UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended May 31, 2009
OR
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o
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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
Commission File No. 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 South Revere Parkway,
Centennial, Colorado
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80112-3932
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrants telephone number, including area code:
(303) 649-1900
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
The net number of shares of the Registrants common stock (the Registrants only outstanding class
of stock) outstanding as of July 3, 2009 was 11,265,953.
PENFORD CORPORATION AND SUBSIDIARIES
INDEX
2
PART I FINANCIAL INFORMATION
Item 1: Financial Statements
PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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May 31,
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August 31,
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(In thousands, except per share data)
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2009
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2008
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(Unaudited)
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ASSETS
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Current assets:
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Cash
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$
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2,492
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$
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534
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Trade accounts receivable, net
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43,541
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28,752
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Inventories
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44,614
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50,200
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Prepaid expenses
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6,243
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4,370
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Insurance recovery receivable
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1,243
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8,000
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Income tax receivable
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6,493
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10,052
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Other
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5,124
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3,881
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Total current assets
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109,750
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105,789
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Property, plant and equipment, net
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156,155
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169,932
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Restricted cash value of life insurance
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9,270
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10,465
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Deferred tax asset
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4,415
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6,293
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Goodwill, net
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6,999
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26,043
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Other intangible assets, net
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672
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760
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Other assets
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1,412
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1,151
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Total assets
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$
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288,673
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$
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320,433
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities:
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Cash overdraft, net
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$
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$
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1,301
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Current portion of long-term debt and capital lease obligations
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21,507
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8,029
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Short-term borrowings
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3,482
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676
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Accounts payable
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29,689
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46,475
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Accrued liabilities
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12,446
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11,195
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Total current liabilities
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67,124
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67,676
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Long-term debt and capital lease obligations
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72,444
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59,860
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Other post-retirement benefits
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13,216
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12,862
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Other liabilities
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18,968
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19,673
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Total liabilities
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171,752
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160,071
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Shareholders equity:
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Preferred stock, par value $1.00 per share, authorized 1,000 shares,
none issued
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Common stock, par value $1.00 per share, authorized 29,000 shares,
issued 13,157 and 13,127 shares, respectively
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13,157
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13,127
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Additional paid-in capital
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93,250
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91,443
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Retained earnings
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42,778
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74,092
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Treasury stock, at cost, 1,981 shares
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(32,757
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(32,757
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Accumulated other comprehensive income
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493
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14,457
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Total shareholders equity
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116,921
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160,362
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Total liabilities and shareholders equity
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$
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288,673
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$
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320,433
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The accompanying notes are an integral part of these statements.
3
PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three months ended
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Nine months ended
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May 31,
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May 31,
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May 31,
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May 31,
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(In thousands, except per share data)
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2009
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2008
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2009
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2008
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Sales
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$
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78,723
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$
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102,799
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$
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239,222
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$
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285,549
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Cost of sales
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80,191
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87,260
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239,444
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242,252
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Gross margin
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(1,468
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)
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15,539
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(222
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)
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43,297
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Operating expenses
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7,318
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7,267
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21,852
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21,173
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Research and development expenses
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1,480
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2,004
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4,561
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6,099
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Goodwill impairment
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13,828
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Flood related costs, net of insurance proceeds
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(1,075
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)
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(9,109
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Restructure costs
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27
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1,356
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Litigation expense
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1,411
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1,411
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Income (loss) from operations
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(9,191
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)
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4,830
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(31,354
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)
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13,258
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Non-operating income, net
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914
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336
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2,628
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1,590
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Interest expense
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1,604
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782
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4,446
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2,649
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Income (loss) before income taxes
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(9,881
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)
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4,384
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(33,172
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)
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12,199
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Income tax expense (benefit)
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(2,466
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)
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1,679
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(3,210
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)
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4,017
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Net income (loss)
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$
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(7,415
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)
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$
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2,705
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$
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(29,962
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)
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$
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8,182
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Weighted average common shares and
equivalents outstanding:
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Basic
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11,176
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11,129
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11,169
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10,371
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Diluted
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11,176
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11,446
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11,169
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10,743
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Earnings (loss) per share:
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Basic
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$
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(0.66
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)
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$
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0.24
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$
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(2.68
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)
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$
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0.79
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Diluted
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$
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(0.66
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)
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$
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0.24
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$
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(2.68
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)
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$
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0.76
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Dividends declared per common share
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$
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$
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0.06
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$
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0.12
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$
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0.18
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The accompanying notes are an integral part of these statements.
4
PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
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Nine Months Ended
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May 31,
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May 31,
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(In thousands)
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2009
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2008
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Cash flows from operating activities:
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Net income (loss)
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$
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(29,962
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)
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$
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8,182
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Adjustments to reconcile net income (loss) to net cash used
in operations:
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Depreciation and amortization
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13,700
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12,182
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Stock-based compensation
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2,091
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1,638
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Goodwill impairment
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13,828
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Gain on sale of dextrose product line
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(1,562
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)
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Deferred income taxes
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(173
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)
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(2,103
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)
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Loss on derivative transactions
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1,101
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4,442
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Loss (gain) on foreign currency transactions
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198
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(1,126
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)
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Other
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10
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(87
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)
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Change in assets and liabilities:
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Trade accounts receivable
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(16,447
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)
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(2,880
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)
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Prepaid expenses
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(2,071
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)
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(1,580
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)
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Inventories
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(76
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)
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(14,812
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)
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Accounts payable and accrued liabilities
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(14,937
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)
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(2,149
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)
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Income tax
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3,072
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(5,031
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)
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Insurance recovery receivable
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6,757
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Other
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2,777
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112
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Net cash used in operating activities
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(21,694
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)
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(3,212
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)
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Cash flows from investing activities:
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Investment in property, plant and equipment, net
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(4,634
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)
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(37,482
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)
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Proceeds from sale of dextrose product line
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2,857
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Proceeds from investments
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1,276
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Other
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(75
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)
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(90
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)
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Net cash used in investing activities
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(576
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)
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(37,572
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)
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Cash flows from financing activities:
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Proceeds from short-term borrowings
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10,298
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|
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5,871
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Payments on short-term borrowings
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(7,849
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)
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(12,395
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)
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Proceeds from revolving line of credit
|
|
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55,931
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|
|
|
61,029
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|
Payments on revolving line of credit
|
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(24,500
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)
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|
|
(28,052
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)
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Payments of long-term debt
|
|
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(5,500
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)
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|
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(26,625
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)
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Payments under capital lease obligation
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(202
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)
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(50
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)
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Exercise of stock options
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|
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|
322
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|
Net proceeds from issuance of common stock
|
|
|
|
|
|
|
46,844
|
|
Payment of loan fees
|
|
|
(551
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)
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|
|
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Decrease in cash overdraft
|
|
|
(1,301
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)
|
|
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(4,070
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)
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Payment of dividends
|
|
|
(2,027
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)
|
|
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(1,774
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)
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Other
|
|
|
|
|
|
|
94
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|
|
|
|
|
|
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|
Net cash provided by financing activities
|
|
|
24,299
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|
|
|
41,194
|
|
|
|
|
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|
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|
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|
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Effect of exchange rate changes on cash and cash equivalents
|
|
|
(71
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)
|
|
|
(410
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)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
1,958
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|
|
|
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|
Cash and cash equivalents, beginning of period
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
2,492
|
|
|
$
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
5
PENFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1BUSINESS
Penford Corporation (which, together with its subsidiary companies, is referred to herein as
Penford or the Company) is a developer, manufacturer and marketer of specialty natural-based
ingredient systems for industrial and food ingredient applications, including fuel grade ethanol.
The Company operates manufacturing facilities in the United States, Australia and New Zealand.
Penford operates in three business segments, each utilizing its carbohydrate chemistry
expertise to develop starch-based products for value-added applications that improve the quality
and performance of customers products. The first two segments, Industrial Ingredients North
America and Food Ingredients North America, 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.
The Company has significant 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. In May 2008, the Companys Industrial Ingredients North America
segment began commercial production and sales of ethanol from its facility in Cedar Rapids, Iowa.
2BASIS OF PRESENTATION
Consolidation
The accompanying condensed consolidated financial statements include the accounts of Penford
and its wholly owned subsidiaries. All material intercompany transactions and balances have been
eliminated. The condensed consolidated balance sheet at May 31, 2009 and the condensed
consolidated statements of operations and cash flows for the interim periods ended May 31, 2009 and
May 31, 2008 have been prepared by the Company without audit. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly
the financial information, have been made. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with U.S. generally accepted accounting
principles, have been condensed or omitted pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). The results of operations for interim periods are not necessarily
indicative of the operating results of a full year or of future operations. Certain prior period
amounts have been reclassified to conform to the current period presentation. The accompanying
condensed consolidated financial statements should be read in conjunction with the consolidated
financial statements included in the Companys Annual Report on Form 10-K for the year ended August
31, 2008.
Use of Estimates
The preparation of the consolidated financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions about future events.
These estimates and underlying assumptions affect the amounts of assets and liabilities reported,
the disclosures in the financial statements and reported amounts of revenues and expenses. Such
estimates include the valuation of accounts receivable, inventories, goodwill and other long-lived
assets, and legal contingencies and assumptions used in the calculation of income taxes, pension
and other post-retirement benefits, among others. These estimates are based on managements best
estimate and judgment. Management evaluates its estimates and assumptions on an ongoing basis
using historical experience and other factors, including the current economic environment, and
adjusts such estimates and assumptions when facts and circumstances dictate. The current credit
market and volatile equity, foreign currency, commodity and energy markets have combined to
increase the uncertainty inherent in managements estimates and assumptions. As future events and
their effects cannot be determined with precision, actual results may differ significantly from
these estimates.
6
Accounting Changes
Effective September 1, 2008, the Company adopted Financial Accounting Standards Board (FASB)
Statement No. 157, Fair Value Measurements (SFAS 157), for financial assets and liabilities
carried at fair value that are recognized or disclosed at fair value in the financial statements on
a recurring basis. 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. The adoption did not have a material impact on the companys financial statements.
See Note 14. Due to the issuance of FASB Staff Position No. 157-2 (FSP 157-2), the effective
date of SFAS 157 has been deferred to fiscal years beginning after November 15, 2008 (fiscal 2010
for the Company) for non-recurring, nonfinancial assets and liabilities that are recognized or
disclosed at fair value. The Company is continuing to evaluate the impact of adopting these
provisions in fiscal 2010. In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3
clarifies the application of SFAS 157 and addresses how the fair value of a financial asset is
determined when the market for that financial asset is inactive. FSP 157-3 was effective upon
issuance. The implementation of this standard did not have an impact on the Companys 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) which
allows companies the option to measure certain financial assets and financial liabilities at fair
value at specified election dates. Effective September 1, 2008, the Company adopted SFAS 159 and
elected not to measure any additional financial instruments and other items at fair value.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB No. 133 (SFAS 161). SFAS 161 requires additional
disclosures about the objectives for using derivative instruments and hedging activities, the
method of accounting for such instruments under SFAS 133 and its related interpretations, the
effect of derivative instruments and related hedged items on financial position, results of
operations, and cash flows, and a tabular disclosure of the fair values of derivative instruments
and their gains and losses. Effective December 1, 2008, the Company adopted SFAS 161. See Note
14.
