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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2005

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 1-10307

 


 

IMPERIAL SUGAR COMPANY

(Exact name of registrant as specified in its charter)

 


 

Texas   74-0704500

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

One Imperial Square, P.O. Box 9, Sugar Land, Texas 77487

(Address of principal executive offices, including Zip Code)

 

(281) 491-9181

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨

 

As of May 2, 2005 there were 10,548,267 shares of common stock, without par value, of the registrant outstanding.

 



IMPERIAL SUGAR COMPANY

 

Index

 

               Page

PART I - FINANCIAL INFORMATION     
     Item 1.    Financial Statements     
          Consolidated Balance Sheets    3
          Consolidated Statements of Operations    4
          Consolidated Statements of Cash Flows    5
          Consolidated Statements of Changes in Shareholders’ Equity    6
          Notes to Consolidated Financial Statements    7
     Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    12
     Item 3.    Quantitative and Qualitative Disclosures About Market Risk    16
     Item 4.    Controls and Procedures    17
PART II - OTHER INFORMATION     
     Item 6.    Exhibits    18

 


 

Forward-Looking Statements

 

Statements regarding future market prices and margins, future energy costs, future operating results, sugarbeet acreage, operating efficiencies, future government and legislative action, future cost savings, future benefit costs, our liquidity and ability to finance our operations, and other statements that are not historical facts contained in this report on Form 10-Q are forward-looking statements. 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

         

 

Forward-looking statements involve risks, uncertainties and assumptions, including, without limitation, market factors, energy costs, the effect of weather and economic conditions, farm and trade policy, our ability to realize planned cost savings, the available supply of sugar, available quantity and quality of sugarbeets, 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. Many of such factors are beyond our ability to control or predict. 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. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. All forward-looking statements in this Form 10-Q are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report and other SEC filings.

 

 

2


PART I - FINANCIAL INFORMATION

 

IMPERIAL SUGAR COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     March 31,
2005


    September 30,
2004


 
     (In Thousands of Dollars)  

ASSETS

                

Current Assets:

                

Cash and Temporary Investments

   $ 49,278     $ 2,514  

Marketable Securities

     1,688       1,688  

Accounts Receivable, Net

     45,750       74,883  

Inventories:

                

Finished Products

     49,217       96,506  

Raw and In-Process Materials

     57,021       55,261  

Supplies

     12,661       10,155  
    


 


Total Inventory

     118,899       161,922  

Deferred Costs and Prepaid Expenses

     19,965       5,824  

Assets Held for Sale

     4,982       372  
    


 


Total Current Assets

     240,562       247,203  

Other Investments

     1,982       2,002  

Property, Plant and Equipment, Net

     132,529       138,136  

Deferred Income Taxes, Net

     20,189       23,887  

Other Assets

     4,772       4,582  
    


 


Total

   $ 400,034     $ 415,810  
    


 


LIABILITIES AND SHAREHOLDERS’ EQUITY

                

Current Liabilities:

                

Accounts Payable, Trade

   $ 64,074     $ 77,849  

Current Maturities of Long-Term Debt

     2,211       5,334  

Other Current Liabilities

     28,870       33,647  
    


 


Total Current Liabilities

     95,155       116,830  
    


 


Long-Term Debt, Net of Current Maturities

     5,568       6,707  

Deferred Employee Benefits and Other Liabilities

     116,629       116,072  

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; 10,548,267 and 10,373,700 Shares Issued and Outstanding at March 31, 2005 and September 30, 2004

     109,745       109,241  

Retained Earnings

     106,524       101,574  

Accumulated Other Comprehensive Loss

     (33,587 )     (34,614 )
    


 


Total Shareholders’ Equity

     182,682       176,201  
    


 


Total

   $ 400,034     $ 415,810  
    


 


 

See notes to consolidated financial statements.

 

 

3


IMPERIAL SUGAR COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    

Three Months Ended

March 31,


   

Six Months Ended

March 31,


 
     2005

    2004

    2005

    2004

 
     (In Thousands of Dollars, Except per Share Amounts)  

Net Sales

   $ 206,888     $ 209,615     $ 466,917     $ 465,613  
    


 


 


 


Cost of Sales

     194,934       192,820       436,207       427,660  

Selling, General and Administrative Expense

     10,224       9,750       20,685       21,198  

Depreciation and Amortization

     3,924       3,436       7,759       6,738  

Loss (Gain) on Asset Sales

     (412 )     (81 )     (6,580 )     37  
    


 


 


 


Total

     208,670       205,925       458,071       455,633  
    


 


