-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M5JJ9qo19g8Ua3hIEGbTclqIJrAWLx/oqcer8Ad2v4lgOvMZ9zLSadjn7fTwy86i I3lxnAz0Aq5soLxpX+9Bgg== 0000950134-04-005133.txt : 20040413 0000950134-04-005133.hdr.sgml : 20040413 20040413143153 ACCESSION NUMBER: 0000950134-04-005133 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040229 FILED AS OF DATE: 20040413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENFORD CORP CENTRAL INDEX KEY: 0000739608 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 911221360 STATE OF INCORPORATION: WA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11488 FILM NUMBER: 04730380 BUSINESS ADDRESS: STREET 1: 7094 SOUTH REVERE PARKWAY CITY: ENGLEWOOD STATE: C0 ZIP: 80112-3932 BUSINESS PHONE: 303-649-1900 MAIL ADDRESS: STREET 1: 7094 SOUTH REVERE PARKWAY STREET 2: - CITY: ENGLEWOOD STATE: C0 ZIP: 80112-3932 FORMER COMPANY: FORMER CONFORMED NAME: PENWEST LTD DATE OF NAME CHANGE: 19920703 10-Q 1 d14433e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended FEBRUARY 29, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ______________________ Commission File No. 0-11488 PENFORD CORPORATION (Exact name of registrant as specified in its charter) Washington 91-1221360 - ---------------------------------------- ------------------------------------ (State of Incorporation) (I.R.S. Employer Identification No.) 7094 South Revere Parkway, Englewood, Colorado 80112-3932 - ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's 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 [X] No [ ] Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act Yes [X] No [ ] The net number of shares of the Registrant's common stock (the Registrant's only outstanding class of stock) outstanding as of April 8, 2004 was 8,765,373. PENFORD CORPORATION AND SUBSIDIARIES INDEX
Page ---- PART I -- FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - February 29, 2004 and August 31, 2003 3 Condensed Consolidated Statements of Income - Three and Six Months ended February 29, 2004 and February 28, 2003 4 Condensed Consolidated Statements of Cash Flow - Six Months ended February 29, 2004 and February 28, 2003 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Item 4. Controls and Procedures 15 PART II -- OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17
2 PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS PENFORD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
February 29, August 31, (In thousands, except share and per share data) 2004 2003 - ----------------------------------------------- ------------ ---------- (Unaudited) ASSETS Current assets: Cash $ 6,478 $ 5,697 Trade accounts receivable 38,637 35,809 Inventories 27,040 26,839 Prepaid expenses 3,519 4,168 Other 2,633 3,772 ----------- --------- Total current assets 78,307 76,285 Property, plant and equipment, net 131,860 128,776 Deferred income taxes 9,837 9,853 Restricted cash value of life insurance 12,277 12,136 Goodwill, net 22,123 18,394 Other intangible assets, net 2,650 2,658 Other assets 3,505 2,791 ------------ ---------- Total assets $ 260,559 $ 250,893 ============ ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 18,012 $ 21,853 Accrued pension liability 2,940 2,524 Accrued liabilities 7,556 9,895 Current portion of long-term debt 4,301 3,000 ------------ ---------- Total current liabilities 32,809 37,272 Long-term debt 78,112 76,696 Other postretirement benefits 12,127 11,648 Deferred income taxes 19,916 19,914 Other liabilities 17,875 17,478 ------------ ---------- Total liabilities 160,839 163,008 Shareholders' equity: Preferred stock, par value $1.00 per share, authorized 1,000,000 shares, none issued - - Common stock, par value $1.00 per share, authorized 29,000,000 shares, issued 10,743,389 and 10,584,715 shares, respectively 10,743 10,585 Additional paid-in capital 36,325 34,628 Retained earnings 74,818 73,985 Treasury stock, at cost, 1,981,016 shares (32,757) (32,757) Accumulated other comprehensive income 10,591 1,444 ------------ ---------- Total shareholders' equity 99,720 87,885 ------------ ---------- Total liabilities and shareholders' equity $ 260,559 $ 250,893 ============ ==========
The accompanying notes are an integral part of these statements. 3 PENFORD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended Six months ended ------------------------ ------------------------ February February February February (In thousands except share and per share data) 29, 2004 28, 2003 29, 2004 28, 2003 --------------------------------------------- ----------- ----------- ----------- ----------- Sales $ 68,482 $ 61,692 $ 134,652 $ 127,734 Cost of sales 58,574 51,145 114,932 105,302 ----------- ----------- ----------- ----------- Gross margin 9,908 10,547 19,720 22,432 Operating expenses 5,483 5,813 11,175 12,180 Research and development expenses 1,454 1,336 2,956 2,748 Restructure costs, net 487 (117) 740 (117) ----------- ----------- ----------- ----------- Income from operations 2,484 3,515 4,849 7,621 Non-operating income, net 530 269 505 2,181 Interest expense 1,185 1,403 2,292 2,984 ----------- ----------- ----------- ----------- Income before income taxes 1,829 2,381 3,062 6,818 Income taxes 794 796 1,182 1,935 ----------- ----------- ----------- ----------- Net income $ 1,035 $ 1,585 $ 1,880 $ 4,883 =========== =========== =========== =========== Weighted average common shares and equivalents outstanding: Basic 8,730,956 7,802,724 8,683,606 7,754,674 Diluted 8,830,901 7,934,858 8,780,022 7,902,764 Earnings per share: Basic $ 0.12 $ 0.20 $ 0.22 $ 0.63 Diluted $ 0.12 $ 0.20 $ 0.21 $ 0.62 Dividends declared per common share $ 0.06 $ 0.06 $ 0.12 $ 0.12
