Amended Quarterly Report (10-q/a)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q/A

(Amendment No. 1)

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED February 28, 2013

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No. 0-11488

 

 

PENFORD CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Washington		91-1221360
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
7094 South Revere Parkway, Centennial, Colorado		80112-3932
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: [phone]

 

 

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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

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.

 

Large Accelerated Filer		¨		Accelerated Filer		x
Non-Accelerated Filer		¨   (Do not check if a smaller reporting company)		Smaller Reporting Company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

The net number of shares of the Registrant’s common stock outstanding as of April 2, 2013 was 12,418,428.

 

 

 

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EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A (“Amendment No. 1”) is being filed to effect a restatement of the previously issued unaudited Condensed Consolidated Financial Statements of Penford Corporation (“Penford” or “the Company”) for the quarterly period ended February 28, 2013 filed with the Securities and Exchange Commission (the “SEC”) on April 5, 2013 (the “Original Filing”). Details of the restatement are discussed in Note 2 to the Condensed Consolidated Financial Statements, “Restatement of Previously Issued Financial Statements,” included in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” immediately preceding “Overview,” and Item 4 “Controls and Procedures” of this Amendment No. 1.

This Amendment No. 1 reflects a correction in the presentation of the proceeds from the sale of by-products from the Company’s manufacturing operations as sales rather than as a reduction of cost of sales in the Condensed Consolidated Statements of Operations. 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.

This Amendment No. 1 amends and restates Items 1, 2 and 4 of Part I and Item 6 of Part II of the Original Filing to reflect the effects of the restatement. In addition, in accordance with Rule 12b-15 of the Securities and Exchange Act of 1934, as amended, this Amendment No. 1 also includes updated certifications from the Company’s Chief Executive Officer and Chief Financial Officer as Exhibits 31.1, 31,2 and 32. Except as noted above, no other information included in the Original Filing is being amended by this Amendment No. 1. All of the information in this Amendment No. 1 is applicable as of the dates addressed in the Original Filing and does not reflect events occurring after the date of the Original Filing or modify or update disclosures affected by subsequent events.

 

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PENFORD CORPORATION AND SUBSIDIARIES

INDEX

 

								Page
PART I—FINANCIAL INFORMATION									3
		Item 1.		Financial Statements					3
						Condensed Consolidated Balance Sheets – February 28, 2013 and August 31, 2012			3
						Condensed Consolidated Statements of Operations – Three and Six Months ended February  28, 2013 and February 29, 2012 (Restated)			4
						Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and Six Months ended February 28, 2013 and February 29, 2012			5
						Condensed Consolidated Statements of Cash Flows – Six Months ended February  28, 2013 and February 29, 2012			6
						Notes to Condensed Consolidated Financial Statements (Restated)			7
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations					19
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk					25
		Item 4.		Controls and Procedures					25
PART II—OTHER INFORMATION									27
		Item 1.		Legal Proceedings					27
		Item 1A.		Risk Factors					27
		Item 6.		Exhibits					27
		Signatures							28

 

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PART I—FINANCIAL INFORMATION

 

Item 1:

Financial Statements

PENFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except per share data)		February 28, 2013				August 31, 2012
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	150			$	154
Trade accounts receivable, net			39,877				36,464
Inventories			47,513				43,672
Prepaid expenses			2,221				2,826
Material and supplies			4,260				3,980
Income tax receivable			229				188
Other			3,120				4,681
Total current assets			97,370				91,965
Property, plant and equipment, net			110,948				113,191
Restricted cash value of life insurance			7,858				7,858
Deferred tax assets			11,558				13,108
Other assets			1,412				1,612
Other intangible assets, net			390				467
Goodwill, net			7,978				7,978
Total assets		$	237,514			$	236,179
Liabilities and Shareholders’ Equity
Current liabilities:
Cash overdraft, net		$	8,510			$	7,337
Current portion of long-term debt and capital lease obligations			339				458
Accounts payable			16,261				19,201
Accrued and other liabilities			7,303				9,142
Total current liabilities			32,413				36,138
Long-term debt and capital lease obligations			85,293				84,004
Other postretirement benefits			19,993				19,707
Pension benefit liability			21,779				20,917
Other liabilities			6,724				6,563
Total liabilities			166,202				167,329
Shareholders’ equity:
Common stock, par value $1.00 per share, authorized 29,000 shares, issued 14,393 and 14,342 shares, respectively, including treasury shares			14,368				14,281
Preferred stock, par value $1.00 per share, authorized 1,000 shares, none issued			—				—
Additional paid-in capital			104,130				103,205
Retained earnings (deficit)			2,539				(286	)
Treasury stock, at cost, 1,981 shares			(32,757	)			(32,757	)
Accumulated other comprehensive loss			(16,968	)			(15,593	)
Total shareholders’ equity			71,312				68,850
Total liabilities and shareholders’ equity		$	237,514			$	236,179

