UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2010
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 number 000-16674
IMPERIAL SUGAR COMPANY
(Exact name of registrant as specified in its charter)
Texas | 74-0704500 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
One Imperial Square, P.O. Box 9, Sugar Land, Texas 77487
(Address of principal executive offices, including Zip Code)
(281) 491-9181
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, see definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ¨ | Accelerated Filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of January 31, 2011, there were 12,267,654 shares of common stock, without par value, of the registrant outstanding.
Index
Page | ||||||||
Item 1. |
Financial Statements | |||||||
Consolidated Balance Sheets (Unaudited) | 2 | |||||||
Consolidated Statements of Operations (Unaudited) | 3 | |||||||
Consolidated Statements of Cash Flows (Unaudited) | 4 | |||||||
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) | 5 | |||||||
Notes to Consolidated Financial Statements (Unaudited) | 6 | |||||||
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | ||||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 19 | ||||||
Item 4. |
Controls and Procedures | 19 | ||||||
Item 1. |
Legal Proceedings | 21 | ||||||
Item 1A. |
Risk Factors | 22 | ||||||
Item 6. |
Exhibits | 22 | ||||||
Signatures | 23 | |||||||
Forward-Looking Statements
Statements regarding future market prices and margins, refinery timelines and operational dates, future expenses and liabilities arising from the Port Wentworth refinery incident, future costs and actions regarding the Louisiana Sugar Refining, LLC venture, future import and export levels, future government and legislative action, future operating results, future availability of raw sugar, operating efficiencies, results of future investments and initiatives, future cost savings, future product innovations, future energy costs, our liquidity and ability to finance our operations and capital investment programs, future pension plan contributions and other statements that are not historical facts contained in this report on Form 10-Q are forward-looking statements that involve certain risks, uncertainties and assumptions. These risks, uncertainties and assumptions include, but are not limited to, market factors, farm and trade policy, unforeseen engineering, construction and equipment delays, our ability to realize planned cost savings and other improvements, the available supply of sugar, energy costs, the effect of weather and economic conditions, results of actuarial assumptions, actual or threatened acts of terrorism or armed hostilities, legislative, administrative and judicial actions and other factors detailed elsewhere in this report and in our other filings with the SEC. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. We identify forward-looking statements in this report by using the following words and similar expressions:
• expect |
• project |
• estimate | ||
• believe |
• anticipate |
• likely | ||
• plan |
• intend |
• could | ||
• should |
• may |
• predict | ||
• budget |
• possible |
Management cautions against placing undue reliance on forward-looking statements or projecting any future results based on such statements or present or future earnings levels. All forward-looking statements in this report on Form 10-Q are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report and in our other SEC filings.
1
PART I - FINANCIAL INFORMATION
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, 2010 |
September 30, 2010 |
|||||||
(In Thousands of Dollars) | ||||||||
ASSETS | ||||||||
Current Assets: |
||||||||
Cash and Cash Equivalents |
$ | 6,709 | $ | 22,750 | ||||
Marketable Securities |
194 | 198 | ||||||
Accounts Receivable, Net |
40,060 | 55,093 | ||||||
Inventories: |
||||||||
Finished Products |
39,775 | 30,526 | ||||||
Raw and In-Process Materials |
51,204 | 67,133 | ||||||
Supplies |
17,113 | 15,716 | ||||||
Total Inventory |
108,092 | 113,375 | ||||||
Prepaid Expenses and Other Current Assets |
28,030 | 40,949 | ||||||
Total Current Assets |
183,085 | 232,365 | ||||||
Other Investments |
15,394 | 15,952 | ||||||
Property, Plant and Equipment, Net |
282,363 | 280,211 | ||||||
Deferred Income Taxes, Net |
11,762 | 10,624 | ||||||
Other Assets |
2,455 | 2,414 | ||||||
Total |
$ | 495,059 | $ | 541,566 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities: |
||||||||
Accounts Payable: |
||||||||
Raw Sugar |
$ | 20,460 | $ | 81,673 | ||||
Other Trade |
26,671 | 28,326 | ||||||
Total Accounts Payable |
47,131 | 109,999 | ||||||
Borrowing under Revolving Credit Line |
48,000 | 22,000 | ||||||
Deferred Income Taxes, Net |
11,427 | 11,427 | ||||||
Other Current Liabilities |
47,664 | 54,189 | ||||||
Total Current Liabilities |
154,222 | 197,615 | ||||||
Deferred Employee Benefits and Other Liabilities |
123,290 | 125,219 | ||||||
Commitments and Contingencies |
||||||||
Shareholders’ Equity: |
||||||||
Preferred Stock, Without Par Value, Issuable in Series; 5,000,000 Shares Authorized, None Issued |
— | — | ||||||
Common Stock, Without Par Value; 50,000,000 Shares Authorized; 12,125,214 and 12,145,098 Shares Issued and Outstanding at December 31, 2010 and September 30, 2010 |
130,426 | 130,168 | ||||||
Retained Earnings |
154,673 | 163,834 | ||||||
Accumulated Other Comprehensive Loss |
(67,552 | ) | (75,270 | ) | ||||
Total Shareholders’ Equity |
217,547 | 218,732 | ||||||
Total |
$ | 495,059 | $ | 541,566 | ||||
See notes to consolidated financial statements.
2
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended December 31, |
||||||||
2010 | 2009 | |||||||
(In Thousands of Dollars, Except per Share Amounts) |
||||||||
Net Sales |
$ | 227,389 | $ | 173,779 | ||||
Business Interruption Insurance Recovery |
— | 84,677 | ||||||
Cost of Sales (includes depreciation of $5,733,000 and $4,594,000 for the three months ended December 31, 2010 and 2009) |
(231,081 | ) | (161,379 | ) | ||||
Selling, General and Administrative Expense (includes depreciation of $219,000 and $335,000 for the three months ended December 31, 2010 and 2009) |
(9,649 | ) | (13,241 | ) | ||||
Insurance Recoveries Recognized |
— | 193,796 | ||||||
Operating Income (Loss) |
(13,341 | ) | 277,632 | |||||
Interest Expense |
(363 | ) | (318 | ) | ||||
Interest Income |
13 | 29 | ||||||
Other Income (Loss), Net |
(685 | ) | 986 | |||||
Income (Loss) before Income Taxes |
(14,376 | ) | 278,329 | |||||
Benefit (Provision) for Income Taxes |
5,461 | (100,213 | ) | |||||
Net Income (Loss) |
$ | (8,915 | ) | $ | 178,116 | |||
Basic Earnings (Loss) per Share of Common Stock |
$ | (0.75 | ) | $ | 15.11 | |||
Diluted Earnings (Loss) per Share of Common Stock |
$ | (0.75 | ) | $ | 14.84 | |||
Weighted Average Shares Outstanding: |
||||||||
Basic |
11,846,291 | 11,789,897 | ||||||
Diluted |
11,846,291 | 12,005,791 | ||||||
See notes to consolidated financial statements.
