UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
August 31,
2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number 0-11488
Penford Corporation
(Exact name of
registrant as specified in its charter)
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Washington
(State or other jurisdiction
of
incorporation or organization)
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91-1221360
(I.R.S. Employer
Identification No.)
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7094 S. Revere Parkway
Centennial, Colorado
(Address of Principal
Executive Offices)
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80112-3932
(Zip
Code)
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Registrants telephone number, including area code:
(303) 649-1900
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $1.00 par value
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The NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 at least the past
90 days. Yes þ
No o
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 o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See definition of
accelerated filer and large accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one).
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the Registrants Common Stock
held by non-affiliates of the Registrant as of February 26,
2010, the last business day of the Registrants second
quarter of fiscal 2010, was approximately $121.0 million
based upon the last sale price reported for such date on The
NASDAQ Global Market. For purposes of making this calculation,
Registrant has assumed that all the outstanding shares were held
by non-affiliates, except for shares held by Registrants
directors and officers and by each person who owns 10% or more
of the outstanding Common Stock. However, this does not
necessarily mean that there are not other persons who may be
deemed to be affiliates of the Registrant.
The number of shares of the Registrants Common Stock (the
Registrants only outstanding class of stock) outstanding
as of November 3, 2010 was 11,363,272.
Documents Incorporated by Reference
Portions of the Registrants definitive Proxy Statement
relating to the 2011 Annual Meeting of Shareholders are
incorporated by reference into Part III of this
Form 10-K.
PENFORD
CORPORATION
FISCAL YEAR 2010
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
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PART I
Description
of Business
Penford Corporation (which, together with its subsidiary
companies, is referred to herein as Penford or the
Company) is a developer, manufacturer and marketer
of specialty natural-based ingredient systems for food and
industrial ingredient applications, including fuel grade
ethanol. The Companys strategically-located manufacturing
facilities in the United States provide it with broad geographic
coverage of its target markets. The Company has significant
research and development capabilities, which are used in
understanding the complex chemistry of carbohydrate-based
materials and in development applications to address customer
needs.
Penford is a Washington corporation originally incorporated in
September 1983. The Company commenced operations as a
publicly-traded company on March 1, 1984.
Penford operates in two business segments, Industrial
Ingredients and Food Ingredients. Each of the Companys
businesses utilizes the Companys carbohydrate chemistry
expertise to develop starch-based ingredients for value-added
applications that improve the quality and performance of
customers products. Financial information about
Penfords segments and geographic areas is included in
Note 19 to the Consolidated Financial Statements.
Additional information on Penfords two business segments
follows:
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Industrial Ingredients, which in fiscal years 2010, 2009
and 2008 generated approximately 72%, 73% and 72%, respectively,
of Penfords revenue, is a supplier of chemically modified
specialty starches to the paper and packaging industries.
Through a commitment to research and development, Industrial
Ingredients develops customized product applications that help
its customers realize improved manufacturing efficiencies and
advancements in product performance. Industrial Ingredients has
specialty processing capabilities for a variety of modified
starches. Specialty products for industrial applications are
designed to improve the strength and performance of
customers products and efficiencies in the manufacture of
coated and uncoated paper and paper packaging products. These
starches are principally ethylated (chemically modified with
ethylene oxide), oxidized (treated with sodium hypochlorite) and
cationic (carrying a positive electrical charge). Ethylated and
oxidized starches are used in coatings and as binders, providing
strength and printability to fine white, magazine and catalog
paper. Cationic and other liquid starches are generally used in
the paper-forming process in paper production, providing strong
bonding of paper fibers and other ingredients.
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The Companys Industrial Ingredients segment also produces
and sells fuel grade ethanol from its facility in Cedar Rapids,
Iowa. Ethanol production gives the Company the ability to select
an additional output choice to capitalize on changing industry
conditions and selling opportunities. Sales of ethanol in fiscal
years 2010, 2009 and 2008 were 37%, 29% and 3%, respectively, of
this segments reported revenue.
In June 2008, the Companys Cedar Rapids, Iowa plant was
temporarily shut down due to record flooding of the Cedar River
and government-ordered mandatory evacuation of the plant and
surrounding areas. See Note 3 to the Consolidated Financial
Statements.
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Food Ingredients, which in fiscal years 2010, 2009 and
2008 generated approximately 28%, 27% and 28%, respectively, of
Penfords revenue, is a developer and manufacturer of
specialty starches and dextrins to the food manufacturing and
food service industries. Its expertise is in leveraging the
inherent characteristics from potato, corn, tapioca and rice to
help improve its customers product performance. Food
Ingredients specialty starches produced for food
applications are used in coatings to provide crispness, improved
taste and texture, and increased product life for products such
as french fries sold in restaurants. Food-grade starch products
are also used as moisture binders to reduce fat levels, modify
texture and improve color and consistency in a variety of foods
such as canned products, sauces, whole and processed meats, dry
powdered mixes and other food and bakery products.
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Discontinued
Operations
In August 2009, the Companys Board of Directors made a
determination that the Company would exit from the business
conducted by the Companys Australia/New Zealand
Operations. As a result of this determination, on
September 2, 2009, the Company completed the sale of its
subsidiary company, Penford New Zealand Limited (Penford
New Zealand), and on November 27, 2009, the Company
completed the sale of the operating assets of another subsidiary
company, Penford Australia Limited (Penford
Australia), including its two remaining Australian plants.
The Australia/New Zealand Operations developed, manufactured and
marketed ingredient systems, including specialty starches and
sweeteners for food and industrial applications. Until
September 2, 2009, the Company operated a corn wet milling
facility in Auckland, New Zealand through Penford New Zealand.
Until November 27, 2009, the Company operated a corn wet
milling facility in Lane Cove, Australia and a wheat starch
manufacturing facility in Tamworth, Australia through Penford
Australia.
The financial data for the Australia/New Zealand Operations have
been presented as discontinued operations. The financial
statements have been prepared in compliance with the provisions
of Financial Accounting Standards Board Accounting Standards
Codification
205-10,
Presentation of Financial Statements
Discontinued Operations (ASC
205-10).
Accordingly, for all periods presented herein, the Consolidated
Balance Sheets, Statements of Operations and Statements of Cash
Flows have been conformed to this presentation. The
Australia/New Zealand Operations was previously reported as the
Companys third operating segment. See Note 2 to the
Consolidated Financial Statements for further details.
Unless otherwise indicated, all amounts, analyses and
discussions in this Annual Report on
Form 10-K
pertain to the Companys continuing operations.
Raw
Materials
Corn: Penfords North American corn wet
milling plant is located in Cedar Rapids, Iowa, the middle of
the U.S. corn belt. Accordingly, the plant has
truck-delivered corn available throughout the year from a number
of suppliers at prices consistent with those available in the
major U.S. grain markets.
Potato Starch: The Companys facilities
in Idaho Falls, Idaho; Richland, Washington; and Plover,
Wisconsin use starch recovered as by-products from potato
processors as the primary raw material to manufacture modified
potato starches. The Company enters into contracts typically
having durations of one to three years with potato processors in
the United States and Canada to acquire potato-based raw
materials.
Chemicals: The primary chemicals used in the
manufacturing processes are readily available commodity
chemicals. The prices for these chemicals are subject to price
fluctuations due to market conditions.
Natural Gas: The primary energy source for
most of Penfords plants is natural gas. Penford contracts
its natural gas supply with regional suppliers, generally under
short-term supply agreements, and regularly uses futures
contracts to hedge the price of natural gas.
Corn, potato starch, chemicals and natural gas are not currently
subject to availability constraints; however, demand for these
items can significantly affect the prices. Penfords
current potato starch requirements constitute a material portion
of the available North American supply. Penford estimates that
it purchases approximately
50-55% of
the recovered potato starch in North America. It is possible
that, in the long term, continued growth in demand for potato
starch-based ingredients and new product development could
result in capacity constraints.
Over half of the Companys manufacturing costs consist of
the costs of corn, potato starch, chemicals and natural gas. The
remaining portion consists of the costs of labor, distribution,
depreciation and maintenance of manufacturing plant and
equipment, and other utilities. The prices of raw materials may
fluctuate, and increases in costs may affect Penfords
business adversely. To mitigate this risk, Penford hedges a
portion of corn and gas purchases with futures and options
contracts in the U.S. and enters into short-term supply
agreements for other production requirements.
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Research
and Development
Penfords research and development efforts cover a range of
projects including technical service work focused on specific
customer support projects which require coordination with
customers research efforts to develop innovative solutions
to specific customer requirements. These projects are
supplemented with longer-term, new product development and
commercialization initiatives. Research and development expenses
were $4.4 million, $4.3 million and $5.7 million
for fiscal years 2010, 2009 and 2008, respectively.
At the end of fiscal 2010, Penford had 23 scientists, including
six with a Ph.D. degree with expert knowledge of carbohydrate
characteristics and chemistry.
Patents,
Trademarks and Trade Names
Penford owns a number of patents, trademarks and trade names.
The Company has approximately 58 current patents and pending
patent applications, most of which are related to technologies
in french fry coatings, coatings for the paper industry, and
animal and human nutrition. Penfords issued patents expire
at various times between 2012 and 2027. The annual cost to
maintain all of the Companys patents is not significant.
Most of Penfords products are currently made with
technology that is broadly available to companies that have the
same level of scientific expertise and production capabilities
as Penford.
Specialty starch ingredient brand names for industrial
applications include, among others,
Penford®
gums,
Pensize®
binders,
Penflex®
sizing agent,
Topcat®
cationic additive and the
Apollo®
starch series. Product brand names for food ingredient
applications include
PenBind®,
PenCling®
and
PenPlus®.
Quarterly
Fluctuations
Penfords revenues and operating results vary from quarter
to quarter. Sales volumes of the Food Ingredients products used
in french fry coatings are generally lower during Penfords
second fiscal quarter due to decreased consumption of french
fries during the post-holiday season. The cost of natural gas in
North America is generally higher in the winter months than the
summer months.
Working
Capital
The Companys growth is funded through a combination of
cash flows from operations and short- and long-term borrowings.
For more information, see the Liquidity and Capital
Resources section under Managements Discussion
and Analysis of Financial Condition and Results of
Operations in Item 7 and the audited consolidated
financial statements and the related notes included elsewhere in
this Annual Report on
Form 10-K.
Penford generally carries a one- to
45-day
supply of materials required for production, depending on the
lead time for specific items. Penford manufactures finished
goods to customer orders or anticipated demand. The Company is
therefore able to carry less than a
30-day
supply of most products. Terms for trade receivables and trade
payables are standard for the industry and region and generally
do not exceed
30-45 day
terms except for trade receivables for export sales.
Environmental
Matters
Penfords operations are governed by various federal,
state, and local environmental laws and regulations. These laws
and regulations include the Clean Air Act, the Clean Water Act,
the Resource Conservation and Recovery Act, the EPA Oil
Pollution Control Act, the Occupational Safety and Health
Administrations hazardous materials regulations, the Toxic
Substances Control Act, the Comprehensive Environmental Response
Compensation and Liability Act, and the Superfund Amendments and
Reauthorization Act.
Permits are required by the various environmental agencies that
regulate the Companys operations. Penford believes that it
has obtained all necessary material environmental permits
required for its operations. Penford believes that its
operations are in compliance with applicable environmental laws
and regulations in all material aspects of its business. Penford
estimates that annual compliance costs, excluding operational
costs for emission control devices, wastewater treatment or
disposal fees, are approximately $1.1 million.
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Penford has adopted and implemented a comprehensive
corporate-wide environmental management program. The program is
managed and designed to structure the conduct of Penfords
business in a safe and fiscally responsible manner that protects
and preserves the health and safety of employees, the
communities surrounding the Companys plants, and the
environment. The Company continuously monitors environmental
legislation and regulations that may affect Penfords
operations.
During fiscal 2010, compliance with environmental regulations
did not have a material impact on the Companys operations.
No unusual expenditures for environmental facilities and
programs are anticipated in fiscal 2011.
Principal
Customers
Penford sells to a variety of customers and has several
relatively large customers in each business segment. The
Companys sales of ethanol to its sole ethanol customer,
Eco-Energy, Inc., represented approximately 27%, 21% and 2% of
the Companys net sales for fiscal years 2010, 2009 and
2008, respectively. Eco-Energy, Inc. is a marketer and
distributor of bio-fuels in the United States and Canada. The
Companys second largest customer, Domtar, Inc.,
represented approximately 8%, 11% and 15% of the Companys
net sales for fiscal years 2010, 2009 and 2008, respectively.
Domtar, Inc. and Eco-Energy are customers of the Companys
Industrial Ingredients business.
Competition
In its primary markets, Penford competes directly with
approximately five other companies that manufacture specialty
starches for the papermaking industry, approximately six other
companies that manufacture specialty food ingredients, and
numerous producers of fuel grade ethanol. Penford competes
indirectly with a larger number of companies that provide
synthetic and natural-based ingredients to industrial and food
customers. Some of these competitors are larger companies, and
have greater financial and technical resources than Penford.
Application expertise, quality and service are the major
competitive advantages for Penford.
Employees
At August 31, 2010, Penford had 330 employees, of
which approximately 40% were members of a trade union. The
collective bargaining agreement covering the Cedar Rapids-based
manufacturing workforce expires in August 2012.
Sales and
Distribution
Sales are generated using a combination of direct sales and
distributor agreements. In many cases, Penford supports its
sales efforts with technical and advisory assistance to
customers. Penford generally ships its products upon receipt of
purchase orders from its customers and, consequently, backlog is
not significant.
Since Penfords customers are generally other manufacturers
and processors, most of the Companys products are
distributed via rail or truck to customer facilities in bulk.
Export
Sales
Export sales from Penfords businesses in the
U.S. accounted for approximately 9%, 8% and 11% of total
sales in fiscal 2010, 2009 and 2008, respectively. See
Note 19 to the Consolidated Financial Statements for sales
by country to which the product was shipped.
Available
Information
Penfords Internet address is www.penx.com. The
Company makes available, free of charge through its Internet
site, the Companys annual reports on
Form 10-K;
quarterly reports on
Form 10-Q;
current reports on
Form 8-K;
Directors and Officers Forms 3, 4 and 5; and amendments to
those reports, as soon as reasonably practicable after
electronically filing such materials with, or furnishing them
to, the Securities and Exchange Commission (SEC).
The information found on Penfords web site will not be
considered to be part of this or any other report or other
filing filed with or furnished to the SEC. The SEC also
maintains an Internet site which
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contains reports, proxy and information statements, and other
information regarding issuers that file information
electronically with the SEC. The SECs Internet address is
www.sec.gov.
In addition, the Company makes available, through the Investor
Relations section of its Internet site, the Companys Code
of Business Conduct and Ethics and the written charters of the
Audit, Governance and Executive Compensation and Development
Committees.
Executive
Officers of the Registrant
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Name
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Age
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Title
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Thomas D. Malkoski
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President and Chief Executive Officer
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Steven O. Cordier
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Senior Vice President, Chief Financial Officer and Assistant
Secretary
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Timothy M. Kortemeyer
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Vice President and President, Industrial Ingredients
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Wallace H. Kunerth
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Vice President and Chief Science Officer
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Christopher L. Lawlor
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Vice President Human Resources, General Counsel and
Secretary
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John R. Randall
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Vice President and President, Food Ingredients
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Mr. Malkoski joined Penford Corporation as Chief
Executive Officer and was appointed to the Board of Directors in
January 2002. He was named President of Penford Corporation in
January 2003. From 1997 to 2001, he served as President and
Chief Executive Officer of Griffith Laboratories, North America,
a formulator, manufacturer and marketer of ingredient systems to
the food industry. Previously, he served in various senior
management positions, including as Vice President/Managing
Director of the Asia Pacific and South Pacific regions for
Chiquita Brands International, an international marketer and
distributor of bananas and other fresh produce.
Mr. Malkoski began his career at the Procter and Gamble
Company, a marketer of consumer brands, progressing through
major product category management responsibilities.
Mr. Malkoski holds a Masters of Business Administration
degree from the University of Michigan.
Mr. Cordier is Penfords Senior Vice President,
Chief Financial Officer and Assistant Secretary. He joined
Penford in July 2002 as Vice President and Chief Financial
Officer, and was promoted to Senior Vice President in November
2004. From September 2005 to April 2006, Mr. Cordier served
as the interim Managing Director of Penfords Australian
and New Zealand operations. He came to Penford from Sensient
Technologies Corporation, a manufacturer of specialty products
for the food, beverage, pharmaceutical and technology
industries, where he held a variety of senior financial
management positions.
Mr. Kortemeyer has served as Vice President of
Penford Corporation since October 2005 and President, Industrial
Ingredients since June 2006. He served as General Manager of
Penford Products from August 2005 to June 2006.
Mr. Kortemeyer joined Penford in 1999 and served as a Team
Leader in the manufacturing operations of Penford Products until
2001. From 2001 until 2003, he was an Operations Manager and
Quality Assurance Manager. From July 2003 to November 2004,
Mr. Kortemeyer served as the business unit manager of the
Companys co-products business, and from November 2004
until August 2005, as the director of the Companys
specialty starches product lines, responsible for sales,
marketing and business development.
Dr. Kunerth has served as Penfords Vice
President and Chief Science Officer since 2000. From 1997 to
2000, he served in food applications research management
positions in the Consumer and Nutrition Sector at Monsanto
Company, a provider of hydrocolloids, high intensity sweeteners,
agricultural products and integrated solutions for industrial,
food and agricultural customers. Before Monsanto, he was the
Vice President of Technology at Penfords food ingredients
business from 1993 to 1997.
Mr. Lawlor joined Penford in April 2005 as Vice
President-Human Resources, General Counsel and Secretary. From
2002 to April 2005, Mr. Lawlor served as Vice
President-Human Resources for Sensient Technologies Corporation,
a manufacturer of specialty chemicals and food products. From
2000 to 2002, he was Assistant General Counsel for Sensient.
Mr. Lawlor was Vice President-Administration, General
Counsel and Secretary for Kelley Company, Inc., a manufacturer
of material handling and safety equipment from 1997 to 2000.
Prior to
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joining Kelley Company, Mr. Lawlor was employed as an
attorney at a manufacturer of paper and packaging products and
in private practice with two national law firms.
Mr. Randall is Vice President of Penford Corporation
and President, Food Ingredients. He joined Penford in February
2003 as Vice President and General Manager of Penford Food
Ingredients and was promoted to President of the Food
Ingredients division in June 2006. Prior to joining Penford,
Mr. Randall was Vice President, Research &
Development/Quality Assurance of Griffith Laboratories, USA, a
specialty foods ingredients business, from 1998 to 2003. From
1993 to 1998, Mr. Randall served in various research and
development positions with KFC Corporation, a quick-service
restaurant business, most recently as Vice President, New
Product Development. Prior to 1993, Mr. Randall served in
research and development leadership positions at Romanoff
International, Inc., a manufacturer and marketer of gourmet
specialty food products, and at Kraft/General Foods.
Risks
Related to Penfords Business
The
availability and cost of agricultural products Penford purchases
are vulnerable to weather and other factors beyond its control.
The Companys ability to pass through cost increases for
these products is limited by worldwide competition and other
factors.
In fiscal 2010, approximately 40% of Penfords
manufacturing costs were the costs of corn, potato starch and
other agricultural raw materials. Weather conditions, plantings,
government programs and policies, and energy costs and global
supply, among other things, have historically caused volatility
in the supply and prices of these agricultural products. Due to
local and/or
international competition, the Company may not be able to pass
through the increases in the cost of agricultural raw materials
to its customers. To manage price volatility in the commodity
markets, the Company may purchase inventory in advance or enter
into exchange traded futures or options contracts. Despite these
hedging activities, the Company may not be successful in
limiting its exposure to market fluctuations in the cost of
agricultural raw materials. Increases in the cost of corn,
potato starch and other agricultural raw materials due to
weather conditions or other factors beyond Penfords
control and that cannot be passed through to customers will
reduce Penfords future profitability.
Increases
in energy and chemical costs may reduce Penfords
profitability.
Energy and chemicals comprised approximately 12% and 11%,
respectively, of the cost of manufacturing the Companys
products in fiscal 2010. Penford uses natural gas extensively in
its Industrial Ingredients business to dry starch products, and,
to a lesser extent, in the Food Ingredients business. The
Company uses chemicals in all of the businesses to modify starch
for specific product applications and customer requirements. The
prices of these inputs to the manufacturing process fluctuate
based on anticipated changes in supply and demand, weather and
the prices of alternative fuels, including petroleum. The
Company may use short-term purchase contracts or exchange traded
futures or option contracts to reduce the price volatility of
natural gas; however, these strategies are not available for the
chemicals the Company purchases. If the Company is unable to
pass on increases in energy and chemical costs to its customers,
margins and profitability would be adversely affected.
The
loss of a major customer could have an adverse effect on
Penfords results of operations.
The Companys sales of ethanol to its sole ethanol
customer, Eco-Energy, Inc., represented approximately 27%, 21%
and 2% of the Companys net sales for fiscal years 2010,
2009 and 2008, respectively. Eco-Energy, Inc. is a marketer and
distributor of bio-fuels in the United States and Canada. The
Companys second largest customer, Domtar, Inc.,
represented approximately 8%, 11% and 15% of the Companys
net sales for fiscal years 2010, 2009 and 2008, respectively.
Sales to the top ten customers represented 65%, 69% and 62% of
net sales for fiscal years 2010, 2009 and 2008, respectively.
Generally, the Company does not have multi-year sales agreements
with its customers. Many customers place orders on an as-needed
basis and generally can change their suppliers without penalty.
If Penford lost one or more major customers, or if one or more
major customers significantly reduced its orders, sales and
results of operations would be adversely affected.
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The
Company is substantially dependent on its manufacturing
facilities; any operational disruption could result in a
reduction of the Companys sales volumes and could cause it
to incur substantial losses.
Penfords revenues are, and will continue to be, derived
from the sale of starch-based ingredients and ethanol that the
Company manufactures at its facilities. The Companys
operations may be subject to significant interruption if any of
its facilities experiences a major accident or is damaged by
severe weather or other natural disasters, as occurred as a
result of the flood of the Cedar River at the Companys
Cedar Rapids, Iowa facility in fiscal 2008. In addition, the
Companys operations may be subject to labor disruptions
and unscheduled downtime, or other operational hazards inherent
in the industry, such as equipment failures, fires, explosions,
abnormal pressures, blowouts, pipeline ruptures, transportation
accidents and natural disasters. Some of these operational
hazards may cause personal injury or loss of life, severe damage
to or destruction of property and equipment or environmental
damage, and may result in suspension of operations and the
imposition of civil or criminal penalties. The Companys
insurance may not be adequate to fully cover the potential
operational hazards described above or that it will be able to
renew this insurance on commercially reasonable terms or at all.
The
agreements governing the Companys debt contain various
covenants that limit its ability to take certain actions and
also require the Company to meet financial maintenance tests,
and Penfords failure to comply with any of the debt
covenants could have a material adverse effect on the
Companys business, financial condition and results of
operations.
The agreements governing Penfords outstanding debt contain
a number of significant covenants that, among other things,
limit its ability to:
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incur additional debt or liens;
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consolidate or merge with any person or transfer or sell all or
substantially all of its assets;
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make investments or acquisitions;
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pay dividends or make certain other restricted payments;
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enter into transactions with affiliates; and
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create dividend or other payment restrictions with respect to
subsidiaries.
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In addition, the Companys revolving credit facility
requires it to comply with specific financial ratios and tests,
under which it is required to achieve specific financial and
operating results. Events beyond the Companys control may
affect its ability to comply with these provisions. A breach of
any of these covenants would result in a default under the
Companys revolving credit facility. In the event of any
default that is not cured or waived, the Companys lenders
could elect to declare all amounts borrowed under the revolving
credit facility, together with accrued interest thereon, due and
payable, which could permit acceleration of other debt. If any
of the Companys debt is accelerated, there is no assurance
that the Company would have sufficient assets to repay that debt
or that it would be able to refinance that debt on commercially
reasonable terms or at all.
Changes
in interest rates may affect Penfords
profitability.
As of August 31, 2010, approximately $18.9 million of
its outstanding debt was subject to variable interest rates
which move in direct relation to the London InterBank Offered
Rate (LIBOR), or the prime rate in the United
States, depending on the selection of borrowing options. Any
significant changes in these interest rates would materially
affect the Companys profitability by increasing or
decreasing its borrowing costs.
Unanticipated
changes in tax rates or exposure to additional income tax
liabilities could affect Penfords
profitability.
The Company is subject to income taxes in the federal and
various state jurisdictions in the United States. The
Companys effective tax rates could be adversely affected
by changes in the mix of earnings in tax jurisdictions with
differing statutory tax rates, changes in the valuation of
deferred tax assets and liabilities or changes in tax laws. The
carrying value of deferred tax assets is dependent on the
Companys ability to generate future taxable income in the
9
United States. The amount of income taxes paid is subject to
interpretation of applicable tax laws in the jurisdictions in
which the Company operates. Although the Company believes it has
complied with all applicable income tax laws, there is no
assurance that a tax authority will not have a different
interpretation of the law or that any additional taxes imposed
as a result of tax audits will not have an adverse effect on the
Companys results of operations.
Pension
expense and the funding of pension obligations are affected by
factors outside the Companys control, including the
performance of plan assets, interest rates, actuarial data and
experience, and changes in laws and regulations.
The future funding obligations for the Companys two
U.S. defined benefit pension plans qualified with the
Internal Revenue Service depend upon the level of benefits
provided for by the plans, the future performance of assets set
aside in trusts for these plans, the level of interest rates
used to determine funding levels, actuarial data and experience
and any changes in government laws and regulations. The pension
plans hold a significant amount of equity and fixed income
securities. When the values of these securities decline, pension
expense can increase and materially affect the Companys
results. Decreases in interest rates that are not offset by
contributions and asset returns could also increase the
Companys obligations under such plans. The Company is
legally required to make contributions to the pension plans in
the future, and those contributions could be material. The
Company expects to contribute $2.3 million to its pension
plans during fiscal 2011.
The
current capital and credit market conditions may adversely
affect the Companys access to capital, cost of capital and
business operations.
The general economic and capital market conditions in the United
States and other parts of the world have deteriorated
significantly and have adversely affected access to capital and
increased the cost of capital. If these conditions continue or
become worse, the Companys future cost of debt and equity
capital and its access to capital markets could be adversely
affected. An inability to obtain adequate financing from debt
and equity sources could force the Company to self-fund
strategic initiatives or even forgo some opportunities,
potentially harming its financial position, results of
operations and liquidity.
Economic
conditions may impair the businesses of the Companys
customers and end user markets, which could adversely affect the
Companys business operations.
As a result of the current economic downturn and macro-economic
challenges currently affecting the economy of the United States
and other parts of the world, the businesses of some of the
Companys customers may not be successful in generating
sufficient revenues. Customers may choose to delay or postpone
purchases from the Company until the economy and their
businesses strengthen. The Companys Industrial Ingredients
business is dependent upon end markets for paper and ethanol in
North America. Paper markets have been under competitive
pressure from imports and over-capacity and may be further
stressed by the continuing economic downturn. Ethanol markets
have been under pressure from declining oil prices and
increasing ethanol production capacity in the United States.
Decisions by current or future customers to forego or defer
purchases
and/or
customers inability to pay the Company for its products
may adversely affect the Companys earnings and cash flow.
Penford
depends on its senior management team; the loss of any member
could adversely affect its operations.
Penfords success depends on the management and leadership
skills of its senior management team. The loss of any of these
individuals, particularly Thomas D. Malkoski, the Companys
President and Chief Executive Officer, or Steven O. Cordier, the
Companys Chief Financial Officer, or the Companys
inability to attract, retain and maintain additional personnel,
could prevent it from fully implementing its business strategy.