 


 


Operating Income (Loss)

     (1,782 )     3,690       8,846       9,980  

Interest Expense, Net

     (410 )     (1,696 )     (1,161 )     (2,946 )

Change in Fair Value of Interest Rate Swaps

     —         (11 )     —         138  

Other Income, Net

     487       544       996       748  
    


 


 


 


Income (Loss) Before Income Taxes

     (1,705 )     2,527       8,681       7,920  

Provision (Benefit) for Income Taxes

     (631 )     890       3,212       2,770  
    


 


 


 


Net Income (Loss)

   $ (1,074 )   $ 1,637     $ 5,469     $ 5,150  
    


 


 


 


Earnings (Loss) per Share of Common Stock:

                                

Basic

   $ (0.10 )   $ 0.16     $ 0.52     $ 0.51  
    


 


 


 


Diluted

   $ (0.10 )   $ 0.15     $ 0.50     $ 0.48  
    


 


 


 


Weighted Average Shares Outstanding:

                                

Basic

     10,458,401       10,173,357       10,417,678       10,110,085  
    


 


 


 


Diluted

     10,458,401       10,812,884       11,035,338       10,726,235  
    


 


 


 


 

See notes to consolidated financial statements.

 

 

4


IMPERIAL SUGAR COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

 

     Six Months Ended
March 31,


 
     2005

    2004

 
     (In Thousands of Dollars)  

Operating Activities:

                

Net Income

   $ 5,469     $ 5,150  

Adjustments for Non-Cash and Non-Operating Items:

                

Reclassification Adjustment from Accumulated Other Comprehensive Income (Loss) to Net Income

     (1,024 )     1,614  

Change in Fair Value of Interest Rate Swaps

     —         (138 )

Cash Settlements on Derivative Instruments

     (552 )     22  

Depreciation and Amortization

     7,759       6,738  

Loss (Gain) on Sale of Assets

     (6,580 )     37  

Deferred Income Taxes

     3,212       2,770  

Other

     446       1,023  

Changes in Operating Assets and Liabilities:

                

Accounts Receivable

     24,162       11,259  

Inventories

     43,023       63,358  

Deferred Costs and Prepaid Expenses

     (14,142 )     (7,656 )

Accounts Payable, Trade

     (13,775 )     (17,445 )

Other Liabilities

     (4,365 )     (7,646 )
    


 


Net Cash Provided by Operating Activities

     43,633       59,086  
    


 


Investing Activities:

                

Capital Expenditures

     (7,140 )     (7,959 )

Proceeds from Sale of Assets

     6,164       2,362  

Proceeds from Collection of Notes Receivable

     —         13,081  

Collection of Escrow from Sale of Foodservice Business

     8,994       —    

Other

     (610 )     631  
    


 


Investing Cash Flow

     7,408       8,115  
    


 


Financing Activities:

                

Short-Term Borrowings, Net

     —         (2,526 )

Revolving Credit Repayments

     (3,250 )     —    

Repayment of Long-Term Debt

     (1,012 )     (27,712 )

Issuance of Common Stock

     504       1,287  

Dividends

     (519 )     —    
    


 


Financing Cash Flow

     (4,277 )     (28,951 )
    


 


Increase in Cash and Temporary Investments

     46,764       38,250  

Cash and Temporary Investments, Beginning of Period

     2,514       6,246  
    


 


Cash and Temporary Investments, End of Period

   $ 49,278     $ 44,496  
    


 


Supplemental Non-Cash Items:

                

Tax Effect of Deferred Gains (Losses)

   $ 552     $ —    
    


 


 

See notes to consolidated financial statements.

 

5


IMPERIAL SUGAR COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Six Months Ended March 31, 2005

(Unaudited)

 

     Shares of
Common
Stock


   Common
Stock


   Retained
Earnings


    Accumulated
Other
Comprehensive
Income (Loss)


    Total

 
          (In Thousands of Dollars)  

Balance September 30, 2004

   10,373,700    $ 109,241    $ 101,574     $ (34,614 )   $ 176,201  

Comprehensive Income:

                                    

Net Income

   —        —        5,469       —         5,469  

Change in Unrealized Securities Gains (Net of Tax of $1)

   —        —        —         2       2  

Change in Derivative Fair Value (Net of Tax of $193)

   —        —        —         359       359  

Recognition of Deferred Gains in Net Income (Net of Tax of $358)

   —        —        —         666       666  
                                


Total Comprehensive Income

   —        —        —         —         6,496  

Cash Dividends Declared

   —        —        (519 )     —         (519 )

Stock Options Exercised and Restricted Stock Granted

   174,567      504      —         —         504  
    
  

  


 


 


Balance March 31, 2005

   10,548,267    $ 109,745    $ 106,524     $ (33,587 )   $ 182,682  
    
  

  


 


 


 

See notes to consolidated financial statements.

