Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
PENX > SEC Filings for PENX > Form 10-K/A on 8-Jul-2013All Recent SEC Filings

Show all filings for PENFORD CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-K/A for PENFORD CORP


8-Jul-2013

Annual Report


Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the Company's consolidated financial statements and the accompanying notes. The notes to the Consolidated Financial Statements referred to in this MD&A are included in Part II Item 8, "Financial Statements and Supplementary Data." Unless otherwise noted, all amounts and analyses are based on continuing operations.

Restatement of Previously Issued Financial Statements

The Company had previously recorded the proceeds from the sale of by-products from its Cedar Rapids, Iowa, manufacturing operations as a reduction of cost of sales. The Company believed that this accounting treatment was an acceptable accounting policy under accounting principles generally accepted in the United States. After several months of consultation and review with the Staff of the SEC, the Company and the Company's Audit Committee concluded that the proceeds from the sale of by-products should be classified as sales rather than as a reduction of cost of sales in the Consolidated Statements of Operations.


Table of Contents

The adjustments to sales and cost of sales shown below affect the amounts previously reported for the Company's consolidated sales and cost of sales and the sales of the Company's Industrial Ingredients segment. The following is a reconciliation of sales and cost of sales as previously reported to the restated amounts. The adjustments do not affect the Company's previously reported gross margin, income (loss) from operations, net income (loss) or earnings (loss) per share in the Consolidated Statements of Operations for the fiscal years ended August 31, 2012, 2011 and 2010 or to any items reported in the Consolidated Balance Sheets or the Consolidated Statements of Comprehensive Income (Loss), Cash Flows or Stockholders' Equity. See Note 2 to the Consolidated Financial Statements.

                                    As Previously
                                      Reported          Adjustment       As Restated
                                                 (Dollars in thousands)

    Year Ended August 31, 2012

    Consolidated sales:            $       361,363     $     71,788     $     433,151
    Consolidated cost of sales             317,453           71,788           389,241
    Industrial Ingredients sales           258,819           71,788           330,607

    Year Ended August 31, 2011

    Consolidated sales:            $       315,441     $     58,322     $     373,763
    Consolidated cost of sales             281,606           58,322           339,928
    Industrial Ingredients sales           233,201           58,322           291,523

    Year Ended August 31, 2010

    Consolidated sales             $       254,274     $     40,243     $     294,517
    Consolidated cost of sales             230,820           40,243           271,063
    Industrial Ingredients sales           184,016           40,243           224,259

In addition to the amounts restated above, the Company has also corrected an error in the consolidated statements of cash flows to classify proceeds and payments related to a short term financing arrangement as a financing activity rather than as an operating activity. The net amount of proceeds and repayments previously reflected as a "Change in operating assets and liabilities - accounts payable and accrued liabilities" of $205,000, $(613,000) and $210,000 for the years ended August 31, 2012, 2011 and 2010, respectively, have been corrected within financing activities at their appropriate gross amounts of proceeds and payments for each respective period.

In connection with the restatement discussed above in the explanatory note to this Annual Report on Form 10-K/A and in Note 2 to the Consolidated Financial Statements, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company reevaluated the effectiveness of its disclosure controls and procedures. Based upon that reevaluation a material weakness was identified as described in Part II Item 9A of this Annual Report on Form 10-K/A, and the Company concluded that its disclosure controls and procedures and internal control over financial reporting were not effective as of August 31, 2012. See Item 9A for a discussion of the material weakness and management's remediation plan.

Overview

Penford generates revenues, income and cash flows by developing, manufacturing and marketing specialty natural-based ingredient systems for food and industrial applications, including fuel grade ethanol. The Company develops and manufactures ingredients with starch as a base, providing value-added applications to its customers. Penford's starch products are manufactured primarily from corn and potatoes and are used principally as binders and coatings in paper, packaging and food production and as an ingredient in fuel.

Penford manages its business in two segments: Industrial Ingredients and Food Ingredients. These segments are based on broad categories of end-market users. See Note 21 to Consolidated Financial Statements for additional information regarding the Company's business segment operations. In January 2012, the Company acquired, through purchase and lease, the net assets and operations of Carolina Starches, which manufactures and markets industrial potato starch products and blends for the paper and packaging industries. The net assets and results of operations since acquisition have been integrated into the Company's existing business segments. The acquired net assets, consisting primarily of property, plant and equipment and working capital, are being managed by and included in the reported balance sheet amounts of the Company's Food Ingredients business, which has experience, expertise and technologies related to the manufacture of potato starch products. Consolidated assets at August 31, 2012 included $11.3 million of assets related to the acquisition.

