e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED May 31, 2011 |
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 0-11488
PENFORD CORPORATION
(Exact name of registrant as specified in its charter)
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Washington
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91-1221360 |
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.) |
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7094 South Revere Parkway, |
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Centennial, Colorado
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80112-3932 |
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(Address of Principal Executive Offices)
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(Zip Code) |
Registrants telephone number, including area code: (303) 649-1900
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer o
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Accelerated Filer þ
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Non-Accelerated Filer o
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Smaller Reporting Company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
The net number of shares of the Registrants common stock outstanding as of July 5, 2011 was
11,346,601.
PENFORD CORPORATION AND SUBSIDIARIES
INDEX
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Page |
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PART IFINANCIAL INFORMATION |
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Item 1. Financial Statements |
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Condensed Consolidated Balance Sheets May 31, 2011 and August 31, 2010 |
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3 |
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Condensed Consolidated Statements of Operations Three and Nine Months ended May 31, 2011
and 2010 |
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4 |
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Condensed Consolidated Statements of Cash Flows Nine Months ended May 31, 2011 and 2010 |
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5 |
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Notes to Condensed Consolidated Financial Statements |
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7 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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20 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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25 |
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Item 4. Controls and Procedures |
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25 |
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PART IIOTHER INFORMATION |
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Item 1. Legal Proceedings |
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26 |
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Item 1A. Risk Factors |
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26 |
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Item 6. Exhibits |
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26 |
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Signatures |
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27 |
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2
PART I FINANCIAL INFORMATION
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Item 1: |
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Financial Statements |
PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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(In thousands, except per share data) |
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May 31, 2011 |
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August 31, 2010 |
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(Unaudited) |
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Assets |
Current assets: |
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Cash and cash equivalents |
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$ |
227 |
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$ |
315 |
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Trade accounts receivable, net |
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31,446 |
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26,749 |
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Inventories |
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27,026 |
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19,849 |
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Prepaid expenses |
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6,496 |
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5,237 |
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Income tax receivable |
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262 |
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3,678 |
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Other |
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7,044 |
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5,287 |
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Total current assets |
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72,501 |
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61,115 |
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Property, plant and equipment, net |
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107,841 |
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111,930 |
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Restricted cash value of life insurance |
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7,996 |
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7,951 |
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Deferred tax assets |
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15,222 |
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16,493 |
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Other assets |
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2,596 |
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3,022 |
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Goodwill, net |
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7,897 |
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7,897 |
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Total assets |
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$ |
214,053 |
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$ |
208,408 |
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Liabilities and Shareholders Equity |
Current liabilities: |
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Cash overdraft, net |
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$ |
6,453 |
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$ |
4,385 |
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Current portion of long-term debt and capital lease obligations |
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429 |
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429 |
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Accounts payable |
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14,081 |
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14,650 |
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Accrued liabilities |
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8,274 |
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6,536 |
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Total current liabilities |
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29,237 |
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26,000 |
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Long-term debt and capital lease obligations |
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24,713 |
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21,038 |
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Redeemable preferred stock, Series A |
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37,725 |
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34,104 |
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Other postretirement benefits |
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17,373 |
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16,891 |
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Pension benefit liability |
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16,537 |
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20,597 |
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Other liabilities |
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6,782 |
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6,206 |
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Total liabilities |
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132,367 |
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124,836 |
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Shareholders equity: |
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Common stock, par value $1.00 per share, authorized 29,000
shares, issued 13,328 and 13,354 shares, respectively,
including treasury shares |
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13,243 |
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13,190 |
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Preferred stock, Series B |
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100 |
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100 |
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Additional paid-in capital |
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102,815 |
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102,303 |
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Retained earnings |
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12,537 |
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14,586 |
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Treasury stock, at cost, 1,981 shares |
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(32,757 |
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(32,757 |
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Accumulated other comprehensive loss |
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(14,252 |
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(13,850 |
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Total shareholders equity |
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81,686 |
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83,572 |
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Total liabilities and shareholders equity |
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$ |
214,053 |
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$ |
208,408 |
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The accompanying notes are an integral part of these statements.
3
PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three months ended |
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Nine months ended |
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May 31, |
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May 31, |
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(In thousands, except per share data) |
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2011 |
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2010 |
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2011 |
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2010 |
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Sales |
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$ |
85,233 |
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$ |
61,909 |
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$ |
231,802 |
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$ |
191,272 |
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Cost of sales |
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74,815 |
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58,644 |
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205,285 |
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171,317 |
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Gross margin |
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10,418 |
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3,265 |
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26,517 |
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19,955 |
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Operating expenses |
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6,664 |
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6,312 |
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17,093 |
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18,854 |
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Research and development expenses |
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1,248 |
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1,044 |
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3,462 |
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3,165 |
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Income (loss) from operations |
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2,506 |
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(4,091 |
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5,962 |
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(2,064 |
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Interest expense |
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(2,380 |
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(1,904 |
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(6,953 |
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(5,324 |
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Other non-operating income (expense), net |
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(12 |
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(2,606 |
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77 |
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(1,997 |
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Income (loss) from continuing operations before income
taxes |
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114 |
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(8,601 |
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(914 |
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(9,385 |
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Income tax expense (benefit) |
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823 |
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(2,843 |
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1,034 |
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(2,882 |
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Loss from continuing operations |
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(709 |
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(5,758 |
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(1,948 |
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(6,503 |
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Income (loss) from discontinued operations, net of tax |
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(218 |
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16,312 |
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Net income (loss) |
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$ |
(709 |
) |
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$ |
(5,976 |
) |
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$ |
(1,948 |
) |
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$ |
9,809 |
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Weighted average common shares and equivalents
outstanding, basic and diluted: |
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12,262 |
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11,796 |
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12,247 |
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11,396 |
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Earnings (loss) per common share, basic and diluted: |
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Loss per share from continuing operations |
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$ |
(0.06 |
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$ |
(0.49 |
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$ |
(0.16 |
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$ |
(0.58 |
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Earnings (loss) per share from discontinued operations |
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$ |
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$ |
(0.02 |
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$ |
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$ |
1.43 |
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Earnings (loss) per share |
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$ |
(0.06 |
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$ |
(0.51 |
) |
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$ |
(0.16 |
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$ |
0.85 |
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The accompanying notes are an integral part of these statements.