 

 

6


IMPERIAL SUGAR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED MARCH 31, 2005 AND 2004

(unaudited)

 

1. ACCOUNTING POLICIES

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and reflect, in the opinion of management, all adjustments, consisting only of normal recurring accruals, that are necessary for a fair presentation of financial position and results of operations for the interim periods presented. These financial statements include the accounts of Imperial Sugar Company and its majority owned subsidiaries (the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures required by accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The financial statements included herein should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2004. The Company operates its business as one domestic segment - the production and sale of refined sugar and related products.

 

Cost of Sales

 

Payments to growers for sugarbeets are based in part upon the Company’s average net selling price for sugar sold (as defined in the participating contracts with growers) during the grower contract years, ending the last day of either February or June. The contracts provide for a variable purchase price which effectively results in the sharing of the net selling price (gross sales price less certain marketing costs, including packaging costs, brokerage, freight expense and amortization of costs for certain facilities used in connection with marketing) with growers. Sugarbeet purchases are recorded upon receipt, and a liability is established for estimated additional amounts to be paid to growers based on the average net return realized to date for sugar sold in each of the contract years through the end of the fiscal period. The final cost of sugarbeets cannot be determined until the end of the contract year for each growing area. Manufacturing costs incurred prior to production are deferred and allocated to production costs based on estimated production for each sugar manufacturing campaign. Additionally, the Company’s sugar inventories, which are accounted for on a LIFO basis, are periodically reduced at interim dates to levels below that of the beginning of the fiscal year. When such interim LIFO liquidations are expected to be restored prior to fiscal year-end, the estimated replacement cost of the liquidated layers is utilized as the basis of the cost of sugar sold from beginning of the year inventory. Accordingly, the cost of sugar utilized in the determination of cost of sales for interim periods includes estimates which may require adjustment in future fiscal periods.

 

Accounting Pronouncements

 

In December 2004, the Financial Accounting Standards Board revised Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation (SFAS 123R). The revised statement requires the recording of compensation expense for the fair value of stock options and other equity-based compensation awards. In April 2005, the Securities and Exchange Commission delayed the implementation date of this pronouncement to fiscal years beginning after June 15, 2005. The Company expects to adopt this standard during the first quarter of fiscal 2006, using the modified prospective method.

 

In November 2004, the Financial Accounting Standards Board issued Financial Accounting Standard No. 151, Inventory Costs (SFAS 151). This statement is an amendment to the guidance in Accounting Research Bulleting 43, Chapter 4, “Inventory Pricing”, and clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. According to the statement, those items must be recognized as current period charges regardless of whether they meet the criteria of abnormal. This statement is effective for periods beginning after June 15, 2005. The Company is evaluating the effect of this statement on its consolidated financial statements.

 

7


Earnings Per Share

 

As permitted by the original Statement of Financial Accounting Standards No. 123, as amended by SFAS 148, the Company measures (and expects to continue measuring until the adoption of SFAS 123R in fiscal 2006) compensation cost using the intrinsic value method prescribed in by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company’s reported net income (loss) and net income (loss) per share would have been different had compensation cost for the Company’s stock-based compensation plans been determined using the fair value method of accounting as shown in the pro forma amounts below (in thousands of dollars, except per share amounts):

 

     Three Months Ended
March 31,


    Six Months Ended
March 31,


 
     2005

    2004

    2005

    2004

 

Net income (loss), as reported

   $ (1,074 )   $ 1,637     $ 5,469     $ 5,150  

Deduct: Total stock-based employee compensation expense determined under fair value based method

     (83 )     (107 )     (135 )     (195 )
    


 


 


 


Pro forma net income (loss)

   $ (1,157 )   $ 1,530     $ 5,334     $ 4,955  
    


 


 


 


Net income (loss) per share, Basic:

                                

As reported

   $ (0.10 )   $ 0.16     $ 0.52     $ 0.51  
    


 


 


 


Pro forma

   $ (0.11 )   $ 0.15     $ 0.51     $ 0.49  
    


 


 


 


Net income (loss) per share, Diluted:

                                

As reported

   $ (0.10 )   $ 0.15     $ 0.50     $ 0.48  
    


 


 


 


