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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended September 30, 2011
Commission File No. 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.) |
8016 Highway 90-A, P.O. Box 9, Sugar Land, Texas 77487-0009
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (281) 491-9181
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Name of each exchange on which registered | |
| Common Stock, without par value Rights to Purchase Preferred Stock |
The NASDAQ Stock Market LLC The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ¨
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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ¨ | Accelerated Filer | x | |||
| Non-Accelerated Filer | ¨ | Smaller Reporting Company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on March 31, 2011, the last business day of registrant’s most recently completed second fiscal quarter, based on the last reported trading price of the registrant’s common stock on the NASDAQ Stock Market LLC on that date, was approximately $156 million.
There were 12,219,036 shares of the registrant’s common stock outstanding on January 4, 2012.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for registrant’s 2012 Annual Shareholders Meeting are incorporated by reference into Part III of this report.
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Forward-Looking Statements
Statements regarding future market prices and margins, our liquidity and ability to finance our operations and capital investment programs, future expenses and liabilities arising from the Port Wentworth refinery incident, future costs and liabilities arising from the Louisiana Sugar Refining LLC venture, future import and export levels, future government and legislative action, future environmental regulatory and compliance costs, future operating results, future availability and cost of raw sugar, operating efficiencies, results of future investments and initiatives, future asset sales, future cost savings, future product innovations, future energy costs, future pension plan contributions and other statements that are not historical facts contained in this report on Form 10-K 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 and equipment delays, our ability to obtain financing and the terms of any such financing, 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-K are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report.
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PART I
Overview
Imperial Sugar Company was incorporated in 1924 and is the successor to a cane sugar plantation and milling operation founded in Sugar Land, Texas in the early 1800s that began producing granulated sugar in 1843. Imperial Sugar Company (which together with its subsidiaries is referred to herein as the “Company”, “we”, “us”, “our” and “ours”) is one of the largest processors and marketers of refined sugar in the North American Free Trade Agreement, or NAFTA, region. We refine, package and distribute cane sugar at a refinery and packaging facility in Georgia and a packaging facility located in Louisiana. For the year ended September 30, 2011, we sold approximately 18 million hundredweight, or cwt, of refined sugar. Additionally, through joint venture operations, we market sugar and other sweeteners in the NAFTA region.
We offer a broad product line and sell to a wide range of customers directly and indirectly through wholesalers and distributors. Our customers include retailers, restaurant chains, distributors and industrial customers, principally food manufacturers. Our products include granulated, powdered, liquid and brown sugars, co-crystallized sweeteners and syrups marketed in a variety of packaging options (6 oz shakers to 50-pound bags and in bulk) under various brands (Dixie Crystals®, Imperial® , Savannah Gold® , NatureWise® and Holly®) or private labels. In addition, we market organic and fair trade sweeteners and sugar/stevia sweetener blends through joint ventures.
The Company experienced an industrial accident in February 2008, at its sugar refinery in Port Wentworth, Georgia, which is located near Savannah, Georgia. Production at the refinery, which comprised approximately 60% of our capacity at that time, was suspended after the accident until we commenced production in the summer of 2009.
In December 2011, we sold our one-third interest in a joint venture established to construct and operate a new refinery at our former Gramercy, Louisiana site, to our partners in the joint venture. Under the terms of the joint venture agreement, in January 2011 we contributed our Louisiana refinery to the joint venture, which constructed a new cane sugar refinery adjacent to the existing refinery. Please read “—Joint Venture Operations”.
Overview of the Domestic Sugar Industry
Refined sugar can be produced by either processing sugar beets or refining raw sugar produced from sugar cane. The profitability of cane and beet sugar operations is affected by government programs designed to support the price of domestic crops of sugar cane and sugar beets. Approximately 70% of domestic sugar demand is supplied by domestic crops, with the balance provided by Mexican imports under NAFTA, and foreign imports under a U.S. quota program.
Cane Sugar Production Process
Sugar cane is grown in tropical and semitropical climates throughout the world as well as domestically in Florida, Louisiana, Texas and Hawaii. Sugar cane is processed into raw sugar by raw cane mills promptly after harvest. Raw sugar is approximately 98% sucrose and may be stored for long periods and transported over long distances without affecting its quality. Raw and refined sugar imports from countries other than Mexico are limited by United States government programs.
Cane sugar refineries like the one we operate purify raw sugar to produce refined sugar. Operating results of cane sugar refineries are driven primarily by the spread between raw sugar and refined sugar prices and by the conversion and other costs of the refining process.
Government Regulation
Federal government programs have existed to support the price of domestic crops of sugar beets and sugar cane almost continually since 1934. The regulatory framework that affects the domestic sugar industry includes the Food Conservation and Energy Act of 2008, known as the 2008 Farm Bill. The 2008 Farm Bill provides for loans on sugar inventories to first processors (i.e., raw cane sugar mills and beet processors), implements a tariff rate quota
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that limits the amount of raw and refined sugar that can be imported duty free into the United States, and imposes marketing allotments on sugar beet processors and domestic raw cane sugar producers except under certain circumstances. NAFTA provides that sugar can be imported from or exported to Mexico duty free after January 1, 2008. Please read “—Sugar Legislation and Other Market Factors.”
Domestic Supply and Demand
Domestic demand for refined sugar has increased at a compound annual growth rate of 1.8% during the past five years. Demand for refined sugar has historically been consistent with population growth and is influenced by consumer preferences for sugar versus alternative sweeteners and dietary trends.
Domestic sugar supplies are most significantly influenced by the size of the domestic sugar beet crop, USDA import quotas and, in recent years, the availability of Mexican sugar for import under NAFTA. Based on data published by the U.S. Department of Agriculture, or USDA, beet sugar production for the past five years has ranged from 39.7% to 49.4% of domestic demand, and is forecasted for crop year 2011/2012 to be 39.6%. Mexican imports during the same five-year period have ranged from 1.5% to 15.1% of U.S. demand, and are estimated by the USDA to be 13.9% in crop year 2011/2012. Current USDA supply and demand estimates forecast a continued tight U.S. sugar supply in crop year 2011/2012, with ending stocks-to-use ratio (the ratio of domestic sugar inventories to domestic demand) declining from 12.7% at September 30, 2011 to 10.3% at September 30, 2012.
Domestic Refined Sugar Prices
Large sugar beet crops have historically led to relatively low refined sugar prices and small crops have led to relatively high refined sugar prices. Recently, the availability of Mexican sugar for import under NAFTA has also influenced supplies and prices in the U.S. A tightening U.S. supply/demand balance as reflected in USDA projections, as well as higher domestic raw sugar costs attributable to domestic as well as world market factors, have resulted in rising domestic prices. We cannot predict the duration of any pricing trend or the effect a sustained trend may have on the sugar industry. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Raw Sugar Availability and Prices
Raw sugar is produced domestically or imported from Mexico or other origins under limitations imposed in the 2008 Farm Bill, subject to minimum levels established in trade treaties. The price and availability of raw sugar to U.S. refiners is dependent on the size of the domestic sugar cane crop and the level of imports. Domestic raw sugar prices increased during the past two and a half years to their highest levels in 30 years in part as the result of a shortage in the world raw sugar market and USDA management of the sugar supplies under the 2008 Farm Bill. We cannot predict the duration of any pricing trend or the effect a sustained trend may have on the sugar industry.
Our Products and Customers
Imperial Sugar is one of the largest processors and marketers of refined sugar in the United States. Refined sugar is our principal product line and accounted for approximately 97% of our consolidated net sales for the year ended September 30, 2011. We produce refined sugar from raw cane sugar and market our sugar products to retailers, distributors and industrial food manufacturers directly through our sales force and indirectly through wholesalers and independent brokers. No customer accounted for more than 10% of our net sales in fiscal 2011.
We maintain sales offices at our headquarters in Sugar Land, Texas, in Port Wentworth, Georgia and at regional locations across the United States. Sales are accomplished through a variety of methods, including direct negotiation, publishing price lists, competitive bidding processes and trade promotions. We consider our marketing and promotional activities important to our overall sales effort, and we advertise our brand names in print media, radio, internet websites and social media. We also distribute various promotional materials, including discount coupons and recipes.
We develop new, innovative value-added products for our customers and consumers. In the retail channel we have introduced new packaging such as stand-up pouches, shakers and pre-measured brown sugar. We have added natural high intensity sweeteners such as sucrose blended with stevia and monk fruit to our portfolio of products. Additionally, we are developing non-traditional sucrose containing products such as polyurethane foam.
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Retail Sales—We produce and sell granulated white, brown and powdered sugar to retailers and distributors in packages ranging from 6 oz. shakers to 50-pound bags. Retail packages are marketed under the trade names:
| • | Dixie Crystals® |
| • | Imperial® |
| • | Holly® |
Retail packages are also sold under retailers’ private labels, generally at prices lower than those for branded sugar. Core geographies for our branded sugar and private label products include the Southeast and Southwest United States. Our primary business strategy is to capitalize on our well-known brands and expand brand penetration through product and packaging innovation. Sales of refined sugar products to retail customers accounted for approximately 37% of our refined sugar sales revenue in fiscal 2011. Sales made to retail customers in the year ended September 30, 2011, were approximately 32% branded and 68% private label.
Industrial Sales—We produce and sell refined sugar, molasses and other ingredients to industrial customers, principally food manufacturers, in bulk, packaged or liquid form. Food manufacturers purchase sugar for use in the preparation of confections, baked products, frozen desserts, cereal, dairy products, canned goods, beverages and various other food products. Historically, we have made the majority of our sales to industrial customers under fixed price, forward sales contracts with terms of up to one year (and occasionally longer). Industrial sales historically provide lower margins than retail and distributor sales. For the year ended September 30, 2011, our sales of refined sugar products to industrial customers accounted for approximately 47% of our refined sugar sales revenue.
Distributor Sales—We sell a variety of sugar products (including granulated, powdered and brown sugar) in package sizes ranging from one-pound packages to 50-pound bags to foodservice and industrial distributors who in turn sell those products to manufacturers, restaurants and institutional foodservice establishments. For the year ended September 30, 2011, our sales of refined sugar products to distributors accounted for approximately 16% of our refined sugar sales revenue. Under the terms of a non-compete agreement negotiated in connection with the sale of a business, we agreed not to sell individual servings of sugar and certain non-sugar products for a period of time ending in December 2012, in exchange for an agreed upon volume purchase requirement of the Company’s refined sugar from the other party. The agreement allows the Company to begin selling individual servings of sugar and certain non-sugar products upon certain notice requirements and an agreed reduction in the customer’s purchase obligation.
Joint Venture Operations
Wholesome Sweeteners—We have a 50% percent equity interest in Wholesome Sweeteners, Inc., a company with approximately $117 million of sales in the most recent fiscal year of organic, fair trade and other natural sweeteners in the U.S. and Canada. Wholesome’s product portfolio includes organic cane sugar, agave syrup, honey, stevia and other specialty sweeteners. Sustained growth has been achieved through the regular introduction of new products and the expanded interest in organic and natural food by North American consumers. Wholesome’s management believes that it has the largest share of the organic sweetener business in the U.S. and Canada. We report our share of Wholesome’s earnings on the equity method of accounting. We are currently exploring with our partner the possible sale to a third party or other strategic alternatives for our Wholesome investment.
Comercializadora Santos Imperial—In conjunction with the opening of U.S./Mexican sugar trade under NAFTA, we formed a 50/50 joint venture with Ingenios Santos, S.A. de C.V., or Santos, that markets sugar products in Mexico and the U.S. under the name Comercializadora Santos Imperial S. de R.L. de C.V., or CSI. Santos owns and operates five sugar mills that produce refined sugar and estandar, a less refined sugar traditionally sold in Mexico. The agreement provided that Santos and Imperial would exclusively market all their respective sugar products sold in Mexico through the joint venture. The joint venture entity also exported Santos’ sugar products to the U.S., which were marketed exclusively by the Company or used as a raw material in our U.S. refineries. In October 2011, we sold our interest in CSI to Santos, terminated our exclusive marketing agreements allowing us to conduct business with other exporters and entered into a two-year, non-exclusive agreement for Santos to supply refined sugar to us. Prior to the sale we reported our share of CSI’s earnings on the equity method of accounting.
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Louisiana Sugar Refining—In November 2009, we completed the formation and funding of a three-party joint venture, Louisiana Sugar Refining, LLC, or LSR, with Sugar Growers and Refiners, Inc., or SUGAR, and Cargill, Incorporated or Cargill to construct and operate a new 3,100 ton per day cane sugar refinery in Gramercy, Louisiana adjacent to our existing sugar refinery.
Prior to the sale described below, LSR was owned one-third by each member, each of which contributed $30 million in cash or assets as equity to initially capitalize the venture. SUGAR’s contribution was $30 million cash; Cargill contributed $23.5 million cash and certain equipment and intellectual property valued at $6.5 million. Our contribution, consisted of the existing refinery assets, including approximately 207 acres of land.
We operated the existing refinery with sales and earnings for our own account until December 31, 2010. The equipment and personal property in the existing refinery (other than the small bag packaging assets) were contributed to LSR on January 1, 2011. Since January 1, 2011, we have continued to operate the small bag packaging facility in Gramercy, with refined bulk sugar purchased from LSR under a long-term, supply agreement with market-based pricing provisions.
We contributed the footprint parcel of approximately 7 acres of land for the new refinery at LSR’s formation. Terms of the operative agreements require that LSR and Imperial jointly enroll the entire site (including the footprint parcel) in the Voluntary Remediation Program, or VRP, of the Louisiana Department of Environmental Quality, or LDEQ, to conduct an environmental assessment of the site and complete remediation of any identified contamination. We are required to pay for the cost of remediation, to the extent the VRP uncovered contamination above the applicable industrial standard, and upon completion of the VRP, we will be released of future environmental liabilities to state and federal authorities. We have completed the VRP site investigation and risk assessment and submitted a site assessment and risk evaluation report to LDEQ for approval. Following LDEQ approval, the remedial action plan will be developed and submitted to LDEQ for approval and thereafter implementation. The estimated cost to complete the remediation for conditions identified in the site investigation and risk assessment evaluation report has been accrued in our consolidated financial statements.
Operating losses incurred by LSR to date, plus additional working capital requirements caused by high sugar prices, have strained the joint venture’s financial capabilities, necessitating a capital injection by the partners. Rather than make this additional capital contribution, we chose to sell our equity stake in LSR and certain idle Louisiana real estate parcels to our partners in December 2011 for $18 million, including $14.2 million at closing, with the remainder payable over 21 months. In connection with this sale, we contributed the remaining refinery land to LSR and remain obligated to complete the VRP. We will continue to package sugar at Gramercy under a revised sugar supply agreement with a minimum term of five years.
Natural Sweet Ventures—In February 2010, we formed Natural Sweet Ventures, or NSV, a 50/50 joint venture with Pure Circle Limited to develop and commercialize sugar/stevia sweetener blends for sale in the NAFTA region. Stevia is an all natural, zero calorie, high intensity sweetener extracted from the leaf of the stevia plant. NSV has produced products at various blend levels and provided samples to a number of food manufacturers for testing by their product development groups. Additionally, we initiated a retail trial of Steviacane tm in November 2010. We can give no assurance as to the ultimate acceptance of these products by customers or the results of NSV.
Operational Facilities
We own and operate a cane sugar refinery in Port Wentworth, Georgia, which is located near Savannah, Georgia, and operate a packaging facility in Gramercy, Louisiana. Each facility has packaging and distribution capabilities, is served by adequate transportation and maintained in good operating condition. The Company experienced an industrial accident in February 2008 at the Port Wentworth sugar refinery. Production at the refinery, which comprised approximately 60% of our capacity at the time, was suspended after the accident until we commenced production in the summer of 2009.
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The following table shows the location and production of our cane sugar refineries:
| Cane Sugar Refineries |
Fiscal 2011 Production (cwt) |
Fiscal 2010 Production (cwt) |
Fiscal 2009 Production (cwt) |
Fiscal 2008 Production (cwt) |
Fiscal 2007 Production (cwt) |
|||||||||||||||
| Port Wentworth, Georgia |
13,873,000 | 12,494,000 | 1,146,000 | 4,930,000 | 14,510,000 | |||||||||||||||
| Gramercy, Louisiana |
1,834,000 | (1) | 10,646,000 | 11,707,000 | 11,802,000 | 11,075,000 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
15,707,000 | 23,140,000 | 12,853,000 | 16,732,000 | 25,585,000 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) | Through December 31, 2010; operational control of the refinery was transferred to LSR on January 1, 2011. |
We also operate a distribution facility in Ludlow, Kentucky and we contract for throughput and storage at a number of warehouses and distribution stations. Co-packers are used under contract for small volume specialty products.
Raw Materials and Processing Requirements
Raw Cane Sugar
We currently purchase raw cane sugar principally from sugar traders whose sources of supply are producers in various foreign countries eligible to export to the U.S. The availability of foreign raw cane sugar for domestic consumption is determined by the import quota level designated by applicable regulation, as well as the provisions of NAFTA and other treaties. Previously, we sourced raw cane sugar for our Gramercy, Louisiana refinery under a long-term contract with SUGAR, the cane sugar growing and milling cooperative which was our partner in LSR. In fiscal 2011, we purchased the majority of our raw sugar needs for our Port Wentworth, Georgia refinery from foreign sources under annual or spot contracts with traders. We expect to purchase substantially all of our requirements for our Port Wentworth facility from foreign sources in the foreseeable future.
Historically, substantially all of our purchases of domestic raw sugar and raw sugar quota imports were priced based upon the Intercontinental Exchange (ICE) Sugar No. 16 futures contract or its predecessor, the Sugar No. 14 futures contract. Non-quota imports under the re-export program, which constitute less than 10% of our raw sugar purchases, are priced based on the ICE Sugar No. 11 futures contract. The terms of raw cane sugar purchase contracts vary. Raw cane sugar purchase contracts can provide for the delivery of a single cargo or for multiple cargoes over a specified period or a specified quantity over one or more crop years. Contract terms may provide for fixed prices but generally provide for prices based on the futures market during a specified period of time. Contracts require delivery to the Company’s facility and provide for a premium if the quality of the raw cane sugar is above a specified grade or a discount if the quality is below a specified grade. Contracts based on the No. 16 contract provide that the seller pays freight, duties, insurance charges and other costs of shipping.
The majority of our industrial sales and a portion of our distributor sales are made under fixed price, forward sales contracts. In an attempt 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 to the extent practical.
We have access to approximately 146,000 short tons of storage capacity at our Port Wentworth, Georgia refinery and have the capability to segregate our raw sugar inventory, which allows us to store bonded sugar. Bonded sugar is sugar that is not entered as an import at the time of arrival, but stored in a bonded warehouse under U.S. federal customs service regulations for entry at a later time.
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Energy
Sugar refining is an energy intensive process. We use coal and natural gas in the Port Wentworth refinery. Fiscal 2011 energy usage, which was impacted by both the ramp up of the Port Wentworth refinery and contribution of the Gramercy refinery to LSR, consisted of 2.6 million mmbtu of natural gas and 0.9 million mmbtu of coal.
We have a coal contract which expires in 2014 with pricing determined using a base price subject to escalation factors based on a commodity price index, mining costs related to regulatory requirements and quality adjustments. Rail freight for coal supplies is generally contracted annually. Natural gas is contracted on a monthly basis. Pricing of natural gas generally is indexed to a spot market index, and we use financial tools such as futures, options, swaps and caps in an effort to stabilize the price for gas purchases under indexed contracts. Energy prices have been volatile in recent years and we cannot predict future energy prices or the effect that rising energy prices may have on our business in the future.
Seasonality
Sales of refined sugar are somewhat seasonal, normally increasing during the first and fourth fiscal quarters because of increased demand of various food manufacturers and consumer retail demand. Shipments of brown and powdered sugar increase in the first fiscal quarter due to holiday baking needs. Our second fiscal quarter ending March 31 historically experiences lower revenues and earnings than our other fiscal quarters as a result of reduced demand for refined sugar, margin reduction from product mix changes and lower absorption of fixed costs of our cane refineries.
Sugar Legislation and Other Market Factors
Our business and results of operations are substantially affected by market factors, principally the domestic and Mexican prices for refined sugar and raw cane sugar. These factors are influenced by a variety of forces, including domestic supply, prices of competing crops, weather conditions and U.S. and Mexican farm and trade policies.
The principal legislation supporting the price of domestic crops of sugar cane and sugar beets is the Food Conservation and Energy Act of 2008, otherwise known as the 2008 Farm Bill, which became effective October 1, 2008 and expires September 30, 2013. Imports of raw and refined sugars are controlled via a Tariff Rate Quota (“TRQ”), which is implemented under Additional U.S. Note 5 of Chapter 17 of the Harmonized Tariff Schedule of the United States and does not expire.
The TRQ limits the amount of raw and refined sugar that can be imported into the United States, subject to a minimum amount mandated under the General Agreement on Tariffs and Trade, by imposing a tariff, currently $15.36 per cwt, on over-quota sugar, which historically made its import uneconomical. The government administers the sugar program by adjusting duties and quotas for imported sugar to maintain domestic sugar prices at a level that discourages loan defaults under the non-recourse loan program. To the extent a processor sells refined sugar for export from the United States, it is entitled to import an equivalent quantity of non-quota eligible foreign raw sugar that would not be subject to the tariff.
Domestic sugar regulations have a number of important provisions:
| • | Non-recourse Loan Program. The 2008 Farm Bill provides for a loan program covering sugar cane and sugar beet crops. The program authorizes the Commodity Credit Corporation, or CCC, a federally owned and operated corporation within the USDA, to extend loans to first-processors of domestically grown sugar cane and sugar beet crops (i.e., raw sugar mills and sugar beet processors) secured by sugar inventories from current-year crop production. The Company is not eligible to participate in this loan program. During the term of the 2008 Farm Bill, national average loan rates are to increase from 18 cents per pound for raw cane sugar in 2008 to 18.75 per pound in 2011, while loan rates for refined beet sugar are established at 128.5% of the raw cane sugar rate. CCC loans are non-recourse in most circumstances and mature the earlier of nine months after the date of the loan or September 30th each year. The program provides price support to the first-processor by effectively enabling the sale of raw cane sugar and refined beet sugar by forfeiture of the collateral at the respective loan rates in the event that market prices drop below that level. |
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| • | Marketing Allotments. The 2008 Farm Bill provided that marketing allotments on sugar beet processors and domestic raw cane sugar producers who supply raw sugar may be imposed by the USDA, but that allocation under these allotments may not initially be less than 85% of domestic consumption. Marketing allotments can have the effect of reducing the amount of domestic sugar that is available for marketing and are intended to strengthen sugar prices. Marketing allotments were in force in fiscal 2011 and continue to be in force for fiscal 2012. The USDA can adjust allotments for changes in domestic production or consumption projections. |
| • | TRQ Administration. Provisions of the 2008 Farm Bill require that the TRQ be established at the beginning of any crop year at World Trade Organization minimum of 1.25 million tons and maintain that level until March 31, unless a supply emergency is declared by the USDA. Additions to the TRQ (above the minimum levels) are required to be allocated to raw cane sugar imports until such point that domestic cane sugar refiners are operating at full capacity. Notwithstanding the existing import restrictions under the 2008 Farm Bill, the USDA has the right to re-allocate import levels among foreign countries if it deems the demand/supply situation within the United States warrants such action. |
The 2008 Farm Bill requires that the USDA operate its non-recourse sugar loan program so as to avoid forfeiture of sugar to the CCC to the maximum extent possible. This is normally done by restriction on the amount of sugar imported under the TRQ and if that is not sufficient, by restrictions on the amount of sugar that may be marketed by domestic producers. In a more rarely used option, if the USDA has taken sugar in default under price support loans, it also has the authority to accept bids from sugar cane and sugar beet processors to obtain raw cane sugar or refined beet sugar in CCC inventory in exchange for reduced production of raw cane sugar or refined beet sugar. This payment-in-kind authority, if employed by the USDA, effectively moves inventories of CCC-owned sugar back into commerce without increasing overall supply. Another provision of the 2008 Farm Bill requires the USDA to divert surplus sugar from the marketplace to the production of ethanol.
Free Trade Initiatives
NAFTA provided for the termination of sugar duties and quotas, so that sugar began to be freely traded without duty between the United States and Mexico in January 2008.
In addition to NAFTA, a number of other trade initiatives and negotiations involving the Americas and other quota holding countries are evolving. In 2005, the United States enacted the Central American-Dominican Republic Free Trade Agreement, or CAFTA-DR. Duty-free access to sugar from CAFTA-DR countries increased 109,000 metric tons over the previous amount during the first year, growing to a 151,000 metric ton increase over the first 15 years and 2,640 metric ton increases each year thereafter.
