Attached files
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2009
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-16674
IMPERIAL SUGAR COMPANY
(Exact name of registrant as specified in its charter)
Texas | 74-0704500 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
One Imperial Square, P.O. Box 9, Sugar Land, Texas 77487
(Address of principal executive offices, including Zip Code)
(281) 491-9181
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, see definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ¨ | Accelerated Filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of January 31, 2010, there were 12,165,004 shares of common stock, without par value, of the registrant outstanding.
Table of Contents
Index
Page | ||||
PART I - FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements | |||
Consolidated Balance Sheets (Unaudited) | 2 | |||
Consolidated Statements of Operations (Unaudited) | 3 | |||
Consolidated Statements of Cash Flows (Unaudited) | 4 | |||
Consolidated Statement of Changes in Shareholders Equity (Unaudited) | 5 | |||
Notes to Consolidated Financial Statements (Unaudited) | 6 | |||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 14 | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 18 | ||
Item 4. | Controls and Procedures | 19 | ||
PART II - OTHER INFORMATION | ||||
Item 1. | Legal Proceedings | 20 | ||
Item 1A. | Risk Factors | 20 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 21 | ||
Item 6. | Exhibits | 21 | ||
Signatures | 22 |
Forward-Looking Statements
Statements regarding future market prices and margins, refinery construction costs, timelines and operational dates, future expenses and liabilities arising from the Port Wentworth refinery incident, future costs and actions regarding the Louisiana Sugar Refining, LLC venture, future import and export levels, future government and legislative action, future operating results, future availability of raw sugar, operating efficiencies, results of future investments and initiatives, future cost savings, future product innovations, future energy costs, our liquidity and ability to finance our operations and capital investment programs, future pension plan contributions and other statements that are not historical facts contained in this report on Form 10-Q are forward-looking statements that involve certain risks, uncertainties and assumptions. These risks, uncertainties and assumptions include, but are not limited to, market factors, farm and trade policy, unforeseen engineering, construction and equipment delays, our ability to realize planned cost savings and other improvements, the available supply of sugar, energy costs, the effect of weather and economic conditions, results of actuarial assumptions, actual or threatened acts of terrorism or armed hostilities, legislative, administrative and judicial actions and other factors detailed elsewhere in this report and in our other filings with the SEC. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. We identify forward-looking statements in this report by using the following words and similar expressions:
expect |
project |
estimate | ||
believe |
anticipate |
likely | ||
plan |
intend |
could | ||
should |
may |
predict | ||
budget |
possible |
Management cautions against placing undue reliance on forward-looking statements or projecting any future results based on such statements or present or future earnings levels. All forward-looking statements in this report on Form 10-Q are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report and in our other SEC filings.
1
Table of Contents
PART I - FINANCIAL INFORMATION
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, 2009 |
September 30, 2009 |
|||||||
(In Thousands of Dollars) | ||||||||
ASSETS | ||||||||
Current Assets: |
||||||||
Cash and Cash Equivalents |
$ | 66,440 | $ | 115,584 | ||||
Marketable Securities |
201 | 56 | ||||||
Accounts Receivable, Net |
29,715 | 34,601 | ||||||
Insurance Settlement Receivable |
45,000 | | ||||||
Inventories: |
||||||||
Finished Products |
41,754 | 18,434 | ||||||
Raw and In-Process Materials |
84,116 | 83,215 | ||||||
Supplies |
11,976 | 10,626 | ||||||
Total Inventory |
137,846 | 112,275 | ||||||
Deferred Income Taxes, Net |
| 16,215 | ||||||
Prepaid Expenses and Other Current Assets |
43,982 | 14,873 | ||||||
Total Current Assets |
323,184 | 293,604 | ||||||
Other Investments |
11,956 | 10,930 | ||||||
Property, Plant and Equipment, Net |
277,096 | 252,913 | ||||||
Deferred Income Taxes, Net |
| 55,940 | ||||||
Other Assets |
2,717 | 2,553 | ||||||
Total |
$ | 614,953 | $ | 615,940 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
Current Liabilities: |
||||||||
Accounts Payable, Trade |
$ | 87,163 | $ | 87,141 | ||||
Borrowing under Revolving Credit Line |
60,000 | 60,000 | ||||||
Deferred Income Taxes, Net |
12,374 | | ||||||
Other Current Liabilities |
50,334 | 28,390 | ||||||
Insurance Advances, Net |
| 227,475 | ||||||
Total Current Liabilities |
209,871 | 403,006 | ||||||
Deferred Income Taxes, Net |
15,645 | | ||||||
Deferred Employee Benefits and Other Liabilities |
124,847 | 126,500 | ||||||
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; 12,165,004 and 12,026,354 Shares Issued and Outstanding at December 31, 2009 and September 30, 2009 |
128,746 | 128,421 | ||||||
Retained Earnings |
205,806 | 27,922 | ||||||
Accumulated Other Comprehensive Loss |
(69,962 | ) | (69,909 | ) | ||||
Total Shareholders Equity |
264,590 | 86,434 | ||||||
Total |
$ | 614,953 | $ | 615,940 | ||||
See notes to consolidated financial statements.
2
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended December 31, |
||||||||
2009 | 2008 | |||||||
(In Thousands of Dollars, Except per Share Amounts) |
||||||||
Net Sales |
$ | 173,779 | $ | 108,648 | ||||
Business Interruption Insurance Recovery |
84,677 | | ||||||
Cost of Sales (includes depreciation of $4,594,000 and $2,291,000 for the three months ended December 31, 2009 and 2008) |
(161,379 | ) | (111,618 | ) | ||||
Selling, General and Administrative Expense (includes depreciation of $335,000 and $586,000 for the three months ended December 31, 2009 and 2008) |
(11,446 | ) | (11,582 | ) | ||||
Refinery Explosion Related Charges |
(1,795 | ) | (14,930 | ) | ||||
Insurance Recoveries Recognized |
193,796 | 11,677 | ||||||
Gain on Litigation Settlement |
| 16,148 | ||||||
Operating Income (Loss) |
277,632 | (1,657 | ) | |||||
Interest Expense |
(318 | ) | (421 | ) | ||||
Interest Income |
29 | 253 | ||||||
Other Income, Net |
986 | 1,016 | ||||||
Income (Loss) from Continuing Operations before Income Taxes |
278,329 | (809 | ) | |||||
Benefit (Provision) for Income Taxes |
(100,213 | ) | 229 | |||||
Income (Loss) from Continuing Operations |
178,116 | (580 | ) | |||||
Income from Discontinued Operations, Net |
| 644 | ||||||
Net Income |
$ | 178,116 | $ | 64 | ||||
Basic Earnings (Loss) per Share of Common Stock: |
||||||||
Income (Loss) from Continuing Operations |
$ | 15.11 | $ | (0. 05 | ) | |||
Income from Discontinued Operations |
| 0.06 | ||||||
Net Income (Loss) |
$ | 15.11 | $ | 0. 01 | ||||
Diluted Earnings (Loss) per Share of Common Stock: |
||||||||
Income (Loss) from Continuing Operations |
$ | 14.84 | $ | (0.05 | ) | |||
Income from Discontinued Operations |
| 0.06 | ||||||
Net Income (Loss) |
$ | 14.84 | $ | 0.01 | ||||
Weighted Average Shares Outstanding: |
||||||||
Basic |
11,789,897 | 11,683,594 | ||||||
Diluted |
12,005,791 | 11,683,594 | ||||||
See notes to consolidated financial statements.