3
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended December 31, |
||||||||
2010 | 2009 | |||||||
(In Thousands of Dollars) | ||||||||
Operating Activities: |
||||||||
Net Income |
$ | (8,915 | ) | $ | 178,116 | |||
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: |
||||||||
Insurance Recoveries Recognized |
— | (278,473 | ) | |||||
Depreciation |
5,952 | 4,929 | ||||||
Deferred Income Taxes |
(5,461 | ) | 100,213 | |||||
Reclassification from Accumulated Other Comprehensive (Income) Loss to Net Income |
(611 | ) | 340 | |||||
Cash (Paid) Received on Change in Fair Value of Derivative Instruments |
12,636 | (536 | ) | |||||
Non-Cash Stock-Based Compensation |
378 | 511 | ||||||
Equity Earnings in Unconsolidated Subsidiaries |
665 | (880 | ) | |||||
Excess Tax Benefits from Stock-Based Compensation |
— | 24 | ||||||
Other |
59 | 61 | ||||||
Changes in Operating Assets and Liabilities: |
||||||||
Accounts Receivable |
15,033 | 4,886 | ||||||
Inventories |
5,283 | (25,571 | ) | |||||
Prepaid Expenses and Other Assets |
12,823 | (3,445 | ) | |||||
Accounts Payable—Raw Sugar |
(61,213 | ) | 11,912 | |||||
Accounts Payable—Other Trade |
306 | (3,437 | ) | |||||
Other Liabilities |
(8,492 | ) | (5,786 | ) | ||||
Net Cash Used in Operations |
(31,557 | ) | (17,136 | ) | ||||
Investing Activities: |
||||||||
Capital Expenditures |
(10,065 | ) | (37,598 | ) | ||||
Advances from Insurance Carriers |
— | 6,000 | ||||||
Other |
(57 | ) | 16 | |||||
Investing Cash Flow |
(10,122 | ) | (31,582 | ) | ||||
Financing Activities: |
||||||||
Borrowings (Repayments) under Revolving Credit Line—Net |
26,000 | — | ||||||
Cash Dividends |
(242 | ) | (240 | ) | ||||
Excess Tax Benefits from Stock-Based Compensation |
— | (24 | ) | |||||
Other |
(120 | ) | (162 | ) | ||||
Financing Cash Flow |
25,638 | (426 | ) | |||||
Increase (Decrease) in Cash and Cash Equivalents |
(16,041 | ) | (49,144 | ) | ||||
Cash and Cash Equivalents, Beginning of Period |
22,750 | 115,584 | ||||||
Cash and Cash Equivalents, End of Period |
$ | 6,709 | $ | 66,440 | ||||
Supplemental Non-Cash Items: |
||||||||
Tax Effect of Deferred Gains and Losses |
$ | 4,716 | $ | 71 | ||||
Purchase of Property, Plant and Equipment on Account |
$ | 4,836 | $ | 20,265 | ||||
See notes to consolidated financial statements.
4
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Months Ended December 31, 2010
(Unaudited)
Shares of Common Stock |
Common Stock |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total | ||||||||||||||||
(In Thousands of Dollars, Except Share Data) | ||||||||||||||||||||
Balance September 30, 2010 |
12,145,098 | $ | 130,168 | $ | 163,834 | $ | (75,270 | ) | $ | 218,732 | ||||||||||
Comprehensive Loss: |
||||||||||||||||||||
Net Loss |
(8,915 | ) | (8,915 | ) | ||||||||||||||||
Foreign Currency Translation Adjustment (Net of Tax of $18,000) |
32 | 32 | ||||||||||||||||||
Change in Derivative Fair Value (Net of Tax of $4,559,000) |
8,077 | 8,077 | ||||||||||||||||||
Reclassification from Accumulated Other Comprehensive Income (Loss) to Net Income (Net of Tax of $220,000) |
(391 | ) | (391 | ) | ||||||||||||||||
Total Comprehensive Loss |
(1,197 | ) | ||||||||||||||||||
Dividends ($0.02 per share) |
(246 | ) | (246 | ) | ||||||||||||||||
Restricted Stock Grants, Net |
(19,884 | ) | 258 | 258 | ||||||||||||||||
Balance December 31, 2010 |
12,125,214 | $ | 130,426 | $ | 154,673 | $ | (67,552 | ) | $ | 217,547 | ||||||||||
See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(Unaudited)
1. ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and reflect, in the opinion of management, all adjustments, consisting only of normal recurring accruals, that are necessary for a fair presentation of financial position and results of operations for the interim periods presented. These financial statements include the accounts of Imperial Sugar Company and its majority-owned subsidiaries (the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures required by accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The financial statements included herein should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2010. The Company operates its business as one domestic segment—the production and sale of refined sugar and related products. Refinery explosion related charges have been combined into Selling, General and Administrative Expense in the Consolidated Statements of Operations.
Cost of Sales
The Company’s sugar inventories, which are accounted for on a LIFO basis, are periodically reduced at interim dates to levels below that of the beginning of the fiscal year. When such interim LIFO liquidations are expected to be restored prior to fiscal year-end, the estimated replacement cost of the liquidated layers is utilized as the basis of the cost of sugar sold from beginning of the year inventory. Accordingly, the cost of sugar utilized in the determination of cost of sales for interim periods includes estimates which may require adjustment in future fiscal periods. Sugar inventory quantities at December 31, 2010 declined below the September 30, 2010 balance, resulting in the liquidation of a LIFO inventory layer with a cost approximately $2.8 million below the cost of current purchases.
Insurance Recoveries
Insurance recoveries that are deemed to be probable and reasonably estimable are recognized to the extent of the related loss. Insurance recoveries which result in gains, including recoveries under business interruption coverage, are recognized only when realized by settlement with the insurers. Advances on insurance settlements are recorded as liabilities or offsets to accrued probable recoveries. The evaluation of insurance recoveries requires estimates and judgments about future results which affect reported amounts and certain disclosures. Actual results could differ from those estimates.
2. INSURANCE RECOVERIES
The Company settled its insurance claim related to the 2008 Port Wentworth accident in December 2009 for an aggregate of $345 million. Insurance recoveries aggregating $66.5 million which were deemed probable and reasonably estimable were recognized to the extent of the related loss in prior periods. The remaining $278.5 million of recoveries were recognized as gains in the quarter ended December 31, 2009, as follows (in millions):
Insurance Recovery |
Previously Recognized |
Recognized in the Three Months Ended December 31, 2009 |
||||||||||
Business interruption |
$ | 84.7 | — | $ | 84.7 | |||||||
Property replacement cost |
212.4 | $ | 23.2 | 189.2 | ||||||||
Payroll and other incurred costs |
47.9 | 43.3 | 4.6 | |||||||||
Total |
$ | 345.0 | $ | 66.5 | $ | 278.5 | ||||||
Financial reporting gains recognized for replacement cost recoveries will not be recognized for tax purposes to the extent the Company made elections under the involuntary conversion rules of the Internal Revenue Code, as the insurance proceeds have been reinvested in replacement property within the required period of time. The replacement cost expenditures establish a new basis in the assets for financial reporting purposes, which will result in higher depreciation charges in future years. The tax basis in the replaced assets will be reduced by the amount of the gain not recognized under the involuntary conversion rules.
6
3. CONTINGENCIES
The Company is party to a number of claims, including eighteen remaining lawsuits brought on behalf of eleven employees or their families and seven third parties or their families, for injuries and losses suffered as a result of the 2008 Port Wentworth refinery industrial accident. None of the lawsuits demand a specific dollar amount of damages sought by the plaintiffs. The Company previously settled thirty lawsuits related to the accident.
The Company has workers compensation insurance which provides for coverage equal to the statutory benefits provided to workers under state law. Additionally, the Company’s general liability policy provides for coverage for damages to third parties up to a policy limit of $100 million. While the Company believes, based on the facts of these cases, that claims by employees and certain contractors are limited to benefits provided under Georgia workers compensation law, the ultimate resolution of these matters could result in liability in excess of the amount accrued. The Company believes the likelihood of the aggregate liability, including the amounts paid in the previous settlements, exceeding the $100 million policy limit is remote.