There is no assurance that it will be able to retain its
existing senior management personnel or to attract additional
qualified personnel when needed.
10
Penford
is subject to stringent environmental and health and safety
laws, which may require it to incur substantial compliance and
remediation costs, thereby reducing profits.
Penford is subject to many federal, state and local
environmental and health and safety laws and regulations,
particularly with respect to the use, handling, treatment,
storage, discharge and disposal of substances and hazardous
wastes used or generated in its manufacturing processes.
Compliance with these laws and regulations is a significant
factor in the Companys business. Penford has incurred and
expects to continue to incur expenditures to comply with
applicable environmental laws and regulations. The
Companys failure to comply with applicable environmental
laws and regulations and permit requirements could result in
civil or criminal fines or penalties or enforcement actions,
including regulatory or judicial orders enjoining or curtailing
operations or requiring corrective measures, installation of
pollution control equipment or remedial actions.
The Company may be required to incur costs relating to the
investigation or remediation of property, including property
where it has disposed of its waste, and for addressing
environmental conditions. Some environmental laws and
regulations impose liability and responsibility on present and
former owners, operators or users of facilities and sites for
contamination at such facilities and sites without regard to
causation or knowledge of contamination. Consequently, there is
no assurance that existing or future circumstances, the
development of new facts or the failure of third parties to
address contamination at current or former facilities or
properties will not require significant expenditures by the
Company.
The Company expects to continue to be subject to increasingly
stringent environmental and health and safety laws and
regulations. It is difficult to predict the future
interpretation and development of environmental and health and
safety laws and regulations or their impact on the
Companys future earnings and operations. The Company
anticipates that compliance will continue to require increased
capital expenditures and operating costs. Any increase in these
costs, or unanticipated liabilities arising, for example, out of
discovery of previously unknown conditions or more aggressive
enforcement actions, could adversely affect the Companys
results of operations, and there is no assurance that they will
not have a material adverse effect on its business, financial
condition and results of operations.
Penfords
unionized workforce could cause interruptions in the
Companys provision of services.
As of August 31, 2010, approximately 40% of the
Companys 330 employees were members of a trade union.
Although the Companys relations with the relevant union
are stable and the Companys labor contract does not expire
until August 2012, there is no assurance that the Company will
not experience work disruptions or stoppages in the future,
which could have a material adverse effect on its business and
results of operations and adversely affect its relationships
with its customers.
Risk
Factors Relating to Penfords Common Stock
Penfords
stock price has fluctuated significantly; the trading price of
its common stock may fluctuate significantly in the
future.
The trading price of the Companys common stock has
fluctuated significantly. In fiscal 2010, the stock price ranged
from a low of $4.83 on August 31, 2010 to a high of $12.15
on January 19, 2010. The trading price of Penfords
common stock may fluctuate significantly in the future as a
result of a number of factors, including:
|
|
|
|
|
actual and anticipated variations in the Companys
operating results;
|
|
|
|
general economic and market conditions, including changes in
demand for the Companys products;
|
|
|
|
interest rates;
|
|
|
|
geopolitical conditions throughout the world;
|
|
|
|
perceptions of the strengths and weaknesses of the
Companys industries;
|
|
|
|
the Companys ability to pay principal and interest on its
debt when due;
|
|
|
|
developments in the Companys relationships with its
lenders, customers
and/or
suppliers;
|
11
|
|
|
|
|
announcements of alliances, mergers or other relationships by or
between the Companys competitors
and/or its
suppliers and customers; and
|
|
|
|
quarterly variations in the Companys results of operations
due to, among other things, seasonality in demand for products
and fluctuations in the cost of raw materials
|
The stock markets in general have experienced broad fluctuations
that have often been unrelated to the operating performance of
particular companies. These broad market fluctuations may
adversely affect the trading price of the Companys common
stock. Accordingly, Penfords common stock may trade at
prices significantly below an investors cost and investors
could lose all or part of their investment in the event that
they choose to sell their shares.
Provisions
of Washington law could discourage or prevent a potential
takeover.
Washington law imposes restrictions on certain transactions
between a corporation and certain significant shareholders. The
Washington Business Corporation Act generally prohibits a
target corporation from engaging in certain
significant business transactions with an acquiring
person, which is defined as a person or group of persons
that beneficially owns 10% or more of the voting securities of
the target corporation, for a period of five years after such
acquisition, unless the transaction or acquisition of shares is
approved by a majority of the members of the target
corporations board of directors prior to the time of the
acquisition. Such prohibited transactions include, among other
things, (1) a merger or consolidation with, disposition of
assets to, or issuance or redemption of stock to or from, the
acquiring person; (2) a termination of 5% or more of the
employees of the target corporation as a result of the acquiring
persons acquisition of 10% or more of the shares; and
(3) allowing the acquiring person to receive any
disproportionate benefit as a shareholder. After the five year
period, a significant business transaction may occur
if it complies with fair price provisions specified
in the statute. A corporation may not opt out of
this statute.
|
|
Item 1B:
|
Unresolved
Staff Comments
|
None.
Penfords facilities as of August 31, 2010 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bldg. Area
|
|
|
|
|
|
|
|
|
|
|
|
(Approx.
|
|
|
Land Area
|
|
|
Owned/
|
|
|
|
|
|
Sq. Ft.)
|
|
|
(Acres)
|
|
|
Leased
|
|
|
Function of Facility
|
|
Centennial, Colorado
|
|
|
25,200
|
|
|
|
|
|
|
|
Leased
|
|
|
Corporate headquarters, administrative offices and research
laboratories
|
Cedar Rapids, Iowa
|
|
|
759,000
|
*
|
|
|
29
|
|
|
|
Owned
|
|
|
Manufacture of corn starch products, administration offices and
research laboratories
|
Idaho Falls, Idaho
|
|
|
30,000
|
|
|
|
4
|
|
|
|
Owned
|
|
|
Manufacture of potato starch products
|
Richland, Washington
|
|
|
45,000
|
|
|
|
|
|
|
|
Owned
|
|
|
Manufacture of potato and tapioca starch products
|
(one facility consisting of property that is partially owned and
partially leased)
|
|
|
9,600
|
|
|
|
4.9
|
|
|
|
Leased
|
|
|
Administrative office and warehouse
|
Plover, Wisconsin
|
|
|
45,000
|
|
|
|
9.5
|
|
|
|
Owned
|
|
|
Manufacture of potato starch products
|
(two facilities, one of which
|
|
|
|
|
|
|
3.3
|
|
|
|
Leased
|
|
|
Manufacture of potato starch products
|
is located on leased land)
|
|
|
15,000
|
|
|
|
|
|
|
|
Owned
|
|
|
Manufacture of potato starch products
|
|
|
|
* |
|
Approximately 119,150 square feet are subject to a
long-term lease to the purchaser of the Companys former
dextrose business |
12
Penfords production facilities are strategically located
near sources of raw materials. The Company believes that its
facilities are maintained in good condition and that the
capacities of its plants are sufficient to meet current
production requirements. The Company invests in expansion,
improvement and maintenance of property, plant and equipment as
required.
|
|
Item 3:
|
Legal
Proceedings
|
As previously reported, the Company filed suit on
January 23, 2009, in the U.S. District Court for the
Northern District of Iowa, Cedar Rapids Division, against two
insurance companies, National Union Fire Insurance Company of
Pittsburgh, Pennsylvania, owned by American International Group,
Inc. (AIG), and ACE American Insurance Company
(ACE), related to insurance coverage arising out of
the flood that struck the Companys Cedar Rapids, Iowa
plant in June 2008. On January 19, 2010, the presiding
judge ruled that flood coverage language contained in the
applicable insurance policy was ambiguous and that,
accordingly, the interpretation of the policy was a
question of fact reserved for a jury. A jury trial was
subsequently conducted in Cedar Rapids during mid-August 2010.
After seven days of trial, the presiding judge dismissed the
Companys claims without issuing a written opinion. On
September 14, 2010, the Company filed a notice of appeal
with the United States Court of Appeals for the Eighth Circuit
(the Eighth Circuit). On October 4, 2010, the
Company filed a Statement of Issues with the Eighth Circuit in
which it noted its intention to present for appellate review
whether, among other things, the presiding judge erred in
dismissing the Companys suit. Through its appeal, the
Company will continue its effort to seek additional payments
from AIG and ACE for approximately $25 million for business
interruption losses that occurred as a result of the flood. The
Company expects the current appeal process to last through
mid-2011. The Company cannot at this time determine the
likelihood of any outcome of its appeal or estimate the amount
of any judgment that might be awarded.
In October 2004, Penford Products Co. (Penford
Products), a wholly-owned subsidiary of the Company, was
sued by a customer in the Fourth Judicial District Court,
Ouachita Parish, Louisiana. The customer sought monetary damages
for Penford Products alleged breach of an agreement to
supply the customer with certain starch products during the 2004
strike affecting Penford Products Cedar Rapids, Iowa
plant. In May 2008, the trial judge ruled against Penford
Products. In fiscal year 2008, the Company elected to satisfy
the judgment and waive appeal rights by paying the customer
approximately $3.8 million. The Company had previously
reserved $2.4 million against this matter in fiscal year
2007.
The Company is involved from time to time in various other
claims and litigation arising in the normal course of business.
In the judgment of management, which relies in part on
information obtained from the Companys outside legal
counsel, the ultimate resolution of these other matters will not
materially affect the consolidated financial position, results
of operations or liquidity of the Company.
13
PART II
|
|
Item 5:
|
Market
for the Registrants Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities
|
Market
Information and Holders of Common Stock
Penfords common stock, $1.00 par value, trades on The
NASDAQ Global Market under the symbol PENX. On
November 3, 2010, there were 440 shareholders of
record. The high and low closing prices of Penfords common
stock during the last two fiscal years are set forth below.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
|
Fiscal 2009
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
Quarter Ended November 30
|
|
$
|
9.63
|
|
|
$
|
5.68
|
|
|
$
|
19.79
|
|
|
$
|
7.50
|
|
Quarter Ended February 28
|
|
$
|
12.15
|
|
|
$
|
7.94
|
|
|
$
|
12.47
|
|
|
$
|
4.88
|
|
Quarter Ended May 31
|
|
$
|
11.68
|
|
|
$
|
7.44
|
|
|
$
|
6.72
|
|
|
$
|
2.07
|
|
Quarter Ended August 31
|
|
$
|
8.25
|
|
|
$
|
4.83
|
|
|
$
|
7.95
|
|
|
$
|
5.19
|
|
Dividends
During each quarter of the first half of fiscal year 2009, the
Board of Directors declared a $0.06 per share cash dividend.
In April 2009, the Board of Directors suspended payment of
dividends. The Company may not declare or pay any dividends on
its common stock without first obtaining approval from the
holders of a majority of the Series A Preferred Stock. See
Note 7 to the Consolidated Financial Statements for further
details. During fiscal year 2009, the Company declared dividends
on its common stock of $1.4 million.
Issuer
Purchases of Equity Securities
None
14
Performance
Graph
The following graph compares the Companys cumulative total
shareholder return on its common stock for a five-year period
(September 1, 2005 to August 31, 2010) with the
cumulative total return of the Nasdaq Market Index and all
companies traded on the Nasdaq Stock Market (Nasdaq)
with a market capitalization of $100 - $200 million,
excluding financial institutions. The graph assumes that $100
was invested on September 1, 2005 in the Companys
common stock and in the stated indices. The comparison assumes
that all dividends are reinvested. The Companys
performance as reflected in the graph is not indicative of the
Companys future performance.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among
penford Corp. the NASDAQ Composite Index
and a peer Group
|
|
|
* |
|
$100 invested on 8/31/05 in stock or index, including
reinvestment of dividends fiscal year ending August 31,
2010. |
ASSUMES $100
INVESTED ON SEPTEMBER 1, 2005
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING AUGUST 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
PENFORD CORPORATION
|
|
|
|
100.00
|
|
|
|
|
109.58
|
|
|
|
|
250.31
|
|
|
|
|
119.10
|
|
|
|
|
46.79
|
|
|
|
|
35.60
|
|
NASDAQ MARKET INDEX (U.S.)
|
|
|
|
100.00
|
|
|
|
|
102.72
|
|
|
|
|
124.11
|
|
|
|
|
110.06
|
|
|
|
|
94.81
|
|
|
|
|
100.82
|
|
NASDAQ MARKET CAP ($100-200M)
|
|
|
|
100.00
|
|
|
|
|
98.04
|
|
|
|
|
104.40
|
|
|
|
|
82.73
|
|
|
|
|
52.32
|
|
|
|
|
44.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management does not believe there is either a published index or
a group of companies whose overall business is sufficiently
similar to the business of Penford to allow a meaningful
benchmark against which the Company can be compared. The Company
sells products based on specialty carbohydrate chemistry to
several distinct markets, making overall comparisons to one of
these markets misleading with respect to the Company as a whole.
For these reasons, the Company has elected to use non-financial
companies traded on Nasdaq with a similar market capitalization
as a peer group.
15
|
|
Item 6:
|
Selected
Financial Data
|
The following table sets forth certain selected financial
information for the five fiscal years as of and for the period
ended August 31, 2010. The amounts have been restated to
reflect the reclassification of discontinued operations and
should be read in conjunction with the consolidated financial
statements and the notes to these statements included in
Item 8.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands, except share and per share data)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
254,274
|
|
|
$
|
255,556
|
|
|
$
|
239,581
|
|
|
$
|
257,944
|
|
|
$
|
223,006
|
|
Cost of sales
|
|
$
|
230,820
|
|
|
$
|
243,265
|
|
|
$
|
194,993
|
|
|
$
|
203,886
|
|
|
$
|
186,610
|
|
Gross margin percentage
|
|
|
9.2
|
%
|
|
|
4.8
|
%
|
|
|
18.6
|
%
|
|
|
21.0
|
%
|
|
|
16.3
|
%
|
Income (loss) from continuing operations(2)
|
|
$
|
(9,629
|
)
|
|
$
|
(6,645
|
)
|
|
$
|
(10,808
|
)(1)
|
|
$
|
11,283
|
(1)
|
|
$
|
2,966
|
|
Income (loss) from discontinued operations(3)
|
|
$
|
16,312
|
|
|
$
|
(58,142
|
)
|
|
$
|
(1,892
|
)
|
|
$
|
2,234
|
|
|
$
|
1,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,683
|
|
|
$
|
(64,787
|
)
|
|
$
|
(12,700
|
)
|
|
$
|
13,517
|
|
|
$
|
4,228
|
|
Diluted earnings (loss) per share from continuing operations
|
|
$
|
(0.84
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
1.22
|
|
|
$
|
0.33
|
|
Diluted earnings (loss) per share from discontinued operations
|
|
$
|
1.41
|
|
|
$
|
(5.21
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
0.24
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.57
|
|
|
$
|
(5.80
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
1.46
|
|
|
$
|
0.47
|
|
Dividends declared per common share
|
|
$
|
|
|
|
$
|
0.12
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
Average common shares and equivalents assuming
dilution
|
|
|
11,600,885
|
|
|
|
11,170,493
|
|
|
|
10,565,432
|
|
|
|
9,283,125
|
|
|
|
9,004,190
|
|
Balance Sheet Data (as of August 31):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
208,408
|
|
|
$
|
258,245
|
|
|
$
|
320,433
|
|
|
$
|
288,388
|
|
|
$
|
250,668
|
|
Capital expenditures
|
|
|
5,980
|
|
|
|
5,379
|
|
|
|
38,505
|
|
|
|
32,782
|
|
|
|
10,582
|
|
Long-term debt
|
|
|
21,038
|
|
|
|
71,141
|
|
|
|
59,860
|
|
|
|
63,403
|
|
|
|
53,171
|
|
Total debt
|
|
|
21,467
|
|
|
|
92,382
|
|
|
|
67,889
|
|
|
|
67,459
|
|
|
|
57,466
|
|
Redeemable preferred stock, Series A(4)
|
|
|
34,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
83,572
|
|
|
|
79,359
|
|
|
|
160,362
|
|
|
|
125,676
|
|
|
|
107,452
|
|
|
|
|
(1) |
|
Includes pre-tax charges of $1.4 million and
$2.4 million in fiscal years 2008 and 2007, respectively,
related to the settlement of litigation. |
|
(2) |
|
In the third quarter of fiscal 2010, the Company refinanced its
bank debt. See Note 8 to the Consolidated Financial
Statements. In connection with the refinancing, the Company
recorded a pre-tax non-cash charge to earnings of approximately
$1.0 million related to unamortized transaction fees
associated with the prior credit facility. In addition, the
Company terminated its interest rate swap agreements with
several banks in the third quarter of fiscal 2010 and recorded a
loss of approximately $1.6 million. In the second quarter
of fiscal 2009, the Companys Food Ingredients business
segment sold assets related to its dextrose product line to a
third-party purchaser and recorded a $1.6 million gain on
the sale. In the fourth quarter of fiscal 2008, the
Companys Cedar |
16
|
|
|
|
|
Rapids, Iowa manufacturing facility suffered severe flooding
which suspended production for most of the fourth quarter. The
Company recorded pre-tax costs of $27.6 million, net of
insurance recoveries in fiscal year 2008 and net insurance
recoveries of $9.1 million in fiscal 2009. See Note 3
to the Consolidated Financial Statements. |
|
(3) |
|
In August 2009, the Company recorded a $33.0 million
non-cash asset impairment charge related to the property, plant
and equipment of the Australia/New Zealand Operations. In the
second quarter of fiscal 2009, the Australia/New Zealand
Operations recorded a $13.8 million non-cash goodwill
impairment charge. See Note 2 to the Consolidated Financial
Statements. In the second quarter of fiscal 2010, the
liquidation of the remaining net assets of Penford Australia was
substantially complete and, as a result, $13.8 of currency
translation adjustments were reclassified from accumulated other
comprehensive income into earnings. Includes a pre-tax gain of
$0.7 million related to the sale of land in New Zealand in
fiscal year 2008. |
|
(4) |
|
On April 7, 2010, the Company issued $40 million of
Series A 15% cumulative non-voting, non-convertible
preferred stock (Series A Preferred Stock) and
100,000 shares of Series B voting convertible
preferred stock (Series B Preferred Stock) in a
private placement to Zell Credit Opportunities Master Fund,
L.P., an investment fund managed by Equity Group Investments, a
private investment firm (the Investor). Proceeds
from the preferred stock issuance of $40.0 million were
used to repay bank debt on April 8, 2010. See Note 7
to the Consolidated Financial Statements. |
|
|
Item 7:
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A)
should be read in conjunction with the Companys
consolidated financial statements and the accompanying notes.
The notes to the Consolidated Financial Statements referred to
in this MD&A are included in Part II Item 8,
Financial Statements and Supplementary Data. Unless
otherwise noted, all amounts and analyses are based on
continuing operations.
Overview
Penford generates revenues, income and cash flows by developing,
manufacturing and marketing specialty natural-based ingredient
systems for industrial and food applications and by producing
and selling fuel grade ethanol. The Company develops and
manufactures ingredients with starch as a base, providing
value-added applications to its customers. Penfords starch
products are manufactured primarily from corn and potatoes and
are used principally as binders and coatings in paper and food
production and as an ingredient in fuel.
In analyzing business trends, management considers a variety of
performance and financial measures, including sales revenue
growth, sales volume growth, and gross margins and operating
income of the Companys business segments. Penford manages
its business in two segments. Industrial Ingredients and Food
Ingredients are broad categories of end-market users, served by
operations in the United States. See Item 1 and
Note 19 to the Consolidated Financial Statements for
additional information regarding the Companys business
segment operations.
Recapitalization
On April 7, 2010, the Company sold $40 million of its
Series A Preferred Stock in a private placement and, on
April 8, 2010, used the proceeds to pay a portion of the
outstanding bank debt obligations under its credit facility.
Also on April 7, 2010, the Company entered into a
$60 million Third Amended and Restated Credit Agreement
(the 2010 Agreement) among the Company; Penford
Products Co.; Bank of Montreal; Bank of America National
Association; and Cooperatieve Centrale Raiffeisen-Boerenleenbank
B.A., Rabobank Nederland New York Branch. Under the
2010 Agreement, the Company may borrow $60 million in
revolving lines of credit and there are no scheduled principal
payments prior to maturity on April 7, 2015. See
Notes 7 and 8 to the Consolidated Financial Statements for
details of the refinancing and preferred stock issuance.
In connection with the refinancing, the Company recorded a
pre-tax non-cash charge to earnings of $1.0 million related
to unamortized transaction fees associated with the prior credit
facility. The Company also terminated its interest rate swaps
and recorded a charge to earnings of $1.6 million related
to amounts recorded in
17
other comprehensive income for the interest rate swaps. See
Notes 7 and 8 to the Consolidated Financial Statements.
Discontinued
Operations
On August 27, 2009, the Companys Board of Directors
made a determination that the Company would exit from the
business conducted by the Companys Australia/New Zealand
Operations. This determination was made upon completion of a
process involving the examination of a range of strategic and
operating choices for the Companys Australia/New Zealand
Operations. The process was undertaken as part of a continuing
program to maximize the Companys asset values and returns.
On September 2, 2009, the Company completed the sale of
Penford New Zealand Limited. On November 27, 2009, the
Companys Australian operating subsidiary, Penford
Australia Limited, completed the sale of substantially all of
its operating assets to two unrelated parties.
The financial data for the Australia/New Zealand Operations have
been presented as discontinued operations. The financial
statements have been prepared in compliance with the provisions
of the Accounting Standards Codification
205-10,
Presentation of Financial Statements
Discontinued Operations (ASC
205-10).
Accordingly, the Consolidated Balance Sheets, Statements of
Operations and Statements of Cash Flows have been conformed to
this presentation. The Australia/New Zealand Operations was
previously reported as the Companys third operating
segment. See Note 2 to the Consolidated Financial
Statements for further details. At August 31, 2010, the
remaining net assets of the Australia/New Zealand Operations,
consisting of $0.3 million of cash and $1.3 million of
other net assets, primarily a receivable from the purchaser of
one of the Companys Australian manufacturing facilities,
have been reported as assets of the continuing operations of the
Company.
Impact
of Cedar River Flooding
On June 12, 2008, the Companys Industrial Ingredients
plant in Cedar Rapids, Iowa was temporarily shut down due to
record flooding of the Cedar River and government-ordered
mandatory evacuation of the plant and surrounding areas. The
Company sustained substantial damage to this facility and the
plant was shut down from mid-June 2008 until the end of August
2008. By the end of August 2008, the Company had begun
manufacturing industrial starch in Cedar Rapids. In late
September 2008, the Company resumed the commercial production
and sale of ethanol.
During the fourth quarter of fiscal 2008, the Company recorded
costs of flood remediation and restoration of
$27.6 million, net of insurance recoveries of
$10.5 million. In fiscal 2009, the Company recorded
flood-related costs of $7.6 million and insurance
recoveries of $16.7 million. See Note 3 to the
Consolidated Financial Statements for details of the flood
restoration costs.
The Company is seeking additional payments from its insurers for
damages arising from the flooding in June 2008 and has filed a
lawsuit against the insurers. See Note 21 to the
Consolidated Financial Statements for additional information
regarding this lawsuit.
Consolidated
Results of Operations
Consolidated fiscal 2010 sales were comparable to the prior
year, decreasing less than one percent to $254.3 million.
Volume improvements in both the industrial ingredients and food
ingredients businesses were offset by unfavorable pricing and
product mix. Although average unit pricing for ethanol improved
during fiscal 2010, the market for industrial starch remained
highly price competitive.
Fiscal 2010 consolidated gross margin increased to
$23.5 million, or 9.2% of sales, from $12.3 million,
or 4.8% of sales, in fiscal 2009. Consolidated gross margin
expanded primarily due to improvements in gross margin at the
Industrial Ingredients business through increased volumes,
favorable ethanol pricing and improved manufacturing yields and
efficiencies. Consolidated operating loss was $4.9 million
in fiscal 2010 compared to an operating loss of
$6.4 million in fiscal 2009. The fiscal 2009 operating loss
included $9.1 million of net insurance recoveries. The
reduction in the operating loss in fiscal 2010 is due to the
improvement in gross margin.
18
Interest expense in fiscal 2010 was $7.5 million compared
with $5.6 million in fiscal 2009. Interest expense
increased in fiscal 2010 due to the increase in the dividend
rate on the Series A Preferred Stock issued in April 2010
over the interest rate for the Companys bank debt plus the
accretion of the discount on the Series A Preferred Stock.
The effective tax rate for fiscal 2010 was 33%. In fiscal 2010,
the effective tax rate was lower than the U.S. federal
statutory rate of 35% primarily due to federal tax incentives
for the production of ethanol offset by nondeductible dividends,
discount accretion on the Companys preferred stock, and
the effect of state taxes. See Note 17 to the Consolidated
Financial Statements.
Accounting
Changes
In December 2008, the Financial Accounting Standards Board
(FASB) issued new authoritative guidance regarding
employer disclosures about postretirement benefit plan assets.
The new guidance requires an employer to disclose information
regarding its investment policies and strategies for its
categories of plan assets, its fair value measurements of plan
assets and any significant concentrations of risk in plan
assets. The new guidance, which was effective September 1,
2009 for the Company, only requires the revised annual
disclosures on a prospective basis. See Note 13 to the
Consolidated Financial Statements for the additional disclosures.
In June 2008, the FASB issued new authoritative guidance for
determining whether unvested share-based payment awards that
contain rights to nonforfeitable dividends are participating
securities prior to vesting and, therefore, included in the
computation of earnings per share pursuant to the two-class
method. The Company adopted the new guidance in the first
quarter of fiscal 2010 and was required to retrospectively
adjust all prior-period earnings per share data. The resulting
impact of the adoption of the new guidance was to include
unvested restricted shares in the computation of basic earnings
per share pursuant to the two-class method which did not have a
material impact on the Companys earnings per share for the
years ending August 31, 2010, 2009 and 2008. See
Note 18 to the Consolidated Financial Statements.
In February 2008, the FASB issued new authoritative guidance
delaying the portions of Accounting Standards Codification
(ASC) 820, Fair Value Measurements and
Disclosures, which required fair value measurements for
non-recurring, nonfinancial assets and liabilities that are
recognized or disclosed at fair value until the Companys
fiscal year 2010. The adoption of this guidance on
September 1, 2009 had no effect on the Companys
financial position or results of operations. See Note 15 to
the Consolidated Financial Statements.
Results
of Operations
Fiscal
2010 Compared to Fiscal 2009
Industrial
Ingredients
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Sales industrial starch
|
|
$
|
115,681
|
|
|
$
|
131,709
|
|
Sales ethanol
|
|
|
68,335
|
|
|
|
54,817
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
184,016
|
|
|
$
|
186,526
|
|
Gross margin
|
|
$
|
461
|
|
|
$
|
(9,327
|
)
|
Loss from operations
|
|
$
|
(11,512
|
)
|
|
$
|
(11,154
|
)
|
Industrial Ingredients fiscal 2010 sales of $184.0 million
declined $2.5 million, or 1.3%, from fiscal 2009.
Industrial starch sales of $115.7 million declined 12% from
fiscal 2009 sales of $131.7 million on competitive pricing
and lower pass through of corn costs to customers, offset by
volume increases of 5%. The industrial starch business continued
to be impacted by weak demand for printing and writing paper
products. Sales of the Companys Liquid Natural Additives
products, included in the industrial starch sales amount,
improved 28% driven by volume increases. During fiscal 2010, the
Industrial Ingredients business shifted more of its
manufacturing mix to the production of ethanol. Sales of ethanol
expanded 25% to $68.3 million from $54.8 million in
fiscal 2009 as both volume and pricing improved.