3
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended December 31, |
||||||||
2009 | 2008 | |||||||
(In Thousands of Dollars) | ||||||||
Operating Activities: |
||||||||
Net Income |
$ | 178,116 | $ | 64 | ||||
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: |
||||||||
Insurance Recoveries Recognized |
(278,473 | ) | (11,677 | ) | ||||
Advances from Insurance Carriers |
| 10,000 | ||||||
Depreciation |
4,929 | 2,877 | ||||||
Deferred Income Taxes |
100,213 | 142 | ||||||
Reclassification from Accumulated Other Comprehensive (Income) Loss to Net Income |
340 | 1,286 | ||||||
Cash Paid (Received) on Change in Fair Value of Derivative Instruments |
(536 | ) | (3,432 | ) | ||||
Non-Cash Stock-Based Compensation |
511 | 493 | ||||||
Equity Earnings in Unconsolidated Subs |
(880 | ) | (433 | ) | ||||
Excess Tax Benefits from Stock-Based Compensation |
24 | (35 | ) | |||||
Income from Discontinued Operations |
| (644 | ) | |||||
Gain on Sale of Marketable Securities |
| (388 | ) | |||||
Gain on Sale of Assets |
| (76 | ) | |||||
Other |
61 | 55 | ||||||
Changes in Operating Assets and Liabilities: |
||||||||
Accounts Receivable |
4,886 | 9,844 | ||||||
Inventories |
(25,571 | ) | (15,034 | ) | ||||
Prepaid Expenses and Other Assets |
(3,445 | ) | 3,175 | |||||
Accounts PayableTrade |
8,475 | (19,999 | ) | |||||
Other Liabilities |
(5,786 | ) | (7,524 | ) | ||||
Net Cash Provided by (Used in) Continuing Operations |
(17,136 | ) | (31,306 | ) | ||||
Net Cash Provided by Discontinued Operations |
| 1,015 | ||||||
Net Cash Provided by (Used in) Operations |
(17,136 | ) | (30,291 | ) | ||||
Investing Activities: |
||||||||
Capital Expenditures |
(37,598 | ) | (16,503 | ) | ||||
Advances from Insurance Carriers |
6,000 | | ||||||
Proceeds from Sale of Marketable Securities |
| 7,500 | ||||||
Proceeds from Sale of Assets |
| 538 | ||||||
Other |
16 | (169 | ) | |||||
Investing Cash Flow |
(31,582 | ) | (8,634 | ) | ||||
Financing Activities: |
||||||||
Issuance of Common Stock |
| 79 | ||||||
Cash Dividends |
(240 | ) | (830 | ) | ||||
Excess Tax Benefits from Stock-Based Compensation |
(24 | ) | 35 | |||||
Other |
(162 | ) | | |||||
Financing Cash Flow |
(426 | ) | (716 | ) | ||||
Increase (Decrease) in Cash and Cash Equivalents |
(49,144 | ) | (39,641 | ) | ||||
Cash and Cash Equivalents, Beginning of Period |
115,584 | 74,723 | ||||||
Cash and Cash Equivalents, End of Period |
$ | 66,440 | $ | 35,082 | ||||
Supplemental Non-Cash Items: |
||||||||
Tax Effect of Deferred Gains and Losses |
$ | 71 | $ | 729 | ||||
Purchase of Property, Plant and Equipment on Account |
$ | 20,265 | $ | | ||||
See notes to consolidated financial statements.
4
Table of Contents
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
For the Three Months Ended December 31, 2009
(Unaudited)
Shares of Common Stock |
Common Stock |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total | |||||||||||||
(In Thousands of Dollars, Except Share Data) | |||||||||||||||||
Balance September 30, 2009 |
12,026,354 | $ | 128,421 | $ | 27,922 | $ | (69,909 | ) | $ | 86,434 | |||||||
Comprehensive Income: |
|||||||||||||||||
Net Income |
178,116 | 178,116 | |||||||||||||||
Foreign Currency Translation Adjustment (Net of Tax of $40,000) |
72 | 72 | |||||||||||||||
Change in Derivative Fair Value (Net of Tax of $193,000) |
(343 | ) | (343 | ) | |||||||||||||
Reclassification from Accumulated Other Comprehensive Income (Loss) to Net Income (Net of Tax of $122,000) |
218 | 218 | |||||||||||||||
Total Comprehensive Income |
178,063 | ||||||||||||||||
Dividends ($0.02 per share) |
(232 | ) | (232 | ) | |||||||||||||
Restricted Stock Grants |
138,650 | 325 | 325 | ||||||||||||||
Balance December 31, 2009 |
12,165,004 | $ | 128,746 | $ | 205,806 | $ | (69,962 | ) | $ | 264,590 | |||||||
See notes to consolidated financial statements.
5
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
1. ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and reflect, in the opinion of management, all adjustments, consisting only of normal recurring accruals, that are necessary for a fair presentation of financial position and results of operations for the interim periods presented. These financial statements include the accounts of Imperial Sugar Company and its majority-owned subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures required by accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The financial statements included herein should be read in conjunction with the financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended September 30, 2009. The Company operates its business as one domestic segmentthe production and sale of refined sugar and related products.
Cost of Sales
The Companys sugar inventories, which are accounted for on a LIFO basis, are periodically reduced at interim dates to levels below that of the beginning of the fiscal year. When such interim LIFO liquidations are expected to be restored prior to fiscal year-end, the estimated replacement cost of the liquidated layers is utilized as the basis of the cost of sugar sold from beginning of the year inventory. Accordingly, the cost of sugar utilized in the determination of cost of sales for interim periods includes estimates which may require adjustment in future fiscal periods.
Insurance Recoveries
Insurance recoveries that are deemed to be probable and reasonably estimable are recognized to the extent of the related loss. Insurance recoveries which result in gains, including recoveries under business interruption coverage, are recognized only when realized by settlement with the insurers. Advances on insurance settlements are recorded as liabilities or offsets to accrued probable recoveries. The evaluation of insurance recoveries requires estimates and judgments about future results which affect reported amounts and certain disclosures. Actual results could differ from those estimates.
Accounting Pronouncements
The FASB has issued new authoritative guidance that once effective, establishes additional accounting and disclosure requirements. Management has evaluated the effects such requirements will have on our consolidated financial statements.
In March 2008, the FASB issued authoritative guidance intended to provide users of employers financial statements with more informative disclosures about the nature and valuation of postretirement benefit plan assets. The disclosures related to plan assets are effective for fiscal years ending after December 15, 2009.
In June 2009, the FASB issued authoritative guidance which amends certain requirements to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. The guidance will be effective as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company is currently evaluating the impact, if any, that this guidance will have on its consolidated financial statements.
