-----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, IPa6SC/JPM8kHEOjtT1Fnv1SqwunT+v2ldHm7rbPwQUzR32A6T72SIBQxG0/Eu5z ZHUEkTah1T2fNuE6JcKjkg== 0001035704-04-000381.txt : 20040715 0001035704-04-000381.hdr.sgml : 20040715 20040715102529 ACCESSION NUMBER: 0001035704-04-000381 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040531 FILED AS OF DATE: 20040715 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: 04915043 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 d16785e10vq.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 MAY 31, 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 July 13, 2004 was 8,781,873. PENFORD CORPORATION AND SUBSIDIARIES INDEX
Page ---- PART I--FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - May 31, 2004 and August 31, 2003 3 Condensed Consolidated Statements of Income - Three and Nine Months ended May 31, 2004 and 2003 4 Condensed Consolidated Statements of Cash Flow - Nine Months ended May 31, 2004 and 2003 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Item 4. Controls and Procedures 17 PART II--OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19
2 PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS PENFORD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
May 31, August 31, (In thousands, except per share data) 2004 2003 - -------------------------------------------------------------------------------- --------- ---------- (Unaudited) ASSETS Current assets: Cash $ 7,294 $ 5,697 Trade accounts receivable, net 41,566 35,809 Inventories 32,493 26,839 Prepaid expenses 3,614 4,168 Other 3,314 3,772 --------- --------- Total current assets 88,281 76,285 Property, plant and equipment, net 127,889 128,776 Deferred income taxes 9,984 9,853 Restricted cash value of life insurance 12,347 12,136 Goodwill, net 20,580 18,394 Other intangible assets, net 2,608 2,658 Other assets 3,499 2,791 --------- --------- Total assets $ 265,188 $ 250,893 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 27,980 $ 21,853 Accrued pension liability 2,717 2,524 Accrued liabilities 8,707 9,895 Current portion of long-term debt 4,438 3,000 --------- --------- Total current liabilities 43,842 37,272 Long-term debt 74,174 76,696 Other post-retirement benefits 12,356 11,648 Deferred income taxes 19,409 19,914 Other liabilities 17,629 17,478 --------- --------- Total liabilities 167,410 163,008 Shareholders' equity: Preferred stock, par value $1.00 per share, authorized 1,000 shares, none issued -- -- Common stock, par value $1.00 per share, authorized 29,000 shares, issued 10,762 and 10,585 shares, respectively 10,762 10,585 Additional paid-in capital 36,613 34,628 Retained earnings 76,610 73,985 Treasury stock, at cost, 1,981 shares (32,757) (32,757) Accumulated other comprehensive income 6,550 1,444 --------- --------- Total shareholders' equity 97,778 87,885 --------- --------- Total liabilities and shareholders' equity $ 265,188 $ 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 Nine months ended May 31, May 31, ----------------------- ----------------------- (In thousands, except per share data) 2004 2003 2004 2003 - ------------------------------------------------------- --------- --------- --------- --------- Sales $ 72,484 $ 66,035 $ 207,136 $ 193,769 Cost of sales 60,461 55,839 175,393 161,141 --------- --------- --------- --------- Gross margin 12,023 10,196 31,743 32,628 Operating expenses 6,156 5,786 17,330 17,969 Research and development expenses 1,595 1,290 4,551 4,036 Restructure costs, net 384 -- 1,125 (117) --------- --------- --------- --------- Income from operations 3,888 3,120 8,737 10,740 Non-operating income, net 505 627 1,010 2,809 Interest expense 1,060 1,265 3,352 4,249 --------- --------- --------- --------- Income before income taxes 3,333 2,482 6,395 9,300 Income taxes 1,014 727 2,196 2,661 --------- --------- --------- --------- Net income $ 2,319 $ 1,755 $ 4,199 $ 6,639 ========= ========= ========= ========= Weighted average common shares and equivalents outstanding: Basic 8,771 8,404 8,713 7,974 Diluted 8,933 8,489 8,835 8,099 Earnings per share: Basic $ 0.26 $ 0.21 $ 0.48 $ 0.83 Diluted $ 0.26 $ 0.21 $ 0.48 $ 0.82 Dividends declared per common share $ 0.06 $ 0.06 $ 0.18 $ 0.18
The accompanying notes are an integral part of these statements. 4 PENFORD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