19
Gross margin improved to $0.5 million in fiscal 2010 from a
negative margin of $9.3 million in fiscal 2009. Margins
improved due to the impact of increased volumes of both
industrial starch and ethanol of $4.6 million, favorable
ethanol pricing of $2.0 million, improved manufacturing
yields and efficiencies of $9.0 million, favorable energy
costs and yields of $6.7 million and reduced distribution
costs of $2.4 million, offset by unfavorable industrial
starch pricing and mix of $14.7 million.
The loss from operations for fiscal 2010 increased
$0.4 million to $11.5 million; however, the operating
loss for fiscal 2009 of $11.2 million included
$9.1 million of net insurance recoveries related to the
Cedar Rapids flooding in fiscal 2008. Excluding the impact of
the net insurance recoveries, operating income increased by
$8.8 million driven by the increase in gross margin.
Operating expenses increased by $1.2 million primarily due
to increased legal costs related to the litigation against the
Companys insurance carriers (see Note 21 to the
Consolidated Financial Statements). Research and development
expenses of $2.4 million were comparable to last year.
Food
Ingredients
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
2010
|
|
2009
|
|
|
(Dollars in thousands)
|
|
Sales
|
|
$
|
70,258
|
|
|
$
|
69,030
|
|
Gross margin
|
|
$
|
22,993
|
|
|
$
|
21,618
|
|
Income from operations
|
|
$
|
15,145
|
|
|
$
|
13,512
|
|
Sales of $70.3 million for the year ended August 31,
2010, increased 1.8%, or $1.2 million, on volume growth of
8% partially offset by unfavorable product mix and pricing. In
the second quarter of fiscal 2009, the Company sold its dextrose
product line which generated $1.9 million in sales for
fiscal 2009. Excluding dextrose product sales in fiscal 2009,
the Food Ingredients sales for fiscal 2010 increased
$3.2 million, or 4.7%. Sales of applications to growth end
markets, protein, bakery and pet chews, grew 16%.
Gross margin improved $1.4 million on lower raw material,
distribution and energy costs. Income from operations grew 12%
on an increase in gross margin. Operating expenses declined
$0.4 million to $5.9 million compared to fiscal 2009
and research and development expenses increased
$0.1 million to $1.9 million.
Corporate
Operating Expenses
Corporate operating expenses decreased to $8.4 million in
fiscal 2010 from $9.3 million in fiscal 2009, primarily due
to a decrease in professional fees and employee related costs.
Fiscal
2009 Compared to Fiscal 2008
Industrial
Ingredients
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Sales industrial starch
|
|
$
|
131,709
|
|
|
$
|
167,365
|
|
Sales ethanol
|
|
|
54,817
|
|
|
|
5,955
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
186,526
|
|
|
$
|
173,320
|
|
Gross margin
|
|
$
|
(9,327
|
)
|
|
$
|
26,248
|
|
Loss from operations
|
|
$
|
(11,154
|
)
|
|
$
|
(16,541
|
)
|
Industrial Ingredients fiscal 2009 sales of $186.5 million
increased $13.2 million, or 7.6%, from fiscal 2008. Annual
sales volume of industrial starches declined 22.8%. The business
suffered severe flood damage to its Cedar Rapids, Iowa
manufacturing facility in June 2008 which shut down production
for most of the fourth quarter of fiscal 2008. Limited
production of starch products resumed in August 2008 and
customer shipments were phased in during the first quarter of
fiscal 2009 as the business restarted manufacturing processes.
During the remainder of
20
fiscal 2009, the Industrial Ingredients starch business was
significantly impacted by weak demand for printing and writing
paper products. Paper industry customers reacted to the demand
decline by implementing extended downtime, closing mills and
reducing inventory levels.
As starch demand decreased, the Industrial Ingredients business
shifted more of its manufacturing mix to the production of
ethanol. In May 2008, the Company began commercial production of
ethanol, which was also suspended in June 2008 due to the impact
of the Cedar Rapids flood. Ethanol production was restarted on a
limited basis in late September 2008. Sales of ethanol in fiscal
2009 were $54.8 million compared to $6.0 million in
fiscal 2008.
Gross margin declined from $26.2 million in fiscal 2008 to
a loss of $9.3 million in fiscal 2009, a reduction of
$35.6 million. Gross margin decreased primarily due to the
shift in the manufacturing mix to ethanol production and a fall
in ethanol selling prices. Ethanol has a lower unit selling
price than industrial starch. The effect of lower industrial
starch pricing of $5.1 million, higher depreciation on the
ethanol facility of $2.2 million, higher distribution costs
of $2.4 million, and $3.3 million of lower yields on
corn and corn by-products also contributed to the margin decline.
Loss from operations for fiscal 2009 included $9.1 million
of net insurance recoveries related to the Cedar Rapids flooding
in fiscal 2008. See Note 3 to the Consolidated Financial
Statements for details of the costs and recoveries. Operating
expenses decreased to $8.3 million in fiscal 2009 from
$11.6 million in fiscal 2008 on lower employee costs.
Fiscal 2008 operating expenses included $1.4 million
related to the settlement of a lawsuit. Research and development
expenses decreased $1.0 million primarily due to lower
employee costs.
Food
Ingredients
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
2009
|
|
2008
|
|
|
(Dollars in thousands)
|
|
Sales
|
|
$
|
69,030
|
|
|
$
|
66,261
|
|
Gross margin
|
|
$
|
21,618
|
|
|
$
|
18,340
|
|
Income from operations
|
|
$
|
13,512
|
|
|
$
|
10,178
|
|
Sales at the Food Ingredients business of $69.0 million
rose $2.8 million, or 4.2%, over fiscal 2008, driven by
improvements in average unit selling prices. The annual volume
declined 7% from 2008, approximately half of which was due to
the sale of the dextrose business in the second quarter of
fiscal 2009. Sales of non-coating applications, excluding
dextrose applications, grew 3.5% and sales of coating
applications rose 11%.
Income from operations grew 32.8% from $10.2 million in
fiscal 2008 to $13.5 million in fiscal 2009 on an increase
in gross margin. Improvements in average unit pricing and
product mix more than offset raw material increases of
$2.4 million and the effect of volume declines of
$1.4 million.
Corporate
Operating Expenses
Corporate operating expenses decreased to $9.3 million in
fiscal 2009 from $10.0 million in fiscal 2008, primarily
due to a decrease in employee incentive costs and an increase in
the cash value of the Company-owned life insurance policies.
21
Non-Operating
Income (Expense)
Other non-operating income (expense) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Loss on extinguishment of debt
|
|
$
|
(1,049
|
)
|
|
$
|
|
|
|
$
|
|
|
Loss on interest rate swap termination
|
|
|
(1,562
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of dextrose product line
|
|
|
|
|
|
|
1,562
|
|
|
|
|
|
Gain (loss) on foreign currency transactions
|
|
|
419
|
|
|
|
127
|
|
|
|
(217
|
)
|
Gain on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
2,890
|
|
Other
|
|
|
271
|
|
|
|
226
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,921
|
)
|
|
$
|
1,915
|
|
|
$
|
2,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On April 7, 2010, the Company refinanced its bank debt. See
Note 8 to the Consolidated Financial Statements. In
connection with the refinancing, the Company recorded a pre-tax
non-cash charge to earnings of approximately $1.0 million
in the third quarter of fiscal 2010 related to unamortized
transaction fees associated with the prior credit facility. In
addition, the Company terminated its interest rate swap
agreements with several banks and recorded a loss of
approximately $1.6 million.
In the second quarter of fiscal 2009, the Companys Food
Ingredients business segment sold assets related to its dextrose
product line to a third-party purchaser for $2.9 million,
net of transaction costs. The Company recorded a
$1.6 million gain on the sale.
The Company recognized a gain (loss) on foreign currency
transactions on Australian dollar denominated assets and
liabilities as disclosed in the table above.
As discussed in Note 3 to the Consolidated Financial
Statements, in June 2008, the flooding of the Cedar Rapids
manufacturing facility shut down production for most of the
quarter. The Company had derivative instruments designated as
cash flow hedges to reduce the price volatility of corn and
natural gas used in the production of starch. Due to the
June 12, 2008 flood event, derivative positions held as of
that date that were forecasted to hedge exposures during the
period the Cedar Rapids plant was shut down were no longer
deemed to be effective cash flow hedges. The $2.9 million
gain, representing ineffectiveness on these instruments, was
reclassified from other comprehensive income and recognized as a
component of non-operating income.
Interest
expense
Interest expense was $7.5 million, $5.6 million and
$3.1 million in fiscal years 2010, 2009 and 2008,
respectively. Interest expense for the year ended
August 31, 2010 increased primarily due to the increase in
the dividend rate on the Series A Preferred Stock issued in
April 2010 over the interest rate for the Companys bank
debt plus the accretion of the discount on the Series A
Preferred Stock. On April 7, 2010, the Company issued
$40 million of preferred stock at a dividend rate of 15%,
the proceeds of which were used to repay outstanding bank debt.
Prior to the $40 million repayment, the Company paid
interest at LIBOR (London Interbank Offered Rate) plus 5%. See
Notes 7 and 8 to the Consolidated Financial Statements.
Interest expense for fiscal 2009 increased $2.5 million
over the prior years expense due to a $1.1 million
decrease in the interest costs capitalized in connection with
the construction of the ethanol facility, an increase in average
debt balances, and an increase in the applicable margin over
LIBOR beginning July 2009.
Income
taxes
The effective tax rates for fiscal years 2010, 2009 and 2008
were 33%, 34% and 33%, respectively. The effective tax rate for
fiscal 2010 is lower than the U.S. federal statutory rate
of 35% primarily due to tax incentives for the production of
ethanol, offset by dividends and discount accretion on the
preferred stock which are recorded as interest expense for
financial reporting purposes but are not deductible in the
computation of taxable income, and
22
the effect of state taxes. In fiscal 2009 and 2008, the
effective tax rate is lower than the U.S. federal statutory
rate of 35% primarily due to adjustments to the unrecognized tax
benefits and adjustments resulting from filing current and
amended tax returns, offset by state income taxes. See
Note 17 to the Consolidated Financial Statements.
At August 31, 2010, the Company had $17.8 million of
net deferred tax assets. A valuation allowance has not been
provided on the net U.S. deferred tax assets as of
August 31, 2010. The determination of the need for a
valuation allowance requires significant judgment and estimates.
The Company evaluates the requirement for a valuation allowance
each quarter as the Company incurred losses in fiscal 2008, 2009
and 2010. The Companys losses in fiscal years 2008 and
2009 were incurred as a result of severe flooding in Cedar
Rapids, Iowa, which shut down the Companys manufacturing
facility for most of the fourth quarter of fiscal 2008. The tax
benefits of operating losses incurred in fiscal 2008 and 2009
have been carried back to offset taxable income in prior years.
The Company expects to recover its deferred tax assets through
future taxable income; however, there can be no assurance that
managements current plans will be achieved or that a
valuation allowance will not be required in the future.
Results
of Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
16,992
|
|
|
$
|
78,030
|
|
|
$
|
107,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,848
|
)
|
|
|
(57,754
|
)
|
|
|
(5,145
|
)
|
Interest expense
|
|
|
444
|
|
|
|
973
|
|
|
|
993
|
|
Gain on sale of assets
|
|
|
199
|
|
|
|
|
|
|
|
|
|
Reclassification of currency translation adjustments into
earnings
|
|
|
13,420
|
|
|
|
|
|
|
|
|
|
Other non-operating income (loss), net
|
|
|
490
|
|
|
|
1,734
|
|
|
|
2,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) on discontinued operations before income taxes
|
|
|
11,817
|
|
|
|
(56,993
|
)
|
|
|
(3,463
|
)
|
Income tax expense (benefit)
|
|
|
(4,495
|
)
|
|
|
1,149
|
|
|
|
(1,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) on discontinued operations
|
|
$
|
16,312
|
|
|
$
|
(58,142
|
)
|
|
$
|
(1,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2010
Penford Australia completed the sale of the shares of its
wholly-owned subsidiary, Penford New Zealand, on
September 2, 2009. Proceeds from the sale, net of
transaction costs, were $4.8 million. On November 27,
2009, Penford Australia completed the sale of substantially all
of its operating assets, including property, plant and
equipment, intellectual property, and inventories in two
transactions to unrelated parties. Proceeds from the sales, net
of transaction costs, were $15.3 million.
Proceeds from the sales included $2.0 million in escrow to
be released in four equal installments payable at six months,
ten months, twenty months and thirty months from
November 27, 2009. Penford Australia received the first two
installments of $0.5 million each in May 2010 and September
2010. The remaining escrowed payments are subject to the
buyers right to make warranty claims under the sale
contract. Penford Australia currently expects that all
warranties will be satisfied and that it will receive the
proceeds from the escrow account as scheduled. The
$1.5 million receivable at August 31, 2010 is included
in other current assets in the Consolidated Balance Sheets.
During the first six months of fiscal 2010, the Company
determined that intercompany loans made by its
U.S. operations to its Australian subsidiaries would not be
fully collectible from the proceeds of the Australian asset
sales and the liquidation of the remaining net financial assets.
Accordingly, the Company recorded an impairment charge in the
U.S. of $13.6 million, which was classified in
discontinued operations for financial reporting purposes. The
impairment charge was offset against $13.6 million of
income in the Australian operations discussed below. The
U.S. tax benefit of the impairment was also recorded in
discontinued operations.
23
In fiscal years 2008 and 2009, the Companys Australian
operations reported tax losses. As of August 31, 2009, the
Companys discontinued Australian operations had recorded a
valuation allowance of $14.6 million against the entire
Australian net deferred tax asset because of the uncertainty of
generating sufficient future taxable income. In fiscal 2010, the
Australian operations recorded $13.6 million of income
related to the U.S. impairment discussed above.
Accordingly, the Company decreased its deferred tax asset
related to the carryfoward of net operating losses and reversed
the corresponding tax valuation allowance. At August 31,
2010, the valuation allowance related to the Australian net
deferred tax asset was $10.9 million.
The liquidation of the remaining net assets of Penford Australia
was substantially completed in fiscal 2010 and, as a result,
$13.8 of currency translation adjustments were reclassified from
accumulated other comprehensive income into earnings.
At August 31, 2010, the remaining net assets of the
Australia/New Zealand Operations, consisting of
$0.3 million of cash and $1.3 million of other net
assets, primarily a receivable from the purchaser of one of the
Companys Australian manufacturing facilities, have been
reported as assets of the continuing operations of the Company.
Fiscal
2009
In fiscal 2009, the Company recorded a $13.8 million
non-cash goodwill impairment charge, which represented all of
the goodwill allocated to its Australia/New Zealand reporting
unit.
At August 31, 2009, in accordance with the accounting
guidance regarding assets held for sale, the Company recorded
the long-lived assets of the Australia/New Zealand Operations at
the lower of their carrying values or fair value less costs to
sell. The Company recorded a non-cash asset impairment charge of
$33.0 million in fiscal 2009 to reduce the carrying value
of the long-lived assets of the Australia/New Zealand Operations
to estimated fair value less costs to sell.
Liquidity
and Capital Resources
The Companys primary sources of short- and long-term
liquidity are cash flow from operations and its revolving line
of credit, which expires on April 7, 2015. The Company
expects to generate sufficient cash flow from operations and to
have sufficient borrowing capacity and ability to fund its cash
requirements during fiscal 2011.
Operating
Activities
At August 31, 2010, Penford had working capital from
continuing operations of $35.1 million, and
$18.9 million outstanding under its credit facility. Cash
flow generated from continuing operations was $10.1 million
in fiscal 2010 compared with cash used in operations of
$11.2 million and $1.4 million in fiscal years 2009
and 2008, respectively. Cash flow generated by operations in
fiscal 2010 grew as working capital requirements, which had
increased in fiscal 2009 during the flood recovery, stabilized
during the year. The change in cash flow in fiscal 2009 from
fiscal 2008 was primarily due to an increase in trade
receivables of $20.1 million as sales of the Industrial
Ingredients business grew after the Cedar Rapids flooding in
fiscal 2008 and reduction in payables of $16.0 million.
Investing
Activities
Capital expenditures were $6.0 million, $5.4 million
and $38.5 million in fiscal years 2010, 2009 and 2008,
respectively. Capital expenditures in fiscal 2008 included
$26.9 million for construction of the ethanol production
facility in Cedar Rapids, Iowa. Penford expects capital
expenditures to be approximately $9.5 million in fiscal
2011. In fiscal 2009, the Companys Food Ingredients
business segment sold assets related to its dextrose product
line to a third-party purchaser for $2.9 million, net of
transaction costs.
24
Financing
Activities
Bank
Debt
In fiscal year 2007, Penford entered into a $145 million
Second Amended and Restated Credit Agreement (the 2007
Agreement) among the Company; Harris N.A. (which has been
replaced by the Bank of Montreal); LaSalle Bank National
Association (now Bank of America); Cooperative Centrale
Raiffeisen-Boorleenbank B.A., Rabobank Nederland
(New York Branch); U.S. Bank National Association; and the
Australia and New Zealand Banking Group Limited. Substantially
all of the Companys U.S. assets secured the 2007
Agreement.
On April 7, 2010, the Company issued $40 million of
preferred stock and, on April 8, 2010, used the proceeds to
pay a portion of the outstanding bank debt obligations under the
2007 Agreement. Also on April 7, 2010, the Company
refinanced its bank debt. The Company entered into a
$60 million Third Amended and Restated Credit Agreement
(the 2010 Agreement) among the Company; Penford
Products Co.; Bank of Montreal; Bank of America National
Association; and Cooperatieve Centrale Raiffeisen-Boerenleenbank
B.A., Rabobank Nederland New York Branch.
The 2010 Agreement refinanced the unpaid debt remaining under
the 2007 Agreement. Under the 2010 Agreement, the Company may
borrow $60 million in revolving lines of credit. The
lenders revolving credit loan commitment may be increased
under certain conditions. On August 31, 2010, the Company
had $18.9 million outstanding under the 2010 Agreement.
Under the 2010 Agreement, there are no scheduled principal
payments prior to maturity on April 7, 2015. As of
August 31, 2010, all of the Companys outstanding bank
debt was subject to variable interest rates.
Interest rates under the 2010 Agreement are based on either the
London Interbank Offering Rates (LIBOR) or the prime
rate, depending on the selection of available borrowing options
under the 2010 Agreement. The Company may choose a borrowing
rate of
1-month,
3-month or
6-month
LIBOR. Pursuant to the 2010 Agreement, the interest rate margin
over LIBOR ranges between 3% and 4%, depending upon the Total
Funded Debt Ratio (as defined).
The 2010 Agreement provides that the Total Funded Debt Ratio,
which is computed as funded debt divided by earnings before
interest, taxes, depreciation and amortization (as defined in
the 2010 Agreement) shall not exceed 3.00. In addition, the
Company must maintain a Fixed Charge Coverage Ratio, as defined
in the 2010 Agreement, of not less than 1.35. Annual capital
expenditures are restricted to $15 million (excluding
certain capital expenditures specified in the 2010 Agreement) if
the Total Funded Debt Ratio is greater than 2.00 for two
consecutive fiscal quarters. The Companys obligations
under the 2010 Agreement are secured by substantially all of the
Companys assets. The Company was in compliance with the
covenants in the 2010 Agreement as of August 31, 2010.
During the first quarter of fiscal 2010, the Iowa Department of
Economic Development (IDED) awarded financial
assistance to the Company as a result of the temporary shutdown
of the Cedar Rapids, Iowa plant in the fourth quarter of fiscal
2008 due to record flooding of the Cedar River. The IDED
provided two five-year non interest bearing loans as follows:
(1) a $1.0 million loan to be repaid in 60 equal
monthly payments of $16,667 beginning December 1, 2009, and
(2) a $1.0 million loan which is forgivable if the
Company maintains certain levels of employment at the Cedar
Rapids plant. The proceeds of these Iowa loans were used to
repay outstanding debt under the 2007 Agreement in the first
quarter of fiscal 2010. At August 31, 2010, the Company had
$1.8 million outstanding related to the IDED loans.
In connection with the refinancing, the Company recorded a
pre-tax non-cash charge to earnings of $1.0 million in the
third quarter of fiscal 2010 related to unamortized transaction
fees associated with the prior credit facility. The Company also
terminated its interest rate swaps in the third quarter of
fiscal 2010 and recorded a charge to earnings of
$1.6 million.
Preferred
Stock
On April 7, 2010, the Company issued $40 million of
Series A 15% cumulative non-voting, non-convertible
preferred stock (Series A Preferred Stock) and
100,000 shares of Series B voting convertible
preferred stock (Series B Preferred Stock) in a
private placement to Zell Credit Opportunities Master Fund,
L.P., an investment
25
fund managed by Equity Group Investments, a private investment
firm (the Investor). Proceeds from the preferred
stock issuance of $40.0 million were used to repay bank
debt on April 8, 2010. See Note 7 to the Consolidated
Financial Statements.
The Company recorded the Series A Preferred Stock and the
Series B Preferred Stock at their relative fair values at
the time of issuance. The Series A Preferred Stock of
$32.3 million was recorded as a long-term liability due to
its mandatory redemption feature and the Series B Preferred
Stock of $7.7 million was recorded as equity. The discount
on the Series A Preferred Stock is being amortized into
income using the effective interest method over the contractual
life of seven years. At August 31, 2010, the carrying value
of the Series A Preferred Stock liability of
$34.1 million includes $1.5 million of accrued
dividends, and $0.4 million of discount accretion for the
period from the date of issuance to August 31, 2010. The
accrued dividends represent the 9% dividends that may be paid or
accrued at the option of the Company. Dividends on the
Series A Preferred Stock and the discount accretion are
recorded as interest expense in the consolidated statements of
operations.
The holders of the Series A Preferred Stock are entitled to
cash dividends of 6% on the sum of the outstanding Series A
Preferred Stock plus accrued and unpaid dividends. In addition,
dividends equal to 9% of the outstanding Series A Preferred
Stock may accrue or be paid currently at the discretion of the
Company. Dividends are payable quarterly beginning May 31,
2010.
Dividends
During each quarter of the first half of fiscal year 2009, the
Board of Directors declared a $0.06 per share cash dividend on
common stock.
In April 2009, the Board of Directors suspended payment of
dividends. The Company may not declare or pay any dividends on
its common stock without first obtaining approval from the
holders of a majority of the Series A Preferred Stock. See
Note 7 to the Consolidated Financial Statements for further
details. During fiscal year 2009, the Company declared dividends
on its common stock of $1.4 million.
Critical
Accounting Estimates
The Companys consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States. The process of preparing
financial statements requires management to make estimates,
judgments and assumptions that affect the Companys
financial position and results of operations. These estimates,
judgments and assumptions are based on the Companys
historical experience and managements knowledge and
understanding of the current facts and circumstances. Management
believes that its estimates, judgments and assumptions are
reasonable based upon information available at the time this
report was prepared. To the extent there are material
differences between estimates, judgments and assumptions and the
actual results, the financial statements will be affected.
Management has reviewed the accounting estimates and related
disclosures with the Audit Committee of the Board of Directors.
The estimates that management believes are the most important to
the financial statements and that require the most difficult,
subjective and complex judgments include the following:
|
|
|
|
|
Evaluation of the allowance for doubtful accounts receivable
|
|
|
|
Hedging activities
|
|
|
|
Benefit plans
|
|
|
|
Long-lived Assets
|
|
|
|
Valuation of goodwill
|
|
|
|
Self-insurance program
|
|
|
|
Income taxes
|
|
|
|
Stock-based compensation
|
26
A description of each of these follows:
Evaluation
of the Allowance for Doubtful Accounts
Receivable
Management makes judgments about the Companys ability to
collect outstanding receivables and provides allowances for the
portion of receivables that the Company may not be able to
collect. Penford estimates the allowance for uncollectible
accounts based on historical experience, known troubled
accounts, industry trends, economic conditions, how recently
payments have been received, and ongoing credit evaluations of
its customers. If the estimates do not reflect the
Companys future ability to collect outstanding invoices,
Penford may experience losses in excess of the reserves
established. At August 31, 2010, the allowance for doubtful
accounts receivable was $0.4 million.
Hedging
Activities
Penford uses derivative instruments, primarily exchange traded
futures contracts, to reduce exposure to price fluctuations of
commodities used in the manufacturing processes in the United
States. The Company relies upon exchange settlement to address
the default risk exposure. Penford has elected to designate
these activities as hedges. This election allows the Company to
defer gains and losses on those derivative instruments until the
underlying commodity is used in the production process.
The requirements for the designation of hedges are very complex,
and require judgments and analyses to qualify as hedges as
defined by generally accepted accounting principles in the
United States. These judgments and analyses include an
assessment that the derivative instruments used are effective
hedges of the underlying risks. If the Company were to fail to
meet the requirements to qualify for derivative accounting, or
if these derivative instruments are not designated as hedges,
the Company would be required to mark these contracts to market
at each reporting date. See Note 15 to the Consolidated
Financial Statements.
Benefit
Plans
Penford has defined benefit plans for its U.S. employees
providing retirement benefits and coverage for retiree health
care. Qualified third-party actuaries assist management in
determining the expense and funded status of these employee
benefit plans. Management makes several estimates and
assumptions in order to measure the expense and funded status,
including interest rates used to discount certain liabilities,
rates of return on plan assets, rates of compensation increases,
employee turnover rates, anticipated mortality rates, and
increases in the cost of medical care. The Company makes
judgments about these assumptions based on historical investment
results and experience as well as available historical market
data and trends. However, if these assumptions are wrong, it
could materially affect the amounts reported in the
Companys future results of operations. Disclosure about
these estimates and assumptions are included in Note 13 to
the Consolidated Financial Statements. See Defined Benefit
Pension and Postretirement Benefit Plans below.
Long-lived
Assets
The Company reviews long-lived assets for impairment when events
or circumstances indicate that the carrying values may not be
recoverable. An impairment loss would be recognized when
estimated undiscounted future cash flows from the operation and
disposition of the asset group are less than the carrying amount
of the asset group. Asset groups have identifiable cash flows
independent of other asset groups. Measurement of an impairment
loss would be based on the excess of the carrying amount of the
asset group over its fair value. Fair value is measured using
discounted cash flows or independent appraisals, as appropriate.
Estimating future cash flows requires significant judgment by
management in such areas as future economic and
industry-specific conditions, product pricing and sales volume
and capital expenditures.
Valuation
of Goodwill
Penford is required to assess, on an annual basis, whether the
value of goodwill reported on the balance sheet has been
impaired, or more often if conditions exist that indicate that
there might be impairment. These assessments require extensive
and subjective judgments to assess the fair value of goodwill.
While the Company engages
27
qualified valuation experts to assist in this process, their
work is based on the Companys estimates of future
operating results and allocation of goodwill to the business
units. If future operating results differ materially from the
estimates, the value of goodwill could be adversely impacted.
Self-Insurance
Program
The Company maintains a self-insurance program covering portions
of workers compensation and group health liability costs.
The amounts in excess of the self-insured levels are fully
insured by third-party insurers. Liabilities associated with
these risks are estimated in part by considering historical
claims experience, severity factors and other actuarial
assumptions. Projections of future losses are inherently
uncertain because of the random nature of insurance claims
occurrences and changes that could occur in actuarial
assumptions. The financial results of the Company could be
significantly affected if future claims and assumptions differ
from those used in determining these liabilities.