Recent Accounting Pronouncements
In December 2007, the FASB issued Statement No. 141R (revised 2007), Business Combinations
(SFAS 141R) and Statement No. 160, Non-Controlling Interest in Consolidated Financial
Statements, an Amendment of ARB No. 51 (SFAS 160). These new standards establish principles and
requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, liabilities assumed, any non-controlling interests, and goodwill
acquired in a business combination. This statement also establishes disclosure requirements to
enable financial statement users to evaluate the nature and financial effects of the business
combination. The requirements of SFAS 141R and SFAS No. 160 are effective for fiscal years
beginning after December 15, 2008 (fiscal 2010 for the Company), and, except for the presentation
and disclosure requirements of SFAS 160, which is not expected to impact the Company, are to be
applied prospectively.
In June 2008, the FASB issued Staff Position FSP Emerging Issues Task Force (EITF) 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether unvested share-based payment
awards that contain rights to nonforfeitable dividends are participating securities prior to
vesting and, therefore, included in the computation of earnings per share. FSP EITF 03-6-1 is
effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company). The
Company is currently evaluating the impact of adopting FSP EITF 03-6-1 on the Companys
consolidated financial statements.
In December 2008, the FASB issued Staff Position No. 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets (FSP 132(R)-1). FSP 132(R)-1 requires additional disclosures
on a prospective basis about assets held in an employers defined benefit pension or other
postretirement plan. FSP 132(R)-1 is effective for fiscal years beginning after December 15, 2008
(fiscal 2010 for the Company). The adoption of FSP 132(R)-1 will not have an effect on the
Companys consolidated financial statements. The Company is currently evaluating the disclosure
requirements of this standard.
7
In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments (FSP SFAS 107-1 and APB 28-1). This FSP requires additional
disclosures regarding financial instruments for interim reporting periods of publicly traded
companies. This FSP requires that disclosures provide quantitative and qualitative information on
fair value estimates for all financial instruments not measured on the balance sheet at fair value.
This FSP is effective for interim reporting periods ending after June 15, 2009 (fourth quarter
fiscal 2009 for the Company). The adoption of this FSP is not expected to have an effect on the
Companys consolidated financial statements. The Company is currently evaluating the disclosure
requirements of this standard.
In April 2009, the FASB issued FSP SFAS 157-4, Determining the Fair Value When the Volume and
Level of Activity for the Asset or Liability Has Significantly Decreased and Identifying
Transactions That Are Not Orderly (FSP 157-4). FSP 157-4 provides additional guidance on
estimating fair value when the volume and level of activity for an asset or liability have
significantly decreased in relation to normal market activity, as well as additional guidance on
circumstances which may indicate a transaction is not orderly. FSP 157-4 is effective for interim
and annual reporting periods ending after June 15, 2009 (fourth quarter fiscal 2009 for the
Company). The adoption of this FSP is not expected to have a material effect on the Companys
consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before the financial statements are issued or are available to be issued.
It requires disclosure of the date through which an entity has evaluated subsequent events and the
basis for selecting that date. SFAS 165 is effective for interim or annual financial periods
ending after June 15, 2009 (fourth quarter fiscal 2009 for the Company). The adoption of this
standard will not have an effect on the Companys consolidated financial statements.
3CEDAR RAPIDS FLOOD
On June 12, 2008, the Companys Cedar Rapids, Iowa plant, operated by the Industrial
Ingredients North America business, was temporarily shut down due to record flooding of the Cedar
River and government-ordered mandatory evacuation of the plant and surrounding areas. By the end
of the first quarter of fiscal 2009, the facilitys processing rate had reached pre-flood levels.
During fiscal 2008 and the first nine months of fiscal 2009, the Company recorded flood
restoration costs of $45.6 million, and insurance recoveries of $27.2 million, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
Three months ended
|
|
|
|
|
August 31, 2008
|
|
February 28, 2009
|
|
May 31, 2009
|
|
Total
|
|
|
|
|
|
(In thousands)
|
Repairs of buildings and equipment
|
|
$
|
17,082
|
|
|
$
|
6,244
|
|
|
$
|
102
|
|
|
$
|
23,428
|
|
Site remediation
|
|
|
5,389
|
|
|
|
348
|
|
|
|
|
|
|
|
5,737
|
|
Write off of inventory and fixed assets
|
|
|
4,016
|
|
|
|
71
|
|
|
|
|
|
|
|
4,087
|
|
Continuing costs during production shut down
|
|
|
9,771
|
|
|
|
|
|
|
|
|
|
|
|
9,771
|
|
Other
|
|
|
1,797
|
|
|
|
754
|
|
|
|
66
|
|
|
|
2,617
|
|
|
|
|
|
|
|
38,055
|
|
|
|
7,417
|
|
|
|
168
|
|
|
|
45,640
|
|
Insurance recoveries
|
|
|
(10,500
|
)
|
|
|
(15,451
|
)
|
|
|
(1,243
|
)
|
|
|
(27,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net flood costs (recoveries)
|
|
$
|
27,555
|
|
|
$
|
(8,034
|
)
|
|
$
|
(1,075
|
)
|
|
$
|
18,446
|
|
|
|
|
|
|
|
The direct costs of the flood in the table above do not include lost profits from the
interruption of the business.
Insurance recoveries
During the third quarter and first nine months of fiscal 2009, the Company recognized
insurance recoveries of $1.2 million and $16.7 million, respectively. The Company received $1.2
million subsequent to May 31, 2009 which has been recorded as a receivable at that date. These
recoveries have been recorded as an offset to the losses caused by the flooding. The Company is
unable to estimate the amount or timing of future recoveries. The amount ultimately recovered from
the Companys insurers may be materially more or less than the Companys direct costs of the flood.
8
4GOODWILL
The Company tests its goodwill for impairment annually and whenever events or circumstances
make it more likely than not that an impairment may have occurred. Penford performed its annual
impairment test as of June 1, 2008 and determined that goodwill in its Australia/New Zealand and
Food Ingredients North America reporting units was not impaired at that time. During the second
quarter of fiscal 2009, the Company continued to experience a worsening demand outlook, a decline
in its sales and operating income, as well as a reduction in its expected future cash flows. In
addition, Penford experienced a sustained, significant decline in its stock price. Given these
impairment indictors, the Company determined that there was a potential for its goodwill to be
impaired.
Accordingly, the Company performed an interim impairment evaluation of its goodwill as of
February 28, 2009. The Company completed its interim goodwill impairment evaluation for both its
Australia/New Zealand and Food Ingredients North America reporting units. The estimated fair
value of the Food Ingredients North America reporting unit exceeded the carrying value of its net
assets by approximately $43 million, and the Company determined that no adjustment to the recorded
amount of goodwill of this reporting unit was required. However, during the second quarter of
fiscal 2009, the Company recorded a $13.8 million non-cash goodwill impairment charge, which
represented all of the goodwill allocated to its Australia/New Zealand reporting unit.
5STOCK-BASED COMPENSATION
Stock 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 May 31, 2009, the aggregate number of shares of the Companys common
stock that were available to be issued as awards under the 2006 Incentive Plan was 188,528. 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.
Valuation and Expense Under 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. 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 option 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. No stock options were granted under the 2006 Incentive Plan during the nine months
ended May 31, 2009.
9
Stock Option Awards
A summary of the stock option activity for the nine months ended May 31, 2009, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (in years)
|
|
|
Intrinsic Value
|
|
|
|
|
Outstanding Balance, August 31, 2008
|
|
|
1,376,347
|
|
|
$
|
15.17
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(6,905
|
)
|
|
|
13.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance, May 31, 2009
|
|
|
1,369,442
|
|
|
$
|
15.18
|
|
|
|
4.54
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at May 31, 2009
|
|
|
902,817
|
|
|
$
|
14.21
|
|
|
|
3.84
|
|
|
$
|
|
|
The aggregate intrinsic value disclosed in the table above represents the total pretax
intrinsic value, based on the Companys closing stock price of $6.10 as of May 31, 2009 that would
have been received by the option holders had all option holders exercised on that date. The
intrinsic value of options exercised during the three and nine months ended May 31, 2008 was
$224,000 and $280,200, respectively. No stock options were exercised during the nine months ended
May 31, 2009.
As of May 31, 2009, the Company had $1.7 million of unrecognized compensation cost related to
non-vested stock option awards that is expected to be recognized over a weighted average period of
1.6 years.
Restricted Stock Awards
The grant date fair value of the Companys restricted stock awards is equal to the fair value
of Penfords common stock at the grant date. The following table summarizes the restricted stock
award activity for the nine months ended May 31, 2009 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
Nonvested at August 31, 2008
|
|
|
109,365
|
|
|
$
|
34.15
|
|
Granted
|
|
|
13,832
|
|
|
|
10.12
|
|
Vested
|
|
|
(33,615
|
)
|
|
|
31.84
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at May 31, 2009
|
|
|
89,582
|
|
|
$
|
31.31
|
|
On January 1, 2009, each non-employee director received an award of 1,976 shares of restricted
stock under the 2006 Incentive Plan at the last reported sale price of the stock on the preceding
trading day, which will vest one year from grant date of the award. The Company recognizes
compensation cost for restricted stock ratably over the vesting period.
As of May 31, 2009, the Company had $1.2 million of unrecognized compensation cost related to
non-vested restricted stock awards that is expected to be recognized over a weighted average period
of 1.4 years.
Compensation Expense
The Company recognizes stock-based compensation expense utilizing the accelerated multiple
option approach over the requisite service period, which equals the vesting period. The following
table summarizes the total stock-based compensation cost under SFAS No. 123R for the three and nine
months ended May 31, 2009 and 2008 and the effect on the Companys Condensed Consolidated
Statements of Operations (in thousands):
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
|
May 31,
|
|
May 31,
|
|
May 31,
|
|
May 31,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
Cost of sales
|
|
$
|
76
|
|
|
$
|
48
|
|
|
$
|
241
|
|
|
$
|
134
|
|
Operating expenses
|
|
|
548
|
|
|
|
591
|
|
|
|
1,806
|
|
|
|
1,488
|
|
Research and development expenses
|
|
|
13
|
|
|
|
10
|
|
|
|
44
|
|
|
|
16
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
637
|
|
|
$
|
649
|
|
|
$
|
2,091
|
|
|
$
|
1,638
|
|
Tax benefit
|
|
|
242
|
|
|
|
247
|
|
|
|
795
|
|
|
|
622
|
|
|
|
|
Total stock-based compensation expense, net of tax
|
|
$
|
395
|
|
|
$
|
402
|
|
|
$
|
1,296
|
|
|
$
|
1,016
|
|
|
|
|
6INVENTORIES
The components of inventory are as follows:
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
August 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
Raw materials
|
|
$
|
24,416
|
|
|
$
|
26,578
|
|
Work in progress
|
|
|
848
|
|
|
|
1,139
|
|
Finished goods
|
|
|
19,350
|
|
|
|
22,483
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
44,614
|
|
|
$
|
50,200
|
|
|
|
|
|
|
|
|
Changes in Australian and New Zealand currency exchange rates have caused a reduction in the
recorded amount of inventory in the first nine months of fiscal 2009 by approximately $2.6 million.
Raw material inventory declined in the first nine months of fiscal 2009 primarily due to the
consumption of on-site corn inventories and a decline in the price of corn in the Industrial
Ingredients North America business.
7PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
August 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
Land
|
|
$
|
19,904
|
|
|
$
|
20,993
|
|
Plant and equipment
|
|
|
378,070
|
|
|
|
385,632
|
|
Construction in progress
|
|
|
7,707
|
|
|
|
6,808
|
|
|
|
|
|
|
|
|
|
|
|
405,681
|
|
|
|
413,433
|
|
Accumulated depreciation
|
|
|
(249,526
|
)
|
|
|
(243,501
|
)
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
$
|
156,155
|
|
|
$
|
169,932
|
|
|
|
|
|
|
|
|
Changes in Australian and New Zealand currency exchange rates have caused a reduction in the
recorded amount of net property, plant and equipment in the first nine months of fiscal 2009 by
approximately $3.7 million.
8DEBT
In fiscal 2007, the Company 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., (New York Branch) (Rabobank Nederland); U.S.
Bank National Association; and the Australia and New Zealand Banking Group Limited. The
description of the 2007 Agreement appearing in this Quarterly Report on Form 10-Q is qualified in
its entirety by reference to the 2007 Agreement, which is filed as an exhibit to the Companys Form
8-K dated October 5, 2006.
11
Effective July 8, 2008, the 2007 Agreement was amended to temporarily adjust the calculation
of selected covenant formulas for the costs of flood damage at the Companys Cedar Rapids, Iowa
facility and the associated property damage and business interruption insurance recoveries.
On February 26, 2009, the Company entered into a second amendment to the 2007 Agreement (the
Second Amendment). The Second Amendment adjusted certain covenants and other provisions in the
2007 Agreement to provide additional relief from the financial impact of the flood at the Companys
Cedar Rapids, Iowa facility. Pursuant to the Second Amendment, Bank of Montreal became the
Administrative agent under the 2007 Agreement, replacing Harris N.A.
On July 9, 2009, the Company and its lenders under the 2007 Agreement executed a third
amendment to the 2007 Agreement (the Third Amendment). The Third Amendment, among other things,
amends financial covenants effective as of May 31, 2009, reduces the amounts that the Company may
borrow under the various facilities available under the 2007 Agreement, shortens the maturity dates
on borrowed funds, increases applicable interest rates, eliminates the Companys ability to declare
dividends on its stock, and adjusts the amortization schedule and provisions regulating mandatory
prepayments, additional indebtedness, subsidiary company support, and reporting requirements. See
Note 20 for further information regarding the Third Amendment. The description of the Third
Amendment appearing in this Quarterly Report on Form 10-Q is qualified in its entirety by reference
to the Third Amendment, which is filed as Exhibit 10.1 to this report.
At May 31, 2009, the Company had $44.9 million and $6.4 million outstanding, respectively,
under the revolving credit and term loan portions of its credit facility. In addition, the Company
had $41.7 million outstanding under its capital expansion credit facility on May 31, 2009. The
Companys ability to borrow under its revolving credit facility is subject to the Companys
compliance with, and is limited by, the covenants in the 2007 Agreement, as amended. Pursuant to
the Third Amendment, the availability of the revolving credit facility has been limited to $52.5
million unless the Company obtains the approval of the lenders holding more than 50% of the U.S.
Dollar equivalent of the sum of the total borrowing and unused commitments under the 2007
Agreement.
The Companys short-term borrowings consist of an Australian variable-rate grain inventory
financing facility with an Australian bank. The facility expires August 31, 2009. The amount
outstanding under this arrangement, which is classified as a current liability on the balance
sheet, was $3.5 million at May 31, 2009.
As of May 31, 2009, 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 debt of $24.4 million at 4.18% and $5.6 million at 5.08%, plus the applicable
margin under the 2007 Agreement.
9INCOME TAXES
The Companys Australian operations reported a tax loss for fiscal 2008 and for the first nine
months of fiscal 2009. Australian tax law provides for an unlimited carryforward period for net
operating losses but does not allow losses to be carried back to previous tax years. Due to the
uncertainty related to generating sufficient future taxable income in Australia, the Company
currently believes that it is more likely than not that the net deferred tax benefit will not be
realized. In the second quarter of fiscal 2009 the Company recorded a $2.1 million valuation
allowance against the entire Australian net deferred tax asset. An additional valuation allowance
of $1.0 million was recorded in the third quarter of fiscal 2009. A valuation allowance has not
been recognized on the net U.S. deferred tax asset as there is sufficient taxable income in
carryback years to realize the net deferred tax asset.
The Companys effective tax rates for the three- and nine-month periods ended May 31, 2009
were 25.0% and 9.7%, respectively. The difference between the effective tax rate and the U.S.
federal statutory rate for the quarter ended May 31, 2009 is due to the favorable tax benefit of
the research and development tax credit and a $0.2 million reduction in the amount of unrecognized
tax benefits due to the lapse of applicable statutes of limitation offset by an increase in the
Australian valuation allowance. The reduction in the effective tax rate from the U.S. federal
statutory rate for the nine months ended May 31, 2009 is primarily due to (1) a $3.1 million
valuation allowance recognized against the Australian net deferred tax assets as discussed above,
and (2) no recognition of a tax benefit in connection with the Australian goodwill impairment
charge of $13.8 million as this charge is not deductible for tax purposes, and (3) an increase of
$0.4 million in the amount of unrecognized tax benefits.
12
The amount of unrecognized tax benefits determined in accordance with Financial Interpretation
No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN 48), decreased by $0.2 million in the quarter ended May 31, 2009 as discussed above, and
increased by $0.4 million for the nine months ended May 31, 2009. The total amount of unrecognized tax benefits at May 31,
2009 was $1.3 million, all of which, if recognized, would favorably impact the effective tax rate.
A state tax audit of the Companys fiscal 2004 to 2006 tax returns was completed in the third
quarter of fiscal 2009 with immaterial adjustments to the Companys taxable income. The Company
has been notified by one state taxing jurisdiction that an audit of the Companys 2005 to 2008 tax
returns will begin in the fourth quarter of fiscal 2009. None of the Companys other income tax
returns are under examination by taxing authorities. The Company does not believe that the total
amount of unrecognized tax benefits at May 31, 2009 will change materially in the next 12 months.
On a quarterly basis, the Company reviews its estimate of the effective income tax rate
expected to be applicable for the full fiscal year. This rate is used to calculate income tax
expense or benefit on current year-to-date pre-tax income or loss. Income tax expense or benefit
for the current interim period is the difference between the computed year-to-date income tax
amount and the tax expense or benefit reported for previous quarters. In reviewing its effective
tax rate, the Company uses estimates of the amounts of permanent differences between book and tax
accounting and projections of fiscal year pre-tax income or loss. Adjustments to the Companys
tax expense related to the prior fiscal year, amounts recorded in accordance with FIN 48, changes
in tax rates, and the effect of a change in the beginning-of-the-year valuation allowance are
treated as discrete items and are recorded in the period in which they arise.
10STOCKHOLDERS EQUITY
In December 2007, the Company completed a public offering of common stock resulting in the
issuance of 2,000,000 common shares at a price to the public of $25.00 per share. The Company
received approximately $47.2 million of net proceeds (net of $2.8 million of expenses related to
the offering) from the sale of the shares. This transaction increased the recorded amounts of
common stock by $2.0 million and increased additional paid-in capital by $45.2 million in the
second quarter of fiscal 2008.
11OTHER COMPREHENSIVE INCOME (LOSS) (OCI)
The components of total comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Net income (loss)
|
|
$
|
(7,415
|
)
|
|
$
|
2,705
|
|
|
$
|
(29,962
|
)
|
|
$
|
8,182
|
|
Foreign currency translation adjustments
|
|
|
8,585
|
|
|
|
(274
|
)
|
|
|
(11,717
|
)
|
|
|
10,795
|
|
Net unrealized gain (loss) on derivative
instruments that qualify as cash flow
hedges,
net of tax
|
|
|
233
|
|
|
|
292
|
|
|
|
(2,247
|
)
|
|
|
1,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
1,403
|
|
|
$
|
2,723
|
|
|
$
|
(43,926
|
)
|
|
$
|
20,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the foreign currency translation adjustments in the first nine months of fiscal
2009 is due to the decline of approximately 9% in the Australian and New Zealand dollars compared
to the U.S. dollar since August 31, 2008.
13
12NON-OPERATING INCOME, NET
Non-operating income, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Royalty and licensing income
|
|
$
|
394
|
|
|
$
|
465
|
|
|
$
|
1,181
|
|
|
$
|
1,320
|
|
Gain on sale of dextrose product line
|
|
|
|
|
|
|
|
|
|
|
1,562
|
|
|
|
|
|
Gain (loss) on foreign currency transactions
|
|
|
443
|
|
|
|
(236
|
)
|
|
|
(198
|
)
|
|
|
208
|
|
Other
|
|
|
77
|
|
|
|
107
|
|
|
|
83
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
914
|
|
|
$
|
336
|
|
|
$
|
2,628
|
|
|
$
|
1,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter of fiscal 2009, the Companys Food Ingredients North America business
segment sold assets related to its dextrose product line to a third-party purchaser for $2.9
million, net of transaction costs. The Company recorded a $1.6 million gain on the sale.
During the three and nine months ended May 31, 2009, the Company recognized a gain (loss) on
foreign currency transactions on Australian dollar denominated assets and liabilities as disclosed
in the table above.
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 has
recognized $11.6 million in royalty income from the inception of the agreement through May 31,
2009.
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 for applications not related to human nutrition. In addition, as part of the settlement
agreement, Penford became entitled to receive additional royalties under a license of rights under
the RS Patents in human nutrition applications and to receive certain other benefits, including an
acceleration and extension of royalties under its license with National Starch. At the time of the
settlement, the Company began recognizing license income of $625,000 ratably over the remaining
life of the patent license, which at the time of the settlement was estimated to be seven years.
13 PENSION AND POST-RETIREMENT BENEFIT PLANS
The components of the net periodic pension and post-retirement benefit costs for the three and
nine months ended May 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
Service cost
|
|
$
|
355
|
|
|
$
|
371
|
|
|
$
|
1,065
|
|
|
$
|
1,113
|
|
Interest cost
|
|
|
646
|
|
|
|
622
|
|
|
|
1,936
|
|
|
|
1,868
|
|
Expected return on plan assets
|
|
|
(607
|
)
|
|
|
(663
|
)
|
|
|
(1,821
|
)
|
|
|
(1,989
|
)
|
Amortization of prior service cost
|
|
|
64
|
|
|
|
64
|
|
|
|
190
|
|
|
|
190
|
|
Amortization of actuarial losses
|
|
|
52
|
|
|
|
12
|
|
|
|
158
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
510
|
|
|
$
|
406
|
|
|
$
|
1,528
|
|
|
$
|
1,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement health care plans
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Service cost
|
|
$
|
64
|
|
|
$
|
77
|
|
|
$
|
194
|
|
|
$
|
233
|
|
Interest cost
|
|
|
229
|
|
|
|
214
|
|
|
|
685
|
|
|
|
640
|
|
Amortization of prior service cost
|
|
|
(38
|
)
|
|
|
(38
|
)
|
|
|
(114
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
255
|
|
|
$
|
253
|
|
|
$
|
765
|
|
|
$
|
759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASURMENTS
Effective September 1, 2008, the Company adopted SFAS 157, Fair Value Measurements (SFAS
157), which defines fair value, establishes a framework for its measurement, and expands
disclosures concerning fair value measurements. The Company adopted the provisions of SFAS 157
with respect to financial assets and liabilities. In February 2008, the FASB issued Staff Position
No. 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157
for nonfinancial assets and liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis at least annually. The major categories of
assets and liabilities that are measured at fair value, for which the Company has not applied the
provisions of SFAS 157, are as follows: reporting units measured at fair value in the first step
of a goodwill impairment test under SFAS No. 142 and the initial recognition of asset retirement
obligations. The adoption of SFAS 157 did not have a material impact on the Companys results of
operations, financial position or cash flow, but did result in additional disclosures.