In August 2010, the Company filed suit in the District Court of Fort Bend County, Texas, against one of its general liability excess insurers, XL Insurance Company America, Inc. (“XL”). XL issued a $25 million policy of insurance (a portion of the $100 million coverage described above) that provides coverage for lawsuits filed as a result of the Port Wentworth refinery industrial accident. XL, which has not denied coverage for payments for settlements or judgments, asserts that its policy does not include coverage of defense costs in litigation. The Company’s lawsuit seeks a declaration that pursuant to the insurance policy it issued to the Company, XL is required to pay the Company’s costs of defense in lawsuits filed by employees and third parties and their families for injuries and losses suffered as a result of the Port Wentworth refinery accident. In October 2010, XL removed the lawsuit to the United States District Court for the Southern District of Texas.
In December 2010, AdvancePierre Foods, Inc. (“Pierre”) filed suit against the Company and its distributor, Evergreen Sweeteners, Inc. in the United States District Court for the Western District of North Carolina seeking damages in connection with sugar that had been voluntarily recalled by the Company in July 2010. The claims asserted against the Company seek recovery of losses allegedly incurred by Pierre due to its alleged incorporation of recalled sugar in food products. Although the complaint does not specify alleged damages, Pierre previously indicated that its damages were approximately $3.2 million. The Company believes that its general liability insurance policy provides coverage for the damages asserted in connection with these claims, and that it may have additional coverage for these claims through another insurance policy. The insurer who provides the Company’s $1 million primary liability insurance policy has assumed the defense of this lawsuit. Ironshore Specialty Insurance Company (“Ironshore”), which provides $25 million of umbrella liability insurance coverage in excess of the $1 million primary liability insurance policy, has denied coverage for the Pierre property damage claims and two other property damage claims totaling $200,000 that involve the same recalled sugar. The Company believes that Ironshore’s umbrella liability insurance policy is enforceable to respond to Pierre’s lawsuit and the other property damage claims. In January 2011, the Company filed suit against Ironshore in the United States District Court for the Southern District of Texas seeking a declaratory judgment that Ironshore is required to provide coverage for the Pierre lawsuit and the other property damage claims pursuant to the umbrella liability insurance policy it issued to the Company.
In November 2010, the Company filed suit in the Fort Bend County, Texas District Court against Hills Fuel Company (“Hills”), its supplier of coal, for breach of contract. Hills failed to make deliveries due under the contract and the Company has been sourcing its supply of coal at prices higher than stipulated under the contract. Hills filed an answer in January 2011 denying the allegations in the complaint.
The Company is party to other litigation and claims which are normal in the course of its operations. While the results of such litigation and claims cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a materially adverse effect on its consolidated results of operations, financial position or cash flows. In connection with the sales of certain businesses, the Company made customary representations and warranties, and undertook indemnification obligations with regard to certain of these representations and warranties including financial statements, environmental and tax matters, and the conduct of the businesses prior to the sale. These indemnification obligations are subject to certain deductibles, caps and expiration dates.
In connection with the sale of a subsidiary in 2002, the buyer assumed $18.5 million of industrial revenue bonds, with final maturity in 2025. The Company remains contingently liable for repayment of the bonds under a guaranty arrangement and does not believe that a liability is probable. The Company has recorded a non-current liability for the $2.0 million fair value of the guarantee. On January 6, 2011, the buyer redeemed $9.0 million of the industrial revenue bonds, releasing the Company’s obligations related to that issuance.
7
4. LSR VENTURE
The Company is a one-third member in Louisiana Sugar Refining, LLC (“LSR”), a joint venture formed to construct and operate a new cane sugar refinery. Each member agreed to contribute $30 million in cash or assets as equity to capitalize the venture. The Company’s contribution, which will occur in three stages, consists of land and the existing refinery assets with a book value of approximately $26.3 million at December 31, 2010. The Company operated the existing refinery with sales and earnings for its own account until December 31, 2010, during which time the Company completed certain improvements. The equipment and personal property in the existing refinery (other than the small packaging assets) were contributed to LSR on January 1, 2011. After January 1, 2011, the Company will continue to operate the small bag packing facility in Gramercy, with 3.5 million cwt of refined bulk sugar purchased annually from LSR under a long term, supply agreement with market-based pricing provisions.
The Company contributed the footprint parcel of approximately 7 acres of land for the new refinery in November 2009. Pursuant to the terms of the operative agreements, LSR and Imperial jointly enrolled the entire site (including the footprint parcel) in the Voluntary Remediation Program (the “VRP”) of the Louisiana Department of Environmental Quality to conduct an environmental assessment of the site and complete remediation of any identified contamination. The Company is required to pay for the cost of remediation if the VRP uncovers contamination above the applicable industrial standard. The Company will convey the remainder of the land to LSR upon completion of the VRP and be released of future environmental liabilities to state and federal authorities. The VRP site assessment is underway to determine the extent of required remediation.
LSR has entered into financing agreements aggregating $145 million to provide construction and working capital financing for the project. The financing is non-recourse to LSR’s members. The members have agreed to proportionately contribute additional capital to LSR if necessary to cover certain construction cost overruns and certain costs relating to the VRP that LSR agreed to assume. Construction costs of the new refinery, which is expected to commence operations in the summer of 2011, are estimated at $120 million. The existing Gramercy refinery will operate during the construction and start-up phase of the new refinery.
5. STOCK-BASED COMPENSATION
During the three months ended December 31, 2010, the Company granted 4,000 shares of restricted stock to employees with a weighted average grant date fair value of $13.70 per share. These shares vest over a period of 48 months.
During the three months ended December 31, 2010, 1,017 shares of restricted stock vested with a fair value at vesting date of $14,000.
6. EARNINGS PER SHARE
The following table presents information necessary to calculate basic and diluted earnings per share (in thousands of dollars, except per share amounts):
Three Months Ended December 31, | ||||||||
2010 | 2009 | |||||||
Net Income (Loss) |
$ | (8,915 | ) | $ | 178,116 | |||
Average Shares Outstanding |
11,846,291 | 11,789,897 | ||||||
Effect of Incremental Shares Issuable from Assumed Exercise of Stock Options and Nonvested Restricted Stock Under the Treasury Stock Method |
— | 215,894 | ||||||
Adjusted Average Shares |
11,846,291 | 12,005,791 | ||||||
Diluted EPS—Net Income (Loss) |
$ | (0.75 | ) | $ | 14.84 | |||
8
7. PENSION AND OTHER POSTRETIREMENT BENEFITS
The components of net periodic benefit costs for the three months ended December 31, 2010 and 2009 were (in thousands):
Three Months Ended December 31, |
||||||||
2010 | 2009 | |||||||
Pension Plans |
||||||||
Service Cost |
$ | 297 | $ | 291 | ||||
Interest Cost |
2,658 | 2,823 | ||||||
Expected Return on Plan Assets |
(2,598 | ) | (2,575 | ) | ||||
Amortization of Prior Service Cost |
19 | 34 | ||||||
Recognized Actuarial Loss |
1,080 | 817 | ||||||
Total Net Periodic Benefit Costs |
$ | 1,456 | $ | 1,390 | ||||
Postretirement Benefits Other than Pension Plans |
||||||||
Service Cost |
$ | 4 | $ | 5 | ||||
Interest Cost |
100 | 113 | ||||||
Amortization of Prior Service Cost |
(399 | ) | (399 | ) | ||||
Recognized Actuarial Loss |
159 | 161 | ||||||
Total Net Periodic Benefit Costs (Income) |
$ | (136 | ) | $ | (120 | ) | ||
Pension plan contributions, which are based on regulatory requirements, were $3.0 million for the three months ended December 31, 2010 and $2.6 million for the three months ended December 31, 2009. Contributions during the remainder of fiscal 2011 are expected to be approximately $12.4 million.