The accompanying notes are an integral part of these statements.

 

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PENFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three months ended								Six months ended
(In thousands, except per share data)		February 28, 2013				February 29, 2012				February 28, 2013				February 29, 2012
		(As restated, see Note 2)
Sales		$	110,082			$	103,477			$	228,104			$	211,645
Cost of sales			99,081				94,076				203,845				190,436
Gross margin			11,001				9,401				24,259				21,209
Operating expenses			7,171				6,434				14,944				12,543
Research and development expenses			1,300				1,317				2,765				2,657
Income from operations			2,530				1,650				6,550				6,009
Interest expense			(983	)			(2,430	)			(2,064	)			(4,827	)
Other non-operating income (expense), net			84				216				(79	)			236
Income (loss) before income taxes			1,631				(564	)			4,407				1,418
Income tax expense (benefit)			440				(224	)			1,510				1,166
Net income (loss)		$	1,191			$	(340	)		$	2,897			$	252
Weighted average common shares and equivalents outstanding:
Basic			12,343				12,300				12,325				12,288
Diluted			12,503				12,300				12,439				12,327
Earnings (loss) per common share:
Basic earnings (loss) per share		$	0.10			$	(0.03	)		$	0.23			$	0.02
Diluted earnings (loss) per share		$	0.10			$	(0.03	)		$	0.23			$	0.02

The accompanying notes are an integral part of these statements.

 

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PENFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

		Three months ended								Six months ended
(In thousands)		February 28, 2013				February 29, 2012				February 28, 2013				February 29, 2012
Net income (loss)		$	1,191			$	(340	)		$	2,897			$	252
Other comprehensive income (loss) net of tax:
Change in fair value of derivatives, net of tax benefit (expense) of $32, $(319), $(157), and $(152), respectively			(53	)			521				256				248
Gain from derivative transactions reclassified into earnings, net of tax expense of $(95), $(221), $(1,434), and $(588), respectively			(155	)			(360	)			(2,341	)			(961	)
Amortization of prior service cost, net of taxes of $8, $0, $17, and $0, respectively			14				—				28				—
Amortization of actuarial loss, net of taxes of $209, $0, $418, and $0, respectively			341				—				682				—
Other comprehensive income (loss)			147				161				(1,375	)			(713	)
Total comprehensive income (loss)		$	1,338			$	(179	)		$	1,522			$	(461	)

The accompanying notes are an integral part of these statements.

 