4
PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended |
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May 31 |
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(In thousands) |
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2011 |
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2010 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
(1,948 |
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$ |
9,809 |
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Less: Income from discontinued operations |
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16,312 |
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Net loss from continuing operations |
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(1,948 |
) |
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(6,503 |
) |
Adjustments to reconcile net income (loss) from continuing
operations
to net cash provided by (used in) operations: |
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Depreciation and amortization |
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10,859 |
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11,149 |
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Non-cash interest on Series A Preferred Stock |
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2,861 |
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900 |
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Stock-based compensation |
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858 |
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1,200 |
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Deferred income tax expense (benefit) |
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929 |
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(2,548 |
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Non-cash gains on hedging transactions |
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(485 |
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(659 |
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Foreign currency transaction gain |
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(417 |
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Loss on early extinguishment of debt |
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1,049 |
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Other |
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(3 |
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Changes in assets and liabilities: |
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Trade receivable |
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(4,734 |
) |
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4,170 |
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Prepaid expenses |
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(1,259 |
) |
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(1,271 |
) |
Inventories |
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(6,692 |
) |
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909 |
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Decrease in margin accounts |
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(1,113 |
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(474 |
) |
Accounts payable and accrued liabilities |
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1,190 |
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33 |
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Income tax receivable |
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3,361 |
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(372 |
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Other |
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(4,046 |
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2,397 |
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Net cash flow provided by (used in) operating activities
continuing
operations |
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(219 |
) |
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9,560 |
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Cash flows from investing activities: |
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Acquisition of property, plant and equipment, net |
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(5,595 |
) |
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(4,342 |
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Net proceeds received from sale of discontinued operations
and other |
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(45 |
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20,779 |
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Net cash provided by (used in) investing activities continuing
operations |
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(5,640 |
) |
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16,437 |
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Cash flows from financing activities: |
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Proceeds from revolving line of credit |
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31,000 |
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23,200 |
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Payments on revolving line of credit |
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(27,000 |
) |
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(51,833 |
) |
Proceeds from issuance of long-term debt |
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2,000 |
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Payments of long-term debt |
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(150 |
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(45,942 |
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Proceeds from issuance of preferred stock |
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40,000 |
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Issuance costs of preferred stock |
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(1,995 |
) |
Payments under capital lease obligation |
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(185 |
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(182 |
) |
Payment of loan fees |
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(1,227 |
) |
Increase in cash overdraft |
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2,068 |
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4,442 |
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Other |
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38 |
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Net cash provided by (used in) financing activities continuing
operations |
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5,771 |
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(31,537 |
) |
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Cash flows from discontinued operations: |
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Net cash provided by operating activities |
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6,330 |
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Net cash used in investing activities |
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(2,848 |
) |
Net cash used in financing activities |
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(3,399 |
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Effect of exchange rate changes on cash and cash equivalents |
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(353 |
) |
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5
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Nine Months Ended |
|
|
|
May 31 |
|
(In thousands) |
|
2011 |
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|
2010 |
|
Net cash used in discontinued operations |
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|
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(270 |
) |
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Decrease in cash and cash equivalents |
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(88 |
) |
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(5,810 |
) |
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Cash and cash equivalents of continuing operations, beginning of
period |
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315 |
|
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|
5,540 |
|
Cash balance of discontinued operations, beginning of period |
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634 |
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Cash and cash equivalents, end of period |
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227 |
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|
364 |
|
Less: cash balance of discontinued operations, end of period |
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Cash and cash equivalents of continuing operations, end of period |
|
$ |
227 |
|
|
$ |
364 |
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|
The accompanying notes are an integral part of these statements.
6
PENFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1BUSINESS
Penford Corporation (Penford or the Company) is a developer, manufacturer and marketer of
specialty natural-based ingredient systems for food and industrial applications, including fuel
grade ethanol. Penfords products provide convenient and cost-effective solutions derived from
renewable sources. Sales of the Companys products are generated using a combination of direct
sales and distributor agreements.
The Company has significant research and development capabilities, which are used in applying
the complex chemistry of carbohydrate-based materials and in developing applications to address
customer needs. In addition, the Company has specialty processing capabilities for a variety of
modified starches.
Penford manages its business in two segments: Industrial Ingredients and Food Ingredients.
These segments are based on broad categories of end-market users. The Industrial Ingredients
segment is a supplier of chemically modified specialty starches to the paper and packaging
industries and a producer of fuel grade ethanol. The Food Ingredients segment is a developer and
manufacturer of specialty starches and dextrin for the food manufacturing and food service
industries. See Note 14 for financial information regarding the Companys business segments.
Discontinued Operations
In fiscal 2010, the Company sold the operating assets of its Australia/New Zealand Operations,
which were previously reported in the consolidated financial statements as an operating segment.
The financial results of the Australia/New Zealand Operations for the three- and nine-month
periods of fiscal 2010 have been classified as discontinued operations in the condensed
consolidated statements of operations. Australian administrative expenses for the three- and
nine-month periods ended May 31, 2011 of $30,000 and $115,000, respectively, were included in
income from continuing operations. The net assets of the Australia/New Zealand Operations as of
May 31, 2011 and August 31, 2010 have been reported as assets and liabilities of the continuing
operations in the condensed consolidated balance sheets. At May 31, 2011, the remaining net assets
of the Australia/New Zealand Operations consist of $0.2 million of cash and $0.8 million of other
net assets, primarily a receivable from the purchaser of one of the Companys Australian
manufacturing facilities. See Note 9 for additional information regarding discontinued operations.
Unless otherwise indicated, amounts and discussions in these notes pertain to the Companys
continuing operations.
2BASIS OF PRESENTATION
Consolidation
The accompanying condensed consolidated financial statements include the accounts of Penford
and its wholly owned subsidiaries. Intercompany accounts and transactions are eliminated in
consolidation. The condensed consolidated balance sheet at May 31, 2011 and the condensed
consolidated statements of operations and cash flows for the interim periods ended May 31, 2011 and
May 31, 2010 have been prepared by the Company without audit. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly
the financial information, have been made. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with U.S. generally accepted accounting
principles, have been condensed or omitted pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). The results of operations for interim periods are not necessarily
indicative of the operating results of a full year or of future operations. Certain prior period
amounts have been reclassified to conform to the current period presentation. The accompanying
condensed consolidated financial statements should be read in conjunction with the consolidated
financial statements included in the Companys Annual Report on Form 10-K for the year ended August
31, 2010.
7
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, stock-based
compensation, the determination of assumptions for pension and postretirement employee benefit
costs, the determination of assumptions for asset impairment assessments, useful lives of property
and equipment and the valuation allowance for deferred tax assets. Actual results may differ from
previously estimated amounts.
3INVENTORIES
The components of inventory are as follows:
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
August 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Raw materials |
|
$ |
12,750 |
|
|
$ |
8,708 |
|
Work in progress |
|
|
6,910 |
|
|
|
1,299 |
|
Finished goods |
|
|
7,366 |
|
|
|
9,842 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
27,026 |
|
|
$ |
19,849 |
|
|
|
|
|
|
|
|
4PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
August 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Land |
|
$ |
10,435 |
|
|
$ |
10,307 |
|
Plant and equipment |
|
|
328,902 |
|
|
|
324,904 |
|
Construction in progress |
|
|
5,304 |
|
|
|
4,272 |
|
|
|
|
|
|
|
|
|
|
|
344,641 |
|
|
|
339,483 |
|
Accumulated depreciation |
|
|
(236,800 |
) |
|
|
(227,553 |
) |
|
|
|
|
|
|
|
Net property, plant and equipment |
|
$ |
107,841 |
|
|
$ |
111,930 |
|
|
|
|
|
|
|
|
5PREFERRED 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). 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 May 31, 2011 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
8
the Series A Preferred Stock is being amortized into income using the
effective interest method over the contractual life of seven years. At May 31, 2011, the carrying
value of the Series A Preferred Stock liability of $37.7 million includes $4.3 million of accrued
dividends, and $1.2 million of discount accretion for the period from the date of issuance. The
accrued dividends represent the 9% dividends that may be paid currently 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 Condensed Consolidated Statements of Operations. During the nine-month
period ended May 31, 2011, non-cash dividends of $2.9 million were recorded as interest expense.
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.
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.
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.
6DEBT
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., a wholly-owned subsidiary
of the Company; 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 under a revolving line of credit.
The lenders revolving credit loan commitment may be increased under certain conditions. On May
31, 2011, the Company had $22.9 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. The Companys obligations under the 2010 Agreement are secured by
substantially all of the Companys 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 May 31, 2011.
Interest rates under the 2010 Agreement are based on either the London Interbank Offered Rate
(LIBOR) or the prime rate, depending on the selection of available borrowing options under the
2010 Agreement. The Company may choose a borrowing rate of 1-month, 3-month or 6-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 May 31, 2011, the Companys borrowing
rate was 3.9%.
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. At May 31, 2011, the Company had $1.7 million outstanding related to the IDED loans.