8. OTHER INCOME
Other income included the following (in thousands of dollars):
Quarter Ended December 31, |
||||||||
2010 | 2009 | |||||||
Equity Earnings in investment in |
||||||||
Comercializadora Santos Imperial S. de R.L. de C.V. |
$ | 177 | $ | 97 | ||||
Wholesome Sweeteners, Inc. |
(1,192 | ) | 783 | |||||
Louisiana Sugar Refining, LLC |
406 | — | ||||||
Other |
(76 | ) | 106 | |||||
Total |
$ | (685 | ) | $ | 986 | |||
The Company reports its share of earnings in these investees on the equity method. Equity earnings in Wholesome Sweeteners for the quarter ended December 31, 2010 includes a $2.4 million adjustment to the carrying value of Imperial’s investment to reflect the increased value of Wholesome’s management incentive shares; such adjustments were not significant in prior periods. Absent this adjustment, Imperial’s 50% interest in Wholesome’s net income was $1.2 million. Summarized combined financial information for the Company’s equity method investees for the quarters ended December 31, 2010 and 2009 includes the following (in thousands of dollars):
Wholesome Sweeteners, Inc. |
Comercializadora Santos Imperial S. de R.L. de C.V. |
Louisiana Sugar Refining, LLC |
||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
Net Sales |
$ | 30,731 | $ | 24,074 | $ | 52,642 | $ | 41,038 | $ | — | $ | — | ||||||||||||
Gross Profit |
$ | 7,361 | $ | 5,923 | $ | 906 | $ | 934 | $ | — | $ | — | ||||||||||||
Operating Income |
$ | 4,545 | $ | 2,972 | $ | 409 | $ | 460 | $ | (1,201 | ) | $ | — | |||||||||||
Net Income |
$ | 2,619 | $ | 2,016 | $ | 355 | $ | 195 | $ | 1,219 | $ | — |
9
9. FAIR VALUE
The Company determines the fair value of natural gas and raw sugar futures contracts and marketable securities using quoted market prices for the individual securities. The following table presents the Company’s assets and liabilities measured and recognized at fair value on a recurring basis classified at the appropriate level of the fair value hierarchy as of December 31, 2010 and September 30, 2010 (in thousands of dollars):
December 31, 2010 | ||||||||||||||||||||
Fair Value | Margin Requirements Settled in Cash |
Balance Sheet Total |
||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Current Assets: |
||||||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
$ | 1,162 | — | — | $ | (1,162 | ) | — | ||||||||||||
No. 11 World Sugar Futures Contracts |
310 | — | — | (310 | ) | — | ||||||||||||||
Natural Gas |
37 | — | — | (37 | ) | — | ||||||||||||||
Marketable Securities |
194 | — | — | — | $ | 194 | ||||||||||||||
Current Liabilities: |
||||||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
13 | — | — | (13 | ) | — | ||||||||||||||
No. 11 World Sugar Futures Contracts |
50 | — | — | (50 | ) | — | ||||||||||||||
Natural Gas |
25 | — | — | (25 | ) | — | ||||||||||||||
Non-Current Assets: |
||||||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
2,177 | — | — | (2,177 | ) | — | ||||||||||||||
No. 11 World Sugar Futures Contracts |
41 | — | — | (41 | ) | — | ||||||||||||||
Non-Current Liabilities: |
||||||||||||||||||||
No. 11 World Sugar Futures Contracts |
3 | — | — | (3 | ) | — | ||||||||||||||
September 30, 2010 | ||||||||||||||||||||
Fair Value | Margin Requirements Settled in Cash |
Balance Sheet Total |
||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Current Assets: |
||||||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
$ | 22,027 | — | — | $ | (22,027 | ) | — | ||||||||||||
No. 11 World Sugar Futures Contracts |
333 | — | — | (333 | ) | |||||||||||||||
Natural Gas |
198 | — | — | — | $ | 198 | ||||||||||||||
Marketable Securities |
||||||||||||||||||||
Current Liabilities: |
194 | — | — | (194 | ) | — | ||||||||||||||
Natural Gas |
333 | — | — | (333 | ) | — | ||||||||||||||
Non-Current Assets: |
||||||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
25 | — | — | (25 | ) | — | ||||||||||||||
Non-Current Liabilities: |
||||||||||||||||||||
Natural Gas |
276 | — | — | (276 | ) | — |
Fair value hierarchy levels are as follows:
• | Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
• | Level 2—Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; |
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• | Level 3—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. These inputs may be used with internally developed methodologies that are used to generate management’s best estimate of fair value. |
10. DERIVATIVE INSTRUMENTS
We use raw sugar futures and options in our raw sugar purchasing programs and natural gas futures and options to hedge natural gas purchases used in our manufacturing operations. Additionally, we periodically use derivatives to manage interest rate and foreign currency exchange risk. Our objective in the use of derivative instruments is to mitigate commodity price, interest rate or foreign currency exchange risk. Our derivatives hedging activity is supervised by a senior risk management committee which monitors and reports compliance with our risk management policy to the Audit Committee of the Board of Directors.
The majority of our industrial channel sales and a portion of our distributor channel sales are made under fixed price, forward sales contracts. In order to mitigate price risk in raw and refined sugar commitments, we manage the volume of refined sugar sales contracted for future delivery in relation to the volume of raw cane sugar purchased for future delivery by entering into forward purchase contracts to buy raw cane sugar at fixed prices and by using raw sugar futures contracts. Historically, substantially all of our purchases of domestic raw sugar and quota raw sugar imports are priced based on the Intercontinental Exchange (ICE) Sugar No. 16 futures contract. We use these futures contracts to price our physical domestic and quota raw sugar purchase commitments. Certain of these derivative instruments qualify as cash flow hedges and are designated as hedges for accounting purposes. To the extent that derivative instruments do not qualify for hedge accounting treatment, the Company records the effect of those instruments in current earnings. Non-quota imports under the re-export program, which constitutes less than 10% of our raw sugar purchases, are priced based on the ICE Sugar No. 11 futures contract. We use these futures contracts to price our world raw purchase commitments, however, these derivative instruments are not designated as cash flow hedges. Additionally we receive short raw sugar futures contracts from certain raw sugar suppliers that are used as pricing mechanisms which are not designated as hedges. We have purchased domestic and world raw sugar futures contracts up to 21 months in advance of the physical purchase.
The pricing of our physical natural gas purchases generally is indexed to a spot market index and we use natural gas futures contracts traded on the New York Mercantile Exchange to hedge the cost of natural gas purchased under these physical contracts. The derivative instruments which qualify as cash flow hedges are designated as hedges for accounting purposes. Additionally, we utilize natural gas futures which are not designated as cash flow hedges to manage the remaining commodity price risk above the volume of derivatives designated as cash flow hedges. We have purchased natural gas futures contracts up to 9 months in advance of the physical purchase of natural gas.
For derivative instruments that qualify as a cash flow hedge, the effective portion of the gain or loss of the derivative is reported as a component of other comprehensive income and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses that result from the discontinuance of cash flow hedges because it is probable that the original forecasted transaction will not occur are recognized in current earnings and the current quarter’s results include $0.9 million of such gains. Gains and losses on derivatives representing hedge ineffectiveness are recognized in current earnings. Gains and losses on derivatives not designated as hedges are recognized in current earnings.
At December 31, 2010 we had the following net futures positions:
Hedge Designation |
Domestic Sugar (cwt) |
World Sugar (cwt) |
Natural Gas (mmbtu) |
|||||||||
Cash Flow |
857,920 | — | — | |||||||||
Not Designated |
425,600 | 324,800 | 320,000 |
All of our futures contracts are settled in cash daily with the respective futures exchanges and therefore do not contain credit-risk-related contingent features. The Company has $5.6 million recorded on the balance sheet for cash held on deposit in margin accounts at December 31, 2010 for the futures positions above. At December 31, 2010 there were no derivative positions to mitigate the risk of interest rates or foreign currency exchange. For the three month period ended December 31, 2010, we did not engage in trading activity with derivatives.