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PENFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six months ended
(In thousands)		February 28, 2013				February 29, 2012
Cash flows from operating activities:
Net income		$	2,897			$	252
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization			6,803				7,086
Non-cash interest on Series A Preferred Stock			—				2,062
Stock-based compensation			812				446
Loss on sale of fixed assets			12				29
Deferred income tax expense			1,394				960
Non-cash loss on hedging transactions			760				2,696
Change in assets and liabilities:
Trade accounts receivable			(3,413	)			(4,190	)
Prepaid expenses			234				(168	)
Inventories			(4,601	)			954
Decrease (increase) in margin accounts			(2,853	)			512
Accounts payable and accrued liabilities			(3,183	)			(1,021	)
Income tax receivable			(41	)			(127	)
Pension benefit liability			862				(61	)
Other receivables			2,080				(279	)
Other			1,589				138
Net cash flow provided by operating activities			3,352				9,289
Cash flows from investing activities:
Acquisition of property, plant and equipment, net			(4,990	)			(6,049	)
Acquisition of Carolina Starches, net of cash acquired			—				(8,347	)
Other			—				21
Net cash used in investing activities			(4,990	)			(14,375	)
Cash flows from financing activities:
Proceeds from revolving line of credit			10,500				23,000
Payments on revolving line of credit			(9,100	)			(14,400	)
Payments of long-term debt			(100	)			(100	)
Payments under capital lease obligation			(139	)			(118	)
Proceeds from financing arrangements			—				490
Payments on financing arrangements			(893	)			(743	)
Exercise of stock options			201				—
Increase (decrease) in cash overdraft			1,173				(2,731	)
Other			(8	)			2
Net cash provided by financing activities			1,634				5,400
Increase (decrease) in cash and cash equivalents			(4	)			314
Cash and cash equivalents, beginning of period			154				281
Cash and cash equivalents, end of period		$	150			$	595

The accompanying notes are an integral part of these statements.

 

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PENFORD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1—BUSINESS

Penford Corporation (which, together with its subsidiary companies, is referred to herein as “Penford” or the “Company”) is a developer, manufacturer and marketer of specialty natural-based ingredient systems for food and industrial applications, including fuel grade ethanol. Penford’s products provide convenient and cost-effective solutions derived from renewable sources. Sales of the Company’s products are generated using a combination of direct sales and distributor agreements.

The Company has significant research and development capabilities, which are used in applying the complex chemistry of carbohydrate-based materials and in developing applications to address customer needs. In addition, the Company has specialty processing capabilities for a variety of modified starches.

Penford manages its business in two segments: Industrial Ingredients and Food Ingredients. These segments are based on broad categories of end-market users. The Industrial Ingredients segment is a supplier of specialty starches to the paper, packaging and other industries, and is a producer of fuel grade ethanol. The Industrial Ingredients segment also sells the by-products from its corn wet milling manufacturing operations, primarily germ, fiber and gluten, to customers who use these by-products as animal feed or to produce corn oil. The Company’s financial statements included in this Quarterly Report on Form 10-Q/A as of February 28, 2013 have been restated to reclassify the proceeds from the sale of by-products to sales rather than as a reduction in cost of sales. The Food Ingredients segment is a developer and manufacturer of specialty starches and dextrins for the food manufacturing and food service industries. See Note 11 for financial information regarding the Company’s business segments.

In January 2012, the Company completed the acquisition of the businesses operated by Carolina Starches, LLC and related entities (“Carolina Starches”) for $8.5 million in cash. Carolina Starches manufactures and markets cationic starches produced from potato, corn and tapioca. The acquisition of these businesses provided an important source of raw material to support continued growth in the Food Ingredients business and it broadened the Company’s portfolio of specialty modified industrial starches. See Note 11 for information concerning the integration of the operations of Carolina Starches into the Company’s two business segments.

2—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 Securities and Exchange Commission (“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 Condensed Consolidated Statements of Operations.

As a result of the above, the Company restated the amounts of sales and cost of sales as previously reported.

 

•

Condensed Consolidated Statements of Operations – increased consolidated sales and increased cost of sales for the three- and six-month periods ended February 28, 2013 and February 29, 2012

 

•

Note 11 – Segment Reporting – increased consolidated and Industrial Ingredients segment sales for the three- and six-month periods ended February 28, 2013 and February 29, 2012

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 as previously reflected in the segment footnote. 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 Condensed Consolidated Statements of Operations for the three- and six-month periods ended February 28, 2013 and February 29, 2012 or to any items reported in the Condensed Consolidated Balance Sheets or the Condensed Consolidated Statements of Comprehensive Income (Loss) or Cash Flows.