The accompanying notes are an integral part of these statements. 4 PENFORD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
Six Months Ended -------------------------- (In thousands) February 29, February 28, 2004 2003 ------------ ------------ Cash flows from operating activities: Net income $ 1,880 $ 4,883 Adjustments to reconcile net income to net cash from operations: Depreciation and amortization 8,927 8,750 Deferred income taxes (222) (951) Gain on sale of Hi-maize(R) assets - (1,916) Loss on early extinguishment of debt 665 - Other 1,001 556 Change in assets and liabilities: Trade accounts receivable (257) (1,488) Prepaid expenses 620 115 Inventories 2,685 3,845 Accounts payable and accrued liabilities (6,846) 892 Taxes payable (1,046) 2 Other 1,429 (1,724) ------------ ------------ Net cash provided by operating activities 8,836 12,964 ------------ ------------ Cash flows from investing activities: Investment in property, plant and equipment, net (4,735) (3,260) Proceeds from sale of Hi-maize(R) assets, net - 2,054 Proceeds from licensing agreement, net - 1,653 Other (159) (267) ------------ ------------ Net cash provided by (used in) investing activities (4,894) 180 ------------ ------------ Cash flows from financing activities: Proceeds from revolving line of credit 35,975 17,747 Payments on revolving line of credit (63,579) (14,299) Proceeds from long-term debt 50,039 - Payments of long-term debt (24,134) (12,345) Exercise of stock options 1,685 819 Payment of loan fees (1,571) (185) Decrease in cash overdraft - (1,754) Payment of dividends (1,038) (929) ------------ ------------ Net cash used in financing activities (2,623) (10,946) ------------ ------------ Effect of exchange rate changes on cash and cash equivalents (538) 219 ------------ ------------ Net increase in cash and cash equivalents 781 2,417 Cash and cash equivalents, beginning of period 5,697 765 ------------ ------------ Cash and cash equivalents end of period $ 6,478 $ 3,182 ============ ============
The accompanying notes are an integral part of these statements. 5 PENFORD CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1-- BUSINESS Penford Corporation ("Penford" or the "Company") is in the business of developing, manufacturing and marketing specialty natural-based ingredient systems for various applications, including papermaking, textiles and food products. The Company operates manufacturing facilities in the United States, Australia, and New Zealand. Penford's products provide excellent binding and film-forming characteristics that make customers' products better through natural, convenient and cost effective solutions. Sales of the Company's products are generated using a combination of direct sales and distributor agreements. The Company has extensive research and development capabilities, which are used in understanding the complex chemistry of carbohydrate-based materials and their application. In addition, the Company has specialty processing capabilities for a variety of modified starches. 2 -- BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of Penford and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated. The condensed consolidated balance sheet at February 29, 2004 and the condensed consolidated statements of income and cash flows for the interim periods ended February 29, 2004 and February 28, 2003 have been prepared by the Company without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, that 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 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 with the current period presentation. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended August 31, 2003. The Company accounts for its stock-based employee compensation related to stock options under the intrinsic value recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and its various interpretations. Accordingly, no compensation expense has been recognized for the stock-based compensation plans other than for the Directors' Plan and restricted stock awards. The following table illustrates the effect on net income and earnings per share if the Company had elected to recognize compensation expense consistent with the provisions prescribed in Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended. Under SFAS No. 123, compensation expense is measured at the grant date based on the value of the award and is recognized over the vesting period. 6