Income
Taxes
The determination of the Companys provision for income
taxes requires significant judgment, the use of estimates and
the interpretation and application of complex tax laws. The
Companys provision for income taxes reflects a combination
of income earned and taxed in the various U.S. federal and
state taxing jurisdictions. Jurisdictional tax law changes,
increases or decreases in permanent differences between book and
tax items, accruals or adjustments of accruals for tax
contingencies or valuation allowances, and the Companys
change in the mix of earnings from these taxing jurisdictions
all affect the overall effective tax rate.
At August 31, 2010, the Company had $17.8 million of
net deferred tax assets. A valuation allowance has not been
provided on the net U.S. deferred tax assets as of
August 31, 2010. The determination of the need for a
valuation allowance requires significant judgment and estimates.
The Company evaluates the requirement for a valuation allowance
each quarter. The Company expects to recover its tax assets
through future taxable income; however, there can be no
assurance that managements current plans will be achieved
or that a valuation allowance will not be required against all
or a portion of the net deferred tax assets in the future.
A tax benefit from an uncertain tax position may be recognized
when it is more likely than not that the tax return
position will be sustained upon examination by the applicable
taxing authorities based on the technical merits of the
position. The amount recognized is measured as the largest
amount of tax benefit that has a greater than 50% likelihood of
being realized upon settlement. See Note 17 to the
Consolidated Financial Statements. The liability for
unrecognized tax benefits contains uncertainties because the
Company is required to make assumptions and to apply judgment to
estimate the exposures associated with the various tax filing
positions. Management believes that the judgments and estimates
it uses in evaluating its tax filing positions are reasonable;
however, actual results could differ, and the Company may be
exposed to significant gains and losses and the Companys
effective tax rate in a given financial statement period could
be materially affected.
Stock-Based
Compensation
The Company recognizes stock-based compensation in accordance
with ASC 718. Under the fair value recognition provisions
of this statement, share-based compensation cost is measured at
the grant date based on the fair value of the award and is
recognized as expense over the requisite service period of the
award. Determining the appropriate fair value model and
calculating the fair value of the share-based awards at the date
of grant requires judgment, including estimating stock price
volatility, forfeiture rates, the risk-free interest rate,
dividends and expected option life. See Note 12 to the
Consolidated Financial Statements.
If circumstances change, and the Company uses different
assumptions for volatility, interest, dividends and option life
in estimating the fair value of stock-based awards granted in
future periods, stock-based compensation expense may differ
significantly from the expense recorded in the current period.
ASC 718 requires forfeitures to be estimated at the date of
grant and revised in subsequent periods if actual forfeitures
differ from those estimated. Therefore, if actual forfeiture
rates differ significantly from those estimated, the
Companys results of operations could be materially
impacted.
28
Contractual
Obligations
As more fully described in Notes 7, 8 and 11 to the
Consolidated Financial Statements, the Company is a party to
various debt, preferred stock and lease agreements at
August 31, 2010 that contractually commit the Company to
pay certain amounts in the future. The purchase obligations at
August 31, 2010 represent an estimate of all open purchase
orders and contractual obligations through the Companys
normal course of business for commitments to purchase goods and
services for production and inventory needs, such as raw
materials, supplies, manufacturing arrangements, capital
expenditures and maintenance. The majority of terms allow the
Company or suppliers the option to cancel or adjust the
requirements based on business needs.
The following table summarizes such contractual commitments at
August 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012-2013
|
|
|
2014-2015
|
|
|
2016 & After
|
|
|
Total
|
|
|
Long-term debt and capital lease obligations
|
|
$
|
429
|
|
|
$
|
887
|
|
|
$
|
20,151
|
|
|
$
|
|
|
|
$
|
21,467
|
|
Postretirement medical(1)
|
|
|
689
|
|
|
|
1,574
|
|
|
|
1,846
|
|
|
|
5,879
|
|
|
|
9,988
|
|
Defined benefit pensions(2)
|
|
|
2,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,316
|
|
Dividends on preferred stock(3)
|
|
|
2,572
|
|
|
|
5,885
|
|
|
|
7,032
|
|
|
|
41,255
|
|
|
|
56,744
|
|
Redemption of preferred stock(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
40,000
|
|
Operating lease obligations
|
|
|
3,751
|
|
|
|
5,310
|
|
|
|
2,456
|
|
|
|
881
|
|
|
|
12,398
|
|
Purchase obligations
|
|
|
71,341
|
|
|
|
3,088
|
|
|
|
|
|
|
|
|
|
|
|
74,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,098
|
|
|
$
|
16,744
|
|
|
$
|
31,485
|
|
|
$
|
88,015
|
|
|
$
|
217,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Estimated contributions to the unfunded postretirement medical
plan made in amounts needed to fund benefit payments for
participants through fiscal 2019 based on actuarial assumptions. |
|
(2) |
|
Estimated contributions to the defined benefit pension plans for
fiscal year 2011. The actual amounts funded in 2011 may
differ from the amounts listed above. Contributions in fiscal
years 2012 through 2016 and beyond are excluded as those amounts
are unknown. |
|
(3) |
|
Payments for dividends on the Series A Preferred Stock
represent the 6% dividends due and payable in cash each quarter
until redemption. The 9% dividends which may be paid in cash or
accrued each quarter until redemption are assumed to be accrued
and paid at redemption. Redemption is assumed to occur on
April 7, 2017. |
|
(4) |
|
Redemption of the Series A Preferred Stock is assumed to
occur on April 7, 2017. |
Off-Balance
Sheet Arrangements
The Company has no off-balance sheet arrangements that have or
are reasonably likely to have a current or future material
effect on the Companys financial condition, changes in
financial conditions, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Defined
Benefit Pension and Postretirement Benefit Plans
Penford maintains defined benefit pension plans and defined
benefit postretirement health care plans in the United States.
The most significant assumptions used to determine benefit
expense and benefit obligations are the discount rate and the
expected return on assets assumption. See Note 13 to the
Consolidated Financial Statements for the assumptions used by
Penford.
The discount rate used by the Company in determining benefit
expense and benefit obligations reflects the yield of high
quality (AA or better rating by a recognized rating agency)
corporate bonds whose cash flows are expected to match the
timing and amounts of projected future benefit payments. Benefit
obligations and expense increase as the discount rate is
reduced. The discount rates to determine net periodic expense
used in 2008 (6.51%), 2009 (6.92%) and 2010 (5.98%) reflect the
changes in bond yields over the past several years. Lowering the
discount rate by 25 basis points would increase pension
expense by approximately $0.2 million and other
29
postretirement benefit expense by $0.1 million. During
fiscal 2010, bond yields declined and Penford has lowered the
discount rate for calculating its benefit obligations at
August 31, 2010, as well as net periodic expense for fiscal
2011, to 5.64%.
The expected long-term return on assets assumption for the
pension plans represents the average rate of return to be earned
on plan assets over the period the benefits included in the
benefit obligation are to be paid. Pension expense increases as
the expected return on plan assets decreases. In developing the
expected rate of return, the Company considers long-term
historical market rates of return as well as actual returns on
the Companys plan assets, and adjusts this information to
reflect expected capital market trends. Penford also considers
forward looking return expectations by asset class, the
contribution of active management and management fees paid by
the plans. The plan assets are held in qualified trusts and
anticipated rates of return are not reduced for income taxes.
The expected long-term return on assets assumption used to
calculate net periodic pension expense was 8.0% for fiscal 2010.
A 50 basis point decrease (increase) in the expected return
on assets assumptions would increase (decrease) pension expense
by approximately $0.1 million based on plan assets at
August 31, 2010. The expected return on plan assets used in
calculating fiscal 2011 pension expense is 8.0%.
Unrecognized net loss amounts reflect the difference between
expected and actual returns on pension plan assets as well as
the effects of changes in actuarial assumptions. Unrecognized
net losses in excess of certain thresholds are amortized into
net periodic pension and postretirement benefit expense over the
average remaining service life of active employees. As of
August 31, 2010, unrecognized losses from all sources are
$18.0 million for the pension plans and unrecognized losses
of $2.2 million for the postretirement health care plan.
Amortization of unrecognized net loss amounts is expected to
increase net pension expense by approximately $1.4 million
in fiscal 2011. Amortization of unrecognized net losses is
expected to increase net postretirement health care expense by
approximately $0.1 million in fiscal 2011.
Penford recognized pension expense of $3.8 million,
$2.0 million and $1.6 million in fiscal years 2010,
2009 and 2008, respectively. Penford expects pension expense to
be approximately $3.7 million in fiscal 2011. The Company
contributed $3.4 million, $1.1 million and
$1.5 million to the pension plans in fiscal years 2010,
2009 and 2008, respectively. Penford estimates that it will be
required to make minimum contributions to the pension plans of
$2.3 million during fiscal 2011. Because of the decline in
general economic and capital market conditions, the Company
expects that pension plan funding contributions will increase
over the medium and long term.
The Company recognized benefit expense for its postretirement
health care plan of $1.6 million, $1.0 million and
$1.0 million in fiscal years 2010, 2009 and 2008,
respectively. Penford expects to recognize approximately
$1.2 million in postretirement health care benefit expense
in fiscal 2011. The Company contributed $0.5 million in
each fiscal years 2010, 2009 and 2008 to the postretirement
health care plans and estimates that it will contribute
$0.5 million in fiscal 2011.
Future changes in plan asset returns, assumed discount rates and
various assumptions related to the participants in the defined
benefit plans will affect future benefit expense and
liabilities. The Company cannot predict what these changes will
be.
Recent
Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board
(FASB) issued guidance to amend the disclosure
requirements relating to fair value measurements. The guidance
requires new disclosures on the transfers of assets and
liabilities between Level 1 (quoted prices in an active
market for identical assets and liabilities) and Level 2
(significant other observable inputs) of the fair value
measurement hierarchy, including the reasons and the timing of
the transfers. The guidance also requires a roll forward of
activities on purchases, sales, issuances, and settlements of
the assets and liabilities measured in Level 3 (significant
unobservable inputs). For the Company, the disclosures related
to the transfers of assets and liabilities were effective for
the third quarter of fiscal 2010. The Company had no transfers
and no disclosure was required. The disclosure on the roll
forward activities for Level 3 fair value measurements will
be effective in the third quarter of fiscal 2011. Other than
requiring additional disclosures, adoption of this guidance will
not have an impact on the Companys financial position,
results of operations or liquidity.
30
Forward-looking
Statements
This Annual Report on
Form 10-K
(Annual Report), including, but not limited, to
statements found in the Notes to Consolidated Financial
Statements and in Item 1 Business and
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations,
contains statements that are forward-looking statements within
the meaning of the federal securities laws. In particular,
statements pertaining to anticipated operations and business
strategies contain forward-looking statements. Likewise,
statements regarding anticipated changes in the Companys
business and anticipated market conditions are forward-looking
statements. Forward-looking statements involve numerous risks
and uncertainties and should not be relied upon as predictions
of future events. Forward-looking statements depend on
assumptions, dates or methods that may be incorrect or
imprecise, and the Company may not be able to realize them.
Forward-looking statements can be identified by the use of
forward-looking terminology such as believes,
expects, may, will,
should, seeks,
approximately, intends,
plans, estimates, or
anticipates, or the negative use of these words and
phrases or similar words or phrases. Forward-looking statements
can be identified by discussions of strategy, plans or
intentions. The following factors, among others, could cause
actual results and future events to differ materially from those
set forth or contemplated in the forward-looking statements:
|
|
|
|
|
competition;
|
|
|
|
the possibility of interruption of business activities due to
equipment problems, accidents, strikes, weather or other
factors;
|
|
|
|
product development risk;
|
|
|
|
changes in corn and other raw material prices and
availability;
|
|
|
|
changes in general economic conditions or developments with
respect to specific industries or customers affecting demand for
the Companys products including unfavorable shifts in
product mix;
|
|
|
|
unanticipated costs, expenses or third-party claims;
|
|
|
|
the risk that results may be affected by construction delays,
cost overruns, technical difficulties, nonperformance by
contractors or changes in capital improvement project
requirements or specifications;
|
|
|
|
interest rate, chemical and energy cost volatility;
|
|
|
|
changes in returns on pension plan assets
and/or
assumptions used for determining employee benefit expense and
obligations;
|
|
|
|
other unforeseen developments in the industries in which
Penford operates,
|
|
|
|
the Companys ability to successfully operate under and
comply with the terms of its bank credit agreement, as
amended;
|
|
|
|
other factors described in Part I, Item 1A
Risk Factors.
|
|
|
Item 7A:
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market
Risk Sensitive Instruments and Positions
Penford is exposed to market risks that are inherent in the
financial instruments that are used in the normal course of
business. Penford may use various hedge instruments to manage or
reduce market risk, but the Company does not use derivative
financial instrument transactions for speculative purposes. The
primary market risks are discussed below.
Interest
Rate Risk
The Companys exposure to market risk for changes in
interest rates relates to its variable-rate borrowings. As of
August 31, 2010, all of the Companys outstanding bank
debt is subject to variable interest rates, which are generally
set for one or three months. The market risk associated with a
100 basis point adverse change in interest rates at
August 31, 2010 is approximately $0.2 million.
31
Foreign
Currency Exchange Rates
At August 31, 2009, the Company had
U.S.-Australian
dollar currency exchange rate risks due to debt borrowings
denominated in Australian dollars. At August 31, 2010, the
Australian dollar-denominated debt had been repaid and the
Company has no plans to borrow funds in a foreign currency.
Commodities
The availability and price of corn, Penfords most
significant raw material, is subject to fluctuations due to
unpredictable factors such as weather, plantings, domestic and
foreign governmental farm programs and policies, changes in
global demand and the worldwide production of corn. To reduce
the price risk caused by market fluctuations, Penford generally
follows a policy of using exchange-traded futures and options
contracts to hedge exposure to corn price fluctuations in North
America. These futures and options contracts are designated as
hedges. The changes in market value of these contracts have
historically been, and are expected to continue to be, highly
effective in offsetting the price changes in corn. A majority of
the Companys sales contracts for corn-based industrial
starch ingredients contain a pricing methodology which allows
the Company to pass-through the majority of the changes in the
commodity price of net corn.
Penfords net corn position in the U.S. consists
primarily of inventories, purchase contracts and exchange-traded
futures and options contracts that hedge Penfords exposure
to commodity price fluctuations. The fair value of the position
is based on quoted market prices. The Company has estimated its
market risk as the potential loss in fair value resulting from a
hypothetical 10% adverse change in prices. As of August 31,
2010 and 2009, the fair value of the Companys net corn
position was approximately $1.6 million and
$(1.5) million, respectively. The market risk associated
with a 10% adverse change in corn prices at August 31, 2010
and 2009 is approximately $161,000 and $149,000, respectively.
Prices for natural gas fluctuate due to anticipated changes in
supply and demand and movement of prices of related or
alternative fuels. To reduce the price risk caused by sudden
market fluctuations, Penford generally enters into short-term
purchase contracts or uses exchange-traded futures and options
contracts to hedge exposure to natural gas price fluctuations.
These futures and options contracts are designated as hedges.
The changes in market value of these contracts have historically
been, and are expected to continue to be, closely correlated
with the price changes in natural gas.
Penfords exchange traded futures and options contracts
hedge production requirements. The fair value of these contracts
is based on quoted market prices. The Company has estimated its
market risk as the potential loss in fair value resulting from a
hypothetical 10% adverse change in prices. As of August 31,
2010 and 2009, the fair value of the natural gas exchange-traded
futures and options contracts was a loss of approximately
$1.2 million and a loss of approximately $1.3 million,
respectively. The market risk associated with a 10% adverse
change in natural gas prices at August 31, 2010 and 2009 is
estimated at $125,000 and $130,000, respectively.
32
|
|
Item 8:
|
Financial
Statements and Supplementary Data
|
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
34
|
|
|
|
|
35
|
|
|
|
|
36
|
|
|
|
|
37
|
|
|
|
|
38
|
|
|
|
|
39
|
|
|
|
|
70
|
|
33
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
315
|
|
|
$
|
5,540
|
|
Trade accounts receivable, net
|
|
|
26,749
|
|
|
|
32,192
|
|
Inventories
|
|
|
19,849
|
|
|
|
18,155
|
|
Prepaid expenses
|
|
|
5,237
|
|
|
|
5,081
|
|
Income tax receivable
|
|
|
3,678
|
|
|
|
3,892
|
|
Other
|
|
|
5,287
|
|
|
|
3,476
|
|
Current assets of discontinued operations
|
|
|
|
|
|
|
38,486
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
61,115
|
|
|
|
106,822
|
|
Property, plant and equipment, net
|
|
|
111,930
|
|
|
|
119,049
|
|
Restricted cash value of life insurance
|
|
|
7,951
|
|
|
|
9,761
|
|
Deferred tax assets
|
|
|
16,493
|
|
|
|
8,277
|
|
Other assets
|
|
|
2,615
|
|
|
|
2,075
|
|
Other intangible assets, net
|
|
|
407
|
|
|
|
481
|
|
Goodwill, net
|
|
|
7,897
|
|
|
|
7,553
|
|
Non-current assets of discontinued operations
|
|
|
|
|
|
|
4,227
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
208,408
|
|
|
$
|
258,245
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Cash overdraft, net
|
|
$
|
4,385
|
|
|
$
|
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
429
|
|
|
|
21,241
|
|
Accounts payable
|
|
|
14,650
|
|
|
|
14,745
|
|
Accrued liabilities
|
|
|
6,536
|
|
|
|
8,972
|
|
Current liabilities of discontinued operations
|
|
|
|
|
|
|
16,028
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
26,000
|
|
|
|
60,986
|
|
Long-term debt and capital lease obligations
|
|
|
21,038
|
|
|
|
71,141
|
|
Redeemable preferred stock, Series A (Note 7)
|
|
|
34,104
|
|
|
|
|
|
Other postretirement benefits
|
|
|
16,891
|
|
|
|
17,678
|
|
Pension benefit liability
|
|
|
20,597
|
|
|
|
18,043
|
|
Other liabilities
|
|
|
6,206
|
|
|
|
8,187
|
|
Non-current liabilities of discontinued operations
|
|
|
|
|
|
|
2,851
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
124,836
|
|
|
|
178,886
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $1.00 per share, authorized
29,000 shares, issued 13,354 shares in 2010 and
13,247 shares in 2009, including treasury shares
|
|
|
13,190
|
|
|
|
13,157
|
|
Preferred stock, Series B (Note 7)
|
|
|
100
|
|
|
|
|
|
Additional paid-in capital
|
|
|
102,303
|
|
|
|
93,829
|
|
Retained earnings
|
|
|
14,586
|
|
|
|
7,944
|
|
Treasury stock, at cost, 1,981 shares
|
|
|
(32,757
|
)
|
|
|
(32,757
|
)
|
Accumulated other comprehensive loss
|
|
|
(13,850
|
)
|
|
|
(2,814
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
83,572
|
|
|
|
79,359
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
208,408
|
|
|
$
|
258,245
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
34
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except
|
|
|
|
share and per share data)
|
|
|
Sales
|
|
$
|
254,274
|
|
|
$
|
255,556
|
|
|
$
|
239,581
|
|
Cost of sales
|
|
|
230,820
|
|
|
|
243,265
|
|
|
|
194,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
23,454
|
|
|
|
12,291
|
|
|
|
44,588
|
|
Operating expenses
|
|
|
23,943
|
|
|
|
23,501
|
|
|
|
25,727
|
|
Research and development expenses
|
|
|
4,371
|
|
|
|
4,348
|
|
|
|
5,671
|
|
Flood related costs, net of insurance proceeds
|
|
|
|
|
|
|
(9,109
|
)
|
|
|
27,555
|
|
Other costs
|
|
|
|
|
|
|
|
|
|
|
1,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,860
|
)
|
|
|
(6,449
|
)
|
|
|
(15,776
|
)
|
Interest expense
|
|
|
7,550
|
|
|
|
5,557
|
|
|
|
3,089
|
|
Other non-operating income (expense), net
|
|
|
(1,921
|
)
|
|
|
1,915
|
|
|
|
2,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(14,331
|
)
|
|
|
(10,091
|
)
|
|
|
(16,105
|
)
|
Income tax benefit
|
|
|
(4,702
|
)
|
|
|
(3,446
|
)
|
|
|
(5,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(9,629
|
)
|
|
|
(6,645
|
)
|
|
|
(10,808
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
16,312
|
|
|
|
(58,142
|
)
|
|
|
(1,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,683
|
|
|
$
|
(64,787
|
)
|
|
$
|
(12,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents outstanding,
basic and diluted
|
|
|
11,600,885
|
|
|
|
11,170,493
|
|
|
|
10,565,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share from continuing operations
|
|
$
|
(0.84
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(1.02
|
)
|
Basic earnings (loss) per share from discontinued operations
|
|
|
1.41
|
|
|
|
(5.21
|
)
|
|
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.57
|
|
|
$
|
(5.80
|
)
|
|
$
|
(1.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share from continuing operations
|
|
$
|
(0.84
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(1.02
|
)
|
Diluted earnings (loss) per share from discontinued operations
|
|
|
1.41
|
|
|
|
(5.21
|
)
|
|
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.57
|
|
|
$
|
(5.80
|
)
|
|
$
|
(1.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
|
|
|
$
|
0.12
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
35
Consolidated
Statements of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Net income (loss)
|
|
$
|
6,683
|
|
|
$
|
(64,787
|
)
|
|
$
|
(12,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives, net of tax benefit
(expense) of $530, $(1,255) and $1,999
|
|
|
(864
|
)
|
|
|
2,047
|
|
|
|
(3,261
|
)
|
Loss (gain) from derivative transactions reclassified into
earnings from other comprehensive income, net of tax benefit
(expense) of $1,555, $(1,837) and $1,574
|
|
|
2,537
|
|
|
|
(2,998
|
)
|
|
|
2,568
|
|
Foreign currency translation adjustments
|
|
|
930
|
|
|
|
(7,635
|
)
|
|
|
2,041
|
|
Gain from foreign currency translation reclassified into earnings
|
|
|
(13,420
|
)
|
|
|
|
|
|
|
|
|
Actuarial loss on post retirement liabilities, net of tax
benefit of $780, $5,441 and $571
|
|
|
(1,272
|
)
|
|
|
(8,879
|
)
|
|
|
(931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from post retirement liabilities reclassified to earnings,
net of tax benefit of $645, $119 and $57
|
|
|
1,053
|
|
|
|
194
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(11,036
|
)
|
|
|
(17,271
|
)
|
|
|
511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(4,353
|
)
|
|
$
|
(82,058
|
)
|
|
$
|
(12,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
36
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,683
|
|
|
$
|
(64,787
|
)
|
|
$
|
(12,700
|
)
|
Less: Net income (loss) from discontinued operations
|
|
$
|
16,312
|
|
|
$
|
(58,142
|
)
|
|
$
|
(1,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(9,629
|
)
|
|
$
|
(6,645
|
)
|
|
$
|
(10,808
|
)
|
Adjustments to reconcile net loss from continuing operations to
net cash provided by (used in) operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
14,791
|
|
|
|
14,455
|
|
|
|
12,066
|
|
Stock-based compensation
|
|
|
1,611
|
|
|
|
2,656
|
|
|
|
2,256
|
|
Loss (gain) on sale and disposal of assets
|
|
|
(2
|
)
|
|
|
(1,554
|
)
|
|
|
3,669
|
|
Deferred income tax benefit
|
|
|
(4,578
|
)
|
|
|
|
|
|
|
(5,019
|
)
|
Loss (gain) on derivative transactions
|
|
|
2,522
|
|
|
|
(133
|
)
|
|
|
661
|
|
Foreign currency transaction gain
|
|
|
(419
|
)
|
|
|
(127
|
)
|
|
|
(706
|
)
|
Loss on early extinguishment of debt
|
|
|
1,049
|
|
|
|
|
|
|
|
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(86
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
5,250
|
|
|
|
(20,111
|
)
|
|
|
24,615
|
|
Inventories
|
|
|
(3,356
|
)
|
|
|
7,754
|
|
|
|
(9,572
|
)
|
Prepaid expenses
|
|
|
(383
|
)
|
|
|
(1,429
|
)
|
|
|
305
|
|
Accounts payable and accrued liabilities
|
|
|
854
|
|
|
|
(15,987
|
)
|
|
|
6,222
|
|
Income taxes
|
|
|
(138
|
)
|
|
|
4,222
|
|
|
|
(8,453
|
)
|
Insurance recovery receivable
|
|
|
|
|
|
|
8,000
|
|
|
|
(8,000
|
)
|
Other
|
|
|
2,496
|
|
|
|
(2,281
|
)
|
|
|
(8,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by (used in) operating
activities continuing operations
|
|
|
10,068
|
|
|
|
(11,180
|
)
|
|
|
(1,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of property, plant and equipment, net
|
|
|
(5,980
|
)
|
|
|
(5,379
|
)
|
|
|
(38,505
|
)
|
Proceeds from sale of dextrose product line
|
|
|
|
|
|
|
2,857
|
|
|
|
|
|
Net proceeds received from sale of discontinued operations and
other
|
|
|
20,712
|
|
|
|
725
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
continuing operations
|
|
|
14,732
|
|
|
|
(1,797
|
)
|
|
|
(38,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving line of credit
|
|
|
30,700
|
|
|
|
55,931
|
|
|
|
67,529
|
|
Payments on revolving line of credit
|
|
|
(58,033
|
)
|
|
|
(24,500
|
)
|
|
|
(41,052
|
)
|
Proceeds from issuance of long-term debt
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(45,992
|
)
|
|
|
(7,750
|
)
|
|
|
(27,625
|
)
|
Proceeds from issuance of preferred stock
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
Issuance costs of preferred stock
|
|
|
(1,995
|
)
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
352
|
|
Payments on capital lease obligations
|
|
|
(245
|
)
|
|
|
(263
|
)
|
|
|
(67
|
)
|
Payment of loan fees
|
|
|
(1,227
|
)
|
|
|
(1,574
|
)
|
|
|
(63
|
)
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
86
|
|
Increase (decrease) in cash overdraft.
|
|
|
4,385
|
|
|
|
(1,301
|
)
|
|
|
(3,609
|
)
|
Payment of dividends
|
|
|
|
|
|
|
(2,026
|
)
|
|
|
(2,449
|
)
|
Net proceeds from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
46,844
|
|
Other
|
|
|
19
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
continuing operations
|
|
|
(30,388
|
)
|
|
|
18,517
|
|
|
|
39,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
6,329
|
|
|
|
(1,713
|
)
|
|
|
9,901
|
|
Net cash provided by (used in) investing activities
|
|
|
(2,848
|
)
|
|
|
(290
|
)
|
|
|
(1,249
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(3,399
|
)
|
|
|
2,044
|
|
|
|
(7,722
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(353
|
)
|
|
|
59
|
|
|
|
(396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by discontinued operations
|
|
|
(271
|
)
|
|
|
100
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(5,859
|
)
|
|
|
5,640
|
|
|
|
534
|
|
Cash and cash equivalents of continuing operations , beginning
of year
|
|
|
5,540
|
|
|
|
|
|
|
|
|
|
Cash balance of discontinued operations, beginning of year
|
|
|
634
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
|
315
|
|
|
|
6,174
|
|
|
|
534
|
|
Less: cash balance of discontinued operations, end of year
|
|
|
|
|
|
|
634
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations, end of year
|
|
$
|
315
|
|
|
$
|
5,540
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
4,939
|
|
|
$
|
3,596
|
|
|
$
|
2,609
|
|
Income taxes paid (refunded), net
|
|
$
|
(172
|
)
|
|
$
|
(10,300
|
)
|
|
$
|
9,742
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations incurred for certain equipment leases
|
|
$
|
34
|
|
|
$
|
|
|
|
$
|
1,150
|
|
The accompanying notes are an integral part of these statements.