 

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		As Previously Reported				Adjustment				As Restated
		(Dollars in thousands)
Quarter Ended February 28, 2013
Consolidated sales		$	89,037			$	21,045			$	110,082
Consolidated cost of sales			78,036				21,045				99,081
Industrial Ingredient sales			62,433				21,045				83,478
Quarter Ended February 29, 2012
Consolidated sales		$	86,188			$	17,289			$	103,477
Consolidated cost of sales			76,787				17,289				94,076
Industrial Ingredient sales			61,284				17,289				78,573
Six Months Ended February 28, 2013
Consolidated sales		$	183,896			$	44,208			$	228,104
Consolidated cost of sales			159,637				44,208				203,845
Industrial Ingredient sales			129,638				44,208				173,846
Six Months Ended February 29, 2012
Consolidated sales		$	176,934			$	34,711			$	211,645
Consolidated cost of sales			155,725				34,711				190,436
Industrial Ingredient sales			126,106				34,711				160,817

In addition to the amounts restated above, the Company has also corrected an error in the consolidated statements of cash flows to properly 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 $(893,000) and $(253,000) for the six months ended February 28, 2013 and February 29, 2012, respectively, have been corrected within financing activities at their appropriate gross amounts of proceeds and payments for each respective period.

3—BASIS OF PRESENTATION

Consolidation

The accompanying condensed consolidated financial statements include the accounts of Penford and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. The condensed consolidated balance sheet at February 28, 2013 and the condensed consolidated statements of operations, comprehensive income (loss) and cash flows for the interim periods ended February 28, 2013 and February 29, 2012 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 accounting principles generally accepted in the United States of America (“U.S. GAAP”), have been condensed or omitted pursuant to the rules and regulations of the 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 Company’s Annual Report on Form 10-K/A for the year ended August 31, 2012.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used in accounting for, among other things, the allowance for doubtful accounts, accruals, legal contingencies, the determination of fair value of net assets acquired in a business combination, the determination of assumptions for pension and postretirement employee benefit costs, useful lives of property and equipment, the assessment of a potential impairment of goodwill or long-lived assets and income taxes including the determination of a need for a valuation allowance for deferred tax assets. Actual results may differ from previously estimated amounts.

 

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Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued guidance requiring entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendment does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income under current accounting standards. The guidance was effective for the Company’s fiscal year and interim periods beginning September 1, 2012. The Company adopted this amended guidance in fiscal 2013 and presented the Condensed Consolidated Statements of Comprehensive Income (Loss) immediately following the Condensed Consolidated Statements of Operations.

In February 2013, the FASB issued guidance requiring entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Entities are required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. This guidance, which is effective prospectively for reporting periods beginning after December 15, 2012, does not change the current requirements for reporting net income or other comprehensive income. The Company is evaluating the impact this guidance will have on its disclosures.

In December 2011, the FASB issued guidance creating new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements are effective for annual reporting periods, and interim reporting periods within those years, beginning on or after January 1, 2013 (fiscal 2014 for Penford). The Company is evaluating the impact this update will have on its disclosures.

4—BALANCE SHEET DETAILS

The components of inventory are as follows:

 

		February 28, 2013				August 31, 2012
		(In thousands)
Raw materials		$	23,924			$	19,773
Work in progress			1,580				1,542
Finished goods			22,009				22,357
Total inventories		$	47,513			$	43,672

The components of property, plant and equipment are as follows:

 

		February 28, 2013				August 31, 2012
		(In thousands)
Land		$	11,624			$	11,623
Plant and equipment			353,565				346,087
Construction in progress			4,468				7,679
			369,657				365,389
Accumulated depreciation			(258,709	)			(252,198	)
Net property, plant and equipment		$	110,948			$	113,191

At February 28, 2013 and August 31, 2012, the Company had approximately $0.4 million and $1.1 million, respectively, of payables related to property, plant and equipment which have been excluded from acquisitions of property, plant and equipment in the statement of cash flows.

 

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Components of accrued liabilities are as follows:

 

		February 28, 2013				August 31, 2012
		(In thousands)
Employee-related costs		$	3,434			$	4,837
Other accrued liabilities			3,869				4,305
Total accrued liabilities		$	7,303			$	9,142

Employee-related costs include accrued payroll, compensated absences, payroll taxes, benefits and incentives.

