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 March 31, 2011
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
(Registrants 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 April 30, 2011, there were 12,244,983 shares of common stock, without par value, of the registrant outstanding.
IMPERIAL SUGAR COMPANY
Page | ||||||
PART I - FINANCIAL INFORMATION | ||||||
Item 1. |
Financial Statements |
|||||
3 | ||||||
4 | ||||||
5 | ||||||
Consolidated Statement of Changes in Shareholders Equity (Unaudited) |
6 | |||||
7 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
15 | ||||
Item 3. |
21 | |||||
Item 4. |
22 | |||||
PART II - OTHER INFORMATION | ||||||
Item 1. |
23 | |||||
Item 1A. |
24 | |||||
Item 4. |
24 | |||||
Item 6. |
24 | |||||
25 |
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.
2
PART I - FINANCIAL INFORMATION
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2011 |
September 30, 2010 |
|||||||
(In Thousands of Dollars) | ||||||||
ASSETS | ||||||||
Current Assets: |
||||||||
Cash and Cash Equivalents |
$ | 2,935 | $ | 22,750 | ||||
Marketable Securities |
194 | 198 | ||||||
Accounts Receivable, Net |
45,160 | 55,093 | ||||||
Inventories: |
||||||||
Finished Products |
37,049 | 30,526 | ||||||
Raw and In-Process Materials |
16,329 | 67,133 | ||||||
Supplies |
18,141 | 15,716 | ||||||
Total Inventory |
71,519 | 113,375 | ||||||
Deferred Income Taxes, Net |
| | ||||||
Prepaid Expenses and Other Current Assets |
23,396 | 40,949 | ||||||
Total Current Assets |
143,204 | 232,365 | ||||||
Other Investments |
46,171 | 15,952 | ||||||
Property, Plant and Equipment, Net |
253,960 | 280,211 | ||||||
Deferred Income Taxes, Net |
9,144 | 10,624 | ||||||
Other Assets |
3,221 | 2,414 | ||||||
Total |
$ | 455,700 | $ | 541,566 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
Current Liabilities: |
||||||||
Accounts Payable: |
||||||||
Raw Sugar |
$ | 13,945 | $ | 81,673 | ||||
Other Trade |
14,676 | 28,326 | ||||||
Total Accounts Payable |
28,621 | 109,999 | ||||||
Borrowing under Revolving Credit Line |
23,000 | 22,000 | ||||||
Deferred Income Taxes, Net |
11,427 | 11,427 | ||||||
Other Current Liabilities |
50,197 | 54,189 | ||||||
Total Current Liabilities |
113,245 | 197,615 | ||||||
Deferred Employee Benefits and Other Liabilities |
117,735 | 125,219 | ||||||
Commitments and Contingencies |
||||||||
Shareholders Equity: |
||||||||
Preferred Stock, Without Par Value, Issuable in Series; 5,000,000 Shares Authorized, |
| | ||||||
Common Stock, Without Par Value; 50,000,000 Shares Authorized; 12,244,983 and 12,145,098 Shares Issued and Outstanding at March 31, 2011 and September 30, 2010 |
131,296 | 130,168 | ||||||
Retained Earnings |
158,585 | 163,834 | ||||||
Accumulated Other Comprehensive Loss |
(65,161 | ) | (75,270 | ) | ||||
Total Shareholders Equity |
224,720 | 218,732 | ||||||
Total |
$ | 455,700 | $ | 541,566 | ||||
See notes to consolidated financial statements.
3
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, |
Six Months Ended March 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In Thousands of Dollars, Except per Share Amounts) | ||||||||||||||||
Net Sales |
$ | 192,166 | $ | 208,863 | $ | 419,555 | $ | 382,642 | ||||||||
Business Interruption Insurance Recovery |
| | | 84,677 | ||||||||||||
Cost of Sales (includes depreciation of $4,954,000 and $5,545,000 for the three months and $10,687,000 and $10,139,000 for the six months ended March 31, 2011 and 2010, respectively) |
(181,869 | ) | (249,710 | ) | (412,950 | ) | (411,089 | ) | ||||||||
Selling, General and Administrative Expense (includes depreciation of $212,000 and $329,000 for the three months and $431,000 and $664,000 for the six months ended March 31, 2011 and 2010, respectively) |
(9,667 | ) | (13,788 | ) | (19,316 | ) | (27,029 | ) | ||||||||
Insurance Recoveries Recognized |
| | | 193,796 | ||||||||||||
Gain on Contribution of Assets to Joint Venture |
3,598 | | 3,598 | | ||||||||||||
Operating Income (Loss) |
4,228 | (54,635 | ) | (9,113 | ) | 222,997 | ||||||||||
Interest Expense |
(435 | ) | (424 | ) | (798 | ) | (742 | ) | ||||||||
Interest Income |
386 | 13 | 399 | 42 | ||||||||||||
Other Income, Net |
1,266 | 2,223 | 581 | 3,209 | ||||||||||||
Income (Loss) before Income Taxes |
5,445 | (52,823 | ) | (8,931 | ) | 225,506 | ||||||||||
Benefit (Provision) for Income Taxes |
(1,290 | ) | 19,559 | 4,171 | (80,654 | ) | ||||||||||
Net Income (Loss) |
$ | 4,155 | $ | (33,264 | ) | $ | (4,760 | ) | $ | 144,852 | ||||||
Basic Earnings (Loss) per Share of Common Stock |
$ | 0.35 | $ | (2.82 | ) | $ | (0.40 | ) | $ | 12.28 | ||||||
Diluted Earnings (Loss) per Share of Common Stock |
$ | 0.34 | $ | (2.82 | ) | $ | (0.40 | ) | $ | 12.01 | ||||||
Weighted Average Shares Outstanding: |
||||||||||||||||
Basic |
11,896,085 | 11,799,787 | 11,870,914 | 11,794,787 | ||||||||||||
Diluted |
12,149,210 | 11,799,787 | 11,870,914 | 12,062,151 | ||||||||||||
See notes to consolidated financial statements.