SFAS 157 defines fair value as the price that would be received from selling an asset or paid
to transfer a liability (an exit price) in Penfords principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date.
SFAS 157 also establishes a fair value hierarchy that requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value.
Observable inputs are inputs that reflect the assumptions market participants would use in pricing
the asset or liability developed based on market data obtain from sources outside the reporting
entity. Unobservable inputs are inputs that reflect Penfords own assumptions based on market data
and on assumptions that market participants would use in pricing the asset or liability developed
based on the best information available in the circumstances. The three levels of inputs that may
be used to measure fair value are:
|
|
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the entity has the ability to access at the measurement date.
|
|
|
|
|
Level 2 inputs are other than quoted prices included within Level 1 that are observable
for assets and liabilities such as (1) quoted prices for similar assets or liabilities in
active markets, (2) quoted prices for identical or similar assets or liabilities in markets
that are not active, or (3) inputs that are derived principally or corroborated by
observable market date by correlation or other means.
|
|
|
|
|
Level 3 inputs are unobservable inputs to the valuation methodology for the assets or
liabilities.
|
15
Presented below are the fair values of the Companys financial instruments at May 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
In Active
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Instruments
|
|
Inputs
|
|
Inputs
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
|
|
(in thousands)
|
Current assets (Other Current Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
(1)
|
|
$
|
444
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (Accrued Liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
|
|
|
$
|
1,984
|
|
|
$
|
|
|
|
$
|
1,984
|
|
Foreign currency contracts
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
43
|
|
|
|
|
Total Liabilities
|
|
$
|
|
|
|
$
|
2,027
|
|
|
$
|
|
|
|
$
|
2,027
|
|
|
|
|
|
|
|
(1)
|
|
As allowed by FSP FIN 39-1, Amendment of FASB Interpretation No. 39, commodity derivative assets and
liabilities have been offset by cash collateral due and paid under master netting arrangements. The cash
collateral offset was $3.4 million at May 31, 2009.
|
Derivative Instruments
Effective December 1, 2008, the Company adopted FASB Statement No. 161, Disclosures about
Derivative Instruments and Hedging Activities an amendment of FASB No. 133 (SFAS 161). SFAS
161 requires additional disclosures about the objectives for using derivative instruments and
hedging activities, method of accounting for such instruments under SFAS 133 and its related
interpretations, the effect of derivative instruments and related hedged items on financial
position, results of operations, and cash flows, and a tabular disclosure of the fair values of
derivative instruments and their gains and losses.
Interest Rate Swap Agreements
The Company uses interest rate swaps to manage the variability of interest payments associated
with its floating-rate long-term debt obligations. The interest payable on the long-term debt
effectively becomes fixed at a certain rate and reduces the impact of future interest rate changes
on future interest expense. As of May 31, 2009, the Company had three interest rate swaps which
fixed the interest payable on $24.4 million of long-term debt at 4.18% and on $5.6 million of
long-term debt at 5.08%, plus the applicable margin under the 2007 Agreement, as amended. The
notional amounts, interest rate reset dates, underlying benchmark rates and interest payment dates
match the terms of the long-term debt. The Company has designated the swap agreements as cash flow
hedges and accounts for them pursuant to FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The unrealized losses on the interest rate swaps are included
in accumulated other comprehensive income (loss). The periodic settlements on the swaps are
recorded as interest expense.
Foreign Currency Contracts
The Companys Food Ingredients North America business purchases certain raw materials in a
foreign currency, the Czech koruna (CZK), the monetary unit of the Czech Republic. In order to
manage the variability in forecasted cash flows due to the foreign currency risk associated with
settlement of accounts payable denominated in CZK, the Company purchases foreign currency forward
contracts. The Company has designated these contracts as cash flow hedges and accounts for them
pursuant to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
To the extent the amounts and timing of the forecasted cash flows and the forward contracts
continue to match, the unrealized losses on the foreign currency purchase contracts are included in
accumulated other comprehensive income (loss). The gain or loss on the contracts is recorded in
cost of sales at the time the inventory is sold. At May 31, 2009, the Company had contracts to
purchase CZK 18,008,946 at various dates between June and August 2009 at a weighted average
exchange rate of 18.24 CZK per U.S. dollar.
Commodity Contracts
The Company uses forward contracts and readily marketable exchange-traded futures on corn and
natural gas to manage the price risk of those inputs to its manufacturing process. The Company has
designated these instruments
16
as hedges and accounts for them pursuant to FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities.
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 and/or inventory
are recognized in current earnings as a component of cost of sales. For derivative instruments
designated as cash flow hedges, the effective portion of the gain or loss on the derivative
instruments is reported as a component of other comprehensive income, net of applicable income
taxes, and recognized in earnings when the hedged exposure affects earnings. The Company recognizes
the gain or loss on the derivative instrument as a component of cost of sales in the period when
the finished goods produced from the hedged item are sold. If it is determined that the derivative
instruments used are no longer effective at offsetting changes in the price of the hedged item,
then the changes in market value would be recognized in current earnings as a component of cost of
good sold or interest expense.
To reduce the price volatility of corn used in fulfilling some of its starch sales contracts,
Penford from time to time uses readily marketable exchange-traded futures as well as forward cash
corn purchases. The exchange-traded futures are not purchased or sold for trading or speculative
purposes and are designated as hedges. The changes in 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
and firm corn purchase contracts. Hedged transactions are expected to occur within 12 months of
the time the hedge is established.
As of May 31, 2009, the Company had the following outstanding forward contracts, futures
contracts and interest rate swaps:
|
|
|
|
|
|
|
Corn Futures
|
|
2,460,000 Bushels
|
|
|
Natural Gas Futures
|
|
610,000 mmbtu (millions of British thermal units)
|
|
|
Interest Rate Swap Contracts
|
|
30,000,000 US Dollars (notional Amount)
|
|
|
Foreign Exchange Contracts
|
|
18,008,946 CZK
|
The fair values of the Companys financial assets, liabilities, and statement of derivative
positions in the scope of SFAS 161 as of May 31, 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments
|
|
|
|
as of the Quarter Ended May 31, 2009
|
|
|
|
(in thousands)
|
|
|
|
2009 Asset Derivatives
|
|
|
2009 Liability Derivatives
|
|
Derivatives Designated as Hedging
|
|
Balance Sheet
|
|
|
|
|
|
Balance Sheet
|
|
|
|
Instruments under SFAS 133
|
|
Location
|
|
Fair Value
|
|
|
Location
|
|
Fair Value
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures
|
|
Other Current Assets
|
|
$
|
246
|
|
|
Other Current Assets
|
|
$
|
(719
|
)
|
Natural Gas Futures
|
|
Other Current Assets
|
|
|
|
|
|
Other Current Assets
|
|
|
(3,308
|
)
|
Interest Rate Contracts
|
|
Other Current Assets
|
|
|
|
|
|
Accrued Liabilities
|
|
|
(1,984
|
)
|
Foreign Exchange Contracts
|
|
Other Current Assets
|
|
|
|
|
|
Accrued Liabilities
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash Flow Hedges
|
|
|
|
|
246
|
|
|
|
|
|
(6,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Va
l
ue Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures
|
|
Other Current Assets
|
|
|
418
|
|
|
Other Current Assets
|
|
|
(777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value Hedges
|
|
|
|
|
418
|
|
|
|
|
|
(777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
Designated as Hedging
Instruments under SFAS
133
|
|
|
|
$
|
664
|
|
|
|
|
$
|
(6,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Derivative Instruments on the Statement of Financial Performance
|
|
|
|
for the Quarter Ended May 31, 2009
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Location of Gain or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Reclassified
|
|
|
|
|
|
Location of Gain or (Loss)
|
|
Amount of Gain or
|
|
|
|
|
|
|
|
from Accum OCI into
|
|
Amount of Gain or
|
|
|
Recognized in Income on
|
|
(Loss) Recognized
|
|
|
|
Amount of Gain or
|
|
|
Income
|
|
(Loss) Reclassified
|
|
|
Derivative (Ineffective
|
|
in Income on
|
|
|
|
(Loss)
|
|
|
(Effective Portion)
|
|
from Accum OCI into
|
|
|
Portion)
|
|
Derivative
|
|
Derivatives in SFAS 133 Cash
|
|
Recognized in OCI
|
|
|
Income Statement
|
|
Income (Effective
|
|
|
Income Statement
|
|
(Ineffective
|
|
Flow Hedging Relationships
|
|
(Effective Portion)
|
|
|
Location
|
|
Portion)
|
|
|
Location
|
|
Portion)
|
|
Cash Flow Hedging
Relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures
|
|
$
|
72
|
|
|
Cost of sales
|
|
$
|
(1,401
|
)
|
|
Cost of sales
|
|
$
|
48
|
|
Natural Gas Futures
|
|
|
(3,308
|
)
|
|
Cost of sales
|
|
|
(2,418
|
)
|
|
Cost of sales
|
|
|
|
|
Interest Rate Contracts
|
|
|
(1,984
|
)
|
|
Interest expense
|
|
|
(223
|
)
|
|
Interest Expense
|
|
|
|
|
Foreign Exchange Contracts
|
|
|
(66
|
)
|
|
Cost of sales
|
|
|
(26
|
)
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(5,286
|
)
|
|
|
|
$
|
(4,068
|
)
|
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Derivative Instruments on the Statement of Financial Performance
|
|
|
|
for the Quarter Ended May 31, 2009
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
|
Location of Gain /
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss)
|
|
|
Location of
|
|
|
|
(Loss) Recognized
|
|
|
Amount of Gain
|
|
|
|
|
|
|
Recognized in
|
|
|
Gain/(Loss)
|
|
|
|
in Income on
|
|
|
/ (Loss)
|
|
|
Hedged Item in
|
|
|
Income on Related
|
|
|
Recognized in
|
|
|
|
Derivative
|
|
|
Recognized in
|
|
|
SFAS 133 Fair
|
|
|
Hedged Item
|
|
|
Income on
|
|
Derivatives in SFAS 133 Fair
|
|
Income Statement
|
|
|
Income on
|
|
|
Value Hedge
|
|
|
Income Statement
|
|
|
Related Hedged
|
|
Value Hedging Relationships
|
|
Location
|
|
|
Derivative
|
|
|
Relationships
|
|
|
Location
|
|
|
Item
|
|
Fair Value Hedge
Relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn Futures
|
|
Cost of sales
|
|
|
|
|
|
Firm Commitments/Inventory
|
|
Cost of sales
|
|
$
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
328
|
|
15RESTRUCTURING COSTS
In the first quarter of fiscal 2008, in connection with reconfiguring the Companys Australian
business, a workforce reduction was implemented in the Companys two Australian operating
facilities. In connection therewith, $1.2 million in employee severance costs and related benefits
were charged to operating income in the first quarter. In the second quarter of fiscal 2008, the
Companys Australian business recorded a restructuring charge of $0.1 million related to a
workforce reduction implemented at its New Zealand operations. These costs are shown as
Restructure Costs in the statement of operations.