5—DEBT

As of February 28, 2013, the Company had $84.0 million outstanding on its $130 million secured revolving credit facility (the “2012 Agreement”) with a syndicate of banks. The lenders’ loan commitment may be increased under certain circumstances.

The maturity date for the revolving loans under the 2012 Agreement is July 9, 2017. Interest rates under the 2012 Agreement are based on either the London Interbank Offered Rate (“LIBOR”) or the prime rate, depending on the selection of available borrowing options under the 2012 Agreement. Pursuant to the 2012 Agreement, the interest rate margin over LIBOR can range between 2% and 4%, depending upon the ratio of the Company’s funded debt to earnings before interest, taxes, depreciation and amortization (defined in the 2012 Agreement as the “Total Leverage Ratio”).

The 2012 Agreement provides that the Total Leverage Ratio shall not exceed 3.50 through November 30, 2013; 3.25 through May 31, 2014; and 3.0 thereafter. In addition, the Company must maintain a Fixed Charge Coverage Ratio, as defined in the 2012 Agreement, of not less than 1.35. Annual capital expenditures will be restricted to $15 million if the Total Leverage Ratio is greater than 2.50 for two consecutive fiscal quarters. The Company’s obligations under the 2012 Agreement are secured by substantially all of the Company’s assets.

At February 28, 2013, the Company also had two non interest bearing loans from the Iowa Department of Economic Development (“IDED”). The IDED provided two five-year non interest bearing loans as follows: (1) a $1.0 million loan to be repaid in 60 equal monthly payments of $16,667 beginning December 1, 2009, and (2) a $1.0 million loan which is forgivable if the Company maintains certain levels of employment at the Cedar Rapids plant. At February 28, 2013, the Company had $1.3 million outstanding related to the IDED loans.

Pursuant to the 2012 Agreement, the Company may declare and pay dividends on its common stock in an amount not to exceed, in any consecutive four quarters, the lesser of $10 million or 50% of Free Cash Flow, as defined in the 2012 Agreement. As of February 28, 2013, the Company was not permitted to pay dividends.

6—INCOME TAXES

Effective Tax Rates

The Company’s effective tax rates for the three- and six-month periods ended February 28, 2013 were 27% and 34%, respectively. The difference between the effective tax rates and the U.S. federal statutory tax rate was primarily due to state income taxes, offset by the tax benefit associated with the research and development tax credit. On January 2, 2013, the American Taxpayer Relief Act of 2012 was enacted, which retroactively reinstated, to January 1, 2012, several corporate tax provisions that had expired, including the research and development tax credit. The Company recorded $0.15 million in the second quarter of fiscal 2013 related to this tax credit for research and development activities in fiscal 2012, which reduced the effective tax rates by 9% and 3%, respectively, for the three- and six-month periods ended February 28, 2013.

The Company’s effective tax rate for the first half of fiscal 2012 was 82%. The difference between the effective tax rate and the U.S. federal statutory tax rate was primarily due to state income taxes and dividends and accretion of discount on the Company’s 15% Series A Preferred Stock. The dividends and accretion of discount were reported as interest expense in the Condensed Consolidated Statements of Operations but were not deductible for tax return purposes. The Series A Preferred Stock was redeemed in the third and fourth quarters of fiscal 2012.

 

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Valuation Allowance

In fiscal 2012, the Company recorded a $1.8 million valuation allowance primarily 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.

At February 28, 2013, the Company had $12.7 million of net deferred tax assets. Other than for the ethanol tax credit carryforwards discussed above, a valuation allowance has not been provided on the net U.S. deferred tax assets as of February 28, 2013. The determination of the need for a valuation allowance requires significant judgment and estimates. The Company evaluates the requirement for a valuation allowance each quarter. The Company believes that it is more likely than not that future operations and the reversal of existing taxable temporary differences will generate sufficient taxable income to realize its deferred tax assets, except for the small ethanol producer tax credit carryforwards, for which a valuation allowance has been provided.

