable cash flows independent of other asset groups. Measurement of an impairment loss would be based on the excess of the carrying amount of the asset group over its fair value. Fair value is measured using discounted cash flows or independent appraisals, as appropriate. Estimating future cash flows requires significant judgment by management in such areas as future economic and industry-specific conditions, product pricing and sales volume and capital expenditures.
Valuation of Goodwill
Penford is required to assess, on an annual basis, whether the value of goodwill reported on the balance sheet has been impaired, or more often if conditions exist that indicate that there might be impairment. These assessments require extensive and subjective judgments to assess the fair value of goodwill. While the Company engages
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qualified valuation experts to assist in this process, their work is based on the Company’s estimates of future operating results and allocation of goodwill to the business units. If future operating results differ materially from the estimates, the value of goodwill could be adversely impacted.
Self-Insurance Program
The Company maintains a self-insurance program covering portions of workers’ compensation and group health liability costs. The amounts in excess of the self-insured levels are fully insured by third-party insurers. Liabilities associated with these risks are estimated in part by considering historical claims experience, severity factors and other actuarial assumptions. Projections of future losses are inherently uncertain because of the random nature of insurance claims occurrences and changes that could occur in actuarial assumptions. The financial results of the Company could be significantly affected if future claims and assumptions differ from those used in determining these liabilities.
Income Taxes
The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The Company’s provision for income taxes reflects a combination of income earned and taxed in the various U.S. federal and state taxing jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the Company’s change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.
At August 31, 2010, the Company had $17.8 million of net deferred tax assets. A valuation allowance has not been provided on the net U.S. deferred tax assets as of August 31, 2010. The determination of the need for a valuation allowance requires significant judgment and estimates. The Company evaluates the requirement for a valuation allowance each quarter. The Company expects to recover its tax assets through future taxable income; however, there can be no assurance that management’s current plans will be achieved or that a valuation allowance will not be required against all or a portion of the net deferred tax assets in the future.
A tax benefit from an uncertain tax position may be recognized when it is “more likely than not” that the tax return position will be sustained upon examination by the applicable taxing authorities based on the technical merits of the position. The amount recognized is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. See Note 17 to the Consolidated Financial Statements. The liability for unrecognized tax benefits contains uncertainties because the Company is required to make assumptions and to apply judgment to estimate the exposures associated with the various tax filing positions. Management believes that the judgments and estimates it uses in evaluating its tax filing positions are reasonable; however, actual results could differ, and the Company may be exposed to significant gains and losses and the Company’s effective tax rate in a given financial statement period could be materially affected.
Stock-Based Compensation
The Company recognizes stock-based compensation in accordance with ASC 718. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of the share-based awards at the date of grant requires judgment, including estimating stock price volatility, forfeiture rates, the risk-free interest rate, dividends and expected option life. See Note 12 to the Consolidated Financial Statements.
If circumstances change, and the Company uses different assumptions for volatility, interest, dividends and option life in estimating the fair value of stock-based awards granted in future periods, stock-based compensation expense may differ significantly from the expense recorded in the current period. ASC 718 requires forfeitures to be estimated at the date of grant and revised in subsequent periods if actual forfeitures differ from those estimated. Therefore, if actual forfeiture rates differ significantly from those estimated, the Company’s results of operations could be materially impacted.
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Contractual Obligations
As more fully described in Notes 7, 8 and 11 to the Consolidated Financial Statements, the Company is a party to various debt, preferred stock and lease agreements at August 31, 2010 that contractually commit the Company to pay certain amounts in the future. The purchase obligations at August 31, 2010 represent an estimate of all open purchase orders and contractual obligations through the Company’s normal course of business for commitments to purchase goods and services for production and inventory needs, such as raw materials, supplies, manufacturing arrangements, capital expenditures and maintenance. The majority of terms allow the Company or suppliers the option to cancel or adjust the requirements based on business needs.
The following table summarizes such contractual commitments at August 31, 2010 (in thousands):
| 2011 | 2012-2013 | 2014-2015 | 2016 & After | Total | ||||||||||||||||
| Long-term debt and capital lease obligations | $ | 429 | $ | 887 | $ | 20,151 | $ | — | $ | 21,467 | ||||||||||
| Postretirement medical(1) | 689 | 1,574 | 1,846 | 5,879 | 9,988 | |||||||||||||||
| Defined benefit pensions(2) | 2,316 | — | — | — | 2,316 | |||||||||||||||
| Dividends on preferred stock(3) | 2,572 | 5,885 | 7,032 | 41,255 | 56,744 | |||||||||||||||
| Redemption of preferred stock(4) | — | — | — | 40,000 | 40,000 | |||||||||||||||
| Operating lease obligations | 3,751 | 5,310 | 2,456 | 881 | 12,398 | |||||||||||||||
| Purchase obligations | 71,341 | 3,088 | — | — | 74,429 | |||||||||||||||
| $ | 81,098 | $ | 16,744 | $ | 31,485 | $ | 88,015 | $ | 217,342 | |||||||||||
| (1) | Estimated contributions to the unfunded postretirement medical plan made in amounts needed to fund benefit payments for participants through fiscal 2019 based on actuarial assumptions. | |
| (2) | Estimated contributions to the defined benefit pension plans for fiscal year 2011. The actual amounts funded in 2011 may differ from the amounts listed above. Contributions in fiscal years 2012 through 2016 and beyond are excluded as those amounts are unknown. | |
| (3) | Payments for dividends on the Series A Preferred Stock represent the 6% dividends due and payable in cash each quarter until redemption. The 9% dividends which may be paid in cash or accrued each quarter until redemption are assumed to be accrued and paid at redemption. Redemption is assumed to occur on April 7, 2017. | |
| (4) | Redemption of the Series A Preferred Stock is assumed to occur on April 7, 2017. |
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Company’s financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Defined Benefit Pension and Postretirement Benefit Plans
Penford maintains defined benefit pension plans and defined benefit postretirement health care plans in the United States.
The most significant assumptions used to determine benefit expense and benefit obligations are the discount rate and the expected return on assets assumption. See Note 13 to the Consolidated Financial Statements for the assumptions used by Penford.
The discount rate used by the Company in determining benefit expense and benefit obligations reflects the yield of high quality (AA or better rating by a recognized rating agency) corporate bonds whose cash flows are expected to match the timing and amounts of projected future benefit payments. Benefit obligations and expense increase as the discount rate is reduced. The discount rates to determine net periodic expense used in 2008 (6.51%), 2009 (6.92%) and 2010 (5.98%) reflect the changes in bond yields over the past several years. Lowering the discount rate by 25 basis points would increase pension expense by approximately $0.2 million and other
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postretirement benefit expense by $0.1 million. During fiscal 2010, bond yields declined and Penford has lowered the discount rate for calculating its benefit obligations at August 31, 2010, as well as net periodic expense for fiscal 2011, to 5.64%.
The expected long-term return on assets assumption for the pension plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. Pension expense increases as the expected return on plan assets decreases. In developing the expected rate of return, the Company considers long-term historical market rates of return as well as actual returns on the Company’s plan assets, and adjusts this information to reflect expected capital market trends. Penford also considers forward looking return expectations by asset class, the contribution of active management and management fees paid by the plans. The plan assets are held in qualified trusts and anticipated rates of return are not reduced for income taxes. The expected long-term return on assets assumption used to calculate net periodic pension expense was 8.0% for fiscal 2010. A 50 basis point decrease (increase) in the expected return on assets assumptions would increase (decrease) pension expense by approximately $0.1 million based on plan assets at August 31, 2010. The expected return on plan assets used in calculating fiscal 2011 pension expense is 8.0%.
Unrecognized net loss amounts reflect the difference between expected and actual returns on pension plan assets as well as the effects of changes in actuarial assumptions. Unrecognized net losses in excess of certain thresholds are amortized into net periodic pension and postretirement benefit expense over the average remaining service life of active employees. As of August 31, 2010, unrecognized losses from all sources are $18.0 million for the pension plans and unrecognized losses of $2.2 million for the postretirement health care plan. Amortization of unrecognized net loss amounts is expected to increase net pension expense by approximately $1.4 million in fiscal 2011. Amortization of unrecognized net losses is expected to increase net postretirement health care expense by approximately $0.1 million in fiscal 2011.
Penford recognized pension expense of $3.8 million, $2.0 million and $1.6 million in fiscal years 2010, 2009 and 2008, respectively. Penford expects pension expense to be approximately $3.7 million in fiscal 2011. The Company contributed $3.4 million, $1.1 million and $1.5 million to the pension plans in fiscal years 2010, 2009 and 2008, respectively. Penford estimates that it will be required to make minimum contributions to the pension plans of $2.3 million during fiscal 2011. Because of the decline in general economic and capital market conditions, the Company expects that pension plan funding contributions will increase over the medium and long term.
The Company recognized benefit expense for its postretirement health care plan of $1.6 million, $1.0 million and $1.0 million in fiscal years 2010, 2009 and 2008, respectively. Penford expects to recognize approximately $1.2 million in postretirement health care benefit expense in fiscal 2011. The Company contributed $0.5 million in each fiscal years 2010, 2009 and 2008 to the postretirement health care plans and estimates that it will contribute $0.5 million in fiscal 2011.
Future changes in plan asset returns, assumed discount rates and various assumptions related to the participants in the defined benefit plans will affect future benefit expense and liabilities. The Company cannot predict what these changes will be.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the disclosure requirements relating to fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in an active market for identical assets and liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. The guidance also requires a roll forward of activities on purchases, sales, issuances, and settlements of the assets and liabilities measured in Level 3 (significant unobservable inputs). For the Company, the disclosures related to the transfers of assets and liabilities were effective for the third quarter of fiscal 2010. The Company had no transfers and no disclosure was required. The disclosure on the roll forward activities for Level 3 fair value measurements will be effective in the third quarter of fiscal 2011. Other than requiring additional disclosures, adoption of this guidance will not have an impact on the Company’s financial position, results of operations or liquidity.
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Forward-looking Statements
This Annual Report onForm 10-K (“Annual Report”), including, but not limited, to statements found in the Notes to Consolidated Financial Statements and in Item 1 — Business and Item 7 — Management’s 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 Company’s business and anticipated market conditions are forward-looking statements. Forward-looking statements involve numerous risks and uncertainties and should not be relied upon as predictions of future events. Forward-looking statements depend on assumptions, dates or methods that may be incorrect or imprecise, and the Company may not be able to realize them. Forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates,” or the negative use of these words and phrases or similar words or phrases. Forward-looking statements can be identified by discussions of strategy, plans or intentions. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
| • | 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; | |
| • | changes in general economic conditions or developments with respect to specific industries or customers affecting demand for the Company’s 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; | |
| • | changes in returns on pension plan assetsand/or assumptions used for determining employee benefit expense and obligations; | |
| • | other unforeseen developments in the industries in which Penford operates, | |
| • | the Company’s ability to successfully operate under and comply with the terms of its bank credit agreement, as amended; | |
| • | other factors described in Part I, Item 1A “Risk Factors.” |
| Item 7A: | Quantitative and Qualitative Disclosures about Market Risk |
Market Risk Sensitive Instruments and Positions
Penford is exposed to market risks that are inherent in the financial instruments that are used in the normal course of business. Penford may use various hedge instruments to manage or reduce market risk, but the Company does not use derivative financial instrument transactions for speculative purposes. The primary market risks are discussed below.
Interest Rate Risk
The Company’s exposure to market risk for changes in interest rates relates to its variable-rate borrowings. As of August 31, 2010, all of the Company’s outstanding bank debt is subject to variable interest rates, which are generally set for one or three months. The market risk associated with a 100 basis point adverse change in interest rates at August 31, 2010 is approximately $0.2 million.
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Foreign Currency Exchange Rates
At August 31, 2009, the Company hadU.S.-Australian dollar currency exchange rate risks due to debt borrowings denominated in Australian dollars. At August 31, 2010, the Australian dollar-denominated debt had been repaid and the Company has no plans to borrow funds in a foreign currency.
Commodities
The availability and price of corn, Penford’s most significant raw material, is subject to fluctuations due to unpredictable factors such as weather, plantings, domestic and foreign governmental farm programs and policies, changes in global demand and the worldwide production of corn. To reduce the price risk caused by market fluctuations, Penford generally follows a policy of using exchange-traded futures and options contracts to hedge exposure to corn price fluctuations in North America. These futures and options contracts are designated as hedges. The changes in market value of these contracts have historically been, and are expected to continue to be, highly effective in offsetting the price changes in corn. A majority of the Company’s sales contracts for corn-based industrial starch ingredients contain a pricing methodology which allows the Company to pass-through the majority of the changes in the commodity price of net corn.
Penford’s net corn position in the U.S. consists primarily of inventories, purchase contracts and exchange-traded futures and options contracts that hedge Penford’s exposure to commodity price fluctuations. The fair value of the position is based on quoted market prices. The Company has estimated its market risk as the potential loss in fair value resulting from a hypothetical 10% adverse change in prices. As of August 31, 2010 and 2009, the fair value of the Company’s net corn position was approximately $1.6 million and $(1.5) million, respectively. The market risk associated with a 10% adverse change in corn prices at August 31, 2010 and 2009 is approximately $161,000 and $149,000, respectively.
Prices for natural gas fluctuate due to anticipated changes in supply and demand and movement of prices of related or alternative fuels. To reduce the price risk caused by sudden market fluctuations, Penford generally enters into short-term purchase contracts or uses exchange-traded futures and options contracts to hedge exposure to natural gas price fluctuations. These futures and options contracts are designated as hedges. The changes in market value of these contracts have historically been, and are expected to continue to be, closely correlated with the price changes in natural gas.
Penford’s exchange traded futures and options contracts hedge production requirements. The fair value of these contracts is based on quoted market prices. The Company has estimated its market risk as the potential loss in fair value resulting from a hypothetical 10% adverse change in prices. As of August 31, 2010 and 2009, the fair value of the natural gas exchange-traded futures and options contracts was a loss of approximately $1.2 million and a loss of approximately $1.3 million, respectively. The market risk associated with a 10% adverse change in natural gas prices at August 31, 2010 and 2009 is estimated at $125,000 and $130,000, respectively.
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Consolidated Balance Sheets
| August 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands, except | ||||||||
| per share data) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
| Cash and cash equivalents | $ | 315 | $ | 5,540 | ||||
| Trade accounts receivable, net | 26,749 | 32,192 | ||||||
| Inventories | 19,849 | 18,155 | ||||||
| Prepaid expenses | 5,237 | 5,081 | ||||||
| Income tax receivable | 3,678 | 3,892 | ||||||
| Other | 5,287 | 3,476 | ||||||
| Current assets of discontinued operations | — | 38,486 | ||||||
| Total current assets | 61,115 | 106,822 | ||||||
| Property, plant and equipment, net | 111,930 | 119,049 | ||||||
| Restricted cash value of life insurance | 7,951 | 9,761 | ||||||
| Deferred tax assets | 16,493 | 8,277 | ||||||
| Other assets | 2,615 | 2,075 | ||||||
| Other intangible assets, net | 407 | 481 | ||||||
| Goodwill, net | 7,897 | 7,553 | ||||||
| Non-current assets of discontinued operations | — | 4,227 | ||||||
| Total assets | $ | 208,408 | $ | 258,245 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
| Cash overdraft, net | $ | 4,385 | $ | — | ||||
| Current portion of long-term debt and capital lease obligations | 429 | 21,241 | ||||||
| Accounts payable | 14,650 | 14,745 | ||||||
| Accrued liabilities | 6,536 | 8,972 | ||||||
| Current liabilities of discontinued operations | — | 16,028 | ||||||
| Total current liabilities | 26,000 | 60,986 | ||||||
| Long-term debt and capital lease obligations | 21,038 | 71,141 | ||||||
| Redeemable preferred stock, Series A (Note 7) | 34,104 | — | ||||||
| Other postretirement benefits | 16,891 | 17,678 | ||||||
| Pension benefit liability | 20,597 | 18,043 | ||||||
| Other liabilities | 6,206 | 8,187 | ||||||
| Non-current liabilities of discontinued operations | — | 2,851 | ||||||
| Total liabilities | 124,836 | 178,886 | ||||||
| Commitments and contingencies | ||||||||
Shareholders’ equity: | ||||||||
| Common stock, par value $1.00 per share, authorized 29,000 shares, issued 13,354 shares in 2010 and 13,247 shares in 2009, including treasury shares | 13,190 | 13,157 | ||||||
| Preferred stock, Series B (Note 7) | 100 | — | ||||||
| Additional paid-in capital | 102,303 | 93,829 | ||||||
| Retained earnings | 14,586 | 7,944 | ||||||
| Treasury stock, at cost, 1,981 shares | (32,757 | ) | (32,757 | ) | ||||
| Accumulated other comprehensive loss | (13,850 | ) | (2,814 | ) | ||||
| Total shareholders’ equity | 83,572 | 79,359 | ||||||
| Total liabilities and shareholders’ equity | $ | 208,408 | $ | 258,245 | ||||
The accompanying notes are an integral part of these statements.