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ------------------ FEBRUARY FEBRUARY FEBRUARY FEBRUARY (In thousands except share and per share data) 29, 2004 28, 2003 29, 2004 28, 2003 --------------------------------------------- -------- -------- -------- -------- Net income, as reported $ 1,035 $ 1,585 $ 1,880 $ 4,883 Add: Stock-based employee compensation expense included in reported net income, net of tax 19 11 37 43 Less: Stock-based employee compensation expense determined under the fair value method for all awards, net of tax (338) (215) (691) (525) -------- -------- -------- -------- Pro forma net income $ 716 $ 1,381 $ 1,226 4,401 Earnings per share: Reported basic earnings per common share $ 0.12 $ 0.20 $ 0.22 $ 0.63 ======== ======== ======== ======== Reported diluted earnings per common share $ 0.12 $ 0.20 $ 0.21 $ 0.62 ======== ======== ======== ======== Pro forma basic earnings per common share $ 0.08 $ 0.18 $ 0.14 $ 0.57 ======== ======== ======== ======== Pro forma diluted earnings per common share $ 0.08 $ 0.17 $ 0.14 $ 0.56 ======== ======== ======== ========
In December 2003, the Financial Accounting Standards Board ("FASB") issued revised SFAS No. 132 (revised 2003), "Employer's Disclosure about Pensions and Other Post-Retirement Benefits." SFAS No. 132 (R) requires additional disclosures in annual financial statements about the types of plan assets, investment strategy, measurement dates, plan obligations, cash flows, and components of net periodic benefit cost of defined benefit pension plans and other post-retirement benefit plans. The annual disclosure requirements are effective for fiscal years ending after December 15, 2003. SFAS No. 132 (R) also requires interim disclosure of the elements of net periodic benefit cost and the total amount of contributions paid or expected to be paid during the current fiscal year if significantly different from amounts previously disclosed. The interim disclosure requirements are effective for interim periods beginning after December 15, 2003. The Company will adopt the disclosure requirements of SFAS No. 132 (R) effective with the quarter beginning March 1, 2004. In January 2004, the FASB issued FASB Staff Position No. 106-1 ("FSP 106-1"), "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the "Act"). The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of post-retirement health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Company's post-retirement health care benefit plan provides no prescription drug benefit to Medicare eligible salaried retirees, and the prescription drug benefit provided to Medicare eligible hourly retirees is insured and the insurance premium is fully paid by the retirees. The benefits of the Act are expected to be realized by the Company's retirees and the Act will have no effect on the Company's results of operations, financial position or liquidity. 3 -- INVENTORIES The components of inventory are as follows:
February 29, August 31, 2004 2003 ------------ ---------- (In thousands) Raw materials and other $ 9,184 $ 11,470 Work in progress 688 569 Finished goods 17,168 14,800 ------------ ---------- Total inventories $ 27,040 $ 26,839 ============ ==========
7 4 -- PROPERTY, PLANT AND EQUIPMENT
February 29, August 31, 2004 2003 ------------ ---------- (In thousands) Land $ 16,326 $ 14,511 Plant and equipment 288,550 278,884 Construction in progress 9,779 7,323 ------------ ---------- 314,655 300,718 Accumulated depreciation (182,795) (171,942) ------------ ---------- Net property, plant and equipment $ 131,860 $ 128,776 ============ ==========
Favorable Australian and New Zealand currency exchange rates have increased net property, plant and equipment in the first six months of fiscal 2004 by approximately $7.0 million. 5 -- RESTRUCTURING RESERVE In fiscal 2002, the Company announced a strategic restructuring of its business operations, including the relocation of its headquarters from Washington to Colorado. As a result, the Company recorded restructuring costs totaling $1.4 million related to severance and other exit activity expenses. The restructuring covered seven employees, all of which were terminated by February 29, 2004. In each of the first and second quarters of fiscal 2004, $0.1 million in severance costs were paid. The restructuring reserve at February 29, 2004 of $0.2 million represents remaining severance costs to be paid in fiscal 2004. In the first quarter of fiscal 2004, the Company's Australian business implemented an organizational restructure plan and expensed $0.3 million as restructuring costs related to severance and fringe benefits for five employees. As of February 29, 2004, all of the employees have been terminated and all severance and related costs were paid. In the second quarter of fiscal 2004, the Company's Industrial Ingredients -- North America business implemented a workforce reduction of 38 employees, all of which have been terminated at February 29, 2004. In connection therewith, $0.5 million was charged to operating expense as restructuring costs. The remaining restructure reserve of $0.1 million at February 29, 2004 represents employee benefit costs to be paid by the end of fiscal 2004. 