7INCOME TAXES
For interim periods in fiscal 2010, the Company estimated the effective income tax rate
expected to be applicable for the full fiscal year ended August 31, 2010 and used that rate to
calculate income tax expense or benefit on year-to-date income or loss. In fiscal 2011, the amounts
of expected permanent differences between book and taxable income resulted in significant
variations in the customary relationship between pretax book income and income tax expense
(benefit) in interim periods. A small change in the Companys expected annual pretax income could
result in a significant change in the annual expected effective tax rate. For the three- and
nine-month periods ended May 31, 2011,
9
the Company used the
year-to-date effective income tax rate. This rate is used to calculate income tax expense or
benefit on current year-to-date pre-tax income or loss.
In reviewing its effective tax rate, the Company uses estimates of the amounts of permanent
differences between book and tax accounting. Adjustments to the Companys estimated tax expense
related to the prior fiscal year, amounts recorded to increase or decrease unrecognized tax
benefits, changes in tax rates, and the effect of a change in the beginning-of-the-year valuation
allowance are generally treated as discrete items and are recorded in the period in which they
arise.
Tax expense for the three-month period ended May 31, 2011 was $0.8 million on pre-tax income
of $0.1 million. The difference between the recorded tax expense and the expected tax expense at
the U.S. federal statutory rate was primarily due to federal and state income taxes on $1.9 million
of non-deductible dividends and discount accretion on the Companys Series A Preferred Stock.
Tax expense for the nine-month period ended May 31, 2011 was $1.0 million on a pre-tax loss of
$0.9 million. The difference between the recorded tax expense and the expected tax benefit at the
U.S. federal statutory rate was due to federal and state income taxes on $5.7 million of
non-deductible dividends and discount accretion on the Companys Series A Preferred Stock, offset
by a $0.9 million tax benefit associated with the tax credit for small ethanol producers and a $0.2
million tax credit related to research and development activities.
The Companys effective tax rates for the three- and nine-month periods ended May 31, 2010
were 33.1% and 30.7%, respectively. The difference between the effective tax rate and the U.S.
federal statutory rate was primarily due to state income taxes 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.
At May 31, 2011, the Company had $16.9 million of net deferred tax assets. A valuation
allowance has not been provided on the net U.S. deferred tax assets as of May 31, 2011. 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 believes
that it is more likely than not that future operations and the reversal of existing taxable
temporary differences will generate sufficient taxable income to realize its deferred tax assets.
In addition, dividends on the Series A Preferred Stock, as well as accretion of the related
discount, which are included in interest expense in the Condensed Consolidated Statements of
Operations, are not deductible for U.S. federal income tax purposes. There can be no assurance
that managements current plans will be achieved or that a valuation allowance will not be required
in the future.
The Internal Revenue Code and applicable regulations contain provisions which may limit the
net operating loss carryforwards available to be used in any given year upon the occurrence of
certain events, including changes with respect to the Companys capital stock that result in a
cumulative ownership change of more than 50 percentage points by 5-percent stockholders over a
three-year period. If changes to the Companys ownership occur in the future, annual limitations
may apply with respect to the Companys ability to utilize its net operating loss carryforwards and
certain current deductions against taxable income in future periods.
In the nine months ended May 31, 2011, the amount of unrecognized tax benefits increased by
less than $0.1 million. The total amount of unrecognized tax benefits at May 31, 2011 was $1.2
million, all of which, if recognized, would favorably impact the effective tax rate. At May 31,
2011, the Company had $0.2 million of accrued interest and penalties included in the long-term tax
liability. The Company does not believe that the total amount of unrecognized tax benefits at May
31, 2011 will change materially in the next 12 months.
In January 2011, the U.S. Internal Revenue Service (IRS) notified the Company that its tax
refund of $3.5 million resulting from a carryback of tax losses from fiscal year 2009 to fiscal
years 2006 and 2007 is being evaluated to determine whether the refund will be examined or accepted
without examination.
10
8OTHER COMPREHENSIVE INCOME (LOSS) (OCI)
The components of total comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Net income (loss) |
|
$ |
(709 |
) |
|
$ |
(5,976 |
) |
|
$ |
(1,948 |
) |
|
$ |
9,809 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
930 |
|
Gain from foreign currency translation
reclassified into earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,420 |
) |
Net unrealized gain (loss) on derivative instruments that qualify as cash flow
hedges, net of tax |
|
|
2,378 |
|
|
|
318 |
|
|
|
(402 |
) |
|
|
1,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
1,669 |
|
|
$ |
(5,658 |
) |
|
$ |
(2,350 |
) |
|
$ |
(1,172 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The liquidation of the remaining net assets of Penford Australia was substantially completed
in the second quarter of fiscal 2010 and, as a result, currency translation adjustments were
reclassified from accumulated other comprehensive income into second quarter fiscal 2010 earnings.
The accumulated derivative instrument losses, net of tax, included in OCI at August 31, 2010 and
2009 were $0.6 million and $2.3 million, respectively. The accumulated derivative instrument
losses, net of tax, included in OCI at May 31, 2011 and 2010 were $1.0 million and $0.7 million,
respectively.
9 DISCONTINUED OPERATIONS
In the first quarter of fiscal 2010, the Company sold the assets of its Australia/New Zealand
Operations, which were previously reported in the consolidated financial statements as an operating
segment. 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 estimated
transaction costs, were $15.3 million.
Proceeds from the Penford Australia asset sales included $2.0 million placed in escrow to be
released in four equal installments. Two installments totaling $1.0 million were received as of
May 31, 2011. The remaining two installments of $0.5 million each, which are subject to the
buyers right to make warranty claims under the sale contract, are due in July 2011 and May 2012.
While no assurances can be given that the buyer will not develop and submit valid warranty claims,
Penford Australia currently expects that it will receive the proceeds from the escrow account as
scheduled.
10STOCK-BASED COMPENSATION
Stock Compensation Plans
Penford maintains the 2006 Long-Term Incentive Plan (the 2006 Incentive Plan) pursuant to
which various stock-based awards may be granted to employees, directors and consultants. As of May
31, 2011, the aggregate number of shares of the Companys common stock that were available to be
issued as awards under the 2006 Incentive Plan was 21,767. In addition, any shares previously
granted under the 1994 Stock Option Plan which are subsequently forfeited or not exercised will be
available for future grants under the 2006 Incentive Plan. Non-qualified stock options granted
under the 2006 Incentive Plan generally vest ratably for periods from one to four years and expire
seven years from the date of grant.
11
General Option Information
A summary of the stock option activity for the nine months ended May 31, 2011, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
Number of |
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (in years) |
|
|
Intrinsic Value |
|
Outstanding Balance, August 31, 2010 |
|
|
1,264,564 |
|
|
$ |
15.07 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
98,000 |
|
|
|
6.59 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(17,551 |
) |
|
|
13.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance, May 31, 2011 |
|
|
1,345,013 |
|
|
|
14.48 |
|
|
|
2.94 |
|
|
$ |
12,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at May 31, 2011 |
|
|
1,081,013 |
|
|
$ |
14.78 |
|
|
|
2.43 |
|
|
$ |
|
|
Under the 2006 Incentive Plan, the Company granted 98,000 stock options during the first nine
months of fiscal 2011, (i) 80,000 stock options which vest one year from the date of grant, and
(ii) 18,000 stock options which vest ratably over four years. The Company estimated the fair value
of stock options granted during the first nine months of fiscal 2011 using the following
weighted-average assumptions and resulting in the following weighted-average grant date fair value:
|
|
|
|
|
Expected volatility |
|
|
71 |
% |
Expected life (years) |
|
|
4.3 |
|
Interest rate |
|
|
1.1-2.8 |
% |
|
|
|
|
|
Weighted-average fair value |
|
$ |
3.62 |
|
The aggregate intrinsic value disclosed in the table above represents the total pretax
intrinsic value, based on the Companys closing stock price of $5.82 as of May 31, 2011 that would
have been received by the option holders had all option holders exercised on that date. No stock
options were exercised during the nine months ended May 31, 2011.