Since the primary end markets for Carolina Starches' products are the paper and packaging industries, the Carolina Starches sales and marketing functions of the acquired operations are being managed by the Industrial Ingredients business; therefore, the sales, cost of sales and a majority of the operating expenses are included in the Industrial Ingredients segment's results of operations in the Consolidated Financial Statements. Sales of $14.7 million related to the acquired Carolina Starches businesses were included in the Industrial Ingredients results of operations.


Table of Contents

In 2012, the Company redeemed 100,000 shares of its Series A 15% Cumulative Non-Voting Non-Convertible Preferred Stock ("Series A Preferred Stock") at the original issue price of $40 million plus accrued dividends of $8.9 million. See Note 7 to the Consolidated Financial Statements. The redemptions were funded with available balances on the Company's revolving credit facility.

In July 2012, in connection with Series A Preferred Stock redemption, the Company refinanced its bank debt. The Company entered into a $130 million Fourth Amended and Restated Credit Agreement which increased the Company's borrowing capacity and extended the maturity date for the revolving line of credit to July 9, 2017. See Note 8 to the Consolidated Financial Statements.

In analyzing business trends, management considers a variety of performance and financial measures, including sales revenue growth, sales volume growth, and gross margins and operating income of the Company's business segments.

Results of Operations

Executive Overview - Consolidated Results of Operations

Consolidated sales increased 15.9% to $433.2 million from $373.8 million.

Sales growth was driven by volume increases in the Food Ingredients business, pricing improvements in both the Food Ingredients and Industrial Ingredients businesses, an increase in by-product sales and sales contributed by the acquisition of Carolina Starches in January 2012.

Consolidated gross margin as a percent of sales improved to 10.1% from 9.1% last year. Gross margin was higher by $10.1 million primarily on favorable average pricing and product mix in both ingredients businesses.

In fiscal 2012, the Company redeemed $40 million of its Series A Preferred Stock plus $8.9 million of accrued dividends. In connection with the redemption, the Company recorded $5.5 million of discount accretion and $1.1 million of issuance cost amortization as a loss on the redemption in other non-operating income (expense) due to the early redemption of the Series A Preferred Stock.

Interest expense for fiscal 2012 decreased $0.7 million from the prior year primarily due to the redemptions of the Series A Preferred Stock in April 2012 ($16.5 million) and July 2012 ($23.5 million) which were funded by the Company's revolving line of credit. The interest rates on the bank debt are based on LIBOR or the bank's prime rate plus a margin. The dividend rate on the Series A Preferred Stock was 15%.

The Company recorded $4.8 million of tax expense on a pretax loss of $4.8 million. The effective tax rate for fiscal 2012 varied from the U.S. federal statutory rate of 35% primarily due to a $1.8 million valuation allowance related to carryforwards of tax incentives for the production of ethanol and by $13.0 million of dividends, discount accretion and amortization of issuance costs on the Series A Preferred Stock which are included in the consolidated results of operations for financial reporting purposes but are not deductible in the computation of taxable income.

The holder of 100,000 shares of Series B Preferred Stock converted the preferred shares into 1,000,000 shares of the Company's common stock.

Results of Operations

Fiscal 2012 Compared to Fiscal 2011

Industrial Ingredients



                                              Year Ended August 31,
                                               2012            2011
                                             (Dollars in thousands)
               Sales - industrial starch   $    156,945      $ 127,471
               Sales - ethanol                  101,874        105,730
               Sales - by-products               71,788         58,322

               Total sales                 $    330,607      $ 291,523
               Gross margin                $     11,744      $   7,523
               Loss from operations        $       (928 )    $  (4,718 )


Table of Contents

Industrial Ingredients fiscal 2012 sales of $330.6 million grew $39.1 million, or 13.4%, over fiscal 2011. Sales of industrial starch products of $14.7 million related to the acquisition of the Carolina Starches business in mid-January 2012 were included in the Industrial Ingredients operating results for fiscal 2012. Industrial corn starch sales of $142.3 million increased 12% primarily on a higher pass through of corn costs to customers, with volume comparable to fiscal 2011. Sales of bioproducts, included in the industrial starch sales amount, improved 22% in fiscal 2012, driven by volume increases of 16% and favorable pricing and product mix of 6%. Fiscal 2012 sales of ethanol constituted 39% of industrial sales in fiscal 2012 compared to 45% in fiscal 2011. A decrease in pricing per gallon and lower volume contributed equally to the revenue decline of 4%. Sales of by-products increased $13.5 million, or 23%, on increases attributable to higher volume of $5.3 million and $8.2 million related to increased sales prices driven by rising by-product market values.