2. INSURANCE RECOVERIES
The Company experienced an explosion and fire on February 7, 2008, at its sugar refinery in Port Wentworth, Georgia, which is located near Savannah, Georgia. Production at the refinery, which comprises approximately 60% of the Companys capacity, was suspended until the summer of 2009 when limited bulk production was commenced. The installation of packaging lines was completed in December, and refined silo construction was completed in January 2010.
6
Table of Contents
IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)(Continued)
The Company settled its insurance claim related to the Port Wentworth accident in December 2009 for an aggregate of $345 million, and received the remaining $45 million of insurance proceeds in early January 2010. 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 are recognized as gains in the quarter ended December 31, 2009, as follows (in millions):
Insurance Recovery |
Previously Recognized |
Current Period Gains | |||||||
Business interruption |
$ | 84.7 | | $ | 84.7 | ||||
Property replacement cost |
212.4 | $ | 23.2 | 189.2 | |||||
Payroll and other incurred costs |
47.9 | 43.3 | 4.6 | ||||||
Total |
$ | 345.0 | $ | 66.5 | $ | 278.5 | |||
Financial reporting gains recognized for replacement cost recoveries will not be recognized for tax purposes to the extent the Company made elections under the involuntary conversion rules of the Internal Revenue Code, as the insurance proceeds have been reinvested in replacement property within the required period of time. The replacement cost expenditures establish a new basis in the assets for financial reporting purposes, which will result in higher depreciation charges in future years. The tax basis in the replaced assets will be reduced by the amount of the gain not recognized under the involuntary conversion rules.
3. CONTINGENCIES
The Company is party to a number of claims, including forty-eight lawsuits brought on behalf of thirty-nine employees or their families and thirty one, third parties or their families, for injuries and losses suffered as a result of the Port Wentworth refinery accident. 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 Companys general liability policy provides for coverage for damages to third parties up to a policy limit of $100 million. While the Company believes it has meritorious defenses in this litigation, and 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 exceeding the $100 million policy limit is remote.
Following the Port Wentworth accident, the U.S. Occupational Safety Health Administration (OSHA) conducted investigations at the Companys Port Wentworth and Gramercy refineries. OSHA concluded its Port Wentworth and Gramercy investigations on July 25, 2008, and issued numerous citations with total proposed penalties of $5.1 million in Port Wentworth and $3.7 million in Gramercy. Additionally, OSHA issued requirements for certain abatement actions to be undertaken by the Company at the Port Wentworth and Gramercy facilities. The Company has contested all of the citations and proposed penalties regarding the Port Wentworth and Gramercy investigations, and these matters have been assigned to the Occupational Safety and Health Review Commission for a review of the merits of the citations, proposed penalties and abatement actions. Trial dates for administrative law hearings have been set for May and June 2010.
Discovery in the OSHA matters is on-going and the Company is unable to predict the final outcome of this matter with certainty. The Company believes that it is probable that it will incur a loss estimated to be approximately $6.0 million, and accordingly, recorded a liability in the consolidated financial statements. OSHA penalties are not covered by insurance, and are not deductible for federal income tax purposes.
On July 31, 2008, the Board of Directors received a letter from an attorney representing a stockholder of the Company requesting, among other things, that the Board cause an independent investigation to be made with respect to alleged mismanagement and breaches of fiduciary duty by the Companys officers, directors and employees relating to the February 7, 2008 explosion at the Companys refinery in Port Wentworth, Georgia. On October 2, 2008, the Board received a similar letter on behalf of another stockholder requesting that the Company commence legal actions against specified officers and directors. The Board of Directors established a committee of independent and disinterested directors on October 23, 2008 with full authority to investigate and address the allegations contained in the stockholder letters described above.
On January 16, 2009, one of such stockholders filed a derivative action in the District Court of Harris County, Texas against twelve current and former directors and officers of the Company and named the Company as a nominal defendant. The action, entitled
7
Table of Contents
IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)(Continued)
Delaney v. Sheptor, et al., Cause No. 2009-03145 (Dist. Ct. Tex.), asserts a claim of breach of fiduciary duty against defendants in connection with the February 2008 explosion at the Port Wentworth facility and seeks unspecified damages on behalf of the Company. The action has been stayed pending completion of the investigation by the committee of independent and disinterested directors.
In January 2009, the Company was notified by its workers compensation liability insurance carrier that it anticipates charging the Company approximately $6.4 million as a result of certain loss-based assessments the carrier expected to receive from the state of Georgias Subsequent Injury Trust Fund (SITF). The Companys insurance contract provides that it reimburse the carrier for such SITF assessments. The Company is currently pursuing a possible abatement. The Company is unable to determine the amount of its ultimate liability for this proposed assessment.
Additionally, 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 connection with the sales of certain businesses, the Company made customary representations and warranties, and undertook indemnification obligations with regard to certain of these representations and warranties including financial statements, environmental and tax matters, and the conduct of the businesses prior to the sale. These indemnification obligations are subject to certain deductibles, caps and expiration dates.
In connection with the sale of a subsidiary in 2002, the buyer assumed $18.5 million of industrial revenue bonds, with final maturity in 2025. The Company remains contingently liable for repayment of the bonds under a guaranty arrangement and does not believe that a liability is probable. The Company has recorded a non-current liability for the fair value of the guarantee.
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 and reported a gain on litigation settlement.
4. LSR VENTURE
In November 2009, the Company completed the formation and funding of a three-party joint venture with Sugar Growers and Refiners, Inc (SUGAR) and Cargill, Incorporated (Cargill) to construct and operate a new 3,100 ton-per-day cane sugar refinery in Gramercy, Louisiana adjacent to the Companys existing sugar refinery.
The venture, Louisiana Sugar Refining, LLC or LSR, is owned one-third by each member, each of which agreed to contribute $30 million in cash or assets as equity to capitalize the venture. SUGARs contribution was $30 million cash; Cargill contributed $23.5 million cash and certain equipment and intellectual property valued at $6.5 million. The Companys contribution, which will occur in three stages, consists of the existing refinery assets with a book value of approximately $22 million, including approximately 207 acres of land.
The Company will operate the existing refinery with sales and earnings for its own account until December 31, 2010, during which time the Company is obligated to complete certain improvements currently estimated to cost approximately $6 million. The equipment and personal property in the existing refinery will be contributed to LSR on January 1, 2011. After January 1, 2011, the Company will continue to operate the small bag packing facility in Gramercy, with 3.5 million cwt of refined bulk sugar purchased 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 the initial closing. Terms of the operative agreements require that LSR and Imperial jointly enroll the entire site (including the footprint) in the Voluntary Remediation Program (the VRP) of the Louisiana Department of Environmental Quality to conduct an environmental assessment of the site and complete remediation of any identified contamination. The Company is obligated to pay for the cost of remediation, if the VRP uncovers contamination above the applicable industrial standard. The Company will convey the remainder of the land to LSR upon completion of the VRP and be released of future environmental liabilities to state and federal authorities.
LSR has completed financing agreements aggregating $145 million to provide construction and working capital financing for the project. The financing is non-recourse to LSRs members. The members have agreed to proportionately contribute additional capital
8
Table of Contents
IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)(Continued)
to LSR if necessary to cover certain construction cost overruns and costs relating to the VRP that LSR agreed to assume. Construction costs of the new refinery are estimated at $120 million. The existing Gramercy refinery will operate during the construction and start-up phase of the new refinery, which began in December 2009 and is expected to be 18 to 24 months.