4
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended March 31, |
||||||||
2011 | 2010 | |||||||
(In Thousands of Dollars) | ||||||||
Operating Activities: |
||||||||
Net Income (Loss) |
$ | (4,760 | ) | $ | 144,852 | |||
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By Operating Activities: |
||||||||
Insurance Recoveries Recognized |
| (278,473 | ) | |||||
Depreciation |
11,118 | 10,803 | ||||||
Deferred Income Taxes |
(4,171 | ) | 80,654 | |||||
Reclassification from Accumulated Other Comprehensive Income (Loss) to Net Income (Loss) |
(1,654 | ) | 512 | |||||
Cash (Paid) Received on Change in Fair Value of Derivative Instruments |
14,201 | (1,849 | ) | |||||
Gain on Contribution of Assets to Joint Venture |
(3,598 | ) | | |||||
Stock-Based Compensation |
1,802 | 1,360 | ||||||
Equity Earnings in Unconsolidated Subsidiaries |
85 | (2,131 | ) | |||||
Reduction of fair value of guarantee |
(700 | ) | | |||||
Excess Tax Benefits from Stock-Based Compensation |
290 | 75 | ||||||
Other |
114 | 113 | ||||||
Changes in Operating Assets and Liabilities: |
||||||||
Accounts Receivable |
9,645 | (15,017 | ) | |||||
Inventories |
41,856 | (20,861 | ) | |||||
Prepaid Expenses and Other Assets |
14,311 | (4,188 | ) | |||||
Accounts PayableRaw Sugar |
(67,728 | ) | 2,501 | |||||
Accounts PayableTrade |
(7,884 | ) | 17,794 | |||||
Other Liabilities |
(5,688 | ) | 302 | |||||
Net Cash Used In Operations |
(2,761 | ) | (63,553 | ) | ||||
Investing Activities: |
||||||||
Capital Expenditures |
(16,801 | ) | (58,301 | ) | ||||
Advances from Insurance Carriers |
| 51,000 | ||||||
Other |
(1 | ) | 16 | |||||
Investing Cash Flow |
(16,802 | ) | (7,285 | ) | ||||
Financing Activities: |
||||||||
Borrowing (Repayment) under Revolving Credit Line, Net |
1,000 | (30,000 | ) | |||||
Cash Dividends |
(578 | ) | (573 | ) | ||||
Excess Tax Benefits from Stock-Based Compensation |
(290 | ) | (75 | ) | ||||
Other |
(384 | ) | (187 | ) | ||||
Financing Cash Flow |
(252 | ) | (30,835 | ) | ||||
Increase (Decrease) in Cash and Cash Equivalents |
(19,815 | ) | (101,673 | ) | ||||
Cash and Cash Equivalents, Beginning of Period |
22,750 | 115,584 | ||||||
Cash and Cash Equivalents, End of Period |
$ | 2,935 | $ | 13,911 | ||||
Supplemental Non-Cash Items: |
||||||||
Tax Effect of Deferred Gains and Losses |
$ | 5,707 | $ | 380 | ||||
Purchase of Property, Plant and Equipment on Account |
$ | 1,221 | $ | 4,724 | ||||
See notes to consolidated financial statements.
5
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
For the Six Months Ended March 31, 2011
(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 Income: |
||||||||||||||||||||
Net Loss |
(4,760 | ) | (4,760 | ) | ||||||||||||||||
Foreign Currency Translation Adjustment (Net of Tax of $90,000) |
159 | 159 | ||||||||||||||||||
Change in Derivative Fair Value (Net of Tax of $5,124,000) |
9,077 | 9,077 | ||||||||||||||||||
Reclassification from Accumulated Other Comprehensive Income (Loss) to Net Income (Net of Tax of $597,000) |
(1,057 | ) | (1,057 | ) | ||||||||||||||||
Change in Pension Liability (Net of Tax of $1,090,000) |
1,930 | 1,930 | ||||||||||||||||||
Total Comprehensive Income |
5,349 | |||||||||||||||||||
Dividends ($0.04 per share) |
(489 | ) | (489 | ) | ||||||||||||||||
Restricted Stock Grants |
99,885 | 1,128 | 1,128 | |||||||||||||||||
Balance March 31, 2011 |
12,244,983 | $ | 131,296 | $ | 158,585 | $ | (65,161 | ) | $ | 224,720 | ||||||||||
See notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2011 AND 2010
(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 Companys Annual Report on Form 10-K for the year ended September 30, 2010. The Company operates its business as one domestic segmentthe 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 Companys 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 March 31, 2011 declined below the September 30, 2010 balance, resulting in the liquidation of a LIFO inventory layer with a cost approximately $17.1 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 property 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 are not 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, resulting in higher depreciation charges. The tax basis in the replaced assets will be reduced by the amount of the gain not recognized under the involuntary conversion rules.
7
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 Companys 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 Companys lawsuit seeks a declaration that pursuant to the insurance policy it issued to the Company, XL is required to pay the Companys costs of defense in lawsuits filed by claimants 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. The lawsuit is in the discovery phase.
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 insurer that issued the Companys $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 Companys $1 million primary liability insurance policy, has denied coverage for the Pierre property damage claims and two other property damage claims totaling approximately $200,000 that involve the same recalled sugar. The Company believes that Ironshores umbrella liability insurance policy is enforceable to respond to Pierres 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. The Company is an additional insured under another primary insurance policy and that insurer has also assumed the defense of this lawsuit under a reservation of rights. As a result, under the second primary insurance policy the Company has defense cost coverage and may have an additional $1 million of coverage in its capacity as an additional insured.