There are additional agreements signed with Panama and Colombia which have received Congressional approval. Those treaties are in the process of being implemented and all parties are amending their laws and regulations to be in compliance with these treaties. When those actions are certified as complete, the treaties will become operative. It is not known at this time when that certification will be granted. Additionally, a World Trade Organization round of negotiations continues. The impact of these negotiations is unknown at this time, but they could provide for additional raw sugar and/or refined sugar access into the United States. Generally, to the extent that additional sugar imports are in the form of raw sugar, such additional access would have a beneficial effect on our access to raw sugar. To the extent that such additional access is in the form of refined sugar, such product will be competitive with our product offerings.
Environmental Regulation
Our operations are governed by various federal, state and local environmental regulations and these regulations impose effluent and emission limitations, and requirements regarding management of water resources, air resources, toxic substances, solid waste and emergency planning. We make application for environmental permits required under federal, state and local regulations and we have obtained or have filed for environmental permits as required in Georgia and Louisiana. Additional expenditures may be required to comply with future environmental protection standards for current operating facilities, although the amount of any further expenditure cannot be fully estimated.
In conjunction with the contribution of our Gramercy, Louisiana refinery to LSR, we have enrolled the site in the VRP with the LDEQ. As part of the VRP, we have undertaken an environmental assessment to determine if the site contains contamination above the applicable industrial standard. We are required to pay for the cost of remediation, to the extent VRP uncovered contamination above the applicable industrial standard and upon completion of the VRP, we will be released of future environmental liabilities to
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state and federal authorities. We have completed the VRP site investigation and risk assessment and have submitted the site assessment and risk evaluation report to LDEQ for approval. Following LDEQ approval, the remedial action plan will be developed and submitted to LDEQ for approval and thereafter implementation. Upon completion of the VRP, the Company and LSR would be released from federal and state environmental obligations for the site.
Process wastewater from our Port Wentworth refinery is treated and discharged by another industrial company in the port under a contract for such services. The industrial company has given notice of termination of the contract effective August 2013, and we are in the process of negotiating a new contract for the treatment of process wastewater. If a new contract for treatment cannot be negotiated, additional expenditures for treatment and discharge of process wastewater may be required, although the amount and timing of any such expenditures cannot currently be estimated.
We have permits that govern our discharge of cooling and storm water at the Port Wentworth refinery. In September 2010, the State of Georgia Department of Natural Resources Environmental Protection Division (“EPD”) issued a notice of violation to the Company in connection with discharges of excess quantities of sugar under the Company’s Clean Water Act discharge permits for storm water and cooling water at the Port Wentworth refinery. In June 2011, the Company entered into a consent order with EPD to settle the notice of violation. Without admitting liability, the Company agreed to pay a fine of $80,000 and make improvements to the Port Wentworth facility by December 31, 2011. The Company also agreed to complete an engineering study of the Port Wentworth refinery by December 31, 2012. The purpose of the study is to evaluate and compare the ability of various potential facility improvements to maintain compliance with applicable storm water and cooling water discharge permits. The recommendations made by the study are required to be implemented by June 30, 2014. Capital expenditures may be required for this implementation, although the amount and timing of any expenditure cannot currently be estimated.
We also have permits that govern our air emissions at the Port Wentworth refinery. In August 2011, the EPD issued to the Port Wentworth facility a Notice of Violation (“NOV”) regarding the Company’s semi-annual air permit report for the first six months of 2011. The Company reported periodic emissions of nitrogen oxides from a boiler above the permit limit. In addition, the Company reported several maintenance, repair, and other issues that had affected the boiler operations and that corrective measures had been taken. EPD requested further information which was provided, including that total excess emissions were minimal and had no significant impact on air quality. In December 2011, we reached an agreement in principle with EPD to settle the NOV, which is subject to execution of a consent order. Without admitting liability, we agreed to pay a settlement amount of $6,000 and submit a written procedure for manually maintaining control of natural gas operation of the boiler.
Health and Safety Regulation
Our operations are subject to a number of federal, state and local health, safety and food safety regulations that are designed to protect workers, customers and consumers of our products. In order to comply with these regulations, we have developed specific operating and maintenance procedures and are required to maintain records and report data on a timely basis. Additionally, we have made capital investment in the past and may be required to make additional investments in the future to comply with such regulations. Health, safety and food safety regulations are subject to change in the future and may require modifications of procedures or additional capital expenditures to comply with new requirements. Current regulatory efforts include OSHA’s development of a comprehensive combustible dust standard and pending federal legislation to address food safety matters. We are unable to predict the impact which these or other changes may have on our operating result, cash flow or financial position.
In July 2010, we settled OSHA citations arising from investigations of our refineries following the 2008 Port Wentworth industrial accident. While making no admission of liability, the Company paid penalties aggregating $6.05 million and agreed to abate the citations by December 31, 2010. In addition, we agreed to implement certain other measures related to worker and facility safety.
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Research
We operate a research and development center in Port Wentworth, Georgia where we conduct research relating to:
| • | manufacturing process technology; |
| • | factory operations; and |
| • | new product development. |
Intellectual Property
The Company engages in research and development activities for proprietary processes and products, including product purification and new sweetener products. The Company has filed patents on several of these technologies, including patents directed toward the manufacture of high-purity sugar products. Additionally, the Company has filed patents for processes used for the generation of reduced calorie natural sweeteners, as well as the products resulting from these processes including stevia extract/sugar blends. Such patents and intellectual property related to stevia extract/sugar blends have been exclusively licensed to NSV for use in the NAFTA region.
Competition
We compete with other cane sugar refiners and with beet sugar processors and, in certain product applications, with producers of other nutritive and non-nutritive sweeteners, such as HFCS, polyols, aspartame, saccharin, sucralose, acesulfame-k and stevia. We also compete with resellers and packaging operations in distributing liquid and bag sugar products. Our principal business is highly competitive, where the selling price and our ability to supply a customer’s needs in a timely fashion are important competitive considerations. Freight costs to transport products can affect our sales. Some of our competitors have an advantage of owning all or part of the agricultural production supplying their refined sugar requirements. We believe our key sugar competitors are Domino® Foods, Inc. and United Sugars Corporation. The principal suppliers of HFCS in North America are Cargill, Inc., Archer Daniels Midland Company and Corn Products, Inc.
Employees
On December 6, 2011, we employed 530 employees. Our Port Wentworth, Georgia refinery employs non-union labor while approximately 70 employees at our Gramercy, Louisiana packaging facility are covered by a collective bargaining agreement which expires in February 2012.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports are available free of charge on our web site located at www.imperialsugar.com as soon as reasonably practicable after we file or furnish these reports electronically with the SEC. The information on our website is not incorporated by reference into this Form 10-K.
In addition to the other information set forth in this report, you should consider the following factors that could materially affect our business, financial condition or operating results. These risks are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.
Our liquidity and capital resources have been reduced and we are exploring alternative sources of capital.
We have used a significant portion of our liquidity since the February 2008 industrial accident in Port Wentworth to fund operating losses, pension contributions and capital expenditures in excess of the applicable insurance recoveries. Operating results have not returned to profitable levels, and we have ongoing capital expenditure and pension contribution requirements. Volatility in raw sugar prices may place additional demands on our liquidity as we maintain our raw sugar purchasing and hedging program. Our revolving credit agreement becomes subject to a minimum EBITDA covenant if our total liquidity falls below $20 million. If the EBITDA covenant had been in effect at September 30, 2011, we would not have met the required EBITDA level.
Our available liquidity and capital resources may not be sufficient to meet our future operating and capital needs and we are exploring alternative sources to provide additional liquidity. We sold our investment in LSR in December 2011 rather than make additional capital contributions necessitated by the joint venture’s financial condition. We are exploring with our partner strategic alternatives for our investment in Wholesome
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Sweeteners, including the possible sale to a third party. In December 2011, we agreed to an amendment to our revolving credit agreement, which modified the minimum liquidity level at which the minimum EBITDA covenant is triggered and provided for an alternative EBITDA covenant through the earlier of April 15th or such time as availability exceeds $50 million should the trigger level be breached. The amendment includes an additional provision which has the effect of reducing the amount available to borrow under the borrowing base formula by an initial $10 million. There can be no assurance that additional sources of liquidity will be available or that we can maintain compliance with the amended credit agreement.
Our future financial condition and future operating results could be adversely impacted by the outcome of claims, litigation and regulatory proceedings.
The Company is party to a number of claims, including five remaining lawsuits for injuries and losses suffered as a result of the Port Wentworth accident. If damages in these matters exceed insurance policy limits, we could be subject to liabilities, which could be material. See Item 3—Legal Proceedings.
Operations at the re-built Port Wentworth refinery have yet to return to prior volumes and efficiencies.
The reconstructed Port Wentworth refinery, which commenced operations in the summer of 2009, has yet to achieve sustained production and packaging volumes and efficiencies demonstrated prior to the 2008 accident. Future operating results and cash flows may be adversely affected if prior operating levels are not achieved on a sustained basis.
The domestic sugar industry is affected by a number of external forces that we are unable to predict or control that could cause fluctuations in prices, which may negatively affect our results of operations.
Our business and results of operations are closely tied to conditions in the domestic sugar industry, principally the prices of both refined sugar and raw cane sugar. The sugar industry is affected by a number of external forces that we are unable to predict or control and that historically have been subject to considerable volatility.
A variety of external forces that we are unable to predict influence the domestic sugar industry and could adversely affect our business and results of operations, including:
| • | the U.S. farm and trade policies; |
| • | the number of domestic acres contracted to grow sugar cane and sugar beets; |
| • | prices of competing crops; |
| • | Sugar/HFCS substitution rate in food and beverage products; |
| • | energy costs; |
| • | supply and price of raw cane sugar in the world market; |
| • | the impact of new entrants in sugar refining or existing competitors adding refining capacity in Mexico or the United States; |
| • | supply and price of raw and refined sugar in Mexico; |
| • | Mexican peso to U.S. dollar exchange rate; |
| • | levels of domestic sugar refining capacity; and |
| • | weather conditions affecting the sugar cane and sugar beet crops and the operations of facilities operated by us and our competitors. |
The domestic sugar business has traditionally been subject to periods of high prices and margins, followed by periods of lower prices and margins. In the past, during periods of high prices, growers have tended to increase their production, which has generally caused a drop in sugar prices until the supply and demand return into balance. Our business consists exclusively of the processing and marketing of refined cane sugar. Consequently, we are unable to counteract the fluctuations to which our business may be subject with revenues or income from businesses that are more predictable or that are subject to different business cycles. As discussed below, partially as a result of the volatile nature of the sugar industry, we have at times in the past experienced operating losses and net losses.
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Our Port Wentworth refinery is supplied almost exclusively by imported raw sugar. Supplies and pricing of imported raw sugar can be influenced by increased world raw sugar prices. Raw sugar imports into the United States compete for surplus production in exporting counties with alternative sales on the world raw sugar market. Recent events affecting the supply of raw sugar in the world market have increased prices to 30 year high levels, causing domestic raw sugar prices to increase substantially. We compete with domestic beet processors and other cane sugar refiners who own some or all of their source of supply and whose results may not be impacted to the degree we are by these factors. We purchase raw sugar of varying quality from many different countries. Lower quality raw sugar can have an adverse effect on our operating performance. If we have an inadequate supply of raw sugar or unacceptable quality, we may be unable to efficiently operate our refinery or meet domestic demand for refined sugar. We may not be able to increase refined sugar prices to our customers to offset such higher raw sugar costs, which could adversely affect our refined sugar margins, financial condition, results of operations and cash flows.
Our business could be adversely affected by the effects of existing and future United States and Mexican farm and trade policies.
Legislative and regulatory actions substantially influence the domestic raw sugar industry. The principal current legislation supporting the price of domestic crops of sugar cane and sugar beets is the 2008 Farm Bill, which extends the sugar price support program for sugar cane and sugar beets until September 30, 2013. The USDA operates a tariff-rate quota that effectively limits the amount of raw and refined sugar that can be imported into the United States by imposing a tariff on over-quota sugar that makes its import uneconomical. This tariff-rate quota could adversely affect the supply and price of raw sugar available to our sugar refinery if there is a shortfall in domestic production. In addition, marketing allotments under the 2008 Farm Bill may reduce the amount and affect the cost of domestic raw sugar that is available to us for refining. United States farm and trade policy also influences domestic sugar grower acreage dedicated to alternate crops. Mexican farm and trade policies influence sugar production in Mexico and non-NAFTA imports, affecting the supply of sugar available for export to the United States. Any of these factors could adversely affect our results of operations.
If demand for sugar decreases in the future, lower sales volumes and lower prices could result, which could affect us adversely.
We cannot predict the demand for sugar in the future and this demand could be affected adversely by numerous factors, including:
| • | Imports of sugar containing products and sugar blends; |
| • | the impact of changes in the availability, development or potential use of various types of alternative sweeteners; |
| • | future changes in consumer sweetener preferences, including impact of dietary trend; |
| • | government nutritional guidelines and labeling laws; |
| • | changes in population; and |
| • | the impact of a weaker domestic and global economy |
Remaining obligations in connection with the LSR joint venture involve risks.
Under the terms of our LSR agreements we have contractual obligations to complete the VRP with the State of Louisiana. Unforeseen costs or liabilities arising from these matters could adversely impact our results of operations and cash flow.
Costs and availability of energy may result in increased operating expenses and reduced results of operations.
Processing raw sugar into refined sugar requires a high level of energy use. We use natural gas and coal to fulfill our energy requirements and fuel prices also affect our transportation costs. Domestic energy prices, particularly natural gas and diesel prices, have been volatile in recent years and we are unable to predict the trend in future prices. Future high energy prices, curtailments or other disruptions of supply could adversely impact our production costs and operating efficiencies.
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We sell commodity products in highly competitive channels of distribution and face significant price pressure.
We sell our products in highly competitive channels of distribution. We compete with other U.S. and Mexican cane sugar refiners and U.S. beet sugar processors and, in certain product applications, with producers of other nutritive and non-nutritive sweeteners. We also compete with distributors and resellers in distributing bag and liquid sugar products. Our branded retail share of sales is under increasing pressure from private labels, requiring increased expenditures on innovation and trade promotion.
Competition in these channels is based primarily on price and the ability to meet timely customer quality and quantity requirements. As a result, we may be unable to protect our sales position by product differentiation and may be unable to raise prices. Our ability to service customer requirements has been disrupted since the 2008 industrial accident at our Port Wentworth refinery and issues related to the transition of the Gramercy refining operations to LSR. Some of our customers have had to seek supply from alternate sources during that period, and our ability to return to normal supply levels with our customers has not been fully demonstrated.
Historically, we have made the majority of our sales to industrial customers under fixed price, forward sales contracts which extend for up to one year. As a result, changes in our realized sales prices tend to lag behind market price changes.
Some competitors may be able to further reduce their product prices because their costs are less than ours or because they have greater financial, technological and other resources than we have. In addition, most of our competitors own or control a substantial portion of their supply of raw materials. This vertical integration may provide these producers a competitive advantage because they are better able to secure a stable supply of raw materials at more favorable costs and in greater quantities than we can. Finally, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can. Increased competition and price pressure could adversely affect our financial condition, results of operations and cash flows.
Damage to our Port Wentworth refinery or Gramercy packaging facility that results in prolonged interruption of operations could materially adversely affect our results.
The Company conducts its operations at a single refinery and an additional packaging facility and is dependent upon these facilities for production. Because these facilities are located in coastal areas, they are subject to severe weather conditions, including hurricanes, tornados and flooding, as well as to normal hazards that could result in material damage. Damage to either of these facilities, or prolonged interruption in the operation of the facilities due to our dependence on ocean-going raw sugar deliveries, or for repairs or other reasons, would have a material effect on the Company’s business, financial condition, results of operations and cash flows.
We have had losses in the recent past and may be unable to maintain profitable operations.
We have at times in the past experienced operating losses and net losses. Losses in future years could be incurred and could be attributable to a number of factors, including:
| • | low refined sugar prices; |
| • | low margins between raw sugar and refined sugar prices; |
| • | disruption of refinery operations; |
| • | reduced production and efficiencies of refinery operations; and |
| • | high energy costs. |
We compete in highly competitive labor markets.
We operate facilities in competitive labor markets. In the event we are unable to attract and retain qualified personnel, our production efficiencies and labor costs could be adversely affected. The Gramercy collective bargaining agreement expires in February 2012 and there are no assurances that it will be extended under terms beneficial to the Company.
The Company incurs substantial costs with respect to pension benefits and providing healthcare for its employees.
The Company’s estimates of liabilities and expenses for pensions and post-retirement healthcare benefits require the use of assumptions related to the rate used to discount future liability, the rate of return on plan assets, and the retirement age and mortality of current and retired employees. Future results may differ from these assumptions. In
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addition, rising healthcare costs and the costs of other employee benefits may affect the Company’s future benefit costs. Such future events may have a material effect on the Company’s financial condition, results of operations and cash flows. Declines in the stock market have reduced assets available to pay retirement benefits and may result in increased costs and funding requirements.
We are exposed to costs arising from environmental compliance, and cleanup, health and safety regulation, and litigation, which may adversely affect our business, financial condition, operating results or cash flows.
Our operations are governed by various federal, state and local environmental laws and regulations. These regulations impose limitations on releases of effluents and emissions from our facilities. They also impose requirements on our management of:
| • | worker safety; |
| • | food quality, safety and integrity; |
| • | water resources; |
| • | air resources; |
| • | combustible dust risk mitigation; |
| • | toxic substances; |
| • | solid waste; and |
| • | emergency planning. |
We received a notice of termination of the contract to process our wastewater at the Port Wentworth refinery effective August 2013. If the Company cannot negotiate a new contract, we must make other arrangements for treatment and discharge of process wastewater, which may require future capital expenditures by the Company or result in increased operating costs.
The Company also agreed with EPD to complete an engineering study of the Port Wentworth refinery by December 31, 2012. The purpose of the study is to evaluate and compare the ability of various potential facility improvements to maintain compliance with applicable storm water and cooling water discharge permits. The recommendations made by the study are required to be implemented by June 30, 2014. The results of these negotiations may require future capital expenditures by the Company. Further, implementation of any plan negotiated with EPD may result in increased operating costs
We cannot predict with certainty the extent of our future liabilities and costs under such laws and regulations, or how such regulations could impact our operations, and these impacts could be material.
ITEM 1B. Unresolved Staff Comments
None.
We own our Port Wentworth cane sugar refinery and our corporate headquarters in Sugar Land, Texas. We lease the land and own the property improvements and equipment at a distribution facility in Kentucky, and contract for production, throughput and storage at a number of co-packers, warehouses and distribution stations. Certain of these properties are subject to liens securing our credit facility.
Under the terms of our LSR agreements, we contributed our Gramercy, Louisiana refinery other than the small packaging assets to the joint venture on January 1, 2011 and are obligated to complete the VRP with respect to this land. Please read “Business—Joint Venture Operations.”
The Company is party to a number of claims, including five remaining lawsuits brought on behalf of five employees or their families, for injuries and losses suffered as a result of the 2008 Port Wentworth refinery industrial accident. All of the lawsuits are pending in the State Court of Chatham County, Georgia. None of the
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lawsuits demand a specific dollar amount of damages sought by the plaintiffs. The Company has workers compensation insurance which provides for coverage equal to the statutory benefits provided to workers under state law. Additionally, the Company’s general liability policy provides for coverage for damages to third parties up to a policy limit of $101 million.
The Company previously settled forty-three lawsuits related to the accident. On October 19, 2011, the attorneys representing the plaintiffs in the lawsuits remaining at that time submitted a time-limited global settlement offer to resolve these lawsuits for a sum within the Company’s remaining limits of insurance. Two of the three insurers who issued the insurance policies representing the Company’s remaining limits of insurance, American Guarantee & Liability Insurance Company (“AGLIC”) and St. Paul Fire & Marine Insurance Company (“St. Paul”), elected not to respond to this settlement offer by its deadline. The Company has notified AGLIC and St. Paul that due to their failure to settle the remaining lawsuits within the Company’s available limits of insurance pursuant to the global settlement offer, the Company will seek to hold them responsible for damages due to their negligent failure to settle and bad faith in the event verdicts or settlements in the remaining lawsuits are in excess of the Company’s limits of insurance.
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 $101 million policy limit is remote.
The Company was named as a defendant in a lawsuit filed by one of its excess general liability insurers, AGLIC, in the U.S. District Court for the Northern District of Georgia on August 19, 2011, and styled as American Guarantee & Liability Insurance Company v. Imperial Sugar Company, et al., Civil Action No. 1:11-CV-2778-WSD (the “Georgia Lawsuit”). AGLIC seeks in the Georgia Lawsuit: (1) a judicial declaration that the AGLIC policy does not cover the Company’s defense expenses incurred though the defense of various claims arising from the industrial accident that occurred at its plant located in Port Wentworth, Georgia (the “Port Wentworth Claims”) in 2008; and (2) an equitable accounting of the settlements of certain of the Port Wentworth Claims that were settled using proceeds provided by the primary and umbrella layers of liability policies and the workers compensation policy issued by Chartis-affiliated insurers. In its briefing concerning its claim for an equitable accounting, AGLIC asserts that the coverage provided by the underlying Chartis policies may have been improperly exhausted and that, therefore, the AGLIC policy may not be available to cover the remaining Port Wentworth Claims. AGLIC shares on a 50/50 pro-rata basis with St. Paul the final $50 million layer of excess liability coverage available to the Company for the Port Wentworth Claims. St. Paul was also named as a defendant in the Georgia Lawsuit and has asserted a cross claim against the Company, which seeks a judicial declaration that the St. Paul policy does not cover the Company’s defense expenses incurred in connection with the Port Wentworth Claims. St. Paul has not asserted any improper exhaustion claim but has stated that it reserves its rights regarding whether the underlying policies were properly exhausted. On December 9, 2011, the Court issued an order denying the Company’s motion to dismiss the Georgia Lawsuit and holding that the Georgia Lawsuit was not wrongfully filed by AGLIC and that venue for the dispute is proper in the U.S. District Court for the Northern District of Georgia. On December 16, 2011, the court held a hearing regarding AGLIC’s claim for an equitable accounting and, at that hearing, ruled that AGLIC and the Company should seek additional information and documents pertaining to the accounting issue from Chartis. On December 23, 2011, the Company filed its answer to the complaint, counterclaims and cross claims against AGLIC and St. Paul, respectively, asserting, among other claims that (1) AGLIC and St. Paul have breached their insurance policies by wrongfully denying coverage for the Company’s defense expenses incurred as a result of the Port Wentworth Claims; and (2) AGLIC’s and St. Paul’s breaches amount to bad faith under Texas law.
On August 23, 2011, the Company filed a lawsuit against AGLIC and St. Paul in the U.S. District Court for the Southern District of Texas, styled Imperial Sugar Company v. American Guarantee & Liability Insurance Company and St. Paul Fire & Marine Insurance Company, Civil Action No. 4:11-cv-3081 (the “Texas Lawsuit”), asserting, among other claims, that: (1) AGLIC and St. Paul have breached the AGLIC and St. Paul insurance policies by wrongfully denying coverage for the Company’s defense expenses incurred as a result of the Port Wentworth Claims; and (2) that AGLIC’s and St. Paul’s breaches amount to bad faith under Texas law. On December 13, 2011, without ruling on AGLIC’s motion to dismiss for failure to state a claim for relief, the U.S. District Court for the Southern District of Texas issued an order transferring the Texas Lawsuit to the U.S. District Court for the Northern District of Georgia. The Texas Lawsuit and the Georgia Lawsuit have since been consolidated into a single lawsuit pending before the U.S. District Court for the Northern District of Georgia.
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 (“Voluntary Recall”). In November, 2011, the Company settled the Pierre lawsuit and two other property damage claims relating to Voluntary Recall. The sums paid to settle the Pierre lawsuit and the two other property damage claims were paid by three insurers, except for a payment of approximately $5,200 which was paid by the Company.
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In December 2010, the Louisiana Department of Environmental Quality (“LDEQ”) issued a Consolidated Compliance Order and Notice of Potential Penalty to the Company alleging violations of state environmental regulations and the terms of the wastewater discharge permit for the Company’s Gramercy, Louisiana refinery. The alleged violations relate to the release of foam into waters of the state and exceedances of applicable criteria for dissolved oxygen and pH. The Company investigated the alleged violations, took measures to cease and contain the foam discharge, and coordinated with the LDEQ to develop and implement a plan to remove and dispose of the foamy material and achieve and maintain compliance with applicable legal requirements. In December 2011, the Company reached an agreement in principle with LDEQ to settle the allegations of violation of environmental regulations, which is subject to execution of a settlement agreement. Without admitting liability, the Company agreed to a settlement amount of $6,000 plus a payment of $4,770 for response costs.
On August 11, 2011, the Georgia Environmental Protection Division (“EPD”) issued to the Port Wentworth facility a Notice of Violation (the “NOV”) regarding the Company’s semi-annual air permit report for the first six months of 2011. The Company reported periodic emissions of nitrogen oxides from a boiler above the permit limit. In addition, the Company reported several maintenance, repair, and other issues that had affected the boiler operations and that corrective measures had been taken. EPD requested further information which was provided, including that total excess emissions were minimal and had no significant impact on air quality. In December 2011, the Company reached an agreement in principle with EPD to settle the NOV, which is subject to execution of a consent order. Without admitting liability, the Company agreed to pay a settlement amount of $6,000 and submit a written plan for manually maintaining control over natural gas operation of the boiler.