Uncertain Tax Positions

In the three- and six month periods ended February 28, 2013, the amount of unrecognized tax benefits increased by approximately $20,000 and $63,000, respectively. The total amount of unrecognized tax benefits at February 28, 2013 was $1.1 million, all of which, if recognized, would favorably impact the effective tax rate. At February 28, 2013, the Company had $0.2 million of accrued interest and penalties included in Other liabilities in the Condensed Consolidated Balance Sheets.

Other

The Company files tax returns in the U.S. federal jurisdiction and various U.S. state jurisdictions, and is subject to examination by taxing authorities in all of those jurisdictions. From time to time, the Company’s tax returns are reviewed or audited by U.S. federal and various U.S. state taxing authorities. The Company believes that adjustments, if any, resulting from these reviews or audits would not be material, individually or in the aggregate, to the Company’s financial position, results of operations or liquidity. It is reasonably possible that the amount of unrecognized tax benefits related to certain of the Company’s tax positions will increase or decrease in the next twelve months as audits or reviews are initiated and settled. At this time, an estimate of the range of a reasonably possible change cannot be made. The Company is not subject to income tax examinations by U.S. federal or state jurisdictions for fiscal years prior to 2007.

7—OTHER COMPREHENSIVE INCOME (LOSS) (“OCI”)

The components of accumulated other comprehensive loss and other comprehensive income (loss) are summarized as follows:

 

(In thousands)		Net Unrealized Gains (Losses) on Cash Flow Hedging Instruments				Gains (Losses) on Postretirement Obligations				Accumulated Other Comprehensive Loss
Balance at August 31, 2012		$	1,638			$	(17,231	)		$	(15,593	)
Other comprehensive income (loss), net of taxes			(2,085	)			710				(1,375	)
Balance at February 28, 2013		$	(447	)		$	(16,521	)		$	(16,968	)

 

(In thousands)		Net Unrealized Gains (Losses) on Cash Flow Hedging Instruments				Postretirement Obligations				Accumulated Other Comprehensive Loss
Balance at August 31, 2011		$	731			$	(8,290	)		$	(7,559	)
Other comprehensive income (loss), net of taxes			(713	)			—				(713	)
Balance at February 29, 2012		$	18			$	(8,290	)		$	(8,272	)

 

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8—STOCK-BASED COMPENSATION

Stock Compensation Plans

Penford maintains the 2006 Long-Term Incentive Plan, as amended, (the “2006 Incentive Plan”) pursuant to which various stock-based awards may be granted to employees, directors and consultants. As of February 28, 2013, the aggregate number of shares of the Company’s common stock that were available to be issued as awards under the 2006 Incentive Plan was 311,116. In addition, any shares previously granted under the 1994 Stock Option Plan which are subsequently forfeited or not exercised will be available for future grants under the 2006 Incentive Plan. Non-qualified stock options and restricted stock awards granted under the 2006 Incentive Plan generally vest ratably over one to four years and expire seven years from the date of grant.

General Option Information

A summary of the stock option activity for the six months ended February 28, 2013, is as follows:

 

		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Term (in years)				Aggregate Intrinsic Value
Outstanding Balance, August 31, 2012			1,824,916			$	10.94
Granted			100,000				7.97
Exercised			(35,500	)			5.65
Cancelled			(69,964	)			13.43
Outstanding Balance, February 28, 2013			1,819,452				10.79				3.76			$	3,841,500
Options Exercisable at February 28, 2013			1,216,453			$	13.16				2.63			$	1,341,700

The aggregate intrinsic value disclosed in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $10.15 as of February 28, 2013 that would have been received by the option holders had all option holders exercised on that date.

The Company estimated the fair value of stock options granted during the first six months of fiscal 2013 using the following weighted-average assumptions and resulting in the following weighted-average grant date fair values:

 

Expected volatility		68%
Expected life (years)		4.6
Interest rate		0.6-1.0%
Weighted-average fair values		$4.30

As of February 28, 2013, the Company had $1.2 million of unrecognized compensation cost related to non-vested stock option awards that is expected to be recognized over a weighted average period of 1.3 years.

