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, 2007
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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
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91-1221360
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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7094 S. Revere Parkway
Centennial, Colorado
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80112-3932
(Zip Code)
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(Address of principal Executive
Offices)
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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 Stock Market, LLC
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Common Stock Purchase Rights
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The Nasdaq Stock Market, LLC
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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
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No
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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
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No
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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
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No
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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.
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Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and
large accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one).
Large accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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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
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No
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The aggregate market value of the Registrants Common Stock
held by non-affiliates of the Registrant as of February 28,
2007, the last business day of the Registrants second
quarter of fiscal 2007, was approximately $179.3 million
based upon the last sale price reported for such date on The
Nasdaq Stock Market LLC. 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 1, 2007 was 9,218,923.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants definitive Proxy Statement
relating to the 2008 Annual Meeting of Shareholders are
incorporated by reference into Part III of this
Form 10-K.
PENFORD
CORPORATION
FISCAL
YEAR 2007
FORM 10-K
ANNUAL REPORT
TABLE OF
CONTENTS
1
Forward-looking
Statements
The statements contained in this Annual Report on
Form 10-K
(Annual Report) that are not historical facts,
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, are forward-looking statements that represent
managements beliefs and assumptions based on currently
available information. Forward-looking statements can be
identified by the use of words such as believes,
may, will, looks,
should, could, anticipates,
expects, or comparable terminology or by discussions
of strategies or trends.
Although the Company believes that the expectations reflected
in such forward-looking statements are reasonable, it cannot
give any assurances that these expectations will prove to be
correct. Such statements by their nature involve substantial
risks and uncertainties that could significantly affect expected
results. Actual future results could differ materially from
those described in such forward-looking statements, and the
Company does not intend to update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise. Among the factors that could cause actual
results to differ materially are the risks and uncertainties
discussed in this Annual Report, including those referenced
below, and those described from time to time in other filings
with the Securities and Exchange Commission which include, but
are not limited to:
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competition;
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the possibility of interruption of business activities due to
equipment problems, accidents, strikes, weather or other
factors;
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product development risk;
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changes in corn and other raw material prices and
availability;
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expectations regarding the construction cost of the ethanol
facility and the timing of ethanol production;
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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;
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unanticipated costs, expenses or third-party claims;
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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;
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interest rate, chemical and energy cost volatility;
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foreign currency exchange rate fluctuations;
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changes in assumptions used for determining employee benefit
expense and obligations; or
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other unforeseen developments in the industries in which
Penford operates.
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Description
of Business
Penford Corporation (which, together with its subsidiary
companies, is referred to herein as Penford or the
Company) is a North American and Australian
developer, manufacturer and marketer of specialty natural-based
ingredient systems for many industrial and food applications.
The Companys strategically-located manufacturing
facilities in the United States, Australia and New Zealand
provide it with broad geographic coverage of its target markets.
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 three business segments, each utilizing its
carbohydrate chemistry expertise to develop starch-based
ingredients for value-added applications in several markets that
improve the quality and performance
2
of customers products, including papermaking and food
products. The first two, industrial ingredients and food
ingredients, are broad categories of end-market users, primarily
served by the Companys United States operations. The third
segment consists of geographically separate operations in
Australia and New Zealand. The Australian and New Zealand
operations are engaged primarily in the food ingredients
business. Financial information about Penfords segments
and geographic areas is included in Note 15 to the
Consolidated Financial Statements.
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.
Penfords three business segments are:
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Industrial Ingredients North America, which in
fiscal 2007 generated approximately 54% 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. Industrial
Ingredients products are a cost-effective alternative to
synthetic, petroleum-based ingredients.
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Food Ingredients North America, which in fiscal 2007
generated approximately 17% 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 is the
only North American manufacturer of modified food-grade potato
starch. 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 quick-service 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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Australia/New Zealand Operations generated approximately 29% of
Penfords revenue in fiscal 2007 and the Company believes
it is the sole domestic producer of value-added modified maize
starches and various starch derived products for the food, paper
and mining industries in Australia and New Zealand. The
Australia/New Zealand segment develops, manufactures and markets
ingredient systems, including specialty starches and sweeteners
for food and industrial applications. In both Australia and New
Zealand, modified starch competition is generally from imports
as there is only one other domestic producer. This
segments flexible manufacturing capabilities allow the
Company to manufacture products to customer specifications and
to quickly respond to customers changing needs.
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In June 2006, the Company announced plans to invest
$42 million for up to 40 million gallons of ethanol
production capacity per year at its Cedar Rapids, Iowa facility.
In October 2006, Penford refinanced its credit facility and
obtained a $45 million capital expansion loan commitment
maturing December 2012 to finance construction of the ethanol
plant. The designed capacity has been expanded to
45 million gallons with construction cost estimates
maintained at $1.00 to $1.05 per gallon. Contracts valued at
$40 million have been awarded for this project as of the
end of October 2007. Penford has much of the infrastructure
within the Cedar Rapids plant to manufacture ethanol cost
effectively, with sufficient grain handling, separation
processes, utilities and logistic capabilities. The factory is
centrally located near rail and ground transport arteries and
the ethanol facility will occupy available space within the
existing site footprint. Once complete, this enhancement of the
Companys bio-refining capabilities will give management
the ability to select from multiple output choices to capitalize
on changing industry conditions and selling opportunities. This
increased flexibility will allow the Company to direct
production towards the most
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attractive mix of strategic and financial opportunities.
Additionally, by improving production capacity and adding
fermentation capability, Penford expects to be better positioned
to participate in emerging bio-processing trends and
technologies that represent potential platforms for future
growth.
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.
Penford Australias corn wet milling facilities in Lane
Cove, Australia, and Auckland, New Zealand are sourced through
truck-delivered corn at contracted prices with regional
independent farmers and merchants. The corn sourced in Australia
and New Zealand is normally contracted prior to harvest
(March June). Corn used in Australia is purchased
and stored for use in both the current and following year. The
corn sourced in New Zealand is purchased in advance for future
delivery. Corn is also purchased from Australia as necessary to
supplement the corn sourced and processed in New Zealand.
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 five years with potato processors in
the United States, Canada and Mexico to acquire potato-based raw
materials.
Wheat Products:
Penford Australias
Tamworth facility uses wheat flour as the primary raw material
for the production of its wheat products, including wheat
starch, wheat gluten and glucose syrup. The Company is currently
negotiating with various suppliers for the supply of wheat flour
subsequent to the expiration of its current supply contract at
the end of calendar 2007.
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 at times uses futures
contracts to hedge the price of natural gas in North America.
Corn, potato starch, wheat flour, chemicals and natural gas are
not currently subject to availability constraints, although
drought conditions in Australia have periodically affected the
prices of corn and wheat in that area and strong demand has
substantially increased the prices of natural gas, chemicals and
agricultural raw materials. Current forecasts for wheat
production in Australia indicate that the existing drought will
affect the future price for that raw material. 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 consists of
the costs of corn, potato starch, wheat flour, 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 prices
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
in all locations.
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 $6.8 million, $6.2 million and $5.8 million
for fiscal years ended August 31, 2007, 2006 and 2005,
respectively.
4
At the end of fiscal 2007, Penford had 39 scientists, including
seven with PhDs with expert knowledge of carbohydrate
characteristics and chemistry.
Patents,
Trademarks and Tradenames
Penford owns a number of patents, trademarks and tradenames.
Penford has approximately 200 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 2008 and 2025. The annual cost to renew
all of the Companys patents is approximately
$0.2 million. However, 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
®
,
PenPlus
®
,
CanTab
®
,
MAPS
tm
,
Mazaca
tm
and
Fieldcleer
tm
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Quarterly
Fluctuations
Penfords revenues and operating results vary from quarter
to quarter. In particular, the Company experiences seasonality
in its Australian operations. The Company has lower sales
volumes and gross margins in Australia and New Zealands
summer months, which occur during Penfords second fiscal
quarter. This seasonal decline is caused by the closure of some
customers plants for public holidays and maintenance
during this period. Decreased consumption of some foods which
use the Companys products, such as packaged bread, also
contributes to this seasonal trend. Sales volumes of the Food
Ingredients North America products used in french
fry coatings are also 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.
See the discussion in Liquidity and Capital Resources under
Managements Discussion and Analysis of Financial Condition
and the Results of Operations in Item 7.
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-day
terms
except for trade receivables for export sales.
Environmental
Matters
Penfords operations are governed by various federal,
state, local and foreign environmental laws and regulations. In
the United States, 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. In
Australia, Penford is subject to the environmental requirements
of the Protection of the Environment Operations Act, the
Dangerous Goods Act, the Ozone Protection Act, the
Environmentally Hazardous Chemicals Act, and the Contaminated
Land Management Act. In New Zealand, the Company is subject to
the Resource Management Act, the Dangerous Goods Act, the
Hazardous Substances and New Organisms Act and the Ozone
Protection Act.
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Permits are required by the various environmental agencies which
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 $1.8 million.
Penford has adopted and implemented a comprehensive
corporate-wide environmental management program. The program is
managed by the Corporate Director of Environmental, Health and
Safety and is 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 2007, there have been no material effects on the
Companys operations that resulted from compliance with
environmental regulations. No unusual expenditures for
environmental facilities and programs are anticipated in fiscal
2008.
Principal
Customers
Penford sells to a variety of customers and has several
relatively large customers in each business segment. None of the
Companys customers constituted 10% of sales in fiscal
years 2006 and 2005. However, for fiscal 2007, the
Companys largest customer, Domtar, Inc., represented
approximately 12% of the Companys consolidated net sales.
Domtar, Inc. is a customer of the Companys Industrial
Ingredients North America business.
Competition
In its primary markets, Penford competes directly with
approximately five other companies that manufacture specialty
starches for the papermaking industry and approximately six
other companies that manufacture specialty food ingredients.
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, 2007, Penford had 596 total employees. In
North America, Penford had 357 employees, of which
approximately 40% are members of a trade union. The collective
bargaining agreement covering the Cedar Rapids- based
manufacturing workforce expires in August 2012. Penford
Australia had 239 employees, of which 69% are members of
trade unions in Australia and New Zealand. The union contracts
for the Tamworth, Australia, and the New Zealand facilities have
expiration dates of September 2008 and February 2008,
respectively. The Lane Cove, Australia, union agreement expires
in December 2007 and is currently being negotiated. There is no
assurance that the Company will successfully renegotiate this
agreement before expiration or at all.
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.
Customers for industrial corn-based starch ingredients purchase
products through fixed-price contracts or formula-priced
contracts for periods covering three months to two years or on a
spot basis. In fiscal 2007, approximately 63% of these sales
were under fixed-price contracts, and the remaining 37% of the
sales were under formula-priced contracts or sold on a spot
basis.
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,
except in Australia and New Zealand where most dry product is
packaged in 25kg bags.
6
Foreign
Operations and Export Sales
Penford expanded into foreign markets with its acquisition of
Penford Australia in September 2000. Penford Australia is the
primary producer of corn starch products in Australia and New
Zealand. Penford Australia manufactures products used to enhance
the quality and performance of packaged food products, generally
through providing the texture and viscosity required by its
customers for products such as sauces and gravies. Penford
Australias starch products are also used in industrial
applications including mining, paper, corrugating and building
materials. The Companys operations in Australia and New
Zealand include three manufacturing facilities for processing
specialty corn starches and wheat-related products. Competition
is mainly from imported products, except in wheat flour based
starches where there is one other producer in Australia. Export
sales from Penfords businesses in the U.S. and
Australia/New Zealand accounted for approximately 15%, 13% and
16% of total sales in fiscal 2007, 2006 and 2005, respectively.
See Note 15 to the Consolidated Financial Statements in
Item 8 for sales, depreciation and amortization, income and
loss from operations, net capital expenditures and total assets
by geographic segment, which information is incorporated by
reference.
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 shall 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 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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Russell A. Allwell
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Managing Director, Penford Australia and Penford New Zealand
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Timothy M. Kortemeyer
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Vice President and President, Penford Products Co.
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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, Penford 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.
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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. Allwell joined Penford as Managing Director of its
Australian and New Zealand operations in April 2006. Prior to
joining Penford, Mr. Allwell had been the General Manager
Retail Sales for George Weston Foods, a manufacturer of baked
goods and other foods, since 2003. From 1996 to 2003,
Mr. Allwell served in various senior management roles with
Berri Ltd., a beverage manufacturer, including as Director of
Strategy from 2000 to 2003, as Marketing Director from 1997 to
2003, and as General Manager New Ventures from 1996
to 1997. Prior to that, Mr. Allwell served in various
management, sales and marketing positions with Simplot
Australia, Kraft Foods, Calbecks Ltd. and Humes ARC Ltd.
Mr. Kortemeyer has served as Vice President of Penford
Corporation since October 2005 and President of Penford Products
Co., Penfords industrial ingredients business, 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 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 of Penford 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.
Factors
that May Affect Business and Future Results.
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 2007, approximately 33% of Penfords
manufacturing costs were the costs of corn, wheat flour and
potato starch. Weather conditions, plantings, government
programs and policies, and energy costs and global
8
supply, among other things, have historically caused volatility
in the supply and prices of these agricultural products. For
example, in 2006 and 2007, growing regions in Australia
experienced significant droughts, reducing crop yields and
increasing acquisition costs for grain raw materials. Due to
local
and/or
international competition, particularly in the Australia/New
Zealand operations, 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, wheat
flour and potato starch 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 2007. Penford uses natural gas extensively in
its Industrial Ingredients business to dry starch products, and,
to a lesser extent, in the other business segments. 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.
In fiscal 2006 and 2005, none of the Companys customers
constituted more than 10% of sales. However, in fiscal 2007, the
Companys largest customer, Domtar, Inc., represented
approximately 12% of consolidated net sales and sales to the top
ten customers represented 44% of consolidated net sales.
Generally, the Company does not have multi-year sales agreements
with its customers. Instead, 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.
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 that the Companys
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. 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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9
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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.
|
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.
Although the Company has fixed the interest rates on a
significant portion of its outstanding debt through interest
rate swaps, as of August 31, 2007, approximately
$37.5 million of its outstanding debt, including amounts
outstanding under the Australian grain inventory financing
facility, was subject to variable interest rates which move in
direct relation to the United States or Australian London
InterBank Offered Rate (LIBOR), the Australian bank
bill rate (BBSY), 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 United States,
Australia and New Zealand. The Companys effective tax
rates could be adversely affected by changes in the mix of
earnings in countries 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, which are predominantly in the United States, is
dependent on the Companys ability to generate future
taxable income in the 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.
Fluctuations
in the relative value of the U.S. dollar and foreign currencies
may negatively affect Penfords revenues and
profitability.
In the ordinary course of business, the Company is subject to
risks associated with changing foreign exchange rates. The value
of the U.S. dollar against foreign currencies has been
generally in decline in recent years. In fiscal year 2007,
approximately 29% of the Companys revenue was denominated
in currencies other than the U.S. dollar. The
Companys revenues and profitability may be adversely
affected by fluctuations in exchange rates between the
U.S. dollar and other currencies.
The
Company may not be able to implement ethanol production as
planned or at all. Even if the Company successfully implements
ethanol production, its ethanol facility may not be
profitable.
The Companys ability to implement ethanol production as
planned is subject to uncertainty. The Company has secured
$45 million of financing for this project which it believes
is adequate for the projects completion; however, the
Company could face financial risks if this amount of financing
is not sufficient to complete the construction of
10
the ethanol facility. Penford may be adversely affected by
environmental, health and safety laws, regulations and
liabilities in implementing ethanol production, which could
increase its costs. Changes in the markets for ethanol,
including oversupply in ethanol capacity,
and/or
legislation and regulations could materially and adversely
affect ethanol demand. There is no assurance that sufficient
demand for ethanol will develop to permit profitable operation
of the ethanol production facility.
Penfords
results of operations could be adversely affected by litigation
and other contingencies.
The Company faces risks arising from litigation matters in which
various factors or developments can lead to changes in current
estimates of liabilities, such as final adverse judgments,
significant settlements or changes in applicable law. A future
adverse outcome, ruling or unfavorable development could result
in future charges that could have a material effect on the
Companys results of operations.
Penford
has foreign operations, which exposes it to the risks of doing
business abroad.
Approximately 29% of the Companys revenues are derived
from its operations in Australia and New Zealand. These foreign
operations subject the Company to a number of risks associated
with conducting business outside the United States, including
the following:
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currency fluctuations;
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transportation delays and interruptions;
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political, social and economic instability and disruptions;
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government embargoes or foreign trade restrictions;
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the imposition of duties, tariffs and other trade barriers;
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import and export controls;
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labor unrest and changing regulatory environments;
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limitations on the Companys ability to enforce legal
rights and remedies; and
|
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|
potentially adverse tax consequences.
|
Although the Companys operations have not been materially
affected by any such factors to date, no assurance can be given
that its operations may not be adversely affected in the future.
Any of these events could have an adverse effect on the
Companys operations in the future by reducing the demand
for its products, decreasing the prices at which the Company can
sell its products or otherwise having an adverse effect on its
business, financial condition or results of operations.
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.
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, local and foreign
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 significant
11
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, 2007, approximately 40% of the
Companys 357 North American employees, and 69% of the
239 employees of Penford Australia, were members of trade
unions. Although the Companys relations with unions are
stable, 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. For example, in the fourth quarter of fiscal 2004 and
the first quarter of fiscal 2005, Penford experienced a union
strike at its Cedar Rapids manufacturing facility. The Company
incurred $4.2 million and $4.1 million in additional
production costs for 2004 and 2005, respectively, in connection
with the strike. Additionally, the Companys non-union
workforce could be disrupted by union organizing activities and
similar actions.