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. On August 25, 2011, the Company and Hills settled the lawsuit by amending the current coal supply agreement to, among other things, extend the term of the agreement and reduce the price payable by the Company for purchases of coal.
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 Company’s Port Wentworth refinery, for breach of contract. The lawsuit seeks damages for deficiencies in construction of the conditioning silos. In June 2011, SSI filed a counterclaim against the Company for $3.5 million for work it allegedly performed and was not paid. The lawsuit is in discovery.
In May 2011, the Company joined seven cane and beet sugar producers and two sugar industry trade associations as plaintiffs in a lawsuit filed against six producers of high fructose corn syrup (the “Member Companies”) and the Corn Refiners Association (the “CRA”) (collectively, the “HFCS Defendants”) in the United States District Court for the Central District of California regarding advertising and marketing of high fructose corn syrup. The lawsuit initially alleged violations of the federal Lanham Act and state law by the HFCS Defendants in marketing and advertising high fructose corn syrup as a natural product equivalent to cane and beet sugar. The lawsuit seeks money damages and injunctive relief. On October 21, 2011, the Court issued an order on the motion to dismiss the amended complaint filed by the HFCS Defendants, denying the motion as to the CRA, granting the motion as to the Member Companies, and giving plaintiffs leave to amend their complaint to set forth additional allegations regarding the Member Companies. On the same day, the Court issued a separate order on a motion filed only by the CRA, dismissing the state law claim for unfair competition. On November 18, 2011, the plaintiffs filed an amended complaint naming the Member Companies as defendants on the federal Lanham Act claim to which the Member Companies have filed a motion to dismiss.
On August 30, 2011, a shareholder of the Company filed a putative class action lawsuit in the United States District Court for the Southern District of Texas, styled as Dawes v. Imperial Sugar Company, et al., Civil Action No. 4:11-cv-03250, alleging that the Company, its current President and Chief Executive Officer, and its current Senior Vice President and Chief Financial Officer, violated the federal securities laws. On September 22, 2011, another shareholder filed a nearly identical putative class action lawsuit against the Company, its current President and Chief Executive Officer and its current Senior Vice President and Chief Financial Officer in the United States District Court for the Southern District of Texas styled as Hassan v. Imperial Sugar Company, et al., Civil Action No 4:11-cv-03457. On October 28, 2011, these cases were consolidated by the court. The complaints assert fraud
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claims under Sections 10 and 20 of the Securities Exchange Act of 1934, and allege that the defendants made misleading statements and/or omissions about the Company’s sales and business prospects, which purportedly were disclosed on August 5, 2011 when the Company announced its third fiscal quarter results. A motion for appointment of lead plaintiff was filed on October 31, 2011. Pursuant to the agreed-upon schedule, the lead plaintiff will file an amended complaint 45 days after entry of an order appointing the lead plaintiff.
On September 27, 2011, the Board of Directors of the Company received a letter from counsel for a shareholder of the Company requesting, among other things, that the Board cause an independent investigation to be made and a legal action commenced with respect to alleged mismanagement and breaches of fiduciary duty by the Company’s officers and directors relating to the August 5, 2011 announcement of the Company’s third fiscal quarter results. On October 12, 2011, the Board received a similar letter on behalf of another shareholder. The Board of Directors established a committee of independent and disinterested directors on October 5, 2011 with full authority to investigate and address the allegations contained in such shareholder letters.
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 material 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the name, age and position of our executive officers as of November 30, 2011. Our by-laws provide that each officer shall hold office until the officer’s successor is elected or appointed and qualified or until the earlier of the officer’s death, resignation or removal by the Board of Directors.
| Name |
Age |
Positions | ||||
| John C. Sheptor |
53 | President and Chief Executive Officer | ||||
| Louis T. Bolognini |
55 | Senior Vice President and General Counsel | ||||
| Patrick D. Henneberry |
57 | Senior Vice President—Commodities and Sales | ||||
| H.P. Mechler |
58 | Senior Vice President and Chief Financial Officer | ||||
| Raylene M. Carter |
55 | Vice President—Manufacturing | ||||
| George Muller |
57 | Vice President—Sales Planning, Supply Chain & Information Technology | ||||
| J. Eric Story |
48 | Vice President and Treasurer | ||||
Mr. Sheptor became President and Chief Executive Officer of the Company in January 2008, after serving as Executive Vice President and Chief Operating Officer since joining the Company in February 2007. Prior to joining Imperial, Mr. Sheptor was Executive Vice President of Merisant Worldwide, Inc., the distributor of Equal®, from 2001 to 2004. Prior to that position, he held supply chain and manufacturing positions for Monsanto Company. From 2005 to 2007, he was Project Deputy Director for the Partnership for Supply Chain Management, a non-governmental organization funded by the President’s Emergency Plan for Aids Relief.
Mr. Bolognini joined the Company as Senior Vice President, General Counsel and Secretary in June 2008. Prior to joining the Company, he was Vice President and General Counsel of BioLab, Inc., a pool and spa manufacturing and marketing company from 1999 to 2008. Mr. Bolognini served as Assistant General Counsel to BioLab’s parent company, Great Lakes Chemical Corporation, from 1990 to 1999. Mr. Bolognini served as an executive officer of BioLab, Inc within a two year period prior to the March 18, 2009 Chapter 11 bankruptcy petition filed by BioLab’s parent company, Chemtura Corporation, on behalf of itself and 26 U.S. affiliates, including BioLab.
Mr. Henneberry joined Imperial as Senior Vice President in July 2002. Prior to joining Imperial, he was employed by Louis Dreyfus Corporation from 1984 to 2002. His more recent positions with Louis Dreyfus were: Vice President, Alcohol Division September 2001 to July 2002, Vice President, Louis Dreyfus eBusiness Ventures from May 2000 to March 2002 and Executive Vice President, Louis Dreyfus Sugar Company from April 1996 to April 2000.
Mr. Mechler became Senior Vice President and Chief Financial Officer in March 2005. He had served as Vice President—Accounting and Finance since February 2003 and was Vice President—Accounting from April 1997 to February 2003. Mr. Mechler had been Controller since joining Imperial in 1988.
Ms. Carter was named Vice President – Manufacturing in January 2011. She joined the Company in February 2009 as Plant Manager of the Gramercy refinery. Prior to joining the Company she was Vice President of Operations of Canyon Creek Management Company, Inc., a privately held investment firm, from October 2006 to January 2009. She served as a Plant Manager with Amoco Fabrics and Fibers Company and Propex Inc. from March 2002 to September 2006. Previous positions with Amoco included senior management positions in Supply Chain Management, Customer Service, Continuous Improvement and Human Resources.
Mr. Muller became Vice President—Sales Planning, Supply Chain & Information Technology in September 2010. He served as Vice President and Chief Information Officer from November 2002 to October 2008 and Vice President- Administration from October 2008 to September 2010. Mr. Muller joined the Company in March 1997 as Director of Management Information Systems.
Mr. Story became Vice President and Treasurer in September 2004 and previously served as Treasurer of Imperial since February 2003. He joined Savannah Foods & Industries, Inc. in 1987, which we acquired in 1997, and has held a number of finance and accounting positions within both Savannah Foods & Industries and Imperial. He became Corporate Controller for Savannah in 1994 and Director of Planning and Analysis for Imperial in 2002.
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Table of Contents
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Price of Common Equity and Related Shareholder Matters
Our common stock currently is listed on The NASDAQ Stock Market LLC (NASDAQ) under the symbol “IPSU”. As of December 22, 2011, there were approximately 1,350 shareholders of record of our common stock.
The following table contains information about the high and low sales price per share of our common stock for fiscal years 2010 and 2011 as reported by NASDAQ.
| Sales Price | Dividends Paid |
|||||||||||
| Three months ended | High | Low | ||||||||||
| Fiscal 2010 |
||||||||||||
| December 31, 2009 |
$ | 17.80 | $ | 11.97 | $ | 0.02 | ||||||
| March 31, 2010 |
18.52 | 13.50 | 0.02 | |||||||||
| June 30, 2010 |
17.28 | 9.50 | 0.02 | |||||||||
| September 30, 2010 |
14.74 | 9.66 | 0.02 | |||||||||
| Fiscal 2011 |
||||||||||||
| December 31, 2010 |
$ | 14.50 | $ | 12.66 | $ | 0.02 | ||||||
| March 31, 2011 |
13.56 | 10.41 | 0.02 | |||||||||
| June 30, 2011 |
21.74 | 12.10 | 0.02 | |||||||||
| September 30, 2011 |
24.49 | 6.44 | 0.02 | |||||||||
Dividend Policy
Our credit agreement limits the payment of dividends, other than dividends payable solely in our capital stock, if our average total liquidity (defined as the borrowing base less average actual borrowings and letters of credit), after adjustment on a pro forma basis for such payment, is less than $30 million. Effective with the December 2011 amendment to the credit agreement, the payment of dividends is prohibited while the modified EBITDA covenant is in effect, after which the original restriction is reinstituted. The Board of Directors of the Company suspended its payment of a quarterly dividend in November 2011. Prior to that date, the Company has paid a regular quarterly dividend since December 2004, most recently at the quarterly rate of $0.02 per share. The determination to declare or pay future dividends out of funds legally available for that purpose will be at the discretion of our Board of Directors and will depend on our future earnings, results of operations, financial condition, capital requirements, any future contractual restrictions and other factors our Board of Directors deems relevant.
Shareholder Return Performance Graph
The following graph compares the cumulative total stockholder return on the Company’s common stock to the cumulative total return of the Standard & Poor’s 500 Stock Index and the American Stock Exchange Consumer Staple Index (IXR) for the period from September 30, 2006 to September 30, 2011. The graph assumes that the value of the investment in the common stock and each index was $1.00 at September 30, 2006 and that all dividends were reinvested on a quarterly basis.
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Table of Contents
ITEM 6. Selected Financial Data
The following selected consolidated financial information is derived from our audited consolidated financial statements. This consolidated financial data should be read in conjunction with our consolidated financial statements including the related notes thereto, and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report.
Selected financial data for the last five years is as follows (in thousands of dollars, except per share data):
| Year Ended September 30, | ||||||||||||||||||||
| 2011 | 2010(1) | 2009(2) | 2008(3) | 2007 | ||||||||||||||||
| For the Period: |
||||||||||||||||||||
| Net Sales |
$ | 847,976 | $ | 908,033 | $ | 522,563 | $ | 592,423 | $ | 875,527 | ||||||||||
| Operating Income (Loss) |
$ | (50,168 | ) | $ | 209,170 | $ | (41,948 | ) | $ | (66,153 | ) | $ | 53,742 | |||||||
| Income (Loss) from Continuing Operations |
$ | (53,393 | ) | $ | 136,860 | $ | (23,827 | ) | $ | (21,181 | ) | $ | 43,555 | |||||||
| Per Share Data: |
||||||||||||||||||||
| Income (Loss) from Continuing Operations: |
||||||||||||||||||||
| Basic |
$ | (4.49 | ) | $ | 11.59 | $ | (2.03 | ) | $ | (1.81 | ) | $ | 3.81 | |||||||
| Diluted |
$ | (4.49 | ) | $ | 11.33 | $ | (2.03 | ) | $ | (1.81 | ) | $ | 3.71 | |||||||
| Cash Dividends Declared per Share |
$ | 0.08 | $ | 0.08 | $ | 0.18 | $ | 2.78 | $ | 3.27 | ||||||||||
| At Period End: |
||||||||||||||||||||
| Total Assets |
$ | 490,421 | $ | 541,566 | $ | 615,940 | $ | 358,765 | $ | 360,065 | ||||||||||
| Long-term Debt-Net of Current Maturities |
$ | — | $ | — | $ | — | $ | — | $ | 1,500 | ||||||||||
| Total Shareholders’ Equity |
$ | 161,454 | $ | 218,732 | $ | 86,434 | $ | 144,070 | $ | 200,091 | ||||||||||
| (1) | Fiscal 2010 includes $278.5 million of insurance recoveries and $33.2 million of gains on derivative contracts intended to hedge 2011 raw sugar costs. |
| (2) | Fiscal 2009 includes $27.9 million of gains on derivative contracts intended to hedge 2010 raw sugar costs and $23.4 million of refinery explosion-related charges. |
| (3) | Fiscal 2008 includes $27.2 million of refinery explosion-related charges. |
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Table of Contents
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion is intended to provide the reader with information that will assist in understanding our consolidated financial statements, the changes in certain key items in those consolidated financial statements from year to year, and the primary factors that accounted for those changes. This discussion should be read in conjunction with information contained in the consolidated financial statements and the related notes thereto.
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, 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 domestically produced 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 sugar refinery.
The Company experienced an industrial accident in February 2008 at its sugar refinery in Port Wentworth, Georgia, which is located near Savannah, Georgia. Production at the refinery, which comprised approximately 60% of our capacity at that time, was suspended after the accident until we commenced production in the summer of 2009.
On January 1, 2011, the Company contributed the equipment and personal property of its existing Gramercy refinery (other than its small bag packaging assets) to LSR in accordance with the terms of our joint venture agreement. While the Company sold its interest in LSR in December 2011, we continue to operate the small bag packaging facility in Gramercy with refined bulk sugar purchased from LSR under a long term supply agreement with market-based pricing provisions. Sales derived from the Gramercy operations since this contribution are lower, as only sales from the small bag packaging facility are consolidated in our results.
Results of Operations
The Company reported a net loss of $53.4 million for the year ended September 30, 2011 primarily as a result of lower margins resulting from high raw sugar costs that were not fully offset by higher sales prices, high operating costs at the Port Wentworth refinery, operating and impairment losses on joint ventures operations and a valuation allowance for net operating loss carryforwards impacting the recognized income tax provision. Reported raw sugar costs were negatively impacted by derivative gains recognized in the prior fiscal year, partially offset by lower costs resulting from a LIFO inventory liquidation.
Fiscal Year Ended September 30, 2011 compared to Fiscal Year Ended September 30, 2010
Our loss from continuing operations was $53.4 million or $4.49 per diluted share in fiscal 2011, compared to income from continuing operations of $136.9 million or $11.33 per diluted share in fiscal 2010.
The recognition of insurance and derivative gains had a significant impact on our reported earnings during the two most recent fiscal years. In December 2009 the Company settled the property insurance claim relating to the Port Wentworth accident and recorded pretax gains totaling $278.5 million ($178.9 million after tax).
The domestic raw sugar market has been extremely volatile and continues to trade at levels well above historical norms. This volatility generated significant gains in fiscal 2010 on derivative contracts entered into to hedge raw sugar purchases relating to fiscal 2011. During fiscal 2010 these gains did not qualify for hedge accounting treatment and accordingly, were included in fiscal 2010 operating results. Beginning October 1, 2010 the Company resumed hedge accounting treatment and gains and losses incurred on designated futures contracts since then have been deferred in Accumulated Other Comprehensive Income and are recognized in the subsequent period in which the refined sugar produced from the hedged raw sugar is sold.
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Table of Contents
While the Port Wentworth refinery’s production continued to ramp up in fiscal 2011, daily production rates continued below normal levels, necessitating additional production days, which, along with increased depreciation and spending in a number of areas, added significant costs to achieve these volumes.
We discuss these and other factors in more detail below.
Net sales was comprised of the following:
| Fiscal Year Ended September 30, |
||||||||
| 2011 | 2010 | |||||||
| (in Millions of Dollars) | ||||||||
| Net Sales: |
||||||||
| Sugar Sales |
$ | 824 | $ | 889 | ||||
| By-product Sales |
21 | 16 | ||||||
| Other |
3 | 3 | ||||||
|
|
|
|
|
|||||
| Net Sales |
$ | 848 | $ | 908 | ||||
|
|
|
|
|
|||||
Sugar sales comprised approximately 97% of our net sales in fiscal 2011 and 98% in fiscal 2010. Sugar sales volumes and prices were as follows:
| Fiscal Year Ended September 30, | ||||||||||||||||
| 2011 | 2010 | |||||||||||||||
| Volume | Price | Volume | Price | |||||||||||||
| (000 cwt) | (per cwt) | (000 cwt) | (per cwt) | |||||||||||||
| Sugar Sales: |
||||||||||||||||
| Industrial |
8,690 | $ | 42.38 | 12,220 | $ | 35.10 | ||||||||||
| Consumer |
6,060 | 50.53 | 5,466 | 45.23 | ||||||||||||
| Distributor |
2,572 | 49.81 | 4,277 | 41.37 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Domestic Sales |
17,322 | 46.33 | 21,964 | 38.84 | ||||||||||||
| World/Toll |
626 | 34.06 | 1,065 | 33.47 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Sugar Sales |
17,946 | $ | 45.91 | 23,029 | $ | 38.59 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Net sales decreased 6.6% in fiscal 2011 due to lower sales volumes offset by higher prices. Sales volumes decreased 22.1% primarily due to the reduced Gramercy sales as a result of the contribution to LSR, offset in part by increased production volume from the Port Wentworth refinery. Domestic prices increased 19.3% due to tight domestic supply conditions and higher raw sugar prices. Raw prices remain at historically high levels in fiscal 2011 as a result of shortfalls in raw sugar production in exporting countries which have pressured U.S. domestic raw sugar prices, as well as the USDA’s administration of raw sugar imports. 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.
Gross margin as a percentage of sales was negative 1.6% for fiscal 2011 as compared to negative 2.1% for fiscal 2010. On a hedge accounting basis excluding the effects of LIFO inventory liquidations, gross margin as a percentage of sales for the current year was a negative 1.2%, compared to a negative 3.1% for fiscal 2010.
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Gross Margin Reconciliation:
| Year Ended September 30, | ||||||||
| 2011 | 2010 | |||||||
| (In Millions of Dollars) | ||||||||
| Gross margin as reported |
$ | (13.5 | ) | $ | (19.3 | ) | ||
| Derivative gains recognized in the period intended to hedge future periods |
— | (33.2 | ) | |||||
| Derivative gains (losses) recognized in prior periods intended to hedge the current period |
34.0 | 27.4 | ||||||
| Impact of LIFO liquidation |
(30.5 | ) | (3.4 | ) | ||||
|
|
|
|
|
|||||
| Gross margin on a hedge accounting basis excluding the impact of LIFO liquidations |
$ | (10.0 | ) | $ | (28.5 | ) | ||
|
|
|
|
|
|||||
| Gross margin as a percent of sales |
-1.2 | % | -3.1 | % | ||||
The improvement in gross margin percentage is primarily due to increases in sales prices in excess of raw sugar costs increases. Improved yields in the current year at the Port Wentworth refinery, along with costs incurred in fiscal 2010 for supply disruptions, also contributed to the gross margin improvement.
Raw sugar production shortfalls in key producing areas created very tight supply in the world raw sugar market, which has driven up world raw sugar prices. Beginning in the second half of 2009, rising world raw sugar prices together with restrictions on imports imposed by the 2008 Farm Bill pushed domestic raw sugar prices to high levels. Average market domestic raw sugar prices increased to $38.38 per cwt in fiscal 2011 compared to $34.24 per cwt in fiscal 2010 and $22.26 per cwt in fiscal 2009. The Company has attempted to offset the increase in raw sugar cost by adjusting its sales prices, however competitive pressures have limited the effectiveness of these efforts. There can be no assurance that we will be successful in achieving future sales price increases sufficient to offset these higher raw sugar costs.
| Year Ended September 30, | ||||||||||||||||
| 2011 | 2010 | |||||||||||||||
| Volume | Raw Market Basis |
Volume | Raw Market Basis |
|||||||||||||
| (000 cwt) | (per cwt) | (000 cwt) | (per cwt) | |||||||||||||
| Cost of raw sugar as reported in Cost of Sales |
15,147 | $ | 32.53 | 21,821 | $ | 26.91 | ||||||||||
| Derivative gains recognized in the period intended to hedge future purchases |
1.55 | |||||||||||||||
| Derivative gains recognized in prior periods intended to hedge the current period |
(2.64 | ) | (1.28 | ) | ||||||||||||
| Raw sugar sold from beginning LIFO inventory |
(2,269 | ) | 21.11 | (456 | ) | 21.28 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Cost of raw sugar on a hedge accounting basis before LIFO impact |
12,878 | $ | 31.90 | 21,365 | $ | 27.30 | ||||||||||
|
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|
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|
|||||||||
Sugar inventory quantities at September 30, 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 beginning LIFO inventory layers with a cost approximately $30 million below the cost of current purchases for the year ended September 30, 2011. Similarly, sugar inventory quantities at September 30, 2010 declined below the September 30, 2009 level resulting in the liquidation of beginning LIFO inventory layers with a cost approximately $3 million below the cost of current purchases for the year ended September 30, 2010.
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Table of Contents
The Company’s raw sugar derivative activity did not qualify for hedge accounting in the second half of fiscal 2009 and all of fiscal 2010 because of the inability to forecast raw sugar purchases as a result of delays in the Port Wentworth refinery production start-up. During those periods, gains and losses on raw sugar futures positions were recognized in earnings as they arose, rather than deferred and recognized when the sale of the refined sugar produced from the related raw sugar purchase occurred. The effect of recognizing derivative gains as they occurred resulted in higher raw sugar cost in subsequent periods. Beginning October 1, 2010, the start of fiscal 2011, 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 | ||||||||||||
| Fiscal 2010 | Fiscal 2011 | Fiscal 2012 | ||||||||||
| Recognized In |
||||||||||||
| Fiscal 2009 |
$ | 27.4 | $ | 0.5 | ||||||||
| Fiscal 2010 |
33.5 | $ | (0.3 | ) | ||||||||
Overall manufacturing costs in fiscal 2011 were similar to fiscal 2010 as improvements in Port Wentworth costs were offset by the challenging final quarter of refining operations in Gramercy. Port Wentworth’s manufacturing costs improved when compared to fiscal 2010 primarily as labor and energy costs per cwt declined as a result of improved daily production rates. Sucrose extraction rates also improved during fiscal 2011 moving closer to pre-accident levels. The effect of these improvements at Port Wentworth increased gross margin as a percent of sales by 1.1%. Port Wentworth’s manufacturing cost structure has been impacted by the 2008 accident resulting in higher depreciation, property taxes and property insurance related to the rebuilt refinery assets. Gramercy’s final quarter of refining operations in the three months ended December 31, 2010 negatively impacted gross margin as a percent of sales by 0.8% as lower daily production rates and substandard sucrose extraction increased costs per cwt of production. Gramercy packaging operations during the last nine months of fiscal 2011 incurred higher costs per cwt than the comparable nine months of fiscal 2010 primarily due to low daily production rates caused by inconsistent refined sugar supplied by LSR. Severance costs in fiscal 2011 increased $2.5 million over the prior year as a result of the workforce reduction associated with contribution of the Gramercy’s refining operations to LSR.
Port Wentworth’s fiscal 2011 annual production increased 11% over the prior year and the average daily melt improved to 4.5 million pounds per day from 4.1 million pounds per day in fiscal 2010. While production rates have increased, they still lag historical rates, necessitating added production days and increased operating costs. 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 | ||||||
| Third quarter fiscal 2011 |
4.5 | 78 | ||||||
| Fourth quarter fiscal 2011 |
4.8 | 81 | ||||||
25
Table of Contents
The Port Wentworth refinery had an average daily melt of approximately 4.8 million pounds per day and operated 77 days in the quarter ended December 31, 2011.
In fiscal 2010 we incurred $8.2 million of costs related to supply disruptions in fulfilling existing industrial sales contracts caused by the production challenges at the Port Wentworth refinery which reduced the gross margin percentage by 0.9% for the year. LSR started up its new refinery in Gramercy in October 2011 and experienced challenges in achieving a steady daily refined production rate. The lack of available refined sugar has impacted Gramercy’s packaging operations and resulted in reduced customer service levels for consumer products delivered from Gramercy. Consumer sales volumes in the first quarter of fiscal 2012 are approximately 8% below the comparable first quarter of fiscal 2011.
Energy costs per cwt for fiscal 2011 were virtually unchanged with the prior year as lower natural gas prices offset increased usage during Gramercy’s final quarter of refining operations. The Port Wentworth refinery has the ability to utilize coal as its primary energy source, while the Gramercy refinery exclusively used natural gas. Energy costs are not a significant component of the Gramercy packaging operations cost structure.
| Fiscal Year Ended September 30, | ||||||||||||||||
| 2011 | 2010 | |||||||||||||||
| Volume | Price | Volume | Price | |||||||||||||
| (000 MMBTU) | (per MMBTU) | (000 MMBTU) | (per MMBTU) | |||||||||||||
| Natural Gas |
2,550 | $ | 4.50 | 4,221 | $ | 5.04 | ||||||||||
| Coal |
926 | 5.22 | 635 | 4.62 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
3,476 | $ | 4.69 | 4,855 | $ | 4.98 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Transportation costs increased compared to the prior year periods primarily due to higher costs to service retail customers as a result of disruptions in logistics patterns caused by the transition of the Gramercy refinery to LSR, higher fuel costs and higher rail fleet costs. Gross margin declined 1.1% as a result of these higher transportation costs.