Pro forma

   $ (0.11 )   $ 0.14     $ 0.48     $ 0.46  
    


 


 


 


 

For purpose of estimating the fair value of options on their date of grant, the Black-Scholes option-pricing model was used with the following assumptions:

 

Expected stock price volatility

   3.9-30.8%

Risk-free interest rate

   2.5 -4.2%

Expected life of options

   5.0 years

 

2. LONG-TERM DEBT

 

Long-term debt was as follows (in thousands of dollars):

 

     March 31,
2005


   September 30,
2004


Senior revolving credit facility

   $ —      $ 3,250

Industrial revenue bonds

     1,500      1,500

Non-interest bearing notes

     6,279      7,291
    

  

Total long-term debt

     7,779      12,041

Less current maturities

     2,211      5,334
    

  

Long-term debt, net

   $ 5,568    $ 6,707
    

  

 

In December 2004, the Company amended its existing senior secured revolving credit facility (“Revolver”) to provide for loans of up to $125 million (subject to a borrowing base and seasonal borrowing limit adjustments). This facility is used to finance various ongoing capital needs of the Company as well as for other general corporate

 

8


purposes. The Revolver matures on December 31, 2008 and has no financial covenants so long as average total liquidity (defined as the average of the borrowing base including cash, less average actual borrowings and letters of credit) exceeds $20 million; otherwise a minimum level of earnings before interest, taxes, depreciation and amortization, as defined (“EBITDA”) test would apply. The Revolver limits our ability to pay dividends or repurchase stock, if our average total liquidity, after adjustment on a pro forma basis for such payment, is less than $20 million.

 

The Revolver is secured by our cash and temporary investments, accounts receivable, inventory, certain investments and certain property, plant and equipment. All subsidiaries of the Company are borrowers or guarantors under the facility.

 

Although the final maturity of the Revolver is December 31, 2008, the Company classifies debt under the Revolver as current, pursuant to Emerging Issues Task Force Issue 95-22. 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.

 

3. CONTINGENCIES

 

The Company is party to litigation and claims which are normal in the course of its operations; while the results of such litigation and claims cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a materially adverse effect on its consolidated results of operations, financial position, or cash flows.

 

In conjunction with the closure of the Sugar Land, Texas refinery in December 2002, the refinery’s union filed three similar grievances alleging the Company owed unspecified severance benefits pursuant to the collective bargaining agreement. The Company contested the grievances, and a series of arbitrators’ decisions agreed with the Company’s position and denied all grievances; the final decision was issued in March 2005. The Company is also involved in litigation with an ex-employee who asserted a claim subsequent to his termination from the Company. The Company believes that the risk of material loss in this matter is remote.

 

In connection with the sales of the Diamond Crystal Brands (“DCB”) foodservice business and the beet factories in 2002, the Company made customary representations and warranties, and undertook indemnification obligations with regard to certain of these representations and warranties. These indemnification obligations are subject to certain deductibles, caps and expiration dates and, in some cases, may be deducted from the related escrow balance. In December 2004 $9.0 million was released to the Company from escrow relating to the sale of the DCB business. To date, one indemnity claim of $0.2 million was asserted and partially settled, leaving an escrow balance from this transaction of less than $0.1 million. The Company does not believe any future claim, if asserted, would be material to the Company’s consolidated financial position, results of operations or cash flows.

 

In connection with the sale of a subsidiary in 2002, the buyer assumed $18.5 million of industrial revenue bonds, with final maturity in 2025. The Company remains contingently liable for repayment of the bonds under a guaranty arrangement and does not believe that a liability is probable. The Company has recorded $3 million as a non-current liability for the fair value of the guarantee pursuant to Financial Interpretation No. 45.

 

 

9


4. EARNINGS PER SHARE

 

The following table presents information necessary to calculate basic and diluted earnings per share (in thousands of dollars, except per share amounts):

 

    

Three Months Ended

March 31,


  

Six Months Ended

March 31,


     2005

    2004

   2005

   2004

Net income (loss)

   $ (1,074 )   $ 1,637    $ 5,469    $ 5,150
    


 

  

  

Average shares outstanding

     10,458,401       10,173,357      10,417,678      10,110,085

Effect of incremental shares issuable from assumed exercise of stock options under the treasury stock method (1)

     —         639,527      617,660      616,150
    


 

  

  

Adjusted average shares

     10,458,401       10,812,884      11,035,338      10,726,235
    


 

  

  

Basic EPS from net income (loss)

   $ (0.10 )   $ 0.16    $ 0.52    $ 0.51
    


 

  

  

Diluted EPS from net income (loss)

   $ (0.10 )   $ 0.15    $ 0.50    $ 0.48
    


 

  

  


(1) Anti-dilutive securities excluded from the computation of diluted EPS for the six months ended March 31, 2005, that could potentially dilute EPS in the future, were options to purchase 221,567 shares of common stock; all options were antidilutive for the three-month period due to the fact that there was a net loss. There were 44,000 anti-dilutive securities excluded for the three and six months ended March 31, 2004.