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Consolidated Statements of Operations
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands, except | ||||||||||||
| share and per share data) | ||||||||||||
| Sales | $ | 254,274 | $ | 255,556 | $ | 239,581 | ||||||
| Cost of sales | 230,820 | 243,265 | 194,993 | |||||||||
| Gross margin | 23,454 | 12,291 | 44,588 | |||||||||
| Operating expenses | 23,943 | 23,501 | 25,727 | |||||||||
| Research and development expenses | 4,371 | 4,348 | 5,671 | |||||||||
| Flood related costs, net of insurance proceeds | — | (9,109 | ) | 27,555 | ||||||||
| Other costs | — | — | 1,411 | |||||||||
| Loss from operations | (4,860 | ) | (6,449 | ) | (15,776 | ) | ||||||
| Interest expense | 7,550 | 5,557 | 3,089 | |||||||||
| Other non-operating income (expense), net | (1,921 | ) | 1,915 | 2,760 | ||||||||
| Loss from continuing operations before income taxes | (14,331 | ) | (10,091 | ) | (16,105 | ) | ||||||
| Income tax benefit | (4,702 | ) | (3,446 | ) | (5,297 | ) | ||||||
| Loss from continuing operations | (9,629 | ) | (6,645 | ) | (10,808 | ) | ||||||
| Income (loss) from discontinued operations, net of tax | 16,312 | (58,142 | ) | (1,892 | ) | |||||||
| Net income (loss) | $ | 6,683 | $ | (64,787 | ) | $ | (12,700 | ) | ||||
| Weighted average common shares and equivalents outstanding, basic and diluted | 11,600,885 | 11,170,493 | 10,565,432 | |||||||||
| Earnings (loss) per common share: | ||||||||||||
| Basic loss per share from continuing operations | $ | (0.84 | ) | $ | (0.59 | ) | $ | (1.02 | ) | |||
| Basic earnings (loss) per share from discontinued operations | 1.41 | (5.21 | ) | (0.18 | ) | |||||||
| Basic earnings (loss) per share | $ | 0.57 | $ | (5.80 | ) | $ | (1.20 | ) | ||||
| Diluted loss per share from continuing operations | $ | (0.84 | ) | $ | (0.59 | ) | $ | (1.02 | ) | |||
| Diluted earnings (loss) per share from discontinued operations | 1.41 | (5.21 | ) | (0.18 | ) | |||||||
| Diluted earnings (loss) per share | $ | 0.57 | $ | (5.80 | ) | $ | (1.20 | ) | ||||
| Dividends declared per common share | $ | — | $ | 0.12 | $ | 0.24 | ||||||
The accompanying notes are an integral part of these statements.
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Consolidated Statements of Comprehensive Income (Loss)
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Net income (loss) | $ | 6,683 | $ | (64,787 | ) | $ | (12,700 | ) | ||||
| Other comprehensive income (loss): | ||||||||||||
| Change in fair value of derivatives, net of tax benefit (expense) of $530, $(1,255) and $1,999 | (864 | ) | 2,047 | (3,261 | ) | |||||||
| Loss (gain) from derivative transactions reclassified into earnings from other comprehensive income, net of tax benefit (expense) of $1,555, $(1,837) and $1,574 | 2,537 | (2,998 | ) | 2,568 | ||||||||
| Foreign currency translation adjustments | 930 | (7,635 | ) | 2,041 | ||||||||
| Gain from foreign currency translation reclassified into earnings | (13,420 | ) | — | — | ||||||||
| Actuarial loss on post retirement liabilities, net of tax benefit of $780, $5,441 and $571 | (1,272 | ) | (8,879 | ) | (931 | ) | ||||||
| Loss from post retirement liabilities reclassified to earnings, net of tax benefit of $645, $119 and $57 | 1,053 | 194 | 94 | |||||||||
| Other comprehensive income (loss) | (11,036 | ) | (17,271 | ) | 511 | |||||||
| Total comprehensive loss | $ | (4,353 | ) | $ | (82,058 | ) | $ | (12,189 | ) | |||
The accompanying notes are an integral part of these statements.
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Consolidated Statements of Cash Flows
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Operating activities: | ||||||||||||
| Net income (loss) | $ | 6,683 | $ | (64,787 | ) | $ | (12,700 | ) | ||||
| Less: Net income (loss) from discontinued operations | $ | 16,312 | $ | (58,142 | ) | $ | (1,892 | ) | ||||
| Net loss from continuing operations | $ | (9,629 | ) | $ | (6,645 | ) | $ | (10,808 | ) | |||
| Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operations: | ||||||||||||
| Depreciation and amortization | 14,791 | 14,455 | 12,066 | |||||||||
| Stock-based compensation | 1,611 | 2,656 | 2,256 | |||||||||
| Loss (gain) on sale and disposal of assets | (2 | ) | (1,554 | ) | 3,669 | |||||||
| Deferred income tax benefit | (4,578 | ) | — | (5,019 | ) | |||||||
| Loss (gain) on derivative transactions | 2,522 | (133 | ) | 661 | ||||||||
| Foreign currency transaction gain | (419 | ) | (127 | ) | (706 | ) | ||||||
| Loss on early extinguishment of debt | 1,049 | — | — | |||||||||
| Excess tax benefit from stock-based compensation | — | — | (86 | ) | ||||||||
| Change in operating assets and liabilities: | ||||||||||||
| Trade accounts receivable | 5,250 | (20,111 | ) | 24,615 | ||||||||
| Inventories | (3,356 | ) | 7,754 | (9,572 | ) | |||||||
| Prepaid expenses | (383 | ) | (1,429 | ) | 305 | |||||||
| Accounts payable and accrued liabilities | 854 | (15,987 | ) | 6,222 | ||||||||
| Income taxes | (138 | ) | 4,222 | (8,453 | ) | |||||||
| Insurance recovery receivable | — | 8,000 | (8,000 | ) | ||||||||
| Other | 2,496 | (2,281 | ) | (8,529 | ) | |||||||
| Net cash flow provided by (used in) operating activities — continuing operations | 10,068 | (11,180 | ) | (1,379 | ) | |||||||
| Investing activities: | ||||||||||||
| Acquisitions of property, plant and equipment, net | (5,980 | ) | (5,379 | ) | (38,505 | ) | ||||||
| Proceeds from sale of dextrose product line | — | 2,857 | — | |||||||||
| Net proceeds received from sale of discontinued operations and other | 20,712 | 725 | (75 | ) | ||||||||
| Net cash provided by (used in) investing activities — continuing operations | 14,732 | (1,797 | ) | (38,580 | ) | |||||||
| Financing activities: | ||||||||||||
| Proceeds from revolving line of credit | 30,700 | 55,931 | 67,529 | |||||||||
| Payments on revolving line of credit | (58,033 | ) | (24,500 | ) | (41,052 | ) | ||||||
| Proceeds from issuance of long-term debt | 2,000 | — | — | |||||||||
| Payments on long-term debt | (45,992 | ) | (7,750 | ) | (27,625 | ) | ||||||
| Proceeds from issuance of preferred stock | 40,000 | — | — | |||||||||
| Issuance costs of preferred stock | (1,995 | ) | — | — | ||||||||
| Exercise of stock options | — | — | 352 | |||||||||
| Payments on capital lease obligations | (245 | ) | (263 | ) | (67 | ) | ||||||
| Payment of loan fees | (1,227 | ) | (1,574 | ) | (63 | ) | ||||||
| Excess tax benefit from stock-based compensation | — | — | 86 | |||||||||
| Increase (decrease) in cash overdraft. | 4,385 | (1,301 | ) | (3,609 | ) | |||||||
| Payment of dividends | — | (2,026 | ) | (2,449 | ) | |||||||
| Net proceeds from issuance of common stock | — | — | 46,844 | |||||||||
| Other | 19 | — | 13 | |||||||||
| Net cash (used in) provided by financing activities — continuing operations | (30,388 | ) | 18,517 | 39,959 | ||||||||
| Cash flows from discontinued operations: | ||||||||||||
| Net cash (used in) provided by operating activities | 6,329 | (1,713 | ) | 9,901 | ||||||||
| Net cash provided by (used in) investing activities | (2,848 | ) | (290 | ) | (1,249 | ) | ||||||
| Net cash (used in) provided by financing activities | (3,399 | ) | 2,044 | (7,722 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | (353 | ) | 59 | (396 | ) | |||||||
| Net cash (used in) provided by discontinued operations | (271 | ) | 100 | 534 | ||||||||
| Increase (decrease) in cash and cash equivalents | (5,859 | ) | 5,640 | 534 | ||||||||
| Cash and cash equivalents of continuing operations , beginning of year | 5,540 | — | — | |||||||||
| Cash balance of discontinued operations, beginning of year | 634 | 534 | — | |||||||||
| Cash and cash equivalents, end of year | 315 | 6,174 | 534 | |||||||||
| Less: cash balance of discontinued operations, end of year | — | 634 | 534 | |||||||||
| Cash and cash equivalents of continuing operations, end of year | $ | 315 | $ | 5,540 | $ | — | ||||||
| Supplemental disclosure of cash flow information | ||||||||||||
| Cash paid during the year for: | ||||||||||||
| Interest | $ | 4,939 | $ | 3,596 | $ | 2,609 | ||||||
| Income taxes paid (refunded), net | $ | (172 | ) | $ | (10,300 | ) | $ | 9,742 | ||||
| Noncash investing and financing activities: | ||||||||||||
| Capital lease obligations incurred for certain equipment leases | $ | 34 | $ | — | $ | 1,150 | ||||||
The accompanying notes are an integral part of these statements.
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Consolidated Statements of Shareholders’ Equity
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Common stock | ||||||||||||
| Balance, beginning of year | $ | 13,157 | $ | 13,127 | $ | 11,099 | ||||||
| Exercise of stock options | — | — | 28 | |||||||||
| Issuance of restricted stock, net | 33 | 30 | — | |||||||||
| Issuance of common stock | — | — | 2,000 | |||||||||
| Balance, end of year | 13,190 | 13,157 | 13,127 | |||||||||
Preferred stock | ||||||||||||
| Balance, beginning of year | — | — | — | |||||||||
| Issuance of preferred stock, Series B | 100 | — | — | |||||||||
| Balance, end of year | 100 | — | — | |||||||||
Additional paid-in capital | ||||||||||||
| Balance, beginning of year | 93,829 | 91,443 | 43,902 | |||||||||
| Exercise of stock options | — | — | 322 | |||||||||
| Tax benefit (deficiency) on stock option and awards | (321 | ) | (256 | ) | 86 | |||||||
| Stock based compensation | 1,586 | 2,672 | 2,289 | |||||||||
| Issuance of restricted stock, net | (33 | ) | (30 | ) | — | |||||||
| Issuance of common stock | — | — | 44,844 | |||||||||
| Issuance of preferred stock | 7,242 | — | — | |||||||||
| Balance, end of year | 102,303 | 93,829 | 91,443 | |||||||||
Retained earnings | ||||||||||||
| Balance, beginning of year | 7,944 | 74,092 | 89,486 | |||||||||
| Cumulative effect of a change in accounting principle | — | — | (118 | ) | ||||||||
| 7,944 | 74,092 | 89,368 | ||||||||||
| Net income (loss) | 6,683 | (64,787 | ) | (12,700 | ) | |||||||
| Dividends declared | — | (1,352 | ) | (2,576 | ) | |||||||
| Other | (41 | ) | (9 | ) | — | |||||||
| Balance, end of year | 14,586 | 7,944 | 74,092 | |||||||||
Treasury stock | (32,757 | ) | (32,757 | ) | (32,757 | ) | ||||||
Accumulated other comprehensive income (loss): | ||||||||||||
| Balance, beginning of year | (2,814 | ) | 14,457 | 13,946 | ||||||||
| Change in fair value of derivatives, net of tax | (864 | ) | 2,047 | (3,261 | ) | |||||||
| Loss (gain) from derivative transactions reclassified into earnings from other comprehensive income, net of tax | 2,537 | (2,998 | ) | 2,568 | ||||||||
| Foreign currency translation adjustments | 930 | (7,635 | ) | 2,041 | ||||||||
| Gain from foreign currency translation reclassified into earnings | (13,420 | ) | — | — | ||||||||
| Net increase in postretirement liabilities, net of tax | (219 | ) | (8,685 | ) | (837 | ) | ||||||
| Balance, end of year | (13,850 | ) | (2,814 | ) | 14,457 | |||||||
Total shareholders’ equity | $ | 83,572 | $ | 79,359 | $ | 160,362 | ||||||
The accompanying notes are an integral part of these statements.
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Notes to Consolidated Financial Statements
| Note 1 — | Summary of Significant Accounting Policies |
Business
Penford Corporation (“Penford” or the “Company”) is a developer, manufacturer and marketer of specialty natural-based ingredient systems for industrial and food ingredient applications and ethanol. Penford’s products provide convenient and cost-effective solutions derived from renewable sources. Sales of the Company’s products are generated using a combination of direct sales and distributor agreements.
The Company has extensive research and development capabilities, which are used in understanding the complex chemistry of carbohydrate-based materials and in developing applications to address customer needs. In addition, the Company has specialty processing capabilities for a variety of modified starches.
Penford manages its business in two segments. The Industrial Ingredients and Food Ingredients segments, located in the U.S., are broad categories of end-market users. The Industrial Ingredients segment is a supplier of chemically modified specialty starches to the paper and packaging industries and a producer of ethanol. The Food Ingredients segment is a developer and manufacturer of specialty starches and dextrin to the food manufacturing and food service industries. See Note 19 for financial information regarding the Company’s business segments.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Penford and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior years’ financial statements in order to conform to the current year presentation.
Discontinued Operations
In August 2009, the Company committed to a plan to exit from the business conducted by the Company’s Australia/New Zealand Operations. On September 2, 2009, the Company completed the sale of Penford New Zealand Limited (“Penford New Zealand”). On November 27, 2009, the Company completed the sale of the operating assets of its subsidiary company Penford Australia Limited (“Penford Australia”), including its two remaining Australian plants. The financial results of the Australia/New Zealand Operations have been classified as discontinued operations in the consolidated statement of operations for all periods for which an income statement is presented. The assets and liabilities of this business were reflected as assets and liabilities of discontinued operations in the consolidated balance sheets as of August 31, 2009 and 2008. At August 31, 2010, the remaining net assets of the Australia/New Zealand Operations, consisting of $0.3 million of cash and $1.3 million of other net assets, primarily a receivable from the purchaser of one of the Company’s Australian manufacturing facilities, have been reported as assets and liabilities of the continuing operations of the Company. See Note 2 for additional information regarding discontinued operations. Unless otherwise indicated, amounts and discussions in these notes pertain to the Company’s continuing operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used in accounting for, among other things, the allowance for doubtful accounts, accruals, the determination of assumptions for pension and postretirement employee benefit costs, useful lives of property and equipment and valuation allowance for deferred tax assets. Actual results may differ from previously estimated amounts.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and temporary investments with maturities of less than three months when purchased. Amounts are reported in the balance sheets at cost, which approximates fair value.
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Cash Overdrafts
Cash overdrafts represent the amount by which outstanding checks issued, but not yet presented to banks for disbursement, exceed balances on deposit in the applicable bank accounts. The changes in cash overdrafts are included as a component of cash flows from financing activities in the consolidated statements of cash flows.