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 Companys Clean Water Act discharge permits for storm water and cooling water at its Port Wentworth, Georgia refinery. At that time, EPD indicated it expected to impose 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 its discharge 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 Companys 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. 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. LDEQ has indicated that it plans to assess a penalty for the alleged violations and invited a settlement proposal from the Company, which has been submitted and is under review by LDEQ.
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
8
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 and, in April 2011, Hills filed a counterclaim alleging that the Company breached the supply contract in not taking coal for a prolonged period of time and claiming $1.5 million in lost profits.
In March 2011, the Company filed suit in the United States District Court for the Southern District of Texas against Southern Systems, Inc. (SSI), the contractor who constructed the conditioning silos at the Companys Port Wentworth refinery, for breach of contract. The lawsuit seeks damages for deficiencies in construction of the conditioning silos. In correspondence to the Company, SSI stated its intent to file a counterclaim against the Company for $2.9 million for work it allegedly performed and was not paid.
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 remained 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 fair value of the guarantee. On January 6, 2011, the buyer redeemed $9.0 million of the industrial revenue bonds, releasing the Companys obligations related to such bonds. As a result of the redemption, the Company reduced the recorded liability by $0.7 million during the three months ended March 31, 2011.
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 Companys contribution, which will occur in three stages, consists of land and the existing refinery assets. 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 resulting in a gain of $3.6 million. After January 1, 2011, the Company continues 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 LSRs 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 six months ended March 31, 2011, the Company granted 146,440 shares of restricted stock to employees with a weighted average grant date fair value of $13.22 per share. These shares vest over periods of 33 to 48 months. Of these grants of restricted stock, 97,610 shares have performance and service conditions which must be met prior to vesting. The remaining 48,830 shares have only service conditions which must be met prior to vesting.
Additionally, during the six months ended March 31, 2011, the Company granted 51,545 restricted stock units (RSUs) to non-employee directors with a weighted average grant date fair value of $11.45 per unit. The RSUs vest six months following termination of Board service.
During the six months ended March 31, 2011, 104,067 restricted shares vested with a vesting date fair value of $1.2
9
million.
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 March 31, |
Six Months
Ended March 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net Income (Loss) |
$ | 4,155 | $ | (33,264 | ) | $ | (4,760 | ) | $ | 144,852 | ||||||
Average Shares Outstanding |
11,896,085 | 11,799,787 | 11,870,914 | 11,794,787 | ||||||||||||
Effect of Incremental Shares Issuable from Assumed Exercise of Stock Options and Nonvested Restricted Stock Under the Treasury Stock Method (1) |
253,125 | | | 267,364 | ||||||||||||
Adjusted Average Shares |
12,149,210 | 11,799,787 | 11,870,914 | 12,062,151 | ||||||||||||
Diluted EPS Net Income (Loss) |
$ | 0.34 | $ | (2.82 | ) | $ | (0.40 | ) | $ | 12.01 | ||||||
(1) | No assumed restricted stock share issuances or option exercises were included in the computation of diluted EPS for the six months ended March 31, 2011 and the three months ended March 31, 2010, because doing so would have an antidilutive effect on the computation of diluted earnings per share. Includes 211,541 shares of restricted stock and 41,584 options for the three months ended March 31, 2011 and 224,614 share of restricted stock and 42,750 options for the six months ended March 31, 2010. Excludes 1,085 and 549,108 antidilutive securities for the three and six months ended March 31, 2011 and 543,637 and 14,328 antidilutive securities for the three and six months ended March 31, 2010. |
7. PENSION AND OTHER POSTRETIREMENT BENEFITS
The components of net periodic benefit costs for the three months and six months ended March 31, 2011 and 2010 were (in thousands):
Three Months Ended March 31, |
Six Months
Ended March 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Pension Plans |
||||||||||||||||
Service Cost |
$ | 252 | $ | 291 | $ | 549 | $ | 582 | ||||||||
Interest Cost |
2,699 | 2,824 | 5,357 | 5,647 | ||||||||||||
Expected Return on Plan Assets |
(2,597 | ) | (2,575 | ) | (5,195 | ) | (5,150 | ) | ||||||||
Amortization of Prior Service Cost |
16 | 35 | 35 | 69 | ||||||||||||
Recognized Actuarial Loss |
934 | 816 | 2,014 | 1,633 | ||||||||||||
Curtailment Loss |
169 | | 169 | | ||||||||||||
Total Net Periodic Benefit Costs |
$ | 1,473 | $ | 1,391 | $ | 2,929 | $ | 2,781 | ||||||||
Postretirement Benefits Other than Pension Plans |
||||||||||||||||
Service Cost |
$ | 4 | $ | 5 | $ | 8 | $ | 10 | ||||||||
Interest Cost |
104 | 113 | 204 | 226 | ||||||||||||
Amortization of Prior Service Cost |
(398 | ) | (398 | ) | (797 | ) | (797 | ) | ||||||||
Recognized Actuarial Loss |
160 | 161 | 319 | 322 | ||||||||||||
Total Net Periodic Benefit Costs (Income) |
$ | (130 | ) | $ | (119 | ) | $ | (266 | ) | $ | (239 | ) | ||||
Pension plan contributions, which are based on regulatory requirements, were $6.0 million for the six months ended March 31, 2011 and $5.2 million for the six months ended March 31, 2010. Contributions during the remainder of fiscal
10
2011 are expected to be approximately $9.4 million. During the three months ended March 31, 2011 a curtailment loss of $169 thousand was recognized for the Colonial Union Pension Plan due to a reduction in headcount associated with the contribution of the Gramercy refinery assets to LSR. As a result of the revaluation of the Colonial Union Pension Plan liability triggered by the curtailment, accrued pension liabilities were reduced by $2.9 million and Accumulated Other Comprehensive Income increased $1.9 million net of tax.