 

During the six-month period ended March 31, 2005, the Company granted options to purchase 159,250 shares of common stock at a weighted average price of $14.96 per share and granted 62,317 shares of restricted stock. These options and restricted shares vest over a three-year period and the options expire ten years after the date of grant. Options to purchase 112,250 shares of common stock, with an average price of $4.70 were exercised during the six months ended March 31, 2005; additionally, 10,750 stock appreciation rights were exercised at a price of $1.35 during that same time period.

 

10


5. PENSION AND OTHER POSTRETIREMENT BENEFITS

 

The components of net periodic benefit costs for the three and six months ended March 31, 2005 and 2004 were (in thousands):

 

     Three Months Ended
March 31,


    Six Months Ended
March 31,


 
     2005

    2004

    2005

    2004

 

Pension Plans

                                

Service Cost

   $ 325     $ 325     $ 650     $ 650  

Interest Cost

     3,639       3,579       7,278       7,158  

Expected Return on Plan Assets

     (3,553 )     (3,710 )     (7,106 )     (7,420 )

Amortization of Prior Service Cost

     32       26       64       52  

Recognized Actuarial Loss

     161       115       322       229  
    


 


 


 


Total Net Periodic Benefit Costs

   $ 604     $ 335     $ 1,208     $ 669  
    


 


 


 


Postretirement Benefits Other than Pension Plans

                                

Service Cost

   $ 3     $ 2     $ 6     $ 8  

Interest Cost

     302       96       604       392  

Amortization of Prior Service Cost

     (265 )     (91 )     (530 )     (250 )

Recognized Actuarial Loss

     175       33       350       108  
    


 


 


 


Total Net Periodic Benefit Costs

   $ 215     $ 40     $ 430     $ 258  
    


 


 


 


 

Pension plan contributions, which are based on regulatory requirements, totaled $0.2 million and $0.4 million during the three and six months ended March 31, 2005; contributions during the remainder of fiscal 2005 are expected to be approximately $1.1 million.

 

 

11


Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This discussion should be read in conjunction with information contained in the Consolidated Financial Statements and the notes thereto and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004.

 

Overview

 

We operate in a single domestic business segment, which produces and sells 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, the quantity and quality of sugarbeets available to us and the availability and price of energy and other resources. These market 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 sugarbeets, prices of competing crops, domestic health and eating trends, competing sweeteners, weather conditions and United States farm and trade policy. The domestic sugar industry is subject to substantial influence by legislative and regulatory actions. The current farm bill limits the importation of raw cane sugar and the marketing of refined beet and raw cane sugar, potentially affecting refined sugar sales prices and volumes as well as the supply and cost of raw material available to our cane refineries.

 

Weather conditions during the growing, harvesting and processing seasons, the availability of acreage to contract for sugarbeets, as well as the effects of crop diseases and insects, may materially affect the quality and quantity of sugarbeets available for purchase as well as the costs of raw materials and processing.

 

Results of Operations

 

Three and Six Months Ended March 31, 2005

 

Our results of operations primarily depend on our success in achieving appropriate spreads of sugar sales prices over raw material costs and our ability to control our manufacturing, distribution and administrative costs. Sugar sales comprise approximately 95% of our net revenues.

 

    

Three Months Ended

March 31,


  

Six Months Ended

March 31,


     2005

   2004

   2005

   2004

     (in Millions of Dollars)

Net Sales:

                           

Sugar Sales

   $ 197    $ 199    $ 447    $ 446

By-product Sales

     5      6      13      14

Other Revenue

     5      5      7      6
    

  

  

  

Net Sales

   $ 207    $ 210    $ 467    $ 466
    

  

  

  

 

 

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Sugar sales volumes and prices were:

 

     Three Months Ended March 31,

   Six Months Ended March 31,

     2005

   2004

   2005

   2004

     Volume

   Price

   Volume

   Price

   Volume

   Price

   Volume

   Price

     (000 cwt)    (per cwt)    (000 cwt)    (per cwt)    (000 cwt)    (per cwt)    (000 cwt)    (per cwt)

Sugar Sales:

                                               