As of May 31, 2011, the Company had $0.4 million of unrecognized compensation cost related to
non-vested stock option awards that is expected to be recognized over a weighted average period of
1.2 years.
Restricted Stock Awards
The grant date fair value of each share of the Companys restricted stock awards is equal to
the fair value of Penfords common stock at the grant date. The following table summarizes the
restricted stock award activity for the nine months ended May 31, 2011 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Number of Shares |
|
|
Fair Value |
|
|
|
|
Nonvested at August 31, 2010 |
|
|
154,707 |
|
|
$ |
15.67 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(70,475 |
) |
|
|
16.87 |
|
Cancelled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at May 31, 2011 |
|
|
84,232 |
|
|
$ |
14.67 |
|
As of May 31, 2011, the Company had $0.2 million of unrecognized compensation cost related to
non-vested restricted stock awards that is expected to be recognized over a weighted average period
of 1.1 years.
12
Compensation Expense
The Company recognizes stock-based compensation expense utilizing the accelerated multiple
option approach over the requisite service period, which equals the vesting period. The following
table summarizes the total stock-based compensation cost for the three and nine months ended May
31, 2011 and 2010 and the effect on the Companys Condensed Consolidated Statements of Operations
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Cost of sales |
|
$ |
30 |
|
|
$ |
39 |
|
|
$ |
92 |
|
|
$ |
125 |
|
Operating expenses |
|
|
204 |
|
|
|
374 |
|
|
|
739 |
|
|
|
1,053 |
|
Research and development expenses |
|
|
8 |
|
|
|
7 |
|
|
|
27 |
|
|
|
22 |
|
Income (loss) from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
|
Total stock-based compensation expense |
|
$ |
242 |
|
|
$ |
420 |
|
|
$ |
858 |
|
|
$ |
1,175 |
|
Income tax benefit |
|
|
92 |
|
|
|
160 |
|
|
|
326 |
|
|
|
447 |
|
|
|
|
Total stock-based compensation expense, net of tax |
|
$ |
150 |
|
|
$ |
260 |
|
|
$ |
532 |
|
|
$ |
728 |
|
|
|
|
11NON-OPERATING INCOME (LOSS), NET
Non-operating income (loss), net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Loss on extinguishment of debt |
|
$ |
|
|
|
$ |
(1,049 |
) |
|
$ |
|
|
|
$ |
(1,049 |
) |
Loss on interest rate swap termination |
|
|
|
|
|
|
(1,562 |
) |
|
|
|
|
|
|
(1,562 |
) |
Gain on foreign currency transactions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
417 |
|
Other |
|
|
(12 |
) |
|
|
5 |
|
|
|
77 |
|
|
|
197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(12 |
) |
|
$ |
(2,606 |
) |
|
$ |
77 |
|
|
$ |
(1,997 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
In the third quarter of fiscal 2010, the Company refinanced its bank debt. See Note 6. 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.
During the nine months ended May 31, 2010, the Company recognized a gain on foreign currency
transactions on Australian dollar denominated assets and liabilities as disclosed in the table
above.
13
12 PENSION AND POST-RETIREMENT BENEFIT PLANS
The components of the net periodic pension and post-retirement benefit costs for the three and
nine months ended May 31, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
Defined benefit pension plans |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Service cost |
|
$ |
404 |
|
|
$ |
389 |
|
|
$ |
1,213 |
|
|
$ |
1,167 |
|
Interest cost |
|
|
674 |
|
|
|
641 |
|
|
|
2,022 |
|
|
|
1,923 |
|
Expected return on plan assets |
|
|
(558 |
) |
|
|
(506 |
) |
|
|
(1,676 |
) |
|
|
(1,518 |
) |
Amortization of prior service cost |
|
|
57 |
|
|
|
61 |
|
|
|
171 |
|
|
|
183 |
|
Amortization of actuarial losses |
|
|
360 |
|
|
|
304 |
|
|
|
1,081 |
|
|
|
912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
937 |
|
|
$ |
889 |
|
|
$ |
2,811 |
|
|
$ |
2,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
Post-retirement health care plans |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Service cost |
|
$ |
68 |
|
|
$ |
88 |
|
|
$ |
204 |
|
|
$ |
264 |
|
Interest cost |
|
|
243 |
|
|
|
269 |
|
|
|
729 |
|
|
|
807 |
|
Amortization of prior service cost |
|
|
(38 |
) |
|
|
(38 |
) |
|
|
(114 |
) |
|
|
(114 |
) |
Amortization of actuarial losses |
|
|
16 |
|
|
|
74 |
|
|
|
49 |
|
|
|
222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
289 |
|
|
$ |
393 |
|
|
$ |
868 |
|
|
$ |
1,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of fiscal 2011, the company contributed $4.4 million to the Companys
pension plans.
13FAIR VALUE MEASURMENTS AND DERIVATIVE INSTRUMENTS
Fair Value Measurements
Presented below are the fair values of the Companys derivatives as of May 31, 2011 and August
31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2011 |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Current assets (Other Current Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives (1) |
|
$ |
(732 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(732 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On the condensed consolidated balance sheet, commodity derivative assets and liabilities have been offset by
cash collateral due and paid under master netting arrangements which are recorded together in Other Current Assets.
The cash collateral offset was $3.0 million at May 31, 2011. |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2010 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
Current assets (Other Current Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives (1)
|
|
$ |
(2,789 |
) |
|
$
|
|
$
|
|
$ |
(2,789 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On the condensed consolidated balance sheet, commodity derivative assets and liabilities have been offset by
cash collateral due and paid under master netting arrangements which are recorded together in Other Current Assets.
The cash collateral offset was $4.5 million at August 31, 2010. |
14
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. |
Other Financial Instruments
The carrying value of cash and cash equivalents, receivables and payables approximates fair
value because of their short maturities. The Companys bank debt reprices with changes in market
interest rates and, accordingly, the carrying amount of such debt approximates fair value.
In 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 May 31, 2011 was $1.7 million and the
fair value of the debt was estimated to be $1.4 million. See Note 6.
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 May 31, 2011 was $37.7 million and the
estimated fair value was $40.5 million.
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. At May
31, 2011, the Company had no outstanding interest rate swaps 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.
For derivative instruments designated as fair value hedges, the gain or loss on the derivative
instruments as well as the offsetting gain or loss on the hedged firm commitments and/or inventory
are recognized in current earnings as a component of cost of sales. For derivative instruments
designated as cash flow hedges, the effective portion of the gain or loss on the derivative
instruments is reported as a component of other comprehensive income (loss), net of applicable
income taxes, and recognized in earnings when the hedged exposure affects earnings. The Company
recognizes the gain or loss on the derivative instrument as a component of cost of sales in the
period when the finished goods produced from the hedged item are sold. If it is determined that
the derivative instruments used are no longer effective at offsetting changes in the price of the
hedged item, then the changes in fair value would be recognized in current earnings as a component
of cost of goods sold.
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), net of tax, recorded in
other comprehensive income at May 31, 2011 that is expected to be reclassified into income within
12 months is $(1.0) million.
15
As of May 31, 2011, Penford had purchased corn positions of 11.1 million bushels, of which 4.6
million bushels represented equivalent firm priced starch and ethanol sales contract volume,
resulting in an open position of 6.5 million bushels.