8. OTHER INCOME
Other income included the following (in thousands of dollars):
Three Months Ended March 31, |
Six Months
Ended March 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Equity Earnings in investment in |
||||||||||||||||
Comercializadora Santos Imperial S. de R.L. de C.V. |
$ | 1,303 | $ | 772 | $ | 1,480 | $ | 869 | ||||||||
Wholesome Sweeteners, Inc. |
1,222 | 479 | 30 | 1,262 | ||||||||||||
Louisiana Sugar Refining, LLC |
(1,913 | ) | | (1,507 | ) | | ||||||||||
Reduction of fair value of guarantee |
700 | | 700 | | ||||||||||||
Settlement of natural gas pricing litigation |
| 761 | | 761 | ||||||||||||
Other |
(46 | ) | 211 | (122 | ) | 317 | ||||||||||
Total |
$ | 1,266 | $ | 2,223 | $ | 581 | $ | 3,209 | ||||||||
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 included a $2.4 million adjustment to the carrying value of Imperials investment to reflect the increased value of Wholesomes management incentive shares; such adjustments were not significant in prior periods. Absent this adjustment, Imperials 50% interest in Wholesomes net income was $2.4 million for the six months ended March 31, 2011. Summarized combined financial information for the Companys equity method investees for the three and six months ended March 31, 2011 and 2010 includes the following (in thousands of dollars):
Three Months Ended March 31, | ||||||||||||||||||||||||
Comercializadora Santos Imperial S. de R.L. de C.V. |
Wholesome Sweeteners, Inc. | Louisiana Sugar Refining, LLC |
||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Net Sales |
$ | 120,235 | $ | 71,647 | $ | 26,321 | $ | 23,069 | $ | 3,211 | $ | | ||||||||||||
Gross Profit |
$ | 4,196 | $ | 2,481 | $ | 6,543 | $ | 4,761 | $ | (3,746 | ) | $ | | |||||||||||
Operating Income |
$ | 3,717 | $ | 2,041 | $ | 4,148 | $ | 2,509 | $ | (5,506 | ) | $ | | |||||||||||
Net Income |
$ | 2,606 | $ | 1,543 | $ | 2,628 | $ | 1,039 | $ | (5,741 | ) | $ | | |||||||||||
Six Months Ended March 31, | ||||||||||||||||||||||||
Comercializadora Santos Imperial S. de R.L. de C.V. |
Wholesome Sweeteners, Inc. | Louisiana Sugar Refining, LLC |
||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Net Sales |
$ | 172,877 | $ | 112,685 | $ | 57,052 | $ | 47,143 | $ | 3,211 | $ | | ||||||||||||
Gross Profit |
$ | 5,102 | $ | 3,415 | $ | 13,904 | $ | 10,684 | $ | (3,746 | ) | $ | | |||||||||||
Operating Income |
$ | 4,126 | $ | 2,501 | $ | 8,693 | $ | 5,481 | $ | (6,707 | ) | $ | | |||||||||||
Net Income |
$ | 2,961 | $ | 1,737 | $ | 5,247 | $ | 3,055 | $ | (4,522 | ) | $ | |
11
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 Companys 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 March 31, 2011 and September 30, 2010 (in thousands of dollars):
March 31, 2011 | ||||||||||||||||||||||
Fair Value | Margin Requirements Settled in Cash |
Balance Sheet Total |
||||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
Current Assets: |
||||||||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
$90 | 463 | | $ | (553 | ) | | |||||||||||||||
Natural Gas |
17 | | | (17 | ) | | ||||||||||||||||
Marketable Securities |
194 | | | | $ | 194 | ||||||||||||||||
Current Liabilities: |
||||||||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
388 | 23 | | (411 | ) | | ||||||||||||||||
Natural Gas |
4 | | | (4 | ) | | ||||||||||||||||
Non-Current Assets: |
||||||||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
| 2,860 | | (2,860 | ) | | ||||||||||||||||
Non-Current Liabilities: |
||||||||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
| 7 | | (7 | ) | | ||||||||||||||||
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 | ) | |||||||||||||||||
Marketable Securities |
198 | | | | $ | 198 | ||||||||||||||||
Current Liabilities: |
||||||||||||||||||||||
No. 11 World Sugar Futures Contracts |
194 | | | (194 | ) | | ||||||||||||||||
Natural Gas |
333 | | | (333 | ) | | ||||||||||||||||
Non-Current Assets: |
||||||||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
25 | | | (25 | ) | | ||||||||||||||||
Non-Current Liabilities: |
||||||||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
276 | | | (276 | ) | |
Fair value hierarchy levels are as follows:
| Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| Level 2Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; |
| Level 3Prices 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 managements best estimate of fair value. |
The Company uses the market approach in determining the fair value of our Level 1 and Level 2 assets and liabilities. Valuation of Level 2 domestic sugar futures contracts is based on the pricing of the Intercontinental Exchange (ICE) Sugar No. 16 futures contract. The Companys policy for determining when transfers between levels are recognized is to do so at the end of each reporting period. Due to inactivity of trading in certain No. 16 domestic sugar futures contracts, the Company transferred contracts with a March 31, 2011 fair value of $3.3 million from Level 1 to Level 2.
12
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 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 raw sugar futures contracts up to 18 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 6 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 years 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 March 31, 2011 we had the following net futures positions:
Hedge Designation |
Domestic Sugar (cwt) |
World Sugar (cwt) |
Natural Gas (mmbtu) |
|||||||||
Cash Flow |
1,565,760 | | | |||||||||
Not Designated |
105,280 | | 150,000 |
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 $3.0 million recorded on the balance sheet for cash held on deposit in margin accounts at March 31, 2011 for the futures positions above. At March 31, 2011 there were no derivative positions to mitigate the risk of interest rates or foreign currency exchange. For the six month period ended March 31, 2011, we did not engage in trading activity with derivatives.