16SEGMENT REPORTING
Financial information for the Companys three segments is presented below. The first two
segments, Industrial IngredientsNorth America and Food IngredientsNorth America, are broad
categories of end-market users, primarily served by the Companys U.S. operations. The Industrial
Ingredients segment provides carbohydrate-based products for industrial applications, primarily in
the paper and packaging products and fuel grade ethanol industries. The Food Ingredients segment
produces specialty starches for food applications. The third segment is the Companys
geographically separate operations in Australia and New Zealand, which are engaged primarily in the
food ingredients business. A fourth item for corporate and other activity is presented to
provide reconciliation to amounts reported in the condensed 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 elimination and consolidation entries. The elimination of intercompany sales between
Australia/New Zealand operations and Food IngredientsNorth America is presented separately since
the chief operating decision maker views segment results prior to intercompany eliminations.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial IngredientsNorth America
|
|
$
|
44,671
|
|
|
$
|
60,861
|
|
|
$
|
133,828
|
|
|
$
|
159,147
|
|
Food IngredientsNorth America
|
|
|
16,606
|
|
|
|
17,139
|
|
|
|
50,971
|
|
|
|
48,857
|
|
Australia/New Zealand Operations
|
|
|
17,613
|
|
|
|
25,096
|
|
|
|
55,041
|
|
|
|
78,498
|
|
Intercompany sales
|
|
|
(167
|
)
|
|
|
(297
|
)
|
|
|
(618
|
)
|
|
|
(953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
78,723
|
|
|
$
|
102,799
|
|
|
$
|
239,222
|
|
|
$
|
285,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial IngredientsNorth America
|
|
$
|
(7,047
|
)
|
|
$
|
5,094
|
|
|
$
|
(11,899
|
)
|
|
$
|
15,358
|
|
Food IngredientsNorth America
|
|
|
3,365
|
|
|
|
2,830
|
|
|
|
9,576
|
|
|
|
7,689
|
|
Australia/New Zealand Operations
|
|
|
(3,113
|
)
|
|
|
(874
|
)
|
|
|
(21,433
|
)
|
|
|
(2,994
|
)
|
Corporate and other
|
|
|
(2,396
|
)
|
|
|
(2,220
|
)
|
|
|
(7,598
|
)
|
|
|
(6,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(9,191
|
)
|
|
$
|
4,830
|
|
|
$
|
(31,354
|
)
|
|
$
|
13,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter of fiscal 2009, the Company recorded a $13.8 million non-cash goodwill
impairment charge related to its Australian/New Zealand Operations. See Note 4 for further
details.
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
August 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Industrial IngredientsNorth America
|
|
$
|
136,836
|
|
|
$
|
141,618
|
|
Food IngredientsNorth America
|
|
|
31,961
|
|
|
|
35,100
|
|
Australia/New Zealand Operations
|
|
|
83,477
|
|
|
|
111,255
|
|
Corporate and other
|
|
|
36,399
|
|
|
|
32,460
|
|
|
|
|
|
|
|
|
|
|
$
|
288,673
|
|
|
$
|
320,433
|
|
|
|
|
|
|
|
|
17EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share reflect only the weighted average common shares outstanding
during the period. Diluted earnings (loss) per share reflect weighted average common shares
outstanding and the effect of any dilutive common stock equivalent shares
.
Diluted earnings
(loss) per share is calculated by dividing net income (loss) by the average common shares
outstanding plus additional common shares that would have been outstanding assuming the exercise
of in-the-money stock options, using the treasury stock method. The following table presents the
computation of diluted weighted average shares outstanding for the three and nine months ended May
31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Weighted average common shares outstanding
|
|
|
11,176
|
|
|
|
11,129
|
|
|
|
11,169
|
|
|
|
10,371
|
|
Dilutive stock options and awards
|
|
|
|
|
|
|
317
|
|
|
|
|
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding,
assuming dilution
|
|
|
11,176
|
|
|
|
11,446
|
|
|
|
11,169
|
|
|
|
10,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended May 31, 2009, there were 89,582 and 91,301
weighted-average restricted stock awards excluded from the calculation of diluted earnings (loss)
per share because they were antidilutive. Weighted-average restricted stock awards of 5,467 and
3,033 shares for the three and nine months ended May 31, 2008, were excluded from the calculation
of diluted earnings per share because they were antidilutive. Weighted-average stock options to
purchase 1,370,023 and 1,374,031 shares of common stock for the three and nine months ended May
31, 2009, were excluded from the calculation of diluted earnings (loss) per share because they
were
19
antidilutive. Weighted-average stock options to purchase 6,739 and 2,263 shares of common
stock for the three and nine months ended May 31, 2008, were excluded from the calculation of
diluted earnings (loss) per share because they were antidilutive.
18LEGAL PROCEEDINGS
On January 23, 2009 the Company filed suit in the U. S. District Court for the Northern
District of Iowa, Cedar Rapids Division, against two insurance companies, National Union Fire
Insurance Company of Pittsburgh, Pennsylvania and ACE American Insurance Company, related to
insurance coverage arising out of the flood that struck the Companys Cedar Rapids, Iowa plant in
June 2008. The Company seeks additional payments from the insurers of more than $30 million for
property damage, time element and various other exposures due to costs and losses incurred as a
result of the flood. The Company cannot at this time determine the likelihood of any outcome or
estimate any damages that might be awarded.
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.
19GUARANTEE
In the second quarter of fiscal 2009, Penford Corporation entered into an agreement with a
supplier of grain to the Companys subsidiary company, Penford New Zealand Limited. Pursuant to
this agreement, the Company has guaranteed the trade payable obligations of Penford New Zealand
arising from the purchase of grain from this supplier up to a limit of 9.0 million New Zealand
Dollars or the New Zealand Dollar equivalent of $5.0 million U.S. Dollars, whichever is less. The
guarantee continues for the period during which the supplier sells grain to Penford New Zealand.
As of May 31, 2009, the outstanding payable balance related to this guarantee is 8.9 million New
Zealand Dollars. This outstanding balance is included in accounts payable in the Condensed
Consolidated Balance Sheet.
20SUBSEQUENT EVENT
On July 9, 2009, the Company and its lenders under the 2007 Agreement executed a third
amendment to the 2007 Agreement (the Third Amendment). The Third Amendment, among other things,
amends financial covenants effective as of May 31, 2009, reduces the amounts which the Company may
borrow under the various facilities available under the 2007 Agreement, shortens the maturity dates
on borrowed funds, increases applicable interest rates, eliminates the Companys ability to declare
dividends on its stock, and adjusts the amortization schedule and provisions regulating mandatory
prepayments, additional indebtedness, subsidiary company support, and reporting requirements. See
Note 20 for further information regarding the Third Amendment. The summary description of the
Third Amendment is qualified in its entirety by reference to the Third Amendment, which is filed as
Exhibit 10.1 to this report.
The Third Amendment adjusts the final maturity date of the term loan available under the 2007
Agreement to December 15, 2009, and the maturity date of the revolver and the capital expansion
loans to November 30, 2010. Beginning on September 30, 2009, the Company must repay the capital
expansion loans in quarterly installments of $1.0 million through December 31, 2009, and $2.0
million thereafter. In addition to the quarterly installments on the capital expansion loan, a
one-time payment of $9.625 million is due on December 15, 2009. Any remaining amount due on the
capital expansion loans and revolver is due at final maturity.
The Third Amendment adjusts the financial covenants in the 2007 Agreement, as amended,
effective May 31, 2009. The Company must maintain a minimum EBITDA (as defined in the Third
Amendment), tangible net worth and fixed charge coverage ratio each fiscal quarter in accordance
with the revisions contained in the Third Amendment. The Third Amendment also provides that the
Company may not declare or pay dividends on, or make any other distributions in respect of, its
common stock. Annual capital expenditures are limited to $8 million. The availability on the $60
million revolver facility is limited to $52.5 million unless the Company obtains the approval of
the lenders holding more than 50% of the U.S. Dollar equivalent of the sum of the total borrowing
and unused commitments under the 2007 Agreement.
20
In connection with the Third Amendment, the Company paid additional arrangement and commitment
fees to its lenders of $1.0 million. The amortization of these and existing deferred loan fees
over the shortened maturity of the Companys debt will increase annual interest expense by an
estimated $1.1 million. The Third Amendment increases the maximum commitment fee for undrawn
balances by 25 basis points and the maximum LIBOR margin payable on outstanding debt by 150 basis
points to 5.00%. The incremental annual interest expense from these pricing changes and the
revised amortization schedule is estimated at $1.2 million.
Accordingly, the Companys current and long-term debt obligations at May 31, 2009 have been
reclassified in accordance with the repayment terms of the Third Amendment. Based on the revised
scheduled payments and maturities of debt existing at May 31, 2009, the maturities of long-term
debt for the fiscal years beginning with the year ending August 31, 2009 are as follows (dollars in
thousands):
|
|
|
|
|
2009
|
|
$
|
5,793
|
|
2010
|
|
|
21,241
|
|
2011
|
|
|
69,930
|
|
2012
|
|
|
232
|
|
2013
|
|
|
237
|
|
|
|
|
|
|
|
$
|
97,433
|
|
|
|
|
|
21
Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
This Quarterly Report on
Form 10-Q
(Quarterly Report), including, but not limited, to
statements found in the Notes to Consolidated Financial Statements and in Item 2 Managements
Discussion and Analysis of Financial Condition and Results of Operations, contains statements that
are forward-looking statements within the meaning of the federal securities laws. In particular,
statements pertaining to anticipated operations and business strategies contain forward-looking
statements. Likewise, statements regarding anticipated changes in the Companys business and
anticipated market conditions are forward-looking statements. Forward-looking statements involve
numerous risks and uncertainties and should not be relied upon as predictions of future events.
Forward-looking statements depend on assumptions, dates or methods that may be incorrect or
imprecise, and the Company may not be able to realize them. Forward-looking statements can be
identified by the use of forward-looking terminology such as believes, expects, may, will,
should, seeks, approximately, intends, plans, estimates, or anticipates, or the
negative use of these words and phrases or similar words or phrases. Forward-looking statements
can be identified by discussions of strategy, plans or intentions. Among the factors that could
cause actual results to differ materially are the risks and uncertainties discussed in this
Quarterly Report, including those referenced in Item 1A in this Quarterly Report, and those
described from time to time in other filings with the Securities and Exchange Commission, including
the Companys Annual Report on
Form 10-K
for the year ended August 31, 2008, which include, but
are not limited to:
|
§
|
|
competition;
|
|
|
§
|
|
the possibility of interruption of business activities due to equipment problems,
accidents, strikes, weather or other factors;
|
|
|
§
|
|
product development risk;
|
|
|
§
|
|
changes in corn and other raw material prices and availability;
|
|
|
§
|
|
the amount and timing of expenditures for flood restoration costs and related
insurance recoveries;
|
|
|
§
|
|
changes in general economic conditions or developments with respect to specific
industries or customers affecting demand for the Companys products including
unfavorable shifts in product mix;
|
|
|
§
|
|
unanticipated costs, expenses or third-party claims;
|
|
|
§
|
|
the risk that results may be affected by construction delays, cost overruns,
technical difficulties, nonperformance by contractors or changes in capital improvement
project requirements or specifications;
|
|
|
§
|
|
interest rate, chemical and energy cost volatility;
|
|
|
§
|
|
foreign currency exchange rate fluctuations;
|
|
|
§
|
|
changes in returns on pension plan assets and/or assumptions used for determining
employee benefit expense and obligations;
|
|
|
§
|
|
other unforeseen developments in the industries in which Penford operates,
|
|
|
§
|
|
the Companys ability to successfully operate under and comply with the terms of the
Second Amended and Restated Credit Agreement, as amended; or
|
|
|
§
|
|
other factors described in Part I, Item 1A Risk Factors.
|
Overview
Penford generates revenues, income and cash flows by developing, manufacturing and marketing
specialty natural-based ingredient systems for industrial and food applications, including fuel
grade ethanol. The Company develops and
22
manufactures ingredients with starch as a base, providing value-added applications to its
customers. Penfords starch products are manufactured primarily from corn, potatoes, and wheat.