Selling, general and administrative expense for fiscal 2011 decreased $3.4 million from the prior year primarily due to lower compensation costs of $2.1 million, volume driven selling costs of $0.6 million and lower depreciation expense of $0.4 million. Fiscal 2011’s cost included $0.4 million of severance costs as a result of a reduction in force made in the fourth fiscal quarter.
The Company settled the Port Wentworth property and business interruption insurance claim in the first fiscal quarter of 2010 for $345.0 million, resulting in pretax gains of $278.5 million in fiscal 2010. We incurred $2.2 million of continuing legal costs related to the refinery explosion in fiscal 2011 as compared to $8.6 million of net charges in fiscal 2010. Details of the settlement of the insurance claim are provided in Note 2 to the Consolidated Financial Statements. The Company recorded a $3.7 million charge in refinery explosion related charges during fiscal 2010, related to certain loss-based assessments from the state of Georgia’s Subsequent Injury Trust Fund which are levied based on workers compensation claims paid during a calendar year.
Interest expense increased $0.6 million in fiscal 2011 as compared to fiscal 2010 as a result of higher borrowing balances. Interest income increased by $0.4 million as compared to fiscal 2010 primarily due to interest earned on use tax settlements.
Other income declined by $12.4 million from $5.5 million in fiscal 2010 to a loss of $6.8 million in fiscal 2011, primarily due to operating losses at LSR as well as impairment losses on the LSR and CSI joint ventures. We sold our interests in CSI and LSR in October 2011 and December 2011, respectively.
The Company provided a valuation allowance for the realization of future tax benefits, principally net operating loss carryforwards, reducing the tax benefit recognized from fiscal 2011 pre-tax loss. The ultimate realization of such benefits is dependent on future taxable income, including potential taxable gains on the sales of assets. The Company sold its interest in LSR for $18 million and is investigating strategic alternatives, including the potential sale of its investment in Wholesome Sweeteners. As of September 30, 2011, the Company’s tax basis in LSR and Wholesome was approximately $10 million and $4 million, respectively. To the extent the Company generates future taxable income from operations or asset sales sufficient to utilize some or all of the future tax benefits, the valuation allowance would be reversed, reducing future income tax provisions. Detail of our provision for income taxes, including reconciliation to the statutory federal rates, is provided in Note 9 to the Consolidated Financial Statements.
26
Table of Contents
Fiscal Year Ended September 30, 2010 compared to Fiscal Year Ended September 30, 2009
Continuing Operations
Our income from continuing operations was $136.9 million or $11.33 per diluted share in fiscal 2010, compared to a loss from continuing operations of $23.8 million or $2.03 per diluted share in fiscal 2009. Fiscal 2010 results include pretax gains totaling $278.5 million ($178.9 million after tax) related to the settlement of the property insurance claim relating to the Port Wentworth accident.
During fiscal 2009 and 2010, the domestic raw sugar market was extremely volatile and traded at levels well above historical norms. This volatility has generated significant gains and losses on derivative contracts entered into to hedge raw sugar purchases relating to future periods. These gains and losses did not qualify for hedge accounting treatment and accordingly, are included in operating results as realized.
The Port Wentworth refinery’s production ramped up during fiscal 2010 following the restart of the refinery which occurred in the summer of 2009. Daily production rates continue below normal levels, necessitating additional production days, which, along with increased depreciation and spending in a number of areas, added costs to achieve these volumes.
We discuss these and other factors in more detail below.
| Fiscal Year Ended September 30, |
||||||||
| 2010 | 2009 | |||||||
| (in Millions of Dollars) | ||||||||
| Net Sales: |
||||||||
| Sugar Sales |
$ | 889 | $ | 510 | ||||
| By-product Sales |
16 | 10 | ||||||
| Other |
3 | 3 | ||||||
|
|
|
|
|
|||||
| Net Sales |
$ | 908 | $ | 523 | ||||
|
|
|
|
|
|||||
Sugar sales comprised approximately 98% of our net sales in fiscal 2010 and fiscal 2009. Sugar sales volumes and prices were:
| Fiscal Year Ended September 30, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Volume | Price | Volume | Price | |||||||||||||
| (000 cwt) | (per cwt) | (000 cwt) | (per cwt) | |||||||||||||
| Sugar Sales: |
||||||||||||||||
| Industrial |
12,220 | $ | 35.10 | 7,071 | $ | 30.90 | ||||||||||
| Consumer |
5,467 | 45.24 | 4,651 | 38.02 | ||||||||||||
| Distributor |
4,277 | 41.37 | 2,886 | 34.75 | ||||||||||||
|
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|
|
|
|
|
|
|
|||||||||
| Domestic Sales |
21,964 | 38.84 | 14,608 | 33.93 | ||||||||||||
| World |
1,065 | 33.47 | 555 | 25.13 | ||||||||||||
|
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|
|||||||||
| Sugar Sales |
23,029 | $ | 38.59 | 15,163 | $ | 33.61 | ||||||||||
|
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|
|||||||||
Net sales increased 73.8% in fiscal 2010 driven by increased sugar sales volume and higher prices. Sales volumes increased 51.9% primarily due to the ramp up in production volume from the Port Wentworth refinery, partially offset by decreased sugar purchased from other producers. Domestic prices increased 14.5% due to domestic supply conditions and higher raw sugar prices. Domestic beet sugar production was 41.2% of domestic
27
Table of Contents
demand which, while higher than the prior year, was significantly below recent historical levels. Additionally, imports from Mexico in fiscal 2010 were 7.3% of U.S. annual demand as compared to 13.2% in the prior year. The combination of these factors, as well as the influence of higher raw cane sugar prices, as discussed below, led to higher refined prices. 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.
Raw sugar production shortfalls in India and poor crop conditions in Brazil have created very tight supply in the world raw sugar market, which has driven up world raw sugar prices. Rising world raw sugar prices together with restrictions on imports imposed by the 2008 Farm Bill pushed domestic raw sugar prices to 30 year highs in early calendar 2010. Prices eased in the spring and summer of 2010 then rose significantly in our fourth fiscal quarter ended September 30, 2010.
The Company attempted to offset the increase in raw sugar cost by adjusting its sales prices.
Gross margin as a percentage of sales was negative (2.1%) for fiscal 2010 as compared to 2.1% for fiscal 2009, as higher refined sugar prices were more than offset by higher raw sugar and refining costs.
Raw sugar derivative gains and losses recognized in fiscal 2009 and fiscal 2010 (aggregating $27.9 million and $35.4 million, respectively), which were entered into to hedge future sugar purchases were as follows:
Raw Sugar Futures Derivative Gains (Losses)
(In Millions)
| Recognized In | Futures Contract Delivery Period | |||||||||||||||||||||||||||||||||||
| Fiscal 2010 | Fiscal 2010 | |||||||||||||||||||||||||||||||||||
| Fiscal 2009 |
Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Fiscal 2011 and 2012 |
|||||||||||||||||||||||||||
| $27.9 | $ | 8.8 | $ | 10.0 | $ | 5.7 | $ | 2.9 | $ | 0.5 | ||||||||||||||||||||||||||
| $ | 18.9 | 7.0 | 7.9 | 3.4 | 0.6 | |||||||||||||||||||||||||||||||
| $ | (24.8 | ) | (16.1 | ) | (5.7 | ) | (3.0 | ) | ||||||||||||||||||||||||||||
| $ | 10.7 | 5.7 | 5.0 | |||||||||||||||||||||||||||||||||
| $ | 30.6 | 30.6 | ||||||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||||||
| $ | 8.8 | $ | 17.0 | $ | (2.5 | ) | $ | 6.3 | $ | 33.7 | ||||||||||||||||||||||||||
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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.
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Our cost of domestic raw cane sugar purchased, excluding the effect of derivative gains and losses and LIFO liquidation, was $28.50 per cwt on a raw market basis in fiscal 2010, compared to $22.00 in fiscal 2009. The higher current period raw sugar cost reflects the higher raw sugar market prices. As a result of these higher domestic raw cane sugar purchases, our gross margin percentage declined by 16.9% compared to last year. Sugar inventory quantities at September 30, 2010 declined below the September 30, 2009 level, resulting in the liquidation of a LIFO inventory layer with a cost approximately $3.4 million below the cost of current purchases.
Cost of sales in 2010 includes $33.2 million of gains on raw sugar futures contracts recognized this year on derivatives entered into to hedge raw sugar purchases in future periods, while cost of sales for the year ended September 30, 2009 included $27.9 million of gains on raw sugar futures contracts entered into to hedge raw sugar purchases in fiscal 2010 and beyond.
Manufacturing costs per cwt were relatively flat in fiscal 2010 as compared to the prior year. Fiscal 2009 included high costs related to the restart of the Port Wentworth refinery in summer 2009 as well as fixed costs incurred in Port Wentworth prior to start up. The Port Wentworth refinery ramped up production volume throughout fiscal 2010, however daily throughput rates continue to lag historical rates, necessitating added production days and increased operating costs. The lower total production volumes and the additional production days during fiscal 2010 generated higher unit cost while refining efficiency adversely impacted yields. Additionally, higher maintenance, safety, insurance, property taxes, depreciation and consulting cost impacted manufacturing costs.
Compared to fiscal 2007, the last comparable period before the Port Wentworth accident, higher manufacturing costs negatively impacted the gross margin percentage by 6.4%. Depreciation increased $10.8 million primarily as a result of commencing depreciation of the reconstructed Port Wentworth facilities. Insurance, property taxes and safety costs increased $14.0 million, compared to 2007, with approximately 57% of the increases related to Port Wentworth. Higher property taxes and insurance costs are primarily the result of the rebuilt Port Wentworth refinery. The OSHA settlement agreement includes requirements to abate the citations and to implement or continue certain safety measures regarding safety and health of our employees.
We incurred $8.2 million of costs related to supply disruptions in fulfilling existing industrial sales contracts caused by the production challenges at the Port Wentworth refinery, which reduced the gross margin percentage by 0.9% for the year.
Energy costs per cwt for fiscal 2010 were lower than the prior year due to lower natural gas prices and the resumption of coal usage in Port Wentworth. Lower energy costs increased gross margin as a percent of sales by 1.3%. The Port Wentworth refinery has the ability to utilize traditionally lower priced coal as its primary energy source, while the Gramercy refinery exclusively used natural gas. Natural gas usage was 87% of our energy usage in fiscal 2010, compared to 100% in the prior year. Our average NYMEX basis cost of natural gas after applying gains and losses from hedging activity decreased to $5.04 per mmbtu in the current year as compared to $7.43 per mmbtu for last year.
| Fiscal Year Ended September 30, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Volume | Price | Volume | Price | |||||||||||||
| (000 MMBTU) | (per MMBTU) | (000 MMBTU) | (per MMBTU) | |||||||||||||
| Natural Gas |
4,221 | $ | 5.04 | 2,749 | $ | 7.43 | ||||||||||
| Coal |
635 | 4.62 | — | — | ||||||||||||
|
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|
|
|||||||||
| Total |
4,855 | $ | 4.98 | 2,749 | $ | 7.43 | ||||||||||
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|
|||||||||
Transportation costs were lower in fiscal 2010, as customer shipments were optimized between Gramercy and Port Wentworth as compared to the longer distances required last year without the benefit of Port Wentworth production. Gross margin improved 1.6% as a result of these lower transportation costs.
Selling, general and administrative expense for fiscal 2010 decreased $4.3 million from fiscal 2009 primarily due to lower compensation costs of $2.1 million, lower legal costs of $1.5 million and lower depreciation expense of $0.7 million.
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The Company settled the Port Wentworth property and business interruption insurance claim in the first fiscal quarter of 2010 for $345.0 million, resulting in pretax gains of $278.5 million. We incurred $4.9 million of continuing legal and consulting costs related to the refinery explosion during the current year as compared to $23.4 million of net charges in the prior year. Details of the settlement of the insurance claim are provided in Note 2 to the Consolidated Financial Statements.
The Company recorded a $3.7 million charge in refinery explosion related charges during fiscal 2010, related to certain loss-based assessments from the state of Georgia’s Subsequent Injury Trust Fund which are levied based on workers compensation claims paid during a calendar year.
The Company along with other sugar industry participants was party to a lawsuit with McNeil Nutritional, which was settled in November 2008. The Company received $16.1 million in connection with the settlement, which was recorded as a gain on litigation settlement in fiscal 2009.
Interest expense increased $0.2 million over fiscal 2009 as higher borrowing balances more than offset lower interest rates. Interest income decreased by $0.4 million as compared to fiscal 2009 due to lower interest rates and lower invested balances.
Other income included the following (in thousands of dollars):
| Fiscal Year Ended September 30, |
||||||||
| 2010 | 2009 | |||||||
| Equity earnings in investment in: |
||||||||
| Comercializadora Santos Imperial S. de R.L. de C.V. |
$ | 1,609 | $ | 1,775 | ||||
| Wholesome Sweeteners, Inc. |
2,895 | 706 | ||||||
| Other |
(69 | ) | — | |||||
| Distributions from cost-basis limited partnership |
— | 147 | ||||||
| Gain on securities |
— | 388 | ||||||
| Settlement on natural gas pricing litigation |
857 | 107 | ||||||
| Other |
250 | (75 | ) | |||||
|
|
|
|
|
|||||
| Total |
$ | 5,542 | $ | 3,048 | ||||
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|
|||||
Wholesome’s results are reported net of amortization of identified intangibles of $0.7 million in fiscal 2010 and fiscal 2009.
Detail of our provision for income taxes, including reconciliation to the statutory federal rates, is provided in Note 9 to the Consolidated Financial Statements.
Discontinued Operations
Income from discontinued operations in fiscal 2009 is a result of the resolution of pre-disposal contingencies.
Liquidity and Capital Resources
In May 2011, the Company entered into a Second Amended and Restated Loan and Security Agreement with certain financial institutions as lenders and Bank of America, N.A. as agent (the “Credit Agreement”). The Credit Agreement provides for a $140 million revolving credit facility maturing December 31, 2015, to refinance and replace the Company’s previous credit facility and for various ongoing capital needs of the Company as well as for other general corporate purposes. At September 30, 2011, the Company had $81.8 million of outstanding borrowings under the Credit Agreement and had the capacity under the borrowing base formula to borrow an additional $44.0 million, after deducting outstanding letters of credit totaling $6.5 million. As of December 28, 2011, the Company had $71.3 million of outstanding borrowings and had the capacity to borrow an additional $35.6 million, after deducting outstanding letters of credit totaling $6.9 million.
The Credit Agreement has no financial covenants unless availability (defined as the borrowing base, less actual borrowings and letters of credit) is less than $20 million at any time or less than $25 million for a period of five consecutive business days, in which case a minimum $20 million trailing four quarter earnings before interest, taxes, depreciation and amortization (“EBITDA”) test would apply until availability has been greater than $30 million for three consecutive months. The
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Company maintained availability above these minimum thresholds throughout fiscal 2011 and fiscal 2012 to date and thus the EBITDA covenant has not been applicable. Had this financial covenant applied as of September 30, 2011, EBITDA for the trailing four quarter period would have been $3.3 million and the Company would not have been in compliance with the EBITDA covenant. As a result of the Company’s future cash needs, including for capital expenditures, pension contributions and margin requirements of the commodity futures program, as well as the need to fund possible future operating losses in the event current margin pressures continue, the Company’s borrowing availability in fiscal 2012 and beyond may be reduced to levels that would trigger the applicability of the financial covenants and other restrictions under the Credit Agreement. In such an event, it is possible that the Company will not be in compliance with such covenants and will need to seek a waiver from its lenders in order to avoid an event of default under the Credit Agreement.
In December 2011, the Company and the lenders agreed to an amendment of the Credit Agreement which modified the minimum EBITDA financial covenant subject to an availability trigger, until the earlier of April 15, 2012 or such time as availability exceeds $50 million. The amendment includes an additional provision which has the effect of reducing the amount available to borrow under the borrowing base formula by $10 million while the modified EBITDA covenant is in effect. The Company is reviewing opportunities to improve its liquidity, including potential asset sales. In December 2011 the Company sold its one third interest in LSR rather than make additional capital contributions necessitated by the financial condition of the venture. The sales price for the Company’s one-third interest and certain other assets was $18.0 million with $14.2 million received at closing and the balance payable over the next 21 months. The Company is exploring with its partner the potential of selling their interests in Wholesome Sweeteners to a third party. Pursuant to the Wholesome joint venture agreement, if a third party agrees to pay a specified minimum price for Wholesome, subject to certain conditions, both the Company and its joint venture partner could be required to sell their interests. There can be no assurance that any transaction to sell the Company’s interest in Wholesome will occur.
The Company did not furnish audited financial statements for the fiscal year ended September 30, 2011 to the agent within 90 days of year end as required in the credit agreement because the audited financial statements of LSR were not yet available. The Company has obtained a waiver and extension of this requirement.
Advances under the Credit Agreement are subject to a borrowing base which specifies advance rates against eligible receivables and inventory, as well as advances against property, plant and equipment. The facility is secured by the cash and cash equivalents, accounts receivable, inventory, substantially all property, plant and equipment and certain investments of the Company and its domestic subsidiaries. All domestic subsidiaries of the Company are borrowers or guarantors under the new facility. Interest rates under the amended Credit Agreement are LIBOR plus a margin that varies (with availability as defined) from 2.25% to 3.25%, or the base rate (Bank of America prime rate) plus a margin of 1.00% to 2.00%. Although the final maturity of the new facility is December 31, 2015, the Company classifies debt under the facility as current, as the Credit 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 the Company’s cash receipts.
The Credit Agreement contains covenants limiting the Company’s ability to, among other things:
| • | incur other indebtedness; |
| • | incur other liens; |
| • | undergo any fundamental changes; |
| • | engage in transactions with affiliates; |
| • | make investments; |
| • | change its fiscal periods; |
| • | enter into mergers or consolidations; |
| • | sell assets; and |
| • | prepay other debt. |
The Credit Agreement limits the Company’s ability to pay dividends or repurchase stock if availability, after adjustment on a pro forma basis for such transaction, is less than $30 million. Notwithstanding this limitation, the Company may pay cash dividends up to $2 million per year. The December 2011 amendment to the Credit Agreement prohibits the payment of dividends so long as the modified EBITDA covenant is in effect.
The Credit Agreement 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.
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The Company is reviewing potential operating and capital improvements in the utilities, refinery operations and water management areas of the Port Wentworth refinery, to improve operating performance. Additionally, in connection with the consent order entered into with the State of Georgia Department of Natural Resources, we are obligated to undertake an engineering study and complete improvements at the refinery to maintain compliance with storm and cooling water discharge permits by 2014. While the impact of these capital requirements cannot be estimated at this time, the Company expects capital expenditure levels to remain above historical replacement capital levels for at least the next two years.
Our capital expenditures during fiscal 2011 were $24.8 million related primarily to safety improvements and normal equipment replacement and included amounts to make improvements to the Gramercy facility prior to the January 1, 2011 contribution to LSR. Capital expenditures in fiscal 2012 are expected to total between $20 and $25 million, related primarily to safety, environmental, process improvement and equipment replacement projects.
Pension liabilities of $101.7 million, along with a $12.2 million liability for postretirement and post employment medical benefits and deferred compensation liabilities of $7.6 million, comprised the substantial portion of the non-current deferred employee benefits and other liabilities at September 30, 2011.
Our contributions to company-sponsored pension plans totaled $15.8 million in fiscal 2011 and are expected to total approximately $15.9 million in fiscal 2012. Based on the fair value of plan assets and interest rates as of September 30, 2011, assuming no change in future interest rates and assuming the plans’ assets grow at 7.0% per year, we estimate that our required contributions in future fiscal years will approximate $20.3 million in 2013, $20.0 million in 2014, $15.7 million in 2015 and $9.5 million in 2016.
The Board of Directors of the Company suspended its payment of a quarterly dividend in November 2011. Prior to that date, the Company had paid a regular quarterly dividend since December 2004, most recently at the quarterly rate of $0.02 per share.
Contractual Obligations and Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
The following table provides a summary of contractual commitments as of September 30, 2011, for the periods indicated:
| Contractual Obligations |
Payments Due by Period | |||||||||||||||||||
| Total | Less than 1 Year |
1-3 Years |
4-5 Years |
More than 5 Years |
||||||||||||||||
| (In Millions of Dollars) | ||||||||||||||||||||
| Long-term Debt Payments |
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Operating Leases |
6.7 | 3.1 | 3.6 | — | — | |||||||||||||||
| Revolving Credit Line Payments |
81.8 | 81.8 | — | — | — | |||||||||||||||
| Purchase Obligations: |
||||||||||||||||||||
| Sugar(1) |
1,425.3 | 251.8 | 260.8 | 260.8 | 651.9 | |||||||||||||||
| Other(2) |
24.4 | 24.4 | — | — | — | |||||||||||||||
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|
|||||||||||
| Total Purchase Obligations |
1538.2 | 361.1 | 264.4 | 260.8 | 651.9 | |||||||||||||||
| Other Long-term Liabilities Reflected on Balance Sheet Under GAAP(3) |
7.6 | 0.8 | 1.5 | 1.4 | 3.9 | |||||||||||||||
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|
|
|
|
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| Total |
$ | 1545.8 | $ | 361.9 | $ | 265.9 | $ | 262.2 | $ | 655.8 | ||||||||||
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| (1) | Includes an estimated price for variably priced sugar contracts; actual price paid in the future will vary and such variance may be significant. Does not include raw sugar futures contracts which are not expected to result in actual delivery. |
| (2) | Includes open purchase orders for the purchase of goods and services issued in the ordinary course of business. |
| (3) | Includes projected future benefit payments for deferred compensation programs for certain current and former employees. Does not include pension and postretirement benefit costs. See Note 10 to the Consolidated Financial Statements. |
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Critical Accounting Policies and Estimates
The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may materially differ from these estimates and our estimates may change materially if our assumptions or conditions change and as additional information becomes available in future periods. Management has discussed the selection of critical accounting policies and estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosure relating to critical accounting policies and estimates in this Form 10-K. Management considers an accounting estimate to be critical if it involves significant estimates or judgments and if the results of the estimation process could materially affect the financial statements.
Our significant accounting policies are more fully described in Note 1 to our Consolidated Financial Statements for fiscal 2011. The following is a summary of the more significant judgments and estimates used in the preparation of the consolidated financial statements.
Contingent Liabilities: The Company is party to a number of claims as a result of the Port Wentworth industrial accident. The Company believes that its workers compensation and liability insurance coverage is adequate to provide for damages arising from such claims and has included a liability and an offsetting insurance recovery on the balance sheet representing the estimated claims to be reimbursed by its workers compensation and liability insurance coverage. The final outcome of these matters may be materially different than the estimated liabilities provided for in these financial statements.
Allowance for Trade Promotions and Coupon Redemptions: Trade promotions are an important component of the sales and marketing of our products, and are critical to the support of our business. Trade promotion costs include amounts paid to encourage retailers to offer temporary price reduction for the sale of our products to consumers, reimbursement of customer paid advertising and amounts paid to obtain favorable display positions in retailers’ stores. Accruals for trade promotions are recorded at the time of sale of product to the customer based on expected levels of performance. Settlement of these liabilities typically occurs in subsequent periods primarily through an authorized process for deductions taken by a customer from amounts otherwise due to us or by direct payment to customers. From time to time, we distribute coupons to consumers for our branded retail products, and accrue a liability for the estimated redemption costs based on historical rates. As a result, the ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions taken by our customers and the actual cost of coupon programs is dependent on actual consumer redemption rates. Allowances for trade promotions and coupon redemptions recorded in the balance sheet at September 30, 2011 totaled $5.6 million. Final determination of trade promotion allowances and coupon redemption may result in adjustments in future periods.
Defined Benefit and Medical Retirement Plans: The plan obligations and related assets of defined benefit and medical retirement plans are presented in Note 10 to the Consolidated Financial Statements. Pension plan assets, which consist primarily of marketable equity and debt instruments, are valued using market quotations. Plan obligations and the annual pension expense are determined based on consultation with actuaries and are based in part on a number of assumptions we provide. Key assumptions in measuring the plan obligations include the discount rate, retirement rates, the long-term healthcare cost trend rate, mortality rates and the estimated future return on plan assets. In determining the discount rate, we use a yield based on market bond issues with maturities corresponding to the anticipated timing of the benefit payments. Asset returns are based upon the anticipated average rate of earnings expected on the invested funds of the plans based on the results of historical statistical studies performed by our advisors. At September 30, 2011, the actuarial assumptions for our plans were: discount rate of 4.61%; long-term rate of return on plan assets of 7.00%; and healthcare cost trend rate ranging from 5.00% to 8.50%. A 1% change in the discount rate would change our recorded pension obligations by approximately $23 million, while a 1% change in the assumed rate of return on assets would change annual costs by $1.5 million. The impact of changes in healthcare trend rates is described in Note 10 to the Consolidated Financial Statements.