As of May 31, 2011, the Company had the following outstanding futures contracts:
|
|
|
Corn Futures
|
|
1,460,000 Bushels |
Natural Gas Futures
|
|
1,020,000 mmbtu (millions of British thermal units) |
Ethanol Swaps
|
|
6,960,000 Gallons |
The following tables provide information about the fair values of the Companys derivatives,
by contract type, as of May 31, 2011 and August 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
Fair Value |
|
|
|
Balance Sheet |
|
|
May 31 |
|
|
Aug. 31 |
|
|
Balance Sheet |
|
|
May 31 |
|
|
Aug. 31 |
|
In thousands |
|
Location |
|
2011 |
|
|
2010 |
|
|
Location |
|
2011 |
|
|
2010 |
|
Cash Flow Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures |
|
Other Current Assets |
|
$ |
180 |
|
|
$ |
|
|
|
Other Current Assets |
|
$ |
|
|
|
$ |
|
|
Natural Gas Futures |
|
Other Current Assets |
|
|
7 |
|
|
|
|
|
|
Other Current Assets |
|
|
51 |
|
|
|
1,082 |
|
Ethanol Gas Futures |
|
Other Current Assets |
|
|
|
|
|
|
|
|
|
Other Current Assets |
|
|
784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures |
|
Other Current Assets |
|
|
4 |
|
|
|
28 |
|
|
Other Current Assets |
|
|
88 |
|
|
|
1,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
Designated as Hedging
Instruments |
|
|
|
|
|
$ |
191 |
|
|
$ |
28 |
|
|
|
|
|
|
$ |
923 |
|
|
$ |
2,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables provide information about the effect of derivative instruments on
the financial performance of the Company for the three- and nine-month periods ended May 31, 2011
and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) |
|
|
|
|
Amount of Gain (Loss) |
|
Reclassified from |
|
Amount of Gain (Loss) |
|
|
Recognized in OCI |
|
AOCI into Income |
|
Recognized in Income |
|
|
Quarter Ended May 31 |
|
Quarter Ended May 31 |
|
Quarter Ended May 31 |
In thousands |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Cash Flow Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures (1)
|
|
$ |
(601 |
) |
|
$ |
40 |
|
|
$ |
(3,862 |
) |
|
$ |
594 |
|
|
$ |
60 |
|
|
$ |
288 |
|
Natural Gas Futures (1)
|
|
|
415 |
|
|
|
(845 |
) |
|
|
(249 |
) |
|
|
(618 |
) |
|
|
|
|
|
|
|
|
Ethanol Futures (1)
|
|
|
(596 |
) |
|
|
|
|
|
|
(506 |
) |
|
|
(75 |
) |
|
|
|
|
|
|
|
|
Interest Rate Contracts(2)
|
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
(93 |
) |
|
|
|
|
|
|
(1,562 |
) |
|
|
|
|
|
$ |
(782 |
) |
|
$ |
(744 |
) |
|
$ |
(4,617 |
) |
|
$ |
(192 |
) |
|
$ |
60 |
|
|
$ |
(1,274 |
) |
|
|
|
Fair Value Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures (1) (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(6 |
) |
|
$ |
(117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) |
|
|
|
|
|
|
Amount of Gain (Loss) |
|
|
Reclassified from |
|
|
Amount of Gain (Loss) |
|
|
|
Recognized in OCI |
|
|
AOCI into Income |
|
|
Recognized in Income |
|
|
|
9 Months Ended May 31 |
|
|
9 Months Ended May 31 |
|
|
9 Months Ended May 31 |
|
In thousands |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Cash Flow Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures (1) |
|
$ |
(7,358 |
) |
|
$ |
384 |
|
|
$ |
(6,125 |
) |
|
$ |
1,690 |
|
|
$ |
85 |
|
|
$ |
113 |
|
Natural Gas Futures (1) |
|
|
(135 |
) |
|
|
(2,088 |
) |
|
|
(1,305 |
) |
|
|
(1,724 |
) |
|
|
|
|
|
|
|
|
Ethanol Futures (1) |
|
|
(910 |
) |
|
|
(590 |
) |
|
|
(323 |
) |
|
|
(514 |
) |
|
|
|
|
|
|
|
|
Interest Rate Contracts(2) |
|
|
|
|
|
|
(395 |
) |
|
|
|
|
|
|
(662 |
) |
|
|
|
|
|
|
(1,562 |
) |
FX Contracts (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26 |
) |
|
|
|
|
|
|
- |
|
|
|
|
|
|
$ |
(8,403 |
) |
|
$ |
(2,689 |
) |
|
$ |
(7,753 |
) |
|
$ |
(1,236 |
) |
|
$ |
85 |
|
|
$ |
(1,449 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures (1) (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(229 |
) |
|
$ |
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
14SEGMENT REPORTING
Financial information from continuing operations for the Companys two segments, Industrial
Ingredients and Food Ingredients, is presented below. These segments serve broad categories of
end-market users. The Industrial Ingredients segment provides carbohydrate-based starches for
industrial applications, primarily in the paper and packaging products and ethanol industries. The
Food Ingredients segment produces specialty starches for food applications. A third item for
corporate and other activity has been presented to provide reconciliation to amounts reported in
the consolidated financial statements. Corporate and other represents the activities related to the
corporate headquarters such as public company reporting, personnel costs of the executive
management team, corporate-wide professional services and consolidation entries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Ingredients |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Starch |
|
$ |
33,535 |
|
|
$ |
27,409 |
|
|
$ |
93,721 |
|
|
$ |
87,740 |
|
Ethanol |
|
|
28,061 |
|
|
|
14,601 |
|
|
|
78,395 |
|
|
|
50,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,596 |
|
|
|
42,010 |
|
|
|
172,116 |
|
|
|
138,383 |
|
Food Ingredients |
|
|
23,637 |
|
|
|
19,899 |
|
|
|
59,686 |
|
|
|
52,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
85,233 |
|
|
$ |
61,909 |
|
|
$ |
231,802 |
|
|
$ |
191,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Ingredients |
|
$ |
(734 |
) |
|
$ |
(6,847 |
) |
|
$ |
(1,695 |
) |
|
$ |
(6,414 |
) |
Food Ingredients |
|
|
5,517 |
|
|
|
5,018 |
|
|
|
13,902 |
|
|
|
11,447 |
|
Corporate and other |
|
|
(2,277 |
) |
|
|
(2,262 |
) |
|
|
(6,245 |
) |
|
|
(7,097 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,506 |
|
|
$ |
(4,091 |
) |
|
$ |
5,962 |
|
|
$ |
(2,064 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
August 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Total assets: |
|
|
|
|
|
|
|
|
Industrial Ingredients |
|
$ |
140,909 |
|
|
$ |
133,738 |
|
Food Ingredients |
|
|
40,479 |
|
|
|
36,542 |
|
Corporate and other |
|
|
32,665 |
|
|
|
38,128 |
|
|
|
|
|
|
|
|
|
|
$ |
214,053 |
|
|
$ |
208,408 |
|
|
|
|
|
|
|
|
17
At May 31, 2011, the remaining net assets of the Australia/New Zealand Operations, consisting
of $0.2 million of cash and $0.8 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.
15EARNINGS (LOSS) PER SHARE
All outstanding unvested share-based payment awards that contain rights to non-forfeitable
dividends participate in undistributed earnings with common shareholders and, therefore, are
included in computing earnings per share under the two-class method. Under the two-class method,
net earnings are reduced by the amount of dividends declared in the period for each class of common
stock and participating security. The remaining undistributed earnings are then allocated to
common stock and participating securities, based on their respective rights to receive dividends.
Restricted stock awards granted to certain employees and directors under the Companys 2006
Incentive Plan which contain non-forfeitable rights to dividends at the same rate as common stock,
are considered participating securities.