Gross margin improved $4.2 million to $11.7 million in fiscal 2012 from $7.5 million a year ago. Margins improved due to the addition of $0.5 million of margin from the acquired businesses of Carolina Starches since acquisition in January 2012, favorable starch pricing of $5.8 million and lower natural gas costs of $2.4 million offset by higher net corn costs of $2.4 million, lower volume of $0.4 million, higher chemical costs of $0.8 million, and higher manufacturing costs of $0.9 million.

The loss from operations for fiscal 2012 improved $3.8 million to $0.9 million from a loss of $4.7 million last year, primarily due to the increase in gross margin. Operating expenses of $9.6 million in fiscal 2012, which included $0.8 million from the acquired business of Carolina Starches, were comparable to the prior year. Higher research and development expenses of $0.4 million were due to increased activity in bioproducts development.

Food Ingredients



                                             Year Ended August 31,
                                              2012             2011
                                            (Dollars in thousands)
                 Sales                    $     102,544      $ 82,240
                 Gross margin             $      32,165      $ 26,311
                 Income from operations   $      21,591      $ 18,037

Sales of $102.5 million for the year ended August 31, 2012, increased 24.7%, or $20.3 million, on volume growth of 16% and favorable product mix and pricing of 8%. Sales of non-coating applications expanded 29%, with revenues from gluten-free applications and pet chews and treats growing at double-digit rates. Sales of coating applications expanded 18% on higher volume of 10% and an 8% improvement in product mix and pricing.

Gross margin improved $5.9 million in fiscal 2012 over the prior year. Increased volume contributed $1.1 million with the remaining increase due to favorable pricing and product mix. Income from operations grew $3.6 million on the increase in gross margin, partially offset by higher operating and research and development expenses. Operating expenses increased $1.6 million to $7.8 million on higher employee costs and professional fees and $0.9 million of costs from the acquired operations of Carolina Starches. Higher research and development expenses of $0.7 million are due to additional personnel in fiscal 2012 and higher legal costs.

Corporate Operating Expenses

Corporate operating expenses increased to $10.6 million in fiscal 2012 from $8.9 million a year ago due to increases in employee costs and legal, accounting and auditing costs incurred in connection with the acquisition of Carolina Starches and a registration statement.


Table of Contents

Fiscal 2011 Compared to Fiscal 2010

Industrial Ingredients



                                              Year Ended August 31,
                                               2011            2010
                                             (Dollars in thousands)
               Sales - industrial starch   $    127,471      $ 115,681
               Sales - ethanol                  105,730         68,335
               Sales - by-products               58,322         40,243

               Total sales                 $    291,523      $ 224,259
               Gross margin                $      7,523      $     461
               Loss from operations        $     (4,718 )    $ (11,512 )

Industrial Ingredients fiscal 2011 sales of $291.5 million grew $67.3 million, or 30.0%, from fiscal 2010. Industrial starch sales of $127.5 million increased 10.2% primarily on a higher pass through of corn costs to customers, offset by a 7% decrease in volume. Sales of the Company's bioproducts, included in the industrial starch sales amount, improved 19% driven by a volume increase of 14% and higher average unit pricing of 4%. During fiscal 2011, the Industrial Ingredients business continued to shift more of its manufacturing mix to the production of ethanol. Sales of ethanol constituted 45% of industrial sales in fiscal 2011 compared to 37% in fiscal 2010. Revenue expanded 55% to $105.7 million as pricing per gallon improved 44% and volume increased 8%. Sales of by-products grew $18.1 million, or 45%, due to pricing increases driven by rising by-product market values.

Gross margin improved $7.0 million to $7.5 million in fiscal 2011 from $0.5 million a year ago. Margins improved due to higher ethanol pricing of $32.2 million, favorable energy costs of $2.0 million, improvements in manufacturing yields of $2.2 million, and reduced distribution costs of $1.2 million, offset by higher corn costs of $27.5 million, higher chemical costs of $1.6 million, and unfavorable industrial starch pricing and mix of $1.5 million.