LSRs raw cane sugar will be supplied by SUGAR through an evergreen raw sugar supply agreement. Cargill will serve as marketer of the refined sugar produced by LSR, other than refined sugar sold to Imperial.
5. STOCK-BASED COMPENSATION
During the three months ended December 31, 2009, the Company granted 133,446 shares of restricted stock to employees with a weighted average grant date fair value of $14.44 per share. Of these grants of restricted stock, 93,412 shares have performance and service conditions which must be met prior to vesting. The remaining 40,034 shares have service conditions which must be met before vesting occurs. These shares vest over a period of 34 months.
During the three months ended December 31, 2009, 16,379 shares of restricted stock vested with a fair value at vesting date of $221,000.
6. EARNINGS PER SHARE
The following table presents information necessary to calculate basic and diluted earnings per share (in thousands of dollars, except per share amounts):
Three Months Ended December 31, | |||||||
2009 | 2008 (1) | ||||||
Income (Loss) from Continuing Operations |
$ | 178,116 | $ | (580 | ) | ||
Average Shares Outstanding |
11,789,897 | 11,683,594 | |||||
Effect of Incremental Shares Issuable from Assumed Exercise of Stock Options and Nonvested Restricted Stock Under the Treasury Stock Method |
215,894 | | |||||
Adjusted Average Shares |
12,005,791 | 11,683,594 | |||||
Diluted EPSContinuing Operations |
$ | 14.84 | $ | (0.05 | ) | ||
Income from Discontinued Operations |
$ | | $ | 644 | |||
Average Shares Outstanding |
11,789,897 | 11,683,594 | |||||
Effect of Incremental Shares Issuable from Assumed Exercise of Stock Options and Nonvested Restricted Stock Under the Treasury Stock Method |
215,894 | | |||||
Adjusted Average Shares |
12,005,791 | 11,683,594 | |||||
Diluted EPSDiscontinued Operations |
$ | 0.00 | $ | 0.06 | |||
Net Income (Loss) |
$ | 178,116 | $ | 64 | |||
Average Shares Outstanding |
11,789,897 | 11,683,594 | |||||
Effect of Incremental Shares Issuable from Assumed Exercise of Stock Options and Nonvested Restricted Stock Under the Treasury Stock Method |
215,894 | | |||||
Adjusted Average Shares |
12,005,791 | 11,683,594 | |||||
Diluted EPSNet Income (Loss) |
$ | 14.84 | $ | 0.01 | |||
(1) | No assumed option exercises or restricted stock share issuances were included in the computation of diluted EPS for the quarter ended December 31, 2008, because doing so would have an antidilutive effect on the computation of diluted earnings per share. Excludes 7,381 and 379,522 antidilutive securities in the quarters ended December 31, 2009 and 2008. |
9
Table of Contents
IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)(Continued)
7. PENSION AND OTHER POSTRETIREMENT BENEFITS
The components of net periodic benefit costs for the three months ended December 31, 2009 and 2008 were (in thousands):
Three Months Ended December 31, |
||||||||
2009 | 2008 | |||||||
Pension Plans |
||||||||
Service Cost |
$ | 291 | $ | 262 | ||||
Interest Cost |
2,823 | 3,273 | ||||||
Expected Return on Plan Assets |
(2,575 | ) | (2,908 | ) | ||||
Amortization of Prior Service Cost |
34 | 31 | ||||||
Recognized Actuarial Loss |
817 | 370 | ||||||
Total Net Periodic Benefit Costs |
$ | 1,390 | $ | 1,028 | ||||
Postretirement Benefits Other than Pension Plans |
||||||||
Service Cost |
$ | 5 | $ | 3 | ||||
Interest Cost |
113 | 148 | ||||||
Amortization of Prior Service Cost |
(399 | ) | (399 | ) | ||||
Recognized Actuarial Loss |
161 | 98 | ||||||
Total Net Periodic Benefit Costs (Income) |
$ | (120 | ) | $ | (150 | ) | ||
Pension plan contributions, which are based on regulatory requirements, were $2.6 million for the three months ended December 31, 2009 and $0.3 million for the three months ended December 31, 2008. Contributions during the remainder of fiscal 2010 are expected to be approximately $11.1 million.
8. OTHER INCOME
Other income included the following (in thousands of dollars):
Quarter Ended December 31, | ||||||
2009 | 2008 | |||||
Equity Earnings in investment in |
||||||
Comercializadora Santos Imperial S. de R.L. de C.V. |
$ | 97 | $ | 106 | ||
Wholesome Sweeteners, Inc. |
783 | 327 | ||||
Distributions from cost basis fuel terminal partnership |
| 147 | ||||
Gain on sale of securities |
| 388 | ||||
Other |
106 | 48 | ||||
Total |
$ | 986 | $ | 1,016 | ||
The Company owns a 50 percent interest in Comercializadora Santos Imperial S. de R.L. de C.V. and a 50 percent interest in Wholesome Sweetners, Inc. The Company reports its share of earnings in these investees on the equity method. Summarized financial information for each of the Companys equity method investees for the quarters ended December 31, 2009 and 2008 includes the following (in thousands of dollars):
Comercializadora Santos Imperial S. de R.L. de C.V. |
Wholesome Sweeteners, Inc. | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Net Sales |
$ | 41,038 | $ | 65,149 | $ | 24,748 | $ | 18,851 | ||||
Gross Profit |
$ | 934 | $ | 658 | $ | 6,598 | $ | 3,959 | ||||
Net Income |
$ | 195 | $ | 213 | $ | 2,016 | $ | 774 |
10
Table of Contents
IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)(Continued)
9. FAIR VALUE
The Company determines the fair value of natural gas and raw sugar futures contracts and marketable securities using quoted market prices for the individual securities. The following table presents the Companys assets and liabilities measured and recognized at fair value on a recurring basis classified at the appropriate level of the fair value hierarchy as of December 31, 2009 and September 30, 2009 (in thousands of dollars):
December 31, 2009 | ||||||||||||||
Fair Value | Margin Requirements Settled in Cash |
Balance Sheet Total | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||
Current Assets: |
||||||||||||||
Natural Gas and Raw Sugar Futures Contracts |
$ | 30,463 | | | $ | (30,463 | ) | | ||||||
Marketable Securities |
201 | | | | $ | 201 | ||||||||
Current Liabilities: |
||||||||||||||
Natural Gas and Raw Sugar Futures Contracts |
507 | | | (507 | ) | | ||||||||
Non-Current Assets: |
||||||||||||||
Natural Gas and Raw Sugar Futures Contracts |
351 | | | (351 | ) | | ||||||||
September 30, 2009 | ||||||||||||||
Fair Value | Margin Requirements Settled in Cash |
Balance Sheet Total | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||
Current Assets: |
||||||||||||||
Natural Gas and Raw Sugar Futures Contracts |
$ | 21,077 | | | $ | (21,077 | ) | | ||||||
Marketable Securities |
56 | | | | $ | 56 | ||||||||
Current Liabilities: |
||||||||||||||
Natural Gas and Raw Sugar Futures Contracts |
126 | | | (126 | ) | | ||||||||
Non-Current Assets: |
||||||||||||||
Natural Gas and Raw Sugar Futures Contracts |
468 | | | (468 | ) | | ||||||||
Non-Current Liabilities: |
||||||||||||||
Natural Gas and Raw Sugar Futures Contracts |
13 | | | (13 | ) | |
Fair value hierarchy levels are as follows:
| Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| Level 2Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; |
| Level 3Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. These inputs may be used with internally developed methodologies that are used to generate managements best estimate of fair value. |
10. DERIVATIVE INSTRUMENTS
We use raw sugar futures and options in our raw sugar purchasing programs and natural gas futures and options to hedge natural gas purchases used in our manufacturing operations. Additionally, we periodically use derivatives to manage interest rate and foreign currency exchange risk. Our objective in the use of derivative instruments is to mitigate commodity price, interest rate or foreign currency exchange risk. Our derivatives hedging activity is supervised by a senior risk management committee which monitors and reports compliance with our risk management policy to the Audit Committee of the Board of Directors.