Basic earnings (loss) per share reflect only the weighted average common shares outstanding
during the period. Diluted earnings (loss) per share reflect weighted average common shares
outstanding and the effect of any dilutive common stock equivalent shares. Diluted earnings
(loss) per share is calculated by dividing net income (loss) by the average common shares
outstanding plus additional common shares that would have been outstanding assuming the exercise
of in-the-money stock options, using the treasury stock method. The following table presents the
reconciliation of income from continuing operations to income from continuing operations
applicable to common shares and the computation of diluted weighted average shares outstanding for
the three and nine months ended May 31, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
|
(In thousands) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(709 |
) |
|
$ |
(5,758 |
) |
|
$ |
(1,948 |
) |
|
$ |
(6,503 |
) |
Less: Allocation to participating securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations applicable
to common shares |
|
$ |
(709 |
) |
|
$ |
(5,758 |
) |
|
$ |
(1,948 |
) |
|
$ |
(6,613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
$ |
|
|
|
$ |
(218 |
) |
|
$ |
|
|
|
$ |
16,312 |
|
Less: Allocation to participating securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
applicable to common shares |
|
$ |
|
|
|
$ |
(218 |
) |
|
$ |
|
|
|
$ |
16,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(709 |
) |
|
$ |
(5,976 |
) |
|
$ |
(1,948 |
) |
|
$ |
9,809 |
|
Less: Allocation to participating securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shares |
|
$ |
(709 |
) |
|
$ |
(5,976 |
) |
|
$ |
(1,948 |
) |
|
$ |
9,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic |
|
|
12,262 |
|
|
|
11,796 |
|
|
|
12,247 |
|
|
|
11,396 |
|
Dilutive stock options and awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding,
diluted |
|
|
12,262 |
|
|
|
11,796 |
|
|
|
12,247 |
|
|
|
11,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended May 31, 2011, there were 84,232 and 102,852
weighted-average restricted stock awards excluded from the calculation of diluted earnings (loss)
per share because they were antidilutive. Weighted-average restricted stock awards of 154,707 and
143,967 shares for the three and nine months ended May 31, 2010, were excluded from the
calculation of diluted earnings (loss) per share because they were antidilutive. Weighted-average
stock options to purchase 1,343,455 and 1,321,822 shares of common stock for the three and nine
months ended May 31, 2011, were excluded from the calculation of diluted earnings (loss) per share
because they were antidilutive. Weighted-average stock options to purchase 1,370,023 and
1,374,031 shares of common stock for the
18
three and nine
months ended May 31, 2010, were excluded from the calculation of diluted earnings (loss) per
share because they were antidilutive.
On April 7, 2010, the Company issued 100,000 shares of its Series B voting convertible
preferred stock. See Note 5 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
Companys common stock at a conversion rate of ten shares of common stock per one share of Series B
Preferred Stock, subject to adjustment in the event of stock dividends, distributions, splits,
reclassifications and the like. If any shares of Series B Preferred Stock have not been converted
into shares of common stock prior to April 7, 2020, the shares of Series B Preferred Stock will
automatically convert into shares of common stock. The holders of the Series B Preferred Stock
shall have the right to one vote for each share of common stock into which the Series B Preferred
Stock is convertible. 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.
16LEGAL PROCEEDINGS
On or about June 2, 2011, the Company was notified by a customer that the customer had been
informed that a lawsuit had been filed against the customer by T.F.H. Publications, Inc. (TFH) in
the United States Court for the District of New Jersey alleging that certain dog chew products
supplied to the customer by the Companys subsidiary, Penford Products Co. (Penford Products),
infringed upon a patent owned by TFH and may infringe upon two other patents owned by TFH. The
customer has requested that Penford Products assume the defense of this lawsuit. The Company
believes that the products supplied to its customer did not infringe upon any TFH patents and
intends to vigorously defend the lawsuit. However, the Company cannot at this time determine the
likelihood of any outcome or estimate any damages that might be awarded.
The Company is involved from time to time in various other claims and litigation arising in
the normal course of business. In the judgment of management, which relies in part upon
information obtained from the Companys 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.
19
Item 2: Managements Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Penford generates revenue, income and cash flows by developing, manufacturing and marketing
specialty natural-based ingredient systems for food and industrial applications, including fuel
grade ethanol. The Company develops and manufactures ingredients with starch as a base, providing
value-added applications to its customers. Penfords starch products are manufactured primarily
from corn and potatoes and are used principally as binders and coatings in paper and food
production and as an ingredient in fuel.
Penford manages its business in two segments: Industrial Ingredients and Food Ingredients.
These segments are based on broad categories of end-market users. See Note 14 to the Condensed
Consolidated Financial Statements for additional information regarding the Companys business
segment operations.
In analyzing business trends, management considers a variety of performance and financial
measures, including sales revenue growth, sales volume growth, and gross margins and operating
income of the Companys business segments.
This Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) should be read in conjunction with the Companys condensed consolidated financial
statements and the accompanying notes. The notes to the Condensed Consolidated Financial
Statements referred to in this MD&A are included in Part I Item 1, Financial Statements.
Results of Operations
Executive Overview
Consolidated sales for the three months ended May 31, 2011 increased 37.7%, or $23.3 million,
to $85.2 million compared with $61.9 million for the three months ended May 31, 2010. Consolidated
sales in the first nine months of fiscal 2011 increased $40.5 million over last year to $231.8
million. Third quarter and year-to-date sales growth was driven by improvements in ethanol volumes
and unit pricing. See the discussion by business segment below for details of changes in revenues.
Consolidated income from operations for the third quarter of fiscal 2011 increased $6.6
million to $2.5 million from an operating loss of $4.1 million in the prior year third quarter.
Consolidated gross margin increased $7.2 million as higher net corn costs were more than offset by
favorable ethanol pricing and lower manufacturing costs. Operating expenses increased $0.4 million
on higher employee costs and an increase in the accounts receivable reserve of $0.6 million in the
industrial ingredients business, partially offset by lower professional fees.
Consolidated income from operations for the nine months ended May 31, 2011 rose $8.0 million
to $6.0 million from an operating loss of $2.0 million in the same period of the prior year.
Consolidated gross margin expanded $6.6 million as improvements in ethanol volume and pricing more
than offset higher net corn costs. Operating expenses improved $1.8 million on lower employee
costs and professional fees.
Interest expense increased for both the third quarter and the first nine months of fiscal 2011
from the same periods in fiscal 2010 primarily due to the higher dividend rate on the Companys
Series A Preferred Stock issued in April 2010 over the interest rate under the Companys prior bank
debt. The increase was also due to the accretion of the discount on the Series A Preferred Stock
since its issuance.
The Companys income tax expense for the third quarter of fiscal 2011 was $0.8 million on $0.1
million of pre-tax income. Income tax expense for the nine months ended May 31, 2011 was $1.0
million on a pre-tax loss of $0.9 million. The difference between the recorded income tax expense
and the expected income tax expense or benefit based on the U.S. federal statutory rate is due to
the non-deductibility of the dividends on the Companys Series A Preferred Stock which are reported
as interest expense in the Condensed Consolidated Statements of Operations. See the Income taxes
section below.
20
Industrial Ingredients
Third quarter fiscal 2011 sales at the Companys Industrial Ingredients business unit
increased $19.6 million, or 46.6%, to $61.6 million from $42.0 million in the third quarter of
fiscal 2010. Industrial starch sales of $33.5 million for the quarter ended May 31, 2011 grew $6.1
million from a year ago on an increase in average unit pricing, which included the effect of an
increase in the cost of corn which is passed through to customers, partially offset by a 12%
decline in sales volume. Sales of specialty starches, included in the industrial starch sales
amount, expanded 33% on increases in both volume and average unit pricing. Sales of ethanol
increased 92% from $14.6 million in the third quarter of fiscal 2010 to $28.1 million in the third
quarter of fiscal 2011. Both sales volume and average unit pricing of ethanol rose at double-digit
rates over the prior year quarter.
Industrial Ingredients sales for the first nine months of fiscal 2011 increased 24.4% to
$172.1 million from $138.4 million in the same period of fiscal 2010. Industrial starch sales rose
7% to $93.7 million in fiscal 2011 from $87.7 million a year ago primarily on favorable average
unit pricing, which included the pass-through of higher corn costs to customers during the period.