The loss from operations for fiscal 2011 improved $6.8 million to $4.7 million from a loss of $11.5 million last year, primarily due to the increase in gross margin. Operating expenses of $9.6 million were comparable to fiscal 2010. An increase in the reserve for uncollectible accounts of $1.5 million in fiscal 2011 due to two paper industry customers, and higher employee costs, license fees and other expenses of $0.8 million were offset by a $2.3 million reduction in legal costs.

Food Ingredients



                                             Year Ended August 31,
                                              2011             2010
                                            (Dollars in thousands)
                 Sales                    $     82,240       $ 70,258
                 Gross margin             $     26,311       $ 22,993
                 Income from operations   $     18,037       $ 15,145

Sales of $82.2 million for the year ended August 31, 2011, increased 17.1%, or $12.0 million, on volume growth of 7% and favorable product mix and pricing of 10%. Sales of non-coating applications expanded 44%, with revenues from gluten-free applications and pet chews and treats more than doubling. Sales of coating applications declined 11% due to lower volume.

Gross margin improved $3.3 million due to the favorable pricing and mix of product sales and growth in non-coating sales. Income from operations grew 19% on the increase in gross margin. Operating expenses increased $0.3 million to $6.2 million on higher employee costs. Research and development expenses increased $0.1 million to $2.1 million.

Corporate Operating Expenses

Corporate operating expenses increased to $8.8 million in fiscal 2011 from $8.4 million a year ago, primarily due to an increase in employee-related costs.


Table of Contents

Non-Operating Income (Expense)

Other non-operating income (expense) consists of the following:



                                                          Year Ended August 31,
                                                       2012        2011        2010
                                                          (Dollars in thousands)

    Loss on redemption of Series A Preferred Stock   $ (6,599 )    $  -      $     -
    Loss on extinguishment of debt                         -       $  -        (1,049 )
    Loss on interest rate swap termination                 -          -        (1,562 )
    Gain on foreign currency transactions                  -          -           419
    Other                                                 413        115          271

                                                     $ (6,186 )    $ 115     $ (1,921 )

In 2012, the Company redeemed 100,000 shares of its Series A 15% Cumulative Non-Voting Non-Convertible Preferred Stock ("Series A Preferred Stock") at the original issue price of $40 million plus accrued dividends of $8.9 million. See Note 7 to the Consolidated Financial Statements. As a result of the early redemptions, the Company recorded accelerated discount accretion of $5.5 million and amortization of issuance costs of $1.1 million as a loss on redemption in other non-operating income (expense).

In 2010, the Company refinanced its bank debt. See Note 8 to the Consolidated Financial Statements. In connection with the refinancing, the Company recorded a pre-tax non-cash charge to earnings of approximately $1.0 million related to unamortized transaction fees associated with the prior credit facility. In addition, the Company terminated its interest rate swap agreements with several banks and recorded a loss of approximately $1.6 million.

Interest expense

Interest expense was $8.6 million, $9.4 million and $7.5 million in fiscal years 2012, 2011 and 2010, respectively. Interest expense for fiscal years 2012 and 2011 increased over fiscal 2010 primarily due to the increase in the dividend rate on the Series A Preferred Stock issued in April 2010 over the interest rate for the Company's bank debt. Interest expense for fiscal 2012 decreased $0.7 million from the prior year primarily due to the redemptions of the Series A Preferred Stock in April 2012 ($16.5 million) and July 2012 ($23.5 million) which were funded by the Company's revolving line of credit. The accretion of the discount on the Series A Preferred Stock and the amortization of issuance costs, which are included in interest expense, were $1.0 million, $1.2 million and $0.5 million for the years ended August 31, 2012, 2011 and 2010, respectively. See Notes 7 and 8 to the Consolidated Financial Statements.