Lower
investment performance by the Companys pension plan assets
will require it to increase its pension liability and expense,
which may also lead to accelerated funding of the Companys
pension obligations and divert funds from other
uses.
Lower investment performance by the Companys pension plan
assets could increase its defined benefit pension plan
obligations. The Company estimates that minimum funding
requirements for its qualified defined benefit pension plans
will be approximately $1.6 million in fiscal 2008. However,
the Company cannot predict whether changing economic conditions
or other factors will lead or require it to make contributions
in excess of its current expectations, diverting funds it would
otherwise apply to other uses. Additionally, there is no
assurance that the Company will have the funds necessary to meet
any minimum pension funding requirements.
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 2007, the stock price ranged from a
low of $16.23 on January 5, 2007 to a high of $41.30 on
October 11, 2007. The trading price of Penfords
common stock may fluctuate significantly in the future as a
result of a number of factors, including:
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actual and anticipated variations in the Companys
operating results;
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general economic and market conditions, including changes in
demand for the Companys products;
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12
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interest rates;
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geopolitical conditions throughout the world;
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perceptions of the strengths and weaknesses of the
Companys industries;
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the Companys ability to pay principal and interest on its
debt when due;
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developments in the Companys relationships with its
lenders, customers
and/or
suppliers;
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announcements of alliances, mergers or other relationships by or
between the Companys competitors
and/or
its
suppliers and customers; and
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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 and the shareholder rights plan 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.
In addition, Penford has adopted a shareholder rights plan,
intended to discourage a potential acquisition of the Company
that its board of directors believes is undesirable to the
Company and its shareholders. The shareholder rights plan
expires in June 2008 and the Companys board of directors
currently does not intend to renew the plan. The shareholder
rights plan and the provisions under Washington law may have the
effect of delaying, deterring or preventing a change of control
in the ownership of Penford.
13
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Item 1B:
|
Unresolved
Staff Comments
|
Not applicable.
Penfords facilities as of August 31, 2007 are as
follows:
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Bldg. Area
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Land Area
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Owned/
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(Sq. Ft.)
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(Acres)
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Leased
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Function of Facility
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North America:
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Centennial, Colorado
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25,200
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Leased
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Corporate headquarters, administrative offices and research
laboratories
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Cedar Rapids, Iowa
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759,000
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29
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Owned
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Manufacture of corn starch products, administration offices and
research laboratories
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Idaho Falls, Idaho
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30,000
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4
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Owned
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Manufacture of potato starch products
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Richland, Washington
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45,000
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Owned
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Manufacture of potato and tapioca starch products
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9,600
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4.9
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Leased
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Administrative office and warehouse
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Plover, Wisconsin
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54,000
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|
10
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Owned
|
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Manufacture of potato starch Products
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Australia/New Zealand:
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Lane Cove, New South Wales
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75,700
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|
7
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Owned
|
|
Manufacture of corn starch products, administrative offices and
research laboratories
|
Tamworth, New South Wales
|
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94,600
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|
6
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Owned
|
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Manufacture of wheat starch and gluten Products
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477
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Owned
|
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Effluent dispersion
|
Tamworth, New South Wales
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425
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Leased
|
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Agricultural and effluent dispersion
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225
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|
Leased
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|
Agricultural use
|
Auckland, New Zealand
|
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104,700
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|
5
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Owned
|
|
Manufacture of corn starch products
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3
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Leased
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Manufacture of corn starch products
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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.
14
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Item 3:
|
Legal
Proceedings
|
In October 2004, Penford Products Co. (Penford
Products), a wholly-owned subsidiary of the Company, was
sued by Graphic Packaging International, Inc.
(Graphic) in the Fourth Judicial District Court,
Ouachita Parish, Louisiana. Graphic sought monetary damages for,
among other things, Penford Products alleged breach of an
agreement during the 2004 strike affecting its Cedar Rapids,
Iowa plant to supply Graphic with certain starch products.
Penford Products denied all liability and countersued for
damages.
During October 2007, this case was tried before a judge of the
above-noted court. As of November 7, 2007, no decision in
the matter had been rendered by the judge and the judge had not
advised Penford Products of the date upon which his decision
would be issued. At trial, Graphic argued that it was entitled
to damages of approximately $3.27 million, plus interest.
Penford Products argued that it was entitled to damages of
approximately $550,000, plus interest.
The Company vigorously defended its position at trial. However,
the Company, applying its best judgment of the likely outcome of
the litigation, has established a loss contingency against this
matter of $2.4 million. Depending upon the eventual outcome
of this litigation, the Company may incur additional material
charges in excess of the amount it has reserved, or it may incur
lower charges, the amounts of which in each case management is
unable to predict at this time.
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 from the Companys outside legal counsel, the
ultimate resolution of these matters will not materially affect
the consolidated financial position, results of operations or
liquidity of the Company.
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Item 4:
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Submission
of Matters to a Vote of Security Holders
|
No matter was submitted to a vote of shareholders during the
fourth quarter of fiscal 2007.
15
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Item 5:
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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, $1.00 par value, trades on The
Nasdaq Stock Market LLC under the symbol PENX. On
November 1, 2007, there were 501 shareholders of
record. The high and low closing prices of Penfords common
stock during the last two fiscal years are set forth below.
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Fiscal 2007
|
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Fiscal 2006
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High
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Low
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High
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Low
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Quarter Ended November 30
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$
|
16.97
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$
|
14.55
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$
|
14.78
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$
|
12.64
|
|
Quarter Ended February 28
|
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$
|
21.88
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$
|
16.23
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$
|
16.48
|
|
|
$
|
11.80
|
|
Quarter Ended May 31
|
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$
|
21.25
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|
$
|
18.29
|
|
|
$
|
18.00
|
|
|
$
|
13.62
|
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Quarter Ended August 31
|
|
$
|
38.65
|
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|
$
|
18.20
|
|
|
$
|
17.85
|
|
|
$
|
13.59
|
|
Dividends
During each quarter of fiscal year 2007 and 2006, the Board of
Directors declared a $0.06 per share cash dividend. On
October 30, 2007, the Board of Directors declared a
dividend of $0.06 per common share payable on December 7,
2007 to shareholders of record as of November 16, 2007. On
a periodic basis, the Board of Directors reviews the
Companys dividend policy which is impacted by
Penfords earnings, financial condition, and cash and
capital requirements. Future dividend payments are at the
discretion of the Board of Directors. Penford has included the
payment of dividends in its planning for fiscal 2008.
Pursuant to its credit agreement, the Company may not declare or
pay dividends on, or make any other distributions in respect of,
its common stock in excess of $8 million in any fiscal year
or if there exists a Default or Event of Default as defined in
the credit agreement. During fiscal years 2007 and 2006, the
Company declared dividends on its common stock of $2.2 and
$2.1 million, respectively.
Issuer
Purchases of Equity Securities
None
16
Performance
Graph
The following graph compares the Companys cumulative total
shareholder return on its common stock for a five-year period
(September 1, 2002 to August 31, 2007) 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, 2002 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
ASSUMES
$100 INVESTED ON SEPTEMBER 1, 2002
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING AUGUST 31, 2007
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2002
|
|
|
2003
|
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2004
|
|
|
2005
|
|
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2006
|
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|
2007
|
PENFORD CORPORATION
|
|
|
|
100.00
|
|
|
|
|
96.64
|
|
|
|
|
124.64
|
|
|
|
|
107.75
|
|
|
|
|
118.07
|
|
|
|
|
269.72
|
|
NASDAQ MARKET INDEX (U.S.)
|
|
|
|
100.00
|
|
|
|
|
136.85
|
|
|
|
|
141.42
|
|
|
|
|
164.86
|
|
|
|
|
170.90
|
|
|
|
|
203.00
|
|
NASDAQ MARKET CAP ($100-200M)
|
|
|
|
100.00
|
|
|
|
|
140.18
|
|
|
|
|
132.48
|
|
|
|
|
131.41
|
|
|
|
|
111.01
|
|
|
|
|
120.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
$100 invested on 8/31/02 in index-including reinvestment of
dividends.
Fiscal year ending August 31.
|
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.
17
|
|
Item 6:
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006(2)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands, except share and per share data)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
|
$
|
296,763
|
|
|
$
|
279,386
|
|
|
$
|
262,467
|
|
Cost of sales
|
|
|
298,203
|
|
|
|
273,476
|
|
|
|
263,542
|
|
|
|
241,298
|
|
|
|
218,784
|
|
Gross margin percentage
|
|
|
17.7
|
%
|
|
|
14.1
|
%
|
|
|
11.2
|
%
|
|
|
13.6
|
%
|
|
|
16.6
|
%
|
Net income(3)
|
|
$
|
13,517
|
(1)
|
|
$
|
4,228
|
|
|
$
|
2,574
|
(4)
|
|
$
|
3,702
|
(5)
|
|
$
|
8,436
|
(6)
|
Diluted earnings per share
|
|
$
|
1.46
|
|
|
$
|
0.47
|
|
|
$
|
0.29
|
|
|
$
|
0.42
|
|
|
$
|
1.03
|
|
Dividends per share
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
Average common shares and equivalents assuming
dilution
|
|
|
9,283,125
|
|
|
|
9,004,190
|
|
|
|
8,946,195
|
|
|
|
8,868,050
|
|
|
|
8,227,549
|
|
Balance Sheet Data (as of August 31):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total assets
|
|
$
|
288,388
|
|
|
$
|
250,668
|
|
|
$
|
249,917
|
|
|
$
|
252,191
|
|
|
$
|
250,893
|
|
Capital expenditures
|
|
|
34,734
|
|
|
|
14,905
|
|
|
|
9,413
|
|
|
|
15,454
|
|
|
|
8,772
|
|
Long-term debt
|
|
|
63,403
|
|
|
|
53,171
|
|
|
|
62,107
|
|
|
|
75,551
|
|
|
|
76,696
|
|
Total debt
|
|
|
74,677
|
|
|
|
67,007
|
|
|
|
66,129
|
|
|
|
80,326
|
|
|
|
79,696
|
|
Shareholders equity
|
|
|
125,676
|
|
|
|
107,452
|
|
|
|
100,026
|
|
|
|
95,719
|
|
|
|
87,885
|
|
|
|
|
(1)
|
|
Includes pre-tax charges of $2.4 million related to an
estimated loss contingency for litigation. See Note 17 to
the Consolidated Financial Statements.
|
|
(2)
|
|
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 123R, Share-Based
Payment, effective at the beginning of fiscal 2006. As a
result, the results of operations for fiscal 2006 and fiscal
2007 include incremental stock-based compensation cost in excess
of what would have been recorded had the Company continued to
account for stock-based compensation using the intrinsic value
method.
|
|
(3)
|
|
In the fourth quarter of fiscal 2004 and the first quarter of
fiscal 2005, Penford experienced a union strike at its Cedar
Rapids, Iowa manufacturing facility. As a result, net income for
fiscal 2004 and fiscal 2005 reflects incremental expenses for
2004 and 2005, respectively, due to the strike.
|
|
(4)
|
|
Includes a pre-tax gain of $1.2 million related to the sale
of land in Australia, a $0.7 million pre-tax gain related
to the sale of an investment and a $1.1 million pre-tax
write off of unamortized deferred loan costs. See Note 12
to the Consolidated Financial Statements. Includes a tax benefit
of $2.5 million related to 2001 through 2004 that the
Company recognized in 2005 when the Company determined that it
was probable that the extraterritorial income exclusion
deduction on its U.S. federal income tax returns for those years
would be sustained. See Note 13 to the Consolidated Financial
Statements.
|
|
(5)
|
|
Includes pre-tax charges of $1.3 million related to the
restructuring of business operations and $0.7 million
related to a pre-tax non-operating expense for the write off of
unamortized deferred loan costs. See Note 12 to the
Consolidated Financial Statements.
|
|
(6)
|
|
Includes a pre-tax gain of $1.9 million related to the sale
of certain assets to National Starch and Chemical Investment
Holdings.
|
|
|
Item 7:
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
Penford generates revenues, income and cash flows by developing,
manufacturing and marketing specialty natural-based ingredient
systems for industrial and food applications. The Company
develops and manufactures ingredients with starch as a base,
providing value-added applications to its customers.
Penfords starch products are
18
manufactured primarily from corn, potatoes, and wheat and are
used principally as binders and coatings in paper and food
production.
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 three segments. The first two, Industrial
Ingredients North America and Food
Ingredients North America, are broad categories of
end-market users, served by operations in the United States. The
third segment is comprised of the Companys operations in
Australia and New Zealand, which operations are engaged
primarily in the food ingredients business. See Item 1 and
Note 15 to the Consolidated Financial Statements for
additional information regarding the Companys business
segment operations.
Consolidated fiscal 2007 sales grew 13.8% to $362.4 million
from $318.4 million in fiscal 2006 due to favorable unit
pricing and product mix in all business segments and stronger
foreign currency exchange rates in Australia and New Zealand.
Gross margin as a percent of sales expanded 360 basis
points from 14.1% in fiscal 2006 to 17.7% in fiscal 2007
primarily due to revenue growth and improved manufacturing
efficiencies in each of the business units. The industrial
business unit contributed $13.9 million of the total
$19.2 million gain in gross margin with improvements in
unit pricing and product mix, energy unit costs, corn
procurement and manufacturing costs.
Operating expenses increased $1.9 million primarily due to
increases in employee-related costs, but declined as a percent
of sales to 8.7% in fiscal 2007 from 9.3% in fiscal 2006. In
addition, the Company recorded a pretax charge in the amount of
$2.4 million related to an estimated loss contingency for
litigation. See Note 17 to the Consolidated Financial
Statements. Interest expense of $5.7 million in fiscal 2007
was $0.2 million less than in fiscal 2006 due to lower debt
balances and interest rates. The margin over the applicable
benchmark interest rate was reduced in fiscal 2007 due to the
improved financial performance of the Company.
The effective tax rate for fiscal 2007, at 31%, is lower than
the statutory tax rate of 35% due to the tax benefits from
domestic (U.S.) production activities, lower tax rates on
foreign earnings, research and development tax incentives in the
United States and Australia, and the effects of a tax audit
settled in fiscal 2007. See Note 13 to the Consolidated
Financial Statements.
The Company, applying its best judgment of the likely outcome of
litigation regarding alleged breach of contract claims against
Penford Products, has established a loss contingency against
this matter of $2.4 million. Depending upon the eventual
outcome of this litigation, the Company may incur additional
material charges in excess of the amount it has reserved, or it
may incur lower charges, the amounts of which in each case
management is unable to predict at this time. See Note 17
to the Consolidated Financial Statements.
In June 2006, the Company announced plans to invest
$42 million for up to 40 million gallons of ethanol
production capacity per year at its Cedar Rapids, Iowa facility.
In October 2006, Penford refinanced its credit facility and
obtained a $45 million capital expansion loan commitment
under its credit facility maturing December 2012 to finance
construction of the ethanol plant. The designed capacity has
been expanded to 45 million gallons with construction cost
estimates maintained at $1.00 to $1.05 per gallon. Contracts
valued at $40 million have been awarded for this project as
of the end of October 2007. Penford already has much of the
infrastructure within the Cedar Rapids plant to manufacture
ethanol cost effectively, with sufficient grain handling,
separation processes, utilities and logistic capabilities. The
factory is centrally located near rail and ground transport
arteries and the ethanol facility will occupy available space
within the existing site footprint. Once complete, this
enhancement of the Companys bio-refining capabilities will
give management the ability to select from multiple output
choices to capitalize on changing industry conditions and
selling opportunities. This increased flexibility will allow the
Company to direct production towards the most attractive mix of
returns and margins. Additionally, by improving throughput
capacity and adding fermentation capability, Penford is better
positioned to participate in emerging bio-processing trends and
technologies that may represent future platforms for growth.
Accounting
Changes
As of August 31, 2007, the Company adopted the recognition
and disclosure provisions of Statement of Financial Accounting
Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87,
88, 106, and 132R (SFAS 158). The
recognition provision requires an employer to recognize a
plans funded status in the statement of financial position
19
and recognize the changes in a plans funded status in the
statement of comprehensive income in the year in which the
changes occur. The effect of adoption on the consolidated
balance sheet was a decrease in other assets of
$2.5 million, a decrease in current accrued liabilities of
$1.2 million, an increase in other liabilities of
$4.3 million, a decrease in other postretirement benefits
of $1.1 million, a decrease in accumulated other
comprehensive income, net of tax, of $2.8 million, and an
increase in deferred tax assets of $1.7 million. The
adoption of SFAS 158s recognition provision did not
have an effect on the Companys consolidated results of
operations for fiscal 2007, or for any prior year presented, and
it will not have an effect on the results of operations in the
future. See Note 10 to the Consolidated Financial
Statements.
As of September 1, 2005, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment
(SFAS 123R), utilizing the modified-prospective
transition method under which prior period results were not
restated. The consolidated results of operations for fiscal
years 2007 and 2006 include incremental stock-based compensation
cost in excess of what would have been recorded had the Company
continued to account for stock-based compensation using the
intrinsic value method. Pretax stock-based compensation expense
included in the consolidated results of operations was
$1.1 million in each of fiscal years 2007 and 2006. See
Note 9 to the Consolidated Financial Statements.
Results
of Operations
Fiscal
2007 Compared to Fiscal 2006
Industrial
Ingredients North America
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
194,957
|
|
|
$
|
165,850
|
|
Cost of sales
|
|
$
|
159,851
|
|
|
$
|
144,656
|
|
Gross margin
|
|
|
18.0
|
%
|
|
|
12.8
|
%
|
Income from operations
|
|
$
|
19,251
|
|
|
$
|
9,121
|
|
Industrial Ingredients fiscal 2007 sales of
$195.0 million increased $29.1 million, or 18%, over
fiscal 2006, primarily driven by unit price increases and the
positive effects on revenue of passing through higher corn
costs. Combined, these factors added $34 million to fiscal
2007 sales. Offsetting these increases was a 6% decline in
volume due to softness in the paper market as customers closed
or temporarily shuttered plants.