In analyzing business trends, management considers a variety of performance and financial
measures, including sales revenue growth, sales volume growth, gross margins and operating income
of the Companys business segments. Penford manages its business in three segments. The first
two, Industrial IngredientsNorth America and Food IngredientsNorth 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 Notes 1 and 16 to the Condensed Consolidated Financial
Statements for additional information regarding the Companys business segment operations.
Impact of Cedar Rapids Flood
On June 12, 2008, the Companys Industrial Ingredients North America plant in Cedar Rapids,
Iowa was temporarily shut down due to record flooding of the Cedar River and government-ordered
mandatory evacuation of the plant and surrounding areas. By the end of the first quarter of fiscal
2009, the facilitys processing rate had reached pre-flood levels.
During the third quarter of fiscal 2009, the Company recorded $0.2 million of flood
restoration costs which are recognized, net of insurance recoveries of $1.2 million, in loss from
operations in the financial statements. For the nine months ended May 31, 2009, the Company
recorded $7.6 million of flood restoration costs which are recognized, net of insurance recoveries
of $16.7 million, in loss from operations in the financial statements. The total direct costs of
the flood since June 2008 were $45.6 million, which included ongoing expenses during the time the
plant was shut down, but did not include lost profits. See Note 3 to the Condensed Consolidated
Financial Statements for details of the restoration costs.
During the third quarter of fiscal 2009, the Company recognized $1.2 million of insurance
recoveries. The Company received $1.2 million subsequent to May 31, 2009 which has been recorded
as a receivable at that date. These recoveries have been recorded as an offset to the losses
caused by the flooding. The insurance recoveries recognized to date total $27.2 million. In
January 2009, the Company filed suit against certain insurers to recover insurance proceeds related
to the flood. See Note 18 to the Condensed Consolidated Financial Statements.
The effect of the flood on the financial results of the Company on a quarter-to-quarter basis
in fiscal 2009 and 2010 will depend on the timing and amount of insurance recoveries, which the
Company is currently unable to estimate. The amount ultimately recovered from the Companys
insurers may be materially more or less than the Companys direct costs of the flood.
Goodwill
During the second quarter of fiscal 2009, the Company continued to experience a worsening
demand outlook, a decline in its sales and operating income, as well as a reduction in its expected
future cash flows. In addition, Penford experienced a sustained, significant decline in its stock
price. During the second quarter of fiscal 2009, the Company concluded that there were sufficient
indicators to perform an interim goodwill impairment analysis in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets. Based on the analysis, the Company recorded a $13.8
million non-cash goodwill impairment charge, which represented all of the goodwill allocated to its
Australia/New Zealand Operations segment. See Note 4 to the Condensed Consolidated Financial
Statements.
Accounting Changes
Effective September 1, 2008, the Company adopted FASB Statement No. 157, Fair Value
Measurements (SFAS 157), for financial assets and liabilities carried at fair value that are
recognized or disclosed at fair value in the financial statements on a recurring basis. 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. The adoption did not
have a material impact on the Companys financial statements. See Note 14 to the Condensed
Consolidated Financial Statements. Due to the issuance of FASB Staff Position No. 157-2 (FSP
157-2), the effective date of SFAS 157 has been deferred to fiscal years beginning after November
15, 2008 (fiscal 2010 for the Company) for non-recurring, nonfinancial assets and liabilities that
are recognized or disclosed at fair value. The Company is continuing to evaluate
23
the impact of adopting these provisions in fiscal 2010. In October 2008, the FASB issued FSP
FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active (FSP 157-3). FSP 157-3 clarifies the application of SFAS 157 and addresses how the fair
value of a financial asset is determined when the market for that financial asset is inactive. FSP
157-3 was effective upon issuance. The implementation of this standard did not have an impact on
the Companys 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) which
allows companies the option to measure certain financial assets and financial liabilities at fair
value at specified election dates. The Company adopted SFAS 159 and elected not to measure any
additional financial instruments and other items at fair value.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB No. 133 (SFAS 161). SFAS 161 requires additional
disclosures about the objectives for using derivative instruments and hedging activities, the
method of accounting for such instruments under SFAS 133 and its related interpretations, the
effect of derivative instruments and related hedged items on financial position, results of
operations, and cash flows, and a tabular disclosure of the fair values of derivative instruments
and their gains and losses. Effective December 1, 2008, the Company adopted SFAS 161. See Note 14
to the Condensed Consolidated Financial Statements.
Results of Operations
Executive Overview
Consolidated sales for the three months ended May 31, 2009 declined 23.4% to $78.7 million
from $102.8 million in the third quarter of fiscal 2008, primarily due to a significant decline in
the demand for paper and writing products, a shift in the manufacturing mix in the Industrial
Ingredients North America business to produce ethanol which sells at lower average prices than
industrial starches, lower volumes in the Food Ingredients North America business, and lower
foreign currency exchange rates in the Australia/New Zealand operations. These factors were
partially offset by favorable unit pricing in the Food Ingredients North America segment.
Consolidated third quarter gross margin declined $17.0 million to a loss of $1.5 million, primarily
due to a decline in ethanol and starch selling prices and an unfavorable product mix of industrial
starches and ethanol which caused a gross margin loss at the Industrial Ingredients North America
segment, as well as lower plant utilization in the Australia/New Zealand business. Loss from
operations was $9.2 million, $14.0 million lower than the third quarter operating income of $4.8
million for fiscal 2008 due to gross margin declines partially offset by a decrease in operating
and research and development expenses of $1.9 million and net insurance recoveries of $1.1 million.
Consolidated sales for the nine months ended May 31, 2009 decreased 16.2% to $239.2 million
from $285.5 million in the same period last year on lower foreign currency exchange rates and a
decline in sales volumes in the Australia/New Zealand Operations, and, in the Industrial
Ingredients North America business, on lower average unit selling prices for ethanol than for
industrial starches as well as declines in average unit selling prices for industrial starches.
These factors were partially offset by higher average unit pricing in the Australia/New Zealand and
Food Ingredients North America businesses. Gross margin was a loss of $0.2 million compared to
income of $43.3 million for the same period last year, on revenue declines in the Industrial
Ingredients North America and Australia/New Zealand segments, lower production yields and higher
chemical costs in the Industrial Ingredients North America unit, and higher grain costs and lower
plant utilization in the Australia/New Zealand business. Operating loss for the nine months ended
May 31, 2009 was $31.4 million compared to operating income of $13.3 million for the same period
last year due to decreased gross margins and a $13.8 million non-cash goodwill impairment charge
related to its Australian and New Zealand business segment. See Note 4 to the Condensed
Consolidated Financial Statements. Included in operations for the nine-month period ended May 31,
2009 were net insurance recoveries of $9.1 million. See Note 3 to the Condensed Consolidated
Financial Statements. Operating income for the first nine months of fiscal 2008 included $1.4
million of severance costs related to reconfiguring the Australia/New Zealand business. See Note
15 to the Condensed Consolidated Financial Statements. A discussion of segment results of
operations and the effective tax rate follows.
24
Industrial IngredientsNorth America
In the second and third quarters of fiscal 2009, U.S. economic activity contracted
significantly and demand for our customers paper and packaging products declined sharply. The
paper industry balanced manufacturing capacity with decreased demand by taking downtime or permanently closing mills and operating rates at paper
mills decreased. Declines in the prices for gasoline and other fuels have also depressed prices
for ethanol.
Third quarter fiscal 2009 sales at the Companys Industrial IngredientsNorth America business
unit declined $16.2 million, or 26.6%, to $44.7 million. Average unit selling prices declined 29%
primarily due to the lower unit selling prices of ethanol compared to industrial starch products
and the increase in ethanol production over the prior year. Sales of ethanol, which the Company
began producing in the third quarter of fiscal 2008, were $14.8 million in the third quarter of
fiscal 2009. Sales for the nine months ended May 31, 2009 decreased 15.9% to $133.8 million as a 2%
increase in volume was not able to offset average unit pricing declines. Sales of ethanol were
$38.7 million for the first nine months of fiscal 2009, compared to $4.7 million for the same
period in fiscal 2008. Ethanol production in fiscal 2008 began in May 2008.
Income from operations for the third quarter of fiscal 2009 at the Companys Industrial
IngredientsNorth America business unit decreased from $5.1 million a year ago to an operating loss
of $7.0 million in fiscal 2009. Third quarter fiscal 2009 gross margin was a loss of $5.6 million
compared to positive margin of $9.4 million for the third quarter of fiscal 2008. Unit margins on
ethanol are lower than industrial starch and the decline in ethanol selling prices as well as the
unfavorable mix in revenues decreased gross margin for the industrial business. Margin and
operating losses of $12.8 million and $11.9 million, respectively, for the nine months ended May
31, 2009 were also driven by the increase in lower margin ethanol sales and the reduction in starch
average unit pricing. See Note 3 to the Condensed Consolidated Financial Statements for a
discussion of the insurance recoveries and costs associated with the flooding in the summer of
2008. These costs and recoveries were included in income from operations. The Company recorded
net insurance recoveries of $1.1 million and $9.1 million for the three and nine months ended May
31, 2009, respectively.
Food IngredientsNorth America
Fiscal 2009 third quarter sales for the Food IngredientsNorth America segment of $16.6
million decreased 3.1%, or $0.5 million, from the third quarter of fiscal 2008, due to 16% lower
volume partially offset by higher average unit pricing of 15.6% and improved product mix. Lower
volume and sales for the quarter ended May 31, 2009 were partially due to the sale of the dextrose
product line in the second quarter of fiscal 2009. Third quarter dextrose sales last year were
$1.2 million. Sales of applications to the coatings, dairy and pet treats end markets improved by
double digit rates. Sales for the nine months ended May 31, 2009 rose 4.3%, or $2.1 million, to
$51.0 million over the same period last year. Sales growth was driven by improvements in unit
pricing, partially offset by a decline in volume. Sales of dextrose applications were $1.9 million
and $3.0 million, respectively, for the nine months ended May 31, 2009 and 2008.
Income from operations for the third quarter of fiscal 2009 at the Food IngredientsNorth
America segment was $3.4 million, a 19% increase over the same period last year. Third quarter
gross margin improved 13.5% to $5.6 million on favorable pricing and product mix, partially offset
by lower volumes and higher raw material costs. Income from operations for the first nine months
of fiscal 2009 improved to $9.6 million, a $1.9 million increase compared to the same period of
fiscal 2008. Gross margin increased by $2.0 million, and gross margin as a percent of sales
increased by 290 basis points over last years period on improved average unit pricing, partially
offset by lower volumes. Operating expenses and research activities increased over the same period
last year as higher employee-related costs were offset by lower expenditures for product trials.