6 -- DEBT On October 7, 2003, Penford replaced its existing secured credit and inventory financing credit facilities with a new $105 million secured credit facility with a group of U.S. and Australian banks. The revolving lines of credit expire on October 7, 2006 and the term loans expire on October 7, 2008. Interest rates under the new credit facility are based on either LIBOR (or the Australian equivalent) or the prime rate, depending on the selection of borrowing options. All of Penford's assets secure the credit facility and the new agreement includes, among other things, financial covenants with limitations on indebtedness and capital expenditures and maintenance of fixed charge and leverage ratios. For the quarter ended February 29, 2004, the Company was in compliance with the covenants and expects to be in compliance for the remainder of the fiscal year. At February 29, 2004, the Company had $32.0 million outstanding under its revolving credit facilities and $50.4 million in term loans. The increase in the Company's total debt since August 31, 2003 is attributable to stronger Australian currency exchange rates. 7 -- TAXES The Company's effective tax rate for the three and six months ended February 29, 2004 and February 28, 2003 varied from the U.S. federal statutory rate due to U. S. tax credits related to research and development and the favorable tax effect of export sales from the U.S. Income tax expense in the second quarter of fiscal 2004 included a $0.3 million charge for the effects of the final implementation of the new Australian consolidation tax legislation. 8 8 -- OTHER COMPREHENSIVE INCOME The components of total comprehensive income are as follows:
Three months ended Six months ended ------------------ ------------------ February February February February 29, 2004 28, 2003 29, 2004 28, 2003 -------- -------- -------- -------- (In thousands) Net income $ 1,035 $ 1,585 $ 1,880 $ 4,883 Foreign currency translation adjustments 2,839 3,056 8,405 3,808 Change in unrealized gains on derivative instruments that qualify as cash flow hedges 718 415 742 63 -------- -------- -------- -------- Total comprehensive income $ 4,592 $ 5,056 $ 11,027 $ 8,754 ======== ======== ======== ========
9 -- NON-OPERATING INCOME, NET Non-operating income, net consists of the following:
Three months ended Six months ended ------------------ ------------------ February February February February 29, 2004 28, 2003 29, 2004 28, 2003 -------- -------- -------- -------- (In thousands) Loss on early extinguishment of debt $ - $ - $ (665) $ - Gain on sale of Hi-maize(R) business - - - 1,916 Gain on sale of investment - - 150 - Royalty and licensing income 396 406 763 406 Other 134 (137) 257 (141) -------- -------- -------- -------- Total $ 530 $ 269 $ 505 $ 2,181 ======== ======== ======== ========
In October 2003, Penford refinanced its existing secured credit and inventory financing credit agreements and wrote off the unamortized deferred transaction costs related to these credit agreements. In the first quarter of fiscal 2003, Penford sold certain assets of its resistant starch Hi-maize(R) business and recorded a gain on the sale. The Company also licensed the rights to its resistant starch intellectual property portfolio for applications in human nutrition. The Company will receive annual royalties for a period of seven years or until a maximum of $11.0 million has been received. The initial licensing fee of $2.25 million is being amortized over the life of the royalty agreement. 9 10 -- SEGMENT REPORTING Financial information for the Company's three segments is presented below. The first two segments, Industrial Ingredients -- North America and Food Ingredients -- North America, are broad categories of end-market users, primarily served by the Company's U.S. operation. The third segment is the Company's geographically separate operations in Australia and New Zealand, which are engaged primarily in the food ingredients business. A fourth item for "corporate and other" activity is presented to provide reconciliation to amounts reported in the condensed consolidated financial statements. Corporate and other represents the activities related to the corporate headquarters such as public company reporting, personnel costs of the executive management team, corporate-wide professional services and elimination and consolidation entries. The elimination of intercompany sales between Australia/New Zealand operations and Food Ingredients -- North America of $74,000 and $267,000 for the three and six month periods ended February 29, 2004, respectively, and $277,000 and $336,000 in the three and six month periods ended February 28, 2003, respectively, is presented separately since the chief operating decision maker views segment results prior to intercompany eliminations.