37
Consolidated
Statements of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
13,157
|
|
|
$
|
13,127
|
|
|
$
|
11,099
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
28
|
|
Issuance of restricted stock, net
|
|
|
33
|
|
|
|
30
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
13,190
|
|
|
|
13,157
|
|
|
|
13,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of preferred stock, Series B
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
93,829
|
|
|
|
91,443
|
|
|
|
43,902
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
322
|
|
Tax benefit (deficiency) on stock option and awards
|
|
|
(321
|
)
|
|
|
(256
|
)
|
|
|
86
|
|
Stock based compensation
|
|
|
1,586
|
|
|
|
2,672
|
|
|
|
2,289
|
|
Issuance of restricted stock, net
|
|
|
(33
|
)
|
|
|
(30
|
)
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
44,844
|
|
Issuance of preferred stock
|
|
|
7,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
102,303
|
|
|
|
93,829
|
|
|
|
91,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
7,944
|
|
|
|
74,092
|
|
|
|
89,486
|
|
Cumulative effect of a change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,944
|
|
|
|
74,092
|
|
|
|
89,368
|
|
Net income (loss)
|
|
|
6,683
|
|
|
|
(64,787
|
)
|
|
|
(12,700
|
)
|
Dividends declared
|
|
|
|
|
|
|
(1,352
|
)
|
|
|
(2,576
|
)
|
Other
|
|
|
(41
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
14,586
|
|
|
|
7,944
|
|
|
|
74,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock
|
|
|
(32,757
|
)
|
|
|
(32,757
|
)
|
|
|
(32,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(2,814
|
)
|
|
|
14,457
|
|
|
|
13,946
|
|
Change in fair value of derivatives, net of tax
|
|
|
(864
|
)
|
|
|
2,047
|
|
|
|
(3,261
|
)
|
Loss (gain) from derivative transactions reclassified into
earnings from other comprehensive income, net of tax
|
|
|
2,537
|
|
|
|
(2,998
|
)
|
|
|
2,568
|
|
Foreign currency translation adjustments
|
|
|
930
|
|
|
|
(7,635
|
)
|
|
|
2,041
|
|
Gain from foreign currency translation reclassified into earnings
|
|
|
(13,420
|
)
|
|
|
|
|
|
|
|
|
Net increase in postretirement liabilities, net of tax
|
|
|
(219
|
)
|
|
|
(8,685
|
)
|
|
|
(837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(13,850
|
)
|
|
|
(2,814
|
)
|
|
|
14,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
83,572
|
|
|
$
|
79,359
|
|
|
$
|
160,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
38
Notes to
Consolidated Financial Statements
|
|
Note 1
|
Summary
of Significant Accounting Policies
|
Business
Penford Corporation (Penford or the
Company) is a developer, manufacturer and marketer
of specialty natural-based ingredient systems for industrial and
food ingredient applications and ethanol. Penfords
products provide convenient and cost-effective solutions derived
from renewable sources. Sales of the Companys products are
generated using a combination of direct sales and distributor
agreements.
The Company has extensive research and development capabilities,
which are used in understanding the complex chemistry of
carbohydrate-based materials and in developing applications to
address customer needs. In addition, the Company has specialty
processing capabilities for a variety of modified starches.
Penford manages its business in two segments. The Industrial
Ingredients and Food Ingredients segments, located in the U.S.,
are broad categories of end-market users. The Industrial
Ingredients segment is a supplier of chemically modified
specialty starches to the paper and packaging industries and a
producer of ethanol. The Food Ingredients segment is a developer
and manufacturer of specialty starches and dextrin to the food
manufacturing and food service industries. See Note 19 for
financial information regarding the Companys business
segments.
Basis of
Presentation
The accompanying consolidated financial statements include the
accounts of Penford and its wholly owned subsidiaries. All
material intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to prior
years financial statements in order to conform to the
current year presentation.
Discontinued
Operations
In August 2009, the Company committed to a plan to exit from the
business conducted by the Companys Australia/New Zealand
Operations. On September 2, 2009, the Company completed the
sale of Penford New Zealand Limited (Penford New
Zealand). On November 27, 2009, the Company completed
the sale of the operating assets of its subsidiary company
Penford Australia Limited (Penford Australia),
including its two remaining Australian plants. The financial
results of the Australia/New Zealand Operations have been
classified as discontinued operations in the consolidated
statement of operations for all periods for which an income
statement is presented. The assets and liabilities of this
business were reflected as assets and liabilities of
discontinued operations in the consolidated balance sheets as of
August 31, 2009 and 2008. At August 31, 2010, the
remaining net assets of the Australia/New Zealand Operations,
consisting of $0.3 million of cash and $1.3 million of
other net assets, primarily a receivable from the purchaser of
one of the Companys Australian manufacturing facilities,
have been reported as assets and liabilities of the continuing
operations of the Company. See Note 2 for additional
information regarding discontinued operations. Unless otherwise
indicated, amounts and discussions in these notes pertain to the
Companys continuing operations.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at
the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Estimates
are used in accounting for, among other things, the allowance
for doubtful accounts, accruals, the determination of
assumptions for pension and postretirement employee benefit
costs, useful lives of property and equipment and valuation
allowance for deferred tax assets. Actual results may differ
from previously estimated amounts.
Cash and
Cash Equivalents
Cash and cash equivalents consist of cash and temporary
investments with maturities of less than three months when
purchased. Amounts are reported in the balance sheets at cost,
which approximates fair value.
39
Cash
Overdrafts
Cash overdrafts represent the amount by which outstanding checks
issued, but not yet presented to banks for disbursement, exceed
balances on deposit in the applicable bank accounts. The changes
in cash overdrafts are included as a component of cash flows
from financing activities in the consolidated statements of cash
flows.
Allowance
for Doubtful Accounts and Concentration of Credit Risk
The allowance for doubtful accounts reflects the Companys
best estimate of probable losses in the accounts receivable
balances. Penford estimates the allowance for uncollectible
accounts based on historical experience, known troubled
accounts, industry trends, economic conditions, how recently
payments have been received, and ongoing credit evaluations of
its customers. Activity in the allowance for doubtful accounts
for fiscal 2010, 2009 and 2008 is as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
Charged to
|
|
|
|
|
|
|
Beginning of
|
|
Costs and
|
|
Deductions
|
|
Balance
|
|
|
Year
|
|
Expenses
|
|
and Other
|
|
End of Year
|
|
Year ended August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
605
|
|
|
$
|
(218
|
)
|
|
$
|
(37
|
)
|
|
$
|
350
|
|
2009
|
|
$
|
550
|
|
|
$
|
(2
|
)
|
|
$
|
57
|
|
|
$
|
605
|
|
2008
|
|
$
|
725
|
|
|
$
|
(154
|
)
|
|
$
|
(21
|
)
|
|
$
|
550
|
|
Approximately 45%, 52% and 70% of the Companys sales in
fiscal 2010, 2009 and 2008, respectively, were made to customers
who operate in the paper industry. This industry has suffered an
economic downturn, which has resulted in the closure of a number
of smaller mills.
Inventories
Inventory is stated at the lower of cost or market. Inventory is
valued using the
first-in,
first-out (FIFO) method, which approximates actual
cost. Capitalized costs include materials, labor and
manufacturing overhead related to the purchase and production of
inventories.
Goodwill
and Other Intangible Assets
In accordance with Accounting Standards Codification
(ASC or the Codification) 350,
Intangibles Goodwill and Other, goodwill
is not amortized, but instead is tested for impairment at least
annually or more frequently if there is an indication of
impairment.
The Company evaluates its goodwill for impairment annually and
whenever events or circumstances make it more likely than not
that an impairment may have occurred. To determine whether
goodwill is impaired, Penford compares the fair value of each
reporting units to that report units carrying amount. If
the fair value of the reporting unit is greater than its
carrying amount goodwill is not considered impaired. If the fair
value of the reporting unit is lower than its carrying amount,
Penford then compares the implied fair value of the reporting
units goodwill with the carrying amount of that goodwill
and if the carrying value is higher than the fair value, an
impairment is recorded. The implied fair value of a reporting
unit is determined using a discounted cash flow method
considering the Companys the market capitalization.
The Company completed its annual goodwill impairment test as of
June 1, 2010 and determined there was no impairment to the
recorded value of goodwill.
Patents are amortized using the straight-line method over their
estimated period of benefit. At August 31, 2010, the
weighted average remaining amortization period for patents is
six years. Penford has no intangible assets with indefinite
lives.
Property,
Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures
for maintenance and repairs are expensed as incurred. The
Company uses the straight-line method to compute depreciation
expense assuming average useful
40
lives of three to forty years for financial reporting purposes.
Equipment and vehicle leases generally have average useful lives
ranging from three to twelve years and real estate between
twelve to forty-six years. Depreciation, which includes
depreciation of assets under capital leases, of
$13.1 million, $13.8 million and $11.7 million
was recorded in fiscal years 2010, 2009 and 2008, respectively.
For income tax purposes, the Company generally uses accelerated
depreciation methods.
Interest is capitalized on major construction projects while in
progress. No interest was capitalized in fiscal years 2010 and
2009. In fiscal 2008, the Company capitalized $1.1 million
in interest costs related to the ethanol facility construction.
Income
Taxes
The provision for income taxes includes federal and state taxes
currently payable and deferred income taxes arising from
temporary differences between financial and income tax reporting
methods. Deferred taxes are recorded using the liability method
in recognition of these temporary differences. A valuation
allowance is provided to the extent that it is more likely than
not that deferred tax assets will not be realized. The Company
has not provided deferred taxes related to its investment in
foreign subsidiaries, which are classified as discontinued
operations, as it does not expect future distributions from the
subsidiaries or repayments of permanent advances.
Revenue
Recognition
Revenue from sales of products and shipping and handling revenue
are recognized at the time goods are shipped and title transfers
to the customer. This transfer is considered complete when a
sales agreement is in place, delivery has occurred, pricing is
fixed or determinable and collection is reasonably assured.
Costs associated with shipping and handling is included in cost
of sales.
Research
and Development
Research and development costs are expensed as incurred, except
for costs of patents, which are capitalized and amortized over
the lives of the patents. Research and development costs
expensed were $4.4 million, $4.3 million and
$5.7 million in fiscal 2010, 2009 and 2008, respectively.
Foreign
Currency
Assets and liabilities of subsidiaries whose functional currency
is deemed to be other than the U.S. dollar are translated
at year end rates of exchange. Resulting translation adjustments
are accumulated in the currency translation adjustments
component of other comprehensive income. Statement of Operations
amounts are translated at average exchange rates prevailing
during the year. For fiscal years 2010 and 2009, the net foreign
currency transaction gain (loss) recognized in earnings was
$0.4 million, $0.1 million and $(0.2) million for
fiscal years 2010, 2009 and 2008, respectively.
Derivatives
Penford uses derivative instruments to manage the exposures
associated with commodity prices, interest rates and energy
costs. The derivative instruments are reported at fair value in
other current assets or accounts payable in the consolidated
balance sheets.
For derivative instruments designated as fair value hedges, the
gain or loss on the derivative instruments as well as the
offsetting gain or loss on the hedged firm commitments are
recognized in current earnings as a component of cost of goods
sold. For derivative instruments designated as cash flow hedges,
the effective portion of the gain or loss on the derivative
instruments is reported as a component of other comprehensive
income (loss), net of applicable income taxes, and recognized in
earnings when the hedged exposure affects earnings. The Company
recognizes the gain or loss on the derivative instrument as a
component of cost of goods sold in the period when the finished
goods produced from the hedged item are sold or, for interest
rate swaps, as a component of interest expense in the period the
forecasted transaction is reported in earnings. If it is
determined that the derivative instruments used are no longer
effective at offsetting changes in cash flows or fair value of
the hedged item, then the changes in fair value would be
recognized in current earnings as a component of cost of good
sold or interest expense.
41
Significant
Customer and Export Sales
The Company has several relatively large customers in each
business segment. The Companys sales of ethanol to its
sole ethanol customer, Eco-Energy, Inc., represented
approximately 27%, 21% and 2% of the Companys net sales
for fiscal years 2010, 2009 and 2008, respectively. Eco-Energy,
Inc. is a marketer and distributor of bio-fuels in the United
States and Canada. The Companys second largest customer,
Domtar, Inc., represented approximately 8%, 11% and 15% of the
Companys net sales for fiscal years 2010, 2009 and 2008,
respectively. Domtar, Inc. and Eco-Energy are customers of the
Companys Industrial Ingredients business. Export sales
accounted for approximately 9%, 8% and 11% of consolidated sales
in fiscal 2010, 2009 and 2008, respectively.
Stock-Based
Compensation
The Company recognizes stock-based compensation in accordance
with Financial Accounting Standards Board (FASB)
ASC 718, Compensation Stock
Compensation. The Company utilizes the Black-Scholes
option-pricing model to determine the fair value of stock
options on the date of grant. This model derives the fair value
of stock options based on certain assumptions related to
expected stock price volatility, expected option life, risk-free
interest rate and dividend yield. See Note 12 for further
detail.
Recent
Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board
(FASB) issued guidance to amend the disclosure
requirements relating to fair value measurements. The guidance
requires new disclosures on the transfers of assets and
liabilities between Level 1 (quoted prices in an active
market for identical assets and liabilities) and Level 2
(significant other observable inputs) of the fair value
measurement hierarchy, including the reasons and the timing of
the transfers. The guidance also requires a roll forward of
activities on purchases, sales, issuance, and settlements of the
assets and liabilities measured in Level 3 (significant
unobservable inputs). For the Company, the disclosures related
to the transfers of assets and liabilities were effective for
the third quarter of fiscal 2010. The Company had no transfers
and no disclosure was required. The disclosure on the roll
forward activities for Level 3 fair value measurements will
be effective in the third quarter of fiscal 2011. Other than
requiring additional disclosures, adoption of this guidance will
not have an impact on the Companys financial position,
results of operations or liquidity.
|
|
Note 2
|
Discontinued
Operations
|
On August 27, 2009, the Company committed to a plan to exit
from the business conducted by its Australia/New Zealand
Operations. As a result, the Companys financial statements
reflect the Australia/New Zealand Operations as discontinued
operations for all periods for which an income statement is
presented in compliance with the provisions of the Financial
Accounting Standards Board Accounting Standards Codification
205-10,
Presentation of Financial Statements
Discontinued Operations (ASC
205-10).
The Australia/New Zealand Operations segment was previously
reported as the Companys third operating segment. The
following tables summarize the financial information for
discontinued operations related to the Australia/New Zealand
Operations. Interest expense on debt directly attributable to
the Australia/New Zealand Operations has been allocated to
discontinued operations.
Penford Australia completed the sale of the shares of its
wholly-owned subsidiary, Penford New Zealand, on
September 2, 2009. Proceeds from the sale, net of
transaction costs, were $4.8 million. On November 27,
2009, Penford Australia completed the sale of substantially all
of its operating assets, including property, plant and
equipment, intellectual property, and inventories in two
transactions to unrelated parties. Proceeds from the sales, net
of transaction costs, were $15.3 million. Additionally, at
November 30, 2009, the Company recorded $1.3 million
of severance costs associated with the asset sales.
Proceeds from the sales included $2.0 million in escrow to
be released in four equal installments payable at six months,
ten months, twenty months and thirty months from
November 27, 2009. Penford Australia received the first two
installments of $0.5 million each in May 2010 and September
2010. The remaining escrowed payments are subject to the
buyers right to make warranty claims under the sale
contract. Penford Australia currently expects that all
warranties will be satisfied and that it will receive the
proceeds from the escrow account as scheduled. The
42
$1.5 million receivable is included in other current assets
in the Consolidated Balance Sheets at August 31, 2010. In
addition, Penford Australia received approximately
$0.8 million as further compensation for grain inventory on
hand on the date of sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
16,992
|
|
|
$
|
78,030
|
|
|
$
|
107,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(1,848
|
)
|
|
$
|
(57,754
|
)
|
|
$
|
(5,145
|
)
|
Interest expense
|
|
|
444
|
|
|
|
973
|
|
|
|
993
|
|
Gain on sale of assets
|
|
|
199
|
|
|
|
|
|
|
|
|
|
Reclassification of currency translation adjustments into
earnings
|
|
|
13,420
|
|
|
|
|
|
|
|
|
|
Other non-operating income, net
|
|
|
490
|
|
|
|
1,734
|
|
|
|
2,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before taxes
|
|
|
11,817
|
|
|
|
(56,993
|
)
|
|
|
(3,463
|
)
|
Income tax expense (benefit)
|
|
|
(4,495
|
)
|
|
|
1,149
|
|
|
|
(1,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
16,312
|
|
|
$
|
(58,142
|
)
|
|
$
|
(1,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2010, the remaining net assets of the
Australia/New Zealand Operations, consisting of
$0.3 million of cash and $1.3 million of other net
assets, primarily a receivable from the purchaser of one of the
Companys Australian manufacturing facilities, have been
reported as assets of the continuing operations of the Company.
|
|
|
|
|
|
|
August 31, 2009
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Cash
|
|
$
|
634
|
|
Trade accounts receivable, net
|
|
|
14,482
|
|
Inventories
|
|
|
22,129
|
|
Prepaid expenses
|
|
|
595
|
|
Income tax receivable
|
|
|
190
|
|
Other
|
|
|
456
|
|
|
|
|
|
|
Current assets of discontinued operations
|
|
|
38,486
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
3,799
|
|
Goodwill and other intangible assets, net
|
|
|
|
|
Other assets
|
|
|
428
|
|
|
|
|
|
|
Non-current assets of discontinued operations
|
|
|
4,227
|
|
|
|
|
|
|
Total assets of discontinued operations
|
|
$
|
42,713
|
|
|
|
|
|
|
|
LIABILITIES
|
Short-term borrowings
|
|
$
|
3,327
|
|
Accounts payable
|
|
|
10,697
|
|
Accrued liabilities
|
|
|
2,004
|
|
|
|
|
|
|
Current liabilities of discontinued operations
|
|
|
16,028
|
|
|
|
|
|
|
Other liabilities
|
|
|
2,851
|
|
|
|
|
|
|
Non-current liabilities of discontinued operations
|
|
|
2,851
|
|
|
|
|
|
|
Total liabilities of discontinued operations
|
|
$
|
18,879
|
|
|
|
|
|
|
43
The financial statements have been prepared in compliance with
the provisions of
ASC 205-10.
Accordingly, as of August 31, 2009, the Company stated the
long-lived assets of the Australia/New Zealand Operations at the
lower of their carrying values or fair value less costs to sell.
The Company estimated fair value of the long-lived assets based
on executed sales agreements for substantially all of its
Australian operating assets and the completed sale price of
Penford New Zealand. During fiscal 2010, there were no
significant changes to these estimates. The Company recorded a
non-cash asset impairment charge of $33.0 million in the
fourth quarter of fiscal 2009 to reduce the carrying value of
the long-lived assets of the Australia/New Zealand Operations to
estimated fair value less costs to sell.
During fiscal 2010, the Company determined that intercompany
loans made by its U.S. operations to its Australian
subsidiaries would not be fully collectible from the proceeds of
the Australian asset sales and the liquidation of the remaining
net financial assets. Accordingly, the Company recorded an
impairment charge in the U.S. of $13.6 million, which
was classified in discontinued operations for financial
reporting purposes. The impairment charge was offset against
$13.6 million of income in the Australian operations
discussed below. The U.S. tax benefit of the impairment was
also recorded in discontinued operations.
In the second quarter of fiscal 2009, the Company recorded a
$13.8 million non-cash goodwill impairment charge, which
represented all of the goodwill allocated to its Australia/New
Zealand reporting unit.
The Companys Australian operations reported tax losses for
fiscal years 2008, 2009 and 2010. Australian tax law provides
for an unlimited carryforward period for net operating losses
but does not allow losses to be carried back to previous tax
years. Due to the classification of the Australia operations as
discontinued and the uncertainty related to generating
sufficient future taxable income in Australia, the Company
believes that it is more likely than not that the net deferred
tax benefit will not be realized. The Companys
discontinued Australian operations recorded a valuation
allowance as of August 31, 2009 of $14.6 million
against the entire Australian net deferred tax asset. During
fiscal 2010, the Australian operations recorded
$13.6 million of income related to the U.S. impairment
discussed above. Accordingly, the Company decreased its deferred
tax asset related to the carryfoward of net operating losses and
reversed the corresponding tax valuation allowance. At
August 31, 2010, the valuation allowance related to the
Australian net deferred tax asset was $10.9 million.
|
|
Note 3
|
Cedar
Rapids Flood
|
On June 12, 2008, the Companys Cedar Rapids, Iowa
plant, operated by the Industrial Ingredients North
America business, was temporarily shut down due to record
flooding of the Cedar River and government-ordered mandatory
evacuation of the plant and surrounding areas.
During fiscal years 2009 and 2008, the Company recorded flood
restoration costs of $45.6 million, and insurance
recoveries of $27.2 million, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Repairs of buildings and equipment
|
|
$
|
6,346
|
|
|
$
|
17,082
|
|
|
$
|
23,428
|
|
Site remediation
|
|
|
348
|
|
|
|
5,389
|
|
|
|
5,737
|
|
Write off of inventory and fixed assets
|
|
|
71
|
|
|
|
4,016
|
|
|
|
4,087
|
|
Continuing costs during production shut down
|
|
|
|
|
|
|
9,771
|
|
|
|
9,771
|
|
Other
|
|
|
820
|
|
|
|
1,797
|
|
|
|
2,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,585
|
|
|
|
38,055
|
|
|
|
45,640
|
|
Insurance recoveries
|
|
|
(16,694
|
)
|
|
|
(10,500
|
)
|
|
|
(27,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net flood costs (recoveries)
|
|
$
|
(9,109
|
)
|
|
$
|
27,555
|
|
|
$
|
18,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The direct costs of the flood in the table above do not include
lost profits from the interruption of the business.
44
Site remediation began as soon as the flood waters subsided. The
Company engaged outside contractors to pump water and clean and
sanitize the facilities and grounds of the manufacturing
facility prior to access by Company personnel. The buildings and
equipment in Cedar Rapids sustained damages due to the severe
flooding.
The carrying value of fixed assets and related equipment spare
parts destroyed in the flooding were written off, totaling
$2.5 million. The write-off of inventory, totaling
$1.5 million, included the cost of raw materials,
work-in-process
and finished goods inventories that were not able to be used or
sold due to flood damage, the establishment of reserves for
estimated recoverability losses, and the costs of disposal,
including freight, for removal of damaged inventory.
During the suspension of production in the fourth quarter of
fiscal 2008, the Company incurred costs for wages, salaries and
related payroll costs, depreciation, pension expense, insurance,
rental costs and other items which continued regardless of the
level of production. Employees normally engaged in the
production of industrial starch were utilized in the
clean-up and
repairs of the facility and equipment, assessment and recovery
of inventories and other aspects of the site restoration. These
expenses totaled $9.8 million.
Insurance
recoveries
During the fiscal years 2009 and 2008, the Company recognized
insurance recoveries of $16.7 million and
$10.5 million, respectively. These recoveries have been
recorded as an offset to the losses caused by the flooding. The
Company is seeking additional payments from its insurers for
damages arising from the flooding. See Note 21.
Components of inventory are as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Raw materials
|
|
$
|
8,708
|
|
|
$
|
7,265
|
|
Work in progress
|
|
|
1,299
|
|
|
|
1,921
|
|
Finished goods
|
|
|
9,842
|
|
|
|
8,969
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
19,849
|
|
|
$
|
18,155
|
|
|
|
|
|
|
|
|
|
|
To reduce the price volatility of corn used in fulfilling some
of its starch sales contracts, Penford, from time to time, uses
readily marketable exchange-traded futures as well as forward
cash corn purchases. The exchange-traded futures are not
purchased or sold for trading or speculative purposes and are
designated as hedges. See Note 15.
|
|
Note 5
|
Property
and equipment
|
Components of property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Land
|
|
$
|
10,307
|
|
|
$
|
10,229
|
|
Plant and equipment
|
|
|
324,904
|
|
|
|
321,356
|
|
Construction in progress
|
|
|
4,272
|
|
|
|
2,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,483
|
|
|
|
333,799
|
|
Accumulated depreciation
|
|
|
(227,553
|
)
|
|
|
(214,750
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
111,930
|
|
|
$
|
119,049
|
|
|
|
|
|
|
|
|
|
|
The above table includes approximately $0.7 million and
$0.9 million of equipment under capital leases for fiscal
years 2010 and 2009, respectively.
45
|
|
Note 6
|
Goodwill
and other intangible assets
|
The Companys goodwill of $7.9 million and
$7.6 million at August 31, 2010 and 2009,
respectively, represents the excess of acquisition costs over
the fair value of the net assets of Penford Australia which was
allocated to the Companys Food Ingredients reporting unit.
The increase in goodwill is due to the change in the foreign
currency exchange rates prior to the divestiture of the
Australian assets.
Penfords intangible assets consist of patents which are
being amortized over the weighted average remaining amortization
period of six years as of August 31, 2010. There is no
residual value associated with patents. The carrying amount and
accumulated amortization of intangible assets are as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2010
|
|
August 31, 2009
|
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Accumulated
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
1,768
|
|
|
$
|
1,361
|
|
|
$
|
1,768
|
|
|
$
|
1,287
|
|
Amortization expense related to intangible assets was
$0.1 million in each of fiscal years 2010, 2009 and 2008.
The estimated aggregate annual amortization expense for patents
is not significant for the next five fiscal years, 2011 through
2015.
|
|
Note 7
|
Preferred
Stock Subject to Mandatory Redemption
|
On April 7, 2010, the Company issued $40 million of
Series A 15% cumulative non-voting, non-convertible
preferred stock (Series A Preferred Stock) and
100,000 shares of Series B voting convertible
preferred stock (Series B Preferred Stock) in a
private placement to Zell Credit Opportunities Master Fund,
L.P., an investment fund managed by Equity Group Investments, a
private investment firm (the Investor). Proceeds
from the preferred stock issuance of $40.0 million were
used to repay bank debt on April 8, 2010. The Company has
1,000,000 shares of authorized preferred stock,
$1.00 par value, of which 200,000 shares are issued
and outstanding at August 31, 2010 in two series as shown
below.
|
|
|
|
|
|
|
Shares Issued and
|
|
|
Outstanding
|
|
Series A 15% Cumulative Non-Voting Non-Convertible
Preferred Stock, redeemable
|
|
|
100,000
|
|
Series B Voting Convertible Preferred Stock
|
|
|
100,000
|
|
The Company recorded the Series A Preferred Stock and the
Series B Preferred Stock at their relative fair values at
the time of issuance. The Series A Preferred Stock of
$32.3 million was recorded as a long-term liability due to
its mandatory redemption feature and the Series B Preferred
Stock of $7.7 million was recorded as equity. The discount
on the Series A Preferred Stock is being amortized into
income using the effective interest method over the contractual
life of seven years. At August 31, 2010, the carrying value
of the Series A Preferred Stock liability of
$34.1 million includes $1.5 million of accrued
dividends, and $0.4 million of discount accretion for the
period from the date of issuance to August 31, 2010. The
accrued dividends represent the 9% dividends that may be paid or
accrued at the option of the Company. Dividends on the
Series A Preferred Stock and the discount accretion are
recorded as interest expense in the consolidated statements of
operations.
The holders of the Series A Preferred Stock are entitled to
cash dividends of 6% on the sum of the outstanding Series A
Preferred Stock plus accrued and unpaid dividends. In addition,
dividends equal to 9% of the outstanding Series A Preferred
Stock may accrue or be paid currently at the discretion of the
Company. Dividends are payable quarterly beginning May 31,
2010.