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The table below shows the location and amounts in the consolidated balance sheets for derivative instruments (in thousands):
As of December 31, 2010:
Hedge Designation | Fair Value |
Margin Requirements Settled in Cash |
Balance Sheet Total |
|||||||||||||
Current Assets: |
||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
Not Designated | $ | 503 | $ | (503 | ) | — | |||||||||
No. 16 Domestic Sugar Futures Contracts |
Cash Flow | 659 | (659 | ) | — | |||||||||||
No. 11 World Sugar Futures Contracts |
Not Designated | 310 | (310 | ) | — | |||||||||||
Natural Gas |
Not Designated | 37 | (37 | ) | — | |||||||||||
Current Liabilities: |
||||||||||||||||
No. 11 World Sugar Futures Contracts |
Not Designated | 50 | (50 | ) | — | |||||||||||
No. 16 Domestic Sugar Futures Contracts |
Cash Flow | 13 | (13 | ) | — | |||||||||||
Natural Gas |
Not Designated | 25 | (25 | ) | — | |||||||||||
Non-Current Assets: |
||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
Not Designated | 2,177 | (2,177 | ) | — | |||||||||||
No. 11 World Sugar Futures Contracts |
Not Designated | 41 | (41 | ) | — | |||||||||||
Non-Current Liabilities: |
||||||||||||||||
No. 11 World Sugar Futures Contracts |
Not Designated | 3 | (3 | ) | — |
As of September 30, 2010:
Hedge Designation | Fair Value |
Margin Requirements Settled in Cash |
Balance Sheet Total |
|||||||||||||
Current Assets: |
||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
Not Designated | $ | 22,027 | $ | (22,027 | ) | — | |||||||||
No. 11 World Sugar Futures Contracts |
Not Designated | 333 | (333 | ) | — | |||||||||||
Current Liabilities: |
||||||||||||||||
No. 11 World Sugar Futures Contracts |
Not Designated | 194 | (194 | ) | — | |||||||||||
Natural Gas |
Cash Flow | 260 | (260 | ) | — | |||||||||||
Natural Gas |
Not Designated | 73 | (73 | ) | — | |||||||||||
Non-Current Assets: |
||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
Not Designated | 25 | (25 | ) | — | |||||||||||
Non-Current Liabilities: |
||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
Not Designated | 276 | (276 | ) | — |
The impact of futures contracts on the consolidated income statement for fiscal 2011 is presented below:
Hedge Designation |
Income Statement Line Item |
Three Months Ended December 31, 2010 | ||||||||||||
Domestic Sugar |
World Sugar | Natural Gas | ||||||||||||
Cash Flow |
Cost of Sales(1) | $ | (1,065 | ) | $ | — | $ | 451 | ||||||
Cash Flow |
Accumulated other comprehensive loss | (12,683 | ) | — | 47 | |||||||||
Not Designated |
Cost of Sales (credit) | (2,021 | ) | (4,063 | ) | (37 | ) |
(1) | Amounts were reclassified from accumulated other comprehensive income. |
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The impact of futures contracts on the consolidated income statement for fiscal 2010 is presented below:
Hedge Designation |
Income Statement Line Item |
Three Months Ended December 31, 2009 | ||||||||||||
Domestic Sugar |
World Sugar | Natural Gas | ||||||||||||
Cash Flow |
Cost of Sales(1) | $ | — | $ | — | $ | 341 | |||||||
Cash Flow |
Accumulated other comprehensive loss | — | — | 536 | ||||||||||
Not Designated |
Cost of Sales (credit) | (18,866 | ) | (52 | ) | 73 |
(1) | Amounts were reclassified from accumulated other comprehensive income. |
There were no gains or losses recognized on cash flow hedges for ineffectiveness, nor were there any portion of derivatives excluded from the effectiveness assessment. Approximately $0.1 million of losses on cash flow hedges for natural gas and $9.2 million of gains on cash flow hedges for domestic raw sugar are expected to be reclassified to earnings over the next twelve months.
11. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in Accumulated Other Comprehensive Income for the quarter ended December 31, 2010 are as follows (in thousands of dollars):
Net Unrealized Gains (Losses) on Derivatives |
Net Unrealized Gains (Losses) on Pension and Other Post Retirement Medical Benefits |
Foreign Currency Translation Adjustments and Other |
Total | |||||||||||||
Balance September 30, 2010 |
$ | (241 | ) | $ | (75,075 | ) | $ | 46 | $ | (75,270 | ) | |||||
Change in Derivative Fair Value (Net of Tax of $4,559,000) |
8,077 | 8,077 | ||||||||||||||
Reclassification from Accumulated Other Comprehensive Income (Loss) to Net Income (Net of Tax of $220,000) |
(391 | ) | (391 | ) | ||||||||||||
Foreign Currency Translation Adjustment (Net of Tax of $18,000) |
32 | 32 | ||||||||||||||
Balance December 31, 2010 |
$ | 7,445 | $ | (75,075 | ) | $ | 78 | $ | (67,552 | ) | ||||||
12. DEBT
The Company has a senior secured revolving credit facility providing for loans of up to $100 million that matures on December 31, 2011. The Company is currently seeking to renew or replace the facility.
13
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This discussion should be read in conjunction with information contained in the Consolidated Financial Statements and the notes thereto and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.
Overview
We operate in a single domestic business segment, the production and sale of refined sugar and related products. Our results of operations substantially depend on market factors, including the demand for and price of refined sugar, the price of raw cane sugar and the availability and price of energy and other resources. These factors are influenced by a variety of external forces that we are unable to predict, including the number of domestic acres contracted to grow sugar cane and sugar beets, prices of competing crops, supply and price of raw cane sugar in the world, domestic dietary trends, competing sweeteners, weather conditions, production outages at key industry facilities and the United States and Mexican farm and trade policies. The domestic sugar industry is subject to substantial influence by legislative and regulatory actions. The 2008 Farm Bill limits the importation of raw cane sugar and the marketing of refined beet and raw cane sugar, potentially affecting refined sugar sales prices and volumes as well as the supply and cost of raw material available to our cane refineries.
Results of Operations
Three Months Ended December 31, 2010 compared to Three Months Ended December 31, 2009
For the three months ended December 31, 2010, we reported a net loss of $8.9 million or $0.75 per diluted share, compared to net income of $178.1 million or $14.84 per diluted share during the first fiscal quarter of the prior year. The recognition of insurance and derivative gains had a significant impact on our reported earnings last year. In December 2009 the Company settled the property insurance claim relating to the Port Wentworth accident and recorded pretax gains totaling $278.5 million ($178.2 million after tax) in the quarter. We discuss these and other factors in more detail below.
Sugar sales comprised approximately 98% of our net sales in the current quarter and the same quarter for the prior year. Sugar sales volumes and prices were:
Three Months Ended December 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Volume | Price | Volume | Price | |||||||||||||
(000 cwt) | (per cwt) | (000 cwt) | (per cwt) | |||||||||||||
Sugar Sales: |
||||||||||||||||
Industrial |
2,393 | $ | 38.61 | 2,484 | $ | 32.04 | ||||||||||
Consumer |
1,827 | 47.94 | 1,264 | 43.66 | ||||||||||||
Distributor |
704 | 46.42 | 771 | 38.38 | ||||||||||||
Domestic Sales |
4,924 | 43.19 | 4,519 | 36.37 | ||||||||||||
World Sales |
281 | 34.77 | 185 | 32.30 | ||||||||||||
Sugar Sales |
5,205 | $ | 42.73 | 4,703 | $ | 36.21 | ||||||||||
Net sales increased 31% for the three months ended December 31, 2010, compared to the same period in the prior year. Domestic sugar volumes increased 9.0% for the quarter primarily due to increased distribution at key retailers in the consumer channel. Prior year’s first quarter consumer sales volumes were constrained as individual packaging lines were initiated at the rebuilt Port Wentworth facility during the period. Domestic sales prices increased 18.8% for the quarter. Refined sugar prices have risen to levels much higher than historical norms due to tighter domestic supply conditions, as well as higher raw sugar prices which placed upward pressure on refined prices. While domestic beet sugar production and imports from Mexico are both projected to increase in fiscal 2011, domestic supply is forecasted by the USDA to remain tight.