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Hedge Accounting Estimates: 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. The Company has applied hedge accounting to the change in fair value of raw sugar derivatives and deferred $10.1 million of gains in Other Comprehensive Income.
Interim LIFO Accruals: Our raw sugar inventories, which are accounted for on the LIFO basis of accounting, 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 cost of sugar sold from beginning of the year inventory. Changes in the estimated replacement cost are recognized in subsequent interim fiscal periods as they arise. These changes in estimates have no effect on results for the full fiscal year.
Impairments: The Company conducts impairment tests on assets whenever events or changes in circumstances indicate that a carrying amount may not be recoverable. An asset is determined to be unrecoverable if the sum of the undiscounted cash flows from the use or disposition of the asset does not exceed the carrying amount of the asset. If an asset is determined to be unrecoverable, the Company will then determine the fair value of the asset and record an impairment charge to reduce the carrying amount to the fair value of the asset. The Company sold its interest in Comercializadora Santos Imperial S. de R.L. de C.V. in October 2011 and its interest in Louisiana Sugar Refining, LLC in December 2011. For the year ended September 30, 2011, the Company recorded impairment charges of $7.1 million on its investments in Comercializadora Santos Imperial S. de R.L. de C.V. and Louisiana Sugar Refining, LLC based on the net realizable value from these transactions.
Accounting for Income Taxes: Accounting for income taxes requires significant judgment in estimating the probability of the future tax benefit expected to be realized from future tax deductions attributable to temporary differences and loss carryforwards. We concluded that future tax benefits of all tax deductions from temporary book/tax differences and loss carryforwards which are not offset by tax liabilities for uncertainties more likely than not will not be realized in future years. Additionally, the final resolution of certain tax positions we have taken or expect to take in filed tax returns is sometimes uncertain, and may be subject to adjustment in future periods. We evaluate the likelihood that a filed position will ultimately be sustained, and have recorded a liability of $5.0 million for such uncertainties. The ultimate resolution of these uncertainties may require an adjustment to this recorded amount.
New Accounting Pronouncements
In May 2011, the FASB issued authoritative guidance to provide a consistent definition of fair value and ensure that fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards are similar. This guidance limits the highest and best use measure to non-financial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis. The guidance also expands disclosures of Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, and a description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. This guidance is effective for the Company in the second quarter of fiscal 2012. The implementation of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
In June 2011, the FASB issued authoritative guidance on the presentation of comprehensive income to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. This guidance is effective for the Company in the first quarter of fiscal 2013 and should be applied retrospectively. The implementation of this guidance will only change the presentation of comprehensive income. It will not have an impact on the Company’s financial position or results of operations.
ITEM 7A. 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.
34
Table of Contents
The information in the table below presents our domestic and world raw sugar futures positions outstanding as of September 30, 2011.
| Expected Maturity Fiscal 2012 |
Expected Maturity Fiscal 2013 |
|||||||
| Domestic Futures Contracts (net long positions): |
||||||||
| Contract Volumes (cwt) |
3,732,000 | 90,000 | ||||||
| Weighted Average Contract Price (per cwt) |
$ | 36.40 | $ | 34.91 | ||||
| Contract Amount |
$ | 135,828,000 | $ | 3,128,000 | ||||
| Weighted Average Fair Value (per cwt) |
$ | 37.73 | $ | 37.03 | ||||
| Fair Value |
$ | 140,810,000 | $ | 3,318,000 | ||||
| Expected Maturity Fiscal 2012 |
||||
| World Futures Contracts (net long positions): |
||||
| Contract Volumes (cwt) |
22,000 | |||
| Weighted Average Contract Price (per cwt) |
$ | 25.74 | ||
| Contract Amount |
$ | 577,000 | ||
| Weighted Average Fair Value (per cwt) |
$ | 25.29 | ||
| Fair Value |
$ | 566,000 | ||
The above information does not include either our physical inventory or our fixed price purchase commitments for raw sugar. At September 30, 2010, our domestic futures position was a net long position of 3,645,000 cwt at an average contract price of $29.10 and an average fair value price of $35.07. Our world futures position at September 30, 2010 was a net long position of 647,000 cwt at an average contract price of $23.26 and an average fair value price of $23.48.
The information in the table below presents our natural gas futures positions outstanding as of September 30, 2011.
| Expected Maturity Fiscal 2012 |
||||
| Futures Contracts (long positions): |
||||
| Contract Volumes (mmbtu) |
590,000 | |||
| Weighted Average Contract Price (per mmbtu) |
$ | 4.62 | ||
| Contract Amount |
$ | 2,723,000 | ||
| Weighted Average Fair Value (per mmbtu) |
$ | 4.04 | ||
| Fair Value |
$ | 2,386,000 | ||
At September 30, 2010, our natural gas futures position was a long position of 490,000 mmbtu with an average contract price of $4.82 and an average fair value price of $4.14.
The Company had $81.8 million of borrowings on its revolving credit facility outstanding at September 30, 2011 which matured within 30 days.
ITEM 8. Financial Statements and Supplementary Data
See the index of financial statements and financial statement schedules under “Item 15. Exhibits, Financial Statement Schedules.”
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Unaudited quarterly financial data for the last eight fiscal quarters is as follows (in thousands of dollars, except per share amounts):
| Fiscal Year 2011 | ||||||||||||||||
| Quarter Ended | ||||||||||||||||
| December 31, 2010 |
March 31, 2011 |
June 30, 2011 |
September 30, 2011 |
|||||||||||||
| Net Sales |
$ | 227,389 | $ | 192,166 | $ | 196,985 | $ | 231,436 | ||||||||
| Gross Margin |
(3,692 | ) | 10,297 | (12,070 | ) | (8,066 | ) | |||||||||
| Net Income (Loss) |
(8,915 | ) | 4,155 | (16,084 | ) | (32,549 | ) | |||||||||
| Earnings Per Share: |
||||||||||||||||
| Net Income (Loss): |
||||||||||||||||
| Basic |
$ | (0.75 | ) | $ | 0.35 | $ | (1.35 | ) | $ | (2.73 | ) | |||||
| Diluted |
$ | (0.75 | ) | $ | 0.34 | $ | (1.35 | ) | $ | (2.73 | ) | |||||
| Cash Dividends Paid |
$ | 0.02 | $ | 0.02 | $ | 0.02 | $ | 0.02 | ||||||||
| Fiscal Year 2010 | ||||||||||||||||
| Quarter Ended | ||||||||||||||||
| December 31, 2009(1)(2) |
March 31, 2010(2) |
June 30, 2010(2) |
September 30, 2010(2) |
|||||||||||||
| Net Sales |
$ | 173,779 | $ | 208,863 | $ | 260,978 | $ | 264,413 | ||||||||
| Gross Margin |
12,400 | (40,847 | ) | 1,910 | 7,268 | |||||||||||
| Net Income (Loss) |
178,116 | (33,264 | ) | (5,687 | ) | (2,305 | ) | |||||||||
| Earnings Per Share: |
||||||||||||||||
| Net Income (Loss) |
||||||||||||||||
| Basic |
$ | 15.11 | $ | (2.82 | ) | $ | (0.48 | ) | $ | (0.19 | ) | |||||
| Diluted |
$ | 14.84 | (2.82 | ) | $ | (0.48 | ) | $ | (0.19 | ) | ||||||
| Cash Dividends Paid |
$ | 0.02 | $ | 0.02 | $ | 0.02 | $ | 0.02 | ||||||||
| (1) | Includes $278.5 million of gains recognized on settlement on insurance claims. |
| (2) | Includes gains (losses) on derivative contracts intended to hedge future raw sugar costs of $18.9 million in the first quarter, ($24.8) million in the second quarter, $10.7 million in the third quarter and $30.6 million in the fourth quarter of fiscal 2010. |
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Management’s Evaluation of Disclosure 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 September 30, 2011 to ensure 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 Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
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Table of Contents
Management’s Report on Internal Control over Financial Reporting
Management’s report on internal control over financial reporting as of September 30, 2011 can be found under “Item 15. Exhibits, Financial Statements Schedules.”
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None
37
Table of Contents
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
ITEM 14. Principal Accountant Fees and Services
Information regarding our executive officers is included in Part I of this report. The other information required by Items 10, 11, 12, 13 and 14 will be included in our definitive proxy statement for the 2012 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days after September 30, 2011, and is incorporated in this report by reference.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements.
| Item |
Page | |||
| Management’s Report on Internal Control Over Financial Reporting |
42 | |||
| 43 | ||||
| Consolidated Financial Statements: |
||||
| 46 | ||||
| Consolidated Statements of Operations for the years ended September 30, 2011, 2010 and 2009 |
47 | |||
| 48 | ||||
| Consolidated Statements of Cash Flows for the years ended September 30, 2011, 2010 and 2009 |
49 | |||
| 50 | ||||
(a)(2) Financial Statement Schedules.
All schedules and other statements for which provision is made in the applicable regulations of the SEC have been omitted because they are not required under the relevant instructions or are inapplicable.
(a)(3) Exhibits.
| Exhibit No. |
Document | |
| *3(a)(1) | Amended and Restated Articles of Incorporation of Reorganized Imperial Sugar (previously filed as Exhibit 3.1 to the Form 8-K dated September 12, 2001 and incorporated herein by reference). | |
| *3(a)(2) | Articles of Amendment dated February 28, 2002, to the Amended and Restated Articles of Incorporation (previously filed as Exhibit 3(a)(2) to the 2002 Form 10-K and incorporated herein by reference). | |
| *3(b) | Amended and Restated By-Laws of Reorganized Imperial Sugar (previously filed as an Exhibit to the Form 8-K dated September 12, 2001 and incorporated herein by reference). | |
38
Table of Contents
| Exhibit No. |
Document | |
| The Company is a party to several long-term debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. Pursuant to paragraph 4 (iii)(A) of Item 601 (b) of Regulation S-K, the Company agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. | ||
| *4(a) | Rights Agreement dated as of December 31, 2002 between the Company and The Bank of New York (previously filed as Exhibit 4(a) to the 2002 Form 10-K and incorporated herein by reference). | |
| *4(b) | Amendment, dated October 10, 2008, to Rights Agreement between Imperial Sugar Company and The Bank of New York (previously filed as Exhibit 4.1 to the Form 8-K dated October 10, 2008 and incorporated herein by reference). | |
| *†10(a)(1) | Executive Employment Agreement with John C. Sheptor (previously filed as Exhibit 10.1 to the Form 8-K dated August 10, 2009 and incorporated herein by reference). | |
| *†10(a)(2) | Severance and Change of Control Agreement for Louis T. Bolognini (previously filed as Exhibit 10.2 to the Form 8-K dated August 10, 2009 and incorporated herein by reference). | |
| *†10(a)(3) | Severance and Change of Control Agreement for Patrick D. Henneberry (previously filed as Exhibit 10.3 to the Form 8-K dated August 10, 2009 and incorporated herein by reference). | |
| * †10(a)(4) | Specimen of Change in Control Agreement for certain of Imperial Sugar’s officers (previously filed as Exhibit 10(a)(6) to the 2008 Form 10-K and incorporated herein by reference). | |
| †10(a)(5) | Schedule of Change in Control Agreements. | |
39
Table of Contents
| Exhibit No. |
Document | |
| *†10(b) | Imperial Holly Corporation Retirement Plan For Non-employee Directors (previously filed as Exhibit 10(j) to the 1994 Form 10-K and incorporated herein by reference). | |
| *†10(c)(1) | Imperial Sugar Company Long Term Incentive Plan as amended and restated effective December 9, 2010 (previously filed as Exhibit 10.1 to the Form 8-K dated February 22, 2011 and incorporated herein by reference). | |
| *†10(c)(3) | Specimen of Imperial Sugar Company Long Term Incentive Plan Non Qualified Stock Option Award Agreement (previously filed as Exhibit 10(e)(2) to the 2005 Form 10-K and incorporated herein by reference). | |
| *10(d)(1) | Second Amended and Restated Loan and Security Agreement dated May 18, 2011, among Imperial Sugar Company and certain of its subsidiaries as Borrowers or as Guarantors and certain financial institutions as Lenders and Bank of America as Agent (previously filed as Exhibit 10.1 to the Form 8-K dated May 23, 2011 and incorporated herein by reference). | |
| 10(d)(2) | First Amendment to Second Amended and Restated Loan and Security Agreement dated December 29, 2011. | |
| †10(e) | Summary of Imperial Sugar Company Management Incentive Plan for fiscal 2011 and 2012. | |
| *10(f) | Member Contribution Agreement dated as of November 19, 2009 by and among Louisiana Sugar Refining, LLC, Imperial-Savannah LP, Sugar Growers and Refiners, Inc., and Cargill, Incorporated (previously filed as Exhibit 2.1 to the Form 8-K dated November 19, 2009 and incorporated herein by reference). | |
| *14 | Code of ethics (previously filed as Exhibit 14 to the 2010 Form 10-K and incorporated herein by reference). | |
| *21 | Subsidiaries of Imperial Sugar Company (previously filed as Exhibit 21 to the 2009 Form 10-K and incorporated by reference). | |
| 23.1 | Consent of Independent Registered Public Accounting Firm. | |
| 23.2 | Consent of Independent Registered Public Accounting Firm. | |
| 31.1 | Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934. | |
| 31.2 | 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. | |
| 101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2011 and 2010; (ii) Consolidated Statements of Operations for the twelve months ended September 30, 2011, 2010 and 2009; (iii) Consolidated Statements of Cash Flows for the twelve months ended September 30, 2011, 2010 and 2009; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the twelve months ended September 30, 2011, 2010 and 2009; and (v) Notes to Consolidated Financial Statements. | |
| * | Indicates we have previously filed the exhibit with the SEC as indicted in the document description. We incorporate those previously filed exhibits in this report by reference. |
| † | Identifies management contracts or compensatory plans or arrangements required to be filed as an exhibit hereto. |
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on January 5, 2012.
| IMPERIAL SUGAR COMPANY | ||
| By: | /s/ JOHN C. SHEPTOR | |
| John C. Sheptor | ||
| President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on January 5, 2012
| Signature |
Title | |
| /s/ JOHN C. SHEPTOR John C. Sheptor |
Director, President and Chief Executive Officer (Principal Executive Officer) | |
| /s/ H. P. MECHLER H. P. Mechler |
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |
| /s/ JAMES J. GAFFNEY James J. Gaffney |
Chairman of the Board of Directors | |
| /s/ GAYLORD O. COAN Gaylord O. Coan |
Director | |
| /S/ RONALD C. KESSELMAN Ronald C. Kesselman |
Director | |
| /s/ DAVID C. MORAN David C. Moran |
Director | |
| /S/ JOHN E. STOKELY John E. Stokely |
Director | |
| /S/ JOHN K. SWEENEY John K. Sweeney |
Director | |
41
Table of Contents
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management, including Imperial Sugar Company’s principal executive officer and principal financial and accounting officer, is responsible for establishing and maintaining adequate internal control over Imperial Sugar Company’s financial reporting. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that Imperial Sugar Company’s internal control over financial reporting was effective as of September 30, 2011.
The effectiveness of our internal control over financial reporting as of September 30, 2011, was audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
| /s/ JOHN C. SHEPTOR | /s/ H.P. MECHLER | |||
| John C. Sheptor | H.P. Mechler | |||
| President and Chief Executive Officer | Senior Vice President and Chief Financial Officer | |||
| (Principal Executive Officer) | (Principal Financial Officer and Principal Accounting Officer) | |||
42
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Imperial Sugar Company
Sugar Land, Texas
We have audited the internal control over financial reporting of Imperial Sugar Company and subsidiaries (the “Company”) as of September 30, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended September 30, 2011 of the Company and our report dated January 5, 2012 expressed an unqualified opinion on those consolidated financial statements and includes explanatory paragraphs relating to the Company’s operating losses, pension plan contributions and capital expenditures that have consumed a significant amount of the Company’s liquidity and that raises substantial doubt about its ability to continue as a going concern and relating to the explosion and fire on February 7, 2008 at the Company’s sugar refinery in Port Wentworth, Georgia.
| /s/ DELOITTE & TOUCHE LLP |
|
Houston, Texas |
| January 5, 2012 |
43
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Imperial Sugar Company
Sugar Land, Texas
We have audited the accompanying consolidated balance sheets of Imperial Sugar Company and subsidiaries (the “Company”) as of September 30, 2011 and 2010, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Louisiana Sugar Refining, LLC (“LSR”) (an equity method investee). The Company’s equity of $15,903,000 in LSR’s net assets at September 30, 2011, and of ($8,858,000) in LSR’s net loss for the respective year then ended is included in the accompanying consolidated financial statements. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Louisiana Sugar Refining, LLC, is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at September 30, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2011, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company experienced an explosion and fire on February 7, 2008 at its sugar refinery in Port Wentworth, Georgia, in which the refinery’s bulk storage silos and virtually its entire packaging capabilities were destroyed.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s operating losses, pension plan contributions and capital expenditures have consumed a significant amount of the Company’s liquidity. As a result, the Company could trigger the applicability of the financial covenants and other restrictions under the credit agreement for which it will need to seek a waiver from its lenders in order to avoid an event of default under the credit agreement. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 30, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 5, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting, based on our audit and the report of the other auditors.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
January 5, 2012
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Louisiana Sugar Refining, LLC
We have audited the balance sheet of Louisiana Sugar Refining, LLC (the Company) as of September 30, 2011, and the related statements of operations, changes in members’ equity, and cash flows for the year then ended (not presented separately herein). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Louisiana Sugar Refining, LLC at September 30, 2011, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
New Orleans, Louisiana
January 5, 2012
45
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| September 30, | ||||||||
| 2011 | 2010 | |||||||
| (In Thousands of Dollars) | ||||||||
| ASSETS | ||||||||
| Current Assets: |
||||||||
| Cash and Cash Equivalents |
$ | 134 | $ | 22,750 | ||||
| Marketable Securities |
206 | 198 | ||||||
| Accounts Receivable, Net |
55,622 | 55,093 | ||||||
| Inventories: |
||||||||
| Finished Products |
31,268 | 30,526 | ||||||
| Raw and In-Process Materials |
21,966 | 67,133 | ||||||
| Supplies |
17,355 | 15,716 | ||||||
|
|
|
|
|
|||||
| Total Inventory |
70,589 | 113,375 | ||||||
| Prepaid Expenses and Other Current Assets |
59,155 | 40,949 | ||||||
|
|
|
|
|
|||||
| Total Current Assets |
185,706 | 232,365 | ||||||
| Other Investments |
38,577 | 15,952 | ||||||
| Property, Plant and Equipment, Net |
251,009 | 280,211 | ||||||
| Deferred Income Taxes, Net |
11,034 | 10,624 | ||||||
| Other Assets |
4,095 | 2,414 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 490,421 | $ | 541,566 | ||||
|
|
|
|
|
|||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: |
||||||||
| Accounts Payable: |
||||||||
| Raw Sugar |
$ | 23,461 | $ | 81,673 | ||||
| Other Trade |
13,367 | 28,326 | ||||||
|
|
|
|
|
|||||
| Total Accounts Payable |
36,828 | 109,999 | ||||||
| Borrowing under Revolving Credit Line |
81,843 | 22,000 | ||||||
| Deferred Income Taxes, Net |
8,313 | 11,427 | ||||||
| Other Current Liabilities |
74,200 | 54,189 | ||||||
|
|
|
|
|
|||||
| Total Current Liabilities |
201,184 | 197,615 | ||||||
|
|
|
|
|
|||||
| Deferred Employee Benefits and Other Liabilities |
127,783 | 125,219 | ||||||
| Commitments and Contingencies |
||||||||
| Shareholders’ Equity: |
||||||||
| Preferred Stock, Without Par Value, Issuable in Series; 5,000,000 Shares Authorized, None Issued |
— | — | ||||||
| Common Stock, Without Par Value; 50,000,000 Shares Authorized; 12,223,978 and 12,145,098 Shares Issued and Outstanding at September 30, 2011 and 2010 |
131,572 | 130,168 | ||||||
| Retained Earnings |
109,463 | 163,834 | ||||||
| Accumulated Other Comprehensive Loss |
(79,581 | ) | (75,270 | ) | ||||
|
|
|
|
|
|||||
| Total Shareholders’ Equity |
161,454 | 218,732 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 490,421 | $ | 541,566 | ||||
|
|
|
|
|
|||||
See notes to consolidated financial statements.
46
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended September 30, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In Thousands of Dollars, Except Share and Per Share Amounts) |
||||||||||||
| Net Sales |
$ | 847,976 | $ | 908,033 | $ | 522,563 | ||||||
| Business Interruption Insurance Recovery |
— | 84,677 | — | |||||||||
| Cost of Sales (includes depreciation of $21,034,000, $21,776,000 and $12,356,000 for the years ended September 30, 2011, 2010 and 2009, respectively) |
(861,507 | ) | (927,302 | ) | (511,510 | ) | ||||||
| Selling, General and Administrative Expense (includes depreciation of $823,000, $1,261,000 and $1,923,000 for the years ended September 30, 2011, 2010 and 2009, respectively) |
(38,013 | ) | (41,434 | ) | (45,760 | ) | ||||||
| Refinery Explosion Related Charges, Net |
(2,222 | ) | (8,600 | ) | (53,793 | ) | ||||||
| Insurance Recoveries Recognized |
— | 193,796 | 30,404 | |||||||||
| Gain on Contribution of Assets to Joint Venture |
3,598 | — | — | |||||||||
| Gain on Litigation Settlement |
— | — | 16,148 | |||||||||
|
|
|
|
|
|
|
|||||||
| Operating Income (Loss) |
(50,168 | ) | 209,170 | (41,948 | ) | |||||||
| Interest Expense |
(2,307 | ) | (1,721 | ) | (1,474 | ) | ||||||
| Interest Income |
404 | 52 | 489 | |||||||||
| Other Income (Loss), Net |
(6,818 | ) | 5,542 | 3,048 | ||||||||
|
|
|
|
|
|
|
|||||||
| Income (Loss) from Continuing Operations Before Income Taxes |
(58,889 | ) | 213,043 | (39,885 | ) | |||||||
| Benefit (Provision) for Income Taxes (includes a valuation allowance of $17,321,000 for the year ended September 30, 2011) |
5,496 | (76,183 | ) | 16,058 | ||||||||
|
|
|
|
|
|
|
|||||||
| Income (Loss) from Continuing Operations |
(53,393 | ) | 136,860 | (23,827 | ) | |||||||
| Income (Loss) from Discontinued Operations |
— | — | 644 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net Income (Loss) |
$ | (53,393 | ) | $ | 136,860 | $ | (23,183 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Basic Earnings (Loss) per Share of Common Stock: |
||||||||||||
| Income (Loss) from Continuing Operations |
$ | (4.49 | ) | $ | 11.59 | $ | (2.03 | ) | ||||
| Income (Loss) from Discontinued Operations |
— | — | 0.05 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net Income (Loss) |
$ | (4.49 | ) | $ | 11.59 | $ | (1.98 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Diluted Earnings (Loss) per Share of Common Stock: |
||||||||||||
| Income (Loss) from Continuing Operations |
$ | (4.49 | ) | $ | 11.33 | $ | (2.03 | ) | ||||
| Income (Loss) from Discontinued Operations |
— | — | 0.05 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net Income (Loss) |
$ | (4.49 | ) | $ | 11.33 | $ | (1.98 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Weighted Average Shares Outstanding: |
||||||||||||
| Basic |
11,899,820 | 11,805,587 | 11,721,357 | |||||||||
|
|
|
|
|
|
|
|||||||
| Diluted |
11,899,820 | 12,082,000 | 11,721,357 | |||||||||
|
|
|
|
|
|
|
|||||||
See notes to consolidated financial statements.