Gross margin increased $13.9 million, or 66%, over fiscal
2006 to $35.1 million, and, as a percentage of sales,
expanded to 18.0% in fiscal 2007 compared to 12.8% in fiscal
2006. Approximately $12 million of the margin growth was
due to higher unit pricing and favorable product mix.
Improvements in energy unit costs of $0.3 million,
favorable corn procurement costs of $3.3 million and
reductions in manufacturing overhead of $1.2 million also
contributed to increased margin. These favorable effects were
partially offset by increased chemical costs of
$0.7 million and the margin effect of a volume decline of
$2.7 million.
Income from operations increased $10.1 million over fiscal
2006 due to the increase in the gross margin, partially offset
by $2.4 million related to an estimated loss contingency
for litigation. See Note 17 to the Consolidated Financial
Statements. Operating expenses declined to 5.2% of sales in
fiscal 2007, compared to 5.5% of sales in fiscal 2006. Research
and development expenses remained comparable to fiscal 2006 at
1.7% of sales.
Food
Ingredients North America
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
62,987
|
|
|
$
|
57,156
|
|
Cost of sales
|
|
$
|
44,036
|
|
|
$
|
41,954
|
|
Gross margin
|
|
|
30.1
|
%
|
|
|
26.6
|
%
|
Income from operations
|
|
$
|
10,684
|
|
|
$
|
7,819
|
|
20
Sales at the Food Ingredients North America business
expanded 10.2% over the prior year driven by an 8.8% increase in
average unit sales prices. Volumes increased slightly, adding
120 basis points to the revenue increase. Annual sales in
the protein end market grew 17% over last year and sales of
applications for the pet chew and treats product lines rose from
$.05 million in fiscal 2006 to $2.4 million in fiscal
2007.
Gross margin improved by $3.7 million in fiscal 2007, due
to higher unit selling prices and favorable product mix, offset
by a 14% increase in the average unit cost of raw materials.
Fiscal 2007 operating income increased 37% over last year on the
expansion in gross margin partially offset by $0.5 million
in higher employee-related expenses and increased research and
development expenses of $0.1 million.
Australia/New
Zealand Operations
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
105,244
|
|
|
$
|
96,121
|
|
Cost of sales
|
|
$
|
95,141
|
|
|
$
|
87,575
|
|
Gross margin
|
|
|
9.6
|
%
|
|
|
8.9
|
%
|
Income from operations
|
|
$
|
3,269
|
|
|
$
|
1,735
|
|
The Australian business reported a 9.5% increase in sales in
fiscal 2007 over fiscal 2006. Favorable foreign currency rates
and favorable unit pricing contributed 730 basis points and
140 basis points, respectively, to the revenue increase.
Sales volumes increased less than 1% and sales in local currency
increased 2%.
Gross margin expanded to 9.6% of sales in fiscal 2007 from 8.9%
in fiscal 2006 on lower distribution costs and improved
production yields and volumes. Escalating wheat costs of
$1.6 million were fully offset by improved product pricing.
Total operating expenses for fiscal 2007 were comparable to
fiscal 2006, but declined to 4.9% of sales from 5.6% in fiscal
2006. Research and development expenses increased by
$0.2 million and, as a percent of sales, were comparable to
fiscal 2006 at 1.6%. Increases in these expenses were due to
enhancements to the segments commercial and research
capabilities. Operating expenses in fiscal 2006 included
$0.9 million of employee- severance costs.
Corporate
Operating Expenses
Corporate operating expenses increased to $9.6 million in
fiscal 2007 from $9.4 million in fiscal 2006. Employee
related costs increased by $0.6 million partially offset by
declines in legal and professional fees.
Fiscal
2006 Compared to Fiscal 2005
Industrial
Ingredients North America
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
165,850
|
|
|
$
|
147,782
|
|
Cost of sales
|
|
$
|
144,656
|
|
|
$
|
136,127
|
|
Gross margin
|
|
|
12.8
|
%
|
|
|
7.9
|
%
|
Income (loss) from operations
|
|
$
|
9,121
|
|
|
$
|
(147
|
)
|
Industrial Ingredients fiscal 2006 sales of $165.9 million
increased $18.1 million, or 12%, over fiscal 2005,
primarily driven by a volume increase of 9%. More favorable
pricing and product mix contributed 2% of the sales increase for
the year.
Gross margin increased $9.5 million, or 82%, over fiscal
2005 to $21.2 million, and, as a percent of sales, expanded
to 12.8% in fiscal 2006 compared to 7.9% in fiscal 2005.
Approximately $8.8 million of the margin growth was due to
higher unit pricing, favorable product mix and increases in
manufacturing volumes.
21
Improvements in energy usage of $2.6 million, favorable
corn procurement of $2.2 million and recovery from
$4.1 million in incremental strike-related costs incurred
during fiscal 2005 also contributed to increased margin. These
favorable effects were partially offset by increased unit costs
of natural gas and chemicals of $3.2 million and
$3.3 million, respectively, as well as $1.2 million in
higher distribution expenses.
Income from operations for fiscal 2006 increased
$9.3 million over fiscal 2005 due to the increase in the
gross margin. Operating expenses, which included
$0.2 million in severance costs, declined to 5.5% of sales
in fiscal 2006, compared to 6.1% of sales in fiscal 2005.
Research and development expenses remained comparable to fiscal
2005 at 1.8% of sales.
Food
Ingredients North America
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
57,156
|
|
|
$
|
53,661
|
|
Cost of sales
|
|
$
|
41,954
|
|
|
$
|
38,964
|
|
Gross margin
|
|
|
26.6
|
%
|
|
|
27.4
|
%
|
Income from operations
|
|
$
|
7,819
|
|
|
$
|
7,404
|
|
Sales at the Food Ingredients North America business
rose 7% in fiscal 2006 over fiscal 2005, driven by an 8% volume
increase. Annual sales volumes in the dairy and protein end
markets grew 42% over fiscal 2005. Sales of formulations for
potato coatings and sweeteners increased 7% and 18%,
respectively. Revenues from nutrition (low-carbohydrate)
applications declined by $4.6 million in fiscal 2006.
Gross margin as a percent of sales declined by 80 basis
points in fiscal 2006 from fiscal 2005, due to the decrease in
sales of higher-margin nutrition products and higher chemical
and energy costs of $0.7 million. Improved plant
utilization from increased production volumes partially offset
the unfavorable product mix. Fiscal 2006 operating and research
and development expenses increased by $0.1 million and
declined to 12.9% of sales compared to 13.6% in fiscal 2005.
Australia/New
Zealand Operations
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
96,121
|
|
|
$
|
96,231
|
|
Cost of sales
|
|
$
|
87,575
|
|
|
$
|
89,362
|
|
Gross margin
|
|
|
8.9
|
%
|
|
|
7.1
|
%
|
Income from operations
|
|
$
|
1,735
|
|
|
$
|
1,331
|
|
The Australian business reported sales of $96.1 million in
fiscal 2006 compared to $96.2 million in fiscal 2005. A 3%
sales volume increase was offset by unfavorable foreign currency
exchange rates. Sales in local currencies increased 1% as volume
increases were partially offset by lower unit pricing.
Gross margin expanded to 8.9% of sales in fiscal 2006 from 7.1%
in fiscal 2005 as the Tamworth, Australia facility improved its
production yields and plant utilization upon completion of a
reconfiguration of its manufacturing processes in fiscal 2005.
Lower wheat and New Zealand grain costs also contributed
$0.6 million to the gross margin improvements.
Operating expenses rose to 5.6% of sales in fiscal 2006 from
4.5% in fiscal 2005 on $0.9 million of employee severance
costs incurred during fiscal 2006.
Corporate
Operating Expenses
Corporate operating expenses increased to $9.4 million in
fiscal 2006 from $7.6 million in fiscal 2005. The Company
expensed $0.7 million in stock-based compensation costs for
corporate employees during fiscal 2006
22
after adoption of SFAS 123R. Legal and professional fees
increased $0.4 million and employee costs, including
contributions to the Companys defined contribution plan,
increased $0.5 million.
Non-Operating
Income (Expense)
Other non-operating income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Royalty and licensing income
|
|
$
|
1,902
|
|
|
$
|
1,827
|
|
|
$
|
1,386
|
|
Gain (loss) on sale of assets
|
|
|
(325
|
)
|
|
|
85
|
|
|
|
64
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(1,051
|
)
|
Gain on sale of Tamworth farm
|
|
|
60
|
|
|
|
78
|
|
|
|
1,166
|
|
Gain on sale of investment
|
|
|
|
|
|
|
|
|
|
|
736
|
|
Other
|
|
|
8
|
|
|
|
(94
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,645
|
|
|
$
|
1,896
|
|
|
$
|
2,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2003, the Company exclusively licensed to National
Starch and Chemical Investment Holdings Corporation
(National Starch) certain rights to its resistant
starch patent portfolio for applications in human nutrition.
Under the terms of the licensing agreement, the Company received
an initial licensing fee and royalties during the years noted
above.
In fiscal 2005, the Company refinanced its secured term and
revolving credit facilities and wrote off $1.1 million of
unamortized debt issuance costs related to this debt.
In fiscal 2005, Penford sold a parcel of land near its wheat
starch plant in Tamworth, New South Wales, Australia, that was
used for disposal of effluent from the Tamworth manufacturing
process for $1.9 million, and recognized a gain on the sale
of $1.2 million. A second parcel of land was sold in fiscal
2006 with leasebacks to the Company. Gain on the sale is being
recognized in income proportionally over the terms of the leases.
In fiscal 2005, the Company sold a majority of its investment in
a small Australian
start-up
company and recognized a $0.7 million pre-tax gain on the
transaction.
Interest
expense
Interest expense was $5.7 million, $5.9 million and
$5.6 million in fiscal years 2007, 2006 and 2005,
respectively. Interest expense for fiscal 2007 declined
$0.2 million from fiscal 2006 with increases in the
interest rates offset by a decline in the applicable interest
rate margin pursuant to the credit agreement as a result of
improved financial performance by the Company and lower average
debt balances, excluding ethanol-related debt borrowings.
Approximately $14.5 million of debt outstanding at
August 31, 2007 was attributable to the construction of the
ethanol production plant. Interest costs of $0.4 million
related to construction of the ethanol facility were capitalized
in fiscal 2007. Interest expense for fiscal 2006 compared to
fiscal 2005 rose on higher short-term interest rates on the
Companys revolving line of credit and short-term
borrowings.
As of August 31, 2007, all of the Companys
outstanding debt, including amounts outstanding under the
Australian grain inventory financing facility, was subject to
variable interest rates. As of August 31, 2007, under
interest rate swap agreements with several banks, the Company
has fixed its interest rates on U.S. dollar denominated
term debt of $32.8 million at 4.18% and $4.2 million
at 5.08%, plus the applicable margin under the Companys
credit facility.
Income
taxes
The effective tax rates for fiscal years 2007, 2006 and 2005
were 31%, 20% and 209%, respectively. The effective tax rate for
fiscal 2007 varied from the U.S. federal statutory rate of
35% primarily due to Australian and U.S. tax incentives
related to research and development, the favorable tax effect of
domestic (U.S.) production
23
activities, and the effect of a tax settlement. The tax benefits
previously available to the Company related to the
extraterritorial income exclusion expired in December 2006. In
May 2007, the Company settled the outstanding Internal Revenue
Service (IRS) audits of the Companys
U.S. federal income tax returns for the fiscal years ended
August 31, 2001 and 2002. Under the settlement, the Company
received a cash refund of $0.3 million. In addition, in
connection with the settlement of these audits in the third
quarter of fiscal 2007, the Company reversed a current tax
liability in the amount of $0.7 million, which represented
its estimate of the probable loss on certain tax positions being
examined.
In December 2006, the Tax Relief Healthcare Act of 2006 was
enacted in the United States, which retroactively reinstated and
extended the research and development tax credit from
January 1, 2006 through December 31, 2007. The Company
recorded the tax effect of $0.2 million of
U.S. research and development tax credits in 2007 related
to fiscal 2006.
The effective tax rate for fiscal 2006 is lower than the
statutory tax rate due to the tax benefits of the
extraterritorial income exclusion (EIE) deduction,
lower tax rates on foreign earnings and research and development
tax credits.
The tax benefit recognized for fiscal 2005 of $4.9 million
included a $2.5 million tax benefit relating to the
Companys incremental EIE deduction on its
U.S. federal income tax returns for fiscal years 2001
through 2004. In fiscal 2005, the Company determined that it was
probable that the EIE deduction would be sustained under audit
by the IRS. See Note 13 to the Consolidated Financial
Statements. Other factors affecting the effective tax rate for
2005 were the benefits resulting from the 2005 EIE deduction,
research and development tax credits, and lower foreign tax
rates.
Liquidity
and Capital Resources
The Companys primary sources of short- and long-term
liquidity are cash flow from operations and its five-year
revolving line of credit which expires in 2011. 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 2008.
Operating
Activities
At August 31, 2007, Penford had working capital of
$39.0 million, and $67.3 million outstanding under its
credit facility. Cash flow from operations was
$22.5 million, $11.4 million and $21.1 million in
fiscal years 2007, 2006 and 2005, respectively. The increase in
cash flow in fiscal 2007 compared to fiscal 2006 was due to the
growth in earnings in fiscal 2007. The decrease in cash flow
from operations in fiscal 2006 compared to fiscal 2005 is due to
a change in the Companys financing of Australian grain
purchases from vendor financing to bank financing. See
Financing Activities below for a discussion of the
grain facility in Australia.
Penford maintains two defined benefit pension plans in the
United States. Rising discount rates have decreased the
Companys underfunded plan status (plan assets compared to
benefit obligations). Based on the current underfunded status of
the plans and the actuarial assumptions being used for fiscal
2008, Penford estimates that it will be required to make minimum
contributions to the pension plans of $1.6 million during
fiscal 2008.
Investing
Activities
Capital expenditures were $34.7 million, $14.9 million
and $9.4 million in fiscal years 2007, 2006 and 2005,
respectively. Capital expenditures in fiscal years 2007 and 2006
include $19.3 million and $0.7 million, respectively,
for the ethanol production facility. Penford expects capital
expenditures, including $27 million in expenditures for the
Companys ethanol production facility, to be approximately
$47 million in fiscal 2008.
Financing
Activities
On October 5, 2006, Penford entered into a
$145 million Second Amended and Restated Credit Agreement
(the 2007 Agreement) among the Company; Harris N.A.;
LaSalle Bank National Association; 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.
24
The 2007 Agreement refinanced the Companys previous
$105 million secured term and revolving credit facilities.
Under the 2007 Agreement, the Company can borrow
$40 million in term loans and $60 million under a
revolving line of credit. The lenders revolving credit
loan commitment may be increased under certain conditions. In
addition, the 2007 Agreement provided the Company with
$45 million in capital expansion funds which are being used
by the Company to finance the construction of its planned
ethanol production facility in Cedar Rapids, Iowa. The capital
expansion funds may be borrowed as term loans from time to time
prior to October 5, 2008.
The final maturity date for the term and revolving loans under
the 2007 Agreement is December 31, 2011. Beginning on
December 31, 2006, the Company must repay the term loans in
twenty equal quarterly installments of $1 million, with the
remaining amount due at final maturity. The final maturity date
for the capital expansion loans is December 31, 2012.
Beginning on December 31, 2008, the Company must repay the
capital expansion loans in equal quarterly installments of
$1.25 million through September 30, 2009 and
$2.5 million thereafter, with the remaining amount due at
final maturity. Interest rates under the 2007 Agreement are
based on either LIBOR in Australia or the United States, or the
prime rate, depending on the selection of available borrowing
options under the 2007 Agreement.
The 2007 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 2007 Agreement), shall not exceed a maximum, which varies
between 3.00 and 4.50 through the term of the 2007 Agreement. In
addition, the Company must maintain a minimum tangible net worth
of $65 million, and a Fixed Charge Coverage Ratio, as
defined in the 2007 Agreement, of not more than 1.50 in fiscal
2007, 1.25 in fiscal 2008 and 1.50 in fiscal 2009 and
thereafter. Annual capital expenditures, exclusive of capital
expenditures incurred in connection with the Companys
ethanol production facility, are limited to $20 million,
unless the Company can maintain a Total Funded Debt Ratio below
2.00 for each fiscal quarter during any fiscal year, which would
result in the annual capital expenditure limit to increase to
$25 million for such fiscal year.
The Companys obligations under the 2007 Agreement are
secured by substantially all of the Companys
U.S. assets and a majority of the shares of Penford
Holdings Pty. Ltd. (Australia). The Company was in compliance
with the covenants in the 2007 Agreement as of August 31,
2007 and expects to be in compliance during fiscal 2008.
Pursuant to the terms of the 2007 Agreement, Penfords
additional borrowing ability as of August 31, 2007 was
$30.5 million under the capital expansion facility and
$44.2 million under the revolving line of credit.
The Companys short-term borrowings consist of an
Australian grain inventory financing facility. In fiscal 2006,
the Companys Australian subsidiary entered into a
variable-rate revolving grain inventory financing facility with
an Australian bank for a maximum of $32.7 million
U.S. dollars at the exchange rate at August 31, 2007.
This facility expires on March 15, 2008 and carries an
effective interest rate equal to BBSY plus approximately 2%.
Payments on this facility are due as the grain financed is
withdrawn from storage. The amount outstanding under this
arrangement, which is classified as a current liability on the
balance sheet, was $7.2 million at August 31, 2007.