Restricted Stock Awards

The grant date fair value of each share of the Company’s restricted stock awards is equal to the fair value of Penford’s common stock at the grant date. The following table summarizes the restricted stock award activity for the six months ended February 28, 2013 as follows:

 

		Number of Shares				Weighted Average Grant Date Fair Value
Nonvested at August 31, 2012			61,716			$	5.94
Granted			24,489				7.35
Vested			(61,716	)			5.94
Cancelled			—				—
Nonvested at February 28, 2013			24,489			$	7.35

On January 1, 2013, each non-employee director received an award of 2,721 shares of restricted stock under the 2006 Incentive Plan at the closing stock price on December 31, 2012. The shares vest one year from the grant date of the award. The Company recognizes compensation cost for restricted stock ratably over the vesting period.

 

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As of February 28, 2013, the Company had $0.2 million of unrecognized compensation cost related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 0.8 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 and the effect on the Company’s Condensed Consolidated Statements of Operations (in thousands):

 

		Three months ended								Six months ended
		February 28, 2013				February 29, 2012				February 28, 2013				February 29, 2012
Cost of sales		$	—			$	6			$	—			$	32
Operating expenses			395				200				812				403
Research and development expenses			—				2				—				11
Total stock-based compensation expense		$	395			$	208			$	812			$	446
Income tax benefit			150				79				309				169
Total stock-based compensation expense, net of tax		$	245			$	129			$	503			$	277

9—PENSION AND POST-RETIREMENT BENEFIT PLANS

The components of the net periodic pension and post-retirement benefit costs are as follows:

 

Defined benefit pension plans		Three months ended								Six months ended
		February 28, 2013				February 29, 2012				February 28, 2013				February 29, 2012
		(In thousands)
Service cost		$	486			$	380			$	972			$	760
Interest cost			662				682				1,324				1,364
Expected return on plan assets			(717	)			(729	)			(1,434	)			(1,458	)
Amortization of prior service cost			60				57				120				114
Amortization of actuarial losses			483				193				966				386
Net periodic benefit cost		$	974			$	583			$	1,948			$	1,166

 

Post-retirement health care plans		Three months ended								Six months ended
		February 28, 2013				February 29, 2012				February 28, 2013				February 29, 2012
		(In thousands)
Service cost		$	59			$	57			$	118			$	114
Interest cost			215				243				430				486
Amortization of prior service cost			(38	)			(38	)			(76	)			(76	)
Amortization of actuarial losses			67				—				134				—
Net periodic benefit cost		$	303			$	262			$	606			$	524

10—FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS

Fair Value Measurements

Presented below are the fair values of the Company’s derivatives as of February 28, 2013 and August 31, 2012:

 

As of February 28, 2013		(Level 1)				(Level 2)				(Level 3)				Total
		(in thousands)
Current assets (Other Current Assets):
Commodity derivatives (1)		$	(419	)		$	—			$	—			$	(419	)

 

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(1)	On the condensed consolidated balance sheet, commodity derivative assets and liabilities have been offset by cash collateral due and paid under master netting arrangements which are recorded together in Other Current Assets. The cash collateral offset was $1.1 million at February 28, 2013.

 

As of August 31, 2012		(Level 1)				(Level 2)				(Level 3)				Total
		(in thousands)
Current assets (Other Current Assets):
Commodity derivatives (1)		$	(1,422	)		$	—			$	—			$	(1,422	)

 

(1)	On the condensed consolidated balance sheet, commodity derivative assets and liabilities have been offset by cash collateral due and paid under master netting arrangements which are recorded together in Other Current Assets. The cash collateral offset was $2.6 million at August 31, 2012.

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 data by correlation or other means.

 

•

Level 3 inputs are unobservable inputs to the valuation methodology for the assets or liabilities.

Other Financial Instruments

The carrying value of cash and cash equivalents, receivables and payables approximates fair value because of their short maturities. The Company’s bank debt reprices with changes in market interest rates and, accordingly, the carrying amount of such debt approximates fair value.