Nine Months Ended May 31, ---------------------- (In thousands) 2004 2003 - ------------------------------------------------------------------- -------- -------- Cash flows from operating activities: Net income $ 4,199 $ 6,639 Adjustments to reconcile net income to net cash from operations: Depreciation and amortization 13,374 13,131 Deferred income taxes (753) (1,159) Gain on sale of Hi-maize(R) assets -- (1,916) Loss on early extinguishment of debt 665 -- Other 1,136 629 Change in assets and liabilities: Trade accounts receivable (4,198) (2,100) Prepaid expenses 512 34 Inventories (3,984) 727 Accounts payable and accrued liabilities 4,002 2,557 Taxes payable 88 445 Other 879 (549) -------- -------- Net cash provided by operating activities 15,920 18,438 -------- -------- Cash flows from investing activities: Investment in property, plant and equipment, net (8,007) (5,889) Proceeds from sale of Hi-maize(R) assets, net -- 2,054 Proceeds from licensing agreement, net -- 1,653 Other (210) (458) -------- -------- Net cash used in investing activities (8,217) (2,640) -------- -------- Cash flows from financing activities: Proceeds from revolving line of credit 35,975 22,783 Payments on revolving line of credit (65,083) (19,001) Proceeds from long-term debt 50,039 -- Payments of long-term debt (24,934) (22,419) Exercise of stock options 1,922 1,172 Net proceeds from issuance of common stock -- 6,976 Payment of loan fees (1,733) (185) Decrease in cash overdraft -- (1,754) Payment of dividends (1,563) (1,398) Other -- (12) -------- -------- Net cash used in financing activities (5,377) (13,838) -------- -------- Effect of exchange rate changes on cash and cash equivalents (729) 208 -------- -------- Net increase in cash and cash equivalents 1,597 2,168 Cash and cash equivalents, beginning of period 5,697 765 -------- -------- Cash and cash equivalents, end of period $ 7,294 $ 2,933 ======== ========
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 May 31, 2004 and the condensed consolidated statements of income and cash flows for the interim periods ended May 31, 2004 and 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 Nine months ended May 31, May 31, ------------------------ ------------------------ (In thousands except share and per share data) 2004 2003 2004 2003 - ------------------------------------------------------ --------- --------- --------- --------- Net income, as reported $ 2,319 $ 1,755 $ 4,199 $ 6,639 Add: Stock-based employee compensation expense included in reported net income, net of tax 21 11 58 57 Less: Stock-based employee compensation expense determined under the fair value method for all awards, net of tax (263) (234) (953) (749) --------- --------- --------- --------- Pro forma net income $ 2,077 $ 1,532 $ 3,304 $ 5,947 Earnings per share: Reported basic earnings per common share $ 0.26 $ 0.21 $ 0.48 $ 0.83 ========= ========= ========= ========= Reported diluted earnings per common share $ 0.26 $ 0.21 $ 0.48 $ 0.82 ========= ========= ========= ========= Pro forma basic earnings per common share $ 0.24 $ 0.18 $ 0.38 $ 0.75 ========= ========= ========= ========= Pro forma diluted earnings per common share $ 0.23 $ 0.18 $ 0.37 $ 0.73 ========= ========= ========= =========
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 adopted the interim disclosure requirements in its Condensed Consolidated Financial Statements for the quarter ended May 31, 2004 as disclosed in Note 10. In May 2004, the FASB issued FASB Staff Position No. 106-2 ("FSP 106-2"), "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:
May 31, August 31, 2004 2003 ------- --------- (In thousands) Raw materials and other $13,719 $11,470 Work in progress 641 569 Finished goods 18,133 14,800 ------- ------- Total inventories $32,493 $26,839 ======= =======
7 4--PROPERTY, PLANT AND EQUIPMENT
May 31, August 31, 2004 2003 --------- ---------- (In thousands) Land $ 15,597 $ 14,511 Plant and equipment 290,210 278,884 Construction in progress 8,037 7,323 --------- --------- 313,844 300,718 Accumulated depreciation (185,955) (171,942) --------- --------- Net property, plant and equipment $ 127,889 $ 128,776 ========= =========