Dividends
In fiscal 2007, Penford paid dividends on its common stock of
$2.2 million at a quarterly rate of $0.06 per share. On
October 30, 2007, the Board of Directors declared a
dividend of $0.06 per common share payable on December 7,
2007 to shareholders of record as of November 16, 2007. On
a periodic basis, the Board of Directors reviews the
Companys dividend policy which is affected by the
Companys earnings, financial condition and cash and
capital requirements. Future dividend payments are at the
discretion of the Board of Directors. Penford has included the
continuation of quarterly dividends in its planning for fiscal
2008.
Pursuant to the 2007 Agreement, the Company may not declare or
pay dividends on, or make any other distributions in respect of,
its common stock in excess of $8 million in any fiscal year
or if there exists a Default or Event of Default as defined in
the 2007 Agreement.
Critical
Accounting Policies
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
25
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 policies and related
disclosures with the Audit Committee of the Board of Directors.
The accounting policies 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
|
|
|
|
Valuation of goodwill
|
|
|
|
Self-insurance program
|
|
|
|
Income taxes
|
|
|
|
Stock-based compensation
|
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, 2007, the allowance for doubtful
accounts receivable was $0.8 million.
Hedging
Activities
Penford uses derivative instruments, primarily futures
contracts, to reduce exposure to price fluctuations of
commodities used in the manufacturing processes in the United
States. 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. To reduce exposure
to variable short-term interest rates, Penford uses interest
rate swap agreements.
The requirements for the designation of hedges are very complex,
and require judgments and analyses to qualify as hedges as
defined by Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended
(SFAS No. 133). 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 of
SFAS No. 133, 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. Penford had
deferred gains (losses), net of tax, of $(0.6) million and
$0.5 million at August 31, 2007 and 2006,
respectively, which are reflected in accumulated other
comprehensive income in both years. See Note 1 and 2 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
26
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 10 to
the Consolidated Financial Statements. See Defined Benefit
Plans below.
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 an impairment. These assessments require
extensive and subjective judgments to assess the fair value of
goodwill. While the Company engages 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. See Note 4
to the Consolidated Financial Statements.
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, as well as Australian and New Zealand, 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.
In evaluating the exposures connected with the various tax
filing positions, the Company establishes an accrual, when,
despite managements belief that the Companys tax
return positions are supportable, management believes that
certain positions may be successfully challenged and a loss is
probable. When facts and circumstances change, these accruals
are adjusted. Beginning in fiscal 2008, the Company will be
required to adopt Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement
No. 109 (FIN 48), which will change
the accounting for tax positions. See discussion in Note 1
to the Consolidated Financial Statements.
Stock-Based
Compensation
Beginning September 1, 2005, the Company recognizes
stock-based compensation in accordance with
SFAS No. 123R. 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 9 to the
Consolidated Financial Statements.
27
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.
SFAS No. 123R 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.
Contractual
Obligations
As more fully described in Notes 5 and 8 to the
Consolidated Financial Statements, the Company is a party to
various debt and lease agreements at August 31, 2007 that
contractually commit the Company to pay certain amounts in the
future. The purchase obligations at August 31, 2007
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, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009-2010
|
|
|
2011-2012
|
|
|
2013 & After
|
|
|
Total
|
|
|
Long-term Debt and Capital Lease Obligations
|
|
$
|
4,056
|
|
|
$
|
20,597
|
|
|
$
|
42,806
|
|
|
$
|
|
|
|
$
|
67,459
|
|
Short-term Borrowings
|
|
|
7,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,218
|
|
Postretirement medical(1)
|
|
|
596
|
|
|
|
1,353
|
|
|
|
1,495
|
|
|
|
4,649
|
|
|
|
8,093
|
|
Operating Lease Obligations
|
|
|
6,602
|
|
|
|
10,957
|
|
|
|
5,262
|
|
|
|
4,408
|
|
|
|
27,229
|
|
Purchase Obligations
|
|
|
101,574
|
|
|
|
2,642
|
|
|
|
|
|
|
|
|
|
|
|
104,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
120,046
|
|
|
$
|
35,549
|
|
|
$
|
49,563
|
|
|
$
|
9,057
|
|
|
$
|
214,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Estimated contributions to the unfunded postretirement medical
plan made in amounts needed to fund benefit payments for
participants through fiscal 2017 based on actuarial assumptions.
|
Off-Balance
Sheet Arrangements
The Company has no off-balance sheet arrangements.
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 10 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 2005 (6.25%), 2006 (5.50%) and 2007 (6.15%) 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 $0.1 million and other
postretirement benefit expense by $0.01 million. During
fiscal 2007, bond yields rose and Penford has increased the
discount rate for calculating its benefit obligations at
August 31, 2007, as well as net periodic expense for fiscal
2008, to 6.51%.
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
28
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 2007. A 50 basis points
decrease (increase) in the expected return on assets assumptions
would increase (decrease) pension expense by approximately
$0.2 million based on plan assets at August 31, 2007.
The expected return on plan assets used in calculating fiscal
2008 pension expense is 8%.
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, 2007, unrecognized losses from all sources are
$3.7 million for the pension plans and $0.6 million
for the postretirement health care plan. Amortization of
unrecognized net loss amounts is expected to increase net
pension expense by approximately $0.05 million in fiscal
2008. Amortization of unrecognized net losses is not expected to
affect the net postretirement health care expense in fiscal 2008.
Penford recognized pension expense of $1.7 million,
$2.4 million and $1.9 million in fiscal years 2007,
2006 and 2005, respectively. Penford expects pension expense to
be approximately $1.6 million in fiscal 2008. The Company
contributed $1.0 million, $3.3 million and
$3.6 million to the pension plans in fiscal years 2007,
2006 and 2005, respectively. Penford estimates that it will be
required to make minimum contributions to the pension plans of
$1.6 million during fiscal 2008.
The Company recognized benefit expense for its postretirement
health care plan of $1.0 million, $1.2 million and
$1.0 million in fiscal years 2007, 2006 and 2005,
respectively. Penford expects to recognize approximately
$1.0 million in postretirement health care benefit expense
in fiscal 2008. The Company contributed $0.6 million,
$0.7 million, and $0.5 million in fiscal years 2007,
2006 and 2005 to the postretirement health care plans and
estimates that it will contribute $0.6 million in fiscal
2008.
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 June 2006, the Financial Accounting Standards Board
(FASB) ratified the Emerging Issues Task Force
(EITF) consensus on EITF Issue
No. 06-2,
Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43. EITF Issue
No. 06-2
requires companies to accrue the costs of compensated absences
under a sabbatical or similar benefit arrangement over the
requisite service period. EITF Issue
No. 06-2
is effective for years beginning after December 15, 2006.
The Company is evaluating the impact that the adoption of EITF
Issue
No. 06-2
will have on its consolidated financial statements and currently
does not believe the adoption will have a material impact on its
consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for the uncertainty in income taxes recognized by prescribing a
recognition threshold that a tax position is required to meet
before being recognized in the financial statements. It also
provides guidance on derecognition, classification, interest and
penalties, interim period accounting and disclosure. FIN 48
is effective for fiscal years beginning after December 15,
2006. The Company is evaluating the impact that the adoption of
FIN 48 will have on its consolidated financial statements
and currently does not believe the adoption will have a material
impact on its consolidated financial statements.
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework and
gives guidance regarding the methods used for measuring fair
value, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after
29
November 15, 2007 (fiscal 2009). The Company is currently
evaluating the impact that the adoption of SFAS 157 may
have on its consolidated financial statements.
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities including an amendment of FASB
No. 115 (SFAS 159). SFAS 159
allows companies the option to measure financial instruments and
certain other items at fair value that are not currently
required to be measured at fair value. SFAS 159 is
effective for fiscal years beginning after November 15,
2007 (fiscal 2009). The Company is currently evaluating the
impact that the adoption of SFAS 159 may have on its
consolidated financial statements.
|
|
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, 2007, all of the Companys outstanding
debt, including amounts outstanding under the Australian grain
inventory financing facility, is subject to variable interest
rates, which are generally set for one or three months. Under
interest rate swap agreements with several banks, the Company
has fixed its interest rates on U.S. dollar denominated
term debt of $32.8 million at 4.18% and $4.2 million
at 5.08%, plus the applicable margin under the Companys
credit facility. The market risk associated with a
100 basis point adverse change in interest rates at
August 31, 2007 is approximately $0.4 million.
Foreign
Currency Exchange Rates
The Company has
U.S.-Australian
and Australian-New Zealand dollar currency exchange rate risks
due to revenues and costs denominated in Australian and New
Zealand dollars with the Companys foreign operation,
Penford Australia. Currently, cash generated by Penford
Australias operations is used for capital investment in
Australia and payment of debt denominated in Australian dollars.
At August 31, 2007, approximately 21% of total debt was
denominated in Australian dollars.
The Company has not maintained any derivative instruments to
mitigate the
U.S.-Australian
dollar currency exchange translation exposure. This position is
reviewed periodically, and based on the Companys review,
may result in the incorporation of derivative instruments in the
Companys hedging strategy. The currency exchange rate risk
between Penfords Australian and New Zealand operations is
not significant. For the year ended August 31, 2007, a 10%
change in the foreign currency exchange rates compared with the
U.S. dollar would have affected fiscal 2007 reported net
income by approximately $0.2 million.
From time to time, Penford enters into foreign exchange forward
contracts to manage exposure to receivables and payables
denominated in currencies different from the functional
currencies of the selling entities. As of August 31, 2007
and 2006, Penford did not have any foreign exchange forward
contracts outstanding. At August 31, 2007, the Company had
U.S. dollar denominated trade receivables of
$1.9 million at Penford Australia.
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
30
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,
2007 and 2006, the fair value of the Companys net corn
position was approximately $1.0 million and
$0.02 million, respectively. The market risk associated
with a 10% adverse change in corn prices at August 31, 2007
and 2006 is estimated at $104,000 and $2,000, respectively.
Over the past years, prices for natural gas have increased over
historic levels. 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,
2007 and 2006, the fair value of the natural gas exchange-traded
futures and options contracts was a loss of approximately
$1.9 million and a loss of approximately $0.3 million,
respectively. The market risk associated with a 10% adverse
change in natural gas prices at August 31, 2007 and 2006 is
estimated at $188,000 and $27,000, respectively.
31
|
|
Item 8:
|
Financial
Statements and Supplementary Data
|
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
33
|
|
|
|
|
34
|
|
|
|
|
34
|
|
|
|
|
35
|
|
|
|
|
36
|
|
|
|
|
37
|
|
|
|
|
63
|
|
32
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
|
|
|
$
|
939
|
|
Trade accounts receivable, net
|
|
|
54,333
|
|
|
|
44,593
|
|
Inventories
|
|
|
39,537
|
|
|
|
34,953
|
|
Prepaid expenses
|
|
|
5,025
|
|
|
|
4,649
|
|
Other
|
|
|
6,384
|
|
|
|
4,782
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
105,279
|
|
|
|
89,916
|
|
Property, plant and equipment, net
|
|
|
146,663
|
|
|
|
124,829
|
|
Restricted cash value of life insurance
|
|
|
10,366
|
|
|
|
10,278
|
|
Other assets
|
|
|
1,725
|
|
|
|
989
|
|
Other intangible assets, net
|
|
|
878
|
|
|
|
2,785
|
|
Goodwill, net
|
|
|
23,477
|
|
|
|
21,871
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
288,388
|
|
|
$
|
250,668
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Cash overdraft, net
|
|
$
|
5,468
|
|
|
$
|
961
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
4,056
|
|
|
|
4,295
|
|
Short-term borrowings
|
|
|
7,218
|
|
|
|
9,541
|
|
Accounts payable
|
|
|
32,410
|
|
|
|
31,686
|
|
Accrued liabilities
|
|
|
17,094
|
|
|
|
11,360
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
66,246
|
|
|
|
57,843
|
|
Long-term debt and capital lease obligations
|
|
|
63,403
|
|
|
|
53,171
|
|
Other postretirement benefits
|
|
|
12,814
|
|
|
|
13,606
|
|
Deferred income taxes
|
|
|
3,140
|
|
|
|
5,924
|
|
Other liabilities
|
|
|
17,109
|
|
|
|
12,672
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
162,712
|
|
|
|
143,216
|
|
Commitments and contingencies (Notes 8 and 17)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $1.00 per share, authorized
1,000,000 shares, none issued
|
|
|
|
|
|
|
|
|
Common stock, par value $1.00 per share, authorized
29,000,000 shares, issued 11,098,739 shares in 2007
and 10,909,153 shares , including treasury shares
|
|
|
11,099
|
|
|
|
10,909
|
|
Additional paid-in capital
|
|
|
43,902
|
|
|
|
39,427
|
|
Retained earnings
|
|
|
89,486
|
|
|
|
78,131
|
|
Treasury stock, at cost, 1,981,016 shares
|
|
|
(32,757
|
)
|
|
|
(32,757
|
)
|
Accumulated other comprehensive income
|
|
|
13,946
|
|
|
|
11,742
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
125,676
|
|
|
|
107,452
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
288,388
|
|
|
$
|
250,668
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
33
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Sales
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
|
$
|
296,763
|
|
Cost of sales
|
|
|
298,203
|
|
|
|
273,476
|
|
|
|
263,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
64,161
|
|
|
|
44,943
|
|
|
|
33,221
|
|
Operating expenses
|
|
|
31,391
|
|
|
|
29,477
|
|
|
|
26,413
|
|
Research and development expenses
|
|
|
6,812
|
|
|
|
6,198
|
|
|
|
5,796
|
|
Other costs
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
23,558
|
|
|
|
9,268
|
|
|
|
1,012
|
|
Interest expense
|
|
|
5,711
|
|
|
|
5,902
|
|
|
|
5,574
|
|
Other non-operating income, net
|
|
|
1,645
|
|
|
|
1,896
|
|
|
|
2,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
19,492
|
|
|
|
5,262
|
|
|
|
(2,353
|
)
|
Income tax expense (benefit)
|
|
|
5,975
|
|
|
|
1,034
|
|
|
|
(4,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,517
|
|
|
$
|
4,228
|
|
|
$
|
2,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents outstanding,
assuming dilution
|
|
|
9,283,125
|
|
|
|
9,004,190
|
|
|
|
8,946,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.50
|
|
|
$
|
0.48
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.46
|
|
|
$
|
0.47
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Net income
|
|
$
|
13,517
|
|
|
$
|
4,228
|
|
|
$
|
2,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives, net of tax benefit
(expense) of $1,619, $(271) and $156
|
|
|
(2,641
|
)
|
|
|
492
|
|
|
|
(303
|
)
|
Loss (gain) from derivative transactions reclassified into
earnings from other comprehensive income, net of tax benefit
(expense) of $950, $(152) and $350
|
|
|
1,550
|
|
|
|
(294
|
)
|
|
|
679
|
|
Foreign currency translation adjustments
|
|
|
4,690
|
|
|
|
536
|
|
|
|
3,271
|
|
(Increase) decrease in post retirement liabilities, net of
applicable income tax benefit (expense) of $(864), $(1,530) and
$365
|
|
|
1,409
|
|
|
|
2,842
|
|
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
5,008
|
|
|
|
3,576
|
|
|
|
2,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
18,525
|
|
|
$
|
7,804
|
|
|
$
|
5,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
34
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,517
|
|
|
$
|
4,228
|
|
|
$
|
2,574
|
|
Adjustments to reconcile net income to net cash from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
15,696
|
|
|
|
15,583
|
|
|
|
17,025
|
|
Stock-based compensation
|
|
|
1,092
|
|
|
|
1,150
|
|
|
|
91
|
|
Loss (gain) on sale of assets
|
|
|
325
|
|
|
|
(85
|
)
|
|
|
(64
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
1,051
|
|
Gain on sale of investment
|
|
|
|
|
|
|
|
|
|
|
(736
|
)
|
Gain on sale of land
|
|
|
(60
|
)
|
|
|
(78
|
)
|
|
|
(1,166
|
)
|
Deferred income tax benefit
|
|
|
(1,771
|
)
|
|
|
(293
|
)
|
|
|
(5,410
|
)
|
Loss (gain) on derivative transactions
|
|
|
(946
|
)
|
|
|
40
|
|
|
|
(300
|
)
|
Excess tax benefit from stock-based compensation
|
|
|
(1,001
|
)
|
|
|
(102
|
)
|
|
|
|
|
Other
|
|
|
95
|
|
|
|
38
|
|
|
|
(67
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
(8,537
|
)
|
|
|
(4,836
|
)
|
|
|
(122
|
)
|
Inventories
|
|
|
(3,136
|
)
|
|
|
(692
|
)
|
|
|
(1,177
|
)
|
Prepaid expenses
|
|
|
(339
|
)
|
|
|
449
|
|
|
|
(914
|
)
|
Accounts payable and accrued liabilities
|
|
|
3,148
|
|
|
|
(4,944
|
)
|
|
|
12,102
|
|
Taxes payable
|
|
|
3,334
|
|
|
|
(215
|
)
|
|
|
(2,594
|
)
|
Other
|
|
|
1,112
|
|
|
|
1,142
|
|
|
|
763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow from operating activities
|
|
|
22,529
|
|
|
|
11,385
|
|
|
|
21,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of property, plant and equipment, net
|
|
|
(34,734
|
)
|
|
|
(14,905
|
)
|
|
|
(9,413
|
)
|
Proceeds from investments
|
|
|
|
|
|
|
|
|
|
|
3,525
|
|
Proceeds from sale of land
|
|
|
|
|
|
|
612
|
|
|
|
1,870
|
|
Other
|
|
|
(44
|
)
|
|
|
(80
|
)
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
|
(34,778
|
)
|
|
|
(14,373
|
)
|
|
|
(4,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
4,625
|
|
|
|
13,916
|
|
|
|
|
|
Payments on short-term borrowings
|
|
|
(7,548
|
)
|
|
|
(4,744
|
)
|
|
|
|
|
Proceeds from revolving line of credit
|
|
|
54,454
|
|
|
|
22,920
|
|
|
|
57,830
|
|
Payments on revolving line of credit
|
|
|
(45,255
|
)
|
|
|
(27,907
|
)
|
|
|
(48,177
|
)
|
Proceeds from long-term debt
|
|
|
4,200
|
|
|
|
|
|
|
|
22,396
|
|
Payments on long-term debt
|
|
|
(4,249
|
)
|
|
|
(3,980
|
)
|
|
|
(47,867
|
)
|
Exercise of stock options
|
|
|
2,572
|
|
|
|
508
|
|
|
|
682
|
|
Payment of loan fees
|
|
|
(836
|
)
|
|
|
(224
|
)
|
|
|
(905
|
)
|
Excess tax benefit from stock-based compensation
|
|
|
1,001
|
|
|
|
102
|
|
|
|
|
|
Increase in cash overdraft.
|
|
|
4,507
|
|
|
|
184
|
|
|
|
776
|
|
Payment of dividends
|
|
|
(2,163
|
)
|
|
|
(2,132
|
)
|
|
|
(2,117
|
)
|
Other
|
|
|
(59
|
)
|
|
|
(32
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used by) financing activities
|
|
|
11,249
|
|
|
|
(1,389
|
)
|
|
|
(17,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
61
|
|
|
|
(51
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(939
|
)
|
|
|
(4,428
|
)
|
|
|
(548
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
939
|
|
|
|
5,367
|
|
|
|
5,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
|
|
|
$
|
939
|
|
|
$
|
5,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
5,645
|
|
|
$
|
5,240
|
|
|
$
|
4,754
|
|
Income taxes, net
|
|
$
|
5,257
|
|
|
$
|
1,342
|
|
|
$
|
563
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations incurred for certain equipment leases
|
|
$
|
72
|
|
|
$
|
102
|
|
|
$
|
85
|
|
The accompanying notes are an integral part of these statements.