The majority of industrial channel sales and a portion of distributor channel sales are made under fixed price contracts which generally extend up to a year, many of which are on a calendar year basis. As a result, realized sales prices tend to lag market trends.
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On January 1, 2011, the Company contributed the equipment and personal property of its existing Gramercy refinery (other than its small packaging assets) to Louisiana Sugar Refining, LLC (“LSR”), its one-third owned joint venture in accordance with the terms of our joint venture agreement. The Company will continue to operate the small bag packaging facility in Gramercy and has agreed to purchase 3.5 million cwt of refined bulk sugar annually from LSR under a long term supply agreement with market-based pricing provisions. Sales derived from the existing Gramercy refinery will be lower in future periods as a result of this contribution, as only sales from the small bag packaging operations will be consolidated in our results. Sales of sugar in bulk and large bags produced at the Gramercy refinery for the quarter ended December 31, 2010 totaled 1.2 million cwt or $50.1 million. These sales contributed gross margin, with derivative activity adjusted to reflect hedge accounting, of approximately $0.2 million.
For the three months ended December 31, 2010, gross margin as a percentage of sales decreased to negative (1.6%) compared to 7.1% in the prior year quarter principally due to the timing of the recognition of raw sugar derivative gains. Additionally, cost of sales includes a $2.9 million severance charge in the current year’s quarter, primarily related to the downsizing of the Gramercy, Louisiana refinery operation.
Tight supply conditions in the world raw sugar market has driven up world raw sugar prices. Rising world raw sugar prices together with restrictions on imports imposed by the 2008 Farm Bill pushed domestic raw sugar prices to 30 year highs. Domestic raw sugar futures prices for the nearby futures contract as quoted on the Intercontinental Exchange at recent quarter ends were as follows:
Closing Price (per cwt) |
||||
September 30, 2008 |
$ | 22.58 | ||
December 31, 2008 |
$ | 20.03 | ||
March 31, 2009 |
$ | 20.98 | ||
June 30, 2009 |
$ | 22.70 | ||
September 30, 2009 |
$ | 30.50 | ||
December 31, 2009 |
$ | 35.03 | ||
March 31, 2010 |
$ | 31.29 | ||
June 30, 2010 |
$ | 33.83 | ||
September 30, 2010 |
$ | 39.80 | ||
December 31, 2010 |
$ | 39.00 |
The Company has largely been able to offset the increase in raw sugar cost by adjusting its sales prices, however there can be no assurance that we will be successful in achieving future sales price increases sufficient to offset these higher raw sugar costs.
The Company’s raw sugar derivative activity did not qualify for deferral accounting in prior periods because of the inability to forecast raw sugar purchases as a result of delays in the Port Wentworth refinery production start-up. Gains and losses on raw sugar futures positions were recognized in earnings as they arose, rather than deferred and recognized when the related raw sugar purchase occurred. The effect of recognizing derivative gains results in higher raw sugar cost in subsequent periods while the recognition of losses results in lower raw sugar costs in future periods. Beginning in the quarter ended December 31, 2010, gains and losses on derivatives designated to hedge raw sugar purchases in future periods qualified for hedge accounting and are deferred in Accumulated Other Comprehensive Income.
The prior year’s gross margin included $18.9 million of gains recognized on raw sugar derivatives which were intended to hedge raw sugar purchases in subsequent periods. These derivative gains increased gross margin percentage for the quarter ended December 31, 2009 by 10.9%. Additionally, both the current and prior year’s quarter were impacted by higher raw sugar costs resulting from the non-deferral of derivative gains arising in prior periods. As a result of the foregoing, had the Company applied deferral accounting in prior periods, raw sugar costs would have been $10.1 million higher in the quarter ended December 31, 2009 and $9.7 million lower for the quarter ended December 31, 2010.
15
Raw sugar derivative gains and losses recognized in fiscal 2009 and fiscal 2010, which were entered into to hedge future sugar purchases were as follows:
Raw Sugar Futures Derivative Gains (Losses)
(In Millions)
Futures Contract Delivery Period | ||||||||||||||||||||||||||||||||||||||||
Recognized In |
Fiscal 2010 | Fiscal 2011 | ||||||||||||||||||||||||||||||||||||||
Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Fiscal 2012 | ||||||||||||||||||||||||||||||||
Fiscal 2009 |
$ | 27.9 | $ | 8.8 | $ | 10.0 | $ | 5.7 | $ | 2.9 | $ | 0.5 | ||||||||||||||||||||||||||||
Q1 Fiscal 2010 |
$ | 18.9 | 7.0 | 7.9 | 3.4 | 0.2 | 0.4 | |||||||||||||||||||||||||||||||||
Q2 Fiscal 2010 |
$ | (24.8 | ) | (16.1 | ) | (5.7 | ) | (1.4 | ) | (1.3 | ) | (0.1 | ) | (0.2 | ) | |||||||||||||||||||||||||
Q3 Fiscal 2010 |
$ | 10.7 | 5.7 | 0.9 | 2.9 | 0.4 | 0.8 | |||||||||||||||||||||||||||||||||
Q4 Fiscal 2010 |
$ | 30.6 | 9.5 | 17.1 | 1.7 | 2.6 | (0.3 | ) | ||||||||||||||||||||||||||||||||
$ | 8.8 | $ | 17.0 | $ | (2.5 | ) | $ | 6.3 | $ | 9.7 | $ | 19.1 | $ | 2.0 | $ | 3.2 | $ | (0.3 | ) | |||||||||||||||||||||
Our unhedged cost of domestic raw cane sugar increased from $25.19 per cwt (on a raw market basis) for the prior year’s first quarter to $28.37 per cwt for the quarter ended December 31, 2010. Sugar inventory quantities at December 31, 2010 declined below the September 30, 2010 level, resulting in the liquidation of a LIFO inventory layer with a cost approximately $2.8 million below the cost of current purchases.
Manufacturing costs per cwt in Port Wentworth improved compared to the same period last year as the increased average daily melt helped improve fixed cost absorption. Repairs and maintenance cost increases along with higher depreciation partially offset the absorption benefit. Port Wentworth total refined sugar production in the quarter increased over the prior year although daily production rates are still below normal levels achieved in fiscal 2006 and 2007. Average daily melt rates and production days since the restart of the refinery in fiscal 2009, and for the two fiscal years prior to the accident were as follows:
Quarterly Period |
Average Daily Melt (millions of pounds) |
Number of Production Days in Quarter | ||
Average quarter fiscal 2006 |
5.9 | 73 | ||
Average quarter fiscal 2007 |
5.9 | 65 | ||
Third quarter fiscal 2009 |
0.5 | 14 | ||
Fourth quarter fiscal 2009 |
1.4 | 85 | ||
First quarter fiscal 2010 |
3.2 | 81 | ||
Second quarter fiscal 2010 |
3.9 | 82 | ||
Third quarter fiscal 2010 |
4.7 | 82 | ||
Fourth quarter fiscal 2010 |
4.4 | 86 | ||
First quarter fiscal 2011 |
4.7 | 77 |
Average daily melt during the period from October 1 to November 30, 2010 improved to 5.1 million pounds. Final inspections of the newly constructed bulk sugar silos at the Port Wentworth refinery revealed construction deficiencies by the contractor which required taking the silos offline for repairs at the end of November 2010. Production rates at the refinery were 4.0 million pounds per day in both December 2010 and January 2011. Repairs were completed in mid-January and the silos are expected to be placed back in service in February.