11
Table of Contents
IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)(Continued)
The majority of our industrial 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 raw sugar quota imports are priced based on the New York Board of Trade (NYBOT) Sugar No. 16 futures contract. We use these futures contracts to price our physical domestic and raw sugar quota 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 NYBOT Sugar No. 11 futures contract. We use these futures contracts to price our world raw purchase commitments, however, these derivative instruments are not designated as cash flow hedges. Additionally we receive short raw sugar futures contracts from certain raw sugar suppliers that are used as pricing mechanisms which are not designated as hedges. We have purchased domestic and world raw sugar futures contracts up to 23 months in advance of the physical purchase.
The Company recognized pre-tax gains of $18.9 million in the three months ended December 31, 2009 and $27.9 million in fiscal year ended September 30, 2009 on domestic raw sugar futures contracts intended to hedge fiscal 2010 and 2011 raw sugar purchases. These derivatives did not qualify for hedge accounting treatment because of the Companys inability to forecast raw sugar purchases as a result of the Port Wentworth start-up during fiscal 2009.
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.
At December 31, 2009 we had the following net futures positions:
Hedge Designation |
Domestic Sugar (cwt) |
World Sugar (cwt) |
Natural Gas (mmbtu) | |||
Cash Flow |
| | 960,000 | |||
Not Designated |
4,838,000 | 642,000 | 210,000 |
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 $11.5 million recorded on the balance sheet for cash held on deposit in margin accounts at December 31, 2009 for the futures positions above. At December 31, 2009 there were no derivative positions to mitigate the risk of interest rates or foreign currency exchange. For the three month period ended December 31, 2009, we did not engage in trading activity with derivatives. The table below shows the location and amounts in the consolidated balance for derivative instruments (in thousands):
Hedge Designation | Fair Value |
Margin Requirements Settled in Cash |
Balance Sheet Total | ||||||||
Current Assets: |
|||||||||||
No. 16 Domestic Sugar Futures Contracts |
Not Designated | $ | 28,002 | $ | (28,002 | ) | | ||||
No. 11 World Sugar Futures Contracts |
Not Designated | 2,461 | (2,461 | ) | | ||||||
Current Liabilities: |
|||||||||||
Natural Gas |
Cash Flow | 474 | (474 | ) | | ||||||
Natural Gas |
Not Designated | 33 | (33 | ) | | ||||||
Non-Current Assets: |
|||||||||||
No. 16 Domestic Sugar Futures Contracts |
Not Designated | 351 | (351 | ) | |
12
Table of Contents
IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)(Continued)
The impact of futures contracts on the consolidated income statement for fiscal 2010 is presented below:
Hedge Designation |
Income Statement Line Item |
Three Months Ended December 31, 2009 | |||||||||||
Domestic Sugar |
World Sugar | Natural Gas | |||||||||||
Cash Flow |
Cost of Sales(1) | $ | | $ | | $ | 341 | ||||||
Cash Flow |
Accumulated other comprehensive loss | | | 536 | |||||||||
Not Designated |
Cost of Sales (credit) | (18,866 | ) | (52 | ) | 73 |
(1) | Amounts were reclassified from accumulated other comprehensive income. |
There were no gains or losses recognized on cash flow hedges for ineffectiveness, nor were there any portion of derivatives excluded from the effectiveness assessment. Approximately $0.5 million of losses on cash flow hedges for natural gas is expected to be reclassified to earnings over the next twelve months.
11. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in Accumulated Other Comprehensive Income for the quarter ended December 31, 2009 are as follows:
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, 2009 |
$ | 25 | $ | (69,820 | ) | $ | (114 | ) | $ | (69,909 | ) | |||||
Change in Derivative Fair Value (Net of Tax of $193,000) |
(343 | ) | (343 | ) | ||||||||||||
Reclassification from Accumulated Other Comprehensive Income (Loss) to Net Income (Net of Tax of $122,000) |
218 | 218 | ||||||||||||||
Foreign Currency Translation Adjustment (Net of Tax of $40,000) |
72 | 72 | ||||||||||||||
Balance December 31, 2009 |
$ | (100 | ) | $ | (69,820 | ) | $ | (42 | ) | $ | (69,962 | ) | ||||
13
Table of Contents
Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This discussion should be read in conjunction with information contained in the Consolidated Financial Statements and the notes thereto and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.
Overview
We operate in a single domestic business segment, the production and sale of refined sugar and related products. Our results of operations substantially depend on market factors, including the demand for and price of refined sugar, the price of raw cane sugar and the availability and price of energy and other resources. These factors are influenced by a variety of external forces that we are unable to predict, including the number of domestic acres contracted to grow sugar cane and sugar beets, prices of competing crops, supply and price of raw cane sugar in the world, domestic dietary trends, competing sweeteners, weather conditions, production outages at key industry facilities and the United States and Mexican farm and trade policies. The domestic sugar industry is subject to substantial influence by legislative and regulatory actions. The 2008 Farm Bill limits the importation of raw cane sugar and the marketing of refined beet and raw cane sugar, potentially affecting refined sugar sales prices and volumes as well as the supply and cost of raw material available to our cane refineries.
The Company experienced an explosion and fire on February 7, 2008, at its sugar refinery in Port Wentworth, Georgia, which is located near Savannah, Georgia. Production at the refinery, which comprises approximately 60% of our capacity, was suspended after the accident until we commenced limited bulk sugar production in the summer of 2009. Packaged production on certain lines began in September 2009. Installation of the remaining packaging lines was completed during the quarter ended December 31, 2009 and the refined silo storage facilities were operational in early January 2010.