35
Consolidated
Statements of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
10,909
|
|
|
$
|
10,849
|
|
|
$
|
10,784
|
|
Exercise of stock options
|
|
|
190
|
|
|
|
51
|
|
|
|
65
|
|
Issuance of restricted stock, net
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
11,099
|
|
|
|
10,909
|
|
|
|
10,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
39,427
|
|
|
|
37,728
|
|
|
|
36,911
|
|
Exercise of stock options
|
|
|
2,382
|
|
|
|
457
|
|
|
|
617
|
|
Tax benefit of stock option exercises
|
|
|
1,001
|
|
|
|
101
|
|
|
|
109
|
|
Stock based compensation
|
|
|
1,050
|
|
|
|
1,150
|
|
|
|
91
|
|
Issuance of restricted stock, net
|
|
|
42
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
43,902
|
|
|
|
39,427
|
|
|
|
37,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
78,131
|
|
|
|
76,040
|
|
|
|
75,585
|
|
Net income
|
|
|
13,517
|
|
|
|
4,228
|
|
|
|
2,574
|
|
Dividends declared
|
|
|
(2,162
|
)
|
|
|
(2,137
|
)
|
|
|
(2,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
89,486
|
|
|
|
78,131
|
|
|
|
76,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock
|
|
|
(32,757
|
)
|
|
|
(32,757
|
)
|
|
|
(32,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
11,742
|
|
|
|
8,166
|
|
|
|
5,196
|
|
Change in fair value of derivatives, net of tax
|
|
|
(2,641
|
)
|
|
|
492
|
|
|
|
(303
|
)
|
Loss (gain) from derivative transactions reclassified into
earnings from other comprehensive income, net of tax
|
|
|
1,550
|
|
|
|
(294
|
)
|
|
|
679
|
|
Foreign currency translation adjustments
|
|
|
4,690
|
|
|
|
536
|
|
|
|
3,271
|
|
(Increase) decrease in postretirement liabilities, net of tax
|
|
|
1,409
|
|
|
|
2,842
|
|
|
|
(677
|
)
|
Adoption of SFAS No. 158 recognition provision, net of
tax
|
|
|
(2,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
13,946
|
|
|
|
11,742
|
|
|
|
8,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
125,676
|
|
|
$
|
107,452
|
|
|
$
|
100,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
36
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. The Company operates manufacturing
facilities in the United States, Australia and New Zealand.
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 three segments. The first two,
Industrial Ingredients and Food Ingredients are broad categories
of end-market users, primarily served by the
U.S. operations. The third segment is the geographically
separate operations in Australia and New Zealand. The Australian
and New Zealand operations are engaged primarily in the food
ingredients business.
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.
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, and the useful lives of property and equipment. 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.
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 2007, 2006 and 2005 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
851
|
|
|
$
|
379
|
|
|
$
|
475
|
|
|
$
|
755
|
|
2006
|
|
$
|
401
|
|
|
$
|
359
|
|
|
$
|
(91
|
)
|
|
$
|
851
|
|
2005
|
|
$
|
364
|
|
|
$
|
196
|
|
|
$
|
159
|
|
|
$
|
401
|
|
37
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In fiscal 2006, the increase in the allowance for doubtful
accounts reflects an additional reserve of approximately
$0.5 million for a bankrupt customer in the industrial
ingredients segment.
In fiscal 2007, approximately $0.5 million was wrote-off
from allowance for doubtful accounts related to an uncollectible
receivable of bankrupt customer in the industrial ingredients
segment.
Approximately half of the Companys sales in fiscal 2007,
2006 and 2005 were made to customers who operate in the North
American paper industry. This industry has suffered an economic
downturn, which has resulted in the closure of a number of
smaller mills.
Financial
Instruments
The carrying value of financial instruments including cash and
cash equivalents, receivables, payables and accrued liabilities
approximates fair value because of their short maturities. The
Companys bank debt re-prices with changes in market
interest rates and, accordingly, the carrying amount of such
debt approximates fair value.
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 Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets, goodwill is not amortized, but instead
is tested for impairment at least annually or more frequently if
there is an indication of impairment.
Patents are amortized using the straight-line method over their
estimated period of benefit. At August 31, 2007, the
weighted average remaining amortization period for patents is
seven 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 lives of three to forty years
for financial reporting purposes. Depreciation of $15,376,000,
$15,527,000 and $16,326,000 was recorded in fiscal years 2007,
2006 and 2005, respectively. For income tax purposes, the
Company generally uses accelerated depreciation methods.
Interest is capitalized on major construction projects while in
progress. In fiscal 2007, the Company capitalized
$0.4 million in interest costs related to the ethanol
facility construction. No interest was capitalized in fiscal
2006 and 2005.
Income
Taxes
The provision for income taxes includes federal, state, and
foreign 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.
Deferred taxes are not recognized on temporary differences from
undistributed earnings of foreign subsidiaries, as these
earnings are deemed to be permanently reinvested.
38
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. Costs associated with shipping and
handling are 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 $6.8 million, $6.2 million and
$5.8 million in fiscal 2007, 2006 and 2005, respectively.
Patent costs of $48,000, $134,000 and $19,000 were capitalized
in fiscal years 2007, 2006 and 2005, 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. Income statement
amounts are translated at average exchange rates prevailing
during the year. For fiscal years 2007 and 2006, the net foreign
currency transaction gain (loss) recognized in earnings was not
material.
Derivatives
Penford uses derivative instruments to manage the exposures
associated with commodity prices, interest rates and energy
costs. The derivative instruments are marked-to-market and any
resulting unrealized gains and losses, representing the fair
value of the derivative instruments, are recorded in other
current assets or accounts payable in the consolidated balance
sheets. The fair value of derivative instruments included in
other current assets at August 31, 2007 was
$(0.6) million.
For derivative instruments designated as fair value hedges, the
gain or loss on the derivative instruments as well as the
offsetting loss or gain on the hedged firm commitments are
recognized in current earnings as a component of cost of goods
sold. At August 31, 2007, derivative instruments designated
as fair value hedges are not material. 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, 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 the price of the hedged item, then the
changes in market value would be recognized in current earnings
as a component of cost of good sold or interest expense. There
was no ineffectiveness related to the Companys hedging
activities related to interest rate swaps. At August 31,
2007, the amount in other comprehensive income related to
derivative transactions which the Company expects to recognize
in earnings in fiscal 2008 is not material.
Significant
Customer and Export Sales
The Company has several relatively large customers in each
business segment. None of the Companys customers
constituted 10% of sales in fiscal 2006 and 2005. However, for
fiscal 2007, the Companys largest customer, Domtar, Inc.,
represented approximately 12% of the Companys consolidated
net sales. Domtar, Inc. is a customer of the Companys
Industrial Ingredients North America business.
Export sales accounted for approximately 15%, 13% and 16% of
consolidated sales in fiscal 2007, 2006 and 2005, respectively.
39
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock-Based
Compensation
Beginning September 1, 2005, the Company began to recognize
stock-based compensation in accordance with
SFAS No. 123R, Share-Based Payment. 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 9 for further detail.
Recent
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(FASB) ratified the Emerging Issues Task Force
(EITF) consensus on EITF Issue
No. 06-2,
Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43. EITF Issue
No. 06-2
requires companies to accrue the costs of compensated absences
under a sabbatical or similar benefit arrangement over the
requisite service period. EITF Issue
No. 06-2
is effective for years beginning after December 15, 2006.
The Company is evaluating the impact that the adoption of EITF
Issue
No. 06-2
will have on its consolidated financial statements and currently
does not believe adoption will have a material impact on its
consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for the uncertainty in income taxes recognized by prescribing a
recognition threshold that a tax position is required to meet
before being recognized in the financial statements. It also
provides guidance on derecognition, classification, interest and
penalties, interim period accounting and disclosure. FIN 48
is effective for fiscal years beginning after December 15,
2006. The Company is evaluating the impact that the adoption of
FIN 48 will have on its consolidated financial statements
and currently does not believe adoption will have a material
impact on its consolidated financial statements
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework and
gives guidance regarding the methods used for measuring fair
value, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after
November 15, 2007 (fiscal 2009). The Company is currently
evaluating the impact that the adoption of SFAS 157 may
have on its consolidated financial statements.
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities including an amendment of FASB
No. 115 (SFAS 159). SFAS 159
allows companies the option to measure financial instruments and
certain other items at fair value that are not currently
required to be measured at fair value. SFAS 159 is
effective for fiscal years beginning after November 15,
2007 (fiscal 2009). The Company is currently evaluating the
impact that the adoption of SFAS 159 may have on its
consolidated financial statements.
Components of inventory are as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Raw materials
|
|
$
|
17,438
|
|
|
$
|
18,531
|
|
Work in progress
|
|
|
720
|
|
|
|
449
|
|
Finished goods
|
|
|
21,379
|
|
|
|
15,973
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
39,537
|
|
|
$
|
34,953
|
|
|
|
|
|
|
|
|
|
|
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
40
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
futures are not purchased or sold for trading or speculative
purposes and are designated as hedges. As of August 31,
2007, Penford had purchased corn positions of 6.4 million
bushels, of which 6.1 million bushels represented
equivalent firm priced starch sales contract volume, resulting
in an open position of 0.3 million bushels. The changes in
market 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. Hedges are
designated as cash flow hedges at the time the transaction is
established and are recognized in earnings in the time period
for which the hedge was established. Hedged transactions are
within 12 months of the time the hedge is established. The
amount of ineffectiveness related to the Companys hedging
activities was not material.
|
|
Note 3
|
Property
and equipment
|
Components of property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Land
|
|
$
|
17,694
|
|
|
$
|
16,659
|
|
Plant and equipment
|
|
|
338,496
|
|
|
|
322,169
|
|
Construction in progress
|
|
|
27,433
|
|
|
|
7,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
383,623
|
|
|
|
345,906
|
|
Accumulated depreciation
|
|
|
(236,960
|
)
|
|
|
(221,077
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
146,663
|
|
|
$
|
124,829
|
|
|
|
|
|
|
|
|
|
|
The above table includes approximately $0.2 million and
$0.1 million of equipment under capital leases for fiscal
years 2007 and 2006, respectively. Changes in Australian and New
Zealand currency exchange rates have increased net property,
plant and equipment in fiscal 2007 by approximately
$2.9 million.
For fiscal 2007, the Company had $19.3 million of capital
expenditures related to construction of the ethanol facility. As
of August 31, 2007, the Company had a total of
$20.0 million in capital expenditures related to the
ethanol facility which includes $0.4 million in related
capitalized interest costs.
|
|
Note 4
|
Goodwill
and other intangible assets
|
Goodwill represents the excess of acquisition costs over the
fair value of the net assets of Penford Australia, which was
acquired on September 29, 2000. The Company evaluates
annually, or more frequently if certain indicators are present,
the carrying value of its goodwill under provisions of
SFAS No. 142.
In accordance with this standard, Penford does not amortize
goodwill. The Company completed the annual update as of
June 1, 2007 and determined there was no impairment to the
recorded value of goodwill. In order to identify potential
impairments, Penford compared the fair value of each of its
reporting units with its carrying amount, including goodwill.
Penford then compared the implied fair value of its reporting
units goodwill with the carrying amount of that goodwill.
The implied fair value of the reporting units was determined
using primarily discounted cash flows. This testing was
performed on Penfords Food Ingredients North
America and the Australia/New Zealand operations reporting
units, which are the same as two of the Companys business
segments. Since there was no indication of impairment, Penford
was not required to complete the second step of the process
which would measure the amount of any impairment. On a
prospective basis, the Company is required to continue to test
its goodwill for impairment on an annual basis, or more
frequently if certain indicators arise.
The Companys goodwill of $23.5 million and
$21.9 million at August 31, 2007 and 2006,
respectively, represents the excess of acquisition costs over
the fair value of the net assets of Penford Australia. The
increase in the carrying value of goodwill since August 31,
2006 reflects the impact of exchange rate fluctuations between
the Australian and U.S. dollar on the translation of this
asset.
41
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Penfords intangible assets consist of patents which are
being amortized over the weighted average remaining amortization
period of seven years as of August 31, 2007. 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,
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
2,239
|
|
|
$
|
1,361
|
|
|
$
|
2,162
|
|
|
$
|
1,217
|
|
Intangible pension asset(1)
|
|
|
|
|
|
|
|
|
|
|
1,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,239
|
|
|
$
|
1,361
|
|
|
$
|
4,002
|
|
|
$
|
1,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Not covered by the scope of SFAS No. 142
|
Amortization expense related to intangible assets was
$0.1 million in each of fiscal years 2007, 2006 and 2005.
The estimated aggregate annual amortization expense for patents
is approximately $0.1 million for each of the next five
fiscal years, 2008 through 2012.
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Secured credit agreements revolving loans, 7.37%
weighted average interest rate at August 31, 2007
|
|
$
|
15,800
|
|
|
$
|
11,188
|
|
Secured credit agreements term loans, 6.97% weighted
average interest rate at August 31, 2007
|
|
|
37,000
|
|
|
|
46,133
|
|
Secured credit agreements capital expansion loans,
6.82% weighted average interest rate at August 31, 2007
|
|
|
14,500
|
|
|
|
|
|
Grain inventory financing facility revolving loan,
8.19% weighted average interest rate at August 31, 2007
|
|
|
7,218
|
|
|
|
9,541
|
|
Capital lease obligations
|
|
|
159
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,677
|
|
|
|
67,007
|
|
Less: current portion and short-term borrowings
|
|
|
11,274
|
|
|
|
13,836
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
63,403
|
|
|
$
|
53,171
|
|
|
|
|
|
|
|
|
|
|
On October 5, 2006, Penford entered into a
$145 million Second Amended and Restated Credit Agreement
(the 2007 Agreement) among the Company; Harris N.A.;
LaSalle Bank National Association; 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.
The 2007 Agreement refinances the Companys previous
$105 million secured term and revolving credit facilities.
Under the 2007 Agreement, the Company may borrow
$40 million in term loans and $60 million in revolving
lines of credit. The lenders revolving credit loan
commitment may be increased under certain conditions. In
addition, the 2007 Agreement provides the Company with
$45 million in new capital expansion funds which may be
used by the Company to finance the construction of its planned
ethanol production facility in Cedar Rapids, Iowa. The capital
expansion funds may be borrowed as term loans from time to time
prior to October 5, 2008.
The final maturity date for the term and revolving loans under
the 2007 Agreement is December 31, 2011. Beginning on
December 31, 2006, the Company must repay the term loans in
twenty equal quarterly installments of $1 million, with the
remaining amount due at final maturity. The final maturity date
for the capital expansion loans
42
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
is December 31, 2012. Beginning on December 31, 2008,
the Company must repay the capital expansion loans in equal
quarterly installments of $1.25 million through
September 30, 2009 and $2.5 million thereafter, with
the remaining amount due at final maturity. Interest rates under
the 2007 Agreement are based on either the London Interbank
Offering Rates (LIBOR) in Australia or the United
States, or the prime rate, depending on the selection of
available borrowing options under the 2007 Agreement.
The 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 2007
Agreement) shall not exceed 3.25 through November 30, 2006.
Subsequent to November 30, 2006, the maximum Total Funded
Debt Ratio varies between 3.00 and 4.50. In addition, the
Company must maintain a minimum tangible net worth of
$65 million, and a Fixed Charge Coverage Ratio, as defined
in the 2007 Agreement, of not more than 1.50 in fiscal 2007,
1.25 in fiscal 2008 and 1.50 in fiscal 2009 and thereafter.