Allowance for Doubtful Accounts and Concentration of Credit Risk
The allowance for doubtful accounts reflects the Company’s best estimate of probable losses in the accounts receivable balances. Penford estimates the allowance for uncollectible accounts based on historical experience, known troubled accounts, industry trends, economic conditions, how recently payments have been received, and ongoing credit evaluations of its customers. Activity in the allowance for doubtful accounts for fiscal 2010, 2009 and 2008 is as follows (dollars in thousands):
| Balance | Charged to | |||||||||||||||
| Beginning of | Costs and | Deductions | Balance | |||||||||||||
| Year | Expenses | and Other | End of Year | |||||||||||||
Year ended August 31: | ||||||||||||||||
| 2010 | $ | 605 | $ | (218 | ) | $ | (37 | ) | $ | 350 | ||||||
| 2009 | $ | 550 | $ | (2 | ) | $ | 57 | $ | 605 | |||||||
| 2008 | $ | 725 | $ | (154 | ) | $ | (21 | ) | $ | 550 | ||||||
Approximately 45%, 52% and 70% of the Company’s sales in fiscal 2010, 2009 and 2008, respectively, were made to customers who operate in the paper industry. This industry has suffered an economic downturn, which has resulted in the closure of a number of smaller mills.
Inventories
Inventory is stated at the lower of cost or market. Inventory is valued using thefirst-in, first-out (“FIFO”) method, which approximates actual cost. Capitalized costs include materials, labor and manufacturing overhead related to the purchase and production of inventories.
Goodwill and Other Intangible Assets
In accordance with Accounting Standards Codification (“ASC” or the “Codification”) 350, “Intangibles — Goodwill and Other,” goodwill is not amortized, but instead is tested for impairment at least annually or more frequently if there is an indication of impairment.
The Company evaluates its goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. To determine whether goodwill is impaired, Penford compares the fair value of each reporting units to that report unit’s carrying amount. If the fair value of the reporting unit is greater than its carrying amount goodwill is not considered impaired. If the fair value of the reporting unit is lower than its carrying amount, Penford then compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill and if the carrying value is higher than the fair value, an impairment is recorded. The implied fair value of a reporting unit is determined using a discounted cash flow method considering the Company’s the market capitalization.
The Company completed its annual goodwill impairment test as of June 1, 2010 and determined there was no impairment to the recorded value of goodwill.
Patents are amortized using the straight-line method over their estimated period of benefit. At August 31, 2010, the weighted average remaining amortization period for patents is six years. Penford has no intangible assets with indefinite lives.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for maintenance and repairs are expensed as incurred. The Company uses the straight-line method to compute depreciation expense assuming average useful
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lives of three to forty years for financial reporting purposes. Equipment and vehicle leases generally have average useful lives ranging from three to twelve years and real estate between twelve to forty-six years. Depreciation, which includes depreciation of assets under capital leases, of $13.1 million, $13.8 million and $11.7 million was recorded in fiscal years 2010, 2009 and 2008, respectively. For income tax purposes, the Company generally uses accelerated depreciation methods.
Interest is capitalized on major construction projects while in progress. No interest was capitalized in fiscal years 2010 and 2009. In fiscal 2008, the Company capitalized $1.1 million in interest costs related to the ethanol facility construction.
Income Taxes
The provision for income taxes includes federal and state taxes currently payable and deferred income taxes arising from temporary differences between financial and income tax reporting methods. Deferred taxes are recorded using the liability method in recognition of these temporary differences. A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized. The Company has not provided deferred taxes related to its investment in foreign subsidiaries, which are classified as discontinued operations, as it does not expect future distributions from the subsidiaries or repayments of permanent advances.
Revenue Recognition
Revenue from sales of products and shipping and handling revenue are recognized at the time goods are shipped and title transfers to the customer. This transfer is considered complete when a sales agreement is in place, delivery has occurred, pricing is fixed or determinable and collection is reasonably assured. Costs associated with shipping and handling is included in cost of sales.
Research and Development
Research and development costs are expensed as incurred, except for costs of patents, which are capitalized and amortized over the lives of the patents. Research and development costs expensed were $4.4 million, $4.3 million and $5.7 million in fiscal 2010, 2009 and 2008, respectively.
Foreign Currency
Assets and liabilities of subsidiaries whose functional currency is deemed to be other than the U.S. dollar are translated at year end rates of exchange. Resulting translation adjustments are accumulated in the currency translation adjustments component of other comprehensive income. Statement of Operations amounts are translated at average exchange rates prevailing during the year. For fiscal years 2010 and 2009, the net foreign currency transaction gain (loss) recognized in earnings was $0.4 million, $0.1 million and $(0.2) million for fiscal years 2010, 2009 and 2008, respectively.
Derivatives
Penford uses derivative instruments to manage the exposures associated with commodity prices, interest rates and energy costs. The derivative instruments are reported at fair value in other current assets or accounts payable in the consolidated balance sheets.
For derivative instruments designated as fair value hedges, the gain or loss on the derivative instruments as well as the offsetting gain or loss on the hedged firm commitments 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 (loss), net of applicable income taxes, and recognized in earnings when the hedged exposure affects earnings. The Company recognizes the gain or loss on the derivative instrument as a component of cost of goods sold in the period when the finished goods produced from the hedged item are sold or, for interest rate swaps, as a component of interest expense in the period the forecasted transaction is reported in earnings. If it is determined that the derivative instruments used are no longer effective at offsetting changes in cash flows or fair value of the hedged item, then the changes in fair value would be recognized in current earnings as a component of cost of good sold or interest expense.
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Significant Customer and Export Sales
The Company has several relatively large customers in each business segment. The Company’s sales of ethanol to its sole ethanol customer, Eco-Energy, Inc., represented approximately 27%, 21% and 2% of the Company’s net sales for fiscal years 2010, 2009 and 2008, respectively. Eco-Energy, Inc. is a marketer and distributor of bio-fuels in the United States and Canada. The Company’s second largest customer, Domtar, Inc., represented approximately 8%, 11% and 15% of the Company’s net sales for fiscal years 2010, 2009 and 2008, respectively. Domtar, Inc. and Eco-Energy are customers of the Company’s Industrial Ingredients business. Export sales accounted for approximately 9%, 8% and 11% of consolidated sales in fiscal 2010, 2009 and 2008, respectively.
Stock-Based Compensation
The Company recognizes stock-based compensation in accordance with Financial Accounting Standards Board (“FASB”) ASC 718, “Compensation — Stock Compensation.” The Company utilizes the Black-Scholes option-pricing model to determine the fair value of stock options on the date of grant. This model derives the fair value of stock options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield. See Note 12 for further detail.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the disclosure requirements relating to fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in an active market for identical assets and liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. The guidance also requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured in Level 3 (significant unobservable inputs). For the Company, the disclosures related to the transfers of assets and liabilities were effective for the third quarter of fiscal 2010. The Company had no transfers and no disclosure was required. The disclosure on the roll forward activities for Level 3 fair value measurements will be effective in the third quarter of fiscal 2011. Other than requiring additional disclosures, adoption of this guidance will not have an impact on the Company’s financial position, results of operations or liquidity.
| Note 2 — | Discontinued Operations |
On August 27, 2009, the Company committed to a plan to exit from the business conducted by its Australia/New Zealand Operations. As a result, the Company’s financial statements reflect the Australia/New Zealand Operations as discontinued operations for all periods for which an income statement is presented in compliance with the provisions of the Financial Accounting Standards Board Accounting Standards Codification205-10, “Presentation of Financial Statements — Discontinued Operations” (“ASC205-10”). The Australia/New Zealand Operations segment was previously reported as the Company’s third operating segment. The following tables summarize the financial information for discontinued operations related to the Australia/New Zealand Operations. Interest expense on debt directly attributable to the Australia/New Zealand Operations has been allocated to discontinued operations.
Penford Australia completed the sale of the shares of its wholly-owned subsidiary, Penford New Zealand, on September 2, 2009. Proceeds from the sale, net of transaction costs, were $4.8 million. On November 27, 2009, Penford Australia completed the sale of substantially all of its operating assets, including property, plant and equipment, intellectual property, and inventories in two transactions to unrelated parties. Proceeds from the sales, net of transaction costs, were $15.3 million. Additionally, at November 30, 2009, the Company recorded $1.3 million of severance costs associated with the asset sales.
Proceeds from the sales included $2.0 million in escrow to be released in four equal installments payable at six months, ten months, twenty months and thirty months from November 27, 2009. Penford Australia received the first two installments of $0.5 million each in May 2010 and September 2010. The remaining escrowed payments are subject to the buyer’s right to make warranty claims under the sale contract. Penford Australia currently expects that all warranties will be satisfied and that it will receive the proceeds from the escrow account as scheduled. The
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$1.5 million receivable is included in other current assets in the Consolidated Balance Sheets at August 31, 2010. In addition, Penford Australia received approximately $0.8 million as further compensation for grain inventory on hand on the date of sale.
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Sales | $ | 16,992 | $ | 78,030 | $ | 107,532 | ||||||
| Loss from operations | $ | (1,848 | ) | $ | (57,754 | ) | $ | (5,145 | ) | |||
| Interest expense | 444 | 973 | 993 | |||||||||
| Gain on sale of assets | 199 | — | — | |||||||||
| Reclassification of currency translation adjustments into earnings | 13,420 | — | — | |||||||||
| Other non-operating income, net | 490 | 1,734 | 2,675 | |||||||||
| Income (loss) from discontinued operations before taxes | 11,817 | (56,993 | ) | (3,463 | ) | |||||||
| Income tax expense (benefit) | (4,495 | ) | 1,149 | (1,571 | ) | |||||||
| Income (loss) from discontinued operations, net of tax | $ | 16,312 | $ | (58,142 | ) | $ | (1,892 | ) | ||||
At August 31, 2010, the remaining net assets of the Australia/New Zealand Operations, consisting of $0.3 million of cash and $1.3 million of other net assets, primarily a receivable from the purchaser of one of the Company’s Australian manufacturing facilities, have been reported as assets of the continuing operations of the Company.
| August 31, 2009 | ||||
| (Dollars in thousands) | ||||
ASSETS | ||||
| Cash | $ | 634 | ||
| Trade accounts receivable, net | 14,482 | |||
| Inventories | 22,129 | |||
| Prepaid expenses | 595 | |||
| Income tax receivable | 190 | |||
| Other | 456 | |||
| Current assets of discontinued operations | 38,486 | |||
| Property, plant and equipment, net | 3,799 | |||
| Goodwill and other intangible assets, net | — | |||
| Other assets | 428 | |||
| Non-current assets of discontinued operations | 4,227 | |||
| Total assets of discontinued operations | $ | 42,713 | ||
| LIABILITIES | ||||
| Short-term borrowings | $ | 3,327 | ||
| Accounts payable | 10,697 | |||
| Accrued liabilities | 2,004 | |||
| Current liabilities of discontinued operations | 16,028 | |||
| Other liabilities | 2,851 | |||
| Non-current liabilities of discontinued operations | 2,851 | |||
| Total liabilities of discontinued operations | $ | 18,879 | ||
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The financial statements have been prepared in compliance with the provisions ofASC 205-10. Accordingly, as of August 31, 2009, the Company stated the long-lived assets of the Australia/New Zealand Operations at the lower of their carrying values or fair value less costs to sell. The Company estimated fair value of the long-lived assets based on executed sales agreements for substantially all of its Australian operating assets and the completed sale price of Penford New Zealand. During fiscal 2010, there were no significant changes to these estimates. The Company recorded a non-cash asset impairment charge of $33.0 million in the fourth quarter of fiscal 2009 to reduce the carrying value of the long-lived assets of the Australia/New Zealand Operations to estimated fair value less costs to sell.
During fiscal 2010, the Company determined that intercompany loans made by its U.S. operations to its Australian subsidiaries would not be fully collectible from the proceeds of the Australian asset sales and the liquidation of the remaining net financial assets. Accordingly, the Company recorded an impairment charge in the U.S. of $13.6 million, which was classified in discontinued operations for financial reporting purposes. The impairment charge was offset against $13.6 million of income in the Australian operations discussed below. The U.S. tax benefit of the impairment was also recorded in discontinued operations.
In the second quarter of fiscal 2009, the Company recorded a $13.8 million non-cash goodwill impairment charge, which represented all of the goodwill allocated to its Australia/New Zealand reporting unit.
The Company’s Australian operations reported tax losses for fiscal years 2008, 2009 and 2010. 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 classification of the Australia operations as discontinued and the uncertainty related to generating sufficient future taxable income in Australia, the Company believes that it is more likely than not that the net deferred tax benefit will not be realized. The Company’s discontinued Australian operations recorded a valuation allowance as of August 31, 2009 of $14.6 million against the entire Australian net deferred tax asset. During fiscal 2010, the Australian operations recorded $13.6 million of income related to the U.S. impairment discussed above. Accordingly, the Company decreased its deferred tax asset related to the carryfoward of net operating losses and reversed the corresponding tax valuation allowance. At August 31, 2010, the valuation allowance related to the Australian net deferred tax asset was $10.9 million.
| Note 3 — | Cedar Rapids Flood |
On June 12, 2008, the Company’s 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.
During fiscal years 2009 and 2008, the Company recorded flood restoration costs of $45.6 million, and insurance recoveries of $27.2 million, as follows:
| Year Ended August 31 | ||||||||||||
| 2009 | 2008 | Total | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Repairs of buildings and equipment | $ | 6,346 | $ | 17,082 | $ | 23,428 | ||||||
| Site remediation | 348 | 5,389 | 5,737 | |||||||||
| Write off of inventory and fixed assets | 71 | 4,016 | 4,087 | |||||||||
| Continuing costs during production shut down | — | 9,771 | 9,771 | |||||||||
| Other | 820 | 1,797 | 2,617 | |||||||||
| 7,585 | 38,055 | 45,640 | ||||||||||
| Insurance recoveries | (16,694 | ) | (10,500 | ) | (27,194 | ) | ||||||
| Net flood costs (recoveries) | $ | (9,109 | ) | $ | 27,555 | $ | 18,446 | |||||
The direct costs of the flood in the table above do not include lost profits from the interruption of the business.
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Site remediation began as soon as the flood waters subsided. The Company engaged outside contractors to pump water and clean and sanitize the facilities and grounds of the manufacturing facility prior to access by Company personnel. The buildings and equipment in Cedar Rapids sustained damages due to the severe flooding.
The carrying value of fixed assets and related equipment spare parts destroyed in the flooding were written off, totaling $2.5 million. The write-off of inventory, totaling $1.5 million, included the cost of raw materials,work-in-process and finished goods inventories that were not able to be used or sold due to flood damage, the establishment of reserves for estimated recoverability losses, and the costs of disposal, including freight, for removal of damaged inventory.
During the suspension of production in the fourth quarter of fiscal 2008, the Company incurred costs for wages, salaries and related payroll costs, depreciation, pension expense, insurance, rental costs and other items which continued regardless of the level of production. Employees normally engaged in the production of industrial starch were utilized in theclean-up and repairs of the facility and equipment, assessment and recovery of inventories and other aspects of the site restoration. These expenses totaled $9.8 million.
Insurance recoveries
During the fiscal years 2009 and 2008, the Company recognized insurance recoveries of $16.7 million and $10.5 million, respectively. These recoveries have been recorded as an offset to the losses caused by the flooding. The Company is seeking additional payments from its insurers for damages arising from the flooding. See Note 21.
| Note 4 — | Inventories |
Components of inventory are as follows:
| August 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
| Raw materials | $ | 8,708 | $ | 7,265 | ||||
| Work in progress | 1,299 | 1,921 | ||||||
| Finished goods | 9,842 | 8,969 | ||||||
| Total inventories | $ | 19,849 | $ | 18,155 | ||||
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. See Note 15.
| Note 5 — | Property and equipment |
Components of property and equipment are as follows:
| August 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
| Land | $ | 10,307 | $ | 10,229 | ||||
| Plant and equipment | 324,904 | 321,356 | ||||||
| Construction in progress | 4,272 | 2,214 | ||||||
| 339,483 | 333,799 | |||||||
| Accumulated depreciation | (227,553 | ) | (214,750 | ) | ||||
| Net property and equipment | $ | 111,930 | $ | 119,049 | ||||
The above table includes approximately $0.7 million and $0.9 million of equipment under capital leases for fiscal years 2010 and 2009, respectively.