Sales of specialty starches, included in the industrial starch sales amount, for the nine months
ended May 31, 2011 grew 22% resulting from favorable changes in both volume and average unit
pricing. Ethanol sales expanded 55% to $78.4 million from $50.6 million a year ago on a 13%
increase in volume and pricing improvements of 37%.
The Industrial Ingredients business unit reported a loss from operations for the third quarter
of fiscal 2011 of $0.7 million compared to an operating loss of $6.8 million for the third quarter
of fiscal 2010. Gross margin improved by $6.5 million on higher ethanol pricing of $11.3 million,
favorable industrial starch and product mix improvements of $1.5 million, and higher manufacturing
yields and lower natural gas and distribution costs of $1.6 million. Higher net corn costs
decreased gross margin by $7.9 million. Manufacturing volumes were comparable to last year.
Operating expenses increased primarily due to a $0.6 million increase in the accounts receivable
reserve related to a paper industry customer, partially offset by lower professional fees.
The Industrial Ingredients business reported a loss from operations of $1.7 million for the
nine months ended May 31, 2011 compared to an operating loss of $6.4 million for the same period of
fiscal 2010. Gross margin improved $4.6 million due to higher ethanol pricing of $20.7 million,
the effect of volume increases of $1.0 million and improvements in distribution and manufacturing
yields and costs of $3.3 million. Unfavorable industrial starch pricing of $2.9 million and higher
net corn costs of $17.5 million offset the above gains in pricing and manufacturing. Operating
expenses for the nine-month period ended May 31, 2011 declined by $0.3 million on a $1.0 million
decline in professional fees, partially offset by a year-to-date increase in the accounts
receivable reserve of $0.7 million.
Food Ingredients
Fiscal 2011 third quarter sales for the Food Ingredients segment of $23.6 million increased
18.8%, or $3.7 million, over the third quarter of fiscal 2010. Sales for the first nine months of
fiscal 2011 of $59.7 million increased 12.9%, or $6.8 million, from a year ago. Sales of
applications to growth end markets, including the dairy, pet and bakery markets, grew 50% and 32%
for the third quarter and the first nine months of fiscal 2011, respectively, on both volume and
pricing improvements. Growth end markets contributed 46% of the revenue for the third quarter of
fiscal 2011 and 44% of revenue year-to-date. Coating application sales declined 19% and 12% for
the three- and nine-month periods ended May 31, 2011, primarily due to decreased volume.
Operating income for the third quarter of fiscal 2011 increased 10% to $5.5 million from $5.0
million a year ago due to the impact of higher revenues of $1.0 million, partially offset by higher
raw material costs of $0.4 million, and higher operating expenses of $0.1 million. Income from
operations for the first nine months of fiscal 2011 increased $2.5 million, or 21.4%, to $13.9
million due to an improvement in gross margin of $2.0 million and a decrease in operating expenses
of $0.6 million. Gross margin improved 11.1% in the first nine months of fiscal 2011 to $19.5
million on the impact of higher revenues. Operating expenses declined due to the collection of a
receivable in the first quarter of fiscal 2011 and lower professional fees.
21
Corporate operating expenses
Corporate operating expenses for the third quarter of fiscal 2011 were comparable to the prior
year period. Corporate operating expenses for the nine months ended May 31, 2011 decreased $1.0
million to $6.1 million from $7.1 million a year ago, primarily due to lower employee costs.
Interest expense
Interest expense for the three- and nine-month periods ended May 31, 2011 increased $0.5
million and $1.6 million, respectively, compared to the same periods last year, primarily due to
the higher dividend rate under the Companys Series A Preferred Stock issued in April 2010 over the
interest rate under the Companys prior bank debt. The increase was also due to the accretion of
the discount on the Series A Preferred Stock. See Notes 5 and 6 to the Condensed Consolidated
Financial Statements.
Income taxes
For interim periods in fiscal 2010, the Company estimated the effective income tax rate
expected to be applicable for the full fiscal year ended August 31, 2010 and used that rate to
calculate income tax expense or benefit on year-to-date income or loss. In fiscal 2011, the amounts
of expected permanent differences between book and taxable income resulted in significant
variations in the customary relationship between pretax book income and income tax expense
(benefit) in interim periods. A small change in the Companys expected annual pretax income could
result in a significant change in the annual expected effective tax rate. For the three- and
nine-month periods ended May 31, 2011, the Company used the year-to-date effective income tax rate.
This rate is used to calculate income tax expense or benefit on current year-to-date pre-tax income
or loss.
In reviewing its effective tax rate, the Company uses estimates of the amounts of permanent
differences between book and tax accounting. Adjustments to the Companys estimated tax expense
related to the prior fiscal year, amounts recorded to increase or decrease unrecognized tax
benefits, changes in tax rates, and the effect of a change in the beginning-of-the-year valuation
allowance are generally treated as discrete items and are recorded in the period in which they
arise.
Tax expense for the three-month period ended May 31, 2011 was $0.8 million on pre-tax income
of $0.1 million. The difference between the recorded tax expense and the expected tax expense at
the U.S. federal statutory rate was primarily due to federal and state income taxes on $1.9 million
of non-deductible dividends and discount accretion on the Companys Series A Preferred Stock.
Tax expense for the nine-month period ended May 31, 2011 was $1.0 million on a pre-tax loss of
$0.9 million. The difference between the recorded tax expense and the expected tax benefit at the
U.S. federal statutory rate was due to federal and state income taxes on $5.7 million of
non-deductible dividends and discount accretion on the Companys Series A Preferred Stock, offset
by a $0.9 million tax benefit associated with the tax credit for small ethanol producers and a $0.2
million tax credit related to research and development activities.
The Companys effective tax rates for the three- and nine-month periods ended May 31, 2010
were 33.1% and 30.7%, respectively. The difference between the effective tax rate and the U.S.
federal statutory rate was primarily due to state income taxes 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.
At May 31, 2011, the Company had $16.9 million of net deferred tax assets. A valuation
allowance has not been provided on the net U.S. deferred tax assets as of May 31, 2011. 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 believes
that it is more likely than not that future operations and the reversal of existing taxable
temporary differences will generate sufficient taxable income to realize its deferred tax assets.
In addition, dividends on the Series A Preferred Stock, as well as accretion of the related
discount, which are included in interest expense in the Condensed Consolidated Statements of
Operations, are not deductible for U.S. federal income tax purposes. There can be no assurance
that managements current plans will be achieved or that a valuation allowance will not be required
in the future.
22
The Internal Revenue Code and applicable regulations contain provisions which may limit the
net operating loss carryforwards available to be used in any given year upon the occurrence of
certain events, including changes with respect to the Companys capital stock that result in a
cumulative ownership change of more than 50 percentage points by 5-percent stockholders over a
three-year period. If changes to the Companys ownership occur in the future, annual limitations
may apply with respect to the Companys ability to utilize its net operating loss carryforwards and
certain current deductions against taxable income in future periods.
Liquidity and Capital Resources
The Companys primary sources of short- and long-term liquidity are cash flow from operations
and its revolving line of credit.
Operating Activities
Cash used in operations was $0.2 million for the nine months ended May 31, 2011 compared with
cash provided by operating activities of $9.6 million for the same period last year. The decline
in operating cash flow was primarily due to an increase in working capital requirements. Working
capital used $13.3 million of cash during the nine months ended May 31, 2011 compared to cash
contributed by working capital of $5.4 million during the first nine months of fiscal 2010.
Changes in cash working capital requirements were due to (1) increases in inventories and accounts
receivable due to higher sales as well as the higher cost of corn and (2) a $4.4 million
contribution to the Companys pension plans in the third quarter of fiscal 2011.