Income taxes

In fiscal 2012, the Company recorded $4.8 million of tax expense on a pretax loss of $4.8 million. The effective tax rate for fiscal 2012 differs from the U.S. federal statutory rate due to $13.0 million of non-deductible expenses related to the Company's Series A Preferred Stock ($5.4 million of dividends, $6.3 million of discount amortization and $1.3 million of amortization of issuance costs) and a $1.8 million valuation allowance. In fiscal 2012, the Company recorded a valuation allowance related to small ethanol producer tax credit carryforwards which expire in fiscal 2014. Tax laws require that any net operating loss carryforwards be utilized before the Company can utilize the small ethanol producer tax credit carryforwards. Due to the near-term expiration of the small ethanol producer tax credit carryforward period, the Company does not believe it has sufficient positive evidence to substantiate that the small ethanol tax credit carryforwards are realizable at a more-likely-than-not level of assurance and recorded a $1.8 million valuation allowance. The valuation allowance will be reversed in future periods if these tax credit carryforwards are utilized. See Note 17 to the Consolidated Financial Statements.

At August 31, 2012, the Company had $13.3 million of net deferred tax assets. A valuation allowance has not been provided on the remaining net U.S. deferred tax assets as of August 31, 2012. The determination of the need for a valuation allowance requires significant judgment and estimates. The Company evaluates the requirement for


Table of Contents

a valuation allowance each quarter. Over half of the net deferred tax assets relate to net operating loss carryforwards which expire in 2030. The Company believes that it is more likely than not that future operations will generate sufficient taxable income to realize its deferred tax assets. There can be no assurance that management's current plans will be achieved or that an additional valuation allowance will not be required in the future.

In fiscal 2011, the Company recorded $0.3 million of tax expense on a pretax loss of $4.8 million. The effective tax rate for fiscal 2011 varied from the U.S. federal statutory rate of 35% primarily due to tax incentives for the production of ethanol of $1.0 million, offset by $7.7 million of dividends and discount accretion on the preferred stock which are recorded as interest expense for financial reporting purposes but are not deductible in the computation of taxable income.

The effective tax rate for fiscal 2010 of 33% is lower than the U.S. federal statutory rate of 35% primarily due to tax incentives for the production of ethanol of $1.0 million, offset by the effect of state taxes and $2.9 million of dividends and discount accretion on the preferred stock as described above.

Discontinued Operations

In fiscal 2010, the Company sold the operating assets of its Australia/New Zealand Operations. The financial results of the Australia/New Zealand Operations for fiscal 2010 have been classified as discontinued operations in the Consolidated Financial Statements. Australian administrative expenses of $0.1 million for each of the years ended August 31, 2012 and 2011 were included in income from continuing operations. The net assets of the Australia/New Zealand Operations as of August 31, 2012 have been reported as assets and liabilities of the continuing operations in the Consolidated Balance Sheets.

At August 31, 2012, the remaining net assets of the Australia/New Zealand Operations consist of $0.1 million of cash and $0.8 million of other net assets, primarily a receivable from the purchaser of one of the Company's Australian manufacturing facilities. See Note 23 for claims related to the collection of this receivable.

Liquidity and Capital Resources

The Company's primary sources of short- and long-term liquidity are cash flow from operations and its revolving line of credit, which expires on July 9, 2017. The Company expects to generate sufficient cash flow from operations and to have sufficient borrowing capacity and ability to fund its cash requirements during fiscal 2013.

                                                                  Year Ended August 31,
                                                          2012             2011            2010
                                                                  (Dollars in thousands)

Net cash flow provided by operating activities          $   2,560        $  3,528        $   9,858
Net cash provided by (used in) investing activities       (22,418 )        (8,253 )         14,732
Net cash provided by (used in) financing activities        19,731           4,691          (30,178 )
Net cash used in discontinued operations                       -               -              (271 )

Net decrease in cash                                    $    (127 )      $    (34 )      $  (5,859 )

Operating Activities

At August 31, 2012, Penford had working capital of $55.8 million, and $82.6 million outstanding under its $130 million revolving credit facility. Cash flow generated from operations of $2.6 million in fiscal year 2012 decreased $1.0 million from the prior year, primarily due to the payment of interest upon the redemption of the Company's preferred stock. See Note 7 to the Consolidated Financial Statements.

The decline in operating cash flow between fiscal 2010 and fiscal 2011 was primarily due to working capital requirements. Working capital used $9.3 million of cash during the year ended August 31, 2011 compared to cash contributed by working capital of $8.7 million during fiscal 2010. Changes in working capital requirements were due to (1) increases in inventories and accounts receivable due to higher sales as well as the higher cost of corn, (2) a $6.4 million contribution to the Company's pension plans in fiscal 2011, and (3) offset by income tax refunds received of $3.4 million.


. . .
  Add PENX to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for PENX - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.