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| Note 6 — | Goodwill and other intangible assets |
The Company’s goodwill of $7.9 million and $7.6 million at August 31, 2010 and 2009, respectively, represents the excess of acquisition costs over the fair value of the net assets of Penford Australia which was allocated to the Company’s Food Ingredients reporting unit. The increase in goodwill is due to the change in the foreign currency exchange rates prior to the divestiture of the Australian assets.
Penford’s intangible assets consist of patents which are being amortized over the weighted average remaining amortization period of six years as of August 31, 2010. There is no residual value associated with patents. The carrying amount and accumulated amortization of intangible assets are as follows (dollars in thousands):
| August 31, 2010 | August 31, 2009 | |||||||||||||||
| Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
| Amount | Amortization | Amount | Amortization | |||||||||||||
Intangible assets: | ||||||||||||||||
| Patents | $ | 1,768 | $ | 1,361 | $ | 1,768 | $ | 1,287 | ||||||||
Amortization expense related to intangible assets was $0.1 million in each of fiscal years 2010, 2009 and 2008. The estimated aggregate annual amortization expense for patents is not significant for the next five fiscal years, 2011 through 2015.
| Note 7 — | Preferred Stock Subject to Mandatory Redemption |
On April 7, 2010, the Company issued $40 million of Series A 15% cumulative non-voting, non-convertible preferred stock (“Series A Preferred Stock”) and 100,000 shares of Series B voting convertible preferred stock (“Series B Preferred Stock”) in a private placement to Zell Credit Opportunities Master Fund, L.P., an investment fund managed by Equity Group Investments, a private investment firm (the “Investor”). Proceeds from the preferred stock issuance of $40.0 million were used to repay bank debt on April 8, 2010. The Company has 1,000,000 shares of authorized preferred stock, $1.00 par value, of which 200,000 shares are issued and outstanding at August 31, 2010 in two series as shown below.
| Shares Issued and | ||||
| Outstanding | ||||
| Series A 15% Cumulative Non-Voting Non-Convertible Preferred Stock, redeemable | 100,000 | |||
| Series B Voting Convertible Preferred Stock | 100,000 | |||
The Company recorded the Series A Preferred Stock and the Series B Preferred Stock at their relative fair values at the time of issuance. The Series A Preferred Stock of $32.3 million was recorded as a long-term liability due to its mandatory redemption feature and the Series B Preferred Stock of $7.7 million was recorded as equity. The discount on the Series A Preferred Stock is being amortized into income using the effective interest method over the contractual life of seven years. At August 31, 2010, the carrying value of the Series A Preferred Stock liability of $34.1 million includes $1.5 million of accrued dividends, and $0.4 million of discount accretion for the period from the date of issuance to August 31, 2010. The accrued dividends represent the 9% dividends that may be paid or accrued at the option of the Company. Dividends on the Series A Preferred Stock and the discount accretion are recorded as interest expense in the consolidated statements of operations.
The holders of the Series A Preferred Stock are entitled to cash dividends of 6% on the sum of the outstanding Series A Preferred Stock plus accrued and unpaid dividends. In addition, dividends equal to 9% of the outstanding Series A Preferred Stock may accrue or be paid currently at the discretion of the Company. Dividends are payable quarterly beginning May 31, 2010.
The Series A Preferred Stock is mandatorily redeemable on April 7, 2017 at a per share redemption price equal to the original issue price of $400 per share plus any accrued and unpaid dividends. At any time on or after April 7, 2012, the Company may redeem, in whole or in part, the shares of the Series A Preferred Stock at a per share redemption price of the original issue price plus any accrued and unpaid dividends.
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The Company may not declare or pay any dividends on its common stock or incur new indebtedness that exceeds a specified ratio without first obtaining approval from the holders of a majority of the Series A Preferred Stock.
The Company also granted to the investor certain information and inspection rights and the right to elect one director to the Company’s Board of Directors while any shares of Series A Preferred Stock remain outstanding. On April 9, 2010, the Board of Directors, upon the recommendation of the investor, elected Matthew Zell, a Managing Director of Equity Group Investments, to be the director designated by the holders of the Series A Preferred Stock.
| Note 8 — | Debt |
| August 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
| Secured credit agreements — revolving loans, 4.61% weighted average interest rate at August 31, 2010 | $ | 18,900 | $ | 45,610 | ||||
| Secured credit agreements — term loans | — | 5,375 | ||||||
| Secured credit agreements — capital expansion loans | — | 40,451 | ||||||
| Iowa Department of Economic Development loans | 1,834 | — | ||||||
| Capital lease obligations | 733 | 946 | ||||||
| 21,467 | 92,382 | |||||||
| Less: current portion and short-term borrowings | 429 | 21,241 | ||||||
| Long-term debt and capital lease obligations | $ | 21,038 | $ | 71,141 | ||||
In fiscal year 2007, Penford entered into a $145 million Second Amended and Restated Credit Agreement (the “2007 Agreement”) among the Company; Harris N.A. (which has been replaced by the Bank of Montreal); LaSalle Bank National Association (now Bank of America); Cooperative Centrale Raiffeisen-Boorleenbank B.A., “Rabobank Nederland” (New York Branch); U.S. Bank National Association; and the Australia and New Zealand Banking Group Limited. Substantially all of the Company’s U.S. assets secured the 2007 Agreement.
On April 7, 2010, the Company used the proceeds from the preferred stock issuance discussed above to pay a portion of the outstanding bank debt obligations under the 2007 Agreement. Also on April 7, 2010, the Company refinanced its bank debt. The Company entered into a $60 million Third Amended and Restated Credit Agreement (the “2010 Agreement”) among the Company; Penford Products Co.; Bank of Montreal; Bank of America National Association; and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland” New York Branch.
The 2010 Agreement refinanced the unpaid debt remaining under the 2007 Agreement. Under the 2010 Agreement, the Company may borrow $60 million in revolving lines of credit. The lenders’ revolving credit loan commitment may be increased under certain conditions. On August 31, 2010, the Company had $18.9 million outstanding under the 2010 Agreement, which is subject to variable interest rates. Under the 2010 Agreement, there are no scheduled principal payments prior to maturity on April 7, 2015.
Interest rates under the 2010 Agreement are based on either the London Interbank Offering Rates (“LIBOR”) or the prime rate, depending on the selection of available borrowing options under the 2010 Agreement. The Company may choose a borrowing rate of1-month,3-month or6-month LIBOR. Pursuant to the 2010 Agreement, the interest rate margin over LIBOR ranges between 3% and 4%, depending upon the Total Funded Debt Ratio (as defined). At August 31, 2010, the Company’s borrowing rate was 3.5%.
The 2010 Agreement provides that the Total Funded Debt Ratio, which is computed as funded debt divided by earnings before interest, taxes, depreciation and amortization (as defined in the 2010 Agreement) shall not exceed 3.00. In addition, the Company must maintain a Fixed Charge Coverage Ratio, as defined in the 2010 Agreement, of not less than 1.35. Annual capital expenditures are restricted to $15 million (excluding certain capital expenditures specified in the 2010 Agreement) if the Total Funded Debt Ratio is greater than 2.00 for two consecutive fiscal quarters. The Company’s obligations under the 2010 Agreement are secured by substantially all of the Company’s
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assets. Pursuant to the 2010 Agreement, the Company may not declare or pay dividends on, or make any other distributions in respect of, its common stock. The Company was in compliance with the covenants in the 2010 Agreement as of August 31, 2010.
In connection with the refinancing, the Company recorded a pre-tax non-cash charge to earnings of $1.0 million in the third quarter of fiscal 2010 related to unamortized transaction fees associated with the prior credit facility. The Company also terminated its interest rate swaps in the third quarter of fiscal 2010 and recorded a charge to earnings of $1.6 million.
During the first quarter of fiscal 2010, the Iowa Department of Economic Development (“IDED”) awarded financial assistance to the Company as a result of the temporary shutdown of the Cedar Rapids, Iowa plant in the fourth quarter of fiscal 2008 due to record flooding of the Cedar River. The IDED provided two five-year non interest bearing loans as follows: (1) a $1.0 million loan to be repaid in 60 equal monthly payments of $16,667 beginning December 1, 2009, and (2) a $1.0 million loan which is forgivable if the Company maintains certain levels of employment at the Cedar Rapids plant. The proceeds of these Iowa loans were used to repay outstanding debt under the 2007 Agreement in the first quarter of fiscal 2010. At August 31, 2010, the Company had $1.8 million outstanding related to the IDED loans.
The maturities of debt existing at August 31, 2010 for the fiscal years beginning with fiscal 2011 are as follows (dollars in thousands):
| 2011 | $ | 429 | ||
| 2012 | 443 | |||
| 2013 | 445 | |||
| 2014 | 200 | |||
| 2015 | 19,950 | |||
| $ | 21,467 | |||
Included in the Company’s long-term debt at August 31, 2010 is $0.7 million of capital lease obligations, of which $0.2 million is considered current portion of long-term debt. See Note 11.
| Note 9 — | Stockholders’ Equity |
Common Stock
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Common shares outstanding | ||||||||||||
| Balance, beginning of year | 13,157,387 | 13,127,369 | 11,098,739 | |||||||||
| Exercise of stock options | — | — | 28,630 | |||||||||
| Issuance of restricted stock, net | 32,194 | 30,018 | — | |||||||||
| Issuance of stock | — | — | 2,000,000 | |||||||||
| Balance, end of year | 13,189,581 | 13,157,387 | 13,127,369 | |||||||||
In December 2007, the Company completed a public offering of common stock resulting in the issuance of 2,000,000 common shares at a price to the public of $25.00 per share. The Company received approximately $47.2 million of net proceeds (net of $2.8 million of expenses related to the offering) from the sale of the shares. This transaction increased the recorded amounts of common stock by $2.0 million and increased additional paid-in capital by $45.2 million in the second quarter of fiscal 2008. The Company incurred approximately $0.4 million in professional fees related to the common stock issuance.
Preferred Stock, Series B
On April 7, 2010, the Company issued $40 million of Series A 15% cumulative non-voting, non-convertible preferred stock (“Series A Preferred Stock”) and 100,000 shares of Series B voting convertible preferred stock
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(“Series B Preferred Stock”) in a private placement to Zell Credit Opportunities Master Fund, L.P., an investment fund managed by Equity Group Investments, a private investment firm (the “Investor”). See Note 7 for further details. Series B Preferred Stock was recorded at its relative fair value of $7.7 million at the time of issuance and recorded as equity. The holders of the Series B Preferred Stock are entitled to dividends equal to the per share dividend declared and paid on the Company’s common stock times the number of shares of common stock into which the Series B Preferred Stock is then convertible. The Series B Preferred Stock is not redeemable and dividends on the Series B Preferred Stock are non-cumulative.
At any time prior to April 7, 2020, at the option of the holder, the outstanding Series B Preferred Stock may be converted into shares of the Company’s common stock at a conversion rate of ten shares of common stock per one share of Series B Preferred Stock, subject to adjustment in the event of stock dividends, distributions, splits, reclassifications and the like. If any shares of Series B Preferred Stock have not been converted into shares of common stock prior to April 7, 2020, the shares of Series B Preferred Stock will automatically convert into shares of common stock. The holders of the Series B Preferred Stock shall have the right to one vote for each share of common stock into which the Series B Preferred Stock is convertible.
In connection with this investment, the Company also agreed to register the shares of Common Stock issuable upon conversion of the Series B Preferred Stock. The registration statement for these shares of Common Stock became effective on June 7, 2010.
Until April 7, 2012, the Investor may not acquire any additional shares of common stock, and may not, with limited exceptions, transfer the Series B Preferred Stock, or the Company’s Common Stock into which the Series B Preferred Stock is convertible.
| Note 10 — | Accumulated Other Comprehensive Loss |
The components of accumulated other comprehensive loss are as follows:
| August 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
| Net unrealized loss on derivatives, net of tax | $ | (582 | ) | $ | (2,256 | ) | ||
| Foreign currency translation adjustments | — | 12,490 | ||||||
| Minimum pension liability, net of tax | (13,268 | ) | (13,048 | ) | ||||
| $ | (13,850 | ) | $ | (2,814 | ) | |||
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| Note 11 — | Leases |
Certain of the Company’s property, plant and equipment is leased under operating leases. Equipment and vehicle leases generally have lease terms ranging from one to fifteen years with renewal options and real estate leases range between five to twenty years with renewal options. In fiscal 2010, rental expense under operating leases was $6.0 million, net of sublease rental income of approximately $0.1 million. In fiscal 2009, rental expense under operating leases was $6.8 million, net of sublease rental income of approximately $0.3 million, and fiscal year 2008 was $6.9 million, net of sublease rental income of approximately $0.4 million. Future minimum lease payments for fiscal years beginning with fiscal year 2011 for noncancelable operating and capital leases having initial lease terms of more than one year are as follows (dollars in thousands):
| Operating Leases | ||||||||
| Capital | Minimum Lease | |||||||
| Leases | Payments | |||||||
| 2011 | $ | 279 | $ | 3,751 | ||||
| 2012 | 262 | 3,011 | ||||||
| 2013 | 253 | 2,299 | ||||||
| 2014 | — | 1,635 | ||||||
| 2015 | — | 821 | ||||||
| Thereafter | — | 881 | ||||||
| Total minimum lease payments | 794 | $ | 12,398 | |||||
| Less: amounts representing interest | (61 | ) | ||||||
| Net minimum lease payments | $ | 733 | ||||||
| Note 12 — | Stock-based Compensation Plans |
Penford maintains the 2006 Long-Term Incentive Plan (the “2006 Incentive Plan”) pursuant to which various stock-based awards may be granted to employees, directors and consultants. As of August 31, 2010, the aggregate number of shares of the Company’s common stock that are available to be issued as awards under the 2006 Incentive Plan is 116,017. In addition, any shares previously granted under the Penford Corporation 1994 Stock Option Plan which are subsequently forfeited or not exercised will be available for future grants under the 2006 Incentive Plan. Non-qualified stock options granted under the 2006 Incentive Plan generally vest ratably over four years and expire seven years from the date of grant.
General Option Information
A summary of the stock option activity for the year ended August 31, 2010 is as follows:
| Weighted Average | ||||||||||||||||||||
| Number of | Weighted Average | Remaining Term (in | Aggregate Intrinsic | |||||||||||||||||
| Shares | Option Price Range | Exercise Price | Years) | Value | ||||||||||||||||
| Outstanding Balance, August 31, 2009 | 1,363,771 | $ | 7.59 - 21.73 | $ | 15.18 | |||||||||||||||
| Granted | — | |||||||||||||||||||
| Exercised | — | |||||||||||||||||||
| Cancelled | (99,207 | ) | 11.16 - 21.31 | 16.68 | ||||||||||||||||
| Outstanding Balance, August 31, 2010 | 1,264,564 | 7.59 - 21.73 | 15.07 | 3.38 | $ | — | ||||||||||||||
| Options Exercisable at August 31, 2010 | 1,077,314 | $ | 7.59 - 21.73 | $ | 14.70 | 3.13 | $ | — | ||||||||||||
The aggregate intrinsic value disclosed in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $4.90 per share as of August 31, 2010 that would have been received by the
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option holders had all option holders exercised on that date. The intrinsic value of options exercised during fiscal year 2008 was $291,800. No stock options were exercised in fiscal years 2010 and 2009.
Valuation and Expense Under ASC 718
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 Company’s expected volatility is based on the historical volatility of the Company’s 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 arein-the-money. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve appropriate for the term of the Company’s stock options awards and the selected dividend yield assumption was determined in view of the Company’s historical and estimated dividend payout. The Company has no reason to believe that the expected volatility of its stock price or its option exercise patterns would differ significantly from historical volatility or option exercises.