Results of Operations
Three Months Ended December 31, 2009 compared to Three Months Ended December 31, 2008
For the three months ended December 31, 2009, we reported income from continuing operations of $178.1 million or $15.11 per basic share, compared to a loss of $0.6 million or $0.05 per basic share during the first fiscal quarter of the prior year. The recognition of insurance and derivative gains has had a significant impact on our reported earnings. In December 2009 the Company settled the property insurance claim relating to the Port Wentworth accident and recorded pretax gains totaling $278.5 million ($178.2 million after tax) in the quarter. Excluding these insurance gains, loss from continuing operations was $92,000. The domestic raw sugar market rose dramatically during the second half of calendar 2009, resulting in first quarter gains of $18.9 million recognized on derivative contracts intended to hedge raw sugar purchases primarily for the balance of fiscal 2010. These gains do not qualify for hedge accounting treatment. Partially offsetting these gains were approximately $8.8 million of higher raw sugar costs resulting from derivative gains recognized in the fourth quarter of fiscal 2009 which were intended to hedge the first quarters raw sugar purchases. We discuss these and other factors in more detail below.
Sugar sales comprised approximately 98% of our net sales in the quarter ended December 31, 2009 and 97% in the prior year. Sugar sales volumes and prices were:
Three Months Ended December 31, | ||||||||||
2009 | 2008 | |||||||||
Volume | Price | Volume | Price | |||||||
(000 cwt) | (per cwt) | (000 cwt) | (per cwt) | |||||||
Sugar Sales: |
||||||||||
Industrial |
2,484 | $ | 32.04 | 1,190 | $ | 30.36 | ||||
Consumer |
1,264 | 43.66 | 1,170 | 38.34 | ||||||
Distributor |
770 | 38.38 | 637 | 34.19 | ||||||
Domestic Sales |
4,518 | 36.37 | 2,997 | 34.29 | ||||||
World Sales |
185 | 32.30 | 120 | 24.09 | ||||||
Sugar Sales |
4,703 | $ | 36.21 | 3,117 | $ | 33.90 | ||||
14
Table of Contents
Net sales increased 59.9% for the three months ended December 31, 2009, compared to the same period in the prior year. Domestic sugar volumes increased 50.8% for the quarter primarily due to the additional production from the Port Wentworth refinery partially offset by lower volumes of sugar purchased from other producers. Domestic sales prices increased 6.1% for the quarter. Sugar production from the domestic sugar beet crop harvested in the fall of 2009, which is forecasted by the USDA to be 5.6% higher than the prior year, is still significantly below recent historical levels. Additionally, imports from Mexico in fiscal 2010 are forecasted to be 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 sugar prices, has 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. The Company continued to fulfill lower-priced contracts which existed at the time of the Port Wentworth accident in February 2008, dampening the effect of higher prices in the current quarter. Fulfillment of these contracts was substantially completed by December 31, 2009, and amounted to 18% of the combined sales in the industrial and distributor channels in the current quarter. Industrial and distributor sales prices are expected to continue to rise during the balance of fiscal 2010 as new contracts commence at higher price levels.
For the three months ended December 31, 2009, gross margin as a percentage of sales increased to 7.1% compared to a negative (2.7%) in the prior year quarter. The increase in gross margin percentage is primarily due to higher refined sugar prices and gains on raw sugar derivatives which were intended to hedge raw sugar purchases later in fiscal 2010.
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 USDA actions on imports imposed by the 2008 Farm Bill have pushed domestic raw sugar prices higher. The Company has announced price increases to attempt to offset the increase in raw sugar cost, however there can be no assurance that we will be successful in achieving sales price increases sufficient to offset these higher raw sugar costs.
Raw sugar derivative gains recognized in fiscal 2009 and the first quarter of fiscal 2010, which were intended to hedge future sugar purchases were as follows:
Raw Sugar Futures Derivative Gains
(In Millions)
Recognized In | Futures Contract Delivery Period | ||||||||||||||||||
Year Ended September 30, |
Quarter Ended December 31, 2009 |
Quarter Ended | Year Ended September 30, 2011 | ||||||||||||||||
December 31, 2009 |
March 31, 2010 |
June 30, 2010 |
September 30, 2010 |
||||||||||||||||
$ | 27.9 | $ | 8.8 | $ | 10.0 | $ | 5.7 | $ | 2.9 | $ | 0.5 | ||||||||
$ | 18.9 | $ | 7.0 | $ | 7.9 | $ | 3.4 | $ | 0.6 |
The recognition of these gains will result in higher raw sugar cost in future periods.
Our cost of domestic raw cane sugar increased from $21.68 per cwt (on a raw market basis) for the prior years first quarter to $25.19 per cwt for the quarter ended December 31, 2009. The current quarters raw sugar cost reflects that $8.8 million of derivative gains recognized in fiscal 2009 was not available as originally intended to reduce cost in the current quarter. The higher domestic raw cane sugar cost decreased our gross margin percentage by 9.2% for the three months ended December 31, 2009 compared to the same quarter last year.
Cost of sales also includes $18.9 million of gains on raw sugar futures contracts recognized in the first quarter of fiscal 2010 which positively impacted gross margin by 10.9%. Absent the impact of the $18.9 million of gains recognized in this quarter, along with the $8.8 million of higher raw sugar cost from fiscal 2009 derivative gains, gross margin as a percent of sales would have been 1.4% in the current quarter. In January 2010, the Company recognized $22.6 million of derivative gains on raw sugar futures contracts that will result in higher raw sugar costs in the future. If the balance of our anticipated raw sugar purchases for fiscal 2010 were priced in the domestic sugar futures market on February 5, 2010, our raw sugar costs for fiscal 2010 would be $30.35 per cwt.
15
Table of Contents
Energy costs per cwt were lower than the prior year due to a significant drop in natural gas prices and as a result gross margin improved 3.4%. The Gramercy refinery uses natural gas exclusively and the Port Wentworth refinery is expected to resume usage of coal as its primary energy source in the second quarter of fiscal 2010. Our average NYMEX basis cost of natural gas after applying gains and losses from hedging activity decreased to $4.67 per mmbtu in the current year as compared to $9.86 last year.
Quarter Ended December 31, | ||||||||||
2009 | 2008 | |||||||||
Volume | Price | Volume | Price | |||||||
(000 MMBTU) | (per MMBTU) | (000 MMBTU) | (per MMBTU) | |||||||
Natural Gas |
1,143 | $ | 4.67 | 572 | $ | 9.86 | ||||
Coal |
| | | | ||||||
Fuel Oil |
| | | | ||||||
Total |
1,143 | $ | 4.67 | 572 | $ | 9.86 | ||||
We have purchased or hedged approximately 76% of our expected natural gas requirements for fiscal 2010 at a price of $5.38 per mmbtu. If the balance of our anticipated natural gas purchases were priced in the futures market on February 5, 2010, our natural gas costs would be $5.44 per mmbtu, $6.4 million lower than fiscal 2009.
Transportation costs were lower than the same quarter last year 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 2.2% as a result of these lower transportation costs.
Manufacturing costs increased over the same quarter last year as the Port Wentworth refinery ramped up production volume throughout the first quarter of fiscal 2010. The lower daily production rates in Port Wentworth decreased sugar yield and increased fixed unit costs due to absorption as the refinery ran at approximately 60% of its normal production rate during the current quarter. Gross margin percentage for the quarter was reduced by 1.6% as a result of these increased costs. Following completion of the silo commissioning, the Port Wentworth refinery continues to ramp up production addressing operating challenges as they arise. Volumes and costs in the second fiscal quarter may be affected as the refinery continues to progress to normal production levels.