Investing Activities
As of May 31, 2011, capital expenditures were $5.6 million, which were primarily for growth
and productivity projects. The Company expects total capital expenditures for fiscal 2011 to be
approximately $10 million. Repayments of intercompany loans by the Companys Australian
discontinued operations in fiscal 2010 are reflected as cash provided by investing activities.
Financing Activities
In April 2010, the Company issued $40 million of preferred stock and also entered into a $60
million Third Amended and Restated Credit Agreement (the 2010 Agreement). See Notes 5 and 6 to
the Condensed Consolidated Financial Statements for details of the refinancing and preferred stock
issuance.
Under the 2010 Agreement, the Company may borrow $60 million under a revolving line of credit.
The lenders revolving credit loan commitment may be increased under certain conditions. At May
31, 2011, the Company had $22.9 million outstanding under its revolving credit facility. Pursuant
to the 2010 Agreement, there are no scheduled principal payments prior to maturity of the 2010
Agreement on April 7, 2015. As of May 31, 2011, all of the Companys outstanding bank debt was
subject to variable interest rates.
At May 31, 2011, the carrying value of the Series A Preferred Stock liability of $37.7 million
includes $4.3 million of accrued dividends and $1.2 million of discount accretion for the period
from the date of issuance to May 31, 2011. The accrued dividends represent dividends at the rate
of 9% 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 Condensed
Consolidated Statements of Operations.
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. 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 be accrued or paid in cash currently at the discretion of
the Company.
23
Contractual Obligations
The Company is a party to various debt and lease agreements at May 31, 2011 that contractually
commit the Company to pay certain amounts in the future. The Company also has open purchase orders
entered into in the ordinary course of business for raw materials, capital projects and other
items, for which significant terms have been confirmed. As of May 31, 2011, there have been no
material changes in the Companys contractual obligations since August 31, 2010, except for
expected contributions to the Companys pension plans for fiscal 2011. The Company expects to
contribute $6.1 million during fiscal 2011, of which $5.4 million has been contributed as of July
5, 2011.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements at May 31, 2011.
Critical Accounting Policies and Estimates
The Companys consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The process of preparing financial statements
requires management to make estimates, judgments and assumptions that affect the Companys
financial position and results of operations. These estimates, judgments and assumptions are based
on the Companys historical experience and managements knowledge and understanding of the current
facts and circumstances. Note 1 to the Consolidated Financial Statements in the Annual Report on
Form 10-K for the fiscal year ended August 31, 2010 describes the significant accounting policies
and methods used in the preparation of the consolidated financial statements. Management believes
that its estimates, judgments and assumptions are reasonable based upon information available at
the time this report was prepared. To the extent there are material differences between estimates,
judgments and assumptions and the actual results, the financial statements will be affected.
Forward-looking Statements
This Quarterly Report on Form 10-Q (Quarterly Report), including but not limited to
statements found in the Notes to Condensed Consolidated Financial Statements and in Item 2
Managements Discussion and Analysis of Financial Condition and Results of Operations, contains
statements that are forward-looking statements within the meaning of the federal securities laws.
In particular, statements pertaining to anticipated operations and business strategies contain
forward-looking statements. Likewise, statements regarding anticipated changes in the Companys
business and anticipated market conditions are forward-looking statements. Forward-looking
statements involve numerous risks and uncertainties and should not be relied upon as predictions of
future events. Forward-looking statements depend on assumptions, dates or methods that may be
incorrect or imprecise, and the Company may not be able to realize them. Forward-looking
statements can be identified by the use of forward-looking terminology such as believes,
expects, may, will, should, seeks, approximately, intends, plans, estimates, or
anticipates, or the negative use of these words and phrases or similar words or phrases.
Forward-looking statements can be identified by discussions of strategy, plans or intentions.
Readers are cautioned not to place undue reliance on these forward-looking statements which are
based on information available as of the date of this report. The Company does not undertake any
obligation to publicly update or revise any forward-looking statements to reflect future events,
information or circumstances that arise after the date of the filing of this Quarterly Report.
Among the factors that could cause actual results to differ materially are the risks and
uncertainties discussed in this Quarterly Report, including those referenced in Part II Item 1A of
this Quarterly Report, and those described from time to time in other filings made with the
Securities and Exchange Commission, including the Companys Annual Report on Form 10-K for the year
ended August 31, 2010, which include but are not limited to:
|
|
|
competition; |
|
|
|
|
the possibility of interruption of business activities due to equipment problems,
accidents, strikes, weather or other factors; |
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product development risk; |
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changes in corn and other raw material prices and availability; |
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changes in general economic conditions or developments with respect to specific
industries or customers affecting demand for the Companys products including
unfavorable shifts in product mix; |
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unanticipated costs, expenses or third-party claims; |
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the risk that results may be affected by construction delays, cost overruns,
technical difficulties, nonperformance by contractors or changes in capital improvement
project requirements or specifications; |
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interest rate, chemical and energy cost volatility; |
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changes in returns on pension plan assets and/or assumptions used for determining
employee benefit expense and obligations; |
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other unforeseen developments in the industries in which Penford operates, |
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the Companys ability to successfully operate under and comply with the terms of its
debt instruments; |
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other factors described in the Companys Form 10-K Part I, Item 1A Risk Factors. |
Item 3: Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to market risks from adverse changes in interest rates and commodity
prices. There have been no material changes in the Companys exposure to market risks from the
disclosure in the Companys Annual Report on Form 10-K for the year ended August 31, 2010.
Item 4: Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
material information required to be disclosed in the Companys periodic reports filed or submitted
under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the Securities and Exchange
Commission. The Companys disclosure controls and procedures are also designed to ensure that
information required to be disclosed in the reports the Company files or submits under the Exchange
Act is accumulated and communicated to the Companys management, including its principal executive
and principal financial officers, or persons performing similar functions, as appropriate, to allow
timely decisions regarding required disclosure.
Under the supervision and with the participation of management, including the Chief Executive
Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of May 31, 2011. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures were effective as of May 31, 2011.
Changes in Internal Control over Financial Reporting
There were no changes in the Companys internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended May 31, 2011 that
materially affected, or are reasonably likely to materially affect, the Companys internal control
over financial reporting.
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PART II OTHER INFORMATION
Item 1: Legal Proceedings
On or about June 2, 2011, the Company was notified by a customer that the customer had been
informed that a lawsuit had been filed against the customer by T.F.H. Publications, Inc. (TFH) in
the United States Court for the District of New Jersey alleging that certain dog chew products
supplied to the customer by the Companys subsidiary, Penford Products Co. (Penford Products),
infringed upon a patent owned by TFH and may infringe upon two other patents owned by TFH. The
customer has requested that Penford Products assume the defense of this lawsuit. The Company
believes that the products supplied to its customer did not infringe upon any TFH patents and
intends to vigorously defend the lawsuit. However, the Company cannot at this time determine the
likelihood of any outcome or estimate any damages that might be awarded.
The Company is involved from time to time in various other claims and litigation arising in
the normal course of business. In the judgment of management, which relies in part upon
information obtained from the Companys 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.
Item 1A: Risk Factors
The information set forth in this report should be read in conjunction with the risk factors
discussed in Part I, Item 1A of the Companys Annual Report on Form 10-K for the year ended August
31, 2010. These risks could materially impact the Companys business, financial condition and/or
future results. The risks described in the Annual Report on Form 10-K and in this Item IA are not
the only risks facing the Company. Additional risks and uncertainties not currently known by the
Company or that the Company currently deems to be immaterial also may materially adversely affect
the Companys business, financial condition and/or operating results.
Item 6: Exhibits.
(d) Exhibits
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Penford Corporation
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(Registrant) |
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July 7, 2011 |
/s/ Steven O. Cordier
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Steven O. Cordier |
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Senior Vice President and Chief Financial Officer |
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EXHIBIT INDEX
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Exhibit No. |
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Description |
31.1
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Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 |
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32
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Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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