In the second quarter of fiscal 2009, the Companys Food Ingredients North America business
segment sold assets related to its dextrose product line to a third-party purchaser for $2.9
million, net of transaction costs. The Company recorded a $1.6 million gain on the sale, reflected
in Non-operating income, net in the statement of operations.
Australia/New Zealand Operations
Sales at the Australia/New Zealand operations declined 29.8%, or $7.5 million, in the third
quarter of fiscal 2009 over the same period of fiscal 2008 primarily due to the decline in the
foreign currency exchange rates compared to the U.S. dollar. A sales volume decline of 3% and an
unfavorable product mix also contributed to the decline in third quarter revenues. Third quarter
sales in local currency declined by 7.9% over the same quarter of fiscal 2008 and average unit
pricing in local currency decreased 5.5%. Sales for the nine months ended May 31, 2009 decreased 29.9%
25
to $55.0 million from $78.5 million last year, primarily due to a 22% decrease in the average
foreign currency exchange rates and a 14% decline in sales volumes, partially offset by higher
average unit pricing. Year-to-date sales in local currency decreased 10.2% and average unit
pricing increased 4.2% in local currency.
Fiscal 2009 third quarter loss from operations at the Companys Australia/New Zealand
operations was $3.1 million compared to an operating loss of $0.9 million in the same period of
fiscal 2008. Third quarter fiscal 2009 gross margin declined by $2.7 million to a loss of $1.5
million. Grain costs in the quarter were $1.2 million higher than a year ago as the drought
premium charged for grain continued. Unit manufacturing costs rose on lower manufacturing
throughput due to product rationalization as well as increases in chemical, packaging and utility
costs. Operating loss for the nine months ended May 31, 2009 was $21.4 million, compared to an
operating loss of $3.0 million for the same period last year. In the second quarter of fiscal
2009, the Company recorded a $13.8 million non-cash goodwill impairment charge. See Note 4 to the
Condensed Consolidated Financial Statements. Year-to-date 2009 gross margin declined $7.4 million
from last year, from positive margin of $4.3 million to a loss of $3.1 million as raw material
grain costs rose $6.7 million and unit manufacturing costs rose $4.1 million. Favorable average
unit pricing of $3.0 million partially offset the increased input and production costs. Operating
and research and development expenses for the nine months ended May 31, 2009 decreased $1.4 million
over the same period a year ago due to the decrease in average foreign currency exchange rates.
Included in the segments operating loss for the first nine months of fiscal 2008 were
restructuring costs of $1.4 million. See Note 15 to the Condensed Consolidated Financial
Statements.
Corporate operating expenses
Corporate operating expenses for the third quarter of fiscal 2009 were $2.4 million, a $0.2
million increase compared to the same quarter last year, primarily due to professional fees. For
the nine months ended May 31, 2009, corporate operating expenses increased $0.8 million to $7.6
million over the same period a year ago due to an increase in professional fees and
employee-related costs.
Interest expense
Interest expense for the three and nine months ended May 31 2009 increased $0.8 million and
$1.8 million, respectively, compared to the same periods last year due to higher average debt
balances. In addition, interest costs related to construction of the ethanol manufacturing plant
were capitalized until May 2008, when the facility began commercial production. Interest costs
capitalized were $0.3 million and $1.1 million for the three and nine months ended May 31, 2008.
In connection with the Third Amendment to the 2007 Agreement, the Company paid additional
arrangement and commitment fees to its lenders of $1.0 million. The amortization of these and
existing deferred loan fees over the shortened maturity of the debt will increase annual interest
expense by an estimated $1.1 million. The Third Amendment increased the maximum commitment fee for
undrawn balances by 25 basis points and the maximum LIBOR margin payable on outstanding debt by 150
basis points to 5.00%. The incremental annual interest expense from these pricing changes and the
revised amortization schedule is estimated at $1.2 million. See Notes 8 and 20 to the Condensed
Consolidated Financial Statements.
Income taxes
The Companys Australian operations reported a tax loss for fiscal 2008 and for the first nine
months of fiscal 2009. Australian tax law provides for an unlimited carryforward period for net
operating losses but does not allow losses to be carried back to previous tax years. Due to the
uncertainty related to generating sufficient future taxable income in Australia, the Company
currently believes that it is more likely than not that the net deferred tax benefit will not be
realized. In the second quarter of fiscal 2009 the Company recorded a $2.1 million valuation
allowance against the entire Australian net deferred tax asset. An additional valuation allowance
of $1.0 million was recorded in the third quarter of fiscal 2009. A valuation allowance has not
been recognized on the net U.S. deferred tax asset as there is sufficient taxable income in
carryback years to realize the net deferred tax asset.
The Companys effective tax rates for the three- and nine-month periods ended May 31, 2009
were 25.0% and 9.7%, respectively. The difference between the effective tax rate and the U.S.
federal statutory rate for the quarter ended May 31, 2009 is due to the favorable tax benefit of
the research and development tax credit and a $0.2 million reduction in the amount of unrecognized
tax benefits due to the lapse of applicable statutes of limitation offset by an increase in the
26
Australian valuation allowance. The reduction in the effective tax rate from the U.S. federal
statutory rate for the nine months ended May 31, 2009 is primarily due to (1) a $3.1 million
valuation allowance recognized against the Australian net deferred tax assets as discussed above,
and (2) no recognition of a tax benefit in connection with the Australian goodwill impairment charge of $13.8 million as this charge is not deductible for tax purposes,
and (3) an increase of $0.4 million in the amount of unrecognized tax benefits.
The amount of unrecognized tax benefits determined in accordance with Financial Interpretation
No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN 48), decreased by $0.2 million in the quarter ended May 31, 2009 as discussed above, and
increased by $0.4 million for the nine months ended May 31, 2009. The total amount of unrecognized
tax benefits at May 31, 2009 was $1.3 million, all of which, if recognized, would favorably impact
the effective tax rate. A state tax audit of the Companys fiscal 2004 to 2006 tax returns was
completed in the third quarter of fiscal 2009 with immaterial adjustments to the Companys taxable
income. The Company has been notified by one state taxing jurisdiction that an audit of the
Companys 2005 to 2008 tax returns will begin in the fourth quarter of fiscal 2009. None of the
Companys other income tax returns are under examination by taxing authorities. The Company does
not believe that the total amount of unrecognized tax benefits at May 31, 2009 will change
materially in the next 12 months.
On a quarterly basis, the Company reviews its estimate of the effective income tax rate
expected to be applicable for the full fiscal year. This rate is used to calculate income tax
expense or benefit on current year-to-date pre-tax income or loss. Income tax expense or benefit
for the current interim period is the difference between the computed year-to-date income tax
amount and the tax expense or benefit reported for previous quarters. In reviewing its effective
tax rate, the Company uses estimates of the amounts of permanent differences between book and tax
accounting and projections of fiscal year pre-tax income or loss. Adjustments to the Companys
tax expense related to the prior fiscal year, amounts recorded in accordance with FIN 48, changes
in tax rates, and the effect of a change in the beginning-of-the-year valuation allowance are
treated as discrete items and are recorded in the period in which they arise.
The determination of the annual effective tax rate applied to current year income or loss
before income tax is based upon a number of estimates and judgments, including the estimated annual
pretax income of the Company in each tax jurisdiction and the amounts of permanent differences
between the book and tax accounting for various items. The Companys interim tax expense can be
impacted by changes in tax rates or laws, the finalization of tax audits, judgments regarding
uncertain tax positions and other items that cannot be estimated with any certainty. Therefore,
there can be significant volatility in the interim provision for income tax expense.
Non-operating income, net
Non-operating income, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Royalty and licensing income
|
|
$
|
394
|
|
|
$
|
465
|
|
|
$
|
1,181
|
|
|
$
|
1,320
|
|
Gain on sale of dextrose product line
|
|
|
|
|
|
|
|
|
|
|
1,562
|
|
|
|
|
|
Gain (loss) on foreign currency
transactions
|
|
|
443
|
|
|
|
(236
|
)
|
|
|
(198
|
)
|
|
|
208
|
|
Other
|
|
|
77
|
|
|
|
107
|
|
|
|
83
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
914
|
|
|
$
|
336
|
|
|
$
|
2,628
|
|
|
$
|
1,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter of fiscal 2009, the Companys Food Ingredients North America business
segment sold assets related to its dextrose product line to a third-party purchaser for $2.9
million, net of transaction costs. The Company recorded a $1.6 million gain on the sale.
During the three and nine months ended May 31, 2009, the Company recognized a gain (loss) on
foreign currency transactions on Australian dollar denominated assets and liabilities as disclosed
in the table above. See Note 12 to the Condensed Consolidated Financial Statements for information
on the Companys royalty and licensing income.
27
Liquidity and Capital Resources
The Companys primary sources of short- and long-term liquidity are cash flow from operations
and its revolving line of credit, which expires in fiscal 2011. In the first nine months of fiscal
2009, the Company received $16.7 million of insurance proceeds related to the damages sustained in
the flooding in Cedar Rapids, Iowa in June 2008. Costs incurred in the same period associated with the flood recovery were $7.6 million. See the Overview
section of this Part I, Item 2 and Note 3 to the Condensed Consolidated Financial Statements for a
discussion of the impact of the flooding on the Companys liquidity. The Company also sold its
assets related to its dextrose product line in the second quarter of fiscal 2009 for cash proceeds
of $2.9 million.
Penford had working capital of $42.6 million and $38.1 million at May 31, 2009 and August 31,
2008, respectively. Cash used in operations was $21.7 million for the nine months ended May 31,
2009 compared to cash used in operations of $3.2 million for the nine months ended May 31, 2008.
The decline in cash flow from operations is primarily due to a decrease in earnings over the same
period last year and the impact of higher working capital balances. Trade receivables expanded as
the Companys Industrial Ingredients sales recovered after operations were restarted in the first
quarter of fiscal 2009 and accounts payable and accrued liabilities declined during the nine months
ended May 31, 2009 as a result of payments for flood restoration services accrued for in the fourth
quarter of fiscal 2008.
At May 31, 2009, the Company had $44.9 million and $6.4 million outstanding, respectively,
under the revolving credit and term loan portions of its credit facility. In addition, the Company
had $41.7 million outstanding on May 31, 2009 under its capital expansion credit facility related
to the construction of the ethanol facility. During the nine months ended May 31, 2009, debt,
including the effects of foreign currency exchange rates, expanded by $28.9 million to fund flood
restoration costs, operating losses, and other working capital requirements. The Companys ability
to borrow under its $60 million revolving credit facility is subject to the Companys compliance
with, and is limited by, the covenants in the 2007 Agreement, as amended.
In fiscal 2007, the Company entered into the 2007 Agreement. Effective July 8, 2008, the 2007
Agreement was amended to temporarily adjust the calculation of selected covenant formulas for the
costs of flood damage at the Companys Cedar Rapids, Iowa facility and the associated property
damage and business interruption insurance recoveries. On February 26, 2009, the Company entered
into the Second Amendment to the 2007 Agreement, which adjusted certain covenants and other
provisions in the 2007 Agreement to provide additional relief from the financial impact of the
flood at the Companys Cedar Rapids, Iowa facility.