Industrial

   3,811    $ 27.45    3,591    $ 28.30    8,238    $ 27.49    7,794    $ 28.46

Consumer

   1,904      31.69    2,020      31.79    4,833      32.19    4,840      32.57

Foodservice

   883      31.02    876      31.96    1,820      30.89    1,717      32.07
    
  

  
  

  
  

  
  

Domestic Sales

   6,598    $ 29.15    6,487    $ 29.87    14,891    $ 29.43    14,352    $ 30.28

World/Toll Sales

   415      11.35    598      8.61    718      12.16    1,143      9.92
    
  

  
  

  
  

  
  

Sugar Sales

   7,013    $ 28.10    7,085    $ 28.08    15,610    $ 28.63    15,495    $ 28.78
    
  

  
  

  
  

  
  

 

Net sales decreased 1.3% for the three months ended March 31, 2005 compared to the same period in the prior year. Domestic sugar volumes increased 1.7% for the quarter, as more aggressive industrial selling increased volumes 6.1%, while consumer volumes decreased 5.7% due to competitive pressures in the private label sector, offsetting increases in branded consumer volumes. For the six months ended March 31, 2005, domestic volumes increased 3.7%, lead by higher industrial sales and a 6.0% increase in foodservice volume due to increased sales efforts to build the foodservice business through our major key distributors. Overall domestic sales prices were 2.4% lower for the quarter and 2.8% lower for the first six months of the year, reflecting the effects of a highly competitive market due to a large domestic sugarbeet crop, resulting in oversupply to the market. Toll volumes (processing of customer owned raw sugar) decreased in both the three and six month periods of the current year. Average world sugar sales prices increased in both the three and six month periods, which, along with the decrease in lower priced toll volumes, resulted in higher average world/toll prices reflected in the table above.

 

Other revenue includes $1.2 million and $2.1 million of sales of USDA marketing allotments to other domestic processors during the three and six month periods of the current year, compared to $0.2 million of allotment sales in the comparable prior year periods. Also included in other revenue is marketing revenue. In fiscal 2005, we expect to finalize the amendment to the marketing agreement with Michigan Sugar Company (MSC), such that MSC will now conduct its own marketing and we will handle the administrative processes related to the sugar sales. The term of the agreement will remain the same and the economics of the amended agreement are intended to be relatively neutral.

 

For the three months ended March 31, 2005, gross margin as a percentage of sales decreased to 5.8% from 8.0% in the prior year quarter. The year-to-date periods reflected a similar decrease for fiscal 2005 versus 2004 with gross margin decreasing to 6.6% from 8.2%. The decrease in gross margin percentage for the three and six month periods is primarily due to lower sales prices along with higher energy, freight and manufacturing costs in the current year, offset in part by lower raw sugar costs. Energy costs were $2.1 million higher for the three months and $4.5 million higher for the six months ended March 31, 2005, amounting to a reduction of gross margin percentage of 1.0% in each period. In addition, increased energy costs have had an adverse effect on our transportation costs and generally we have been unable to pass on such costs to our customers. Higher freight costs decreased gross margin percentage by 0.2% and 0.3% for the three and six month periods, respectively. Our cost of raw cane sugar decreased from $21.04 per cwt (on a raw market basis) for the quarter ended March 31, 2004 to $20.52 per cwt for the current quarter, and from $21.27 per cwt to $20.54 per cwt for the year-to-date periods. Lower raw sugar costs increased our gross margin percentage 1.6% and 2.1% for the three and six month periods, but not enough to fully offset the decline in sugar sales prices noted above. Manufacturing costs for the three and six month periods ended March 31, 2005 were higher primarily due to higher packaging costs in the current year and sales and property tax credits in the prior year. Local taxes in the current year are higher in part due to the effect of a benefit in the prior year of a sales tax credit under an economic incentive agreement associated with our Louisiana refinery which has been fully exhausted.

 

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Energy costs increased over the past year and we expect them to continue to be a larger part of our costs for the remainder of fiscal 2005. We expect to purchase over 4 million mmbtu of natural gas in fiscal 2005 and our average cost of natural gas after applying gains and losses from hedging activity increased to $8.04 per mmbtu in the current quarter from $5.91 per mmbtu in the comparable prior year’s quarter and to $7.36 from $5.31 in the year-to-date period. As of April 29, 2005 we had purchased or hedged approximately 73% of our natural gas requirements for fiscal 2005. If the remaining 27% were purchased at the traded futures prices on that date, our natural gas costs in 2005 would increase approximately $1.88 per mmbtu. The costs of our other energy sources have also increased. We have contracted for our coal supplies for 2005 of approximately 2.5 million mmbtu, at rates that are $1.53 per mmbtu higher than fiscal 2004. If we were to purchase the remaining uncontracted portion of our anticipated energy requirements at prices equal to the prevailing futures market price on April 29, 2005, energy costs for the full year of fiscal 2005, including previously priced amounts, would be approximately $12 million higher than in fiscal 2004.