The Gramercy refinery’s final quarter of operations prior to the LSR transition was challenging with reduced yields, higher energy and environmental costs as well as a lower average daily melt. In late December, after the refinery had suspended operations in preparation for the change in operating management, the Company began experiencing issues with the waste water treatment ponds, including the levels of dissolved oxygen and pH and the discharge of foam from the ponds. The Company has undertaken efforts to return the ponds to normal operating
16
parameters. Costs aggregating $0.9 million were charged to operating expense in the quarter ended December 31, 2010 as a result of these matters. Gross margin was negatively impacted by 3.9% as result of higher Gramercy costs. LSR delayed re-starting the refinery until early February. As a result of the delay in re-starting the Gramercy refinery, the Company was not able to operate its retail packaging operations in Gramercy as planned in January, reducing available packaged product for the retail channel of distribution by approximately 230,000 cwt.
Energy costs per cwt were relatively flat with the prior year as lower natural gas prices were partially offset by higher coal cost. Our average NYMEX basis cost of natural gas after applying gains and losses from hedging activity decreased to $4.21 per mmbtu in the current year as compared to $4.67 last year.
Quarter Ended December 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Volume | Price | Volume | Price | |||||||||||||
(000 MMBTU) | (per MMBTU) | (000 MMBTU) | (per MMBTU) | |||||||||||||
Natural Gas |
886 | $ | 4.21 | 1,143 | $ | 4.67 | ||||||||||
Coal |
308 | $ | 5.03 | — | — | |||||||||||
Fuel Oil |
— | — | — | — | ||||||||||||
Total |
1,194 | $ | 4.42 | 1,143 | $ | 4.67 | ||||||||||
Transportation costs increased compared to the same quarter last year due to higher rail fleet costs and as a result gross margin declined 0.3%.
Selling, general and administrative expense decreased $3.6 million for the quarter ended December 31, 2010 compared to the same period in the prior year. The significant changes were $2.2 million of lower legal costs including a $1.3 million insurance reimbursement of legal fees related to a shareholder derivative lawsuit settled in October 2010, and $1.4 million of lower compensation costs.
The Company settled the Port Wentworth property and business interruption insurance claim in December 2009 for $345.0 million resulting in pretax gains of $278.5 million. Details of the settlement of the insurance claim are provided in Note 2 to the Consolidated Financial Statements.
Other income, which includes equity investment earnings, declined in the current quarter, primarily the result of a reduction in the carrying value of our equity based investment in Wholesome Sweeteners, reflecting an increase in the value of Wholesome’s management equity incentive shares.
We have estimated a combined federal and state income tax rate of 38.0% for the three months ended December 31, 2010 compared to 36.0% in the same period last year.
Liquidity and Capital Resources
At December 31, 2010, the Company had cash and cash equivalents of $6.7 million and $48 million of outstanding borrowings under our $100 million revolving credit agreement with Bank of America, N.A. (the “Revolver”). At December 31, 2010, we had the capacity under the borrowing base formula to borrow an additional $46.1 million against inventory and receivables, after deducting outstanding letters of credit totaling $5.9 million.
The Company has used a significant portion of its liquidity since the February 2008 industrial accident in Port Wentworth to fund operating losses and capital expenditures in excess of the applicable insurance recoveries. Operating results have not returned to profitable levels, and we have ongoing capital expenditure and pension contribution requirements. Volatility in raw sugar prices may place additional demands on our liquidity as we maintain our raw sugar purchasing and hedging program. In connection with purchases of sugar futures contracts, we are required to settle gains and losses in cash each day, based on the change in the price of the futures contract, which can require us to make significant cash payments. As described below, the Revolver becomes subject to a minimum EBITDA covenant if our average total liquidity falls below $20 million.
While we believe that our available liquidity and capital resources, including cash from operations and the Revolver, are sufficient to meet our operating and capital needs, we are exploring alternative sources of capital to provide additional liquidity and capital resources. In conjunction with this initiative, we are seeking to renew or replace the Revolver, which is currently scheduled to expire December 31, 2011. There can be no assurance that financing will be available to us or that the terms of such financing would be attractive.
17
The Revolver is secured by substantially all of our current assets, certain investments and certain property, plant and equipment. Each of our subsidiaries is either a borrower or a guarantor under the facility. Interest on borrowings under the Revolver is at LIBOR plus a margin that varies (with liquidity, as defined) from 1.00% to 1.75%, or the base rate (Bank of America prime rate) plus a margin of negative 0.25% to positive 0.25%.
The agreement contains covenants limiting our ability to, among other things:
• | incur other indebtedness; |
• | incur other liens; |
• | undergo any fundamental changes; |
• | engage in transactions with affiliates; |
• | enter into sale and leaseback transactions; |
• | change our fiscal periods; |
• | enter into mergers or consolidations; |
• | sell assets; and |
• | prepay other debt. |
In addition, in the event that our average total liquidity (defined as the average of the borrowing base, less average actual borrowings and letters of credit) falls below $20 million, the Revolver requires that we comply with a quarterly covenant which establishes a minimum level of earnings before interest, taxes, depreciation and amortization, as defined (EBITDA). The Revolver limits our ability to pay dividends or repurchase stock if our average total liquidity, after adjustment on a pro forma basis for such transaction, is less than $20 million. Average total liquidity for the quarter ended December 31, 2010 was $87 million.
The Revolver also includes customary events of default, including a change of control. Borrowings will generally be available subject to a borrowing base and to the accuracy of all representations and warranties, including the absence of a material adverse change and the absence of any default or event of default. In the past we classified debt under the Revolver as current, as the agreement contains a subjective acceleration clause if in the opinion of the lenders there is a material adverse effect, and provides the lenders direct access to our cash receipts.
Our capital expenditures for the three months ended December 31, 2010 were $10.1 million including amounts to make improvements to the Gramercy facility prior to the January 1, 2011 contribution to LSR. Capital expenditures in fiscal 2011 are expected to total between $20 million and $25 million, related primarily to safety improvements and normal equipment replacement.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and estimate methodologies since the filing of our Annual Report on Form 10-K for the year ended September 30, 2010, except for the accounting for derivative instruments. The Company uses raw sugar futures contracts to hedge commodity price risk in forecasted raw sugar purchases. In order to apply hedge accounting to the gains and losses arising from the change in fair value of these derivative instruments, the Company must be able to reasonably estimate the amount and timing of future raw sugar purchases. Commencing with the quarter ended December 31, 2010, the Company applied hedge accounting to the change in fair value of raw sugar derivatives, deferring $11.7 million of gains in Other Comprehensive Income.
18
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We use raw sugar futures and options in our raw sugar purchasing programs and natural gas futures and options to hedge natural gas purchases used in our manufacturing operations. Our derivatives hedging activity is supervised by a senior risk management committee which monitors and reports compliance with our risk management policy to the Audit Committee of the Board of Directors.
The information in the table below presents our domestic and world raw sugar futures positions outstanding as of December 31, 2010.