13
The table below shows the location and amounts in the consolidated balance sheets for derivative instruments (in thousands):
As of March 31, 2011:
Hedge Designation | Fair Value |
Margin Requirements Settled in Cash |
Balance Sheet Total |
|||||||||||||
Current Assets: |
||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
Not Designated | $ | 3 | $ | (3 | ) | | |||||||||
No. 16 Domestic Sugar Futures Contracts |
Cash Flow | 550 | (550 | ) | | |||||||||||
Natural Gas |
Not Designated | 17 | (17 | ) | | |||||||||||
Current Liabilities: |
||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
Not Designated | $ | 47 | $ | (47 | ) | | |||||||||
No. 16 Domestic Sugar Futures Contracts |
Cash Flow | 364 | (364 | ) | | |||||||||||
Natural Gas |
Not Designated | 4 | (4 | ) | | |||||||||||
Non-Current Assets: |
||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
Cash Flow | 2,860 | (2,860 | ) | | |||||||||||
Non-Current Liabilities: |
||||||||||||||||
No. 16 Domestic Sugar Futures Contracts |
Cash Flow | 7 | (7 | ) | |
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 March 31, 2011 | Six Months Ended March 31, 2011 | |||||||||||||||||||||||
Domestic Sugar |
World Sugar |
Natural Gas |
Domestic Sugar |
World Sugar |
Natural Gas |
|||||||||||||||||||||
Cash Flow |
Cost of Sales(1) |
$ | (1,186 | ) | $ | | $ | 142 | $ | (2,248 | ) | $ | | $ | 594 | |||||||||||
Cash Flow |
Accumulated other comprehensive loss |
(1,565 | ) | | | (14,248 | ) | | 47 | |||||||||||||||||
Not Designated |
Cost of Sales (credit) |
126 | (327 | ) | 48 | (1,895 | ) | (4,390 | ) | 11 |
(1) | Amounts were reclassified from accumulated other comprehensive income. |
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 March 31, 2010 | Six Months Ended March 31, 2010 | |||||||||||||||||||||||
Domestic Sugar |
World Sugar |
Natural Gas |
Domestic Sugar |
World Sugar |
Natural Gas |
|||||||||||||||||||||
Cash Flow |
Cost of Sales(1) |
$ | | | 184 | | | 524 | ||||||||||||||||||
Cash Flow |
Accumulated other comprehensive loss |
| | 1,313 | | | 1,849 | |||||||||||||||||||
Not Designated |
Cost of Sales (credit) |
7,070 | 8,616 | 134 | (11,796 | ) | 8,564 | 207 |
(1) | Amounts were reclassified from accumulated other comprehensive income. |
14
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 $9.0 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 six months ended March 31, 2011 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 $5,124,000) |
9,077 | 9,077 | ||||||||||||||
Reclassification from Accumulated Other Comprehensive Income (Loss) to Net Income (Net of Tax of $597,000) |
(1,057 | ) | (1,057 | ) | ||||||||||||
Change in Pension Liability (Net of Tax of $1,090,000) |
1,930 | 1,930 | ||||||||||||||
Foreign Currency Translation Adjustment (Net of Tax of $90,000) |
159 | 159 | ||||||||||||||
Balance March 31, 2011 |
$ | 7,779 | $ | (73,145 | ) | $ | 205 | $ | (65,161 | ) | ||||||
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.
Item 2. | MANAGEMENTS 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.
On January 1, 2011, we contributed the equipment and personal property of our existing Gramercy refinery (other than our small packaging assets) to Louisiana Sugar Refining, LLC (LSR), a one-third owned joint venture in accordance with the terms of our joint venture agreement and recognized a $3.6 million gain. We continue to operate the small bag packaging facility in Gramercy and have 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 three months 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.
15
Results of Operations
Three and Six Months Ended March 31, 2011 compared to Three and Six Months Ended March 31, 2010
For the three months ended March 31, 2011, we reported net income of $4.2 million or $0.34 per diluted share, compared to a net loss of $33.3 million or $2.82 per diluted share during the second fiscal quarter of the prior year. For the six months ended March 31, 2011, we reported a net loss of $4.8 million or $0.40 per diluted share, compared to net income of $144.9 million or $12.01 per diluted share for the same period last year. The LSR contribution, recognition of insurance proceeds, derivative activity and LIFO inventory had a significant impact on our reported earnings in these periods. Absent these items, operating income would have been $5.4 million for the three months ended March 31, 2011 and a $1.0 million operating loss for the six months ended March 31, 2011, as compared to operating losses of $12.8 million and $23.8 million for the three and six months ended March 31, 2010 respectively. We discuss these and other factors in more detail below.