The Series A Preferred Stock is mandatorily redeemable on
April 7, 2017 at a per share redemption price equal to the
original issue price of $400 per share plus any accrued and
unpaid dividends. At any time on or after April 7, 2012,
the Company may redeem, in whole or in part, the shares of the
Series A Preferred Stock at a per share redemption price of
the original issue price plus any accrued and unpaid dividends.
46
The Company may not declare or pay any dividends on its common
stock or incur new indebtedness that exceeds a specified ratio
without first obtaining approval from the holders of a majority
of the Series A Preferred Stock.
The Company also granted to the investor certain information and
inspection rights and the right to elect one director to the
Companys Board of Directors while any shares of
Series A Preferred Stock remain outstanding. On
April 9, 2010, the Board of Directors, upon the
recommendation of the investor, elected Matthew Zell, a Managing
Director of Equity Group Investments, to be the director
designated by the holders of the Series A Preferred Stock.
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Secured credit agreements revolving loans, 4.61%
weighted average interest rate at August 31, 2010
|
|
$
|
18,900
|
|
|
$
|
45,610
|
|
Secured credit agreements term loans
|
|
|
|
|
|
|
5,375
|
|
Secured credit agreements capital expansion loans
|
|
|
|
|
|
|
40,451
|
|
Iowa Department of Economic Development loans
|
|
|
1,834
|
|
|
|
|
|
Capital lease obligations
|
|
|
733
|
|
|
|
946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,467
|
|
|
|
92,382
|
|
Less: current portion and short-term borrowings
|
|
|
429
|
|
|
|
21,241
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations
|
|
$
|
21,038
|
|
|
$
|
71,141
|
|
|
|
|
|
|
|
|
|
|
In fiscal year 2007, Penford entered into a $145 million
Second Amended and Restated Credit Agreement (the 2007
Agreement) among the Company; Harris N.A. (which has been
replaced by the Bank of Montreal); LaSalle Bank National
Association (now Bank of America); Cooperative Centrale
Raiffeisen-Boorleenbank B.A., Rabobank Nederland
(New York Branch); U.S. Bank National Association; and the
Australia and New Zealand Banking Group Limited. Substantially
all of the Companys U.S. assets secured the 2007
Agreement.
On April 7, 2010, the Company used the proceeds from the
preferred stock issuance discussed above to pay a portion of the
outstanding bank debt obligations under the 2007 Agreement. Also
on April 7, 2010, the Company refinanced its bank debt. The
Company entered into a $60 million Third Amended and
Restated Credit Agreement (the 2010 Agreement) among
the Company; Penford Products Co.; Bank of Montreal; Bank of
America National Association; and Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A., Rabobank Nederland
New York Branch.
The 2010 Agreement refinanced the unpaid debt remaining under
the 2007 Agreement. Under the 2010 Agreement, the Company may
borrow $60 million in revolving lines of credit. The
lenders revolving credit loan commitment may be increased
under certain conditions. On August 31, 2010, the Company
had $18.9 million outstanding under the 2010 Agreement,
which is subject to variable interest rates. Under the 2010
Agreement, there are no scheduled principal payments prior to
maturity on April 7, 2015.
Interest rates under the 2010 Agreement are based on either the
London Interbank Offering Rates (LIBOR) or the prime
rate, depending on the selection of available borrowing options
under the 2010 Agreement. The Company may choose a borrowing
rate of
1-month,
3-month or
6-month
LIBOR. Pursuant to the 2010 Agreement, the interest rate margin
over LIBOR ranges between 3% and 4%, depending upon the Total
Funded Debt Ratio (as defined). At August 31, 2010, the
Companys borrowing rate was 3.5%.
The 2010 Agreement provides that the Total Funded Debt Ratio,
which is computed as funded debt divided by earnings before
interest, taxes, depreciation and amortization (as defined in
the 2010 Agreement) shall not exceed 3.00. In addition, the
Company must maintain a Fixed Charge Coverage Ratio, as defined
in the 2010 Agreement, of not less than 1.35. Annual capital
expenditures are restricted to $15 million (excluding
certain capital expenditures specified in the 2010 Agreement) if
the Total Funded Debt Ratio is greater than 2.00 for two
consecutive fiscal quarters. The Companys obligations
under the 2010 Agreement are secured by substantially all of the
Companys
47
assets. Pursuant to the 2010 Agreement, the Company may not
declare or pay dividends on, or make any other distributions in
respect of, its common stock. The Company was in compliance with
the covenants in the 2010 Agreement as of August 31, 2010.
In connection with the refinancing, the Company recorded a
pre-tax non-cash charge to earnings of $1.0 million in the
third quarter of fiscal 2010 related to unamortized transaction
fees associated with the prior credit facility. The Company also
terminated its interest rate swaps in the third quarter of
fiscal 2010 and recorded a charge to earnings of
$1.6 million.
During the first quarter of fiscal 2010, the Iowa Department of
Economic Development (IDED) awarded financial
assistance to the Company as a result of the temporary shutdown
of the Cedar Rapids, Iowa plant in the fourth quarter of fiscal
2008 due to record flooding of the Cedar River. The IDED
provided two five-year non interest bearing loans as follows:
(1) a $1.0 million loan to be repaid in 60 equal
monthly payments of $16,667 beginning December 1, 2009, and
(2) a $1.0 million loan which is forgivable if the
Company maintains certain levels of employment at the Cedar
Rapids plant. The proceeds of these Iowa loans were used to
repay outstanding debt under the 2007 Agreement in the first
quarter of fiscal 2010. At August 31, 2010, the Company had
$1.8 million outstanding related to the IDED loans.
The maturities of debt existing at August 31, 2010 for the
fiscal years beginning with fiscal 2011 are as follows (dollars
in thousands):
|
|
|
|
|
2011
|
|
$
|
429
|
|
2012
|
|
|
443
|
|
2013
|
|
|
445
|
|
2014
|
|
|
200
|
|
2015
|
|
|
19,950
|
|
|
|
|
|
|
|
|
$
|
21,467
|
|
|
|
|
|
|
Included in the Companys long-term debt at August 31,
2010 is $0.7 million of capital lease obligations, of which
$0.2 million is considered current portion of long-term
debt. See Note 11.
|
|
Note 9
|
Stockholders
Equity
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
13,157,387
|
|
|
|
13,127,369
|
|
|
|
11,098,739
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
28,630
|
|
Issuance of restricted stock, net
|
|
|
32,194
|
|
|
|
30,018
|
|
|
|
|
|
Issuance of stock
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
13,189,581
|
|
|
|
13,157,387
|
|
|
|
13,127,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2007, the Company completed a public offering of
common stock resulting in the issuance of 2,000,000 common
shares at a price to the public of $25.00 per share. The Company
received approximately $47.2 million of net proceeds (net
of $2.8 million of expenses related to the offering) from
the sale of the shares. This transaction increased the recorded
amounts of common stock by $2.0 million and increased
additional paid-in capital by $45.2 million in the second
quarter of fiscal 2008. The Company incurred approximately
$0.4 million in professional fees related to the common
stock issuance.
Preferred
Stock, Series B
On April 7, 2010, the Company issued $40 million of
Series A 15% cumulative non-voting, non-convertible
preferred stock (Series A Preferred Stock) and
100,000 shares of Series B voting convertible
preferred stock
48
(Series B Preferred Stock) in a private
placement to Zell Credit Opportunities Master Fund, L.P., an
investment fund managed by Equity Group Investments, a private
investment firm (the Investor). See Note 7 for
further details. Series B Preferred Stock was recorded at
its relative fair value of $7.7 million at the time of
issuance and recorded as equity. The holders of the
Series B Preferred Stock are entitled to dividends equal to
the per share dividend declared and paid on the Companys
common stock times the number of shares of common stock into
which the Series B Preferred Stock is then convertible. The
Series B Preferred Stock is not redeemable and dividends on
the Series B Preferred Stock are non-cumulative.
At any time prior to April 7, 2020, at the option of the
holder, the outstanding Series B Preferred Stock may be
converted into shares of the Companys common stock at a
conversion rate of ten shares of common stock per one share of
Series B Preferred Stock, subject to adjustment in the
event of stock dividends, distributions, splits,
reclassifications and the like. If any shares of Series B
Preferred Stock have not been converted into shares of common
stock prior to April 7, 2020, the shares of Series B
Preferred Stock will automatically convert into shares of common
stock. The holders of the Series B Preferred Stock shall
have the right to one vote for each share of common stock into
which the Series B Preferred Stock is convertible.
In connection with this investment, the Company also agreed to
register the shares of Common Stock issuable upon conversion of
the Series B Preferred Stock. The registration statement
for these shares of Common Stock became effective on
June 7, 2010.
Until April 7, 2012, the Investor may not acquire any
additional shares of common stock, and may not, with limited
exceptions, transfer the Series B Preferred Stock, or the
Companys Common Stock into which the Series B
Preferred Stock is convertible.
|
|
Note 10
|
Accumulated
Other Comprehensive Loss
|
The components of accumulated other comprehensive loss are as
follows:
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Net unrealized loss on derivatives, net of tax
|
|
$
|
(582
|
)
|
|
$
|
(2,256
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
12,490
|
|
Minimum pension liability, net of tax
|
|
|
(13,268
|
)
|
|
|
(13,048
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(13,850
|
)
|
|
$
|
(2,814
|
)
|
|
|
|
|
|
|
|
|
|
49
Certain of the Companys property, plant and equipment is
leased under operating leases. Equipment and vehicle leases
generally have lease terms ranging from one to fifteen years
with renewal options and real estate leases range between five
to twenty years with renewal options. In fiscal 2010, rental
expense under operating leases was $6.0 million, net of
sublease rental income of approximately $0.1 million. In
fiscal 2009, rental expense under operating leases was
$6.8 million, net of sublease rental income of
approximately $0.3 million, and fiscal year 2008 was
$6.9 million, net of sublease rental income of
approximately $0.4 million. Future minimum lease payments
for fiscal years beginning with fiscal year 2011 for
noncancelable operating and capital leases having initial lease
terms of more than one year are as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
Capital
|
|
|
Minimum Lease
|
|
|
|
Leases
|
|
|
Payments
|
|
|
2011
|
|
$
|
279
|
|
|
$
|
3,751
|
|
2012
|
|
|
262
|
|
|
|
3,011
|
|
2013
|
|
|
253
|
|
|
|
2,299
|
|
2014
|
|
|
|
|
|
|
1,635
|
|
2015
|
|
|
|
|
|
|
821
|
|
Thereafter
|
|
|
|
|
|
|
881
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
794
|
|
|
$
|
12,398
|
|
|
|
|
|
|
|
|
|
|
Less: amounts representing interest
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments
|
|
$
|
733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12
|
Stock-based
Compensation Plans
|
Penford maintains the 2006 Long-Term Incentive Plan (the
2006 Incentive Plan) pursuant to which various
stock-based awards may be granted to employees, directors and
consultants. As of August 31, 2010, the aggregate number of
shares of the Companys common stock that are available to
be issued as awards under the 2006 Incentive Plan is 116,017. In
addition, any shares previously granted under the Penford
Corporation 1994 Stock Option Plan which are subsequently
forfeited or not exercised will be available for future grants
under the 2006 Incentive Plan. Non-qualified stock options
granted under the 2006 Incentive Plan generally vest ratably
over four years and expire seven years from the date of grant.
General
Option Information
A summary of the stock option activity for the year ended
August 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining Term (in
|
|
|
Aggregate Intrinsic
|
|
|
|
Shares
|
|
|
Option Price Range
|
|
|
Exercise Price
|
|
|
Years)
|
|
|
Value
|
|
|
Outstanding Balance, August 31, 2009
|
|
|
1,363,771
|
|
|
$
|
7.59 - 21.73
|
|
|
$
|
15.18
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(99,207
|
)
|
|
|
11.16 - 21.31
|
|
|
|
16.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance, August 31, 2010
|
|
|
1,264,564
|
|
|
|
7.59 - 21.73
|
|
|
|
15.07
|
|
|
|
3.38
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at August 31, 2010
|
|
|
1,077,314
|
|
|
$
|
7.59 - 21.73
|
|
|
$
|
14.70
|
|
|
|
3.13
|
|
|
$
|
|
|
The aggregate intrinsic value disclosed in the table above
represents the total pretax intrinsic value, based on the
Companys closing stock price of $4.90 per share as of
August 31, 2010 that would have been received by the
50
option holders had all option holders exercised on that date.
The intrinsic value of options exercised during fiscal year 2008
was $291,800. No stock options were exercised in fiscal years
2010 and 2009.
Valuation
and Expense Under ASC 718
The Company utilizes the Black-Scholes option-pricing model to
determine the fair value of stock options on the date of grant.
This model derives the fair value of stock options based on
certain assumptions related to expected stock price volatility,
expected option life, risk-free interest rate and dividend
yield. The Companys expected volatility is based on the
historical volatility of the Companys stock price over the
most recent period commensurate with the expected term of the
stock option award. The estimated expected option life is based
primarily on historical employee exercise patterns and considers
whether and the extent to which the options are
in-the-money.
The risk-free interest rate assumption is based upon the
U.S. Treasury yield curve appropriate for the term of the
Companys stock options awards and the selected dividend
yield assumption was determined in view of the Companys
historical and estimated dividend payout. The Company has no
reason to believe that the expected volatility of its stock
price or its option exercise patterns would differ significantly
from historical volatility or option exercises.
Under the 2006 Incentive Plan, the Company estimated the fair
value of stock options using the following assumptions and
resulting in the following weighted-average grant date fair
values:
|
|
|
|
|
|
|
2008
|
|
Expected volatility
|
|
|
41
|
%
|
Expected life (years)
|
|
|
5.5
|
|
Interest rate (percent)
|
|
|
2.8-3.7
|
|
Dividend yield
|
|
|
1.0
|
%
|
Weighted-average fair values
|
|
$
|
6.65
|
|
No stock options were granted in fiscal year 2010 and 2009. As
of August 31, 2010, the Company had $0.6 million of
unrecognized compensation costs related to non-vested stock
option awards that are expected to be recognized over a weighted
average period of 1.3 years.
Restricted
Stock Awards
The grant date fair value of the Companys restricted stock
awards is equal to the fair value of Penfords common stock
at the grant date. The following table summarizes the restricted
stock award activity for the twelve months ended August 31,
2010 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Number of Shares
|
|
|
Fair Value
|
|
|
Nonvested at August 31, 2009
|
|
|
89,582
|
|
|
$
|
31.31
|
|
Granted
|
|
|
113,707
|
|
|
|
6.60
|
|
Vested
|
|
|
(39,082
|
)
|
|
|
26.31
|
|
Cancelled
|
|
|
(9,500
|
)
|
|
|
10.82
|
|
|
|
|
|
|
|
|
|
|
Nonvested at August 31, 2010
|
|
|
154,707
|
|
|
$
|
15.67
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2010, 2009 and 2008, each non-employee
director received an award of 2,301, 1,976 and 781 shares
of restricted stock under the 2006 Incentive Plan at the last
reported sale price of the stock on the preceding trading day,
which vest one year from grant date of the award. The Company
recognizes compensation cost for restricted stock ratably over
the vesting period.
As of August 31, 2010, the Company had $0.7 million of
unrecognized compensation costs related to non-vested restricted
stock awards that is expected to be recognized over a weighted
average period of 1.2 years.
51
Compensation
Expense
The Company recognizes stock-based compensation expense
utilizing the accelerated multiple option approach over the
requisite service period, which equals the vesting period. The
following table summarizes the total stock-based compensation
cost for fiscal years 2010, 2009 and 2008 and the effect on the
Companys consolidated statements of operations (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cost of sales
|
|
$
|
170
|
|
|
$
|
307
|
|
|
$
|
176
|
|
Operating expenses
|
|
|
1,413
|
|
|
|
2,300
|
|
|
|
2,055
|
|
Research and development expenses
|
|
|
28
|
|
|
|
49
|
|
|
|
25
|
|
Discontinued operations
|
|
|
(25
|
)
|
|
|
16
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
1,586
|
|
|
$
|
2,672
|
|
|
$
|
2,289
|
|
Tax benefit
|
|
|
603
|
|
|
|
1,015
|
|
|
|
870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense, net of tax
|
|
$
|
983
|
|
|
$
|
1,657
|
|
|
$
|
1,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13
|
Pensions
and Other Postretirement Benefits
|
Penford maintains two noncontributory defined benefit pension
plans that cover substantially all North American employees and
retirees.
The Company also maintains a postretirement health care benefit
plan covering its North American bargaining unit hourly retirees.
52
Obligations
and Funded Status
The following represents information summarizing the
Companys pension and other postretirement benefit plans. A
measurement date of August 31, 2010 was used for all plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at September 1
|
|
$
|
43,861
|
|
|
$
|
38,289
|
|
|
$
|
18,345
|
|
|
$
|
13,532
|
|
Service cost
|
|
|
1,608
|
|
|
|
1,420
|
|
|
|
353
|
|
|
|
259
|
|
Interest cost
|
|
|
2,633
|
|
|
|
2,581
|
|
|
|
1,077
|
|
|
|
913
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
145
|
|
|
|
147
|
|
Actuarial (gain) loss
|
|
|
463
|
|
|
|
(507
|
)
|
|
|
10
|
|
|
|
2,423
|
|
Change in assumptions
|
|
|
2,215
|
|
|
|
3,950
|
|
|
|
(1,668
|
)
|
|
|
1,748
|
|
Benefits paid
|
|
|
(1,905
|
)
|
|
|
(1,872
|
)
|
|
|
(682
|
)
|
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at August 31
|
|
$
|
48,875
|
|
|
$
|
43,861
|
|
|
$
|
17,580
|
|
|
$
|
18,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at September 1
|
|
$
|
25,818
|
|
|
$
|
30,835
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
991
|
|
|
|
(4,279
|
)
|
|
|
|
|
|
|
|
|
Company contributions
|
|
|
3,374
|
|
|
|
1,134
|
|
|
|
537
|
|
|
|
530
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
145
|
|
|
|
147
|
|
Benefits paid
|
|
|
(1,905
|
)
|
|
|
(1,872
|
)
|
|
|
(682
|
)
|
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of the plan assets at August 31
|
|
$
|
28,278
|
|
|
$
|
25,818
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability Plan assets less than projected
benefit obligation
|
|
$
|
(20,597
|
)
|
|
$
|
(18,043
|
)
|
|
$
|
(17,580
|
)
|
|
$
|
(18,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accrued benefit liability
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(689
|
)
|
|
$
|
(667
|
)
|
Non-current accrued benefit liability
|
|
|
(20,597
|
)
|
|
|
(18,043
|
)
|
|
|
(16,891
|
)
|
|
|
(17,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Amount Recognized
|
|
$
|
(20,597
|
)
|
|
$
|
(18,043
|
)
|
|
$
|
(17,580
|
)
|
|
$
|
(18,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss consists of the following
amounts that have not yet been recognized as components of net
benefit cost (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2010
|
|
|
August 31, 2009
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
Unrecognized prior service cost (credit)
|
|
$
|
1,773
|
|
|
$
|
(611
|
)
|
|
$
|
2,017
|
|
|
$
|
(763
|
)
|
Unrecognized net actuarial loss
|
|
|
18,029
|
|
|
|
2,208
|
|
|
|
15,632
|
|
|
|
4,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,802
|
|
|
$
|
1,597
|
|
|
$
|
17,649
|
|
|
$
|
3,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
Selected information related to the Companys defined
benefit pension plans that have benefit obligations in excess of
fair value of plan assets is presented below (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
2010
|
|
2009
|
|
Projected benefit obligation
|
|
$
|
48,875
|
|
|
$
|
43,861
|
|
Accumulated benefit obligation
|
|
$
|
46,142
|
|
|
$
|
41,427
|
|
Fair value of plan assets
|
|
$
|
28,278
|
|
|
$
|
25,818
|
|
Effective August 1, 2004, the Companys postretirement
health care benefit plan covering bargaining unit hourly
employees was closed to new entrants and to any current employee
who did not meet minimum requirements as to age plus years of
service.
The defined benefit pension plans for salary and hourly
employees were closed to new participants effective
January 1, 2005 and August 1, 2004, respectively.
Net
Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,608
|
|
|
$
|
1,420
|
|
|
$
|
1,485
|
|
|
$
|
353
|
|
|
$
|
259
|
|
|
$
|
310
|
|
Interest cost
|
|
|
2,633
|
|
|
|
2,581
|
|
|
|
2,491
|
|
|
|
1,077
|
|
|
|
913
|
|
|
|
854
|
|
Expected return on plan assets
|
|
|
(2,022
|
)
|
|
|
(2,428
|
)
|
|
|
(2,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
244
|
|
|
|
253
|
|
|
|
253
|
|
|
|
(152
|
)
|
|
|
(152
|
)
|
|
|
(152
|
)
|
Amortization of actuarial loss
|
|
|
1,312
|
|
|
|
211
|
|
|
|
50
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit cost
|
|
$
|
3,775
|
|
|
$
|
2,037
|
|
|
$
|
1,627
|
|
|
$
|
1,572
|
|
|
$
|
1,020
|
|
|
$
|
1,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions
The Company assesses its benefit plan assumptions on a regular
basis. Assumptions used in determining plan information are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
2010
|
|
2009
|
|
2008
|
|
2010
|
|
2009
|
|
2008
|
|
Weighted-average assumptions used to calculate net periodic
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.98
|
%
|
|
|
6.92
|
%
|
|
|
6.51
|
%
|
|
|
5.98
|
%
|
|
|
6.92
|
%
|
|
|
6.51
|
%
|
Expected return on plan assets
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to calculate benefit
obligations at August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.64
|
%
|
|
|
5.98
|
%
|
|
|
6.92
|
%
|
|
|
5.64
|
%
|
|
|
5.98
|
%
|
|
|
6.92
|
%
|
Expected return on plan assets
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected long-term return on assets assumption for the
pension plans represents the average rate of return to be earned
on plan assets over the period the benefits included in the
benefit obligation are to be paid. In developing the expected
rate of return, the Company considers long-term historical
market rates of return as well as actual returns on the
Companys plan assets, and adjusts this information to
reflect expected capital market trends. Penford also considers
forward looking return expectations by asset class, the
contribution of active management
54
and management fees paid by the plans. The plan assets are held
in qualified trusts and anticipated rates of return are not
reduced for income taxes. The expected long-term return on
assets assumption used to calculate net periodic pension expense
was 8.0% for fiscal 2010. A decrease (increase) of 50 basis
points in the expected return on assets assumptions would
increase (decrease) pension expense by approximately
$0.1 million based on the assets of the plans at
August 31, 2010. The expected return on plan assets to be
used in calculating fiscal 2011 pension expense is 8%.
The discount rate used by the Company in determining pension
expense and pension obligations reflects the yield of high
quality (AA or better rating by a recognized rating agency)
corporate bonds whose cash flows are expected to match the
timing and amounts of projected future benefit payments. The
discount rates to determine net periodic expense used in 2008
(6.51%), 2009 (6.92%) and 2010 (5.98%) reflect the change in
bond yields over the last several years. During fiscal 2010,
bond yields declined and Penford has lowered the discount rate
for calculating its benefit obligations at August 31, 2010,
as well as net periodic expense for fiscal 2011, to 5.64%.
Lowering the discount rate by 25 basis points would
increase pension expense by approximately $0.2 million and
other postretirement benefit expense by $0.1 million.
Unrecognized net loss amounts reflect the difference between
expected and actual returns on pension plan assets as well as
the effects of changes in actuarial assumptions. Unrecognized
net losses in excess of certain thresholds are amortized into
net periodic pension and postretirement benefit expense over the
average remaining service life of active employees. Amortization
of unrecognized net loss amounts is expected to increase net
pension expense by approximately $1.4 million in fiscal
2011. Amortization of unrecognized net losses is expected to
increase net postretirement health care expense by approximately
$0.1 million in fiscal 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Assumed health care cost trend rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current health care trend assumption
|
|
|
8.00
|
%
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
Ultimate health care trend rate
|
|
|
4.50
|
%
|
|
|
4.75
|
%
|
|
|
4.75
|
%
|
Year ultimate health care trend is reached
|
|
|
2028
|
|
|
|
2016
|
|
|
|
2016
|
|
The assumed health care cost trend rate could have a significant
effect on the amounts reported. A one-percentage-point change in
the assumed health care cost trend rate would have the following
effects:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-
|
|
1-Percentage-
|
|
|
Point
|
|
Point
|
|
|
Increase
|
|
Decrease
|
|
|
(Dollars in thousands)
|
|
Effect on total of service and interest cost components in
fiscal 2010
|
|
$
|
241
|
|
|
$
|
(194
|
)
|
Effect on postretirement accumulated benefit obligation as of
August 31, 2010
|
|
$
|
2,562
|
|
|
$
|
(2,117
|
)
|
Plan
Assets
The weighted average asset allocations of the investment
portfolio for the pension plans at August 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
August 31,
|
|
|
Allocation
|
|
2010
|
|
2009
|
|
U.S. equities
|
|
|
55
|
%
|
|
|
56
|
%
|
|
|
57
|
%
|
International equities
|
|
|
15
|
%
|
|
|
16
|
%
|
|
|
16
|
%
|
Fixed income investments
|
|
|
25
|
%
|
|
|
26
|
%
|
|
|
24
|
%
|
Real estate
|
|
|
5
|
%
|
|
|
2
|
%
|
|
|
3
|
%
|
The assets of the pension plans are invested in units of common
trust funds actively managed by Russell Trust Company, a
professional fund investment manager. The investment strategy
for the defined benefit pension assets is to maintain a
diversified asset allocation in order to minimize the risk of
large losses and maximize the long-term risk-adjusted rate of
return. No plan assets are invested in Penford shares. There are
no plan assets for the Companys postretirement health care
plans.
55
See Note 15, Fair Value Measurements and Derivative
Instruments, for a description of the fair value hierarchy
that prioritizes the inputs to valuation techniques used to
measure fair value. The Companys employee pension plan
assets are principally comprised of the following types of
investments:
Common collective trust funds: The fair value
of these funds is based on the cumulative net asset value of
their underlying investments. The investments in common
collective trust funds are comprised of equity funds, fixed
income funds and international equity funds. The funds are
valued at net asset value based on the closing market value of
the units bought or sold as of the valuation date and are
classified in Level 2 of the fair value hierarchy.
Real estate equity funds: The real estate
equity funds are composed of underlying investments in primarily
nine established income-producing real estate funds and
short-term investment funds. The underlying fund net asset
values are based on the values of the real estate assets as
determined by appraisal. The appraisals are conducted in
accordance with Appraisal Institute guidelines including
consideration of projected income and expenses of the property
as well as recent sales of similar properties. The underlying
funds value all real estate investments quarterly and all real
estate investments are independently appraised at least once per
year as required by the Global Investment Performance Standards.
Redemption requests are considered quarterly and are subject to
notice of 110 days. The real estate fund is included in
Level 3 of the fair value hierarchy.