Selling, general and administrative expense decreased $0.1 million for the quarter ended December 31, 2009 compared to the same period in the prior year primarily due to lower computer related depreciation, offset in part by higher marketing related spending.
The Company settled the Port Wentworth property and business interruption insurance claim in late December for $345.0 million resulting in pretax gains of $278.5 million. We incurred $1.8 million of continuing legal and consulting costs related to the refinery explosion during the current quarter as compared to $14.9 million of charges consisting primarily of cleanup, repairs and continuing payroll costs in the prior year quarter. Details of the settlement of the insurance claim are provided in Note 2 to the Consolidated Financial Statements.
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 the quarter ended December 31, 2008.
As a result of the foregoing, operating income was $277.6 million in the first fiscal quarter compared to an operating loss of $(1.7) million in the first fiscal quarter of the prior year.
16
Table of Contents
Other income, which includes equity investment earnings and distributions from cost basis investments, was virtually unchanged in the three-month period ended December 31, 2009 compared to the same period in the prior year as a significant improvement in Wholesome Sweeteners, Inc. earnings was offset by lower gains on sales of securities. Other income included the following (in thousands of dollars):
Quarter Ended December 31, | ||||||
2009 | 2008 | |||||
Equity Earnings in investment in |
||||||
Mexican marketing Joint Venture |
$ | 97 | $ | 106 | ||
Wholesome Sweeteners, Inc. |
783 | 327 | ||||
Distributions from cost basis fuel terminal partnership |
| 147 | ||||
Gain on sale of securities |
| 388 | ||||
Other |
106 | 48 | ||||
Total |
$ | 986 | $ | 1,016 | ||
We have estimated a combined federal and state income tax rate of 36.0% for the three months ended December 31, 2009 compared to 28.3% in the same period last year. The increase in the effective tax rate is primarily attributable to a change in the accrual for tax uncertainties in fiscal 2009.
Income from discontinued operations in fiscal 2009 is a result of the resolution of pre-disposal contingencies.
Liquidity and Capital Resources
We have rebuilt the portions of the Port Wentworth refinery and packaging operations that were damaged or destroyed in the industrial accident in February 2008. The start up of the refined sugar silos, completed in early January 2010, was the last significant construction component of the rebuild effort. The replacement cost of the damaged facilities at the Port Wentworth refinery is estimated at $230 million and we had spent $196 million on the project through December 31, 2009. The remaining balance of $34 million is expected to be expended over the second and third quarter of fiscal 2010 as final contract retainage is paid to vendors upon completion of performance obligations. Through December 31, 2009, we have received advances on our property insurance claims totaling $300 million and received an additional $45 million in January 2010 in the final claim settlement.
At December 31, 2009, the Company had cash and cash equivalents of $66.4 million. Additionally, as more fully described below, the Company has a revolving credit agreement with Bank of America, N.A. (the Revolver) which provides for up to $100 million (subject to a borrowing base) of senior secured revolving credit loans. At December 31, 2009, we had $60 million of outstanding borrowings and had the capacity under the borrowing base formula to borrow $32.6 million against inventory and receivables, after deducting outstanding letters of credit totaling $7.4 million.
We believe that our available liquidity and capital resources including cash from operations, insurance recoveries, cash balances and existing revolving credit agreement, are sufficient to meet our operating and capital needs, including remaining estimated reconstruction costs and ongoing capital improvements, through fiscal 2010. The recent credit crisis and related turmoil in the global financial system could make the availability of borrowings available to finance any insurance shortfall or other liquidity needs difficult, and the cost of such borrowings expensive.
The Revolver, which expires December 31, 2011, is secured by substantially all of our current assets, certain investments and certain property, plant and equipment. Each of our subsidiaries is either a borrower or a guarantor under the facility. Interest on borrowings under the Revolver is at LIBOR plus a margin that varies (with liquidity, as defined) from 1.00% to 1.75%, or the base rate (Bank of America prime rate) plus a margin of negative 0.25% to positive 0.25%.
The agreement contains covenants limiting our ability to, among other things:
| incur other indebtedness; |
| incur other liens; |
17
Table of Contents
| undergo any fundamental changes; |
| engage in transactions with affiliates; |
| enter into sale and leaseback transactions; |
| change our fiscal periods; |
| enter into mergers or consolidations; |
| sell assets; and |
| prepay other debt. |
In addition, in the event that our average total liquidity (defined as the average of the borrowing base, less average actual borrowings and letters of credit) falls below $20 million, the Revolver requires that we comply with a quarterly covenant which establishes a minimum level of earnings before interest, taxes, depreciation and amortization, as defined (EBITDA). The Revolver limits our ability to pay dividends or repurchase stock if our average total liquidity, after adjustment on a pro forma basis for such transaction, is less than $20 million. Average total liquidity for the quarter ended December 31, 2009 was $98 million.
The Revolver also includes customary events of default, including a change of control. Borrowings will generally be available subject to a borrowing base and to the accuracy of all representations and warranties, including the absence of a material adverse change and the absence of any default or event of default. Although the facility has a final maturity date of December 31, 2011, we classify debt under the Revolver as current, as the agreement contains a subjective acceleration clause if in the opinion of the lenders there is a material adverse effect, and provides the lenders direct access to our cash receipts.
Our capital expenditures for the three months ended December 31, 2009 were $37.6 million including $34.5 million relating to the Port Wentworth rebuild. We expect to spend an additional $34 million in the second and third quarters of this year to complete the Port Wentworth rebuild. Capital expenditures in fiscal 2010, excluding the Port Wentworth rebuild project, are expected to total between $15 million and $20 million, related primarily to safety improvements and normal equipment replacement, and includes approximately $6.0 million of improvements we are obligated to complete in connect with the LSR joint venture agreements.
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, 2009.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We use raw sugar futures and options in our raw sugar purchasing programs and natural gas futures and options to hedge natural gas purchases used in our manufacturing operations. Our derivatives hedging activity is supervised by a senior risk management committee which monitors and reports compliance with our risk management policy to the Audit Committee of the Board of Directors.
The information in the table below presents our domestic and world raw sugar futures positions outstanding as of December 31, 2009.
Expected Maturity Fiscal 2010 |
Expected Maturity Fiscal 2011 |
Expected Maturity Fiscal 2012 | |||||||
Domestic Futures Contracts (net long positions): |
|||||||||
Contract Volumes (cwt) |
4,334,000 | 498,000 | 6,000 | ||||||
Weighted Average Contract Price (per cwt) |
$ | 27.09 | $ | 26.07 | $ | 26.20 | |||
Contract Amount |
$ | 117,397,000 | $ | 12,994,000 | $ | 147,000 | |||
Weighted Average Fair Value (per cwt) |
$ | 33.38 | $ | 28.19 | $ | 26.43 | |||
Fair Value |
$ | 144,694,000 | $ | 14,049,000 | $ | 148,000 |
18
Table of Contents
Expected Maturity Fiscal 2010 | |||
World Futures Contracts (net long positions): |
|||
Contract Volumes (cwt) |
642,000 | ||
Weighted Average Contract Price (per cwt) |
$ | 23.12 | |
Contract Amount |
$ | 14,835,000 | |
Weighted Average Fair Value (per cwt) |
$ | 26.95 | |
Fair Value |
$ | 17,295,000 |
The above information does not include either our physical inventory or our fixed price purchase commitments for raw sugar. At December 31, 2008, our domestic futures position was a net long position of 336,000 cwt at an average contract price of $20.58 and an average fair value price of $18.77. Our world futures position at December 31, 2008 was a net long position of 676,480 cwt at an average contract price of $14.07 and an average fair value price of $11.81.