Under the 2006 Incentive Plan, the Company estimated the fair value of stock options using the following assumptions and resulting in the following weighted-average grant date fair values:
| 2008 | ||||
| Expected volatility | 41 | % | ||
| Expected life (years) | 5.5 | |||
| Interest rate (percent) | 2.8-3.7 | |||
| Dividend yield | 1.0 | % | ||
| Weighted-average fair values | $ | 6.65 | ||
No stock options were granted in fiscal year 2010 and 2009. As of August 31, 2010, the Company had $0.6 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 1.3 years.
Restricted Stock Awards
The grant date fair value of the Company’s restricted stock awards is equal to the fair value of Penford’s common stock at the grant date. The following table summarizes the restricted stock award activity for the twelve months ended August 31, 2010 as follows:
| Weighted | ||||||||
| Average | ||||||||
| Grant Date | ||||||||
| Number of Shares | Fair Value | |||||||
| Nonvested at August 31, 2009 | 89,582 | $ | 31.31 | |||||
| Granted | 113,707 | 6.60 | ||||||
| Vested | (39,082 | ) | 26.31 | |||||
| Cancelled | (9,500 | ) | 10.82 | |||||
| Nonvested at August 31, 2010 | 154,707 | $ | 15.67 | |||||
On January 1, 2010, 2009 and 2008, each non-employee director received an award of 2,301, 1,976 and 781 shares of restricted stock under the 2006 Incentive Plan at the last reported sale price of the stock on the preceding trading day, which vest one year from grant date of the award. The Company recognizes compensation cost for restricted stock ratably over the vesting period.
As of August 31, 2010, the Company had $0.7 million of unrecognized compensation costs related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 1.2 years.
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Compensation Expense
The Company recognizes stock-based compensation expense utilizing the accelerated multiple option approach over the requisite service period, which equals the vesting period. The following table summarizes the total stock-based compensation cost for fiscal years 2010, 2009 and 2008 and the effect on the Company’s consolidated statements of operations (dollars in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Cost of sales | $ | 170 | $ | 307 | $ | 176 | ||||||
| Operating expenses | 1,413 | 2,300 | 2,055 | |||||||||
| Research and development expenses | 28 | 49 | 25 | |||||||||
| Discontinued operations | (25 | ) | 16 | 33 | ||||||||
| Total stock-based compensation expense | $ | 1,586 | $ | 2,672 | $ | 2,289 | ||||||
| Tax benefit | 603 | 1,015 | 870 | |||||||||
| Total stock-based compensation expense, net of tax | $ | 983 | $ | 1,657 | $ | 1,419 | ||||||
| Note 13 — | Pensions and Other Postretirement Benefits |
Penford maintains two noncontributory defined benefit pension plans that cover substantially all North American employees and retirees.
The Company also maintains a postretirement health care benefit plan covering its North American bargaining unit hourly retirees.
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Obligations and Funded Status
The following represents information summarizing the Company’s pension and other postretirement benefit plans. A measurement date of August 31, 2010 was used for all plans.
| Year Ended August 31, | ||||||||||||||||
| Pension Benefits | Other Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Change in benefit obligation: | ||||||||||||||||
| Benefit obligation at September 1 | $ | 43,861 | $ | 38,289 | $ | 18,345 | $ | 13,532 | ||||||||
| Service cost | 1,608 | 1,420 | 353 | 259 | ||||||||||||
| Interest cost | 2,633 | 2,581 | 1,077 | 913 | ||||||||||||
| Plan participants’ contributions | — | — | 145 | 147 | ||||||||||||
| Actuarial (gain) loss | 463 | (507 | ) | 10 | 2,423 | |||||||||||
| Change in assumptions | 2,215 | 3,950 | (1,668 | ) | 1,748 | |||||||||||
| Benefits paid | (1,905 | ) | (1,872 | ) | (682 | ) | (677 | ) | ||||||||
| Benefit obligation at August 31 | $ | 48,875 | $ | 43,861 | $ | 17,580 | $ | 18,345 | ||||||||
Change in plan assets: | ||||||||||||||||
| Fair value of plan assets at September 1 | $ | 25,818 | $ | 30,835 | $ | — | $ | — | ||||||||
| Actual return on plan assets | 991 | (4,279 | ) | — | — | |||||||||||
| Company contributions | 3,374 | 1,134 | 537 | 530 | ||||||||||||
| Plan participants’ contributions | — | — | 145 | 147 | ||||||||||||
| Benefits paid | (1,905 | ) | (1,872 | ) | (682 | ) | (677 | ) | ||||||||
| Fair value of the plan assets at August 31 | $ | 28,278 | $ | 25,818 | $ | — | $ | — | ||||||||
Funded status: | ||||||||||||||||
| Net liability — Plan assets less than projected benefit obligation | $ | (20,597 | ) | $ | (18,043 | ) | $ | (17,580 | ) | $ | (18,345 | ) | ||||
Recognized as: | ||||||||||||||||
| Current accrued benefit liability | $ | — | $ | — | $ | (689 | ) | $ | (667 | ) | ||||||
| Non-current accrued benefit liability | (20,597 | ) | (18,043 | ) | (16,891 | ) | (17,678 | ) | ||||||||
| Net Amount Recognized | $ | (20,597 | ) | $ | (18,043 | ) | $ | (17,580 | ) | $ | (18,345 | ) | ||||
Accumulated other comprehensive loss consists of the following amounts that have not yet been recognized as components of net benefit cost (dollars in thousands):
| August 31, 2010 | August 31, 2009 | |||||||||||||||
| Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | |||||||||||||
| Unrecognized prior service cost (credit) | $ | 1,773 | $ | (611 | ) | $ | 2,017 | $ | (763 | ) | ||||||
| Unrecognized net actuarial loss | 18,029 | 2,208 | 15,632 | 4,160 | ||||||||||||
| Total | $ | 19,802 | $ | 1,597 | $ | 17,649 | $ | 3,397 | ||||||||
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Selected information related to the Company’s defined benefit pension plans that have benefit obligations in excess of fair value of plan assets is presented below (dollars in thousands):
| August 31, | ||||||||
| 2010 | 2009 | |||||||
| Projected benefit obligation | $ | 48,875 | $ | 43,861 | ||||
| Accumulated benefit obligation | $ | 46,142 | $ | 41,427 | ||||
| Fair value of plan assets | $ | 28,278 | $ | 25,818 | ||||
Effective August 1, 2004, the Company’s postretirement health care benefit plan covering bargaining unit hourly employees was closed to new entrants and to any current employee who did not meet minimum requirements as to age plus years of service.
The defined benefit pension plans for salary and hourly employees were closed to new participants effective January 1, 2005 and August 1, 2004, respectively.
Net Periodic Benefit Cost
| Year Ended August 31, | ||||||||||||||||||||||||
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Components of net periodic benefit cost | ||||||||||||||||||||||||
| Service cost | $ | 1,608 | $ | 1,420 | $ | 1,485 | $ | 353 | $ | 259 | $ | 310 | ||||||||||||
| Interest cost | 2,633 | 2,581 | 2,491 | 1,077 | 913 | 854 | ||||||||||||||||||
| Expected return on plan assets | (2,022 | ) | (2,428 | ) | (2,652 | ) | — | — | — | |||||||||||||||
| Amortization of prior service cost | 244 | 253 | 253 | (152 | ) | (152 | ) | (152 | ) | |||||||||||||||
| Amortization of actuarial loss | 1,312 | 211 | 50 | 294 | — | — | ||||||||||||||||||
| Benefit cost | $ | 3,775 | $ | 2,037 | $ | 1,627 | $ | 1,572 | $ | 1,020 | $ | 1,012 | ||||||||||||
Assumptions
The Company assesses its benefit plan assumptions on a regular basis. Assumptions used in determining plan information are as follows:
| August 31, | ||||||||||||||||||||||||
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
Weighted-average assumptions used to calculate net periodic expense: | ||||||||||||||||||||||||
| Discount rate | 5.98 | % | 6.92 | % | 6.51 | % | 5.98 | % | 6.92 | % | 6.51 | % | ||||||||||||
| Expected return on plan assets | 8.00 | % | 8.00 | % | 8.00 | % | ||||||||||||||||||
| Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | ||||||||||||||||||
Weighted-average assumptions used to calculate benefit obligations at August 31: | ||||||||||||||||||||||||
| Discount rate | 5.64 | % | 5.98 | % | 6.92 | % | 5.64 | % | 5.98 | % | 6.92 | % | ||||||||||||
| Expected return on plan assets | 8.00 | % | 8.00 | % | 8.00 | % | ||||||||||||||||||
| Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | ||||||||||||||||||
The expected long-term return on assets assumption for the pension plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. In developing the expected rate of return, the Company considers long-term historical market rates of return as well as actual returns on the Company’s plan assets, and adjusts this information to reflect expected capital market trends. Penford also considers forward looking return expectations by asset class, the contribution of active management
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and management fees paid by the plans. The plan assets are held in qualified trusts and anticipated rates of return are not reduced for income taxes. The expected long-term return on assets assumption used to calculate net periodic pension expense was 8.0% for fiscal 2010. A decrease (increase) of 50 basis points in the expected return on assets assumptions would increase (decrease) pension expense by approximately $0.1 million based on the assets of the plans at August 31, 2010. The expected return on plan assets to be used in calculating fiscal 2011 pension expense is 8%.
The discount rate used by the Company in determining pension expense and pension obligations reflects the yield of high quality (AA or better rating by a recognized rating agency) corporate bonds whose cash flows are expected to match the timing and amounts of projected future benefit payments. The discount rates to determine net periodic expense used in 2008 (6.51%), 2009 (6.92%) and 2010 (5.98%) reflect the change in bond yields over the last several years. During fiscal 2010, bond yields declined and Penford has lowered the discount rate for calculating its benefit obligations at August 31, 2010, as well as net periodic expense for fiscal 2011, to 5.64%. Lowering the discount rate by 25 basis points would increase pension expense by approximately $0.2 million and other postretirement benefit expense by $0.1 million.
Unrecognized net loss amounts reflect the difference between expected and actual returns on pension plan assets as well as the effects of changes in actuarial assumptions. Unrecognized net losses in excess of certain thresholds are amortized into net periodic pension and postretirement benefit expense over the average remaining service life of active employees. Amortization of unrecognized net loss amounts is expected to increase net pension expense by approximately $1.4 million in fiscal 2011. Amortization of unrecognized net losses is expected to increase net postretirement health care expense by approximately $0.1 million in fiscal 2011.
| 2010 | 2009 | 2008 | ||||||||||
Assumed health care cost trend rates: | ||||||||||||
| Current health care trend assumption | 8.00 | % | 9.00 | % | 9.00 | % | ||||||
| Ultimate health care trend rate | 4.50 | % | 4.75 | % | 4.75 | % | ||||||
| Year ultimate health care trend is reached | 2028 | 2016 | 2016 | |||||||||
The assumed health care cost trend rate could have a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:
| 1-Percentage- | 1-Percentage- | |||||||
| Point | Point | |||||||
| Increase | Decrease | |||||||
| (Dollars in thousands) | ||||||||
| Effect on total of service and interest cost components in fiscal 2010 | $ | 241 | $ | (194 | ) | |||
| Effect on postretirement accumulated benefit obligation as of August 31, 2010 | $ | 2,562 | $ | (2,117 | ) | |||
Plan Assets
The weighted average asset allocations of the investment portfolio for the pension plans at August 31 are as follows:
| Target | August 31, | |||||||||||
| Allocation | 2010 | 2009 | ||||||||||
| U.S. equities | 55 | % | 56 | % | 57 | % | ||||||
| International equities | 15 | % | 16 | % | 16 | % | ||||||
| Fixed income investments | 25 | % | 26 | % | 24 | % | ||||||
| Real estate | 5 | % | 2 | % | 3 | % | ||||||
The assets of the pension plans are invested in units of common trust funds actively managed by Russell Trust Company, a professional fund investment manager. The investment strategy for the defined benefit pension assets is to maintain a diversified asset allocation in order to minimize the risk of large losses and maximize the long-term risk-adjusted rate of return. No plan assets are invested in Penford shares. There are no plan assets for the Company’s postretirement health care plans.
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See Note 15, “Fair Value Measurements and Derivative Instruments,” for a description of the fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The Company’s employee pension plan assets are principally comprised of the following types of investments:
Common collective trust funds: The fair value of these funds is based on the cumulative net asset value of their underlying investments. The investments in common collective trust funds are comprised of equity funds, fixed income funds and international equity funds. The funds are valued at net asset value based on the closing market value of the units bought or sold as of the valuation date and are classified in Level 2 of the fair value hierarchy.
Real estate equity funds: The real estate equity funds are composed of underlying investments in primarily nine established income-producing real estate funds and short-term investment funds. The underlying fund net asset values are based on the values of the real estate assets as determined by appraisal. The appraisals are conducted in accordance with Appraisal Institute guidelines including consideration of projected income and expenses of the property as well as recent sales of similar properties. The underlying funds value all real estate investments quarterly and all real estate investments are independently appraised at least once per year as required by the Global Investment Performance Standards. Redemption requests are considered quarterly and are subject to notice of 110 days. The real estate fund is included in Level 3 of the fair value hierarchy.
The following table presents the fair value of the pension plan’s assets by major asset category as of August 31, 2010.
| Quoted Prices | ||||||||||||||||
| in Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Instruments | Inputs | Inputs | ||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
| Common collective trust funds | $ | $ | 27,712 | $ | — | $ | 27,712 | |||||||||
| Real estate equity funds | — | — | 566 | 566 | ||||||||||||
| Fair value of plan assets | $ | — | $ | 27,712 | $ | 566 | $ | 28,278 | ||||||||
The following table summarizes the changes in fair value of the pension plan’s real estate equity fund (Level 3) for fiscal year ended August 31, 2010.
| Real Estate | ||||
| Equity Fund | ||||
| (In thousands) | ||||
| Balance, August 31, 2009 | $ | 622 | ||
| Actual return on plan assets: | ||||
| Relating to assets still held at the reporting date | (56 | ) | ||
| Relating to assets sold during the period | — | |||
| Purchases and sales | — | |||
| Transfers in (out) of Level 3 | — | |||
| Balance, August 31, 2010 | $ | 566 | ||
Contributions and Benefit Payments
The Company’s funding policy for the defined benefit pension plans is to contribute amounts sufficient to meet the statutory funding requirements of the Employee Retirement Income Security Act of 1974. The Company contributed $3.4 million, $1.1 million and $1.5 million in fiscal 2010, 2009 and 2008, respectively. The Company estimates that the minimum pension plan funding contribution during fiscal 2011 will be approximately $2.3 million.
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Penford funds the benefit payments of its postretirement health care plans on a cash basis; therefore, the Company’s contributions to these plans in fiscal 2011 will approximate the benefit payments below.
Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include benefits attributable to estimate future employee service.
| Other | ||||||||
| Pension | Postretirement | |||||||
| (Dollars in millions) | ||||||||
| 2011 | $ | 2.1 | $ | 0.7 | ||||
| 2012 | 2.3 | 0.7 | ||||||
| 2013 | 2.3 | 0.8 | ||||||
| 2014 | 2.4 | 0.9 | ||||||
| 2015 | 2.5 | 0.9 | ||||||
| 2016-2020 | $ | 14.8 | $ | 5.9 | ||||
| Note 14 — | Other Employee Benefits |
Savings and Stock Ownership Plan
The Company has a defined contribution savings plan by which eligible North American-based employees can elect a maximum salary deferral of 16%. The plan provides a 100% match on the first 3% of salary contributions and a 50% match on the next 3% per employee. The Company’s matching contributions were $897,000, $935,000 and $986,000 for fiscal years 2010, 2009 and 2008, respectively.
Deferred Compensation Plan
The Company provides its directors and certain employees the opportunity to defer a portion of their salary, bonus and fees. The deferrals earn interest based on Moody’s current Corporate Bond Yield. Deferred compensation interest of $204,000, $231,000 and $209,000 was accrued in fiscal years 2010, 2009 and 2008, respectively.