Three months ended Six months ended ------------------- ------------------ February February February February 29, 2004 28, 2003 29, 2004 28, 2003 -------- -------- -------- -------- (In thousands) Sales: Industrial Ingredients -- North America $ 35,801 $ 33,672 $ 68,327 $ 69,360 Food Ingredients -- North America 10,973 10,953 22,866 22,463 Australia/New Zealand operations 21,782 17,344 43,726 36,247 Intercompany sales (74) (277) (267) (336) -------- -------- -------- -------- $ 68,482 $ 61,692 $134,652 $127,734 ======== ======== ======== ======== Income from operations: Industrial Ingredients -- North America (1) $ 1,567 $ 2,396 $ 3,115 $ 5,200 Food Ingredients -- North America 719 1,685 2,618 3,385 Australia/New Zealand operations (2) 1,537 1,017 1,808 2,465 Corporate and other (3) (1,339) (1,583) (2,692) (3,429) -------- -------- -------- -------- $ 2,484 $ 3,515 $ 4,849 $ 7,621 ======== ======== ======== ========
- ----------------- (1) Restructuring costs of $487,000 have been included in income from operations in the three and six month periods ended February 29, 2004. (2) Restructuring costs of $253,000 have been included in income from operations in the six months ended February 29, 2004. (3) Restructuring reserve adjustment of $(117,000) is included in income from operations for the three and six months ended February 28, 2003.
February 29, August 31, 2004 2003 ----------- ---------- (In thousands) Total assets: Industrial Ingredients - North America $ 102,242 $ 106,732 Food Ingredients -- North America 32,699 35,205 Australia/New Zealand operations 97,702 85,269 Corporate and other 27,916 23,687 ----------- ---------- $ 260,559 $ 250,893 =========== ==========
10 11 -- EARNINGS PER SHARE Basic earnings per share reflects only the weighted average common shares outstanding during the period. Diluted earnings per share reflects weighted average common shares outstanding and the effect of any dilutive common stock equivalent shares. The following table presents the computation of diluted weighted average shares outstanding for the three and six months ended February 29, 2004 and February 28, 2003.
Three months ended Six months ended -------------------- -------------------- February February February February 29, 2004 28, 2003 29, 2004 28, 2003 --------- --------- --------- --------- Weighted average common shares outstanding 8,730,956 7,802,724 8,683,606 7,754,674 Dilutive stock options 99,945 132,134 96,416 148,090 Weighted average common shares, --------- --------- --------- --------- outstanding, assuming dilution 8,830,901 7,934,858 8,780,022 7,902,764 ========= ========= ========= =========
11 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS The statements contained in this Quarterly Report on Form 10-Q ("Quarterly Report") that are not historical facts, including, but not limited to statements found in the Notes to Condensed Consolidated Financial Statements and in Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements that represent management's beliefs and assumptions based on currently available information. Forward-looking statements can be identified by the use of words such as "believes," "may," "will," "looks," "should," "could," "anticipates," "expects," or comparable terminology or by discussions of strategies or trends. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such forward-looking statements, and the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in this Quarterly Report, including those referenced above, and those described from time to time in other filings with the Securities and Exchange Commission which include, but are not limited to, competition; the possibility of interruption of business activities due to equipment problems, accidents, strikes, weather or other factors; product development risk; changes in corn and other raw material prices and availability; changes in general economic conditions or developments with respect to specific industries or customers affecting demand for the Company's products including unfavorable shifts in product mix; unanticipated costs, expenses or third party claims; the risk that results may be affected by construction delays, cost overruns, technical difficulties, nonperformance by contractors or changes in capital improvement project requirements or specifications; interest rate and energy cost volatility; foreign currency exchange rate fluctuations; or other unforeseen developments in the industries in which Penford operates. RESULTS OF OPERATIONS Results of operations for the Company's three segments are presented below. The first two segments, Industrial Ingredients -- North America and Food Ingredients -- North America, are broad categories of end-market users, primarily served by the Company's U.S. operations. The third segment is the Company's geographically separate operations in Australia and New Zealand, which are engaged primarily in the food ingredients business. Corporate and other represents the activities related to the corporate headquarters such as public company reporting, personnel costs of the executive management team, corporate-wide professional services and elimination and consolidation entries. Management Overview For the three months ended February 29, 2004, consolidated sales increased $6.8 million or 11% to $68.5 