Favorable Australian and New Zealand currency exchange rates have increased net property, plant and equipment in the first nine months of fiscal 2004 by approximately $4.1 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 May 31, 2004. In fiscal 2004, $0.4 million in severance costs were paid. The restructuring reserve at May 31, 2004 of $0.1 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 May 31, 2004, all five of the employees have been terminated and all severance and related costs have been 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 were terminated during the second quarter. In connection therewith, $0.5 million was charged to operating expense as restructuring costs. As of May 31, 2004, all severance and related costs were paid. In the third quarter of fiscal 2004, the Company's Australian business recorded a restructuring charge of $0.4 million related to a workforce reduction of 11 employees at its Tamworth, New South Wales, facility. The restructure reserve at May 31, 2004 of $0.2 million represents severance and related benefits to be paid in 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 May 31, 2004, the Company was in compliance with the covenants and expects to be in compliance for the remainder of the fiscal year. At May 31, 2004, the Company had $29.7 million outstanding under its revolving credit facilities and $48.9 million in term loans. 7--TAXES The Company's effective tax rate for the three and nine months ended May 31, 2004 and 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 for the nine months ended May 31, 2004 included a $0.3 million second quarter charge for the effects of the final implementation of the new Australian consolidation tax legislation. 8 8--OTHER COMPREHENSIVE INCOME (LOSS) The components of total comprehensive income (loss) are as follows:
Three months ended Nine months ended May 31, May 31, ---------------------- ---------------------- 2004 2003 2004 2003 -------- -------- -------- -------- (In thousands) Net income $ 2,319 $ 1,755 $ 4,199 $ 6,639 Foreign currency translation adjustments (4,122) 2,456 4,283 6,264 Change in unrealized gains on derivative instruments that qualify as cash flow hedges 82 823 (86) (22) -------- -------- -------- -------- Total comprehensive income (loss) $ (1,721) $ 4,125 $ 9,305 $ 12,881 ======== ======== ======== ========
9--NON-OPERATING INCOME, NET Non-operating income, net consists of the following:
Three months ended Nine months ended May 31, May 31, ------------------- -------------------- 2004 2003 2004 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 434 400 1,197 806 Other 71 227 328 87 ------- ------- ------- ------- Total $ 505 $ 627 $ 1,010 $ 2,809 ======= ======= ======= =======
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 NOTE 10 - PENSION AND POST-RETIREMENT BENEFIT PLANS The following represents the net periodic pension and post-retirement benefit costs and related components in accordance with SFAS No. 132 (R) as described in Note 2:
Three months ended Nine months ended Defined benefit plans May 31, May 31, -------------------- -------------------- 2004 2003 2004 2003 ------- ------- ------- ------- (In thousands) Service cost $ 229 $ 179 $ 686 $ 537 Interest cost 472 460 1,417 1,379 Expected return on plan assets (434) (427) (1,302) (1,282) Amortization and deferrals 167 95 500 286 ------- ------- ------- ------- Net periodic benefit cost $ 434 $ 307 $ 1,301 $ 920 ======= ======= ======= =======
Three months ended Nine months ended Post-retirement plan May 31, May 31, ------------------ ----------------- 2004 2003 2004 2003 ------ ------ ------ ------ (In thousands) Service cost $ 126 $ 77 $ 379 $ 232 Interest cost 213 176 639 528 Amortization 15 (16) 44 (48) ------ ------ ------ ------ Net periodic benefit cost $ 354 $ 237 $1,062 $ 712 ====== ====== ====== ======
Penford previously disclosed in its consolidated financial statements for the year ended August 31, 2003 that it expected to make minimum contributions to the pension plans of $1.8 million during fiscal 2004. Contributions of $1.1 million have been made to the pension plans during the first nine months of fiscal 2004. Penford does not anticipate any additional contributions to the plans for the remainder of fiscal 2004. Required contributions to the pension plans during fiscal 2004 were reduced as a result of federal funding relief legislation. 10 11--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. 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. 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 $192,000 and $459,000 for the three and nine month periods ended May 31, 2004, respectively, and $135,000 and $472,000 in the three and nine month periods ended May 31, 2003, respectively, is presented separately since the chief operating decision maker views segment results prior to intercompany eliminations.