The following table presents the fair value of the pension
plans assets by major asset category as of August 31,
2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Instruments
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Common collective trust funds
|
|
$
|
|
|
|
$
|
27,712
|
|
|
$
|
|
|
|
$
|
27,712
|
|
Real estate equity funds
|
|
|
|
|
|
|
|
|
|
|
566
|
|
|
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets
|
|
$
|
|
|
|
$
|
27,712
|
|
|
$
|
566
|
|
|
$
|
28,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the changes in fair value of the
pension plans real estate equity fund
(Level 3) for fiscal year ended August 31, 2010.
|
|
|
|
|
|
|
Real Estate
|
|
|
|
Equity Fund
|
|
|
|
(In thousands)
|
|
|
Balance, August 31, 2009
|
|
$
|
622
|
|
Actual return on plan assets:
|
|
|
|
|
Relating to assets still held at the reporting date
|
|
|
(56
|
)
|
Relating to assets sold during the period
|
|
|
|
|
Purchases and sales
|
|
|
|
|
Transfers in (out) of Level 3
|
|
|
|
|
|
|
|
|
|
Balance, August 31, 2010
|
|
$
|
566
|
|
|
|
|
|
|
Contributions
and Benefit Payments
The Companys funding policy for the defined benefit
pension plans is to contribute amounts sufficient to meet the
statutory funding requirements of the Employee Retirement Income
Security Act of 1974. The Company contributed $3.4 million,
$1.1 million and $1.5 million in fiscal 2010, 2009 and
2008, respectively. The Company estimates that the minimum
pension plan funding contribution during fiscal 2011 will be
approximately $2.3 million.
56
Penford funds the benefit payments of its postretirement health
care plans on a cash basis; therefore, the Companys
contributions to these plans in fiscal 2011 will approximate the
benefit payments below.
Expected benefit payments are based on the same assumptions used
to measure the benefit obligations and include benefits
attributable to estimate future employee service.
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Pension
|
|
Postretirement
|
|
|
(Dollars in millions)
|
|
2011
|
|
$
|
2.1
|
|
|
$
|
0.7
|
|
2012
|
|
|
2.3
|
|
|
|
0.7
|
|
2013
|
|
|
2.3
|
|
|
|
0.8
|
|
2014
|
|
|
2.4
|
|
|
|
0.9
|
|
2015
|
|
|
2.5
|
|
|
|
0.9
|
|
2016-2020
|
|
$
|
14.8
|
|
|
$
|
5.9
|
|
|
|
Note 14
|
Other
Employee Benefits
|
Savings
and Stock Ownership Plan
The Company has a defined contribution savings plan by which
eligible North American-based employees can elect a maximum
salary deferral of 16%. The plan provides a 100% match on the
first 3% of salary contributions and a 50% match on the next 3%
per employee. The Companys matching contributions were
$897,000, $935,000 and $986,000 for fiscal years 2010, 2009 and
2008, respectively.
Deferred
Compensation Plan
The Company provides its directors and certain employees the
opportunity to defer a portion of their salary, bonus and fees.
The deferrals earn interest based on Moodys current
Corporate Bond Yield. Deferred compensation interest of
$204,000, $231,000 and $209,000 was accrued in fiscal years
2010, 2009 and 2008, respectively.
Supplemental
Executive Retirement Plan
The Company sponsors a supplemental executive retirement plan, a
non-qualified plan, which covers certain employees. No current
executive officers participate in this plan. For fiscal 2010,
2009 and 2008, the net periodic pension expense accrued for this
plan was $343,000, $342,000 and $330,000, respectively. The
accrued obligation related to the plan was $2.5 million and
$4.3 million for fiscal years 2010 and 2009, respectively.
Health
Care and Life Insurance Benefits
The Company offers health care and life insurance benefits to
most active North American employees. Costs incurred to provide
these benefits are charged to expense as incurred. Health care
and life insurance expense, net of employee contributions, was
$4.7 million, $4.3 million and $4.1 million in
fiscal years 2010, 2009 and 2008, respectively.
|
|
Note 15
|
Fair
Value Measurements and Derivative Instruments
|
Fair
Value Measurements
The provisions of ASC 820, Fair Value Measurements
and Disclosures (ASC 820), which defines fair
value, establishes a framework for its measurement, and expands
disclosures concerning fair value measurements, were effective
as of the beginning of the second quarter of fiscal 2009 for the
Companys financial assets and liabilities, as well as for
other assets and liabilities carried at fair value on a
recurring basis. As of September 1, 2009, the Company
adopted the provisions of ASC 820 relating to nonrecurring
fair value measurement requirements for nonfinancial assets and
liabilities. These include long-lived assets which are
considered to be other than temporarily impaired, reporting
units measured at fair value in the first step of a goodwill
impairment test, the initial recognition of asset retirement
obligations, and securities issued with characteristics of both
liabilities and equity.
57
ASC 820 defines fair value as the price that would be received
from selling an asset or paid to transfer a liability (an exit
price) in Penfords principal or most advantageous market
for the asset or liability in an orderly transaction between
market participants on the measurement date. ASC 820 also
establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. Observable inputs
are inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based on
market data obtained from sources outside the reporting entity.
Unobservable inputs are inputs that reflect Penfords own
assumptions based on market data and on assumptions that market
participants would use in pricing the asset or liability
developed based on the best information available in the
circumstances. The three levels of inputs that may be used to
measure fair value are:
|
|
|
|
|
Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities that the entity has
the ability to access at the measurement date.
|
|
|
|
Level 2 inputs are other than quoted prices included within
Level 1 that are observable for assets and liabilities such
as (1) quoted prices for similar assets or liabilities in
active markets, (2) quoted prices for identical or similar
assets or liabilities in markets that are not active, or
(3) inputs that are derived principally or corroborated by
observable market date by correlation or other means.
|
|
|
|
Level 3 inputs are unobservable inputs to the valuation
methodology for the assets or liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2010
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Current assets (Other Current Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives(1)
|
|
$
|
1,827
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Commodity derivative assets and liabilities have been offset by
cash collateral due and paid under master netting arrangements.
The cash collateral offset was $4.5 million at
August 31, 2010. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2009
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Current assets (Other Current Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives(1)
|
|
$
|
430
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (Accrued Liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
|
|
|
$
|
1,829
|
|
|
$
|
|
|
|
$
|
1,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Commodity derivative assets and liabilities have been offset by
cash collateral due and paid under master netting arrangements.
The cash collateral offset was $0.4 million at
August 31, 2009. |
Other
Financial Instruments
The carrying value of cash and cash equivalents, receivables and
payables approximates fair value because of their short
maturities. The Companys bank debt reprices with changes
in market interest rates and, accordingly, the carrying amount
of such debt approximates fair value.
In the first quarter of fiscal 2010, the Company received two
non-interest bearing loans from the State of Iowa totaling
$2.0 million. The carrying value of the debt at
August 31, 2010 was $1.8 million and the fair value of
the debt was estimated to be $1.5 million. See Note 8.
In the third quarter of fiscal 2010, the Company issued two
series of preferred stock for $40 million as described in
Note 7. The Company recorded the Series A Preferred
Stock and the Series B Preferred Stock at their relative
fair values at the time of issuance. The Series A Preferred
Stock of $32.3 million was recorded as a long-term
liability and the Series B Preferred Stock of
$7.7 million was recorded as equity. The fair value of the
Series A Preferred Stock was determined using the market
approach in comparing yields on similar debt securities. The
discount on the Series A Preferred Stock is being amortized
into income using the effective interest method over the
contractual life of seven years. The carrying value of the
Series A Preferred Stock at August 31, 2010 was
$34.1 million and the estimated fair value was
$34.3 million.
58
Interest
Rate Swap Agreements
The Company used interest rate swaps to manage the variability
of interest payments associated with its floating-rate debt
obligations. The interest payable on the debt effectively became
fixed at a certain rate and reduced the impact of future
interest rate changes on future interest expense. Unrealized
losses on interest rate swaps were included in accumulated other
comprehensive income (loss). The periodic settlements on the
swaps were recorded as interest expense. In the third quarter of
fiscal 2010, the Company terminated its interest rate swaps with
several banks and recorded a loss of approximately
$1.6 million in net non-operating income (expense). At
August 31, 2010, the Company had no outstanding interest
rate swaps and no gains or losses remaining in other
comprehensive income (loss).
Foreign
Currency Contracts
In fiscal year 2009, the Companys Food Ingredients
business purchased certain raw materials in a foreign currency,
the Czech koruna (CZK), the monetary unit of the Czech Republic.
In order to manage the variability in forecasted cash flows due
to the foreign currency risk associated with settlement of
accounts payable denominated in CZK, the Company purchased
foreign currency forward contracts. The Company designated these
contracts as cash flow hedges and accounted for them pursuant to
ASC 815. To the extent the amounts and timing of the
forecasted cash flows and the forward contracts continued to
match, the unrealized losses on the foreign currency purchase
contracts were included in other comprehensive income (loss).
The gain or loss on the contracts was recorded in cost of sales
at the time the inventory was sold. At August 31, 2010, the
Company had no outstanding foreign currency contracts and no
gains or losses remaining in other comprehensive income (loss).
Commodity
Contracts
The Company uses forward contracts and readily marketable
exchange-traded futures on corn and natural gas to manage the
price risk of those inputs to its manufacturing process. The
Company has designated these instruments as hedges and accounts
for them pursuant to ASC 815.
For derivative instruments designated as fair value hedges, the
gain or loss on the derivative instruments as well as the
offsetting gain or loss on the hedged firm commitments
and/or
inventory are recognized in current earnings as a component of
cost of sales. For derivative instruments designated as cash
flow hedges, the effective portion of the gain or loss on the
derivative instruments is reported as a component of other
comprehensive income (loss), net of applicable income taxes, and
recognized in earnings when the hedged exposure affects
earnings. The Company recognizes the gain or loss on the
derivative instrument as a component of cost of sales in the
period when the finished goods produced from the hedged item are
sold. If it is determined that the derivative instruments used
are no longer effective at offsetting changes in the price of
the hedged item, then the changes in market value would be
recognized in current earnings as a component of cost of goods
sold or interest expense.
To reduce the price volatility of corn used in fulfilling some
of its starch sales contracts, Penford from time to time uses
readily marketable exchange-traded futures as well as forward
cash corn purchases. The exchange-traded futures are not
purchased or sold for trading or speculative purposes and are
designated as hedges. The changes in fair value of such
contracts have historically been, and are expected to continue
to be, effective in offsetting the price changes of the hedged
commodity. Penford also at times uses exchange-traded futures to
hedge corn inventories and firm corn purchase contracts. Hedged
transactions are generally expected to occur within
12 months of the time the hedge is established. The
deferred gain (loss) recorded in other comprehensive income at
August 31, 2010 that is expected to be reclassified into
income within 12 months is $0.5 million.
As of August 31, 2010, Penford had purchased corn positions
of 5.2 million bushels, of which 3.2 million bushels
represented equivalent firm priced starch sales contract volume,
resulting in an open position of 2.0 million bushels.
As of August 31, 2010, the Company had the following
outstanding futures contracts:
|
|
|
Corn Futures
|
|
6,765,000 Bushels
|
Natural Gas Futures
|
|
1,040,000 mmbtu (millions of British thermal units)
|
59
The following tables provide information about the fair values
of the Companys derivatives, by contract type, as of
August 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Balance Sheet
|
|
|
Fair Value August 31
|
|
|
Balance Sheet
|
|
Fair Value August 31
|
|
|
|
Location
|
|
|
2010
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
In thousands
|
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures
|
|
|
Other Current Assets
|
|
|
$
|
|
$
|
82
|
|
|
Other Current Assets
|
|
$
|
|
|
|
$
|
916
|
|
Natural Gas Futures
|
|
|
Other Current Assets
|
|
|
|
|
|
|
|
|
Other Current Assets
|
|
|
1,082
|
|
|
|
1,301
|
|
Interest Rate Contracts
|
|
|
Other Current Assets
|
|
|
|
|
|
|
|
|
Accrued Liabilities
|
|
|
|
|
|
|
1,829
|
|
Fair Value Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures
|
|
|
Other Current Assets
|
|
|
28
|
|
|
1,303
|
|
|
Other Current Assets
|
|
|
1,735
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated as Hedging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instruments
|
|
|
|
|
|
$28
|
|
$
|
1,385
|
|
|
|
|
$
|
2,817
|
|
|
$
|
4,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables provide information about the effect of
derivative instruments on the financial performance of the
Company for the year ended August 31, 2010 and
August 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
Reclassified from
|
|
|
Amount of Gain (Loss)
|
|
|
|
Recognized in OCI
|
|
|
AOCI into Income
|
|
|
Recognized in Income
|
|
|
|
Year Ended Aug 31
|
|
|
Year Ended Aug 31
|
|
|
Year Ended Aug 31
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
In thousands
|
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures(1)
|
|
$
|
384
|
|
|
$
|
(2,077
|
)
|
|
$
|
349
|
|
|
$
|
654
|
|
|
$
|
(194
|
)
|
|
$
|
(559
|
)
|
Natural Gas Futures(1)
|
|
|
(3,170
|
)
|
|
|
(12,603
|
)
|
|
|
(2,168
|
)
|
|
|
(6,618
|
)
|
|
|
|
|
|
|
|
|
Ethanol Futures(1)
|
|
|
(590
|
)
|
|
|
|
|
|
|
(493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts(2)(4)
|
|
|
(395
|
)
|
|
|
(1,648
|
)
|
|
|
(662
|
)
|
|
|
(736
|
)
|
|
|
(1,562
|
)
|
|
|
|
|
FX Contracts(1)
|
|
|
|
|
|
|
(74
|
)
|
|
|
(26
|
)
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,771
|
)
|
|
$
|
(16,402
|
)
|
|
$
|
(3,000
|
)
|
|
$
|
(6,749
|
)
|
|
$
|
(1,756
|
)
|
|
$
|
(559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures(1)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85
|
|
|
$
|
(559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gains and losses reported in cost of goods sold |
|
(2) |
|
Gains and losses reported in interest expense. |
|
(3) |
|
Hedged items are firm commitments and inventory |
|
(4) |
|
Amount of loss recognized in income was reported in
non-operating income (expense) |
60
|
|
Note 16
|
Other
Non-operating Income (Expense)
|
Other non-operating income (expense) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Loss on extinguishment of debt
|
|
$
|
(1,049
|
)
|
|
$
|
|
|
|
$
|
|
|
Loss on interest rate swap termination
|
|
|
(1,562
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of dextrose product line
|
|
|
|
|
|
|
1,562
|
|
|
|
|
|
Gain (loss) on foreign currency transactions
|
|
|
419
|
|
|
|
127
|
|
|
|
(217
|
)
|
Gain on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
2,890
|
|
Other
|
|
|
271
|
|
|
|
226
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,921
|
)
|
|
$
|
1,915
|
|
|
$
|
2,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On April 7, 2010, the Company refinanced its bank debt. See
Note 8. In connection with the refinancing, the Company
recorded a pre-tax non-cash charge to earnings of approximately
$1.0 million in the third quarter of fiscal 2010 related to
unamortized transaction fees associated with the prior credit
facility. In addition, the Company terminated its interest rate
swap agreements with several banks and recorded a loss of
approximately $1.6 million.
In the second quarter of fiscal 2009, the Companys Food
Ingredients business segment sold assets related to its dextrose
product line to a third-party purchaser for $2.9 million,
net of transaction costs. The Company recorded a
$1.6 million gain on the sale.
The Company recognized a gain (loss) on foreign currency
transactions on Australian dollar denominated assets and
liabilities as disclosed in the table above.
As discussed in Note 3, in June 2008, the flooding of the
Cedar Rapids manufacturing facility shut down production for
most of the quarter. The Company had derivative instruments
designated as cash flow hedges to reduce the price volatility of
corn and natural gas used in the production of starch. Due to
the June 12, 2008 flood event, derivative positions held as
of that date that were forecasted to hedge exposures during the
period the Cedar Rapids plant was shut down were no longer
deemed to be effective cash flow hedges. The $2.9 million
gain, representing ineffectiveness on these instruments, was
reclassified from other comprehensive income and recognized as a
component of non-operating income.
The majority of the Companys income (loss) from continuing
operations before income taxes of $(14.3) million,
$(10.1) million and $(16.1) million is related to the
Companys domestic operations. See Note 2 for foreign
income (loss) before income taxes and foreign tax expense. The
majority of the Companys foreign operations are included
in the discontinued operations presentation in the consolidated
financial statements.
61
Income tax expense (benefit) on continuing operations consists
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(332
|
)
|
|
$
|
(3,305
|
)
|
|
$
|
(157
|
)
|
State
|
|
|
208
|
|
|
|
(141
|
)
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(124
|
)
|
|
|
(3,446
|
)
|
|
|
(278
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(4,447
|
)
|
|
|
291
|
|
|
|
(4,365
|
)
|
State
|
|
|
(131
|
)
|
|
|
(291
|
)
|
|
|
(654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,578
|
)
|
|
|
|
|
|
|
(5,019
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(4,702
|
)
|
|
$
|
(3,446
|
)
|
|
$
|
(5,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Comprehensive tax expense (benefit) allocable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes
|
|
$
|
(4,702
|
)
|
|
$
|
(3,446
|
)
|
|
$
|
(5,297
|
)
|
Discontinued operations
|
|
|
(4,495
|
)
|
|
|
1,149
|
|
|
|
(1,571
|
)
|
Comprehensive income (loss)
|
|
|
891
|
|
|
|
(5,906
|
)
|
|
|
(938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(8,306
|
)
|
|
$
|
(8,203
|
)
|
|
$
|
(7,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal tax to the actual
provision (benefit) for taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Statutory tax rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Statutory tax on income
|
|
$
|
(5,016
|
)
|
|
$
|
(3,532
|
)
|
|
$
|
(5,637
|
)
|
State taxes, net of federal benefit
|
|
|
(154
|
)
|
|
|
(221
|
)
|
|
|
(500
|
)
|
Tax credits
|
|
|
(1,029
|
)
|
|
|
(181
|
)
|
|
|
(2
|
)
|
Non-deductible expenses related to preferred stock
|
|
|
1,020
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
477
|
|
|
|
488
|
|
|
|
842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit)
|
|
$
|
(4,702
|
)
|
|
$
|
(3,446
|
)
|
|
$
|
(5,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
The significant components of deferred tax assets and
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Alternative minimum tax credit
|
|
$
|
3,108
|
|
|
$
|
3,117
|
|
Postretirement benefits
|
|
|
14,669
|
|
|
|
15,209
|
|
Provisions for accrued expenses
|
|
|
2,280
|
|
|
|
2,185
|
|
Stock-based compensation
|
|
|
2,392
|
|
|
|
2,168
|
|
Deferred flood losses
|
|
|
3,257
|
|
|
|
3,297
|
|
Net operating loss carryforward
|
|
|
9,497
|
|
|
|
899
|
|
Tax credit carryforwards
|
|
|
2,508
|
|
|
|
|
|
Other
|
|
|
2,374
|
|
|
|
3,230
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
40,085
|
|
|
|
30,105
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
21,659
|
|
|
|
19,324
|
|
Other
|
|
|
613
|
|
|
|
808
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
22,272
|
|
|
|
20,132
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
17,813
|
|
|
$
|
9,973
|
|
|
|
|
|
|
|
|
|
|
Recognized as:
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
1,320
|
|
|
$
|
1,696
|
|
Deferred tax asset
|
|
|
16,493
|
|
|
|
8,277
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
$
|
17,813
|
|
|
$
|
9,973
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2010, in the United States, the Company had a
U.S. federal alternative minimum tax credit carryforward of
$3.1 million with no expiration, research and development
credit carryforwards of $1.0 million expiring 2025 through
2030, a small ethanol producer credit of $1.5 million
expiring 2013, and a net operating loss carryforward of
$24.3 million expiring in 2030. The Company also has
U.S. state net operating loss carryforwards of
$25 million with various expiration dates.
At August 31, 2010, the Company had $17.8 million of
net deferred tax assets. A valuation allowance has not been
provided on the net U.S. deferred tax assets as of
August 31, 2010. The determination of the need for a
valuation allowance requires significant judgment and estimates.
The Company evaluates the requirement for a valuation allowance
each quarter as the Company incurred losses in fiscal 2008, 2009
and 2010. The Companys losses in fiscal years 2008 and
2009 were incurred as a result of severe flooding in Cedar
Rapids, Iowa, which shut down the Companys manufacturing
facility for most of the fourth quarter of fiscal 2008. The tax
benefits of operating losses incurred in fiscal 2008 and 2009
have been carried back to offset taxable income in prior years.
While there have been losses since 2008 for reasons indicated
above, the Company believes that it is more likely than not that
future operations will generate sufficient taxable income to
realize its deferred tax assets. Dividends on the Series A
Preferred Stock, as well as accretion of the related discount,
which are included in interest expense in the Consolidated
Statement of Operations, are not deductible for
U.S. federal income tax purposes. There can be no assurance
that managements current plans will be achieved or that a
valuation allowance will not be required in the future.
Deferred tax liabilities or assets are not recognized on
temporary differences from undistributed earnings of foreign
subsidiaries and from foreign exchange translation gains or
losses on permanent advances to foreign subsidiaries as the
Company does not expect that the divestiture of its foreign
subsidiaries will result in any tax benefit or expense.
63
The total amount of gross unrecognized tax benefits was
$1.1 million at August 31, 2010, all of which, if
recognized, would impact the Companys effective tax rate.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Unrecognized tax benefits at beginning of year
|
|
$
|
1,281
|
|
|
$
|
698
|
|
Additions for tax positions related to prior years
|
|
|
118
|
|
|
|
531
|
|
Reductions for tax positions related to prior years
|
|
|
|
|
|
|
(4
|
)
|
Additions for tax positions related to current year
|
|
|
160
|
|
|
|
233
|
|
Reductions due to lapse of applicable statute of limitations
|
|
|
(428
|
)
|
|
|
(162
|
)
|
Settlements with taxing authorities
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits at end of year
|
|
$
|
1,131
|
|
|
$
|
1,281
|
|
|
|
|
|
|
|
|
|
|
The Companys policy is to recognize interest and penalty
expense associated with uncertain tax positions as a component
of income tax expense (benefit) in the consolidated statements
of operations. As of August 31, 2009, the Company had
$0.2 million of accrued interest and penalties included in
the long-term tax liability. During fiscal 2010, the Company
decreased the liability for unrecognized tax benefits by $22,000
for interest and increased the liability by $3,000 for penalties.
The Company files tax returns in the U.S. federal
jurisdiction and various U.S. state jurisdictions, and is
subject to examination by taxing authorities in all of those
jurisdictions. From time to time, the Companys tax returns
are reviewed or audited by various U.S. state taxing
authorities. The Company believes that adjustments, if any,
resulting from these reviews or audits would not be material,
individually or in the aggregate, to the Companys
financial position, results of operations or liquidity. It is
reasonably possible that the amount of unrecognized tax benefits
related to certain of the Companys tax positions will
increase or decrease in the next twelve months as audits or
reviews are initiated and settled. At this time, an estimate of
the range of a reasonably possible change cannot be made. With
few exceptions, the Company is not subject to income tax
examinations by U.S. federal or state jurisdictions for
fiscal years prior to 2007.
|
|
Note 18
|
Earnings
(loss) per Common Share
|
Effective September 1, 2009, the Company adopted
ASC 260-10-45,
Participating Securities and the
Two-Class Method
(ASC
260-10-45)
which requires all outstanding unvested share-based payment
awards that contain rights to non-forfeitable dividends
participate in undistributed earnings with common shareholders
and, therefore, are included in computing earnings per share
under the two-class method. Under the two-class method, net
earnings are reduced by the amount of dividends declared in the
period for each class of common stock and participating
security. The remaining undistributed earnings are then
allocated to common stock and participating securities, based on
their respective rights to receive dividends. Restricted stock
awards granted to certain employees and directors under the
Companys 2006 Incentive Plan which contain non-forfeitable
rights to dividends at the same rate as common stock, are
considered participating securities. The Company has applied the
provisions of
ASC 260-10-45
retrospectively to all periods presented.
Basic earnings (loss) per share reflect only the weighted
average common shares outstanding during the period. Diluted
earnings (loss) per share reflect weighted average common shares
outstanding and the effect of any dilutive common stock
equivalent shares. Diluted earnings (loss) per share is
calculated by dividing net income (loss) by the average common
shares outstanding plus additional common shares that would have
been outstanding assuming the exercise of
in-the-money
stock options, using the treasury stock method. The following
table presents the reconciliation of income from continuing
operations to income from continuing operations applicable to
64
common shares and equivalents and the computation of diluted
weighted average shares outstanding for the fiscal years 2010,
2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(9,629
|
)
|
|
$
|
(6,645
|
)
|
|
$
|
(10,808
|
)
|
Less: Allocation to participating securities
|
|
|
(84
|
)
|
|
|
(11
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations applicable to common shares and
equivalents
|
|
$
|
(9,713
|
)
|
|
$
|
(6,656
|
)
|
|
$
|
(10,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
16,312
|
|
|
$
|
(58,142
|
)
|
|
$
|
(1,892
|
)
|
Less: Allocation to participating securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations applicable to common
shares and equivalents
|
|
$
|
16,312
|
|
|
$
|
(58,142
|
)
|
|
$
|
(1,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,683
|
|
|
$
|
(64,787
|
)
|
|
$
|
(12,700
|
)
|
Less: Allocation to participating securities
|
|
|
(84
|
)
|
|
|
(11
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shares and equivalents
|
|
$
|
6,599
|
|
|
$
|
(64,798
|
)
|
|
$
|
(12,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents outstanding, basic
|
|
|
11,601
|
|
|
|
11,170
|
|
|
|
10,565
|
|
Dilutive stock options and awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents outstanding,
diluted
|
|
|
11,601
|
|
|
|
11,170
|
|
|
|
10,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On April 7, 2010, the Company issued 100,000 shares of
Series B voting convertible preferred stock
(Series B Preferred Stock). See Note 7 for
further details. At any time prior to April 7, 2020, at the
option of the holder, the outstanding Series B Preferred
Stock may be converted into shares of the Companys common
stock at a conversion rate of ten shares of common stock per one
share of Series B Preferred Stock, subject to adjustment in
the event of stock dividends, distributions, splits,
reclassifications and the like. If any shares of Series B
Preferred Stock have not been converted into shares of common
stock prior to April 7, 2020, the shares of Series B
Preferred Stock will automatically convert into shares of common
stock. The holders of the Series B Preferred Stock shall
have the right to one vote for each share of common stock into
which the Series B Preferred Stock is convertible. These
shares are convertible into common shares for no cash
consideration; therefore the weighted average shares are
included in the computation of basic earnings per share.