million from $61.7 million in fiscal 2003 driven by stronger Australian and New Zealand currency exchange rates as well as increased volumes and improved pricing in the Industrial Ingredients -- North America business segment. The Australian dollar appreciated by 31% compared with the second quarter of last year. While currency rates have had a favorable impact on consolidated results of operations, Penford's Australian operations are being negatively impacted in their ability to export products and compete with less expensive imports. Sales for the first six months of fiscal 2004 were $134.7 million, an increase of $6.9 million, or 5%, over the same period in fiscal 2003. The six-month sales increase is attributable to strong currency exchange rates offset by volume declines in the Industrial Ingredients and Australian businesses. 12 Higher natural gas costs in North America and increased manufacturing costs in the Food Ingredients -- North America business caused consolidated second quarter 2004 gross margin as a percent of sales to contract to 14.5% from 17.1% last year. The Company's emphasis on controls over discretionary spending reduced second quarter operating and research and development expenses to 10.1% of sales from 11.6% of sales in last year's second quarter. Operating income for the quarter ended February 29, 2004 included $0.5 million of costs related to a workforce reduction affecting 38 employees in the Industrial Ingredients -- North America business. A discussion of segment results of operations follows. Sales Sales at the Company's Industrial Ingredients -- North America business unit increased by $2.1 million, or 6%, to $35.8 million in the second quarter of fiscal 2004 compared to the year-ago quarter. Volumes increased by 3%, accounting for approximately one-half of the increase in sales. The remainder of the increase is attributable to favorable pricing and an increase in sales of specialty products. Shipments by Penford's customers remain soft but customer production curtailments directly impacting Penford's Industrial business have diminished. Sales for the first half of fiscal 2004 decreased $1.0 million from last year primarily due to a 3% decrease in sales volumes which was only partially offset by favorable pricing and product mix. Sales at Penford's Australia/New Zealand operations rose $4.4 million, or 26%, and $7.5 million, or 21%, in the three and six month periods ended February 29, 2004, respectively, compared to the same periods last year. Quarter and fiscal year-to-date increases are due to favorable currency exchange rates, partially offset by lower sales volumes and price competition for products domestically manufactured in Australia and New Zealand. Second quarter 2004 sales for the Food Ingredients -- North America business were comparable to sales for the same quarter last year. First half fiscal 2004 sales increased $0.4 million, or 2%, over last year, due primarily to an improvement in sales of potato coating products for the quick service restaurant business. Income from operations Income from operations at the Company's Industrial Ingredients -- North America business unit declined from $2.4 million in the second quarter of fiscal 2003 to $1.6 million in the second quarter of fiscal 2004 because of a decline in gross margin and the costs related to a workforce reduction. The quarterly gross margin declined to 13.1% from 15.6% last year primarily due to a 40% increase in the cost of natural gas over the year ago quarter which offset the favorable effects of pricing and increased sales volumes. In December 2003, Penford recorded $0.5 million in pre-tax expense related to a workforce reduction in this business segment. Restructuring costs are shown separately in the Consolidated Statements of Income. See Note 5 to the Consolidated Financial Statements. Income from operations decreased $2.1 million for the six months ended February 29, 2004 compared to the same period last year due to the rise in natural gas costs, a first half sales volume decrease of 3% and the aforementioned restructuring costs. Gross margin decreased in the first half of fiscal 2004 to 13.6% from 16.2% in the same period last year primarily due to a 33% increase in natural gas costs. Income from operations at Penford's Australia/New Zealand operations increased $0.5 to $1.5 million in the second quarter of fiscal 2004 compared to the year ago quarter. Gross profit increased $0.7 million due to the favorable effects of Australian and New Zealand exchange rates and the moderation of grain costs toward the end of the quarter as high cost drought-related grain was depleted from inventory, offset by a $0.2 million increase in operating expenses. Gross margin as a percent of sales increased to 12.8% in the second quarter of 2004 from 11.8% in the same period last year. Operating income for the first six months of fiscal 2004 declined $0.7 million from the prior year on lower sales volumes, price competition, higher grain costs and $0.3 million of severance costs related to a reduction in the workforce. See Note 5 to the Consolidated Financial Statements. Second quarter income from operations at the Food Ingredients -- North American business unit decreased $1.0 million to $0.7 million compared to the same period in fiscal 