47
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In Thousands of Dollars)
| Shares of Common Stock |
Common Stock |
Retained Earnings |
Accumulated Other Comprehensive |
Total | ||||||||||||||||
| BALANCE September 30, 2008 |
11,964,927 | 125,992 | 53,823 | (35,745 | ) | 144,070 | ||||||||||||||
| Comprehensive Loss: |
||||||||||||||||||||
| Net Loss |
(23,183 | ) | (23,183 | ) | ||||||||||||||||
| Change in Derivative Fair Value (Net of Tax of $1,845) |
(3,262 | ) | (3,262 | ) | ||||||||||||||||
| Reclassification from Accumulated Other Comprehensive Income to Net Income (Net of Tax of $2,691) |
4,757 | 4,757 | ||||||||||||||||||
| Foreign Currency Translation Adjustment (Net of Tax of $54) |
(96 | ) | (96 | ) | ||||||||||||||||
| Change in Pension and Other Postretirement Benefits Liability (Net of Tax of $20,247) |
(35,796 | ) | (35,796 | ) | ||||||||||||||||
|
|
|
|||||||||||||||||||
| Total Comprehensive Loss |
(57,580 | ) | ||||||||||||||||||
| Adjustments to Apply Measurement Date Change for Pension and Other Postretirement Benefits (Net of Tax of $126) |
(629 | ) | 233 | (396 | ) | |||||||||||||||
| Dividends ($0.18 per share) |
(2,089 | ) | (2,089 | ) | ||||||||||||||||
| Stock Options Exercised and Restricted Stock Grants, Net |
61,427 | 2,429 | 2,429 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| BALANCE September 30, 2009 |
12,026,354 | 128,421 | 27,922 | (69,909 | ) | 86,434 | ||||||||||||||
| Comprehensive Income: |
||||||||||||||||||||
| Net Income |
136,860 | 136,860 | ||||||||||||||||||
| Change in Derivative Fair Value (Net of Tax of $688) |
(1,233 | ) | (1,233 | ) | ||||||||||||||||
| Reclassification from Accumulated Other Comprehensive Income to Net Income (Net of Tax of $540) |
967 | 967 | ||||||||||||||||||
| Foreign Currency Translation Adjustment (Net of Tax of $89) |
160 | 160 | ||||||||||||||||||
| Change in Pension and Other Postretirement Benefits Liability (Net of Tax of $2,933) |
(5,255 | ) | (5,255 | ) | ||||||||||||||||
|
|
|
|||||||||||||||||||
| Total Comprehensive Income |
131,499 | |||||||||||||||||||
| Dividends ($0.08 per share) |
(948 | ) | (948 | ) | ||||||||||||||||
| Restricted Stock Grants, Net |
118,744 | 1,747 | 1,747 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| BALANCE September 30, 2010 |
12,145,098 | $ | 130,168 | $ | 163,834 | $ | (75,270 | ) | $ | 218,732 | ||||||||||
| Comprehensive Loss: |
||||||||||||||||||||
| Net Loss |
(53,393 | ) | (53,393 | ) | ||||||||||||||||
| Change in Derivative Fair Value |
19,335 | 19,335 | ||||||||||||||||||
| Reclassification from Accumulated Other Comprehensive Income to Net Income |
(8,855 | ) | (8,855 | ) | ||||||||||||||||
| Foreign Currency Translation Adjustment |
(72 | ) | (72 | ) | ||||||||||||||||
| Change in Pension and Other Postretirement Benefits Liability |
(14,719 | ) | (14,719 | ) | ||||||||||||||||
|
|
|
|||||||||||||||||||
| Total Comprehensive Loss |
(57,704 | ) | ||||||||||||||||||
| Dividends ($0.08 per share) |
(978 | ) | (978 | ) | ||||||||||||||||
| Restricted Stock Grants, Net |
78,880 | 1,404 | 1,404 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| BALANCE September 30, 2011 |
12,223,978 | $ | 131,572 | $ | 109,463 | $ | (79,581 | ) | $ | 161,454 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
See notes to consolidated financial statements.
48
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended September 30, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In Thousands of Dollars) | ||||||||||||
| Operating Activities: |
||||||||||||
| Net Income (Loss) |
$ | (53,393 | ) | $ | 136,860 | $ | (23,183 | ) | ||||
| Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities: |
||||||||||||
| Depreciation |
21,857 | 23,037 | 14,279 | |||||||||
| Deferred Income Taxes |
(5,496 | ) | 75,970 | (16,032 | ) | |||||||
| Reclassification from Accumulated Other Comprehensive Income (Loss) to Net Income (Loss) |
(8,855 | ) | 1,506 | 7,448 | ||||||||
| Cash (Paid) Received on Change in Fair Value of Derivative Instruments |
19,335 | (1,922 | ) | (5,108 | ) | |||||||
| Gain on Contribution of Assets to Joint Venture |
(3,598 | ) | — | — | ||||||||
| Equity (Earnings) Loss in Unconsolidated Investees |
499 | (4,435 | ) | (2,481 | ) | |||||||
| Impairment of Investments in Unconsolidated Investees |
7,123 | — | — | |||||||||
| Income from Discontinued Operations |
— | — | (644 | ) | ||||||||
| Stock-Based Compensation Expense |
2,173 | 1,992 | 2,502 | |||||||||
| Reduction of Fair Value of Guarantee |
(700 | ) | — | — | ||||||||
| Excess Tax Benefits from Stock-Based Compensation |
379 | 39 | 141 | |||||||||
| Savannah Event Related Impairment Charges: |
||||||||||||
| Inventory destroyed or damaged |
— | — | 1,639 | |||||||||
| Property Plant and Equipment |
— | — | 405 | |||||||||
| Insurance Recoveries Recognized |
— | (278,473 | ) | (30,404 | ) | |||||||
| Advances from Insurance Carriers |
— | — | 60,000 | |||||||||
| Other |
408 | 254 | (174 | ) | ||||||||
| Changes in Operating Assets and Liabilities: |
||||||||||||
| Accounts Receivable |
949 | (20,492 | ) | (6,137 | ) | |||||||
| Income Tax Receivable |
— | — | 12,704 | |||||||||
| Inventories |
42,786 | (1,100 | ) | (13,966 | ) | |||||||
| Prepaid Expenses and Other Assets |
3,221 | (2,710 | ) | (5,789 | ) | |||||||
| Accounts Payable, Raw Sugar |
(58,212 | ) | 38,888 | 12,767 | ||||||||
| Accounts Payable, Other Trade |
(8,980 | ) | 5,891 | (2,423 | ) | |||||||
| Other Liabilities |
(14,960 | ) | (7,242 | ) | (4,829 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net Cash Provided by (Used in) Continuing Operations |
(55,464 | ) | (31,937 | ) | 715 | |||||||
|
|
|
|
|
|
|
|||||||
| Net Cash Provided by Discontinued Operations |
— | — | 1,015 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net Cash Provided by (Used in) Operating Activities |
(55,464 | ) | (31,937 | ) | 1,730 | |||||||
|
|
|
|
|
|
|
|||||||
| Investing Activities: |
||||||||||||
| Capital Expenditures |
(24,803 | ) | (72,337 | ) | (160,762 | ) | ||||||
| Advances from Insurance Carriers |
— | 51,000 | 134,000 | |||||||||
| Proceeds from Sale of Marketable Securities |
— | — | 7,754 | |||||||||
| Proceeds from Sales of Assets |
— | — | 538 | |||||||||
| Other |
(369 | ) | (266 | ) | (7 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net Cash (Used in) Investing Activities |
(25,172 | ) | (21,603 | ) | (18,477 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Financing Activities: |
||||||||||||
| Borrowing (Repayments) under Revolving Credit Line, Net |
59,843 | (38,000 | ) | 60,000 | ||||||||
| Cash Dividends |
(1,054 | ) | (1,050 | ) | (2,319 | ) | ||||||
| Stock Option and Warrant Proceeds |
— | — | 79 | |||||||||
| Excess Tax Benefits from Stock-Based Compensation |
(379 | ) | (39 | ) | (141 | ) | ||||||
| Other |
(390 | ) | (205 | ) | (11 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net Cash Provided by (Used in) Financing Activities |
58,020 | (39,294 | ) | 57,608 | ||||||||
|
|
|
|
|
|
|
|||||||
| Increase (Decrease) in Cash and Cash Equivalents |
(22,616 | ) | (92,834 | ) | 40,861 | |||||||
| Cash and Cash Equivalents, Beginning of Period |
22,750 | 115,584 | 74,723 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and Cash Equivalents, End of Period |
$ | 134 | $ | 22,750 | $ | 115,584 | ||||||
|
|
|
|
|
|
|
|||||||
| Supplemental Non-Cash Items: |
||||||||||||
| Tax Effect of Deferred Gains and Losses |
$ | — | $ | 2,992 | $ | 19,330 | ||||||
|
|
|
|
|
|
|
|||||||
| Purchase of Property, Plant and Equipment on Account |
$ | 1,008 | $ | 6,797 | $ | 28,718 | ||||||
|
|
|
|
|
|
|
|||||||
49
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2011, 2010 and 2009
1. ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Imperial Sugar Company and its wholly owned subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated. The Company operates its business as one domestic segment—the production and sale of refined sugar and related products. The Company has evaluated subsequent events through the date the financial statements were issued.
The consolidated financial statements have been prepared on the going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. However events and circumstances described below create substantial doubt about the Company’s ability to continue as a going concern.
The Company’s revolving credit agreement requires the maintenance of certain minimum availability levels or requires the Company to meet a financial covenant related to a minimum earnings level. Operating losses, pension plan contributions and capital expenditures have consumed a significant amount of the Company’s liquidity. While the minimum availability levels under the credit agreement have not been breached, future cash needs, including capital expenditures, pension contributions and margin requirements of the commodity futures program, as well as the need to fund possible future operating losses in the event current margin pressures continue, the Company’s borrowing availability in fiscal 2012 and beyond may be reduced to levels that would trigger the applicability of the financial covenants and other restrictions under the credit agreement. In such an event, it is possible that the Company will not be in compliance with such covenants and will need to seek a waiver from its lenders in order to avoid an event of default under the credit agreement. There is no assurance that such a waiver will be obtained from our lenders or that the lenders would not condition a waiver on the Company’s agreement to terms that could materially limit the Company’s ability to make additional borrowings or that could be otherwise disadvantageous.
The Company is attempting to enhance operating cash flow by increasing sales prices and improving operating efficiencies, and is reviewing opportunities to improve its liquidity, including potential sale of assets. In December 2011 the Company sold its one-third interest in Louisiana Sugar Refining, LLC (“LSR”) rather than make additional capital contributions necessitated by the financial condition of the venture. The sales price for the Company’s one-third interest and certain other assets was $18.0 million with $14.2 million received at closing and the balance payable over the next 21 months. The Company is exploring with its partner the potential of selling their interests in Wholesome Sweeteners, Inc. (“Wholesome”) to a third party. Pursuant to the Wholesome joint venture agreement, if a third party agrees to pay a specified minimum price for Wholesome, subject to certain conditions, both the Company and its joint venture partner could be required to sell their interests. However, there is no assurance that these steps will be successful or will improve the Company’s financial condition sufficiently to avoid the consequences under the bank credit agreement described above.
The Company’s continuation as a going concern is dependant upon its ability to generate sufficient cash flows from operations or increase its liquidity through asset sales in order to meet its obligations as they become due. The consolidated financial statements do not include any adjustments relating to the recoverability and reclassification of recorded assets or amounts and reclassification of liabilities that may result from these uncertainties should the Company be unable to continue as a going concern.
Business Risks
The Company is significantly affected by market factors, including demand for and price of refined sugar and raw cane sugar and the price and availability of energy. 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, dietary trends, competing sweeteners, weather conditions, production outages at key industry facilities and the United States and Mexican farm and trade policies. Federal legislation and regulations provide for mechanisms designed to support the price of domestic sugar crops, principally through the limitations on importation of raw cane sugar for domestic consumption and marketing allotments.
50
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
A significant portion of the Company’s industrial sales are made under fixed price, forward sales contracts, which generally extend up to one year and occasionally longer. The Company also contracts to purchase raw cane sugar substantially in advance of the time it delivers the refined sugar produced from the purchase. To mitigate its exposure to future price changes, the Company attempts to manage the volume of refined sugar sales contracted for future delivery in relation to the volume of raw cane sugar contracted for future receipt and utilizes traded raw sugar futures, when feasible.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires estimates and assumptions that affect the reported amounts as well as certain disclosures. The Company’s financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments with maturities of 90 days or less at the time of purchase.
Marketable Securities
The Company’s marketable securities which are classified as “available for sale” are reflected in the Consolidated Balance Sheet at fair market value, with the aggregate unrealized gains or losses, net of related deferred taxes, included as a separate component of comprehensive income within shareholders’ equity.
Trade Receivables
The Company accounts for trade receivables balances net of allowances for doubtful accounts. The allowance balance is determined based upon a review of prior loss history, trends in credit quality statistics, individual customer credit extensions and other factors.
Advertising and Promotion
Cost of developing and distributing advertisements is expensed as incurred. Coupon redemptions are estimated based on historical redemption rates and accrued for during the coupon distribution period. Advertising expenses are reported in Selling, General and Administrative Expense. Customer advertising reimbursements and other customer promotional activities are accrued as the related sales are made and recorded as reductions of Net Sales.
Inventories
Inventories are stated at the lower of cost or market. Cost of raw sugar, including the raw sugar component of refined sugar, is determined under the last-in, first-out (LIFO) method. All other costs are determined under the first-in, first-out (FIFO) or average method. LIFO inventory at September 30, 2011 and 2010 was $24.2 million and $33.1 million lower than the amount which would be reported on the FIFO inventory valuation method. Sugar inventory quantities at September 30, 2011 and 2010 declined below the level at the beginning of the year, resulting in the liquidation of a LIFO inventory layer with a cost approximately $30.5 and $3.4 million, respectively below the cost of current purchases. Raw and in-process materials include $2.3 million and $3.1 million of in-process materials at September 30, 2011 and 2010. Supplies inventory includes operating and packaging supplies as well as maintenance parts utilized in the Company’s manufacturing operations. Obsolescence reserve for supplies inventory was $1.5 million at September 30, 2011 and $1.7 million at September 30, 2010.
51
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
Revenue Recognition
The Company recognizes revenues when products are shipped under contract terms or approved purchase orders at stated prices and all significant obligations of the Company have been satisfied. Risk of loss passes at time of shipment. Provisions are made for estimated returns and estimated credit losses.
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 and are categorized in the Statement of Cash Flows based on the nature of the activity underlying the recovery. 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.
Hedge Accounting
The Company uses raw sugar futures and options in its raw sugar purchasing programs and uses natural gas futures, options and basis swaps to hedge natural gas purchases used in its manufacturing operations. The Company applies hedge accounting to these cash flow hedge instruments if the hedge instrument is expected to be effective and if the Company is able to reasonably forecast the amount and timing of the future purchased transaction. Under hedge accounting, eligible gains and losses on raw sugar futures and options are deferred and recognized as part of the cost of inventory purchases and charged or credited to cost of sales as such inventory is sold. Eligible gains and losses on natural gas futures, options and basis swaps are deferred and recognized as part of the cost of the natural gas purchases and charged to cost of sales in the period the forecasted purchase impacts earnings. The Company recognizes gains and losses on derivative instruments in current earnings, if the requirements of hedge accounting are not met.
Property and Depreciation
Property is stated at cost and includes expenditures for renewals and improvements and capitalized interest. Maintenance and repairs are charged to current operations. The Company capitalizes certain costs in connection with the development of internal-use computer software. When property is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts, and any gain or loss on disposition is included in income.
Depreciation is provided principally on the straight-line method over the estimated service lives of the assets. In general, buildings are depreciated over 12 to 30 years and machinery and equipment over 10 to 15 years.
Impairment of Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset or its disposition. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use are based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value, less cost to sell.
Fair Value of Financial Instruments
The fair value of financial instruments is estimated based upon market trading information, where available. Absent published market values for an instrument, management estimates the fair value of debt based on quotations from broker/dealers or interest rate information for similar instruments. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximates fair value because of the short maturity and/or frequent repricing of those instruments.
52
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
Federal Income Taxes
Federal income tax expense includes the current tax obligation or benefit and the change in deferred income tax liability for the period. Deferred income taxes result from temporary differences between financial and tax bases of certain assets and liabilities. The Company evaluates the realizability of deferred tax assets quarterly. When, based on all available evidence, it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established that is, in management’s judgement, sufficient to reduce the asset to an amount that is more likely than not to be realized.
Stock-Based Compensation
The Company recognizes compensation expense for awards of equity instruments based on the grant date fair value of those awards.
Environmental Matters
The Company provides for environmental remediation costs based on estimates of known environmental remediation exposure when such amounts are probable and estimable. Ongoing environmental compliance costs, including maintenance and monitoring costs, are expensed as incurred. Capital costs incurred to prevent future environmental contamination are capitalized.
New Accounting Pronouncements
In May 2011, the FASB issued authoritative guidance to provide a consistent definition of fair value and ensure that fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards are similar. This guidance limits the highest and best use measure to non-financial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis. The guidance also expands disclosures of Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, and a description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. This guidance is effective for the Company in the second quarter of fiscal 2012. The implementation of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
In June 2011, the FASB issued authoritative guidance on the presentation of comprehensive income to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. This guidance is effective for the Company in the first quarter of fiscal 2013 and should be applied retrospectively. The implementation of this guidance will only change the presentation of comprehensive income. It will not have an impact on the Company’s financial position or results of operations.
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 fiscal 2010, as follows (in millions):
| Insurance Recovery |
Previously Recognized |
Recognized in Fiscal 2010 |
||||||||||
| 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 | ||||||
|
|
|
|
|
|
|
|||||||
53
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
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.
3. CONTINGENCIES
The Company is party to a number of claims, including five remaining lawsuits brought on behalf of five employees or their families, for injuries and losses suffered as a result of the 2008 Port Wentworth refinery industrial accident. All of the lawsuits are pending in the State Court of Chatham County, Georgia. None of the lawsuits demand a specific dollar amount of damages sought by the plaintiffs. The Company has workers compensation insurance which provides for coverage equal to the statutory benefits provided to workers under state law. Additionally, the Company’s general liability policy provides for coverage for damages to third parties up to a policy limit of $101 million.
The Company previously settled forty-three lawsuits related to the accident. On October 19, 2011, the attorneys representing the plaintiffs in the lawsuits remaining at that time submitted a time-limited global settlement offer to resolve these lawsuits for a sum within the Company’s remaining limits of insurance. Two of the three insurers who issued the insurance policies representing the Company’s remaining limits of insurance, American Guarantee & Liability Insurance Company (“AGLIC”) and St. Paul Fire & Marine Insurance Company (“St. Paul”), elected not to respond to this settlement offer by its deadline. The Company has notified AGLIC and St. Paul that due to their failure to settle the remaining lawsuits within the Company’s available limits of insurance pursuant to the global settlement offer, the Company will seek to hold them responsible for damages due to their negligent failure to settle and bad faith in the event verdicts or settlements in the remaining lawsuits are in excess of the Company’s limits of insurance.
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 $101 million policy limit is remote.
The Company was named as a defendant in a lawsuit filed by one of its excess general liability insurers, AGLIC, in the U.S. District Court for the Northern District of Georgia on August 19, 2011, and styled as American Guarantee & Liability Insurance Company v. Imperial Sugar Company, et al., Civil Action No. 1:11-CV-2778-WSD (the “Georgia Lawsuit”). AGLIC seeks in the Georgia Lawsuit: (1) a judicial declaration that the AGLIC policy does not cover the Company’s defense expenses incurred though the defense of various claims arising from the industrial accident that occurred at its plant located in Port Wentworth, Georgia (the “Port Wentworth Claims”) in 2008; and (2) an equitable accounting of the settlements of certain of the Port Wentworth Claims that were settled using proceeds provided by the primary and umbrella layers of liability policies and the workers compensation policy issued by Chartis-affiliated insurers. In its briefing concerning its claim for an equitable accounting, AGLIC asserts that the coverage provided by the underlying Chartis policies may have been improperly exhausted and that, therefore, the AGLIC policy may not be available to cover the remaining Port Wentworth Claims. AGLIC shares on a 50/50 pro-rata basis with St. Paul the final $50 million layer of excess liability coverage available to the Company for the Port Wentworth Claims. St. Paul was also named as a defendant in the Georgia Lawsuit and has asserted a cross claim against the Company, which seeks a judicial declaration that the St. Paul policy does not cover the Company’s defense expenses incurred in connection with the Port Wentworth Claims. St. Paul has not asserted any improper exhaustion claim but has stated that it reserves its rights regarding whether the underlying policies were properly exhausted. On December 9, 2011, the Court issued an order denying the Company’s motion to dismiss the Georgia Lawsuit and holding that the Georgia Lawsuit was not wrongfully filed by AGLIC and that venue for the dispute is proper in the U.S. District Court for the Northern District of Georgia. On December 16, 2011, the court held a hearing regarding AGLIC’s claim for an equitable accounting and, at that hearing, ruled that AGLIC and the Company should seek additional information and documents pertaining to the accounting issue from Chartis. On December 23, 2011, the Company filed its answer to the complaint, counterclaims and cross claims against AGLIC and St. Paul, respectively, asserting, among other claims that (1) AGLIC and St. Paul have breached their insurance policies by wrongfully denying coverage for the Company’s defense expenses incurred as a result of the Port Wentworth Claims; and (2) AGLIC’s and St. Paul’s breaches amount to bad faith under Texas law.
On August 23, 2011, the Company filed a lawsuit against AGLIC and St. Paul in the U.S. District Court for the Southern District of Texas, styled Imperial Sugar Company v. American Guarantee & Liability Insurance Company and St. Paul Fire & Marine Insurance Company, Civil Action No. 4:11-cv-3081 (the “Texas Lawsuit”), asserting, among other claims, that: (1) AGLIC and St. Paul have breached the AGLIC and St. Paul insurance policies by wrongfully denying coverage for the Company’s defense expenses incurred as a result of the Port Wentworth Claims; and (2) that AGLIC’s and St. Paul’s breaches amount to bad faith under Texas law. On December 13, 2011, without ruling on AGLIC’s motion to dismiss for failure to state a claim for relief, the U.S. District Court for the Southern District of Texas issued an order transferring the Texas Lawsuit to the U.S. District Court for the Northern District of Georgia. The Texas Lawsuit and the Georgia Lawsuit have since been consolidated into a single lawsuit pending before the U.S. District Court for the Northern District of Georgia.
54
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
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 (“Voluntary Recall”). In November, 2011, the Company settled the Pierre lawsuit and two other property damage claims relating to Voluntary Recall. The sums paid to settle the Pierre lawsuit and the two other property damage claims were paid by three insurers, except for a payment of approximately $5,200 which was paid by the Company.
In December 2010, the Louisiana Department of Environmental Quality (“LDEQ”) issued a Consolidated Compliance Order and Notice of Potential Penalty to the Company alleging violations of state environmental regulations and the terms of the wastewater discharge permit for the Company’s Gramercy, Louisiana refinery. The alleged violations relate to the release of foam into waters of the state and exceedances of applicable criteria for dissolved oxygen and pH. The Company investigated the alleged violations, took measures to cease and contain the foam discharge, and coordinated with the LDEQ to develop and implement a plan to remove and dispose of the foamy material and achieve and maintain compliance with applicable legal requirements. In December 2011, the Company reached an agreement in principle with LDEQ to settle the allegations of violation of environmental regulations, which is subject to execution of a settlement agreement. Without admitting liability, the Company agreed to a settlement amount of $6,000 plus a payment of $4,770 for response costs.
On August 11, 2011, the Georgia Environmental Protection Division (“EPD”) issued to the Port Wentworth facility a Notice of Violation (the “NOV”) regarding the Company’s semi-annual air permit report for the first six months of 2011. The Company reported periodic emissions of nitrogen oxides from a boiler above the permit limit. In addition, the Company reported several maintenance, repair, and other issues that had affected the boiler operations and that corrective measures had been taken. EPD requested further information which was provided, including that total excess emissions were minimal and had no significant impact on air quality. In December 2011, the Company reached an agreement in principle with EPD to settle the NOV, which is subject to execution of a consent order. Without admitting liability, the Company agreed to pay a settlement amount of $6,000 and submit a written plan for manually maintaining control over natural gas operation of the boiler.
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. On August 25, 2011, the Company and Hills settled the lawsuit by amending the current coal supply agreement to, among other things, extend the term of the agreement and reduce the price payable by the Company for purchases of coal.
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 Company’s Port Wentworth refinery, for breach of contract. The lawsuit seeks damages for deficiencies in construction of the conditioning silos. In June 2011, SSI filed a counterclaim against the Company for $3.5 million for work it allegedly performed and was not paid. The lawsuit is in discovery and the Company is unable to predict the ultimate outcome of this matter.
In May 2011, the Company joined seven cane and beet sugar producers and two sugar industry trade associations as plaintiffs in a lawsuit filed against six producers of high fructose corn syrup (the “Member Companies”) and the Corn Refiners Association (the “CRA”) (collectively, the “HFCS Defendants”) in the United States District Court for the Central District of California regarding advertising and marketing of high fructose corn syrup. The lawsuit initially alleged violations of the federal Lanham Act and state law by the HFCS Defendants in marketing and advertising high fructose corn syrup as a natural product equivalent to cane and beet sugar. The lawsuit seeks money damages and injunctive relief. On October 21, 2011, the Court issued an order on the motion to dismiss the amended complaint filed by the HFCS Defendants, denying the motion as to the CRA, granting the motion as to the Member Companies, and giving plaintiffs leave to amend their complaint to set forth additional allegations regarding the Member Companies. On the same day, the Court issued a separate order on a motion filed only by the CRA, dismissing the state law claim for unfair competition. On November 18, 2011, the plaintiffs filed an amended complaint naming the Member Companies as defendants on the federal Lanham Act claim to which the Member Companies have filed a motion to dismiss. The lawsuit remains ongoing, and the Company is unable to predict the ultimate outcome of this matter.