Three months ended Nine months ended May 31, May 31, ------------------------ ------------------------ 2004 2003 2004 2003 --------- --------- --------- --------- (In thousands) Sales: Industrial Ingredients--North America $ 38,679 $ 34,912 $ 107,006 $ 104,272 Food Ingredients--North America 11,417 10,954 34,283 33,418 Australia/New Zealand operations 22,580 20,304 66,306 56,551 Intercompany sales (192) (135) (459) (472) --------- --------- --------- --------- $ 72,484 $ 66,035 $ 207,136 $ 193,769 ========= ========= ========= ========= Income from operations: Industrial Ingredients--North America (1) $ 2,964 $ 2,190 $ 6,079 $ 7,390 Food Ingredients--North America 1,096 1,113 3,714 4,499 Australia/New Zealand operations (2) 1,692 1,217 3,500 3,682 Corporate and other (3) (1,864) (1,400) (4,556) (4,831) --------- --------- --------- --------- $ 3,888 $ 3,120 $ 8,737 $ 10,740 ========= ========= ========= =========
- --------------------------------------------------- (1) Restructuring costs of $487,000 have been included in income from operations in the nine months ended May 31, 2004. (2) Restructuring costs of $384,000 and $638,000 have been included in income from operations for the three and nine months ended May 31, 2004, respectively. (3) Restructuring reserve adjustment of $(117,000) is included in income from operations in the nine months ended May 31, 2003.
May 31, August 31, 2004 2003 -------- ---------- (In thousands) Total assets: Industrial Ingredients-North America $105,775 $106,732 Food Ingredients--North America 31,655 35,205 Australia/New Zealand operations 97,986 85,269 Corporate and other 29,772 23,687 -------- -------- $265,188 $250,893 ======== ========
11 12--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 nine months ended May 31, 2004 and 2003.
Three months ended Nine months ended May 31, May 31, ------------------ ------------------ 2004 2003 2004 2003 ----- ----- ----- ----- (In thousands) Weighted average common shares outstanding 8,771 8,404 8,713 7,974 Dilutive stock options 162 85 122 125 ----- ----- ----- ----- Weighted average common shares outstanding, assuming dilution 8,933 8,489 8,835 8,099 ===== ===== ===== =====
12 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 FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2004 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 Consolidated sales for three months ended May 31, 2004, increased $6.4 million or 10% to $72.5 million from $66.0 million in fiscal 2003 reflecting higher volumes at Penford's Industrial Ingredients--North America business and favorable Australian and New Zealand currency exchange rates. The decline in grain costs at Penford's Australia/New Zealand operations as well as effective implementation of productivity improvement programs worldwide improved gross margin for the third quarter of fiscal 2004 to $12.0 million from $10.2 million in fiscal 2003. Gross margin as a percent of sales increased to 16.6% in the third quarter of fiscal 2004 from 15.4% in the prior year period. Sales for the nine months ended May 31, 2004 were $207.1 million, an increase of $13.4 million, or 7%, over the same period in fiscal 2003, primarily due to favorable currency exchange rates, partially offset by volume decline and price competition at the Company's Australia and New Zealand operations. 13 Reduced discretionary spending and workforce reductions have held operating and research and development expenses to 10.7% of sales for the third quarter of fiscal 2004. Operating income for the quarter ended May 31, 2004 included a $0.4 million restructuring charge related to a workforce reduction at the Company's Australian business which affected 11 employees. Operating income for the nine months ended May 31, 2004 declined by $2.0 million from the prior year period, due primarily to higher natural gas costs and restructuring costs of $1.1 million. A discussion of segment results of operations follows. Sales Sales at the Company's Industrial Ingredients--North America business unit increased by $3.8 million, or 11%, to $38.7 million in the third quarter of fiscal 2004 compared to the prior year period. Volumes rose 7% as paper mill customers experienced increased orders from their end markets, increasing Penford's sales by approximately $2.4 million. Improvements in average pricing also contributed to the increase in sales. Sales for the nine months ended May 31, 2004 rose $2.7 