Sugar sales comprised approximately 97% of our net sales in all periods. Sugar sales volumes and prices were:
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
Volume | Price | Volume | Price | Volume | Price | Volume | Price | |||||||||||||||||||||||||
(000 cwt) | (per cwt) | (000 cwt) | (per cwt) | (000 cwt) | (per cwt) | (000 cwt) | (per cwt) | |||||||||||||||||||||||||
Sugar Sales: |
||||||||||||||||||||||||||||||||
Industrial |
2,090 | $ | 43.37 | 2,970 | $ | 34.84 | 4,483 | $ | 40.83 | 5,454 | $ | 33.56 | ||||||||||||||||||||
Consumer |
1,314 | 50.19 | 1,106 | 47.37 | 3,141 | 48.88 | 2,370 | 45.39 | ||||||||||||||||||||||||
Distributor |
549 | 48.90 | 979 | 40.35 | 1,253 | 47.51 | 1,750 | 39.49 | ||||||||||||||||||||||||
Domestic Sales |
3,953 | 46.41 | 5,055 | 38.65 | 8,877 | 44.62 | 9,574 | 37.57 | ||||||||||||||||||||||||
World Sales |
40 | 44.93 | 208 | 37.64 | 321 | 36.02 | 392 | 35.12 | ||||||||||||||||||||||||
Sugar Sales |
3,993 | $ | 46.39 | 5,263 | $ | 38.61 | 9,198 | $ | 44.32 | 9,966 | $ | 37.48 | ||||||||||||||||||||
Net sales decreased 8.0% for the three months ended March 31, 2011, compared to the same period in the prior year. Domestic sugar volumes decreased 21.8% for the quarter primarily due to the reduction in volumes from the Gramercy refinery after the contribution of the facility to LSR. Domestic sales prices increased 20.1% for the quarter. Net sales for the six month period increased 9.6% over the six months ended March 31, 2010. Domestic sugar volumes decreased 7.3% for the six months ended March 2011 as compared to the prior year period quarter primarily due to the contribution of the Gramercy facility to LSR offset in part by higher production at the Port Wentworth refinery. Domestic sales prices increased 18.8% for the current six month period. 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.
For the three months ended March 31, 2011, gross margin as a percentage of sales increased to 5.4% compared to a negative 19.6% in the prior year quarter. The increase in gross margin percentage is primarily due to higher refined sugar sales prices, as well as the effect of recognizing losses on raw sugar derivatives in the prior year quarter which were intended to hedge raw sugar purchases in later periods. Gross margin as a percent of sales for the six months ended March 31, 2011 improved to 1.6% from a negative 7.4% for the same period last year primarily due to higher refined sugar prices partially offset by higher raw sugar costs.
16
Tight supply conditions in the world raw sugar market have 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 | ||
March 31, 2011 |
$ | 39.63 |
Our cost of domestic raw cane sugar increased to $33.87 per cwt (on a raw market basis) for the current year quarter as compared to $30.15 per cwt for the quarter ended March 31, 2010. Raw sugar costs for the six months ended March 31, 2011 were $31.03 per cwt (on a raw market basis) compared to $27.82 per cwt for the six months ended March 31, 2010. 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 Companys 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.
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 | ) | |||||||||||||||||||||
The prior years cost of sales included $24.8 million of losses for the quarter ended March 31, 2010 and $5.9 million of losses for the six months ended March 31, 2010 recognized on raw sugar derivatives which were intended to hedge raw sugar purchases in subsequent periods. These derivative losses decreased gross margin percentage for the quarter ended March 31, 2010 by 11.9% and 1.5% for the six months ended March 31, 2010. Additionally, both the current and prior years 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 $31.7 million lower in the six months and $41.8 million lower in quarter ended March 31, 2010 resulting in gross margins of 0.9% and 0.4% respectively. Similarly, had hedge accounting been applied in prior periods, raw sugar costs
17
would have been $28.8 million lower for the six months and $19.1 million lower for quarter ended March 31, 2011 resulting in gross margins of 8.4% and 15.3%, respectively, including the effects of LIFO liquidations described below.
Sugar inventory quantities at March 31, 2011 declined below the September 30, 2010 level primarily as a result of the contribution of the Gramercy refinery to LSR, resulting in the liquidation of a LIFO inventory layer with a cost approximately $17.1 million below the cost of current purchases for the six months ended March 31, 2011 and $14.3 million for the three months ended March 31, 2011.
Manufacturing costs per cwt in Port Wentworth improved compared to the same quarter and six month periods last year as the increased average daily melt helped improve fixed cost absorption. Sugar yields also improved and gross margin increased by 3.5% for the quarter ended March 31, 2011 and 1.1% for the six months ended March 31, 2011 largely as a result of these lower costs and improved yields. 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. Although the silo repairs were completed in mid-January, the silos were not placed back in service until the first week of April 2011 in an effort to minimize the impact on servicing customers needs. The refinery ran at reduced production rates during this period from December 2010 through March 2011. The average daily melt for the month of April 2011 was 4.4 million pounds per day. 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 | ||
Second quarter fiscal 2011 |
4.2 | 89 |
Gramercys packaging costs for the current quarter were significantly impacted by the slower than expected restart of the LSR refinery. The LSR refinery was restarted in early February 2011 and began delivering refined sugar in mid-February thereby limiting the packaging volume in Gramercy and negatively impacting costs. Gramercy packaging volumes for the quarter were approximately 40% of the amount expected to be purchased from LSR under the 3.5 million cwt annual commitment. The increased Gramercy cost per cwt reduced gross margin percentage by 1.4% for the quarter. Manufacturing costs for the six month period were higher than the prior year as the final quarter of refining operations in Gramercy prior to the LSR contribution was challenging with reduced yields, higher energy and environmental costs as well as a lower average daily melt. Gross margin percentage was negatively impacted by 2.2% for the six months ended March 2011 as a result of these higher Gramercy costs. In addition, the cost of market-related purchases of bulk refined sugar from LSR exceeded the prior years cost of producing bulk sugar, reducing gross margin by 1.3% and 0.6%, respectively, for the three months and six months ended March 31, 2011.
Energy costs per cwt were lower than the prior year for the quarter and the six months as lower natural gas prices were partially offset by higher coal cost. The table below shows our energy cost by source with the natural gas cost shown on a NYMEX basis after applying gains and losses from hedging activity.