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IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
On August 30, 2011, a shareholder of the Company filed a putative class action lawsuit in the United States District Court for the Southern District of Texas, styled as Dawes v. Imperial Sugar Company, et al., Civil Action No. 4:11-cv-03250, alleging that the Company, its current President and Chief Executive Officer, and its current Senior Vice President and Chief Financial Officer, violated the federal securities laws. On September 22, 2011, another shareholder filed a nearly identical putative class action lawsuit against the Company, its current President and Chief Executive Officer and its current Senior Vice President and Chief Financial Officer in the United States District Court for the Southern District of Texas styled as Hassan v. Imperial Sugar Company, et al., Civil Action No 4:11-cv-03457. On October 28, 2011, these cases were consolidated by the court. The complaints assert fraud claims under Sections 10 and 20 of the Securities Exchange Act of 1934, and allege that the defendants made misleading statements and/or omissions about the Company’s sales and business prospects, which purportedly were disclosed on August 5, 2011 when the Company announced its third fiscal quarter results. A motion for appointment of lead plaintiff was filed on October 31, 2011. Pursuant to the agreed-upon schedule, the lead plaintiff will file an amended complaint 45 days after entry of an order appointing the lead plaintiff. This matter is in the early stages and the Company cannot predict its ultimate outcome.
On September 27, 2011, the Board of Directors of the Company received a letter from counsel for a shareholder of the Company requesting, among other things, that the Board cause an independent investigation to be made and a legal action commenced with respect to alleged mismanagement and breaches of fiduciary duty by the Company’s officers and directors relating to the August 5, 2011 announcement of the Company’s third fiscal quarter results. On October 12, 2011, the Board received a similar letter on behalf of another shareholder. The Board of Directors established a committee of independent and disinterested directors on October 5, 2011 with full authority to investigate and address the allegations contained in such shareholder letters.
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 material 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 Company’s 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
In November 2009, the Company became 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 contributed $30 million in cash or assets as equity to capitalize the venture. The Company’s contribution consisted 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 packaging facility in Gramercy, with 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 at its formation 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 LDEQ 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. Upon completion of the VRP the Company will be released of future environmental liabilities to state and federal authorities. The Company has completed the VRP site investigation and risk assessment and has submitted a site assessment and risk evaluation report to LDEQ for approval. Following LDEQ approval, the
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IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
remedial action plan will be developed and submitted to LDEQ for approval and thereafter implementation. The estimated cost to complete the remediation for conditions identified in the site investigation and risk assessment evaluation report has been accrued in our consolidated financial statements.
Operating losses incurred by LSR, plus additional working capital requirements caused by high sugar prices, strained the joint venture’s financial capabilities, necessitating a capital injection by the partners. Rather than make this additional capital contribution, the Company chose to sell its equity stake in LSR and certain idle Louisiana real estate parcels to our partners in December 2011 for $18 million, including $14.2 million at closing, with the remainder payable over 21 months. In connection with the sale, the Company contributed the remaining refinery land to LSR and remains obligated to complete the VRP. We will continue to package sugar at Gramercy under a revised sugar supply agreement with a minimum term of five years. The Company reduced the carrying value of its investment in LSR to net realizable value.
5. MARKETABLE SECURITIES AND OTHER INVESTMENTS
The Company’s marketable securities at September 30, 2011 and 2010 consisted of (in thousands):
| September 30, | ||||||||
| 2011 | 2010 | |||||||
| U.S. Treasury Securities |
$ | 150 | $ | 142 | ||||
| Certificate of Deposit |
56 | 56 | ||||||
|
|
|
|
|
|||||
| Total Marketable Securities |
$ | 206 | $ | 198 | ||||
|
|
|
|
|
|||||
Other investments at September 30, 2011 and 2010 consisted of (in thousands):
| September 30, | ||||||||
| 2011 | 2010 | |||||||
| Equity Investments: |
||||||||
| Comercializadora Santos Imperial S. de R.L. de C.V. |
$ | 5,500 | $ | 4,432 | ||||
| Wholesome Sweeteners Inc.(1) |
16,791 | 10,869 | ||||||
| Louisiana Sugar Refining, LLC |
15,903 | — | ||||||
| Other |
— | 268 | ||||||
| Cost Basis Investments: |
||||||||
| Intercontinental Commodity Exchange Stock |
383 | 383 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 38,577 | $ | 15,952 | ||||
|
|
|
|
|
|||||
| (1) | Includes intangibles, net of amortization of $1.3 million and $2.1 million at September 30, 2011 and 2010, resulting from the July 2008 purchase of an additional 5% interest in Wholesome Sweeteners Inc. |
The Company sold its interest in Comercializadora Santos Imperial S. de R.L. de C.V. in October 2011 and its interest in Louisiana Sugar Refining, LLC in December 2011.
6. ACCOUNTS RECEIVABLE
Accounts receivable are reported net of an allowance for credit losses of $0.5 million at September 30, 2011 and $0.6 million at September 30, 2010. The provision for credit losses charged to selling, general and administrative expenses was a credit of $0.1 million in fiscal 2011, an expense of $0.2 million in fiscal 2010 and an expense of $0.2 million in fiscal 2009.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands of dollars):
| September 30, | ||||||||
| 2011 | 2010 | |||||||
| Land |
$ | 1,321 | $ | 3,703 | ||||
| Buildings |
95,531 | 107,355 | ||||||
| Machinery and Equipment |
224,171 | 244,323 | ||||||
| Construction in Progress |
11,258 | 16,036 | ||||||
|
|
|
|
|
|||||
| Total |
332,281 | 371,417 | ||||||
| Less Accumulated Depreciation |
(81,272 | ) | (91,206 | ) | ||||
|
|
|
|
|
|||||
| Property, Plant and Equipment—Net |
$ | 251,009 | $ | 280,211 | ||||
|
|
|
|
|
|||||
8. DEBT
In May 2011 the Company amended and extended its senior secured revolving credit facility (“Revolver”) providing for loans of up to $140 million (subject to a borrowing base). This facility is used to finance various ongoing capital needs of the Company as well as for other general corporate purposes. The Revolver matures on December 31, 2015 and will have no financial covenants unless availability (defined as the borrowing base, less actual borrowings and letters of credit) is less than $20 million on any day or less than $25 million for five consecutive business days; otherwise a minimum EBITDA test would apply. The Revolver limits the Company’s ability to pay dividends if availability, after adjustment on a pro forma basis for such payment, is less than $30 million. Notwithstanding this limit, the Company can pay up to $2 million of dividends per year. Minimum availability during fiscal 2011 was $30.2 million. The facility is secured by the Company’s cash and cash equivalents, accounts receivable, inventory, certain investments and certain plant, property, and equipment. All subsidiaries of the Company are borrowers or guarantors under the facility. At September 30, 2011 the Company had $81.8 million outstanding under the revolving credit facility with a fair value of $81.0 million.
In December 2011, the Revolver was amended to include a provision to modify the minimum EBITDA financial covenant subject to an availability trigger, until the earlier of April 15, 2012 or such time as availability exceeds $50 million. The amendment includes an additional provision which has the effect of reducing the amount available to borrow under the borrowing base formula by $10 million while the modified EBITDA covenant is in effect. The amendment also prohibits the payment of dividends while the modified EBITDA covenant is in effect.
The Company did not furnish audited financial statements for the fiscal year ended September 30, 2011 to the agent within 90 days of year end as required in the credit agreement because the audited financial statements of LSR were not yet available. The Company has obtained a waiver and extension of this requirement.
Interest rates on the amended Revolver are LIBOR plus a margin that varies (with liquidity as defined) from 2.25% to 3.25%, or the base rate (Bank of America prime rate) plus a margin of 1.00% to 2.00%.
Although the final maturity of the Revolver is December 31, 2015, the Company classifies debt under the Revolver 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.
Cash paid for interest on debt and other long-term liabilities was $2.3 million, $1.5 million and $1.7 million for the years ended September 30, 2011, 2010 and 2009, respectively. Interest capitalized as part of the cost of constructing assets was $0.1 million, $0.3 million and $0.8 million for the years ended September 30, 2011, 2010 and 2009, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
9. INCOME TAXES
The components of the consolidated income tax provision (benefit) were as follows (in thousands of dollars):
| Year Ended September 30, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Federal: |
||||||||||||
| Current |
$ | — | $ | — | $ | (100 | ) | |||||
| Deferred |
(22,165 | ) | 73,924 | (15,926 | ) | |||||||
| State: |
||||||||||||
| Current |
— | 213 | 445 | |||||||||
| Deferred |
(652 | ) | 2,046 | (477 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Provision (Benefit) Before Valuation Allowance |
(22,817 | ) | 76,183 | (16,058 | ) | |||||||
| Valuation Allowance |
17,321 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | (5,496 | ) | $ | 76,183 | $ | (16,058 | ) | ||||
|
|
|
|
|
|
|
|||||||
GAAP requires that the Company consider available evidence, to determine if a valuation allowance is needed to reduce the Company’s carrying value of deferred tax assets to an amount more likely than not to be realized. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryforward periods available under the tax law.
As of September 30, 2011, the Company has provided a valuation allowance of $18.9 million on certain federal and state tax jurisdictions’ deferred tax assets to reduce the amount of these assets to the extent necessary to result in an amount that is more likely than not to be realized.
The consolidated income tax provision from continuing operations is different from the amount which would be provided by applying the statutory federal income tax rate of 35% to the Company’s income before taxes. The reasons for the differences from the statutory rate are as follows (in thousands of dollars):
| Year Ended September 30, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Income Taxes Computed at the Statutory Federal Rate |
$ | (20,611 | ) | $ | 74,564 | $ | (13,605 | ) | ||||
| State Income Taxes, Net of Federal Benefit |
(652 | ) | 2,259 | (32 | ) | |||||||
| Effect of Amended Prior Year Return Permanent Items |
— | — | (2,673 | ) | ||||||||
| Other |
(1,554 | ) | (640 | ) | 252 | |||||||
|
|
|
|
|
|
|
|||||||
| Total before Valuation Allowance |
(22,817 | ) | 76,183 | (16,058 | ) | |||||||
| Valuation Allowance |
17,321 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | (5,496 | ) | $ | 76,183 | $ | (16,058 | ) | ||||
|
|
|
|
|
|
|
|||||||
Income taxes paid were $34.0 thousand, $657.0 thousand and $74.0 thousand in fiscal 2011, 2010 and 2009, respectively.
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IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
The tax effects of temporary differences which give rise to the Company’s deferred tax assets and liabilities were as follows (in thousands of dollars):
| September 30, 2011 | September 30, 2010 | |||||||||||||||||||||||
| Assets | Liabilities | Total | Assets | Liabilities | Total | |||||||||||||||||||
| Current: |
||||||||||||||||||||||||
| Inventory Valuation Differences |
$ | — | $ | (4,467 | ) | $ | (4,467 | ) | $ | — | $ | (4,296 | ) | $ | (4,296 | ) | ||||||||
| Accruals Not Currently Deductible |
1,042 | — | 1,042 | 1,282 | — | 1,282 | ||||||||||||||||||
| Deferred Gains on Sugar Futures |
— | (3,477 | ) | (3,477 | ) | — | (7,622 | ) | (7,622 | ) | ||||||||||||||
| Other |
— | (1,220 | ) | (1,220 | ) | — | (791 | ) | (791 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Current |
1,042 | (9,164 | ) | (8,122 | ) | 1,282 | (12,709 | ) | (11,427 | ) | ||||||||||||||
| Valuation Allowance |
(191 | ) | — | (191 | ) | — | — | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Current, Net of Valuation Allowance |
851 | (9,164 | ) | (8,313 | ) | 1,282 | (12,709 | ) | (11,427 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Noncurrent: |
||||||||||||||||||||||||
| Depreciable Asset Basis Differences |
— | (63,268 | ) | (63,268 | ) | — | (62,498 | ) | (62,498 | ) | ||||||||||||||
| Investment in JV |
— | (2,697 | ) | (2,697 | ) | — | — | — | ||||||||||||||||
| Pensions |
40,901 | — | 40,901 | 40,486 | — | 40,486 | ||||||||||||||||||
| Accruals Not Currently Deductible |
1,249 | — | 1,249 | 1,485 | — | 1,485 | ||||||||||||||||||
| Operating Loss Carryforwards |
54,666 | — | 54,666 | 30,365 | — | 30,365 | ||||||||||||||||||
| Foreign Tax Credits Carryforwards |
3,000 | — | 3,000 | — | — | — | ||||||||||||||||||
| Credit Carryforwards |
2,045 | — | 2,045 | 3,713 | — | 3,713 | ||||||||||||||||||
| Other |
— | (6,149 | ) | (6,149 | ) | — | (2,927 | ) | (2,927 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Noncurrent |
101,861 | (72,114 | ) | 29,747 | 76,049 | (65,425 | ) | 10,624 | ||||||||||||||||
| Valuation Allowance |
(18,713 | ) | — | (18,713 | ) | — | — | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Non-Current, Net of Valuation Allowance |
83,148 | (72,114 | ) | 11,034 | 76,049 | (65,425 | ) | 10,624 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 83,999 | $ | (81,278 | ) | $ | 2,721 | $ | 77,331 | $ | (78,134 | ) | $ | (803 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
The Company has a net operating loss carryforward for federal income tax purposes of $149.6 million, of which, $21.1 million expires in 2029, $64.3 million expires in 2030 and $64.2 million expires in 2031. Net operating loss carryforwards totaling $16.4 million are subject to an annual limitation under Section 382 of the Internal Revenue Code.
A reconciliation of the change in the amount of unrecognized tax benefits for the twelve months ended September 30, 2011, is as follows (in thousands):
| Tax | Interest | Total | ||||||||||
| Balance, October 1, 2010 |
$ | 4,931 | $ | 1,510 | $ | 6,441 | ||||||
| Additions based on tax positions related to the current year |
321 | 0 | 321 | |||||||||
| Reductions for tax positions of prior years |
(250 | ) | (38 | ) | (287 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Balance, September 30, 2011 |
$ | 5,002 | 1,472 | 6,475 | ||||||||
|
|
|
|
|
|
|
|||||||
Substantially all of the $5.0 million unrecognized benefits would affect the Company’s effective tax rate if recognized. Interest and penalties recognized in the Consolidated Balance Sheet at September 30, 2011 were $1.9 million. The Company classifies interest and penalties related to unrecognized tax benefits as interest and tax expense, respectively.
The Company files tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the fiscal years 2006 through 2010. The Company or its subsidiaries’ state tax returns are open to audit under the statute of limitations for the fiscal years 2006 through 2010.
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IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
10. PENSION AND OTHER BENEFIT PROGRAMS
Defined Benefit Pension Plans and Postretirement Benefits Other Than Pensions
Certain of the Company’s current and former employees are covered by retirement plans. Retirement benefits are primarily a function of years of service and the employee’s compensation for a defined period of employment. In 2003, the Company froze the benefits under the salaried pension plan resulting in reductions in future pension obligations. The Company funds pension costs at an actuarially determined amount based on normal cost and the amortization of prior service costs, gains and losses over the remaining service periods. Additionally, the Company previously provided a supplemental non-qualified, unfunded pension plan for certain management members as well as a non-qualified retirement plan for former non-employee directors, which provided benefits based upon years of service as a director and the retainer in effect at the date of a director’s retirement. Certain of the Company’s employees who meet the applicable eligibility requirements are covered by benefit plans that provide postretirement health care and life insurance benefits to employees.
During fiscal 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. Additionally, Accumulated Other Comprehensive Income increased $1.9 million as a result of the revaluation of the Colonial Union Pension Plan liability triggered by the curtailment.
The Company adopted the measurement date provisions of amended authoritative guidance from the FASB related to accounting for defined benefit pension plans and other postretirement plans effective October 1, 2008. As a result of this change, pension and postretirement obligations were measured at September 30th in fiscal 2009 through 2011, as compared to a June 30th measurement date in prior years. The Company applied the “one measurement” approach in its adoption. The effect of applying the measurement date provisions to the balance sheet was as follows:
| Before Application |
Adjustments | After Application |
||||||||||
| Assets: |
||||||||||||
| Deferred Income Taxes, Net |
$ | 34,062 | $ | 213 | $ | 34,275 | ||||||
| Liabilities and Shareholders Equity: |
||||||||||||
| Deferred Employee Benefits and Other Liabilities |
78,459 | 609 | 79,068 | |||||||||
| Retained Earnings |
53,823 | (629 | ) | 53,194 | ||||||||
| Accumulated Other Comprehensive Loss |
35,745 | (233 | ) | 35,512 | ||||||||
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IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
The following tables present the benefit obligations, changes in plan assets, the funded status of the pension and postretirement benefits plans and the assumptions used (in thousands of dollars):
| Pension Benefits | ||||||||||||
| Year Ended September 30, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Change in Benefit Obligation: |
||||||||||||
| Benefit Obligation at Beginning of Measurement Period |
$ | 228,055 | $ | 219,294 | $ | 190,958 | ||||||
| Adjustment to fiscal year end measurement date |
— | — | 3,370 | |||||||||
| Service Cost |
1,060 | 1,164 | 1,058 | |||||||||
| Interest Cost |
10,624 | 11,294 | 12,911 | |||||||||
| Curtailments |
(386 | ) | — | — | ||||||||
| Amendments |
— | (235 | ) | — | ||||||||
| Actuarial (Gain) Loss |
9,187 | 11,174 | 29,052 | |||||||||
| Expenses Paid |
(1,303 | ) | (916 | ) | (1,051 | ) | ||||||
| Benefits Paid |
(14,370 | ) | (13,720 | ) | (17,004 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Benefits Obligation at End of Measurement Period |
$ | 232,867 | $ | 228,055 | $ | 219,294 | ||||||
|
|
|
|
|
|
|
|||||||
| Change in Plan Assets: |
||||||||||||
| Fair Value of Plan Assets at Beginning of Measurement Period |
$ | 130,072 | $ | 120,415 | $ | 136,015 | ||||||
| Adjustment for Fourth Quarter Contributions |
— | — | 3,324 | |||||||||
| Adjustment to fiscal year end measurement date |
— | — | 2,943 | |||||||||
| Actual Return on Plan Assets |
963 | 10,729 | (14,451 | ) | ||||||||
| Employer Contribution |
15,829 | 13,564 | 10,639 | |||||||||
| Expenses Paid |
(1,303 | ) | (916 | ) | (1,051 | ) | ||||||
| Benefits Paid |
(14,370 | ) | (13,720 | ) | (17,004 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Fair Value of Plan Assets at End of Measurement Period |
$ | 131,191 | $ | 130,072 | $ | 120,415 | ||||||
|
|
|
|
|
|
|
|||||||
| Accrued Pension Cost at September 30 |
$ | (101,676 | ) | $ | (97,983 | ) | $ | (98,879 | ) | |||
|
|
|
|
|
|
|
|||||||
| Current Liabilities |
$ | (778 | ) | $ | (819 | ) | $ | (772 | ) | |||
| Noncurrent Liabilities |
(100,898 | ) | (97,164 | ) | (98,107 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| $ | (101,676 | ) | $ | (97,983 | ) | $ | (98,879 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Amounts Recognized in Accumulated Other Comprehensive Loss: |
||||||||||||
| Net Actuarial Loss |
$ | 136,392 | $ | 122,371 | $ | 114,908 | ||||||
| Prior Service Cost |
189 | 415 | 772 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 136,581 | $ | 122,786 | $ | 115,680 | ||||||
|
|
|
|
|
|
|
|||||||
62
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
| Postretirement Benefits Other Than Pensions | ||||||||||||
| Year Ended September 30, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Change in Benefit Obligation: |
||||||||||||
| Benefit Obligation at Beginning of Measurement Period |
$ | 8,681 | $ | $8,898 | $ | 8,674 | ||||||
| Adjustment to fiscal year end measurement date |
— | — | 142 | |||||||||
| Service Cost |
16 | 18 | 11 | |||||||||
| Interest Cost |
400 | 452 | 585 | |||||||||
| Actuarial (Gain) Loss |
(36 | ) | 118 | 406 | ||||||||
| Benefits Paid |
(994 | ) | (805 | ) | (920 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Benefits Obligation at End of Measurement Period |
$ | 8,067 | $ | 8,681 | $ | 8,898 | ||||||
|
|
|
|
|
|
|
|||||||
| Change in Plan Assets: |
||||||||||||
| Fair Value of Plan Assets at Beginning of Measurement Period |
$ | — | — | — | ||||||||
| Employer Contribution |
994 | $ | 805 | $ | 920 | |||||||
| Benefits Paid |
(994 | ) | (805 | ) | (920 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Fair Value of Plan Assets at End of Measurement Period |
$ | — | $ | — | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
| Accrued Benefit Cost at September 30 |
$ | (8,067 | ) | $ | (8,681 | ) | $ | (8,898 | ) | |||
|
|
|
|
|
|
|
|||||||
| Current Liabilities |
$ | (729 | ) | $ | (766 | ) | $ | (812 | ) | |||
| Noncurrent Liabilities |
(7,338 | ) | (7,915 | ) | (8,086 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| $ | (8,067 | ) | $ | (8,681 | ) | $ | (8,898 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Amounts Recognized in Accumulated Other Comprehensive Loss: |
||||||||||||
| Net Actuarial Loss |
$ | 6,106 | $ | 6,777 | $ | 7,289 | ||||||
| Prior Service Cost |
(10,939 | ) | (12,534 | ) | (14,128 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | (4,833 | ) | $ | (5,757 | ) | $ | (6,839 | ) | |||
|
|
|
|
|
|
|
|||||||
63
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
The assumptions used and the annual costs related to these plans consist of the following (in thousands of dollars):
| Year Ended September 30, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Pension Benefits |
||||||||||||
| Weighted-average Assumptions: |
||||||||||||
| Discount Rate |
||||||||||||
| At measurement date |
4.61 | % | 4.82 | % | 5.33 | % | ||||||
| For the year ended |
4.85 | % | 5.33 | % | 7.63 | % | ||||||
| Expected Return on Plan Assets |
7.00 | % | 7.00 | % | 8.00 | % | ||||||
| Components of Net Periodic Benefit Cost of Company-sponsored Plans (in thousands): |
||||||||||||
| Service Cost |
$ | 1,060 | $ | 1,164 | $ | 1,058 | ||||||
| Interest Cost |
10,624 | 11,294 | 12,911 | |||||||||
| Expected Return on Plan Assets |
(10,410 | ) | (10,300 | ) | (11,703 | ) | ||||||
| Curtailments |
169 | — | — | |||||||||
| Amortization of Prior Service Cost |
56 | 122 | 122 | |||||||||
| Recognized Actuarial Loss |
4,227 | 3,282 | 917 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Pension Cost |
$ | 5,726 | $ | 5,562 | $ | 3,305 | ||||||
|
|
|
|
|
|
|
|||||||
| Net Actuarial Loss |
$ | 18,634 | $ | 10,744 | $ | 55,206 | ||||||
| Prior Service Cost |
— | (235 | ) | — | ||||||||
| Amortization of Prior Service Cost |
(225 | ) | (122 | ) | (123 | ) | ||||||
| Amortization of Actuarial (Loss) |
(4,613 | ) | (3,282 | ) | (1,291 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Total Recognized in Accumulated Other Comprehensive Loss |
$ | 13,796 | $ | 7,105 | $ | 53,792 | ||||||
|
|
|
|
|
|
|
|||||||
| Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income |
$ | 19,522 | $ | 12,667 | $ | 57,097 | ||||||
|
|
|
|
|
|
|
|||||||
The prior service cost and estimated net loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $49,000 and $5,099,000, respectively.
| Year Ended September 30, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Postretirement Benefits Other Than Pensions |
||||||||||||
| Discount Rate Assumptions |
4.61 | % | 4.82 | % | 5.33 | % | ||||||
| Components of Net Periodic Benefit Cost (in thousands): |
||||||||||||
| Service Cost |
$ | 16 | $ | 18 | $ | 11 | ||||||
| Interest Cost |
400 | 452 | 584 | |||||||||
| Amortization of Prior Service Cost |
(1,594 | ) | (1,594 | ) | (1,594 | ) | ||||||
| Recognized Actuarial Loss |
635 | 645 | 398 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net Periodic Benefit Cost (Credit) |
$ | (543 | ) | $ | (479 | ) | $ | (601 | ) | |||
|
|
|
|
|
|
|
|||||||
| Net Actuarial Loss/(Gain) |
$ | (36 | ) | $ | 118 | $ | 406 | |||||
| Amortization of Prior Service Cost |
1,594 | 1,594 | 1,993 | |||||||||
| Amortization of Actuarial Gain/(Loss) |
(635 | ) | (645 | ) | (507 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Total Recognized in Accumulated Other Comprehensive Loss |
$ | 923 | $ | 1,067 | $ | 1,892 | ||||||
|
|
|
|
|
|
|
|||||||
| Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income |
$ | 380 | $ | 588 | $ | 1,291 | ||||||
|
|
|
|
|
|
|
|||||||
The prior service cost credit and estimated net loss for postretirement benefits other than pensions that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $1,594,000 and $551,000, respectively.