million, or 3% from the prior year period, due primarily to improvements in average pricing. Sales for the Australia/New Zealand operations increased $2.3 million, or 11%, and $9.8 million, or 17%, in the three and nine months ended May 31, 2004, respectively, compared to the prior year periods. Favorable currency exchange rates were the dominant factor for the increase, offset by lower volumes and the effects of pricing incentives resulting from competition from imported products. Third quarter fiscal 2004 sales for the Food Ingredients--North America business increased $0.5 million, or 4%, to $11.4 million compared to the prior year quarter. Sales for the nine months ended May 31, 2004 increased $0.9 million, or 3%, over last year. Sales for both the third quarter and fiscal 2004 year to date increased due to stronger sales of potato coatings products and new binding, coating and marinade products for processed meat applications. Income from operations Income from operations at Penford's Industrial Ingredients--North America business unit increased $0.8 million in the third quarter of fiscal 2004 to $3.0 million compared to the year ago period. Gross margin as a percent of sales increased to 15.0% for the quarter ended May 31, 2004 from 14.5% the previous year on increased revenues, better efficiency due to higher plant utilization and reduced manufacturing costs from process improvements. These improvements in gross margin were offset by approximately $0.2 million in higher natural gas costs, which remains above levels a year ago. Income from operations decreased $1.3 million for the nine months ended May 31, 2004 compared to the same period last year and gross margin as a percent of sales declined to 14.1% from 15.6% last year. Improvements in average sales pricing were more than offset by higher natural gas costs of approximately $1.7 million, increased retirement costs of approximately $0.8 million and second quarter 2004 restructuring costs of $0.5 million. See Note 5 to the Condensed Consolidated Financial Statements. Income from operations at the Company's Australia/New Zealand operations increased $0.5 million to $1.7 million in the third quarter of fiscal 2004 compared to the prior year period. Gross margin as a percent of sales increased to 15.0% in the third quarter of fiscal 2004 from 11.4% in the same period last year. Gross profit increased $1.1 million due primarily to lower grain input costs and the impact of workforce reductions announced during the first half of fiscal 2004, partially offset by competitive pricing. Operating income for the third quarter of fiscal 2004 includes a $0.4 million charge related to additional headcount reductions announced during the third quarter at Australia's plant in Tamworth, New South Wales. Operating income for the nine months ended May 31, 2004 declined $0.2 million from the prior year on lower sales volumes, competitive pricing and $0.6 million of restructuring costs, partially offset by lower grain costs and favorable currency exchange rates. The fiscal 2004 third quarter and year-to-date restructuring costs have been reflected as a separate line in the accompanying Condensed Consolidated Statements of Income. See Note 5 to the Condensed Consolidated Financial Statements. 14 Third quarter income from operations at the Food Ingredients--North American business unit was comparable to the same period in fiscal 2003. In the third quarter of fiscal 2004, gross margin as a percent of sales declined to 24.8% from 25.8% last year due to higher input costs and sales incentive programs to strengthen market position in the potato coatings product categories. Operating income for the nine months ended fiscal 2004 declined by $0.8 million due to lower plant utilization in the second quarter of fiscal 2004 caused by a five-week shut down in dextrose production to balance inventories and second quarter manufacturing plant inefficiencies. Higher natural gas costs also continue to negatively affect gross margins. Corporate operating expenses Corporate operating expenses for the third quarter of fiscal 2004 increased $0.5 million over the prior year period primarily related to higher public company costs. Operating expenses declined $0.3 million in the nine months ended May 31, 2004, compared to prior year period due to lower executive personnel and recruiting costs, and a reduction in overall discretionary spending, offset