Annual capital expenditures, exclusive of capital expenditures
incurred in connection with the Companys ethanol
production facility, are limited to $20 million, unless the
Company can maintain a Total Funded Debt Ratio below 2.00 for
each fiscal quarter during any fiscal year, which would result
in the annual capital expenditure limit to increase to
$25 million for such fiscal year. The Companys
obligations under the 2007 Agreement are secured by
substantially all of the Companys U.S. assets.
At August 31, 2007, the Company had $15.8 million and
$37.0 million outstanding, respectively, under the
revolving credit and term loan portions of its credit facility.
In addition, the Company has borrowed $14.5 million of the
$45 million in capital expansion loans available under the
credit facility for the construction of the ethanol facility.
Pursuant to the terms of the 2007 Agreement, Penfords
additional borrowing ability as of August 31, 2007 was
$30.5 million under the capital expansion facility and
$44.2 million under the revolving credit facility. The
Company was in compliance with the covenants in the Agreement as
of August 31, 2007 and expects to be in compliance during
fiscal 2008.
The Companys short-term borrowings consist of an
Australian revolving line of credit. On March 1, 2006, the
Companys Australian subsidiary entered into a
variable-rate revolving grain inventory financing facility with
an Australian bank for a maximum of $32.7 million
U.S. dollars at the exchange rate at August 31, 2007.
This facility expires on March 15, 2008 and carries an
effective interest rate equal to the Australian one-month bank
bill rate (BBSY) plus approximately 2%. Payments on
this facility are due as the grain financed is withdrawn from
storage. The amount outstanding under this arrangement, which is
classified as a current liability on the balance sheet, was
$7.2 million at August 31, 2007.
As of August 31, 2007, all of the Companys
outstanding debt, including amounts outstanding under the
Australian grain inventory financing facility, is subject to
variable interest rates. Under interest rate swap agreements
with several banks, the Company has fixed its interest rates on
U.S. dollar denominated term debt of $32.8 million at
4.18% and $4.2 million at 5.08%, plus the applicable margin
under the 2007 Agreement.
As of August 31, 2007, Penford borrowed $37.0 million
in term loans and $30.3 million under its revolving lines
of credit, of which $8.1 million U.S. dollar
equivalent was denominated in Australian dollars. The maturities
of debt existing at August 31, 2007 for the fiscal years
beginning with fiscal 2008 are as follows (dollars in thousands):
|
|
|
|
|
2008
|
|
$
|
11,274
|
|
2009
|
|
|
7,821
|
|
2010
|
|
|
12,776
|
|
2011
|
|
|
6,006
|
|
2012
|
|
|
36,800
|
|
|
|
|
|
|
|
|
$
|
74,677
|
|
|
|
|
|
|
Included in the Companys long-term debt at August 31,
2007 is $159,000 of capital lease obligations, of which $56,000
is considered current portion of long-term debt. See Note 8.
43
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 6
|
Stockholders
Equity
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
10,909,153
|
|
|
|
10,849,487
|
|
|
|
10,784,200
|
|
Exercise of stock options
|
|
|
189,586
|
|
|
|
50,972
|
|
|
|
65,287
|
|
Issuance of restricted stock, net
|
|
|
|
|
|
|
8,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
11,098,739
|
|
|
|
10,909,153
|
|
|
|
10,849,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Purchase Rights
On June 16, 1988, Penford distributed a dividend of one
right (Right) for each outstanding share of Penford
common stock. The Rights will become exercisable if a purchaser
acquires 15% of Penfords common stock or makes an offer to
acquire common stock. In the event that a purchaser acquires 15%
of the common stock of Penford, each Right shall entitle the
holder, other than the acquirer, to purchase one share of common
stock of Penford at a price of $100. In the event that Penford
is acquired in a merger or transfers 50% or more of its assets
or earnings to any one entity, each Right entitles the holder to
purchase common stock of the surviving or purchasing company
having a market value of twice the exercise price of the Right.
The Rights may be redeemed by Penford at a price of $0.01 per
Right and expire on June 16, 2008.
|
|
Note 7
|
Accumulated
Other Comprehensive Income (Loss)
|
The components of accumulated other comprehensive income (loss)
are as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Net unrealized gain (loss) on derivatives, net of tax
|
|
$
|
(611
|
)
|
|
$
|
480
|
|
Foreign currency translation adjustments
|
|
|
18,083
|
|
|
|
13,393
|
|
Minimum pension liability, net of tax
|
|
|
(722
|
)
|
|
|
(2,131
|
)
|
Impact of adoption of SFAS No. 158, net of tax
|
|
|
(2,804
|
)
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,946
|
|
|
$
|
11,742
|
|
|
|
|
|
|
|
|
|
|
The earnings associated with the Companys investment in
Penford Australia are considered to be permanently invested and
no provision for U.S. income taxes on the related
translation adjustment has been provided.
44
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Certain of the Companys property, plant and equipment is
leased under operating leases generally ranging from one to
twenty years with renewal options. Rental expense under
operating leases was $6.6 million, $6.3 million and
$5.4 million in fiscal years 2007, 2006 and 2005,
respectively. Future minimum lease payments for fiscal years
beginning with fiscal year 2008 for noncancelable operating and
capital leases having initial lease terms of more than one year
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
2008
|
|
$
|
69
|
|
|
$
|
6,602
|
|
2009
|
|
|
77
|
|
|
|
6,138
|
|
2010
|
|
|
28
|
|
|
|
4,819
|
|
2011
|
|
|
6
|
|
|
|
2,983
|
|
2012
|
|
|
|
|
|
|
2,279
|
|
Thereafter
|
|
|
|
|
|
|
4,408
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
180
|
|
|
$
|
27,229
|
|
|
|
|
|
|
|
|
|
|
Less: amounts representing interest
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments
|
|
$
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9
|
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. Prior to the 2006 Incentive Plan, the Company
awarded stock options to employees and officers through the
Penford Corporation 1994 Stock Option Plan (the 1994
Plan) and to members of its Board under the Stock Option
Plan for Non-Employee Directors (the Directors
Plan). The 1994 Plan was suspended when the 2006 Plan
became effective in the second quarter of fiscal 2006. The
Directors Plan expired in August 2005. As of
August 31, 2007, the aggregate number of shares of the
Companys common stock that are available to be issued as
awards under the 2006 Incentive Plan is 736,976. In addition,
any shares previously granted under the 1994 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 1994 Plan
generally vest ratably over four years and expire ten years from
the date of grant. 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. Non-qualified options
granted under the Directors Plan were granted at 75% of
the fair market value of the Companys common stock on the
date of grant. Options granted under the Directors Plan
vested six months after the grant date and expire at the earlier
of ten years after the date of grant or three years after the
date the non-employee director ceases to be a member of the
Board.
45
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
General
Option Information
A summary of the stock option activity for the three years ended
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Option Price
|
|
|
Exercise
|
|
|
Remaining Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Range
|
|
|
Price
|
|
|
(In Years)
|
|
|
Value
|
|
|
Outstanding Balance, August 31, 2004
|
|
|
972,663
|
|
|
$
|
5.77 - 17.69
|
|
|
$
|
13.31
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
224,235
|
|
|
|
12.75 - 16.34
|
|
|
|
15.69
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(62,378
|
)
|
|
|
5.77 - 14.50
|
|
|
|
10.45
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(26,985
|
)
|
|
|
12.75 - 14.50
|
|
|
|
12.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance, August 31, 2005
|
|
|
1,107,535
|
|
|
|
6.02 - 17.69
|
|
|
|
13.96
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
248,500
|
|
|
|
13.32 - 16.03
|
|
|
|
14.81
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(50,972
|
)
|
|
|
6.02 - 13.92
|
|
|
|
15.35
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(134,000
|
)
|
|
|
12.79 - 17.69
|
|
|
|
16.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance, August 31, 2006
|
|
|
1,171,063
|
|
|
|
6.18 - 17.69
|
|
|
|
13.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
75,000
|
|
|
|
16.25 - 19.77
|
|
|
|
16.72
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(189,586
|
)
|
|
|
6.18 - 17.69
|
|
|
|
13.57
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(22,500
|
)
|
|
|
12.14 - 16.34
|
|
|
|
14.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance, August 31, 2007
|
|
|
1,033,977
|
|
|
|
7.59 - 19.77
|
|
|
|
14.25
|
|
|
|
5.62
|
|
|
$
|
21,760,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at August 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
689,735
|
|
|
|
6.02 - 17.69
|
|
|
|
13.57
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
721,938
|
|
|
|
6.18 - 17.69
|
|
|
|
13.38
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
696,352
|
|
|
$
|
7.59 - 17.69
|
|
|
$
|
13.60
|
|
|
|
5.12
|
|
|
$
|
15,108,798
|
|
The aggregate intrinsic value disclosed in the table above
represents the total pretax intrinsic value, based on the
Companys closing stock price of $35.30 as of
August 31, 2007 that would have been received by the option
holders had all option holders exercised on that date. The
intrinsic value of options exercised during fiscal years 2007,
2006 and 2005 was $2,761,400, $274,700 and $327,400,
respectively.
The following table summarizes information concerning
outstanding and exercisable options as of August 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Remaining
|
|
|
Wtd. Avg.
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Options
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
$ 7.59 - 13.00
|
|
|
397,307
|
|
|
|
4.83
|
|
|
$
|
12.01
|
|
|
|
397,307
|
|
|
$
|
12.01
|
|
13.01 - 16.00
|
|
|
341,170
|
|
|
|
6.20
|
|
|
|
14.71
|
|
|
|
157,795
|
|
|
|
14.55
|
|
16.01 - 19.77
|
|
|
295,500
|
|
|
|
6.03
|
|
|
|
16.75
|
|
|
|
141,250
|
|
|
|
17.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,033,977
|
|
|
|
|
|
|
|
|
|
|
|
696,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Adoption
of SFAS No. 123R
On September 1, 2005, the Company adopted
SFAS No. 123R which requires the measurement and
recognition of compensation cost for all share-based payment
awards made to employees and directors based on estimated fair
values.
Prior to the adoption of SFAS No. 123R, the Company
accounted for its stock-based employee compensation related to
stock options under the intrinsic value recognition and
measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and the
disclosure alternative prescribed by SFAS No. 123,
Accounting for Stock-Based Compensation, as amended
by SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure.
Accordingly, the Company presented pro forma information for the
periods prior to the adoption of SFAS No. 123R and no
compensation cost was recognized for the stock-based
compensation plans other than the grant date intrinsic value for
the options granted under the Directors Plan and
restricted stock awards prior to September 1, 2005.
The Company elected to use the modified prospective transition
method for adopting SFAS No. 123R which requires the
recognition of stock-based compensation cost on a prospective
basis; therefore, prior period financial statements have not
been restated. Under this method, the provisions of
SFAS No. 123R are applied to all awards granted after
the adoption date and to awards not yet vested with unrecognized
expense at the adoption date based on the estimated fair value
at grant date as determined under the original provisions of
SFAS No. 123. Pursuant to the requirements of
SFAS No. 123R, the Company will continue to present
the pro forma information for periods prior to the adoption date.
Valuation
and Expense Under SFAS No. 123R
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected volatility
|
|
|
45
|
%
|
|
|
51
|
%
|
|
|
|
|
Expected life (years)
|
|
|
5.5
|
|
|
|
5.5
|
|
|
|
|
|
Interest rate (percent)
|
|
|
4.5-4.9
|
|
|
|
4.9-5.1
|
|
|
|
|
|
Dividend yield
|
|
|
1.5
|
%
|
|
|
1.6
|
%
|
|
|
|
|
Weighted-average fair values
|
|
$
|
6.88
|
|
|
$
|
7.18
|
|
|
|
|
|
47
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the 1994 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected volatility
|
|
|
|
|
|
|
52
|
%
|
|
|
58
|
%
|
Expected life (years)
|
|
|
|
|
|
|
5.0
|
|
|
|
4.1
|
|
Interest rate (percent)
|
|
|
|
|
|
|
4.4-4.5
|
|
|
|
3.7-4.0
|
|
Dividend yield
|
|
|
|
|
|
|
1.7
|
%
|
|
|
1.6
|
%
|
Weighted-average fair values
|
|
|
|
|
|
$
|
6.01
|
|
|
$
|
6.95
|
|
There were no stock options granted under the Directors
Plan in fiscal years 2007 and 2006 and options granted to
directors in fiscal 2005 were cancelled in exchange for cash
because of changes in the tax laws.
As of August 31, 2007, the Company had $1.1 million of
unrecognized compensation costs related to non-vested stock
option awards that are expected to be recognized over a weighted
average period of 1.5 years.
The Company recognizes stock-based compensation expense
utilizing the accelerated multiple option approach over the
requisite service period, which equals the vesting period. For
each of fiscal years 2007 and 2006, the Company recognized
$1.1 million in stock-based compensation costs. In fiscal
years 2007, 2006 and 2005, the Company recognized $42,000 per
year of stock-based compensation cost related to directors
restricted stock awards. The following table summarizes the
stock-based compensation cost under SFAS No. 123R for
fiscal years 2007 and 2006 and the effect on the Companys
consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cost of sales
|
|
$
|
104
|
|
|
$
|
70
|
|
Operating expenses
|
|
|
926
|
|
|
|
999
|
|
Research and development expenses
|
|
|
20
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
1,050
|
|
|
$
|
1,107
|
|
Tax benefit
|
|
|
399
|
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense, net of tax
|
|
$
|
651
|
|
|
$
|
697
|
|
|
|
|
|
|
|
|
|
|
See Note 15 for stock-based compensation costs recognized
in the financial statements of each business segment.
48
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pro-forma
Information under SFAS No. 123 for Periods Prior to
Fiscal 2006
If the fair value recognition provisions of SFAS 123 had
been applied to stock-based compensation for fiscal 2005, the
Companys pro forma net income and basic and diluted
earnings per share would have been as follows:
|
|
|
|
|
|
|
2005
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
Net income, as reported
|
|
$
|
2,574
|
|
Add: Stock-based employee compensation expense included in
reported net income, net of tax
|
|
|
36
|
|
Less: Stock-based employee compensation expense determined under
the fair value method for all awards, net of tax
|
|
|
(898
|
)
|
|
|
|
|
|
Net income, pro forma
|
|
$
|
1,712
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basic as reported
|
|
$
|
0.29
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
0.19
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
0.29
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
0.19
|
|
|
|
|
|
|
Restricted
Stock
Non-employee directors receive restricted stock under the 1993
Non-Employee Director Restricted Stock Plan, which provides that
beginning September 1, 1993 and every three years
thereafter, each non-employee director shall receive $18,000
worth of common stock of the Company, based on the last reported
sale price of the stock on the preceding trading day. One-third
of the shares vest on each anniversary of the date of the award.
The Company recognizes compensation cost for restricted stock
ratably over the vesting period. On September 1, 2005,
8,694 shares of restricted common stock of the Company were
granted to the non-employee directors. As of October 30,
2007, this plan has been terminated and no additional restricted
stock will be granted under this plan.
|
|
Note 10
|
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.