Supplemental Executive Retirement Plan
The Company sponsors a supplemental executive retirement plan, a non-qualified plan, which covers certain employees. No current executive officers participate in this plan. For fiscal 2010, 2009 and 2008, the net periodic pension expense accrued for this plan was $343,000, $342,000 and $330,000, respectively. The accrued obligation related to the plan was $2.5 million and $4.3 million for fiscal years 2010 and 2009, respectively.
Health Care and Life Insurance Benefits
The Company offers health care and life insurance benefits to most active North American employees. Costs incurred to provide these benefits are charged to expense as incurred. Health care and life insurance expense, net of employee contributions, was $4.7 million, $4.3 million and $4.1 million in fiscal years 2010, 2009 and 2008, respectively.
| Note 15 — | Fair Value Measurements and Derivative Instruments |
Fair Value Measurements
The provisions of ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), which defines fair value, establishes a framework for its measurement, and expands disclosures concerning fair value measurements, were effective as of the beginning of the second quarter of fiscal 2009 for the Company’s financial assets and liabilities, as well as for other assets and liabilities carried at fair value on a recurring basis. As of September 1, 2009, the Company adopted the provisions of ASC 820 relating to nonrecurring fair value measurement requirements for nonfinancial assets and liabilities. These include long-lived assets which are considered to be other than temporarily impaired, reporting units measured at fair value in the first step of a goodwill impairment test, the initial recognition of asset retirement obligations, and securities issued with characteristics of both liabilities and equity.
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ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability (an exit price) in Penford’s principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources outside the reporting entity. Unobservable inputs are inputs that reflect Penford’s own assumptions based on market data and on assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three levels of inputs that may be used to measure fair value are:
| • | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. | |
| • | Level 2 inputs are other than quoted prices included within Level 1 that are observable for assets and liabilities such as (1) quoted prices for similar assets or liabilities in active markets, (2) quoted prices for identical or similar assets or liabilities in markets that are not active, or (3) inputs that are derived principally or corroborated by observable market date by correlation or other means. | |
| • | Level 3 inputs are unobservable inputs to the valuation methodology for the assets or liabilities. |
As of August 31, 2010 | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
| (In thousands) | ||||||||||||||||
| Current assets (Other Current Assets): | �� | |||||||||||||||
| Commodity derivatives(1) | $ | 1,827 | $ | — | $ | — | $ | 1,827 | ||||||||
| (1) | Commodity derivative assets and liabilities have been offset by cash collateral due and paid under master netting arrangements. The cash collateral offset was $4.5 million at August 31, 2010. |
As of August 31, 2009 | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
| (In thousands) | ||||||||||||||||
| Current assets (Other Current Assets): | ||||||||||||||||
| Commodity derivatives(1) | $ | 430 | $ | — | $ | — | $ | 430 | ||||||||
| Current liabilities (Accrued Liabilities): | ||||||||||||||||
| Interest rate swaps | $ | — | $ | 1,829 | $ | — | $ | 1,829 | ||||||||
| (1) | Commodity derivative assets and liabilities have been offset by cash collateral due and paid under master netting arrangements. The cash collateral offset was $0.4 million at August 31, 2009. |
Other Financial Instruments
The carrying value of cash and cash equivalents, receivables and payables approximates fair value because of their short maturities. The Company’s bank debt reprices with changes in market interest rates and, accordingly, the carrying amount of such debt approximates fair value.
In the first quarter of fiscal 2010, the Company received two non-interest bearing loans from the State of Iowa totaling $2.0 million. The carrying value of the debt at August 31, 2010 was $1.8 million and the fair value of the debt was estimated to be $1.5 million. See Note 8.
In the third quarter of fiscal 2010, the Company issued two series of preferred stock for $40 million as described in Note 7. The Company recorded the Series A Preferred Stock and the Series B Preferred Stock at their relative fair values at the time of issuance. The Series A Preferred Stock of $32.3 million was recorded as a long-term liability and the Series B Preferred Stock of $7.7 million was recorded as equity. The fair value of the Series A Preferred Stock was determined using the market approach in comparing yields on similar debt securities. The discount on the Series A Preferred Stock is being amortized into income using the effective interest method over the contractual life of seven years. The carrying value of the Series A Preferred Stock at August 31, 2010 was $34.1 million and the estimated fair value was $34.3 million.
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Interest Rate Swap Agreements
The Company used interest rate swaps to manage the variability of interest payments associated with its floating-rate debt obligations. The interest payable on the debt effectively became fixed at a certain rate and reduced the impact of future interest rate changes on future interest expense. Unrealized losses on interest rate swaps were included in accumulated other comprehensive income (loss). The periodic settlements on the swaps were recorded as interest expense. In the third quarter of fiscal 2010, the Company terminated its interest rate swaps with several banks and recorded a loss of approximately $1.6 million in net non-operating income (expense). At August 31, 2010, the Company had no outstanding interest rate swaps and no gains or losses remaining in other comprehensive income (loss).
Foreign Currency Contracts
In fiscal year 2009, the Company’s Food Ingredients business purchased certain raw materials in a foreign currency, the Czech koruna (CZK), the monetary unit of the Czech Republic. In order to manage the variability in forecasted cash flows due to the foreign currency risk associated with settlement of accounts payable denominated in CZK, the Company purchased foreign currency forward contracts. The Company designated these contracts as cash flow hedges and accounted for them pursuant to ASC 815. To the extent the amounts and timing of the forecasted cash flows and the forward contracts continued to match, the unrealized losses on the foreign currency purchase contracts were included in other comprehensive income (loss). The gain or loss on the contracts was recorded in cost of sales at the time the inventory was sold. At August 31, 2010, the Company had no outstanding foreign currency contracts and no gains or losses remaining in other comprehensive income (loss).
Commodity Contracts
The Company uses forward contracts and readily marketable exchange-traded futures on corn and natural gas to manage the price risk of those inputs to its manufacturing process. The Company has designated these instruments as hedges and accounts for them pursuant to ASC 815.
For derivative instruments designated as fair value hedges, the gain or loss on the derivative instruments as well as the offsetting gain or loss on the hedged firm commitmentsand/or inventory are recognized in current earnings as a component of cost of sales. For derivative instruments designated as cash flow hedges, the effective portion of the gain or loss on the derivative instruments is reported as a component of other comprehensive income (loss), net of applicable income taxes, and recognized in earnings when the hedged exposure affects earnings. The Company recognizes the gain or loss on the derivative instrument as a component of cost of sales in the period when the finished goods produced from the hedged item are sold. If it is determined that the derivative instruments used are no longer effective at offsetting changes in the price of the hedged item, then the changes in market value would be recognized in current earnings as a component of cost of goods sold or interest expense.
To reduce the price volatility of corn used in fulfilling some of its starch sales contracts, Penford from time to time uses readily marketable exchange-traded futures as well as forward cash corn purchases. The exchange-traded futures are not purchased or sold for trading or speculative purposes and are designated as hedges. The changes in fair 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 generally expected to occur within 12 months of the time the hedge is established. The deferred gain (loss) recorded in other comprehensive income at August 31, 2010 that is expected to be reclassified into income within 12 months is $0.5 million.
As of August 31, 2010, Penford had purchased corn positions of 5.2 million bushels, of which 3.2 million bushels represented equivalent firm priced starch sales contract volume, resulting in an open position of 2.0 million bushels.
As of August 31, 2010, the Company had the following outstanding futures contracts:
| Corn Futures | 6,765,000 Bushels | |
| Natural Gas Futures | 1,040,000 mmbtu (millions of British thermal units) |
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The following tables provide information about the fair values of the Company’s derivatives, by contract type, as of August 31, 2010 and 2009.
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||
| Balance Sheet | Fair Value August 31 | Balance Sheet | Fair Value August 31 | |||||||||||||||||
| Location | 2010 | 2009 | Location | 2010 | 2009 | |||||||||||||||
| In thousands | ||||||||||||||||||||
| Cash Flow Hedges: | ||||||||||||||||||||
| Corn Futures | Other Current Assets | $— | $ | 82 | Other Current Assets | $ | — | $ | 916 | |||||||||||
| Natural Gas Futures | Other Current Assets | — | — | Other Current Assets | 1,082 | 1,301 | ||||||||||||||
| Interest Rate Contracts | Other Current Assets | — | — | Accrued Liabilities | — | 1,829 | ||||||||||||||
| Fair Value Hedges: | ||||||||||||||||||||
| Corn Futures | Other Current Assets | 28 | 1,303 | Other Current Assets | 1,735 | 174 | ||||||||||||||
| Total Derivatives | ||||||||||||||||||||
| Designated as Hedging | ||||||||||||||||||||
| Instruments | $28 | $ | 1,385 | $ | 2,817 | $ | 4,220 | |||||||||||||
The following tables provide information about the effect of derivative instruments on the financial performance of the Company for the year ended August 31, 2010 and August 31, 2009.
| Amount of Gain (Loss) | ||||||||||||||||||||||||
| Amount of Gain (Loss) | Reclassified from | Amount of Gain (Loss) | ||||||||||||||||||||||
| Recognized in OCI | AOCI into Income | Recognized in Income | ||||||||||||||||||||||
| Year Ended Aug 31 | Year Ended Aug 31 | Year Ended Aug 31 | ||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
| In thousands | ||||||||||||||||||||||||
| Cash Flow Hedges: | ||||||||||||||||||||||||
| Corn Futures(1) | $ | 384 | $ | (2,077 | ) | $ | 349 | $ | 654 | $ | (194 | ) | $ | (559 | ) | |||||||||
| Natural Gas Futures(1) | (3,170 | ) | (12,603 | ) | (2,168 | ) | (6,618 | ) | — | — | ||||||||||||||
| Ethanol Futures(1) | (590 | ) | — | (493 | ) | — | — | — | ||||||||||||||||
| Interest Rate Contracts(2)(4) | (395 | ) | (1,648 | ) | (662 | ) | (736 | ) | (1,562 | ) | — | |||||||||||||
| FX Contracts(1) | — | (74 | ) | (26 | ) | (49 | ) | — | — | |||||||||||||||
| $ | (3,771 | ) | $ | (16,402 | ) | $ | (3,000 | ) | $ | (6,749 | ) | $ | (1,756 | ) | $ | (559 | ) | |||||||
| Fair Value Hedges: | ||||||||||||||||||||||||
| Corn Futures(1)(3) | $ | 85 | $ | (559 | ) | |||||||||||||||||||
| (1) | Gains and losses reported in cost of goods sold | |
| (2) | Gains and losses reported in interest expense. | |
| (3) | Hedged items are firm commitments and inventory | |
| (4) | Amount of loss recognized in income was reported in non-operating income (expense) |
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| Note 16 — | Other Non-operating Income (Expense) |
Other non-operating income (expense) consists of the following:
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Loss on extinguishment of debt | $ | (1,049 | ) | $ | — | $ | — | |||||
| Loss on interest rate swap termination | (1,562 | ) | — | — | ||||||||
| Gain on sale of dextrose product line | — | 1,562 | — | |||||||||
| Gain (loss) on foreign currency transactions | 419 | 127 | (217 | ) | ||||||||
| Gain on cash flow hedges | — | — | 2,890 | |||||||||
| Other | 271 | 226 | 87 | |||||||||
| $ | (1,921 | ) | $ | 1,915 | $ | 2,760 | ||||||
On April 7, 2010, the Company refinanced its bank debt. See Note 8. In connection with the refinancing, the Company recorded a pre-tax non-cash charge to earnings of approximately $1.0 million in the third quarter of fiscal 2010 related to unamortized transaction fees associated with the prior credit facility. In addition, the Company terminated its interest rate swap agreements with several banks and recorded a loss of approximately $1.6 million.
In the second quarter of fiscal 2009, the Company’s Food Ingredients 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.
The Company recognized a gain (loss) on foreign currency transactions on Australian dollar denominated assets and liabilities as disclosed in the table above.
As discussed in Note 3, in June 2008, the flooding of the Cedar Rapids manufacturing facility shut down production for most of the quarter. The Company had derivative instruments designated as cash flow hedges to reduce the price volatility of corn and natural gas used in the production of starch. Due to the June 12, 2008 flood event, derivative positions held as of that date that were forecasted to hedge exposures during the period the Cedar Rapids plant was shut down were no longer deemed to be effective cash flow hedges. The $2.9 million gain, representing ineffectiveness on these instruments, was reclassified from other comprehensive income and recognized as a component of non-operating income.
| Note 17 — | Income Taxes |
The majority of the Company’s income (loss) from continuing operations before income taxes of $(14.3) million, $(10.1) million and $(16.1) million is related to the Company’s domestic operations. See Note 2 for foreign income (loss) before income taxes and foreign tax expense. The majority of the Company’s foreign operations are included in the discontinued operations presentation in the consolidated financial statements.
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Income tax expense (benefit) on continuing operations consists of the following:
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Current: | ||||||||||||
| Federal | $ | (332 | ) | $ | (3,305 | ) | $ | (157 | ) | |||
| State | 208 | (141 | ) | (121 | ) | |||||||
| (124 | ) | (3,446 | ) | (278 | ) | |||||||
| Deferred: | ||||||||||||
| Federal | (4,447 | ) | 291 | (4,365 | ) | |||||||
| State | (131 | ) | (291 | ) | (654 | ) | ||||||
| (4,578 | ) | — | (5,019 | ) | ||||||||
| Total | $ | (4,702 | ) | $ | (3,446 | ) | $ | (5,297 | ) | |||
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Comprehensive tax expense (benefit) allocable to: | ||||||||||||
| Loss before taxes | $ | (4,702 | ) | $ | (3,446 | ) | $ | (5,297 | ) | |||
| Discontinued operations | (4,495 | ) | 1,149 | (1,571 | ) | |||||||
| Comprehensive income (loss) | 891 | (5,906 | ) | (938 | ) | |||||||
| $ | (8,306 | ) | $ | (8,203 | ) | $ | (7,806 | ) | ||||
A reconciliation of the statutory federal tax to the actual provision (benefit) for taxes is as follows:
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Statutory tax rate | 35 | % | 35 | % | 35 | % | ||||||
| Statutory tax on income | $ | (5,016 | ) | $ | (3,532 | ) | $ | (5,637 | ) | |||
| State taxes, net of federal benefit | (154 | ) | (221 | ) | (500 | ) | ||||||
| Tax credits | (1,029 | ) | (181 | ) | (2 | ) | ||||||
| Non-deductible expenses related to preferred stock | 1,020 | — | — | |||||||||
| Other | 477 | 488 | 842 | |||||||||
| Total provision (benefit) | $ | (4,702 | ) | $ | (3,446 | ) | $ | (5,297 | ) | |||
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The significant components of deferred tax assets and liabilities are as follows:
| August 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
| Deferred tax assets: | ||||||||
| Alternative minimum tax credit | $ | 3,108 | $ | 3,117 | ||||
| Postretirement benefits | 14,669 | 15,209 | ||||||
| Provisions for accrued expenses | 2,280 | 2,185 | ||||||
| Stock-based compensation | 2,392 | 2,168 | ||||||
| Deferred flood losses | 3,257 | 3,297 | ||||||
| Net operating loss carryforward | 9,497 | 899 | ||||||
| Tax credit carryforwards | 2,508 | — | ||||||
| Other | 2,374 | 3,230 | ||||||
| Total deferred tax assets | 40,085 | 30,105 | ||||||
| Deferred tax liabilities: | ||||||||
| Depreciation | 21,659 | 19,324 | ||||||
| Other | 613 | 808 | ||||||
| Total deferred tax liabilities | 22,272 | 20,132 | ||||||
| Net deferred tax assets | $ | 17,813 | $ | 9,973 | ||||
| Recognized as: | ||||||||
| Other current assets | $ | 1,320 | $ | 1,696 | ||||
| Deferred tax asset | 16,493 | 8,277 | ||||||
| Total net deferred tax assets | $ | 17,813 | $ | 9,973 | ||||
At August 31, 2010, in the United States, the Company had a U.S. federal alternative minimum tax credit carryforward of $3.1 million with no expiration, research and development credit carryforwards of $1.0 million expiring 2025 through 2030, a small ethanol producer credit of $1.5 million expiring 2013, and a net operating loss carryforward of $24.3 million expiring in 2030. The Company also has U.S. state net operating loss carryforwards of $25 million with various expiration dates.