by higher third quarter public company costs. Interest and taxes Interest expense decreased $0.2 million and $0.9 million in the three and nine months ended May 31, 2004, respectively, compared to the same periods in the prior year. Lower average debt outstanding during the periods and lower interest rates equally contributed to the decline in interest rates. The Company's effective tax rate for the three and nine months ended May 31, 2004 and 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 for the nine months ended May 31, 2004 included a $0.3 million second quarter 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 Nine months ended May 31, May 31, ------------------- -------------------- 2004 2003 2004 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 434 400 1,197 806 Other 71 227 328 87 ------- ------- ------- ------- Total $ 505 $ 627 $ 1,010 $ 2,809 ======= ======= ======= =======
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. 15 LIQUIDITY AND CAPITAL RESOURCES At May 31, 2004, Penford had working capital of $44.4 million compared to $39.0 million at August 31, 2003. Cash flow from operations was $15.9 million and $18.4 million for the nine months ended May 31, 2004 and 2003, respectively. The decrease in operating cash flow is primarily due to an increase in working capital. Cash flow from investing activities declined approximately $5.6 million in the nine months of fiscal 2004 compared to the same period in the prior year. 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 quarter of fiscal 2003, and an increase in fiscal 2004 capital expenditures of $2.1 million. 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 May 31, 2004, the Company was in compliance with the covenants and expects to be in compliance for the remainder of the fiscal year. At May 31, 2004, the Company had $29.7 million outstanding under its revolving credit facilities and $48.9 million in term loans. During the nine month period ended May 31, 2004, the Company paid dividends of $1.6 million representing $0.18 per share, the same per share dividend rate as the nine month period ended May 31, 2003. On June 29, 2004, the Board of Directors declared a dividend of $0.06 per common share payable on September 3, 2004 to shareholders of record as of August 13, 2004. 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. RECENT ACCOUNTING PRONOUNCEMENTS 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 adopted the interim disclosure requirements in its Condensed Consolidated Financial Statements for the quarter ended May 31, 2004 as disclosed in Note 10. In May 2004, the FASB issued FASB Staff Position No. 106-2 ("FSP 106-2"), "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. 16 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, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, 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. 17 PART II - OTHER INFORMATION 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 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Forms 8-K. A Form 8-K was filed on March 24, 2004 relating to the Registrant's financial information for the second fiscal quarter ended February 29, 2004, as presented in a press release on March 22, 2004. 18 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) July 14, 2004 /s/ Steven O. Cordier ---------------------------------------------- Steven O. Cordier Vice President, Chief Financial Officer and Corporate Secretary 19 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 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-31.1 2 d16785exv31w1.txt CERTIFICATION PURSUANT TO SECTION 302-CEO 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: July 14, 2004 /s/ Thomas D. Malkoski ------------------------------ Thomas D. Malkoski Chief Executive Officer EX-31.2 3 d16785exv31w2.txt CERTIFICATION PURSUANT TO SECTION 302-CFO 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: July 14, 2004 /s/ Steven O. Cordier ------------------------------------------ Steven O. Cordier Vice President and Chief Financial Officer EX-32 4 d16785exv32.txt CERTIFICATION PURSUANT TO SECTION 906-CEO/CFO 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 May 31, 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: July 14, 2004 /s/ Steven O. Cordier - --------------------------------------------- Steven O. Cordier Chief Financial Officer Dated: July 14, 2004 -----END PRIVACY-ENHANCED MESSAGE-----