Weighted-average restricted stock awards of 146,668, 90,868 and
88,363 for fiscal years 2010, 2009 and 2008, respectively, were
excluded from the calculation of diluted earnings per share
because they were antidilutive. Weighted-average stock options
omitted from the denominator of the earnings per share
calculation because they were antidilutive were 1,309,273,
1,371,701 and 1,036,474 for 2010, 2009 and 2008, respectively.
|
|
Note 19
|
Segment
Reporting
|
Financial information from continuing operations for the
Companys two segments, Industrial Ingredients and Food
Ingredients, is presented below. Industrial Ingredients and Food
Ingredients, are broad categories of end-market users served by
the Companys U.S. operations. The Industrial
Ingredients segment provides carbohydrate-based starches for
industrial applications, primarily in the paper and packaging
products and fuel industries. The Food Ingredients segment
produces specialty starches for food applications. A third item
for corporate and other activity has been presented
to provide reconciliation to amounts reported in the
consolidated financial statements. Corporate and other
represents the activities related to the corporate headquarters
such as public company reporting,
65
personnel costs of the executive management team, corporate-wide
professional services and consolidation entries. The accounting
policies of the reportable segments are the same as those
described in Note 1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Starch
|
|
$
|
115,681
|
|
|
$
|
131,709
|
|
|
$
|
167,365
|
|
Ethanol
|
|
|
68,335
|
|
|
|
54,817
|
|
|
|
5,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
184,016
|
|
|
$
|
186,526
|
|
|
$
|
173,320
|
|
Food ingredients
|
|
|
70,258
|
|
|
|
69,030
|
|
|
|
66,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
254,274
|
|
|
$
|
255,556
|
|
|
$
|
239,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients
|
|
$
|
10,850
|
|
|
$
|
11,081
|
|
|
$
|
9,073
|
|
Food ingredients
|
|
|
2,341
|
|
|
|
2,759
|
|
|
|
2,693
|
|
Corporate and other
|
|
|
1,600
|
|
|
|
615
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,791
|
|
|
$
|
14,455
|
|
|
$
|
12,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients
|
|
$
|
(11,512
|
)
|
|
$
|
(11,154
|
)
|
|
$
|
(16,541
|
)
|
Food ingredients
|
|
|
15,145
|
|
|
|
13,512
|
|
|
|
10,178
|
|
Corporate and other
|
|
|
(8,493
|
)
|
|
|
(8,807
|
)
|
|
|
(9,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,860
|
)
|
|
$
|
(6,449
|
)
|
|
$
|
(15,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients
|
|
$
|
4,713
|
|
|
$
|
3,683
|
|
|
$
|
35,415
|
|
Food ingredients
|
|
|
1,267
|
|
|
|
1,696
|
|
|
|
3,090
|
|
Corporate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,980
|
|
|
$
|
5,379
|
|
|
$
|
38,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
Industrial ingredients
|
|
$
|
133,738
|
|
|
$
|
139,609
|
|
Food ingredients
|
|
|
36,542
|
|
|
|
37,387
|
|
Discontinued operations
|
|
|
|
|
|
|
42,713
|
|
Corporate and other
|
|
|
38,128
|
|
|
|
38,536
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
208,408
|
|
|
$
|
258,245
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2010, the remaining net assets of the
Australia/New Zealand Operations, consisting of
$0.3 million of cash and $1.3 million of other net
assets, have been reported as assets of the continuing
operations in Corporate and other. All other assets
are located in the United States.
66
Reconciliation of income (loss) from operations for the
Companys segments to income (loss) before income taxes as
reported in the consolidated financial statements follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Loss from operations
|
|
$
|
(4,860
|
)
|
|
$
|
(6,449
|
)
|
|
$
|
(15,776
|
)
|
Interest expense
|
|
|
(7,550
|
)
|
|
|
(5,557
|
)
|
|
|
(3,089
|
)
|
Other non-operating income (expense)
|
|
|
(1,921
|
)
|
|
|
1,915
|
|
|
|
2,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
$
|
(14,331
|
)
|
|
$
|
(10,091
|
)
|
|
$
|
(16,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, attributed to the area to which the product was shipped,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
United States
|
|
$
|
231,042
|
|
|
$
|
234,081
|
|
|
$
|
213,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
3,738
|
|
|
|
5,137
|
|
|
|
11,839
|
|
Mexico
|
|
|
10,578
|
|
|
|
9,086
|
|
|
|
7,777
|
|
Other
|
|
|
8,916
|
|
|
|
7,252
|
|
|
|
6,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-United
States
|
|
|
23,232
|
|
|
|
21,475
|
|
|
|
25,879
|
|
Total
|
|
$
|
254,274
|
|
|
$
|
255,556
|
|
|
$
|
239,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 20
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
Fiscal 2010
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
Sales
|
|
$
|
67,070
|
|
|
$
|
62,293
|
|
|
$
|
61,909
|
|
|
$
|
63,002
|
|
|
$
|
254,274
|
|
Cost of sales
|
|
|
56,442
|
|
|
|
56,231
|
|
|
|
58,644
|
|
|
|
59,503
|
|
|
|
230,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
10,628
|
|
|
|
6,062
|
|
|
|
3,265
|
|
|
|
3,499
|
|
|
|
23,454
|
|
Income (loss) from continuing operations
|
|
|
1,056
|
|
|
|
(1,801
|
)
|
|
|
(5,758
|
)
|
|
|
(3,126
|
)
|
|
|
(9,629
|
)
|
Income (loss) from discontinued operations
|
|
|
3,482
|
|
|
|
13,048
|
|
|
|
(218
|
)
|
|
|
|
|
|
|
16,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
4,538
|
|
|
|
11,247
|
|
|
|
(5,976
|
)
|
|
|
(3,126
|
)
|
|
|
6,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic continuing operations
|
|
$
|
0.09
|
|
|
$
|
(0.17
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.84
|
)
|
Basic discontinued operations
|
|
|
0.31
|
|
|
|
1.16
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.40
|
|
|
$
|
0.99
|
|
|
$
|
(0.51
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted continuing operations
|
|
$
|
0.09
|
|
|
$
|
(0.17
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.84
|
)
|
Diluted discontinued operations
|
|
|
0.31
|
|
|
|
1.16
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.40
|
|
|
$
|
0.99
|
|
|
$
|
(0.51
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
Fiscal 2009
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Sales
|
|
$
|
59,584
|
|
|
$
|
63,939
|
|
|
$
|
61,276
|
|
|
$
|
70,757
|
|
|
$
|
255,556
|
|
Cost of sales
|
|
|
54,179
|
|
|
|
66,519
|
|
|
|
61,262
|
|
|
|
61,305
|
|
|
|
243,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
5,405
|
|
|
|
(2,580
|
)
|
|
|
14
|
|
|
|
9,452
|
|
|
|
12,291
|
|
Income (loss) from continuing operations
|
|
|
563
|
|
|
|
(4,205
|
)
|
|
|
(4,342
|
)
|
|
|
1,339
|
|
|
|
(6,645
|
)
|
Loss from discontinued operations
|
|
|
(932
|
)
|
|
|
(17,973
|
)
|
|
|
(3,072
|
)
|
|
|
(36,165
|
)
|
|
|
(58,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(369
|
)
|
|
|
(22,178
|
)
|
|
|
(7,414
|
)
|
|
|
(34,826
|
)
|
|
|
(64,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic continuing operations
|
|
$
|
0.05
|
|
|
$
|
(0.38
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.59
|
)
|
Basic discontinued operations
|
|
|
(0.08
|
)
|
|
|
(1.61
|
)
|
|
|
(0.27
|
)
|
|
|
(3.24
|
)
|
|
|
(5.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.03
|
)
|
|
$
|
(1.99
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(3.12
|
)
|
|
$
|
(5.80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted continuing operations
|
|
$
|
0.05
|
|
|
$
|
(0.38
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.59
|
)
|
Diluted discontinued operations
|
|
|
(0.08
|
)
|
|
|
(1.61
|
)
|
|
|
(0.27
|
)
|
|
|
(3.24
|
)
|
|
|
(5.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(0.03
|
)
|
|
$
|
(1.99
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(3.12
|
)
|
|
$
|
(5.80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.12
|
|
In the second quarter of fiscal 2010, the liquidation of the
remaining net assets of Penford Australia was substantially
completed, as a result, $13.8 million of currency
translation adjustments were reclassified from accumulated other
comprehensive income into second quarter income (loss) from
discontinued operations. In the fourth quarter of fiscal 2009,
the Company recorded a $33.0 million non-cash asset
impairment charge related to discontinued operations. In the
second quarter of fiscal 2009, the Company recorded a
$13.8 million non-cash goodwill impairment charge, which
represented all of the goodwill allocated to its Australia/New
Zealand reporting unit. See Note 2.
In the fourth quarter of fiscal 2008, the Companys Cedar
Rapids, Iowa plant was temporarily shut down due to record
flooding of the Cedar River and government-ordered mandatory
evacuation of the plant and surrounding areas. See Note 3
for further detail. In fiscal year 2009, loss from continuing
operations included $9.1 million of net insurance proceeds
related to the Cedar Rapids flooding in fiscal 2008. The
following table summarizes the flood related costs and insurance
proceeds recorded by quarter for fiscal year 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
Fiscal 2009
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Flood related costs
|
|
$
|
6,786
|
|
|
$
|
631
|
|
|
$
|
168
|
|
|
$
|
|
|
|
$
|
7,585
|
|
Insurance proceeds
|
|
|
(11,020
|
)
|
|
|
(4,430
|
)
|
|
|
(1,244
|
)
|
|
|
|
|
|
|
(16,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance proceeds, net of flood related costs
|
|
$
|
(4,234
|
)
|
|
$
|
(3,799
|
)
|
|
$
|
(1,076
|
)
|
|
$
|
|
|
|
$
|
(9,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 21
|
Legal
Proceedings
|
As previously reported, the Company filed suit on
January 23, 2009, in the U.S. District Court for the
Northern District of Iowa, Cedar Rapids Division, against two
insurance companies, National Union Fire Insurance Company of
Pittsburgh, Pennsylvania, owned by American International Group,
Inc. (AIG), and ACE American Insurance Company
(ACE), related to insurance coverage arising out of
the flood that struck the Companys Cedar Rapids, Iowa
plant in June 2008. On January 19, 2010, the presiding
judge ruled that flood coverage language contained in the
applicable insurance policy was ambiguous and that,
accordingly, the interpretation of the policy was a
question of fact reserved for a jury. A jury trial was
subsequently conducted in Cedar Rapids during mid-August 2010.
After seven days of trial, the presiding judge dismissed the
Companys claims without issuing a written opinion. On
September 14, 2010, the Company filed a notice of appeal
with the United States Court of Appeals for
68
the Eighth Circuit (the Eighth Circuit). On
October 4, 2010, the Company filed a Statement of Issues
with the Eighth Circuit in which it noted its intention to
present for appellate review whether, among other things, the
presiding judge erred in dismissing the Companys suit.
Through its appeal, the Company will continue its effort to seek
additional payments from AIG and ACE for approximately
$25 million for business interruption losses that occurred
as a result of the flood. The Company expects the current appeal
process to last through the mid-2011. The Company cannot at this
time determine the likelihood of any outcome of its appeal or
estimate the amount of any judgment that might be awarded.
In October 2004, Penford Products Co. (Penford
Products), a wholly-owned subsidiary of the Company, was
sued by a customer in the Fourth Judicial District Court,
Ouachita Parish, Louisiana. The customer sought monetary damages
for Penford Products alleged breach of an agreement to
supply the customer with certain starch products during the 2004
strike affecting Penford Products Cedar Rapids, Iowa
plant. In May 2008, the trial judge ruled against Penford
Products. In fiscal year 2008, the Company elected to satisfy
the judgment and waive appeal rights by paying the customer
approximately $3.8 million. The Company had previously
reserved $2.4 million against this matter in fiscal year
2007.
The Company is involved from time to time in various other
claims and litigation arising in the normal course of business.
In the judgment of management, which relies in part on
information obtained from the Companys outside legal
counsel, the ultimate resolution of these other matters will not
materially affect the consolidated financial position, results
of operations or liquidity of the Company.
69
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Penford Corporation:
We have audited the accompanying consolidated balance sheet of
Penford Corporation and subsidiaries (the Company) as of
August 31, 2010, and the related consolidated statements of
operations and comprehensive income (loss), cash flows, and
shareholders equity for the year ended August 31,
2010. We also have audited Penford Corporations internal
control over financial reporting as of August 31, 2010,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Penford
Corporations management is responsible for these
consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on these consolidated financial statements and an opinion on the
Companys internal control over financial reporting based
on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audit of the consolidated financial statements
included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Penford Corporation and subsidiaries as of
August 31, 2010, and the results of its operations and its
cash flows for the year ended August 31, 2010, in
conformity with U.S. generally accepted accounting
principles. Also in our opinion, Penford Corporation maintained,
in all material respects, effective internal control over
financial reporting as of August 31, 2010, based on
criteria established in Internal Control
Integrated Framework issued by COSO.
Denver, Colorado
November 11, 2010
70
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Penford Corporation
We have audited the accompanying consolidated balance sheet of
Penford Corporation as of August 31, 2009 and the related
consolidated statements of operations, comprehensive income,
shareholders equity, and cash flows for each of the two
years in the period ended August 31, 2009. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Penford Corporation at August 31,
2009 and the consolidated results of its operations and its cash
flows for each of the two years in the period ended
August 31, 2009, in conformity with U.S. generally
accepted accounting principles.
Denver, Colorado
November 13, 2009,
except for Note 18, as to which the date is
November 11, 2010
71
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures.
|
Disclosure
Controls and Procedures
Penford maintains disclosure controls and procedures that are
designed to ensure that material information required to be
disclosed in the Companys periodic reports filed or
submitted under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and
Exchange Commission. The Companys disclosure controls and
procedures are also designed to ensure that information required
to be disclosed in the reports the Company files or submits
under the Exchange Act is accumulated and communicated to the
Companys management, including its principal executive and
principal financial officers, or persons performing similar
functions, as appropriate, to allow timely decisions regarding
required disclosure.
Under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial
Officer, the Company has evaluated the effectiveness of its
disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15(b)
as of August 31, 2010. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded
that these disclosure controls and procedures are effective as
of August 31, 2010.
Internal
Control Over Financial Reporting
Managements report on internal control over financial
reporting and the related reports of the Companys
registered independent public accounting firms are included
below and at the end of Item 8 above. There were no changes
in the Companys internal control over financial reporting
during the quarter ended August 31, 2010 that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Managements
Annual Report on Internal Control Over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the
Company. Internal control over financial reporting is a process
to provide reasonable assurance regarding the reliability of our
financial reporting for external purposes in accordance with
accounting principles generally accepted in the United States of
America. Internal control over financial reporting includes
maintaining records that in reasonable detail accurately and
fairly reflect the Companys transactions; providing
reasonable assurance that transactions are recorded as necessary
for preparation of the Companys financial statements;
providing reasonable assurance that receipts and expenditures of
the Companys assets are made in accordance with
managements authorization; and providing reasonable
assurance that unauthorized acquisition, use or disposition of
the Companys assets that could have a material effect on
the financial statements would be prevented or detected on a
timely basis. Because of its inherent limitations, internal
control over financial reporting is not intended to provide
absolute assurance that a misstatement of the Companys
financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of the
Companys internal controls over financial reporting based
on the framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this evaluation, management
concluded that the Companys internal control over
financial reporting was effective as of August 31, 2010.
|
|
Item 9B.
|
Other
Information.
|
The Company determined not to have an annual incentive bonus
program for its executives for fiscal year 2011. Since the
Companys Change in Control Agreements with its executives
provide benefits upon a termination of employment in connection
with a change in control based upon target bonuses under the
annual incentive bonus program as well as based upon the
percentage of attainment of target bonuses, the Executive
Compensation and Development Committee (ECDC) of the
Companys Board of Directors approved on November 11,
2010, an
72
amendment to the Change in Control Agreements with its
executives to (i) provide a deemed target bonus for fiscal
year 2011 which is equal to the fiscal year 2010 target bonus
without the additional 5% approved last year by the ECDC (and
therefore generally equal to the 2009 target bonus), and
(ii) treat the target bonuses for fiscal years 2009, 2010
and 2011 as attained solely for purposes of the Change in
Control Agreements.
The preceding summary is a brief description of the amendment to
the form of the Companys Change in Control Agreement and
is qualified in its entirety by, and should be read in
conjunction with, the complete text of the form of Second
Amendment to Change in Control Agreement, which is filed as
Exhibit 10.4 to this report.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
The applicable information set forth under the headings
Election of Directors, Information About the
Board and Its Committees, and Section 16(a)
Beneficial Ownership Reporting Compliance in the
definitive Proxy Statement for the 2011 Annual Meeting of
Shareholders (the 2011 Proxy Statement), to be filed
not later than 120 days after the end of the fiscal year
covered by this report, is incorporated herein by reference.
Information regarding the Executive Officers of the Registrant
is set forth in Part I, Item 1.
The Company has adopted a Code of Business Conduct and Ethics
(the Code) that is applicable to all employees,
consultants and members of the Board of Directors, including the
Chief Executive Officer, Chief Financial Officer and Corporate
Controller. This Code embodies the commitment of the Company and
its subsidiaries to conduct business in accordance with the
highest ethical standards and applicable laws, rules and
regulations. The Code is available on the Companys
Internet site ate www.penx.com under the Investor
Relations section.
|
|
Item 11.
|
Executive
Compensation.
|
The applicable information set forth under the headings
Executive Compensation, Director
Compensation and Information About the Board and Its
Committees in the 2011 Proxy Statement is incorporated
herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The applicable information set forth under the heading
Security Ownership of Certain Beneficial Owners and
Management in the 2011 Proxy Statement is incorporated
herein by reference.
73
Securities
Authorized for Issuance under Equity Compensation
Plans
The following table provides information regarding
Penfords equity compensation plans at August 31,
2010. The Company has no equity compensation plans that have not
been approved by security holders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
(a)
|
|
|
|
Number of securities
|
|
|
Number of
|
|
(b)
|
|
Remaining Available
|
|
|
Securities to be
|
|
Weighted-
|
|
for Future Issuance
|
|
|
Issued upon
|
|
Average exercise
|
|
Under Equity
|
|
|
Exercise of
|
|
Price of
|
|
Compensation Plans
|
|
|
Outstanding
|
|
Outstanding
|
|
(Excluding
|
|
|
Options,
|
|
Options,
|
|
Securities
|
|
|
Warrants and
|
|
Warrants and
|
|
Reflected in Column
|
Plan Category
|
|
Rights
|
|
Rights
|
|
(a))
|
|
Equity compensation plans approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
1994 Stock Option Plan(1)
|
|
|
654,000
|
|
|
$
|
14.17
|
|
|
|
|
|
2006 Long-Term Incentive Plan (2)
|
|
|
540,500
|
|
|
$
|
16.80
|
|
|
|
116,017
|
|
Stock Option Plan for Non-Employee Directors (3)
|
|
|
70,064
|
|
|
$
|
10.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,264,564
|
|
|
$
|
15.07
|
|
|
|
116,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This plan has been terminated and no additional options are
available for grant. The options which are subsequently
forfeited or not exercised are available for issuance under the
2006 Long-Term Incentive Plan. |
|
(2) |
|
Shares available for issuance under the 2006 Long-Term Incentive
Plan can be granted pursuant to stock options, stock
appreciation rights, restricted stock or units or performance
based cash awards. Does not include 164,207 issued but unvested
shares of common stock at August 31, 2010. |
|
(3) |
|
This plan has been terminated and no additional options will be
granted under this plan. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The applicable information relating to certain relationships and
related transactions of the Company is set forth under the
heading Transactions with Related Persons in the
2011 Proxy Statement and is incorporated herein by reference.
Information related to director independence is set forth under
the heading of Information About the Board and Its
Committees in the 2011 Proxy Statement and is incorporated
herein by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services.
|
The applicable information concerning principal accountant fees
and services appears under the heading Fees Paid to KPMG
LLP in the 2011 Proxy Statement and is incorporated herein
by reference.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules.
|
(a)(1) Financial Statements
Financial statements required to be filed for the registrant
under Items 8 or 15 are included in Part II,
Item 8.
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are omitted because they are not applicable or the information
is included in the Consolidated Financial Statements in
Part II, Item 8.
(3) Exhibits
See index to Exhibits on page 77.
74
(b) Exhibits
See Item 15(a)(3), above.
(c) Financial Statement Schedules
None
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 12th day of November 2010.
PENFORD CORPORATION
Thomas D. Malkoski
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated
below on November 12, 2010.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Thomas
D. Malkoski
Thomas
D. Malkoski
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
/s/ Steven
O. Cordier
Steven
O. Cordier
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
/s/ Paul
H. Hatfield
Paul
H. Hatfield
|
|
Chairman of the Board of Directors
|
|
|
|
/s/ William
E. Buchholz
William
E. Buchholz
|
|
Director
|
|
|
|
/s/ Jeffrey
T. Cook
Jeffrey
T. Cook
|
|
Director
|
|
|
|
/s/ R.
Randolph Devening
R.
Randolph Devening
|
|
Director
|
|
|
|
/s/ John
C. Hunter III
John
C. Hunter III
|
|
Director
|
|
|
|
/s/ Sally
G. Narodick
Sally
G. Narodick
|
|
Director
|
|
|
|
/s/ Edward
F. Ryan
Edward
F. Ryan
|
|
Director
|
|
|
|
/s/ James
E. Warjone
James
E. Warjone
|
|
Director
|
|
|
|
/s/ Matthew
Zell
Matthew
Zell
|
|
Director
|
76
INDEX TO
EXHIBITS
Exhibits identified in parentheses below, on file with the
Securities and Exchange Commission, are incorporated by
reference. Copies of exhibits can be obtained at no cost by
writing to Penford Corporation, 7094 S. Revere
Parkway, Centennial, Colorado 80112.
|
|
|
|
|
Exhibit No.
|
|
Item
|
|
|
3
|
.1
|
|
Restated and Amended Articles of Incorporation, as amended
(filed as an exhibit to Registrants File
No. 000-11488,
Form 10-K
for the fiscal year ended August 31, 2006)
|
|
3
|
.2
|
|
Bylaws of Registrant as amended and restated as of
October 29, 2008 (filed as an exhibit to Registrants
File
No. 000-11488,
Current Report on
Form 8-K
filed October 31, 2008)
|
|
3
|
.3
|
|
Articles of Amendment of Penford Corporation for Series A
15% Cumulative Non-Voting Non-Convertible Preferred Stock (filed
as an exhibit to Registrants File
No. 000-11488,
Form 8-K
dated April 6, 2010, filed April 9, 2010)
|
|
3
|
.4
|
|
Articles of Amendment of Penford Corporation for Series B
Voting Convertible Preferred Stock (filed as an exhibit to
Registrants File
No. 000-11488,
Form 8-K
dated April 6, 2010, filed April 9, 2010)
|
|
3
|
.5
|
|
Amendment to Amended and Restated Bylaws of Penford Corporation
(filed as an exhibit to Registrants File
No. 000-11488,
Form 8-K
dated April 6, 2010, filed April 9, 2010)
|
|
10
|
.1
|
|
Penford Corporation Deferred Compensation Plan, amended and
restated as of January 1, 2005 (filed as an exhibit to
Registrants File
No. 000-11488,
Form 10-K
for the year ended August 31, 2007, filed November 9,
2007)*
|
|
10
|
.2
|
|
Form of Change of Control Agreement and Annexes between Penford
Corporation and Messrs. Cordier, Kortemeyer, Kunerth,
Lawlor, Malkoski and Randall and certain other key employees (a
representative copy of these agreements is filed as an exhibit
to Registrants File
No. 000-11488,
Form 10-Q
for the quarter ended February 28, 2006, filed
April 10, 2006)*
|
|
10
|
.3
|
|
Form of Amendment to Change in Control Agreement (filed as an
exhibit to Registrants File
No. 000-11488,
Form 10-Q
for the quarter ended November 30, 2008, filed
January 9, 2009)*
|
|
10
|
.4
|
|
Form of Second Amendment to Change in Control Agreement*
|
|
10
|
.5
|
|
Penford Corporation 1993 Non-Employee Director Restricted Stock
Plan (filed as an exhibit to Registrants File
No. 000-11488,
Form 10-Q
for the quarter ended November 30, 1993)*
|
|
10
|
.6
|
|
Penford Corporation 1994 Stock Option Plan as amended and
restated as of January 8, 2002 (filed as an exhibit to
Registrants File
No. 000-11488,
Proxy Statement filed with the Commission on January 18,
2002)*
|
|
10
|
.7
|
|
Penford Corporation Stock Option Plan for Non-Employee Directors
(filed as a exhibit to Registrants File
No. 000-11488,
Form 10-Q
for the quarter ended May 31, 1996, filed July 15,
1996)*
|
|
10
|
.8
|
|
Penford Corporation 2006 Long-Term Incentive Plan (incorporated
by reference to Appendix A to Registrants File
No. 000-11488,
Proxy Statement filed December 20, 2005)*
|
|
10
|
.9
|
|
Form of Penford Corporations 2006 Long-Term Incentive Plan
Stock Option Grant Notice, including the Stock Option Agreement
and Notice of Exercise (incorporated by reference to the
exhibits to the Registrants File
No. 000-11488,
Current Report on
Form 8-K
filed February 21, 2006)*
|
|
10
|
.10
|
|
Form of Penford Corporation 2006 Long-Term Incentive Plan
Restricted Stock Award Notice and Agreement (filed as an exhibit
to Registrants File
No. 000-11488,
Form 10-K
for the year ended August 31, 2007, filed November 9,
2007)*
|
|
10
|
.11
|
|
Second Amended and Restated Credit Agreement dated as of
October 5, 2006 (filed as an exhibit to Registrants
File
No. 000-11488,
Form 8-K
dated October 5, 2006, filed October 10, 2006)
|
|
10
|
.12
|
|
First Amendment to Second Amended and Restated Credit Agreement
(filed as an exhibit to Registrants File
No. 000-11488,
Form 10-Q
for the quarter ended May 31, 2008, filed July 10,
2008)
|
|
10
|
.13
|
|
Second Amendment to Second Amended and Restated Credit
Agreement, Resignation of Agent and Appointment of Successor
Agent dated as of February 26, 2009 (filed as an exhibit to
Registrants File
No. 000-11488,
Form 8-K
dated February 26, 2009, filed March 3, 2009)
|
|
10
|
.14
|
|
Third Amendment to Second Amended and Restated Credit Agreement
(filed as an exhibit to Registrants File
No. 000-11488,
Form 10-Q
for the quarter ended May 31, 2009, filed July 10,
2009)
|
77
|
|
|
|
|
Exhibit No.
|
|
Item
|
|
|
10
|
.15
|
|
Director Special Assignments Policy dated August 26, 2005
(filed as an exhibit to Registrants File
No. 000-11488,
Form 8-K
dated August 26, 2005, filed September 1, 2005)*
|
|
10
|
.16
|
|
Non-Employee Director Compensation Term Sheet (filed as an
exhibit to Registrants File
No. 000-11488,
Form 10-K
for the year ended August 31, 2007, filed November 9,
2007)*
|
|
10
|
.17
|
|
Form of Performance-Based Cash Award Agreement under the 2006
Long-Term Incentive Plan (filed as an exhibit to
Registrants File
No. 000-11488,
Form 10-Q
for the quarter ended November 30, 2009, filed
January 8, 2010)*
|
|
10
|
.18
|
|
Securities Purchase Agreement by and between Penford Corporation
and Zell Credit Opportunities Master Fund, L.P., dated
April 7, 2010 (filed as an exhibit to Registrants
File
No. 000-11488,
Form 8-K
dated April 6, 2010, filed April 9, 2010)
|
|
10
|
.19
|
|
Investor Rights Agreement by and between Penford Corporation and
Zell Credit Opportunities Master Fund, L.P., dated April 7,
2010 (filed as an exhibit to Registrants File
No. 000-11488,
Form 8-K
dated April 6, 2010, filed April 9, 2010)
|
|
10
|
.20
|
|
Standstill Letter Agreement by and between Penford Corporation
and Zell Credit Opportunities Master Fund, L.P., dated
April 7, 2010 (filed as an exhibit to Registrants
File
No. 000-11488,
Form 8-K
dated April 6, 2010, filed April 9, 2010)
|
|
10
|
.21
|
|
Third Amended and Restated Credit Agreement among the Company,
Penford Products Co., Bank of Montreal, Bank of America National
Association and Cooperatieve Centrale Raiffeisen-Boerenleenbank
B.A., Rabobank Nederland New York Branch, dated
April 7, 2010 (filed as an exhibit to Registrants
File
No. 000-11488,
Form 8-K
dated April 6, 2010, filed April 9, 2010)
|
|
21
|
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP
|
|
23
|
.2
|
|
Consent of KPMG LLP
|
|
24
|
|
|
Power of Attorney
|
|
31
|
.1
|
|
Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
Certifications of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
|
|
Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley act
of 2002
|
|
|
|
* |
|
Denotes management contract or compensatory plan or arrangement |
78