At August 31, 2010, the Company had $17.8 million of net deferred tax assets. A valuation allowance has not been provided on the net U.S. deferred tax assets as of August 31, 2010. The determination of the need for a valuation allowance requires significant judgment and estimates. The Company evaluates the requirement for a valuation allowance each quarter as the Company incurred losses in fiscal 2008, 2009 and 2010. The Company’s losses in fiscal years 2008 and 2009 were incurred as a result of severe flooding in Cedar Rapids, Iowa, which shut down the Company’s manufacturing facility for most of the fourth quarter of fiscal 2008. The tax benefits of operating losses incurred in fiscal 2008 and 2009 have been carried back to offset taxable income in prior years. While there have been losses since 2008 for reasons indicated above, the Company believes that it is more likely than not that future operations will generate sufficient taxable income to realize its deferred tax assets. Dividends on the Series A Preferred Stock, as well as accretion of the related discount, which are included in interest expense in the Consolidated Statement of Operations, are not deductible for U.S. federal income tax purposes. There can be no assurance that management’s current plans will be achieved or that a valuation allowance will not be required in the future.
Deferred tax liabilities or assets are not recognized on temporary differences from undistributed earnings of foreign subsidiaries and from foreign exchange translation gains or losses on permanent advances to foreign subsidiaries as the Company does not expect that the divestiture of its foreign subsidiaries will result in any tax benefit or expense.
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The total amount of gross unrecognized tax benefits was $1.1 million at August 31, 2010, all of which, if recognized, would impact the Company’s effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (dollars in thousands):
| 2010 | 2009 | |||||||
| Unrecognized tax benefits at beginning of year | $ | 1,281 | $ | 698 | ||||
| Additions for tax positions related to prior years | 118 | 531 | ||||||
| Reductions for tax positions related to prior years | — | (4 | ) | |||||
| Additions for tax positions related to current year | 160 | 233 | ||||||
| Reductions due to lapse of applicable statute of limitations | (428 | ) | (162 | ) | ||||
| Settlements with taxing authorities | — | (15 | ) | |||||
| Unrecognized tax benefits at end of year | $ | 1,131 | $ | 1,281 | ||||
The Company’s policy is to recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense (benefit) in the consolidated statements of operations. As of August 31, 2009, the Company had $0.2 million of accrued interest and penalties included in the long-term tax liability. During fiscal 2010, the Company decreased the liability for unrecognized tax benefits by $22,000 for interest and increased the liability by $3,000 for penalties.
The Company files tax returns in the U.S. federal jurisdiction and various U.S. state jurisdictions, and is subject to examination by taxing authorities in all of those jurisdictions. From time to time, the Company’s tax returns are reviewed or audited by various U.S. state taxing authorities. The Company believes that adjustments, if any, resulting from these reviews or audits would not be material, individually or in the aggregate, to the Company’s financial position, results of operations or liquidity. It is reasonably possible that the amount of unrecognized tax benefits related to certain of the Company’s tax positions will increase or decrease in the next twelve months as audits or reviews are initiated and settled. At this time, an estimate of the range of a reasonably possible change cannot be made. With few exceptions, the Company is not subject to income tax examinations by U.S. federal or state jurisdictions for fiscal years prior to 2007.
| Note 18 — | Earnings (loss) per Common Share |
Effective September 1, 2009, the Company adoptedASC 260-10-45, “Participating Securities and theTwo-Class Method” (“ASC260-10-45”) which requires all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders and, therefore, are included in computing earnings per share under the two-class method. Under the two-class method, net earnings are reduced by the amount of dividends declared in the period for each class of common stock and participating security. The remaining undistributed earnings are then allocated to common stock and participating securities, based on their respective rights to receive dividends. Restricted stock awards granted to certain employees and directors under the Company’s 2006 Incentive Plan which contain non-forfeitable rights to dividends at the same rate as common stock, are considered participating securities. The Company has applied the provisions ofASC 260-10-45 retrospectively to all periods presented.
Basic earnings (loss) per share reflect only the weighted average common shares outstanding during the period. Diluted earnings (loss) per share reflect weighted average common shares outstanding and the effect of any dilutive 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 ofin-the-money stock options, using the treasury stock method. The following table presents the reconciliation of income from continuing operations to income from continuing operations applicable to
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common shares and equivalents and the computation of diluted weighted average shares outstanding for the fiscal years 2010, 2009 and 2008.
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
Numerator: | ||||||||||||
| Loss from continuing operations | $ | (9,629 | ) | $ | (6,645 | ) | $ | (10,808 | ) | |||
| Less: Allocation to participating securities | (84 | ) | (11 | ) | (22 | ) | ||||||
| Loss from continuing operations applicable to common shares and equivalents | $ | (9,713 | ) | $ | (6,656 | ) | $ | (10,830 | ) | |||
| Income (loss) from discontinued operations | $ | 16,312 | $ | (58,142 | ) | $ | (1,892 | ) | ||||
| Less: Allocation to participating securities | — | — | — | |||||||||
| Income (loss) from discontinued operations applicable to common shares and equivalents | $ | 16,312 | $ | (58,142 | ) | $ | (1,892 | ) | ||||
| Net income (loss) | $ | 6,683 | $ | (64,787 | ) | $ | (12,700 | ) | ||||
| Less: Allocation to participating securities | (84 | ) | (11 | ) | (22 | ) | ||||||
| Net income (loss) applicable to common shares and equivalents | $ | 6,599 | $ | (64,798 | ) | $ | (12,722 | ) | ||||
Denominator: | ||||||||||||
| Weighted average common shares and equivalents outstanding, basic | 11,601 | 11,170 | 10,565 | |||||||||
| Dilutive stock options and awards | — | — | — | |||||||||
| Weighted average common shares and equivalents outstanding, diluted | 11,601 | 11,170 | 10,565 | |||||||||
On April 7, 2010, the Company issued 100,000 shares of Series B voting convertible preferred stock (“Series B Preferred Stock”). See Note 7 for further details. At any time prior to April 7, 2020, at the option of the holder, the outstanding Series B Preferred Stock may be converted into shares of the Company’s common stock at a conversion rate of ten shares of common stock per one share of Series B Preferred Stock, subject to adjustment in the event of stock dividends, distributions, splits, reclassifications and the like. If any shares of Series B Preferred Stock have not been converted into shares of common stock prior to April 7, 2020, the shares of Series B Preferred Stock will automatically convert into shares of common stock. The holders of the Series B Preferred Stock shall have the right to one vote for each share of common stock into which the Series B Preferred Stock is convertible. These shares are convertible into common shares for no cash consideration; therefore the weighted average shares are included in the computation of basic earnings per share.
Weighted-average restricted stock awards of 146,668, 90,868 and 88,363 for fiscal years 2010, 2009 and 2008, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive. Weighted-average stock options omitted from the denominator of the earnings per share calculation because they were antidilutive were 1,309,273, 1,371,701 and 1,036,474 for 2010, 2009 and 2008, respectively.
| Note 19 — | Segment Reporting |
Financial information from continuing operations for the Company’s two segments, Industrial Ingredients and Food Ingredients, is presented below. Industrial Ingredients and Food Ingredients, are broad categories of end-market users served by the Company’s U.S. operations. The Industrial Ingredients segment provides carbohydrate-based starches for industrial applications, primarily in the paper and packaging products and fuel industries. The Food Ingredients segment produces specialty starches for food applications. A third item for “corporate and other” activity has been presented to provide reconciliation to amounts reported in the consolidated financial statements. Corporate and other represents the activities related to the corporate headquarters such as public company reporting,
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personnel costs of the executive management team, corporate-wide professional services and consolidation entries. The accounting policies of the reportable segments are the same as those described in Note 1.
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Sales | ||||||||||||
| Industrial ingredients | ||||||||||||
| Industrial Starch | $ | 115,681 | $ | 131,709 | $ | 167,365 | ||||||
| Ethanol | 68,335 | 54,817 | 5,955 | |||||||||
| $ | 184,016 | $ | 186,526 | $ | 173,320 | |||||||
| Food ingredients | 70,258 | 69,030 | 66,261 | |||||||||
| $ | 254,274 | $ | 255,556 | $ | 239,581 | |||||||
| Depreciation and amortization | ||||||||||||
| Industrial ingredients | $ | 10,850 | $ | 11,081 | $ | 9,073 | ||||||
| Food ingredients | 2,341 | 2,759 | 2,693 | |||||||||
| Corporate and other | 1,600 | 615 | 300 | |||||||||
| $ | 14,791 | $ | 14,455 | $ | 12,066 | |||||||
| Income (loss) from continuing operations | ||||||||||||
| Industrial ingredients | $ | (11,512 | ) | $ | (11,154 | ) | $ | (16,541 | ) | |||
| Food ingredients | 15,145 | 13,512 | 10,178 | |||||||||
| Corporate and other | (8,493 | ) | (8,807 | ) | (9,413 | ) | ||||||
| $ | (4,860 | ) | $ | (6,449 | ) | $ | (15,776 | ) | ||||
| Capital expenditures, net | ||||||||||||
| Industrial ingredients | $ | 4,713 | $ | 3,683 | $ | 35,415 | ||||||
| Food ingredients | 1,267 | 1,696 | 3,090 | |||||||||
| Corporate and other | — | — | — | |||||||||
| $ | 5,980 | $ | 5,379 | $ | 38,505 | |||||||
| August 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
| Total assets | ||||||||
| Industrial ingredients | $ | 133,738 | $ | 139,609 | ||||
| Food ingredients | 36,542 | 37,387 | ||||||
| Discontinued operations | — | 42,713 | ||||||
| Corporate and other | 38,128 | 38,536 | ||||||
| $ | 208,408 | $ | 258,245 | |||||
At August 31, 2010, the remaining net assets of the Australia/New Zealand Operations, consisting of $0.3 million of cash and $1.3 million of other net assets, have been reported as assets of the continuing operations in “Corporate and other.” All other assets are located in the United States.
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Reconciliation of income (loss) from operations for the Company’s segments to income (loss) before income taxes as reported in the consolidated financial statements follows:
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Loss from operations | $ | (4,860 | ) | $ | (6,449 | ) | $ | (15,776 | ) | |||
| Interest expense | (7,550 | ) | (5,557 | ) | (3,089 | ) | ||||||
| Other non-operating income (expense) | (1,921 | ) | 1,915 | 2,760 | ||||||||
| Loss from continuing operations before income taxes | $ | (14,331 | ) | $ | (10,091 | ) | $ | (16,105 | ) | |||
Sales, attributed to the area to which the product was shipped, are as follows:
| Year Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| United States | $ | 231,042 | $ | 234,081 | $ | 213,702 | ||||||
| Canada | 3,738 | 5,137 | 11,839 | |||||||||
| Mexico | 10,578 | 9,086 | 7,777 | |||||||||
| Other | 8,916 | 7,252 | 6,263 | |||||||||
Non-United States | 23,232 | 21,475 | 25,879 | |||||||||
| Total | $ | 254,274 | $ | 255,556 | $ | 239,581 | ||||||
| Note 20 — | Quarterly Financial Data (Unaudited) |
| First | Second | Third | Fourth | |||||||||||||||||
Fiscal 2010 | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||
| Sales | $ | 67,070 | $ | 62,293 | $ | 61,909 | $ | 63,002 | $ | 254,274 | ||||||||||
| Cost of sales | 56,442 | 56,231 | 58,644 | 59,503 | 230,820 | |||||||||||||||
| Gross margin | 10,628 | 6,062 | 3,265 | 3,499 | 23,454 | |||||||||||||||
| Income (loss) from continuing operations | 1,056 | (1,801 | ) | (5,758 | ) | (3,126 | ) | (9,629 | ) | |||||||||||
| Income (loss) from discontinued operations | 3,482 | 13,048 | (218 | ) | — | 16,312 | ||||||||||||||
| Net income (loss) | 4,538 | 11,247 | (5,976 | ) | (3,126 | ) | 6,683 | |||||||||||||
| Earnings (loss) per common share: | ||||||||||||||||||||
| Basic — continuing operations | $ | 0.09 | $ | (0.17 | ) | $ | (0.49 | ) | $ | (0.26 | ) | $ | (0.84 | ) | ||||||
| Basic — discontinued operations | 0.31 | 1.16 | (0.02 | ) | — | 1.41 | ||||||||||||||
| Basic earnings (loss) per share | $ | 0.40 | $ | 0.99 | $ | (0.51 | ) | $ | (0.26 | ) | $ | 0.57 | ||||||||
| Diluted — continuing operations | $ | 0.09 | $ | (0.17 | ) | $ | (0.49 | ) | $ | (0.26 | ) | $ | (0.84 | ) | ||||||
| Diluted — discontinued operations | 0.31 | 1.16 | (0.02 | ) | — | 1.41 | ||||||||||||||
| Diluted earnings (loss) per share | $ | 0.40 | $ | 0.99 | $ | (0.51 | ) | $ | (0.26 | ) | $ | 0.57 | ||||||||
| Dividends declared | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
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| First | Second | Third | Fourth | |||||||||||||||||
Fiscal 2009 | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||
| Sales | $ | 59,584 | $ | 63,939 | $ | 61,276 | $ | 70,757 | $ | 255,556 | ||||||||||
| Cost of sales | 54,179 | 66,519 | 61,262 | 61,305 | 243,265 | |||||||||||||||
| Gross margin | 5,405 | (2,580 | ) | 14 | 9,452 | 12,291 | ||||||||||||||
| Income (loss) from continuing operations | 563 | (4,205 | ) | (4,342 | ) | 1,339 | (6,645 | ) | ||||||||||||
| Loss from discontinued operations | (932 | ) | (17,973 | ) | (3,072 | ) | (36,165 | ) | (58,142 | ) | ||||||||||
| Net loss | (369 | ) | (22,178 | ) | (7,414 | ) | (34,826 | ) | (64,787 | ) | ||||||||||
| Earnings (loss) per common share: | ||||||||||||||||||||
| Basic — continuing operations | $ | 0.05 | $ | (0.38 | ) | $ | (0.39 | ) | $ | 0.12 | $ | (0.59 | ) | |||||||
| Basic — discontinued operations | (0.08 | ) | (1.61 | ) | (0.27 | ) | (3.24 | ) | (5.21 | ) | ||||||||||
| Basic loss per share | $ | (0.03 | ) | $ | (1.99 | ) | $ | (0.66 | ) | $ | (3.12 | ) | $ | (5.80 | ) | |||||
| Diluted — continuing operations | $ | 0.05 | $ | (0.38 | ) | $ | (0.39 | ) | $ | 0.12 | $ | (0.59 | ) | |||||||
| Diluted — discontinued operations | (0.08 | ) | (1.61 | ) | (0.27 | ) | (3.24 | ) | (5.21 | ) | ||||||||||
| Diluted loss per share | $ | (0.03 | ) | $ | (1.99 | ) | $ | (0.66 | ) | $ | (3.12 | ) | $ | (5.80 | ) | |||||
| Dividends declared | $ | 0.06 | $ | 0.06 | $ | — | $ | — | $ | 0.12 | ||||||||||
In the second quarter of fiscal 2010, the liquidation of the remaining net assets of Penford Australia was substantially completed, as a result, $13.8 million of currency translation adjustments were reclassified from accumulated other comprehensive income into second quarter income (loss) from discontinued operations. In the fourth quarter of fiscal 2009, the Company recorded a $33.0 million non-cash asset impairment charge related to discontinued operations. In the second quarter of fiscal 2009, the Company recorded a $13.8 million non-cash goodwill impairment charge, which represented all of the goodwill allocated to its Australia/New Zealand reporting unit. See Note 2.