Expected Maturity Fiscal 2011 |
Expected Maturity Fiscal 2012 |
|||||||
Domestic Futures Contracts (net long positions): |
||||||||
Contract Volumes (cwt) |
635,000 | 648,000 | ||||||
Weighted Average Contract Price (per cwt) |
$ | 37.57 | $ | 30.68 | ||||
Contract Amount |
$ | 23,859,000 | $ | 19,897,000 | ||||
Weighted Average Fair Value (per cwt) |
$ | 39.23 | $ | 34.19 | ||||
Fair Value |
$ | 24,913,000 | $ | 22,170,000 | ||||
Expected Maturity Fiscal 2011 |
Expected Maturity Fiscal 2012 |
|||||||
World Futures Contracts (net long positions): |
||||||||
Contract Volumes (cwt) |
161,000 | 164,000 | ||||||
Weighted Average Contract Price (per cwt) |
$ | 25.02 | $ | 23.30 | ||||
Contract Amount |
$ | 4,035,000 | $ | 3,809,000 | ||||
Weighted Average Fair Value (per cwt) |
$ | 26.32 | $ | 23.83 | ||||
Fair Value |
$ | 4,245,000 | $ | 3,897,000 |
The above information does not include either our physical inventory or our fixed price purchase commitments for raw sugar. At December 31, 2009, our domestic futures position was a net long position of 4,838,000 cwt at an average contract price of $26.98 and an average fair value price of $32.84. Our world futures position at December 31, 2009 was a net long position of 642,000 cwt at an average contract price of $23.12 and an average fair value price of $26.95.
The information in the table below presents our natural gas futures positions outstanding as of December 31, 2010.
Expected Maturity Fiscal 2011 |
||||
Futures Contracts (long positions): |
||||
Contract Volumes (mmbtu) |
320,000 | |||
Weighted Average Contract Price (per mmbtu) |
$ | 4.42 | ||
Contract Amount |
$ | 1,416,000 | ||
Weighted Average Fair Value (per mmbtu) |
$ | 4.46 | ||
Fair Value |
$ | 1,427,000 |
At December 31, 2009, our natural gas futures position was a long position of 1,170,000 mmbtu with an average contract price of $6.08 and an average fair value price of $5.64.
At December 31, 2010 and 2009, we had no interest rate derivatives which were sensitive to interest rate changes.
Item 4. | CONTROLS AND PROCEDURES |
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2010, to provide reasonable assurance that information required
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to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in our internal controls over financial reporting that occurred during the three months ended December 31, 2010, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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Item 1. | Legal Proceedings |
The Company is party to a number of claims, including eighteen remaining lawsuits brought on behalf of eleven employees or their families and seven third parties or their families, for injuries and losses suffered as a result of the 2008 Port Wentworth refinery industrial accident. None of the lawsuits demand a specific dollar amount of damages sought by the plaintiffs. The Company previously settled thirty lawsuits related to the accident.
The Company has workers compensation insurance which provides for coverage equal to the statutory benefits provided to workers under state law. Additionally, the Company’s general liability policy provides for coverage for damages to third parties up to a policy limit of $100 million. While the Company believes, based on the facts of these cases, that claims by employees and certain contractors are limited to benefits provided under Georgia workers compensation law, the ultimate resolution of these matters could result in liability in excess of the amount accrued. The Company believes the likelihood of the aggregate liability, including the amounts paid in the previous settlements, exceeding the $100 million policy limit is remote.
In August 2010, the Company filed suit in the District Court of Fort Bend County, Texas, against one of its general liability excess insurers, XL Insurance Company America, Inc. (“XL”). XL issued a $25 million policy of insurance (a portion of the $100 million coverage described above) that provides coverage for lawsuits filed as a result of the Port Wentworth refinery industrial accident. XL, which has not denied coverage for payments for settlements or judgments, asserts that its policy does not include coverage of defense costs in litigation. The Company’s lawsuit seeks a declaration that pursuant to the insurance policy it issued to the Company, XL is required to pay the Company’s costs of defense in lawsuits filed by employees and third parties and their families for injuries and losses suffered as a result of the Port Wentworth refinery accident. In October 2010, XL removed the lawsuit to the United States District Court for the Southern District of Texas.
In December 2010, AdvancePierre Foods, Inc. (“Pierre”) filed suit against the Company and its distributor, Evergreen Sweeteners, Inc. in the United States District Court for the Western District of North Carolina seeking damages in connection with sugar that had been voluntarily recalled by the Company in July 2010. The claims asserted against the Company seek recovery of losses allegedly incurred by Pierre due to its alleged incorporation of recalled sugar in food products. Although the complaint does not specify alleged damages, Pierre previously indicated that its damages were approximately $3.2 million. The Company believes that its general liability insurance policy provides coverage for the damages asserted in connection with these claims, and that it may have additional coverage for these claims through another insurance policy. The insurer who provides the Company’s $1 million primary liability insurance policy has assumed the defense of this lawsuit. Ironshore Specialty Insurance Company (“Ironshore”), which provides $25 million of umbrella liability insurance coverage in excess of the $1 million primary liability insurance policy, has denied coverage for the Pierre property damage claims and two other property damage claims totaling $200,000 that involve the same recalled sugar. The Company believes that Ironshore’s umbrella liability insurance policy is enforceable to respond to Pierre’s lawsuit and the other property damage claims. In January 2011, the Company filed suit against Ironshore in the United States District Court for the Southern District of Texas seeking a declaratory judgment that Ironshore is required to provide coverage for the Pierre lawsuit and the other property damage claims pursuant to the umbrella liability insurance policy it issued to the Company.
In September 2010, the State of Georgia Department of Natural Resources Environmental Protection Division (“EPD”) issued a notice of violation to the Company in connection with discharges of excess quantities of sugar under the Company’s discharge permits for storm water and cooling water at its Port Wentworth, Georgia refinery. EPD is seeking a penalty of $45,000 for these violations. The Company is in negotiations with EPD regarding the proposed penalties and a comprehensive plan to maintain compliance with the terms of these permits and future environmental standards applicable to storm water and cooling water. Additional expenditures may be required to comply with current and future permits and environmental standards associated with storm water and cooling water, although the amount and timing of any further expenditure cannot currently be estimated.
In December 2010, the Louisiana Department of Environmental Quality (“LDEQ”) issued a Consolidated Compliance Order and Notice of Potential Penalty to the Company alleging violations of state environmental regulations and the terms of the wastewater discharge permit for the Company’s Gramercy, Louisiana refinery. The alleged violations relate to the release of foam into waters of the state and exceedances of applicable criteria for dissolved oxygen and pH. Issuance of a penalty assessment is being considered by LDEQ for the alleged violations. The Company investigated the alleged violations, took measures to cease and contain the foam discharge, and coordinated with the LDEQ to develop and implement a plan to remove and dispose of the foamy material and achieve and maintain compliance with applicable legal requirements.
In November 2010, the Company filed suit in the Fort Bend County, Texas District Court against Hills Fuel Company (“Hills”), its supplier of coal, for breach of contract. Hills failed to make deliveries due under the contract and the Company has been sourcing its supply of coal at prices higher than stipulated under the contract. Hills filed an answer in January 2011 denying the allegations in the complaint.
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The Company is party to other litigation and claims which are normal in the course of its operations. While the results of such litigation and claims cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a materially adverse effect on its consolidated results of operations, financial position or cash flows. In connection with the sales of certain businesses, the Company made customary representations and warranties, and undertook indemnification obligations with regard to certain of these representations and warranties including financial statements, environmental and tax matters, and the conduct of the businesses prior to the sale. These indemnification obligations are subject to certain deductibles, caps and expiration dates.
Item 1A. | Risk Factors |
There have been no material changes from the risk factors disclosed in Part I, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended September 30, 2010.
Item 6. | Exhibits |
(a) Exhibits
31.1 | Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934. | |
31.2 | Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934. | |
32 | Certifications required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
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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.
IMPERIAL SUGAR COMPANY | ||||||
(Registrant) | ||||||
Dated: February 4, 2011 | By: | /s/ H. P. Mechler | ||||
H. P. Mechler | ||||||
Senior Vice President and Chief Financial Officer |
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Exhibit Index
Exhibit |
Document | |
31.1 | Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934. | |
31.2 | Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934. | |
32 | Certifications required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
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