49
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Adoption
of SFAS No. 158
In September 2006, the FASB issued Statement No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132R
(SFAS No. 158). SFAS 158 requires
companies to recognize the funded status of defined benefit
pension and other postretirement plans as an asset or liability
in the statement of financial position and to recognize changes
in that funded status in the year in which the changes occur
through comprehensive income in shareholders equity. In
addition, a company is required to measure plan assets and
benefit obligations as of the date of its fiscal year-end
statement of financial position. The Company currently measures
its plan assets and benefit obligations as of the end of its
fiscal year. The incremental effects of adopting
SFAS No. 158 on the Companys consolidated
balance sheet as of August 31, 2007 are presented in the
following table. The adoption of SFAS No. 158 had no
effect on the Companys consolidated results of operations
for the fiscal year ended August 31, 2007, or for any prior
period presented, and it will not affect the Companys
consolidated results of operation in future periods. Prior to
the adoption of SFAS No. 158 on August 31, 2007,
the Company recognized an additional minimum pension liability
pursuant to the provisions of SFAS Nos. 87 and 106, which
is reflected in the Balance Before SFAS No. 158
Adoption column in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
SFAS No. 158
|
|
|
|
|
|
|
Balance Before SFAS
|
|
|
Adoption
|
|
|
Balance After SFAS
|
|
|
|
No. 158 Adoption
|
|
|
Adjustments
|
|
|
No. 158 Adoption
|
|
|
|
(Dollars in thousands)
|
|
|
Intangible Asset
|
|
$
|
2,522
|
|
|
$
|
(2,522
|
)
|
|
$
|
|
|
Current accrued benefit liability
|
|
|
1,776
|
|
|
|
(1,180
|
)
|
|
|
596
|
|
Non-current accrued benefit liability pensions
|
|
|
1,316
|
|
|
|
4,298
|
|
|
|
5,614
|
|
Other postretirement benefits
|
|
|
13,932
|
|
|
|
(1,118
|
)
|
|
|
12,814
|
|
Accumulated other comprehensive loss, net of tax
|
|
|
722
|
|
|
|
2,804
|
|
|
|
3,526
|
|
Deferred income tax liability
|
|
|
7,095
|
|
|
|
1,719
|
|
|
|
8,814
|
|
50
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Obligations
and Funded Status
The following represents information summarizing the
Companys pension and other postretirement benefit plans. A
measurement date of August 31, 2007 was used for all plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at September 1
|
|
$
|
36,735
|
|
|
$
|
39,132
|
|
|
$
|
13,621
|
|
|
$
|
15,041
|
|
Service cost
|
|
|
1,467
|
|
|
|
1,673
|
|
|
|
309
|
|
|
|
391
|
|
Interest cost
|
|
|
2,207
|
|
|
|
2,102
|
|
|
|
818
|
|
|
|
785
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
151
|
|
|
|
148
|
|
Amendments
|
|
|
873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss
|
|
|
(387
|
)
|
|
|
(1,052
|
)
|
|
|
(1,218
|
)
|
|
|
(840
|
)
|
Change in assumptions
|
|
|
175
|
|
|
|
(3,312
|
)
|
|
|
529
|
|
|
|
(1,104
|
)
|
Benefits paid
|
|
|
(1,829
|
)
|
|
|
(1,808
|
)
|
|
|
(800
|
)
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at August 31
|
|
$
|
39,241
|
|
|
$
|
36,735
|
|
|
$
|
13,410
|
|
|
$
|
13,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at September 1
|
|
$
|
30,521
|
|
|
$
|
26,759
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
3,945
|
|
|
|
2,262
|
|
|
|
|
|
|
|
|
|
Company contributions
|
|
|
990
|
|
|
|
3,308
|
|
|
|
649
|
|
|
|
652
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
151
|
|
|
|
148
|
|
Benefits paid
|
|
|
(1,829
|
)
|
|
|
(1,808
|
)
|
|
|
(800
|
)
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of the plan assets at August 31
|
|
$
|
33,627
|
|
|
$
|
30,521
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets less than projected benefit obligation
|
|
$
|
(5,614
|
)
|
|
$
|
(6,214
|
)
|
|
$
|
(13,410
|
)
|
|
$
|
(13,621
|
)
|
Unrecognized net actuarial loss
|
|
|
NA
|
|
|
|
5,655
|
|
|
|
NA
|
|
|
|
1,234
|
|
Unrecognized prior service cost
|
|
|
NA
|
|
|
|
1,840
|
|
|
|
NA
|
|
|
|
(1,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability)
|
|
$
|
(5,614
|
)
|
|
$
|
1,281
|
|
|
$
|
(13,410
|
)
|
|
$
|
(13,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset
|
|
$
|
|
|
|
$
|
1,840
|
|
|
$
|
|
|
|
$
|
|
|
Current accrued benefit liability
|
|
|
|
|
|
|
(1,090
|
)
|
|
|
(596
|
)
|
|
|
|
|
Non-current accrued benefit liability
|
|
|
(5,614
|
)
|
|
|
(2,748
|
)
|
|
|
(12,814
|
)
|
|
|
(13,606
|
)
|
Other comprehensive income
|
|
|
NA
|
|
|
|
3,279
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Amount Recognized
|
|
$
|
(5,614
|
)
|
|
$
|
1,281
|
|
|
$
|
(13,410
|
)
|
|
$
|
(13,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss as of August 31, 2007
consists of the following amounts that have not yet been
recognized as components of net benefit cost (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
Unrecognized prior service cost (credit)
|
|
$
|
2,522
|
|
|
$
|
(1,067
|
)
|
Unrecognized net actuarial loss
|
|
|
3,687
|
|
|
|
545
|
|
Total
|
|
$
|
6,209
|
|
|
$
|
(522
|
)
|
51
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
Projected benefit obligation
|
|
$
|
39,241
|
|
|
$
|
36,735
|
|
Accumulated benefit obligation
|
|
$
|
36,719
|
|
|
$
|
34,359
|
|
Fair value of plan assets
|
|
$
|
33,627
|
|
|
$
|
30,521
|
|
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
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,467
|
|
|
$
|
1,673
|
|
|
$
|
1,066
|
|
|
$
|
309
|
|
|
$
|
391
|
|
|
$
|
352
|
|
Interest cost
|
|
|
2,207
|
|
|
|
2,102
|
|
|
|
2,065
|
|
|
|
818
|
|
|
|
785
|
|
|
|
775
|
|
Expected return on plan assets
|
|
|
(2,379
|
)
|
|
|
(2,150
|
)
|
|
|
(1,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of transition obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
191
|
|
|
|
187
|
|
|
|
194
|
|
|
|
(152
|
)
|
|
|
(152
|
)
|
|
|
(152
|
)
|
Amortization of actuarial loss
|
|
|
190
|
|
|
|
602
|
|
|
|
480
|
|
|
|
|
|
|
|
143
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit cost
|
|
$
|
1,676
|
|
|
$
|
2,414
|
|
|
$
|
1,937
|
|
|
$
|
975
|
|
|
$
|
1,167
|
|
|
$
|
1,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted-average assumptions used to calculate net periodic
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.15
|
%
|
|
|
5.50
|
%
|
|
|
6.25
|
%
|
|
|
6.15
|
%
|
|
|
5.50
|
%
|
|
|
6.25
|
%
|
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
|
|
|
6.51
|
%
|
|
|
6.15
|
%
|
|
|
5.50
|
%
|
|
|
6.51
|
%
|
|
|
6.15
|
%
|
|
|
5.50
|
%
|
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
52
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
2007. A decrease (increase) of 50 basis points in the
expected return on assets assumptions would increase (decrease)
pension expense by approximately $0.2 million based on the
assets of the plans at August 31, 2007. The expected return
on plan assets to be used in calculating fiscal 2008 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 2005
(6.25%), 2006 (5.50%) and 2007 (6.15%) reflect the change in
bond yields over the last several years. During fiscal 2007,
bond yields rose and Penford has increased the discount rate for
calculating its benefit obligations at August 31, 2007, as
well as net periodic expense for fiscal 2008, to 6.51%. Lowering
the discount rate by 25 basis points would increase pension
expense by approximately $0.1 million and other
postretirement benefit expense by $0.01 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 $0.05 million in fiscal
2008. Amortization of unrecognized net losses is not expected to
impact the net postretirement health care expense in fiscal 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Assumed health care cost trend rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current health care trend assumption
|
|
|
9.00
|
%
|
|
|
10.00
|
%
|
|
|
10.00
|
%
|
Ultimate health care trend rate
|
|
|
4.75
|
%
|
|
|
4.75
|
%
|
|
|
4.75
|
%
|
Year ultimate health care trend is reached
|
|
|
2015
|
|
|
|
2015
|
|
|
|
2014
|
|
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 2007
|
|
$
|
190
|
|
|
$
|
(154
|
)
|
Effect on postretirement accumulated benefit obligation as of
August 31, 2007
|
|
$
|
1,984
|
|
|
$
|
(1,629
|
)
|
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
|
|
|
2007
|
|
|
2006
|
|
|
U.S. equities
|
|
|
60
|
%
|
|
|
55
|
%
|
|
|
55
|
%
|
International equities
|
|
|
10
|
%
|
|
|
15
|
%
|
|
|
15
|
%
|
Fixed income investments
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Real estate
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
53
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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 $1.0 million,
$3.3 million and $3.6 million in fiscal 2007, 2006 and
2005, respectively. The Company expects to contribute
$1.6 million to its defined benefit pension plans during
fiscal 2008. Penford funds the benefit payments of its
postretirement health care plans on a cash basis; therefore, the
Companys contributions to these plans in fiscal 2008 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)
|
|
|
2008
|
|
$
|
2.0
|
|
|
$
|
0.6
|
|
2009
|
|
|
2.0
|
|
|
|
0.7
|
|
2010
|
|
|
2.0
|
|
|
|
0.7
|
|
2011
|
|
|
2.1
|
|
|
|
0.7
|
|
2012
|
|
|
2.2
|
|
|
|
0.8
|
|
2013-2017
|
|
$
|
12.6
|
|
|
$
|
4.6
|
|
|
|
Note 11
|
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
$920,000, $882,000 and $750,000 for fiscal years 2007, 2006 and
2005, 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
$180,000, $184,000 and $188,000 was accrued in fiscal years
2007, 2006 and 2005, 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 2007,
2006 and 2005, the net periodic pension expense accrued for this
plan was $320,000, $305,000 and $302,000, respectively. The
accrued obligation related to the plan was $4.0 million and
$3.9 million for fiscal years 2007 and 2006, 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
54
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employee contributions, was $4.4 million, $4.3 million
and $4.7 million in fiscal years 2007, 2006 and 2005,
respectively.
Superannuation
Fund
The Company contributes to superannuation funds on behalf of the
employees of Penford Australia. Australian law requires the
Company to contribute at least 9% of each employees
eligible pay. In New Zealand, the Company sponsors a
superannuation benefit plan whereby it contributes 7.5% and 5%
of eligible pay for salaried and hourly employees, respectively.
The Company contributions to superannuation funds were
$1.1 million, in each of fiscal years 2007, 2006 and 2005.
|
|
Note 12
|
Other
Non-operating Income
|
Other non-operating income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Royalty and licensing income
|
|
$
|
1,902
|
|
|
$
|
1,827
|
|
|
$
|
1,386
|
|
Gain (loss) on sale of assets
|
|
|
(325
|
)
|
|
|
85
|
|
|
|
64
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(1,051
|
)
|
Gain on sale of Tamworth farm
|
|
|
60
|
|
|
|
78
|
|
|
|
1,166
|
|
Gain on sale of investment
|
|
|
|
|
|
|
|
|
|
|
736
|
|
Other
|
|
|
8
|
|
|
|
(94
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,645
|
|
|
$
|
1,896
|
|
|
$
|
2,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2003, the Company exclusively licensed to National
Starch and Chemical Investment Holdings Corporation
(National Starch) certain rights to its resistant
starch patent portfolio (the RS Patents) for
applications in human nutrition. Under the terms of the
licensing agreement, the Company received an initial licensing
fee of $2.25 million ($1.6 million net of transaction
expenses) which is being amortized over the life of the royalty
agreement. The Company recognized $1.9 million,
$1.8 million and $1.4 million in income during fiscal
2007, 2006 and 2005, respectively, related to the licensing fee
and royalties. The Company has recognized $8.5 million in
royalty income from the inception of the agreement through
August 31, 2007.
In the first quarter of fiscal 2007, in connection with the
settlement of litigation in which Penfords Australian
subsidiary companies were plaintiffs, Penford received a
one-time payment of $625,000 and granted a license to one of the
defendants in this litigation under Penfords RS Patents in
certain non-human nutrition applications. In addition, Penford
became entitled to receive additional royalties under a license
of rights under the RS Patents in human nutrition applications
granted to one of the defendants. As part of the settlement
agreement, Penford is entitled to receive certain other
benefits, including an acceleration and extension of certain
royalties under its license with National Starch. The Company is
deferring and recognizing license income of $625,000 ratably
over the remaining life of the patent license, which is
estimated to be seven years.
In 2005, the Company refinanced its secured term and revolving
credit facilities and wrote off $1.1 million of unamortized
debt issuance costs related to these credit agreements.
In fiscal 2005, Penford sold a parcel of land near its wheat
starch plant in Tamworth, New South Wales, Australia, that was
used for disposal of effluent from the Tamworth manufacturing
process for $1.9 million, and recognized a gain on the sale
of $1.2 million.
In fiscal 2006, the Company sold a parcel of land suitable only
for agricultural purposes in Tamworth, New South Wales,
Australia to a third-party purchaser for $0.7 million. The
Company leases back the property from the purchaser under two
lease terms and arrangements: i) a small parcel of land
will be leased for 25 years beginning August 2006 with
annual rent of approximately $0.016 million converted to
U.S. dollars at the Australian dollar
55
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exchange rate at August 31, 2007 and ii) the majority
of land sold was leased for one year beginning August 2006 with
annual rental of approximately $0.09 million converted to
U.S. dollars at the Australian dollar exchange rate at
August 31, 2007. The total gain on the sale was
$0.3 million. The gain of $0.1 million in excess of
the present value of the lease payments was recognized during
the second quarter of fiscal 2006. The remaining gain of
$0.2 million is being recognized proportionally over the
terms of the leases discussed above.
In fiscal 2005, the Company sold a majority of its investment in
a small Australian
start-up
company and recognized a $0.7 million pre-tax gain on the
transaction.
Income (loss) before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Domestic
|
|
$
|
16,335
|
|
|
$
|
3,502
|
|
|
$
|
(4,635
|
)
|
Foreign
|
|
|
3,157
|
|
|
|
1,760
|
|
|
|
2,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,492
|
|
|
$
|
5,262
|
|
|
$
|
(2,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,630
|
|
|
$
|
68
|
|
|
$
|
(353
|
)
|
State
|
|
|
1,051
|
|
|
|
709
|
|
|
|
170
|
|
Foreign
|
|
|
2,065
|
|
|
|
550
|
|
|
|
666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,746
|
|
|
|
1,327
|
|
|
|
483
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
78
|
|
|
|
529
|
|
|
|
(4,579
|
)
|
State
|
|
|
(644
|
)
|
|
|
(536
|
)
|
|
|
(573
|
)
|
Foreign
|
|
|
(1,205
|
)
|
|
|
(286
|
)
|
|
|
(258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,771
|
)
|
|
|
(293
|
)
|
|
|
(5,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,975
|
|
|
$
|
1,034
|
|
|
$
|
(4,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Comprehensive tax expense (benefit) allocable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
$
|
5,975
|
|
|
$
|
1,034
|
|
|
$
|
(4,927
|
)
|
Comprehensive income (loss)
|
|
|
(195
|
)
|
|
|
1,649
|
|
|
|
(871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,780
|
|
|
$
|
2,683
|
|
|
$
|
(5,798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the statutory federal tax to the actual
provision (benefit) for taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Statutory tax rate
|
|
|
35
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
Statutory tax on income
|
|
$
|
6,822
|
|
|
$
|
1,789
|
|
|
$
|
(800
|
)
|
State taxes, net of federal benefit
|
|
|
79
|
|
|
|
114
|
|
|
|
(245
|
)
|
Domestic production exclusion benefit
|
|
|
(202
|
)
|
|
|
(14
|
)
|
|
|
|
|
Tax credits, including research and development credits
|
|
|
(382
|
)
|
|
|
(136
|
)
|
|
|
(247
|
)
|
Extraterritorial income exclusion benefit
|
|
|
(5
|
)
|
|
|
(546
|
)
|
|
|
(2,970
|
)
|
Lower statutory rate on foreign earnings
|
|
|
(66
|
)
|
|
|
(82
|
)
|
|
|
(449
|
)
|
Other
|
|
|
(271
|
)
|
|
|
(91
|
)
|
|
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit)
|
|
$
|
5,975
|
|
|
$
|
1,034
|
|
|
$
|
(4,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred tax assets and
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Alternative minimum tax credit
|
|
$
|
|
|
|
$
|
466
|
|
Postretirement benefits
|
|
|
8,814
|
|
|
|
7,957
|
|
Provisions for accrued expenses
|
|
|
2,902
|
|
|
|
1,988
|
|
Stock-based compensation
|
|
|
735
|
|
|
|
389
|
|
Other
|
|
|
2,627
|
|
|
|
1,274
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
15,078
|
|
|
|
12,074
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
15,502
|
|
|
|
16,513
|
|
Other
|
|
|
434
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
15,936
|
|
|
|
16,906
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
858
|
|
|
$
|
4,832
|
|
|
|
|
|
|
|
|
|
|
Recognized as:
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
1,985
|
|
|
$
|
1,092
|
|
Other assets
|
|
|
297
|
|
|
|
|
|
Long-term deferred income tax liability
|
|
|
(3,140
|
)
|
|
|
(5,924
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax liabilities
|
|
$
|
858
|
|
|
$
|
4,832
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2007, the Company had no federal alternative
minimum tax credit or research and development carry forwards.
Deferred taxes are not recognized on temporary differences from
undistributed earnings of foreign subsidiaries of approximately
$16.9 million, as these earnings are deemed to be
permanently reinvested. The amount of unrecognized deferred tax
liability associated with these temporary differences is
approximately $6.4 million.
The Company has not provided for U.S. federal income and
foreign withholding taxes on undistributed earnings from
non-U.S. operations
as of August 31, 2007 because the Company intends to
reinvest such earnings indefinitely outside of the United States.
57
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In August 2005, the Company received a report from the Internal
Revenue Service (IRS) regarding the audit of the
Companys U.S. federal income tax returns for fiscal
years ended August 31, 2001 and 2002. In May 2007, the
Company settled the outstanding IRS audits of the Companys
U.S. federal income tax returns for the fiscal years ended
August 31, 2001 and 2002. Under the settlement the Company
received a cash refund of $0.3 million. In addition, in
connection with the settlement of these audits in the third
quarter of fiscal 2007, the Company reversed a current tax
liability in the amount of $0.7 million, which represented
its estimate of the probable loss on certain tax positions being
examined.
In December 2006, the Tax Relief Healthcare Act of 2006 was
enacted in the U.S., which retroactively reinstated and extended
the research and development tax credit from January 1,
2006 through December 31, 2007. The Company recorded the
tax effect of $0.2 million of U.S. research and
development tax credits in 2007 related to fiscal 2006.
In 2004, the Company filed amended U.S. federal income tax
returns for fiscal years ended August 31, 2001 and 2002,
increasing the extraterritorial income exclusion
(EIE) deduction. The methodology that was used to
determine the incremental EIE deduction for those years was also
utilized for the federal income tax returns for fiscal years
ended August 31, 2003, 2004 and 2005. Penford had not
recognized the tax benefit associated with the incremental EIE
deduction for fiscal years 2001 through 2004 because the Company
had concluded that it was not probable, as defined in FASB
Statement No. 5, Accounting for Contingencies,
that the deduction would be sustained. In its tax audits of the
fiscal 2001 and 2002 federal income tax returns, the IRS did not
challenge the Companys EIE deduction for those years.
Accordingly, in 2005, the Company recognized the incremental tax
benefit of this deduction for fiscal years 2001 through 2004.
The amount of tax benefit recognized for years prior to 2005 was
$2.5 million.