2003, primarily due to a decrease in the unit's gross margin. Quarterly gross margin as a percent of sales declined to 21.9% from 29.5% last year due to lower plant utilization caused by a five-week shut down in dextrose production to balance inventories, manufacturing plant 13 inefficiencies and higher energy costs. Decreases in gross margin and income from operations during the first half of fiscal 2004 compared to the same period last year are attributable to the second quarter margin decline. Corporate operating expenses Corporate operating expenses declined $0.2 million and $0.7 million in the three and six month periods of fiscal 2004, respectively, compared to the same periods in the prior year. Primary contributors to the decline in both periods are a decrease in executive personnel costs and recruiting costs and a reduction in overall discretionary spending. Interest and taxes Interest expense decreased 16% and 23% in the three and six months ended February 29, 2004, respectively, compared to the same periods in fiscal 2003 primarily due to lower average debt outstanding during the periods. The Company's effective tax rate for the three and six months ended February 29, 2004 and February 28, 2003 varied from the U.S. federal statutory rate due to U. S. tax credits related to research and development and the favorable tax effect of export sales from the U.S. Income tax expense in the second quarter of fiscal 2004 included a $0.3 million charge for the effects of the final implementation of the new Australian consolidation tax legislation. Non-operating income, net Non-operating income, net consists of the following:
Three months ended Six months ended ------------------ ------------------ February February February February 29, 2004 28, 2003 29, 2004 28, 2003 -------- -------- -------- -------- (In thousands) Loss on early extinguishment of debt $ - $ - $ (665) $ - Gain on sale of Hi-maize(R) business - - - 1,916 Gain on sale of investment - - 150 - Royalty and licensing income 396 406 763 406 Other 134 (137) 257 (141) -------- -------- -------- -------- Total $ 530 $ 269 $ 505 $ 2,181 ======== ======== ======== ========
In October 2003, Penford refinanced its existing secured credit and inventory financing credit agreements and wrote off the unamortized deferred transaction costs related to these credit agreements. In the first quarter of fiscal 2003, Penford sold certain assets of its resistant starch Hi-maize(R) business and recorded a gain on the sale. The Company also licensed the rights to its resistant starch intellectual property portfolio for applications in human nutrition. The Company will receive annual royalties for a period of seven years or until a maximum of $11.0 million has been received. The initial licensing fee of $2.25 million is being amortized over the life of the royalty agreement. LIQUIDITY AND CAPITAL RESOURCES At February 29, 2004, Penford had working capital of $45.5 million compared to $39.0 million at August 31, 2003. Cash flow from operations was $8.8 million and $13.0 million for the six months ended February 29, 2004 and February 28, 2003, respectively. The decrease in operating cash flow is primarily due to an increase in working capital. Cash flow from investing activities declined approximately $5.1 million in the first half of fiscal 2004 compared to the prior year period. This decline is due to cash receipts totaling $3.7 million related to the Company's sale of certain assets of its Hi-maize(R) business and an upfront licensing fee for the use of certain intellectual property in the first half of fiscal 2003 and an increase in capital expenditures of $1.5 million. 14 On October 7, 2003, Penford replaced its existing secured credit and inventory financing credit facilities with a new $105 million secured credit facility with a group of U.S. and Australian banks. The revolving lines of credit expire on October 7, 2006 and the term loans expire on October 7, 2008. Interest rates under the new credit facility are based on either LIBOR (or the Australian equivalent) or the prime rate, depending on the selection of borrowing options. All of Penford's assets secure the credit facility and the new agreement includes, among other things, financial covenants with limitations on indebtedness and capital expenditures and maintenance of fixed charge and leverage ratios. For the quarter ended February 29, 2004, the Company was in compliance with the covenants and expects to be in compliance for the remainder of the fiscal year. At February 29, 2004, the Company had $32.0 million outstanding under its revolving credit facilities and $50.4 million in term loans. During the six month period ended February 29, 2004, the Company paid dividends of $1.0 million representing $0.12 per share, the same per share dividend rate as the six month period ended February 28, 2003. Any future dividends will be paid at the discretion of the Company's board of directors and will depend upon, among other things, earnings, financial condition, cash requirements and availability, and contractual requirements. ACCOUNTING PRINCIPLES NOT YET ADOPTED In December 2003, the Financial Accounting Standards Board ("FASB") issued revised SFAS No. 132 (revised 2003), "Employer's Disclosure about Pensions and Other Post-Retirement