The information in the table below presents our natural gas futures positions outstanding as of December 31, 2009.
Expected Maturity Fiscal 2010 |
Expected Maturity Fiscal 2011 | |||||
Futures Contracts (long positions): |
||||||
Contract Volumes (mmbtu) |
1,110,000 | 60,000 | ||||
Weighted Average Contract Price (per mmbtu) |
$ | 6.03 | $ | 6.95 | ||
Contract Amount |
$ | 6,692,000 | $ | 417,000 | ||
Weighted Average Fair Value (per mmbtu) |
$ | 5.61 | $ | 6.22 | ||
Fair Value |
$ | 6,229,000 | $ | 373,000 |
At December 31, 2008, our natural gas futures position was a long position of 970,000 mmbtu with an average contract price of $9.37 and an average fair value price of $5.85.
At December 31, 2009 and 2008, we had no interest rate derivatives which were sensitive to interest rate changes.
Item 4. | CONTROLS AND PROCEDURES |
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2009, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in our internal controls over financial reporting that occurred during the three months ended December 31, 2009, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
19
Table of Contents
PART II - OTHER INFORMATION
Item 1. | Legal Proceedings |
The Company is party to a number of claims, including forty-eight lawsuits brought on behalf of thirty-nine employees or their families and thirty one, third parties or their families, for injuries and losses suffered as a result of the Port Wentworth refinery accident. 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 Companys general liability policy provides for coverage for damages to third parties up to a policy limit of $100 million. While the Company believes it has meritorious defenses in this litigation, and 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 exceeding the $100 million policy limit is remote.
Following the Port Wentworth accident, the U.S. Occupational Safety Health Administration (OSHA) conducted investigations at the Companys Port Wentworth and Gramercy refineries. OSHA concluded its Port Wentworth and Gramercy investigations on July 25, 2008, and issued numerous citations with total proposed penalties of $5.1 million in Port Wentworth and $3.7 million in Gramercy. Additionally, OSHA issued requirements for certain abatement actions to be undertaken by the Company at the Port Wentworth and Gramercy facilities. The Company has contested all of the citations and proposed penalties regarding the Port Wentworth and Gramercy investigations, and these matters have been assigned to the Occupational Safety and Health Review Commission for a review of the merits of the citations, proposed penalties and abatement actions. Trial dates for administrative law hearings have been set for May and June 2010.
Discovery in the OSHA matters is on-going and the Company is unable to predict the final outcome of this matter with certainty. The Company believes that it is probable that it will incur a loss estimated to be approximately $6.0 million, and accordingly, recorded a liability in the consolidated financial statements. OSHA penalties are not covered by insurance, and are not deductible for federal income tax purposes.
On July 31, 2008, the Board of Directors received a letter from an attorney representing a stockholder of the Company requesting, among other things, that the Board cause an independent investigation to be made with respect to alleged mismanagement and breaches of fiduciary duty by the Companys officers, directors and employees relating to the February 7, 2008 explosion at the Companys refinery in Port Wentworth, Georgia. On October 2, 2008, the Board received a similar letter on behalf of another stockholder requesting that the Company commence legal actions against specified officers and directors. The Board of Directors established a committee of independent and disinterested directors on October 23, 2008 with full authority to investigate and address the allegations contained in the stockholder letters described above.
On January 16, 2009, one of such stockholders filed a derivative action in the District Court of Harris County, Texas against twelve current and former directors and officers of the Company and named the Company as a nominal defendant. The action, entitled Delaney v. Sheptor, et al., Cause No. 2009-03145 (Dist. Ct. Tex.), asserts a claim of breach of fiduciary duty against defendants in connection with the February 2008 explosion at the Port Wentworth facility and seeks unspecified damages on behalf of the Company. The action has been stayed pending completion of the investigation by the committee of independent and disinterested directors.
In January 2009, the Company was notified by its workers compensation liability insurance carrier that it anticipates charging the Company approximately $6.4 million as a result of certain loss-based assessments the carrier expected to receive from the state of Georgias Subsequent Injury Trust Fund (SITF). The Companys insurance contract provides that it reimburse the carrier for such SITF assessments. The Company is currently pursuing a possible abatement. The Company is unable to determine the amount of its ultimate liability for this proposed assessment.
Additionally, 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 connection with the sales of certain businesses, the Company made customary representations and warranties, and undertook indemnification obligations with regard to certain of these representations and warranties including financial statements, environmental and tax matters, and the conduct of the businesses prior to the sale. These indemnification obligations are subject to certain deductibles, caps and expiration dates.
Item 1A. | Risk Factors |
There have been no material changes from the risk factors disclosed in Part I, Item 1A, of the Companys Annual Report on Form 10-K for the year ended September 30, 2009.
20
Table of Contents
Item 4. | Submission of Matters to a Vote of Security Holders |
On January 29, 2010, the Company held its annual meeting of shareholders and voted on two proposals.
(1) Three directors were elected with votes cast as follows:
Nominee |
Votes for | Votes against | Abstentions | |||
Directors in Class II Terms expiring at the 2013 Annual Meeting of Shareholders: |
||||||
James J. Gaffney |
7,104,692 | 759,169 | 12,288 | |||
Yves-Andre Istel |
6,987,064 | 875,372 | 13,713 | |||
Ronald C. Kesselman |
7,591,861 | 270,881 | 13,406 |
The following five directors of the Company whose terms of office are scheduled to continue until 2011 or 2012 are as follows:
Gaylord O. Coan
David C. Moran
John C. Sheptor
John E. Stokely
John K. Sweeney
(2) The shareholders ratified the appointment of Deloitte & Touche L.L.P. as the Companys independent registered public accounting firm for the fiscal year ending September 30, 2010, with votes cast as follows:
Votes for |
Votes against | Abstentions | ||
10,002,390 | 34,051 | 22,641 |
Item 6. | Exhibits |
(a) Exhibits
10 |
Amended and Restated Imperial Sugar Company Long Term Incentive Plan dated as of January 28, 2010. | |
31.1 |
Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934. | |
31.2 |
Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934. | |
32 |
Certifications required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
21
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
IMPERIAL SUGAR COMPANY | ||||
(Registrant) | ||||
Dated: February 8, 2010 | By: | /s/ H. P. Mechler | ||
H. P. Mechler | ||||
Senior Vice President and Chief Financial Officer |
22
Table of Contents
Exhibit Index
Exhibit No. |
Document | |
10 |
Amended and Restated Imperial Sugar Company Long Term Incentive Plan dated as of January 28, 2010. | |
31.1 |
Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934. | |
31.2 |
Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934. | |
32 |
Certifications required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
23