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
Volume | Price | Volume | Price | Volume | Price | Volume | Price | |||||||||||||||||||||||||
(000 mmbtu) | (per mmbtu) | (000 mmbtu) | (per mmbtu) | (000 mmbtu) | (per mmbtu) | (000 mmbtu) | (per mmbtu) | |||||||||||||||||||||||||
Natural Gas |
575 | $ | 4.45 | 1,187 | $ | 5.45 | 1,462 | $ | 4.31 | 2,330 | $ | 5.07 | ||||||||||||||||||||
Coal |
197 | 5.22 | 63 | 4.25 | 505 | 5.11 | 63 | 4.25 | ||||||||||||||||||||||||
Total |
773 | $ | 4.65 | 1,249 | $ | 5.39 | 1,967 | $ | 4.51 | 2,392 | $ | 5.05 | ||||||||||||||||||||
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Transportation costs for quarter and the six months increased compared to the same prior year periods primarily due to higher costs to service retail customers as a result of the delayed restart of the Gramercy packaging operations, higher fuel costs and higher rail fleet costs. As a result of these factors, gross margin declined 1.2% for the quarter and 0.7% for the six months ended March 31, 2011.
Selling, general and administrative costs in the second quarter decreased $4.1 million from the prior year second quarter primarily due to $3.7 million of workers compensation costs in last years second quarter for a loss based assessment under the state of Georgias Subsequent Injury Trust Fund. Selling, general and administrative costs for the six months ended March 31, 2011 declined $7.7 million from the same period last year, primarily due to the $3.7 million workers compensation assessment, $2.6 million of lower legal costs principally related to the February 2008 Port Wentworth accident and $1.0 million of lower employee 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 negative operating results in the LSR ventures first quarter of operations. Other income for the six months March 31, 2011 was lower than the prior period primarily due to LSR as well as a reduction in the carrying value of our equity based investment in Wholesome Sweeteners, reflecting an increase in the value of Wholesomes management equity incentive shares.
The Company has estimated a combined federal and state income tax rate of 46.7% for the six months ended March 31, 2011 compared to 35.8% in the same period last year. The most significant item affecting the comparability of the effective tax rate is an increase in the proportion of favorable permanent differences between reported GAAP income and taxable income, compared to the net loss for the six months ended March 31, 2011.
Liquidity and Capital Resources
At March 31, 2011, the Company had cash and cash equivalents of $2.9 million and $23 million of outstanding borrowings under our $100 million revolving credit agreement with Bank of America, N.A. (the Revolver). The Company had the capacity under the March 31, 2011 borrowing base formula to borrow an additional $56.8 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 pre-accident 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 level of earnings before interest, taxes, depreciation and amortization, as defined (EBITDA) covenant if our quarterly 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 have received a commitment, subject to final documentation, from Bank of America, N.A. to provide a $140 million revolving credit facility maturing in December 2015. This proposed facility will refinance our current facility and will be used to finance various ongoing capital needs of the Company as well as for other general corporate purposes. The proposed revolving credit facility matures on December 31, 2015 and will have no financial covenants so long as availability (defined as the borrowing base, less actual borrowings and letters of credit) exceeds $25 million; otherwise a minimum EBITDA test would apply until availability has been greater than $30 million for three consecutive months. Advances under the proposed facility are subject to a borrowing base which specifies advance rates against eligible receivables and inventory, as well as an initial $40 million allowable advance against property, plant and equipment. The proposed facility is secured by the Companys cash and cash equivalents, accounts receivable, inventory, substantially all property, plant and equipment and certain investments. All domestic subsidiaries of the Company would be borrowers or guarantors under the facility. Interest rates under the proposed facility would be LIBOR plus a margin that varies (with liquidity as defined) from 2.00% to 2.75%, or the base rate (Bank of America prime rate) plus a margin of 0.75% to positive 1.50%. Although the final maturity of the proposed facility is December 31, 2015, the Company would classify debt under the proposed facility as current, as the agreement contains a subjective acceleration clause which can be exercised, if, in the opinion of the lender, there is a material adverse effect, and provides the lenders direct access to our cash receipts.
The current Revolver is secured by substantially all of our current assets, certain investments and certain property, plant and equipment. Each of our domestic subsidiaries is either a borrower or a guarantor under the facility. Interest on
19
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 current and proposed agreements contain 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 quarterly average total liquidity (defined as the average of the borrowing base, less average actual borrowings and letters of credit) falls below $20 million, the current Revolver requires that we comply with a quarterly covenant which establishes a minimum EBITDA. The current 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 March 31, 2011 was $63 million.
The current 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.
Our capital expenditures for the quarter and six months ended March 31, 2011 were $6.7 million and $16.8 million, respectively, and included 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.
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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 $14.2 million of gains in Other Comprehensive Income.
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 raw sugar futures positions outstanding as of March 31, 2011.
Expected Maturity Fiscal 2011 |
Expected Maturity Fiscal 2012 |
|||||||
Domestic Futures Contracts (net long positions): |
||||||||
Contract Volumes (cwt) |
556,000 | 1,116,000 | ||||||
Weighted Average Contract Price (per cwt) |
$ | 40.41 | $ | 33.20 | ||||
Contract Amount |
$ | 22,449,000 | $ | 37,037,000 | ||||
Weighted Average Fair Value (per cwt) |
$ | 39.87 | $ | 36.16 | ||||
Fair Value |
$ | 22,149,000 | $ | 40,333,000 |
The above information does not include either our physical inventory or our fixed price purchase commitments for raw sugar. At March 31, 2010, our domestic futures position was a net long position of 5,582,000 cwt at an average contract price of $30.18 and an average fair value price of $29.65. Our world futures position at March 31, 2010 was a net long position of 1,305,000 cwt at an average contract price of $23.49 and an average fair value price of $16.59.
The information in the table below presents our natural gas futures positions outstanding as of March 31, 2011.