Benefits." SFAS No. 132 (R) requires additional disclosures in annual financial statements about the types of plan assets, investment strategy, measurement dates, plan obligations, cash flows, and components of net periodic benefit cost of defined benefit pension plans and other post-retirement benefit plans. The annual disclosure requirements are effective for fiscal years ending after December 15, 2003. SFAS No. 132 (R) also requires interim disclosure of the elements of net periodic benefit cost and the total amount of contributions paid or expected to be paid during the current fiscal year if significantly different from amounts previously disclosed. The interim disclosure requirements are effective for interim periods beginning after December 15, 2003. The Company will adopt the disclosure requirements of SFAS No. 132 (R) effective with the quarter beginning March 1, 2004. In January 2004, the FASB issued FASB Staff Position No. 106-1 ("FSP 106-1"), "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the "Act"). The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of post-retirement health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Company's post-retirement health care benefit plan provides no prescription drug benefit to Medicare eligible salaried retirees, and the prescription drug benefit provided to Medicare eligible hourly retirees is insured and the insurance premium is fully paid by the retirees. The benefits of the Act are expected to be realized by the Company's retirees and the Act will have no effect on the Company's results of operations, financial position or liquidity. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to market risks from adverse changes in interest rates, foreign currency exchange rates and commodity prices. Since August 31, 2003, there have been no significant changes in the Company's exposure to market risks. ITEM 4: CONTROLS AND PROCEDURES. Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective such that information related to the Company required to be disclosed in the Securities and Exchange Commission ("SEC") reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. 15 PART II - OTHER INFORMATION ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Shareholders on January 20, 2004. The only item voted upon at the meeting was the election of directors. The results of the election are shown below. Directors not elected at this meeting and whose term of office continued after the meeting are Richard T. Crowder, Paul H. Hatfield, John C. Hunter III and James E. Warjone.
Percent of Percent of Director Votes For Total Shares Votes Withheld Total Shares - -------------------- --------- ------------ -------------- ------------ Jeffrey T. Cook 6,521,111 75.0% 42,777 0.5% Thomas D. Malkoski 6,386,142 73.4% 177,746 2.0% Sally G. Narodick 6,230,712 71.6% 333,176 3.8% William E. Buchholz 6,380,335 73.3% 183,553 2.1% R. Randolph Devening 6,530,139 75.1% 33,749 0.4%
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Forms 8-K. A Form 8-K was filed on December 19, 2003 relating to the Registrant's financial information for the first fiscal quarter ended November 30, 2003, as presented in a press release on December 18, 2003. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Penford Corporation --------------------------------- (Registrant) April 13, 2004 /s/ Steven O. Cordier --------------------------------- Steven O. Cordier Vice President, Chief Financial Officer and Corporate Secretary 17 EXHIBIT INDEX
Exhibit No. Description - ----------- --------------------------------------------------------------------------------------------------- 31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley act of 2002
18 EX-31.1 3 d14433exv31w1.txt CERTIFICATIONS OF CEO PURSUANT TO SECTION 302 Exhibit 31.1 CERTIFICATIONS I, Thomas D. Malkoski, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Penford Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. PENFORD CORPORATION Date: April 13, 2004 /s/ Thomas D. Malkoski --------------------------------- Thomas D. Malkoski Chief Executive Officer EX-31.2 4 d14433exv31w2.txt CERTIFICATIONS OF CFO PURSUANT TO SECTION 302 Exhibit 31.2 CERTIFICATIONS I, Steven O. Cordier, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Penford Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. PENFORD CORPORATION Date: April 13, 2004 /s/ Steven O. Cordier --------------------------------- Steven O. Cordier Vice President and Chief Financial Officer EX-32 5 d14433exv32.txt CERTIFICATIONS OF CEO & CFO PURSUANT TO SEC. 906 Exhibit 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Quarterly Report of Penford Corporation (the "Company") on Form 10-Q for the period ended February 29, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Thomas D. Malkoski, Chief Executive Officer of the Company, and Steven O. Cordier, Chief Financial Officer of the Company, respectively, do each hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that to his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Thomas D. Malkoski - --------------------------- Thomas D. Malkoski Chief Executive Officer Dated: April 13, 2004 /s/ Steven O. Cordier - ---------------------------- Steven O. Cordier Chief Financial Officer Dated: April 13, 2004 -----END PRIVACY-ENHANCED MESSAGE-----