64
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
Aggregated accumulated benefit obligations for all plans were $232.9 million and $228.1 million at September 30, 2011 and 2010, respectively. Accumulated benefit obligations were in excess of plan assets for all plans for both periods.
Pension plan contributions totaled $15.8 million and $13.6 million during fiscal 2011 and 2010; contributions during fiscal 2012 are expected to be approximately $15.9 million.
The assumed health care cost trend rate used in measuring the accumulated benefit obligation for postretirement benefits other than pensions as of September 30, 2011 and 2010 was 8.5%. In 2011, the rate was assumed to decrease gradually to 5% for fiscal 2019 and remain at that level thereafter. In 2010, the rate was assumed to decrease gradually to 5% for fiscal 2018 and remain level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
| 1-Percentage Point Increase |
1-Percentage Point Decrease |
|||||||
| (In Thousands of Dollars) | ||||||||
| Effect on Total Service and Interest Cost |
$ | 18 | $ | (16 | ) | |||
| Effect on Postretirement Benefit Obligation |
323 | (290 | ) | |||||
The plan assets of the defined benefit pension plans are held in a third party master trust, which is administered by the Company’s Welfare and Benefits Committee (the “Committee”). The Committee oversees the trust activities and the financial integrity of the pension plans by establishing and managing funds for the immediate and future needs of the plans’ operations and programs.
The primary investment objective for the portfolio of assets is to meet or exceed the future obligations of the plans’ participants. Financial risks and returns are managed through diversification of plan assets, selection of investment managers and quarterly review of portfolio performance results. Plan asset investments are broadly diversified primarily into marketable securities, such as equity and high quality fixed income securities. Target allocations among various asset categories achieve a target mix that is the strategic allocation for the portfolio. Minimum and maximum criteria are used to set boundaries for each target allocation to ensure the portfolio does not drift from the target mix.
The Company’s plan assets actual and target allocation percentages were as follows:
| September 30, 2011 |
September 30, 2010 |
|||||||||||||||
| Asset Category |
Actual | Target | Actual | Target | ||||||||||||
| Intermediate Fixed Income |
36 | % | 32 | % | 31 | % | 32 | % | ||||||||
| Large Cap Equity |
21 | % | 22 | % | 18 | % | 22 | % | ||||||||
| Mid Cap Equity |
8 | % | 10 | % | 11 | % | 10 | % | ||||||||
| Small Cap Equity |
3 | % | 4 | % | 5 | % | 4 | % | ||||||||
| International Equity |
10 | % | 12 | % | 13 | % | 12 | % | ||||||||
| Hedge Fund |
12 | % | 15 | % | 12 | % | 15 | % | ||||||||
| Real Estate Fund |
6 | % | 5 | % | 4 | % | 5 | % | ||||||||
| Cash and Other |
4 | % | 0 | % | 6 | % | 0 | % | ||||||||
65
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
Plan assets at September 30, 2011 are summarized in the following table at the appropriate level of the fair value hierarchy (in thousands of dollars):
| Asset Category |
Fair Value Measurements at September 30, 2011 | |||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Intermediate Fixed Income |
$ | 47,097 | $ | 14,741 | $ | 32,356 | $ | — | ||||||||
| Large Cap Equity |
27,196 | 27,196 | — | — | ||||||||||||
| Mid Cap Equity |
11,009 | 11,009 | — | — | ||||||||||||
| Small Cap Equity |
4,457 | 4,457 | — | — | ||||||||||||
| International Equity |
13,197 | 13,197 | — | — | ||||||||||||
| Hedge Fund |
15,684 | — | — | 15,684 | ||||||||||||
| Real Estate Fund |
7,122 | — | — | 7,122 | ||||||||||||
| Cash and Other |
5,429 | 3,319 | 2,110 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 131,191 | $ | 73,919 | $ | 34,466 | $ | 22,806 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Fair value hierarchy levels are as follows:
| • | Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| • | Level 2—Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; |
| • | Level 3—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. These inputs may be used with internally developed methodologies that are used to generate management’s best estimate of fair value. |
Changes in Level 3 assets from October 1, 2010 to September 30, 2011 are as follows:
| Hedge Fund | Real Estate Fund | Total | ||||||||||
| Beginning balance at September 30, 2010 |
$ | 15,444 | $ | 6,348 | $ | 21,792 | ||||||
| Purchases |
— | — | — | |||||||||
| Sales |
— | — | — | |||||||||
| Realized and Unrealized Gain (Loss) |
240 | 774 | 1,014 | |||||||||
|
|
|
|
|
|
|
|||||||
| Ending balance at September 30, 2011 |
$ | 15,684 | $ | 7,122 | $ | 22,806 | ||||||
|
|
|
|
|
|
|
|||||||
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
| Fiscal Year Ending September 30, |
Pension Benefits |
Post
Retirement Benefits Other Than Pensions |
||||||
| 2012 |
$ | 15,694 | $ | 746 | ||||
| 2013 |
15,907 | 729 | ||||||
| 2014 |
16,128 | 717 | ||||||
| 2015 |
16,210 | 709 | ||||||
| 2016 |
16,277 | 686 | ||||||
| 2017-2021 |
80,402 | 3,076 | ||||||
The assumed rate of return is based on the results of historical statistical return studies.
66
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
401(k) Plans
Substantially all of the employees may elect to defer a portion of their annual compensation in the Company- sponsored 401(k) tax deferred savings plans. The Company makes matching contributions in some of these plans. The amount charged to expense for these plans was $1.3 million, $1.5 million and $1.4 million for the years ended September 30, 2011, 2010 and 2009, respectively. The Company suspended its matching contribution effective January 1, 2012.
Deferred Compensation
The Company has non-current liabilities for an inactive deferred compensation plan aggregating $7.6 million and $7.8 million at September 30, 2011 and 2010, respectively. Interest expense includes $0.5 million, $0.6 million and $0.6 million in fiscal 2011, 2010 and 2009, respectively, for such plan.
11. STOCK-BASED COMPENSATION
The Company has a long-term incentive plan which provides for the granting of incentive awards in the form of stock options, restricted stock, stock appreciation rights (SARs), cash award performance units and performance shares at the discretion of the Executive Compensation Committee of the Board of Directors. The plan authorizes the granting of up to 3,034,568 shares of common stock. As of September 30, 2011, shares available for future grants totaled 558,298.
Stock Options
Stock options granted to date have an exercise price equal to the fair market value of the shares of the Company’s common stock at the date of grant. Options became exercisable in annual increments over a three-year period from grant date and expire ten years from date of grant.
For the purpose of estimating the fair value of options on their date of grant, the Company began using a binomial lattice option pricing model in fiscal 2005 and used a Black-Scholes option-pricing model previously. The following assumptions were used in those models:
| Expected Stock Price Volatility |
3.0-35% | |
| Risk-free Interest Rate |
2.5-4.2 % | |
| Expected Life of Options |
5.0 | |
| Dividend Yield |
0-0.7% |
A summary of stock option activity in the plan is as follows:
| Options | Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term |
Aggregate Intrinsic Value |
|||||||||||||
| (Per share) | (In years) | (In thousands) | ||||||||||||||
| Outstanding at September 30, 2009 |
87,704 | $ | 4.90 | |||||||||||||
| Forfeited |
(834 | ) | 6.78 | |||||||||||||
|
|
|
|||||||||||||||
| Outstanding at September 30, 2010 |
86,870 | $ | 4.88 | |||||||||||||
|
|
|
|||||||||||||||
| Outstanding at September 30, 2011 |
86,870 | $ | 4.88 | 1.9 | $ | 183 | ||||||||||
|
|
|
|||||||||||||||
| Vested at September 30, 2011 |
86,870 | $ | 4.88 | 1.9 | $ | 183 | ||||||||||
|
|
|
|||||||||||||||
| Expected to vest in the future |
— | $ | — | — | $ | — | ||||||||||
|
|
|
|||||||||||||||
As of September 30, 2011, there was no remaining unrecognized compensation expense related to nonvested stock options.
67
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
Restricted Stock and Restricted Stock Units
Restricted stock awards consist of the Company’s common stock and generally vest over a three or four-year period from the date of grant. Restricted stock awards are valued at the average market price of the Company’s stock at the date of grant, and the Company records the compensation expense over the vesting term. Restricted Stock Units (RSU’s) granted in fiscal 2010 and 2011 had no requisite service period and were immediately expensed.
In fiscal 2011, the Company issued 139,440 shares of common stock in a restricted stock grant, 70% of which, or 97,610 shares, are subject to vesting terms that are performance-based. The performance-based portion of the grant cliff vests, to the extent the performance objectives have been achieved, at the end of a 33 month period ending September 30, 2013. The remaining 30% of the shares vest over the same 33 month period. In fiscal 2010, the Company issued 133,446 shares in a restricted stock grant, 70% of which, or 93,412 shares, are subject to vesting terms that are performance-based. The performance-based portion of the grant cliff vests, to the extent the performance objectives have been achieved, at the end of a 34 month period ending September 30, 2012. The remaining 30% of the shares vest over time during the same 34 month period.
The Company recorded compensation expense of $2.2 million, $2.0 million and $2.5 million in fiscal 2011, 2010 and 2009, respectively, related to restricted stock grants.
A summary of restricted stock and restricted stock unit activity in the plan is as follows:
| Restricted Stock | RSU’s | |||||||||||||||||
| Number of Shares |
Weighted- Average Grant Date Fair Value |
Number of Units |
Weighted- Average Grant Date Fair Value |
|||||||||||||||
| (Per share) | (Per unit) | |||||||||||||||||
| Balance at September 30, 2009 |
244,177 | $ | 17.53 | 98,666 | $ | 16.05 | ||||||||||||
| Granted |
140,446 | 14.33 | 22,071 | 14.43 | ||||||||||||||
| Vested |
(57,032 | ) | 15.79 | (27,008 | ) | 19.57 | ||||||||||||
| Forfeited |
(27,987 | ) | 14.12 | (500 | ) | 21.83 | ||||||||||||
|
|
|
|
|
|||||||||||||||
| Balance at September 30, 2010 |
299,604 | 16.68 | 93,229 | 14.62 | ||||||||||||||
| Granted |
149,440 | 13.11 | 38,441 | 11.45 | ||||||||||||||
| Vested |
(179,812 | ) | 18.62 | — | 0.00 | |||||||||||||
| Forfeited |
(29,822 | ) | 12.49 | — | 0.00 | |||||||||||||
|
|
|
|
|
|||||||||||||||
| Balance at September 30, 2011 |
239,410 | $ | 13.51 | 131,670 | $ | 13.69 | ||||||||||||
|
|
|
|
|
|||||||||||||||
The total fair value of restricted shares vested during fiscal 2011 and 2010 was $1.8 million and $1.1 million. As of September 30, 2011, there was approximately $0.9 million of total unrecognized compensation expense related to nonvested restricted stock which is expected to be recognized over a weighted-average period of 1.7 years.
68
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
12. EARNINGS PER SHARE
The following table presents information necessary to calculate basic and diluted earnings per share (in thousands of dollars, except share and per share amounts):
| Year Ended September 30, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Income (Loss) from Continuing Operations |
$ | (53,393 | ) | $ | 136,860 | $ | (23,827 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Average Shares Outstanding |
11,899,820 | 11,805,587 | 11,721,357 | |||||||||
| Effect of Incremental Shares Issuable from Assumed Exercise of Stock Options, Warrants and Nonvested Restricted Stock Under the Treasury Stock Method(1) |
— | 276,413 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Adjusted Average Shares |
11,899,820 | 12,082,000 | 11,721,357 | |||||||||
|
|
|
|
|
|
|
|||||||
| Diluted EPS—Continuing Operations |
$ | (4.49 | ) | $ | 11.33 | $ | (2.03 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Income (Loss) from Discontinued Operations |
$ | — | $ | — | $ | 644 | ||||||
|
|
|
|
|
|
|
|||||||
| Average Shares Outstanding |
11,899,820 | 11,805,587 | 11,721,357 | |||||||||
| Effect of Incremental Shares Issuable from Assumed Exercise of Stock Options, Warrants and Nonvested Restricted Stock Under the Treasury Stock Method(1) |
— | 276,413 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Adjusted Average Shares |
11,899,820 | 12,082,000 | 11,721,357 | |||||||||
|
|
|
|
|
|
|
|||||||
| Diluted EPS—Discontinued Operations |
$ | 0.00 | $ | 0.00 | $ | 0.05 | ||||||
|
|
|
|
|
|
|
|||||||
| Net Income (Loss) |
$ | (53,393 | ) | $ | 136,860 | $ | (23,183 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Average Shares Outstanding |
11,899,820 | 11,805,587 | 11,721,357 | |||||||||
| Effect of Incremental Shares Issuable from Assumed Exercise of Stock Options, Warrants and Nonvested Restricted Stock Under the Treasury Stock Method(1) |
— | 276,413 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Adjusted Average Shares |
11,899,820 | 12,082,000 | 11,721,357 | |||||||||
|
|
|
|
|
|
|
|||||||
| Diluted EPS—Net Income (Loss) |
$ | (4.49 | ) | $ | 11.33 | $ | (1.98 | ) | ||||
|
|
|
|
|
|
|
|||||||
| (1) | The computation of diluted EPS for the year ended September 30, 2010 includes 44,037 options and 232,376 restricted stock shares and excludes 4,735 antidilutive restricted stock shares. No assumed option exercises or restricted stock share issuances were included in the computation of diluted EPS for the years ended September 30, 2011 and 2009, because doing so would have an antidilutive effect on the computation of diluted earnings per share. The computations exclude 471,054 and 430,547 antidilutive aggregate of unexercised stock options and nonvested restricted stock for the years ended September 30, 2011 and 2009. |
69
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
13. OTHER INCOME
Other income included the following (in thousands of dollars):
| Year ended September 30, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Equity Earnings in investment in: |
||||||||||||
| Comercializadora Santos Imperial S. de R.L. de C.V. |
$ | 2,791 | $ | 1,609 | $ | 1,775 | ||||||
| Wholesome Sweeteners, Inc. |
5,922 | 2,895 | 706 | |||||||||
| Louisiana Sugar Refining, LLC |
(8,858 | ) | 233 | — | ||||||||
| Other |
(354 | ) | (302 | ) | — | |||||||
| Reduction of fair value of guarantee |
700 | — | — | |||||||||
| Impairment of investments in unconsolidated investees |
(7,123 | ) | — | — | ||||||||
| Distributions from cost basis fuel terminal partnership |
— | — | 147 | |||||||||
| Gain on securities |
— | — | 388 | |||||||||
| Settlement of natural gas pricing litigation |
— | 857 | 107 | |||||||||
| Other |
104 | 250 | (75 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | (6,818 | ) | $ | 5,542 | $ | 3,048 | |||||
|
|
|
|
|
|
|
|||||||
Summarized combined financial information for the Company’s equity method investees for the years ended September 30, 2011 and 2010 includes the following (in thousands of dollars):
| Comercializadora
Santos Imperial S. de R.L. de C.V. |
Wholesome Sweeteners, Inc. | |||||||||||||||||||||||
| Twelve Months Ended September 30, | Twelve Months Ended September 30, | |||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
| Net Sales |
$ | 327,721 | $ | 259,464 | $ | 221,189 | $ | 117,208 | $ | 99,792 | $ | 70,445 | ||||||||||||
| Gross Margin |
$ | 9,408 | $ | 7,976 | $ | 6,517 | $ | 26,226 | $ | 21,062 | $ | 11,676 | ||||||||||||
| Operating Income |
$ | 7,332 | $ | 5,199 | $ | 5,020 | $ | 15,940 | $ | 11,859 | $ | 5,326 | ||||||||||||
| Net Income |
$ | 5,582 | $ | 3,219 | $ | 4,248 | $ | 10,460 | $ | 6,917 | $ | 2,572 | ||||||||||||
| As of September 30, | As of September 30, | |||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||
| Current Assets |
$ | 34,877 | $ | 28,244 | $ | 70,468 | $ | 46,423 | ||||||||||||||||
| Non-Current Assets |
$ | 3,104 | $ | 1,603 | $ | 870 | $ | 1,081 | ||||||||||||||||
| Current Liabilities |
$ | 24,712 | $ | 20,963 | $ | 39,356 | $ | 27,532 | ||||||||||||||||
| Non-Current Liabilities |
$ | — | $ | — | $ | 1,986 | $ | 266 | ||||||||||||||||
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IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
| Louisiana Sugar Refining LLC | ||||||||
| Twelve Months Ended September 30, |
||||||||
| 2011 | 2010 | |||||||
| Net Sales |
$ | 281,950 | $ | — | ||||
| Gross Margin |
$ | (18,911 | ) | $ | — | |||
| Operating Income |
$ | (27,002 | ) | $ | 1,441 | |||
| Net Income (Loss) |
$ | (26,575 | ) | $ | 700 | |||
| As of September 30, | ||||||||
| 2011 | 2010 | |||||||
| Current Assets |
$ | 113,305 | $ | 116,838 | ||||
| Non-Current Assets |
$ | 153,484 | $ | 54,516 | ||||
| Current Liabilities |
$ | 105,812 | $ | 5,665 | ||||
| Non-Current Liabilities |
$ | 100,000 | $ | 100,000 | ||||
The Company sold its interest in Comercializadora Santos Imperial S. de R.L. de C.V. in October 2011 and its interest in Louisiana Sugar Refining, LLC in December 2011.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company determines the fair value of natural gas and raw sugar futures contracts and marketable securities using quoted market prices for the individual securities. The following table presents the Company’s assets and liabilities measured and recognized at fair value on a recurring basis classified at the appropriate level of the fair value hierarchy as of September 30, 2011 and September 30, 2010 (in thousands of dollars):
| September 30, 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 |
$ | 7,507 | — | — | $ | (7,507 | ) | — | ||||||||||||
| Marketable Securities |
206 | — | — | — | $ | 206 | ||||||||||||||
| Current Liabilities: |
||||||||||||||||||||
| No. 16 Domestic Sugar Futures Contracts |
$ | 2,525 | — | — | $ | (2,525 | ) | — | ||||||||||||
| No. 11 World Sugar Futures Contracts |
10 | — | — | (10 | ) | — | ||||||||||||||
| Natural Gas |
337 | — | — | (337 | ) | — | ||||||||||||||
| Non-Current Assets: |
||||||||||||||||||||
| No. 16 Domestic Sugar Futures Contracts |
— | 190 | — | (190 | ) | — | ||||||||||||||
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IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
| 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 | ) | — | ||||||||||||||
15. DERIVATIVE INSTRUMENTS
We use raw sugar futures and options in our raw sugar purchasing programs and natural gas futures and options to hedge natural gas purchases used in our manufacturing operations. Additionally, we periodically use derivatives to manage interest rate and foreign currency exchange risk. Our objective in the use of derivative instruments is to mitigate commodity price, interest rate or foreign currency exchange risk. Our derivatives hedging activity is supervised by a senior risk management committee which monitors and reports compliance with our risk management policy to the Audit Committee of the Board of Directors.
The majority of our industrial channel sales and a portion of our distributor channel sales are made under fixed price, forward sales contracts. In order to mitigate price risk in raw and refined sugar commitments, we manage the volume of refined sugar sales contracted for future delivery in relation to the volume of raw cane sugar purchased for future delivery by entering into forward purchase contracts to buy raw cane sugar at fixed prices and by using raw sugar futures contracts. Historically, substantially all of our purchases of domestic raw sugar and quota raw sugar imports are priced based on the Intercontinental Exchange (ICE) Sugar No. 16 futures contract. We use these futures contracts to price our physical domestic and quota raw sugar purchase commitments. Certain of these derivative instruments qualify as cash flow hedges and are designated as hedges for accounting purposes. To the extent that derivative instruments do not qualify for hedge accounting treatment, the Company records the effect of those instruments in current earnings. Non-quota imports under the re-export program, which constitutes less than 10% of our raw sugar purchases, are priced based on the ICE Sugar No. 11 futures contract. We use these futures contracts to price our world raw purchase commitments, however, these derivative instruments are not designated as cash flow hedges. We have purchased domestic and world raw sugar futures contracts up to 14 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. These derivative instruments qualify as cash flow hedges and 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 12 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. 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.
72
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
At September 30, 2011 we had the following net futures positions:
| Hedge Designation |
Domestic Sugar (cwt) |
World Sugar (cwt) |
Natural Gas (mmbtu) |
|||||||||
| Cash Flow |
3,513,440 | — | — | |||||||||
| Not Designated |
308,000 | 22,400 | 590,000 | |||||||||
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 $8.7 million recorded on the balance sheet for cash held on deposit in margin accounts at September 30, 2011 for the futures positions above. At September 30, 2011 there were no derivative positions to mitigate the risk of interest rates or foreign currency exchange. For the twelve month period ended September 30, 2011, we did not engage in trading activity with derivatives.
The table below shows the location and amounts in the consolidated balance sheets for derivative instruments (in thousands):
As of September 30, 2011:
| Hedge Designation |
Fair Value |
Margin Requirements Settled in Cash |
Balance Sheet Total |
|||||||||||
| Current Assets: |
||||||||||||||
| No. 16 Domestic Sugar Futures Contracts |
Cash Flow | $ | 7,507 | $ | (7,507 | ) | — | |||||||
| Current Liabilities: |
||||||||||||||
| No. 11 World Sugar Futures Contracts |
Not Designated | 10 | (10 | ) | — | |||||||||
| No. 16 Domestic Sugar Futures Contracts |
Cash Flow | 1,458 | (1,458 | ) | — | |||||||||
| Natural Gas |
Not Designated | 337 | (337 | ) | — | |||||||||
| No. 16 Domestic Sugar Futures Contracts |
Not Designated | 1,067 | (1,067 | ) | — | |||||||||
| Non-Current Assets: |
||||||||||||||
| No. 16 Domestic Sugar Futures Contracts |
Cash Flow | 190 | (190 | ) | — | |||||||||
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 | ) | — | |||||||||
73
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
The impact of futures contracts on the consolidated income statement for the twelve months ended September 30, 2011 and 2010 is presented below:
| Hedge Designation |
Income Statement Line Item |
Twelve Months
Ended September 30, 2011 |
Twelve Months
Ended September 30, 2010 |
|||||||||||||||||||||||
| Domestic Sugar |
World Sugar |
Natural Gas |
Domestic Sugar |
World Sugar |
Natural Gas |
|||||||||||||||||||||
| Cash Flow |
Cost of Sales(1) | $ | (9,449 | ) | $ | — | $ | 594 | $ | (225 | ) | $ | — | $ | 1,731 | |||||||||||
| Cash Flow |
Accumulated other comprehensive loss | (19,382 | ) | — | 47 | — | — | 1,922 | ||||||||||||||||||
| Not Designated |
Cost of Sales (credit) | (879 | ) | (4,672 | ) | 473 | (49,615 | ) | 5,260 | 364 | ||||||||||||||||
| (1) | Amounts were reclassified from accumulated other comprehensive income. |
There were no gains or losses recognized on cash flow hedges for ineffectiveness, nor were there any portion of derivatives excluded from the effectiveness assessment. Approximately $9.8 million of gains on cash flow hedges for raw sugar is expected to be reclassified to earnings over the next twelve months.
16. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in Accumulated Other Comprehensive Income (Loss) for the twelve months ended September 30, 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 |
19,335 | 19,335 | ||||||||||||||
| Reclassification from Accumulated Other Comprehensive Income to Net Income |
(8,855 | ) | (8,855 | ) | ||||||||||||
| Foreign Currency Translation Adjustment |
(72 | ) | (72 | ) | ||||||||||||
| Change in Pension and Other Postretirement Benefits Liability |
(14,719 | ) | (14,719 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance September 30, 2011 |
$ | 10,239 | (89,794 | ) | (26 | ) | (79,581 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
17. DISCONTINUED OPERATIONS
In fiscal 2009, the Company settled indemnity claims in connection with businesses previously sold, and recorded the resultant income in discontinued operations.
18. RELATED PARTY AND OTHER INFORMATION
The Company recorded approximately $77.2 million, $1.7 million and $34.0 million of cost of sales in fiscal 2011, 2010 and 2009 respectively, and $6.3 million of finished goods inventory at September 30, 2011, resulting from purchases from CSI and LSR.
74
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011, 2010 and 2009
Prepaid expenses and other current assets includes deposits on futures contracts and prepaid insurance of $14.1 million and $16.4 million at September 30, 2011 and 2010, respectively. Other current liabilities include payroll and employee benefit accruals totaling $6.7 million and $7.3 million at September 30, 2011 and 2010, respectively. Other current liabilities at September 30, 2011 includes an accrual for estimated unpaid probable losses arising from contingencies totaling $44.1 million; prepaid expenses and other current assets includes a like amount of recoveries under insurance policies.
75