Expected Maturity Fiscal 2011 |
||||
Futures Contracts (long positions): |
||||
Contract Volumes (mmbtu) |
150,000 | |||
Weighted Average Contract Price (per mmbtu) |
$ | 4.41 | ||
Contract Amount |
$ | 662,000 | ||
Weighted Average Fair Value (per mmbtu) |
$ | 4.50 | ||
Fair Value |
$ | 674,000 |
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At March 31, 2010, our natural gas futures position was a long position of 630,000 mmbtu with an average contract price of $6.23 and an average fair value price of $4.12.
At March 31, 2011 and 2010, 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 March 31, 2011, to provide reasonable assurance that information required 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 Commissions 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 March 31, 2011, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
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 Companys 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 Companys lawsuit seeks a declaration that pursuant to the insurance policy it issued to the Company, XL is required to pay the Companys costs of defense in lawsuits filed by claimants 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. The lawsuit is in the discovery phase.
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 insurer that issued the Companys $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 Companys $1 million primary liability insurance policy, has denied coverage for the Pierre property damage claims and two other property damage claims totaling approximately $200,000 that involve the same recalled sugar. The Company believes that Ironshores umbrella liability insurance policy is enforceable to respond to Pierres 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. The Company is an additional insured under another primary insurance policy and that insurer has also assumed the defense of this lawsuit under a reservation of rights. As a result, under the second primary insurance policy the Company has defense cost coverage and may have an additional $1 million of coverage in its capacity as an additional insured.
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 Companys Clean Water Act discharge permits for storm water and cooling water at its Port Wentworth, Georgia refinery. At that time, EPD indicated it expected to impose 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 its discharge 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 Companys 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. 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. LDEQ has indicated that it plans to assess a penalty for the alleged violations and invited a settlement proposal from the Company, which has been submitted and is under review by LDEQ.
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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 and, in April 2011, Hills filed a counterclaim alleging that the Company breached the supply contract in not taking coal for a prolonged period of time and claiming $1.5 million in lost profits.
In March 2011, the Company filed suit in the United States District Court for the Southern District of Texas against Southern Systems, Inc. (SSI), the contractor who constructed the conditioning silos at the Companys Port Wentworth refinery, for breach of contract. The lawsuit seeks damages for deficiencies in construction of the conditioning silos. In correspondence to the Company, SSI stated its intent to file a counterclaim against the Company for $2.9 million for work it allegedly performed and was not paid.
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 Companys Annual Report on Form 10-K for the year ended September 30, 2010.
Item 4. | Submission of Matters to a Vote of Security Holders |
On February 18, 2011, the Company held its annual meeting of shareholders and voted on five proposals.
(1) Three directors were elected with votes cast as follows:
Nominee |
Votes for | Votes against | Abstentions | |||||||||
Directors in Class III Terms expiring at the 2014 Annual |
||||||||||||
Gaylord O. Coan |
6,167,840 | 621,495 | 80,220 | |||||||||
David C. Moran |
6,290,094 | 495,398 | 84,063 | |||||||||
John E. Stokely |
6,373,434 | 413,165 | 82,956 |
The following five directors of the Company whose terms of office are scheduled to continue until 2012 or 2013 are as follows:
James J. Gaffney
Yves-Andre Istel
Ronald C. Kesselman
John Sheptor
John K. Sweeney
(2) The shareholders approved an amendment and restatement of the Companys Long Tern Incentive Plan., with votes cast as follows:
Votes for |
Votes against | Abstentions | ||||||||||
5,506,130 |
1,250,223 | 113,202 |
(3) The shareholders ratified the appointment of Deloitte & Touche L.L.P. as the Companys independent registered public accounting firm for the fiscal year ending September 30, 2011, with votes cast as follows:
Votes for |
Votes against | Abstentions | ||||||||||
9,596,395 |
210,163 | 53,519 |
(4) The shareholders approved, on an advisory basis, the compensation of the Companys named executive officers, with votes cast as follows:
Votes for |
Votes against | Abstentions | ||||||||||
6,375,826 |
420,590 | 73,139 |
(5) The shareholders indicated, on an advisory basis, a preference for holding an advisory vote on the compensation of the Companys named executive officers each year, with votes cast as follows:
One Year |
Two Years | Three Years | Abstentions | |||||||||
5,889,654 |
218,553 | 688,237 | 73,111 |
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. |
24
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: May 9, 2011 | By: | /S/ H. P. MECHLER | ||
H. P. Mechler | ||||
Senior Vice President and Chief Financial Officer |
25
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. |
26
Exhibit 31.1
CERTIFICATION
I, John C. Sheptor, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Imperial Sugar Company; |
2. | Based on my knowledge, this 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 report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
4. | The registrants 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrants 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 |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants 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 registrants internal control over financial reporting. |
Date: May 9, 2011 | By: | /s/ John C. Sheptor | ||||
John C. Sheptor | ||||||
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, H.P. Mechler, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Imperial Sugar Company; |
2. | Based on my knowledge, this 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 report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
4. | The registrants 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrants 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 |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants 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 registrants internal control over financial reporting. |
Date: May 9, 2011 | By: | /s/ H. P. Mechler | ||||
H. P. Mechler | ||||||
Senior Vice President and Chief Financial Officer |
Exhibit 32
Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18,
United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), John C. Sheptor, President and Chief Executive Officer, and H.P. Mechler, Senior Vice President and Chief Financial Officer, of Imperial Sugar Company, a Texas corporation (the Company), each hereby certifies that, to the best of his knowledge:
(1) | the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (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. |
Dated: May 9, 2011 | /s/ John C. Sheptor | |||||
John C. Sheptor | ||||||
President and Chief Executive Officer | ||||||
/s/ H. P. Mechler | ||||||
H. P. Mechler | ||||||
Senior Vice President and Chief Financial Officer |