 

Selling, general and administrative expense increased $0.5 million or 4.9% for the three months ended March 31, 2005, compared to the same period for 2004. The increases in the current year are related to a $0.3 million employee separation charge in the current quarter, as well as increased advertising expense, professional services fees, insurance and medical expense. These were partially offset by lower bad debt, incentive compensation and recruiting expenses in the current quarter. For the year-to-date period, selling, general and administrative costs decreased by $0.5 million or 2.4% due to decreased bad debt costs, incentive compensation accruals and advertising costs, partially offset by increased professional services fees and benefit costs. We expect to experience higher selling, general and administrative expenses during the remainder of this fiscal year as previously open management positions have now been filled and professional services fees and benefit costs are also expected to increase versus fiscal year 2004.

 

Depreciation expense has increased $0.5 million and $1.0 million in the three and six-month periods ended March 31, 2005 compared to those same periods in the prior year. This increase is primarily due to capital projects recently placed in service including our new Enterprise Resource Planning system.

 

We sold various assets during the six months ended March 31, 2005, including land and a warehouse in Georgia for a gain of approximately $2.7 million, a royalty interest in a coal seam methane gas project for a gain of approximately $1.9 million and wastewater rights and emission reduction credits at closed factories for a gain of $0.9 million. In April 2005, we signed a definitive agreement to sell our former Sugar Land refinery, which has a net book value of $4.6 million, for $7 million. The sale, which is expected to close in fiscal 2006, is subject to normal due diligence and other matters including creation of certain tax-advantaged financing districts, which require state and local approval.

 

Operating income (including gains on asset sales) decreased from $3.7 million for the three months ended March 31, 2004 to a negative $1.8 million for three months ended March 31, 2005, and decreased from $10.0 million to $8.8 million for the six month period. As a result of the market conditions described above, currently we anticipate operating profitability (excluding gains and losses on asset sales) is likely to decline significantly in fiscal year 2005 from fiscal 2004 performance.

 

The Company’s lower borrowing level in fiscal 2005, as well as reduced interest costs and fees related to the refinancing of the bank agreement, were the primary reasons for the decrease in interest expense for the quarter and year-to-date periods ended March 31, 2005 compared to 2004. Additionally, in the prior year, the Company recorded an additional $0.7 million of interest expense related to a change in estimate of the remaining term of deferred debt costs due to the early payoff of the term debt.

 

We are not currently paying federal income taxes on our earnings as a result of net operating loss carryforwards from prior periods.

 

Liquidity and Capital Resources

 

We fund our liquidity and capital requirements from cash generated from operations, supplemented as necessary with revolving credit borrowings under an agreement which was amended in December 2004 to provide for up to $125 million (subject to a borrowing base and seasonal borrowing limit adjustment) of senior secured revolving credit loans (the “Revolver”) at rates that are lower than the previous facility and which provide more capital structure flexibility and less restrictive covenants. At March 31, 2005 we had no outstanding borrowings under the Revolver and had borrowing capacity of $77.6 million, after deducting outstanding letters of credit totaling $22.4 million.

 

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The Revolver, which expires in December 2008, is secured by our cash and temporary investments, accounts receivable, inventory, certain investments and certain property, plant and equipment. Each of our subsidiaries is either a borrower or a guarantor under the facility. The agreement contains covenants limiting our ability to, among other things:

 

    incur other indebtedness
    incur other liens
    undergo any fundamental changes
    engage in transactions with affiliates
    enter into sale and leaseback transactions
    change our fiscal periods
    enter into mergers or consolidations
    sell assets
    prepay other debt

 

In addition, in the event that our average total liquidity (defined as the average of the borrowing base including cash, less average actual borrowings and letters of credit) falls below $20 million, the Revolver requires that we comply with a quarterly covenant which establishes a minimum level of earnings before interest, taxes, depreciation and amortization. The Revolver limits our ability to pay dividends or repurchase stock if our average total liquidity, after adjustment on a pro forma basis for such transaction, is less than $20 million.