In the fourth quarter of fiscal 2008, the Company’s Cedar Rapids, Iowa plant was temporarily shut down due to record flooding of the Cedar River and government-ordered mandatory evacuation of the plant and surrounding areas. See Note 3 for further detail. In fiscal year 2009, loss from continuing operations included $9.1 million of net insurance proceeds related to the Cedar Rapids flooding in fiscal 2008. The following table summarizes the flood related costs and insurance proceeds recorded by quarter for fiscal year 2009.
| First | Second | Third | Fourth | |||||||||||||||||
Fiscal 2009 | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Flood related costs | $ | 6,786 | $ | 631 | $ | 168 | $ | — | $ | 7,585 | ||||||||||
| Insurance proceeds | (11,020 | ) | (4,430 | ) | (1,244 | ) | — | (16,694 | ) | |||||||||||
| Insurance proceeds, net of flood related costs | $ | (4,234 | ) | $ | (3,799 | ) | $ | (1,076 | ) | $ | — | $ | (9,109 | ) | ||||||
| Note 21 — | Legal Proceedings |
As previously reported, the Company filed suit on January 23, 2009, in the U.S. District Court for the Northern District of Iowa, Cedar Rapids Division, against two insurance companies, National Union Fire Insurance Company of Pittsburgh, Pennsylvania, owned by American International Group, Inc. (“AIG”), and ACE American Insurance Company (“ACE”), related to insurance coverage arising out of the flood that struck the Company’s Cedar Rapids, Iowa plant in June 2008. On January 19, 2010, the presiding judge ruled that flood coverage language contained in the applicable insurance policy was “ambiguous” and that, accordingly, the interpretation of the policy was “a question of fact reserved for a jury.” A jury trial was subsequently conducted in Cedar Rapids during mid-August 2010. After seven days of trial, the presiding judge dismissed the Company’s claims without issuing a written opinion. On September 14, 2010, the Company filed a notice of appeal with the United States Court of Appeals for
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the Eighth Circuit (the “Eighth Circuit”). On October 4, 2010, the Company filed a Statement of Issues with the Eighth Circuit in which it noted its intention to present for appellate review whether, among other things, the presiding judge erred in dismissing the Company’s suit. Through its appeal, the Company will continue its effort to seek additional payments from AIG and ACE for approximately $25 million for business interruption losses that occurred as a result of the flood. The Company expects the current appeal process to last through the mid-2011. The Company cannot at this time determine the likelihood of any outcome of its appeal or estimate the amount of any judgment that might be awarded.
In October 2004, Penford Products Co. (“Penford Products”), a wholly-owned subsidiary of the Company, was sued by a customer in the Fourth Judicial District Court, Ouachita Parish, Louisiana. The customer sought monetary damages for Penford Products’ alleged breach of an agreement to supply the customer with certain starch products during the 2004 strike affecting Penford Products’ Cedar Rapids, Iowa plant. In May 2008, the trial judge ruled against Penford Products. In fiscal year 2008, the Company elected to satisfy the judgment and waive appeal rights by paying the customer approximately $3.8 million. The Company had previously reserved $2.4 million against this matter in fiscal year 2007.
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 obtained from the Company’s outside legal counsel, the ultimate resolution of these other matters will not materially affect the consolidated financial position, results of operations or liquidity of the Company.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Penford Corporation:
We have audited the accompanying consolidated balance sheet of Penford Corporation and subsidiaries (the Company) as of August 31, 2010, and the related consolidated statements of operations and comprehensive income (loss), cash flows, and shareholders’ equity for the year ended August 31, 2010. We also have audited Penford Corporation’s internal control over financial reporting as of August 31, 2010, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Penford Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Penford Corporation and subsidiaries as of August 31, 2010, and the results of its operations and its cash flows for the year ended August 31, 2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Penford Corporation maintained, in all material respects, effective internal control over financial reporting as of August 31, 2010, based on criteria established inInternal Control — Integrated Frameworkissued by COSO.
/s/ KPMG LLP
Denver, Colorado
November 11, 2010
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Penford Corporation
We have audited the accompanying consolidated balance sheet of Penford Corporation as of August 31, 2009 and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended August 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Penford Corporation at August 31, 2009 and the consolidated results of its operations and its cash flows for each of the two years in the period ended August 31, 2009, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Denver, Colorado
November 13, 2009,
except for Note 18, as to which the date is
November 11, 2010
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
Not applicable.
| Item 9A. | Controls and Procedures. |
Disclosure Controls and Procedures
Penford maintains disclosure controls and procedures that are designed to ensure that material information required to be disclosed in the Company’s periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Company’s disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and procedures pursuant to Exchange ActRule 13a-15(b) as of August 31, 2010. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of August 31, 2010.
Internal Control Over Financial Reporting
Management’s report on internal control over financial reporting and the related reports of the Company’s registered independent public accounting firms are included below and at the end of Item 8 above. There were no changes in the Company’s internal control over financial reporting during the quarter ended August 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect the Company’s transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the Company’s financial statements; providing reasonable assurance that receipts and expenditures of the Company’s assets are made in accordance with management’s authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the Company’s financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of the Company’s internal controls over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of August 31, 2010.
| Item 9B. | Other Information. |
The Company determined not to have an annual incentive bonus program for its executives for fiscal year 2011. Since the Company’s Change in Control Agreements with its executives provide benefits upon a termination of employment in connection with a change in control based upon target bonuses under the annual incentive bonus program as well as based upon the percentage of attainment of target bonuses, the Executive Compensation and Development Committee (“ECDC”) of the Company’s Board of Directors approved on November 11, 2010, an
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amendment to the Change in Control Agreements with its executives to (i) provide a deemed target bonus for fiscal year 2011 which is equal to the fiscal year 2010 target bonus without the additional 5% approved last year by the ECDC (and therefore generally equal to the 2009 target bonus), and (ii) treat the target bonuses for fiscal years 2009, 2010 and 2011 as attained solely for purposes of the Change in Control Agreements.
The preceding summary is a brief description of the amendment to the form of the Company’s Change in Control Agreement and is qualified in its entirety by, and should be read in conjunction with, the complete text of the form of Second Amendment to Change in Control Agreement, which is filed as Exhibit 10.4 to this report.
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance. |
The applicable information set forth under the headings “Election of Directors,” “Information About the Board and Its Committees,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement for the 2011 Annual Meeting of Shareholders (the “2011 Proxy Statement”), to be filed not later than 120 days after the end of the fiscal year covered by this report, is incorporated herein by reference. Information regarding the Executive Officers of the Registrant is set forth in Part I, Item 1.
The Company has adopted a Code of Business Conduct and Ethics (the “Code”) that is applicable to all employees, consultants and members of the Board of Directors, including the Chief Executive Officer, Chief Financial Officer and Corporate Controller. This Code embodies the commitment of the Company and its subsidiaries to conduct business in accordance with the highest ethical standards and applicable laws, rules and regulations. The Code is available on the Company’s Internet site atewww.penx.com under the Investor Relations section.
| Item 11. | Executive Compensation. |
The applicable information set forth under the headings “Executive Compensation,” “Director Compensation” and “Information About the Board and Its Committees” in the 2011 Proxy Statement is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The applicable information set forth under the heading “Security Ownership of Certain Beneficial Owners and Management” in the 2011 Proxy Statement is incorporated herein by reference.
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Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information regarding Penford’s equity compensation plans at August 31, 2010. The Company has no equity compensation plans that have not been approved by security holders.
| (c) | ||||||||||||
| (a) | Number of securities | |||||||||||
| Number of | (b) | Remaining Available | ||||||||||
| Securities to be | Weighted- | for Future Issuance | ||||||||||
| Issued upon | Average exercise | Under Equity | ||||||||||
| Exercise of | Price of | Compensation Plans | ||||||||||
| Outstanding | Outstanding | (Excluding | ||||||||||
| Options, | Options, | Securities | ||||||||||
| Warrants and | Warrants and | Reflected in Column | ||||||||||
Plan Category | Rights | Rights | (a)) | |||||||||
| Equity compensation plans approved by security holders: | ||||||||||||
| 1994 Stock Option Plan(1) | 654,000 | $ | 14.17 | — | ||||||||
| 2006 Long-Term Incentive Plan (2) | 540,500 | $ | 16.80 | 116,017 | ||||||||
| Stock Option Plan for Non-Employee Directors (3) | 70,064 | $ | 10.09 | — | ||||||||
| Total | 1,264,564 | $ | 15.07 | 116,017 | ||||||||
| (1) | This plan has been terminated and no additional options are available for grant. The options which are subsequently forfeited or not exercised are available for issuance under the 2006 Long-Term Incentive Plan. | |
| (2) | Shares available for issuance under the 2006 Long-Term Incentive Plan can be granted pursuant to stock options, stock appreciation rights, restricted stock or units or performance based cash awards. Does not include 164,207 issued but unvested shares of common stock at August 31, 2010. | |
| (3) | This plan has been terminated and no additional options will be granted under this plan. |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The applicable information relating to certain relationships and related transactions of the Company is set forth under the heading “Transactions with Related Persons” in the 2011 Proxy Statement and is incorporated herein by reference. Information related to director independence is set forth under the heading of “Information About the Board and Its Committees” in the 2011 Proxy Statement and is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services. |
The applicable information concerning principal accountant fees and services appears under the heading “Fees Paid to KPMG LLP” in the 2011 Proxy Statement and is incorporated herein by reference.
PART IV
| Item 15. | Exhibits and Financial Statement Schedules. |
(a)(1)Financial Statements
Financial statements required to be filed for the registrant under Items 8 or 15 are included in Part II, Item 8.
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because they are not applicable or the information is included in the Consolidated Financial Statements in Part II, Item 8.
(3) Exhibits
See index to Exhibits on page 77.
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(b) Exhibits
See Item 15(a)(3), above.
(c) Financial Statement Schedules
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 12th day of November 2010.
PENFORD CORPORATION
/s/ Thomas D. Malkoski
Thomas D. Malkoski
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below on November 12, 2010.
Signature | Title | |||
/s/ Thomas D. Malkoski Thomas D. Malkoski | President, Chief Executive Officer and Director (Principal Executive Officer) | |||
/s/ Steven O. Cordier Steven O. Cordier | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | |||
/s/ Paul H. Hatfield Paul H. Hatfield | Chairman of the Board of Directors | |||
/s/ William E. Buchholz William E. Buchholz | Director | |||
/s/ Jeffrey T. Cook Jeffrey T. Cook | Director | |||
/s/ R. Randolph Devening R. Randolph Devening | Director | |||
/s/ John C. Hunter III John C. Hunter III | Director | |||
/s/ Sally G. Narodick Sally G. Narodick | Director | |||
/s/ Edward F. Ryan Edward F. Ryan | Director | |||
/s/ James E. Warjone James E. Warjone | Director | |||
/s/ Matthew Zell Matthew Zell | Director | |||
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INDEX TO EXHIBITS
Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference. Copies of exhibits can be obtained at no cost by writing to Penford Corporation, 7094 S. Revere Parkway, Centennial, Colorado 80112.
Exhibit No. | Item | |||
| 3 | .1 | Restated and Amended Articles of Incorporation, as amended (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-K for the fiscal year ended August 31, 2006) | ||
| 3 | .2 | Bylaws of Registrant as amended and restated as of October 29, 2008 (filed as an exhibit to Registrant’s FileNo. 000-11488, Current Report onForm 8-K filed October 31, 2008) | ||
| 3 | .3 | Articles of Amendment of Penford Corporation for Series A 15% Cumulative Non-Voting Non-Convertible Preferred Stock (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 8-K dated April 6, 2010, filed April 9, 2010) | ||
| 3 | .4 | Articles of Amendment of Penford Corporation for Series B Voting Convertible Preferred Stock (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 8-K dated April 6, 2010, filed April 9, 2010) | ||
| 3 | .5 | Amendment to Amended and Restated Bylaws of Penford Corporation (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 8-K dated April 6, 2010, filed April 9, 2010) | ||
| 10 | .1 | Penford Corporation Deferred Compensation Plan, amended and restated as of January 1, 2005 (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-K for the year ended August 31, 2007, filed November 9, 2007)* | ||
| 10 | .2 | Form of Change of Control Agreement and Annexes between Penford Corporation and Messrs. Cordier, Kortemeyer, Kunerth, Lawlor, Malkoski and Randall and certain other key employees (a representative copy of these agreements is filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-Q for the quarter ended February 28, 2006, filed April 10, 2006)* | ||
| 10 | .3 | Form of Amendment to Change in Control Agreement (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-Q for the quarter ended November 30, 2008, filed January 9, 2009)* | ||
| 10 | .4 | Form of Second Amendment to Change in Control Agreement* | ||
| 10 | .5 | Penford Corporation 1993 Non-Employee Director Restricted Stock Plan (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-Q for the quarter ended November 30, 1993)* | ||
| 10 | .6 | Penford Corporation 1994 Stock Option Plan as amended and restated as of January 8, 2002 (filed as an exhibit to Registrant’s FileNo. 000-11488, Proxy Statement filed with the Commission on January 18, 2002)* | ||
| 10 | .7 | Penford Corporation Stock Option Plan for Non-Employee Directors (filed as a exhibit to Registrant’s FileNo. 000-11488,Form 10-Q for the quarter ended May 31, 1996, filed July 15, 1996)* | ||
| 10 | .8 | Penford Corporation 2006 Long-Term Incentive Plan (incorporated by reference to Appendix A to Registrant’s FileNo. 000-11488, Proxy Statement filed December 20, 2005)* | ||
| 10 | .9 | Form of Penford Corporation’s 2006 Long-Term Incentive Plan Stock Option Grant Notice, including the Stock Option Agreement and Notice of Exercise (incorporated by reference to the exhibits to the Registrant’s FileNo. 000-11488, Current Report onForm 8-K filed February 21, 2006)* | ||
| 10 | .10 | Form of Penford Corporation 2006 Long-Term Incentive Plan Restricted Stock Award Notice and Agreement (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-K for the year ended August 31, 2007, filed November 9, 2007)* | ||
| 10 | .11 | Second Amended and Restated Credit Agreement dated as of October 5, 2006 (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 8-K dated October 5, 2006, filed October 10, 2006) | ||
| 10 | .12 | First Amendment to Second Amended and Restated Credit Agreement (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-Q for the quarter ended May 31, 2008, filed July 10, 2008) | ||
| 10 | .13 | Second Amendment to Second Amended and Restated Credit Agreement, Resignation of Agent and Appointment of Successor Agent dated as of February 26, 2009 (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 8-K dated February 26, 2009, filed March 3, 2009) | ||
| 10 | .14 | Third Amendment to Second Amended and Restated Credit Agreement (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-Q for the quarter ended May 31, 2009, filed July 10, 2009) | ||
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Exhibit No. | Item | |||
| 10 | .15 | Director Special Assignments Policy dated August 26, 2005 (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 8-K dated August 26, 2005, filed September 1, 2005)* | ||
| 10 | .16 | Non-Employee Director Compensation Term Sheet (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-K for the year ended August 31, 2007, filed November 9, 2007)* | ||
| 10 | .17 | Form of Performance-Based Cash Award Agreement under the 2006 Long-Term Incentive Plan (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 10-Q for the quarter ended November 30, 2009, filed January 8, 2010)* | ||
| 10 | .18 | Securities Purchase Agreement by and between Penford Corporation and Zell Credit Opportunities Master Fund, L.P., dated April 7, 2010 (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 8-K dated April 6, 2010, filed April 9, 2010) | ||
| 10 | .19 | Investor Rights Agreement by and between Penford Corporation and Zell Credit Opportunities Master Fund, L.P., dated April 7, 2010 (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 8-K dated April 6, 2010, filed April 9, 2010) | ||
| 10 | .20 | Standstill Letter Agreement by and between Penford Corporation and Zell Credit Opportunities Master Fund, L.P., dated April 7, 2010 (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 8-K dated April 6, 2010, filed April 9, 2010) | ||
| 10 | .21 | Third Amended and Restated Credit Agreement among the Company, Penford Products Co., Bank of Montreal, Bank of America National Association and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland” New York Branch, dated April 7, 2010 (filed as an exhibit to Registrant’s FileNo. 000-11488,Form 8-K dated April 6, 2010, filed April 9, 2010) | ||
| 21 | Subsidiaries of the Registrant | |||
| 23 | .1 | Consent of Ernst & Young LLP | ||
| 23 | .2 | Consent of KPMG LLP | ||
| 24 | Power of Attorney | |||
| 31 | .1 | Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31 | .2 | Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley act of 2002 | |||
| * | Denotes management contract or compensatory plan or arrangement |
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