On July 9, 2009, the Company and its lenders under the 2007 Agreement executed a third
amendment to the 2007 Agreement (the Third Amendment). The Third Amendment, among other things,
amends financial covenants effective as of May 31, 2009, reduces the amounts that the Company may
borrow under the various facilities available under the 2007 Agreement, shortens the maturity dates
on borrowed funds, increases applicable interest rates, eliminates the Companys ability to declare
dividends on its stock, and adjusts the amortization schedule and provisions regulating mandatory
prepayments, additional indebtedness, subsidiary company support, and reporting requirements. See
Note 20 to the Condensed Consolidated Financial Statements for further information regarding this
amendment.
The Companys short-term borrowings consist of an Australian variable-rate grain inventory
financing facility with an Australian bank which expires August 31, 2009. The amount outstanding
under this arrangement, which is classified as a current liability on the balance sheet, was $3.5
million at May 31, 2009.
As of May 31, 2009, 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 debt of $24.4 million at 4.18% and $5.6 million at 5.08%, plus the applicable
margin under the 2007 Agreement. At May 31, 2009, the fair value of the interest rate swaps was
recorded in the balance sheet as a liability of $2.0 million.
The Company paid dividends of $2.0 million during the nine months ended May 31, 2009, which
represents a quarterly rate of $0.06 per share. In April 2009, the Board of Directors suspended
payment of dividends. Pursuant to the Third Amendment, the Company may not declare or pay
dividends on, or make any other distributions in respect of, its common stock.
28
Guaranteed Obligations
In the second quarter of fiscal 2009, Penford Corporation entered into an agreement with a
supplier of grain to the Companys subsidiary company, Penford New Zealand Limited. Pursuant to
this agreement, the Company has guaranteed the trade payable obligations of Penford New Zealand
arising from the purchase of grain from this supplier up to a limit of 9.0 million New Zealand
Dollars or the New Zealand Dollar equivalent of $5.0 million U.S. Dollars, whichever is less. The guarantee continues for the period during which the supplier sells
grain to Penford New Zealand. As of May 31, 2009, the outstanding payable balance related to this
guarantee is 8.9 million New Zealand Dollars. This outstanding balance is included in accounts
payable in the Condensed Consolidated Balance Sheet.
Contractual Obligations
The Company is a party to various debt and lease agreements at May 31, 2009 that contractually
commit the Company to pay certain amounts in the future. The Company also has open purchase orders
entered into in the ordinary course of business for raw materials, capital projects and other
items, for which significant terms have been confirmed. As of May 31, 2009, there have been no
material changes in the Companys contractual obligations since August 31, 2008, except for changes
in the obligations for long-term debt and capital leases.
The Companys scheduled debt payments have been revised pursuant to the terms of the Third
Amendment. See Note 20 to the Condensed Consolidated Financial Statements for further information
regarding this amendment.
Pension Contributions
In light of the temporary pension funding relief provided by the Worker, Retiree and Employer
Recovery Act of 2008 (the Act), which was enacted in December 2008, the Company currently
estimates that the minimum funding contributions to its defined benefit pension plans for plan year
2009 (calendar year 2009) will be $2.4 million and that the minimum contributions for 2009 will be
paid as follows: $0.6 million in each of fiscal years 2009 and 2010 and $1.2 million in fiscal year
2011. The amount and timing of contributions will depend on the funding and cost elections allowed
under the Act and selected by the Company.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements at May 31, 2009.
Recent Accounting Pronouncements
In December 2007, the FASB issued Statement No. 141R (revised 2007), Business Combinations
(SFAS 141R) and Statement No. 160, Non-Controlling Interest in Consolidated Financial
Statements, an Amendment of ARB No. 51 (SFAS 160). These new standards establish principles and
requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, liabilities assumed, any non-controlling interests, and goodwill
acquired in a business combination. This statement also establishes disclosure requirements to
enable financial statement users to evaluate the nature and financial effects of the business
combination. The requirements of SFAS 141R and SFAS No. 160 are effective for fiscal years
beginning after December 15, 2008 (fiscal 2010 for the Company), and, except for the presentation
and disclosure requirements of SFAS 160, are to be applied prospectively.
In June 2008, the FASB issued Staff Position FSP Emerging Issues Task Force (EITF) 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether unvested share-based payment
awards that contain rights to nonforfeitable dividends are participating securities prior to
vesting and, therefore, included in the computation of earnings per share. FSP EITF 03-6-1 is
effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company). The
Company is currently evaluating the impact of adopting FSP EITF 03-6-1 on the Companys
consolidated financial statements.
In December 2008, the FASB issued Staff Position No. 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets (FSP 132(R)-1). FSP 132(R)-1 requires additional disclosures
on a prospective basis about assets held in an employers defined benefit pension or other
postretirement plan. FSP 132(R)-1 is effective for fiscal years beginning after December 15, 2008
(fiscal 2010 for the Company). The Company does not expect the adoption of FSP 132(R)-1 to have a
material effect on its consolidated financial statements.
29
In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments (FSP SFAS 107-1 and APB 28-1). This FSP requires additional
disclosures regarding financial instruments for interim reporting periods of publicly traded
companies. This FSP requires that disclosures provide quantitative and qualitative information on
fair value estimates for all financial instruments not measured on the balance sheet at fair value.
This FSP is effective for interim reporting periods ending after June 15, 2009 (fourth quarter
fiscal 2009 for the Company). The adoption of this FSP is not expected to have an effect on the
Companys consolidated financial statements. The Company is currently evaluating the disclosure
requirements of this standard.
In April 2009, the FASB issued FSP SFAS 157-4, Determining the Fair Value When the Volume and
Level of Activity for the Asset or Liability Has Significantly Decreased and Identifying
Transactions That Are Not Orderly (FSP 157-4). FSP 157-4 provides additional guidance on
estimating fair value when the volume and level of activity for an asset or liability have
significantly decreased in relation to normal market activity, as well as additional guidance on
circumstances which may indicate a transaction is not orderly. FSP 157-4 is effective for interim
and annual reporting periods ending after June 15, 2009 (fourth quarter fiscal 2009 for the
Company). The adoption of this FSP is not expected to have a material effect on the Companys
consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before the financial statements are issued. It requires disclosure of the
date through which an entity has evaluated subsequent events and the basis for selecting that date.
SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009 (fourth
quarter fiscal 2009 for the Company). The adoption of this standard will not have an effect on the
Companys consolidated financial statements.
Critical Accounting Policies and Estimates
The Companys consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The process of preparing financial statements
requires management to make estimates, judgments and assumptions that affect the Companys
financial position and results of operations. These estimates, judgments and assumptions are based
on the Companys historical experience and managements knowledge and understanding of the current
facts and circumstances. Note 1 to the Consolidated Financial Statements in the Annual Report on
Form 10-K for the fiscal year ended August 31, 2008 describes the significant accounting policies
and methods used in the preparation of the consolidated financial statements. 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.
Item 3: Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risks from adverse changes in interest rates, foreign
currency exchange rates and commodity prices. There have been no material changes in the Companys
exposure to market risks from the disclosure in the Companys Annual Report on Form 10-K for the
year ended August 31, 2008.
Item 4: Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Penfords management, with the participation of its chief executive officer and chief
financial officer, evaluated the effectiveness of the Companys disclosure controls and procedures
as of May 31, 2009. Based on managements evaluation, the chief executive officer and chief
financial officer have concluded that the Companys disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) are effective to ensure that information required to be disclosed by the Company
in reports filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms
and is accumulated and communicated to management, including the chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in the Companys internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended May 31, 2009 that
has materially affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.
30
PART II OTHER INFORMATION
Item 1: Legal Proceedings
On January 23, 2009 the Company filed suit in the United States District Court for the
Northern District of Iowa, Cedar Rapids Division, against two insurance companies, National Union
Fire Insurance Company of Pittsburgh, Pennsylvania and ACE American Insurance Company. This is an
insurance coverage suit that arises out of the flood that struck the Companys Cedar Rapids, Iowa
plant in June 2008. The Company seeks additional payments from the insurers of more than $30
million for property damage, time element and various other exposures due to costs and losses
incurred as a result of the flood. The Company cannot at this time determine the likelihood of any
outcome or estimate any damages that might be awarded.
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.
Item 1A: Risk Factors
The information set forth in this report should be read in conjunction with the risk factors
discussed in Item 1A of the Companys Annual Report on Form 10-K for the year ended August 31,
2008, which could materially impact the Companys business, financial condition and future results.
The risks described in the Annual Report on Form 10-K are not the only risks facing the Company.
Additional risks and uncertainties not currently known by the Company or that the Company currently
deems to be immaterial also may materially adversely affect the Companys business, financial
condition and/or operating results.
With respect to the risk factor identified in the Companys Form 10-K which appears under the
heading, The loss of a major customer could have an adverse effect on Penfords results of
operations, the amount of the Companys ethanol sales, as well as the portion of total sales that
consists of ethanol, have materially increased. The Companys sales of ethanol to its sole ethanol
customer, Eco-Energy, Inc., represented approximately 19% and 16% of the Companys consolidated net
sales for the three and nine months ended May 31, 2009, respectively.
With respect to the risk factor identified in the Companys Form 10-K which appears under the
heading, 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, as discussed earlier in
this report, the recent amendment to the Companys bank credit agreement has materially changed the
terms governing the Companys debt. Although the Company expects to be able to comply with these
new terms, the Companys inability to comply with these terms could have a material adverse effect
on its business, financial condition and results of operations.
With respect to the risk factor identified in the Companys Form 10-K which appears under the
heading, Economic conditions may impair the businesses of the Companys customers and end user
markets, which could adversely affect the Companys business operations, the current economic
recession has continued to adversely affect demand for certain products sold by the Companys
Industrial Ingredients business, resulting in operating losses. The timing and amount of any
recovery of demand for the Companys industrial products are uncertain.
31
Item 6: Exhibits.
(d) Exhibits
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10.1
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Third Amendment to Second Amended and Restated Credit Agreement
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32
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Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Penford Corporation
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(Registrant)
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July 10, 2009
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/s/ Steven O. Cordier
Steven O. Cordier
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Senior Vice President and Chief Financial Officer
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33
EXHIBIT INDEX
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please
note that they are included to provide information regarding their terms and are not intended to
provide any other factual or disclosure information about Penford or the other parties to the
agreements. The agreements may contain representations and warranties by each of the parties to
the applicable agreement. These representations and warranties have been made solely for the
benefit of the other party or parties to the applicable agreement and:
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should not in all instances be treated as categorical statements of fact, but rather as
a means of allocating the risk to one of the parties if those statements prove to be
inaccurate;
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may have been qualified by disclosures that were made to the other party or parties in
connection with the negotiation of the applicable agreement, which disclosures are not
necessarily reflected in the agreement;
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may apply standards of materiality in a manner that is different from what may be
viewed as material to investors; and
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were made only as of the date of the applicable agreement or other date or dates that
may be specified in the agreement and are subject to more recent developments.
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Accordingly, the representations and warranties may not describe the actual state of affairs
as of the date they were made or at any other time. Additional information about Penford may be
found elsewhere in this Quarterly Report on Form 10-Q, Penfords Annual Report on Form 10-K for the
year ended August 31, 2008 and in Penfords other public filings, which are available without
charge through the Securities and Exchange Commissions website at http://sec.gov.
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Exhibit No.
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Description
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10.1
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Third Amendment to Second Amended and Restated Credit Agreement
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31.1
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Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
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32
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Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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34
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