 

The Revolver also includes customary events of default, including a change of control. Borrowings are generally 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. Although the facility has a final maturity date of December 31, 2008, we classify debt under the Revolver as current, pursuant to Emerging Issues Task Force Issue 95-22 as the agreement contains a subjective acceleration clause if in the opinion of the lenders there is a material adverse effect, and provides the lenders direct access to our cash receipts.

 

Our capital expenditures for the six months ended March 31, 2005 were $7.1 million, primarily for technology, productivity and packaging improvements. Capital expenditures in fiscal 2005 are expected to total approximately $18 million, $10 million related to productivity and packaging improvements, $6 million of expenditures related to normal replacement of factory equipment, and $2 million of technology investments (primarily an Enterprise Resource Planning system).

 

On December 7, 2004, our Board of Directors instituted a regular quarterly dividend and declared a cash dividend of $0.05 per share, which was paid on January 26, 2005 to shareholders of record on January 12, 2005. On May 3, 2005 our Board of Directors declared a cash dividend of $0.05 per share to shareholders of record on May 17, 2005, which is payable on May 27, 2005.

 

Our sugar production operations require seasonal working capital. Our seasonal requirements are expected to peak during the second half of our fiscal year when inventory levels are high, and a substantial portion of the payment to raw material suppliers have been made. Management believes that the credit facility and cash flow from operations will provide sufficient capital to meet anticipated working capital and operational needs for at least the next twelve months.

 

Critical Accounting Policies and Estimates

 

There have been no material changes to our critical accounting policies and estimate methodologies since the filing of our Annual Report on Form 10-K for the year ended September 30, 2004.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 ability to effectively hedge raw sugar purchases is limited by the illiquidity in the domestic raw sugar futures market. Gains and losses on raw sugar futures and options are matched to inventory purchases and charged or credited to cost of sales as such inventory is sold. Gains and losses on natural gas futures are matched to the natural gas purchases and charged to cost of sales in the period of the purchase.

 

The information in the table below presents our domestic and world raw sugar futures positions outstanding as of March 31, 2005.

 

    

Expected Maturity

Fiscal 2005


  

Expected Maturity

Fiscal 2006


Domestic Futures Contracts (long positions):

             

Contract Volumes (cwt.)

     2,483,000      379,000

Weighted Average Contract Price (per cwt.)

   $ 20.75    $ 20.88

Contract Amount

   $ 51,521,000    $ 7,906,000

Weighted Average Fair Value (per cwt.)

   $ 20.75    $ 20.75

Fair Value

   $ 51,522,000    $ 7,855,000
    

Expected Maturity

Fiscal 2005


  

Expected Maturity

Fiscal 2006


World Futures Contracts (net long positions):

             

Contract Volumes (cwt.)

     680,000      227,000

Weighted Average Contract Price (per cwt.)

   $ 8.72    $ 8.94

Contract Amount

   $ 5,928,000    $ 2,032,000

Weighted Average Fair Value (per cwt.)

   $ 8.73    $ 9.04

Fair Value

   $ 5,938,000    $ 2,055,000

 

The above information does not include either our physical inventory or our fixed price purchase commitments for raw sugar.

 

The information in the table below presents our natural gas futures positions outstanding as of March 31, 2005.

 

    

Expected Maturity

Fiscal 2005


  

Expected Maturity

Fiscal 2006


Futures Contracts (net long positions):

             

Contract Volumes (mmbtu)

     1,250,000      50,000

Weighted Average Contract Price (per mmbtu)

   $ 6.59    $ 6.94

Contract Amount

   $ 8,240,000    $ 347,000

Weighted Average Fair Value (per mmbtu)

   $ 7.81    $ 7.94

Fair Value

   $ 9,764,000    $ 397,000

 

 

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Item 4. CONTROLS AND PROCEDURES

 

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2005 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

There has been no change in our internal controls over financial reporting that occurred during the three months ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting except those required by the partial implementation of our new Enterprise Resource Planning system.

 

 

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PART II - OTHER INFORMATION

 

Item 6. Exhibits

 

  (a) Exhibits

 

31.1    Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.
31.2    Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.
32.1    Chief Executive Officer Certification 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.
32.2    Chief Financial Officer Certification required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

IMPERIAL SUGAR COMPANY

   

(Registrant)

Dated: May 4, 2005

 

By:

 

/s/ H. P. Mechler


       

H. P. Mechler

       

Senior Vice President and

       

Chief Financial Officer

 

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Exhibit Index

 

Exhibit No.

 

Document


31.1   Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.
31.2   Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.
32.1   Chief Executive Officer Certification 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.
32.2   Chief Financial Officer Certification required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

 

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