In evaluating the exposures connected with the various tax
filing positions, the Company establishes an accrual, when,
despite managements belief that the Companys tax
return positions are supportable, management believes that
certain positions may be successfully challenged and a loss is
probable. When facts and circumstances change, these accruals
are adjusted. Beginning in fiscal 2008, the Company will adopt
FIN 48, which will change the accounting for tax positions.
See discussion in Note 1.
|
|
Note 14
|
Earnings
Per Common Share
|
The following table presents the computation of basic and
diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands, except share and
|
|
|
|
per share data)
|
|
|
Net income
|
|
$
|
13,517
|
|
|
$
|
4,228
|
|
|
$
|
2,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
8,986,413
|
|
|
|
8,899,999
|
|
|
|
8,826,916
|
|
Net effect of dilutive stock options
|
|
|
296,712
|
|
|
|
104,191
|
|
|
|
119,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents outstanding,
assuming dilution
|
|
|
9,283,125
|
|
|
|
9,004,190
|
|
|
|
8,946,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.50
|
|
|
$
|
0.48
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.46
|
|
|
$
|
0.47
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average stock options omitted from the denominator of
the earnings per share calculation because they were
antidilutive were 57,159, 536,775 and 346,388 for 2007, 2006 and
2005, respectively.
58
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 15
|
Segment
Reporting
|
Financial information for the Companys three segments is
presented below. The first two segments, Industrial
Ingredients North America and Food
Ingredients North America, 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
industries. The Food Ingredients segment produces specialty
starches for food applications. The third segment is the
geographically separate operations in Australia and New Zealand.
The Australian and New Zealand operations produce specialty
starches used primarily in the food ingredients business. See
Part 1, Item 1, Business, for a
description of the products for each segment. A fourth 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, personnel costs of the executive management
team, corporate-wide professional services and consolidation
entries. The elimination of intercompany sales between
Australia/New Zealand operations and Food
Ingredients North America is presented separately
since the chief operating decision maker views segment results
prior to intercompany eliminations. The accounting policies of
the reportable segments are the same as those described in
Note 1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients North America
|
|
$
|
194,957
|
|
|
$
|
165,850
|
|
|
$
|
147,782
|
|
Food ingredients North America
|
|
|
62,987
|
|
|
|
57,156
|
|
|
|
53,661
|
|
Australia/New Zealand operations
|
|
|
105,244
|
|
|
|
96,121
|
|
|
|
96,231
|
|
Corporate and other
|
|
|
(824
|
)
|
|
|
(708
|
)
|
|
|
(911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
|
$
|
296,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients North America
|
|
$
|
7,830
|
|
|
$
|
7,812
|
|
|
$
|
8,832
|
|
Food ingredients North America
|
|
|
2,944
|
|
|
|
3,301
|
|
|
|
3,311
|
|
Australia/New Zealand operations
|
|
|
4,605
|
|
|
|
4,199
|
|
|
|
4,306
|
|
Corporate and other
|
|
|
317
|
|
|
|
271
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,696
|
|
|
$
|
15,583
|
|
|
$
|
17,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients North America
|
|
$
|
19,251
|
|
|
$
|
9,121
|
|
|
$
|
(147
|
)
|
Food ingredients North America
|
|
|
10,684
|
|
|
|
7,819
|
|
|
|
7,404
|
|
Australia/New Zealand operations
|
|
|
3,269
|
|
|
|
1,735
|
|
|
|
1,331
|
|
Corporate and other
|
|
|
(9,646
|
)
|
|
|
(9,407
|
)
|
|
|
(7,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,558
|
|
|
$
|
9,268
|
|
|
$
|
1,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients North America
|
|
$
|
30,492
|
|
|
$
|
8,858
|
|
|
$
|
4,211
|
|
Food ingredients North America
|
|
|
2,477
|
|
|
|
1,651
|
|
|
|
1,742
|
|
Australia/New Zealand operations
|
|
|
1,952
|
|
|
|
4,323
|
|
|
|
3,319
|
|
Corporate and other
|
|
|
(187
|
)
|
|
|
73
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,734
|
|
|
$
|
14,905
|
|
|
$
|
9,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
Industrial ingredients North America
|
|
$
|
133,187
|
|
|
$
|
98,733
|
|
Food ingredients North America
|
|
|
33,684
|
|
|
|
31,714
|
|
Australia/New Zealand operations
|
|
|
108,084
|
|
|
|
104,491
|
|
Corporate and other
|
|
|
13,433
|
|
|
|
15,730
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
288,388
|
|
|
$
|
250,668
|
|
|
|
|
|
|
|
|
|
|
Total goodwill Australia/New Zealand
|
|
$
|
23,477
|
|
|
$
|
21,871
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of total income from operations for the
Companys segments to income before income taxes as
reported in the consolidated financial statements follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Income from operations
|
|
$
|
23,558
|
|
|
$
|
9,268
|
|
|
$
|
1,012
|
|
Other non-operating income
|
|
|
1,645
|
|
|
|
1,896
|
|
|
|
2,209
|
|
Interest expense
|
|
|
(5,711
|
)
|
|
|
(5,902
|
)
|
|
|
(5,574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
19,492
|
|
|
$
|
5,262
|
|
|
$
|
(2,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, attributed to the point of origin, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
257,120
|
|
|
$
|
222,298
|
|
|
$
|
200,532
|
|
Australia/New Zealand
|
|
|
105,244
|
|
|
|
96,121
|
|
|
|
96,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
|
$
|
296,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, attributed to the area to which the product was shipped,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
United States
|
|
$
|
227,438
|
|
|
$
|
198,439
|
|
|
$
|
175,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia/New Zealand
|
|
|
79,647
|
|
|
|
79,919
|
|
|
|
74,222
|
|
Japan
|
|
|
18,636
|
|
|
|
18,334
|
|
|
|
19,343
|
|
Canada
|
|
|
12,654
|
|
|
|
11,718
|
|
|
|
13,063
|
|
Mexico
|
|
|
10,358
|
|
|
|
5,761
|
|
|
|
2,268
|
|
Other
|
|
|
13,631
|
|
|
|
4,248
|
|
|
|
12,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S
|
|
|
134,926
|
|
|
|
119,980
|
|
|
|
121,022
|
|
Total
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
|
$
|
296,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Long-lived assets, net
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
103,942
|
|
|
$
|
82,556
|
|
Australia/New Zealand
|
|
|
66,198
|
|
|
|
64,144
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
170,140
|
|
|
$
|
146,700
|
|
|
|
|
|
|
|
|
|
|
With the adoption of SFAS No. 123R on
September 1, 2005, the Company recognized $1.1 million
in stock-based compensation expense for each of fiscal years
2007 and 2006. The following table summarizes the stock-based
compensation expense related to stock option awards by segment
for fiscal years 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Industrial Ingredients North America
|
|
$
|
264
|
|
|
$
|
217
|
|
Food Ingredients North America
|
|
|
170
|
|
|
|
123
|
|
Australia/New Zealand operations
|
|
|
52
|
|
|
|
49
|
|
Corporate
|
|
|
564
|
|
|
|
718
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,050
|
|
|
$
|
1,107
|
|
|
|
|
|
|
|
|
|
|
Prior to September 1, 2005, the Company presented pro forma
information for the periods prior to the adoption of
SFAS No. 123R and no compensation expense was
recognized for the stock-based compensation plans other than for
the Directors Plan and restricted stock awards. See
Note 9.
|
|
Note 16
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
Fiscal 2007
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Sales
|
|
$
|
85,500
|
|
|
$
|
85,241
|
|
|
$
|
95,406
|
|
|
$
|
96,217
|
|
|
$
|
362,364
|
|
Cost of sales
|
|
|
72,306
|
|
|
|
72,839
|
|
|
|
76,838
|
|
|
|
76,220
|
|
|
|
298,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
13,194
|
|
|
|
12,402
|
|
|
|
18,568
|
|
|
|
19,997
|
|
|
|
64,161
|
|
Net income
|
|
|
2,573
|
|
|
|
1,706
|
|
|
|
4,955
|
|
|
|
4,283
|
|
|
|
13,517
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.19
|
|
|
$
|
0.55
|
|
|
$
|
0.47
|
|
|
$
|
1.50
|
|
Diluted
|
|
$
|
0.28
|
|
|
$
|
0.19
|
|
|
$
|
0.54
|
|
|
$
|
0.45
|
|
|
$
|
1.46
|
|
Dividends declared
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.24
|
|
61
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
Fiscal 2006
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Sales
|
|
$
|
77,903
|
|
|
$
|
77,078
|
|
|
$
|
79,130
|
|
|
$
|
84,308
|
|
|
$
|
318,419
|
|
Cost of sales
|
|
|
67,503
|
|
|
|
68,534
|
|
|
|
67,070
|
|
|
|
70,369
|
|
|
|
273,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
10,400
|
|
|
|
8,544
|
|
|
|
12,060
|
|
|
|
13,939
|
|
|
|
44,943
|
|
Net income (loss)
|
|
|
196
|
|
|
|
(511
|
)
|
|
|
1,991
|
|
|
|
2,552
|
|
|
|
4,228
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.22
|
|
|
$
|
0.29
|
|
|
$
|
0.48
|
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.22
|
|
|
$
|
0.28
|
|
|
$
|
0.47
|
|
Dividends declared
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.24
|
|
In the fourth quarter of fiscal 2007, the Company recorded a
$2.4 million pretax charge for an estimated loss
contingency related to litigation. See Note 17.
|
|
Note 17
|
Legal
Proceedings
|
In October 2004, Penford Products Co. (Penford
Products), a wholly-owned subsidiary of the Company, was
sued by Graphic Packaging International, Inc.
(Graphic) in the Fourth Judicial District Court,
Ouachita Parish, State of Louisiana. Graphic sought monetary
damages for, among other things, Penford Products alleged
breach of an agreement during the 2004 strike affecting its
Cedar Rapids, Iowa plant to supply Graphic with certain starch
products. Penford Products denied all liability and countersued
for damages.
During October 2007, this case was tried before a judge of the
above-noted court. As of November 7, 2007, no decision in
the matter had been rendered by the judge and the judge had not
advised Penford Products of the date upon which his decision
would be issued. At trial, Graphic argued that it was entitled
to damages in the amount of approximately $3.27 million,
plus interest. Penford Products argued that it was entitled to
damages of approximately $550,000, plus interest.
The Company vigorously defended its position at trial. However,
the Company, applying its best judgment of the likely outcome of
the litigation, has established a loss contingency against this
matter of $2.4 million. Depending upon the eventual outcome
of this litigation, the Company may incur additional material
charges in excess of the amount it has reserved, or it may incur
lower charges, the amounts of which in each case management is
unable to predict at this time.
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 from the Companys outside legal counsel, the
ultimate resolution of these matters will not materially affect
the consolidated financial position, results of operations or
liquidity of the Company.
62
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Penford Corporation
We have audited the accompanying consolidated balance sheets of
Penford Corporation as of August 31, 2007 and 2006, and the
related consolidated statements of operations, comprehensive
income, shareholders equity, and cash flows for each of
the three years in the period ended August 31, 2007. 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,
2007 and 2006, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended August 31, 2007, in conformity with
U.S. generally accepted accounting principles.
As discussed in Notes 1 and 9 to the consolidated financial
statements, effective September, 1, 2005, the Company adopted
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment.
As discussed in Notes 1 and 10 to the consolidated
financial statements, effective August 31, 2007, the
Company changed its method for accounting for postretirement
benefit plans in accordance with Statement of Financial
Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Penford Corporations internal control
over financial reporting as of August 31, 2007, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated November 6, 2007
expressed an unqualified opinion thereon.
Denver, Colorado
November 6, 2007
63
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Penford Corporation
We have audited Penford Corporations internal control over
financial reporting as of August 31, 2007, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Penford
Corporations management is responsible for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying Report of
Management on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A 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, Penford Corporation maintained, in all material
respects, effective internal control over financial reporting as
of August 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Penford Corporation as of
August 31, 2007 and 2006, and the related consolidated
statements of operations, comprehensive income,
shareholders equity, and cash flows for each of the three
years in the period ended August 31, 2007 of Penford
Corporation and our report dated November 6, 2007 expressed
an unqualified opinion thereon.
Denver, Colorado
November 6, 2007
64
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures.
|
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 the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that these disclosure controls and
procedures are effective. Managements report on internal
control over financial reporting and the related report of the
Companys registered independent public accounting firm 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, 2007 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
REPORT OF
MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our 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, 2007.
|
|
Item 9B.
|
Other
Information.
|
Not applicable.
|
|
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 2008 Annual Meeting of
Shareholders (the 2008 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
65
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 2008 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 2008 Proxy Statement is incorporated
herein by reference.
Securities
Authorized for Issuance under Equity Compensation
Plans
The following table provides information regarding
Penfords equity compensation plans at August 31,
2007. The Company has no equity compensation plans that have not
been approved by security holders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of Securities
|
|
|
|
Securities to be
|
|
|
Weighted-
|
|
|
Remaining Available
|
|
|
|
Issued Upon
|
|
|
Average Exercise
|
|
|
for Future Issuance
|
|
|
|
Exercise of
|
|
|
Price of
|
|
|
Under Equity
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Compensation Plans
|
|
|
|
Options,
|
|
|
Options,
|
|
|
(Excluding 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)
|
|
|
702,500
|
|
|
$
|
14.11
|
|
|
|
|
|
1993 Non-Employee Director Restricted Stock Plan(2)
|
|
|
|
|
|
|
|
|
|
|
10,039
|
|
2006 Long-Term Incentive Plan(4)
|
|
|
220,500
|
|
|
$
|
15.88
|
|
|
|
736,976
|
|
Stock Option Plan for Non-Employee Directors(3)
|
|
|
110,997
|
|
|
$
|
10.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,033,977
|
|
|
$
|
14.25
|
|
|
|
747,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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)
|
|
Each Director received a grant of $18,000 of restricted stock
every three years. The restricted stock vests one-third on each
anniversary of the grant date. As of October 30, 2007, this
plan has been terminated and no additional restricted stock will
be granted under this plan.
|
|
(3)
|
|
This plan has been terminated and no additional options will be
granted under this plan.
|
|
(4)
|
|
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.
|
|
|
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
2008 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 2008 Proxy Statement and is incorporated
herein by reference.
66
|
|
Item 14.
|
Principal
Accountant Fees and Services.
|
The applicable information concerning principal accountant fees
and services appears under the heading Fees Paid to
Ernst & Young LLP in the 2008 Proxy Statement
and is incorporated herein by reference.
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules.
|
(a)(1)
Financial Statements
The consolidated balance sheets as of August 31, 2007 and
2006 and the related consolidated statements of operations,
comprehensive income, cash flows and shareholders equity
for each of the three years in the period ended August 31,
2007 and the reports of the independent registered public
accounting firm 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 69.
(b)
Exhibits
See Item 15(a)(3), above.
(c)
Financial Statement Schedules
None
67
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 7th day of November 2007.
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 7, 2007.
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|
|
|
|
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/
James
E. Warjone
James
E. Warjone
|
|
Director
|
68
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
|
|
|
2
|
.1
|
|
Starch Australasia Share Sale Agreement completed as of
September 29, 2000 among Penford Holdings Pty. Limited, a
wholly owned subsidiary of Registrant, and Goodman Fielder
Limited (filed as an exhibit to Registrants File
No. 000-11488,
Form 8-K/A
dated September 29, 2000, filed December 12, 2000)
|
|
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 28, 2005 (filed as an exhibit to Registrants
File
No. 000-11488,
Form 10-K
for the fiscal year ended August 31, 2005)
|
|
3
|
.3
|
|
Section 3.2 of the Registrants Amended and Restated
Bylaws (filed as an exhibit to Registrants File
No. 000-11488,
Form 8-K
filed November 3, 2005)
|
|
4
|
.1
|
|
Amended and Restated Rights Agreement dated as of April 30,
1997 (filed as an exhibit to Registrants File
No. 000-11488,
Amendment to Registration Statement on
Form 8-K/A
dated May 5, 1997, filed May 5, 1997)
|
|
10
|
.1
|
|
Penford Corporation Deferred Compensation Plan, amended and
restated as of January 1, 2005 *
|
|
10
|
.2
|
|
Form of Change of Control Agreement and Annexes between Penford
Corporation and Messrs. Kortemeyer, Cordier, Kunerth,
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
|
|
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
|
.4
|
|
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
|
.5
|
|
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
|
.6
|
|
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
|
.7
|
|
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
|
.8
|
|
Form of Penford Corporation 2006 Long-Term Incentive Plan
Restricted Stock Award Notice and Agreement*
|
|
10
|
.9
|
|
Separation Agreement dated as of July 31, 1998 between
Registrant and Penwest Pharmaceuticals Co. (filed as an exhibit
to Registrants File
No. 000-11488,
Form 8-K
dated August 31, 1998, filed September 15, 1998)
|
|
10
|
.10
|
|
Amended and Restated Credit Agreement dated August 22, 2005
(filed as an exhibit to Registrants File
No. 000-11488,
Form 8-K
dated August 22, 2005, filed August 26, 2005)
|
|
10
|
.11
|
|
First Amendment to Amended and Restated Credit Agreement (filed
as an exhibit to Registrants File
No. 000-11488,
Form 10-Q
for the quarter ended May 31, 2006, filed July 10,
2006)
|
|
10
|
.12
|
|
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
|
.13
|
|
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
|
.14
|
|
Non-Employee Director Compensation Term Sheet *
|
|
21
|
|
|
Subsidiaries of the Registrant
|
|
23
|
|
|
Consent of Independent Registered Public Accounting Firm
|
|
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
|
69
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