The Company has two non-interest bearing loans from the State of Iowa. The carrying value of the debt at February 28, 2013 was $1.3 million and the fair value of the debt was estimated to be $1.2 million. See Note 5. The fair values of these loans were calculated utilizing Level 2 inputs to a discounted cash flow model. The most significant input is the discount rate which was determined by comparing yields on corporate debentures for debt issuers with financial characteristics similar to Penford’s non-interest bearing loans.

Commodity Contracts

The Company uses forward contracts and readily marketable exchange-traded futures on corn and natural gas to manage the price risk of these inputs to its manufacturing process. The Company also uses futures contracts to manage the variability of the cash flows from the forecasted sales of ethanol. The Company has designated the derivative instruments on corn and the forecasted sales of ethanol as hedges.

For derivative instruments designated as fair value hedges, the gain or loss on the derivative instruments as well as the offsetting gain or loss on the hedged firm commitments and/or inventory are recognized in current earnings as a component of cost of sales. For derivative instruments designated as cash flow hedges, the effective portion of the gain or loss on the derivative instruments is reported as a component of other comprehensive income (loss), net of applicable income taxes, and recognized in earnings when the hedged exposure affects earnings. The Company recognizes the gain or loss on the derivative instrument as a component of cost of sales in the period when the finished goods produced from the hedged item are sold. If it is determined that the derivative instruments used are no longer effective at offsetting changes in the price of the hedged item, future changes in fair value would be recognized in current earnings as a component of cost of goods sold.

To reduce the price volatility of corn used in fulfilling some of its starch sales contracts, Penford 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. Penford also uses exchange-traded futures to hedge corn inventories and firm corn purchase contracts. Hedged transactions are generally expected to occur within 12 months of the time the hedge is established. The deferred loss, net of tax, recorded in other comprehensive income at February 28, 2013 that is expected to be reclassified into income within 12 months is $0.4 million.

As of February 28, 2013, Penford had purchased corn positions of 4.9 million bushels, of which 2.5 million bushels represented equivalent firm priced starch and ethanol sales contract volume, resulting in an open position of 2.4 million bushels.

 

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Prices for natural gas fluctuate due to anticipated changes in supply and demand and movement of prices of related or alternative fuels. To reduce the price risk caused by market fluctuations, Penford generally enters into short-term purchase contracts or uses exchange-traded futures contracts to hedge exposure to natural gas price fluctuations. In September 2011, the Company discontinued hedge accounting treatment for natural gas futures as the hedging relationship no longer met the requirements for hedge accounting. Gains and losses on natural gas futures contracts are recognized in current earnings in cost of sales.

As of February 28, 2013, the Company had the following outstanding futures contracts:

 

		Corn Futures		5,170,000		Bushels
		Natural Gas Futures		720,000		mmbtu (millions of British thermal units)
		Ethanol Futures		290,000		Gallons

The following tables provide information about the fair values of the Company’s derivatives, by contract type, as of February 28, 2013 and August 31, 2012.

 

		Assets												Liabilities
In thousands						Fair Value												Fair Value
		Balance Sheet Location				Feb 28				Aug 31				Balance Sheet Location				Feb 28				Aug 31
						2013				2012								2013				2012
Derivatives designated as hedging instruments:
Cash Flow Hedges:
Corn Futures			Other Current Assets			$	—			$	12				Other Current Assets			$	451			$	126
Ethanol Futures			Other Current Assets				—				—				Other Current Assets				4				706
Fair Value Hedges:
Corn Futures			Other Current Assets				173				—				Other Current Assets				44				602
Derivatives not designated as hedging instruments:
Natural Gas Futures			Other Current Assets				—				—				Other Current Assets				93				—
						$	173			$	12							$	592			$	1,434

The following tables provide information about the effect of derivative instruments on the financial performance of the Company for the three- and six- month periods ended February 28, 2013 and February 29, 2012.

 

In thousands		Amount of Gain (Loss) Recognized in OCI								Amount of Gain (Loss) Reclassified from AOCI into Income								Amount of Gain (Loss) Recognized in Income
		3 Months Ended								3 Months Ended								3 Months Ended
		Feb 28, 2013				Feb 29, 2012				Feb 28, 2013				Feb 29, 2012				Feb 28, 2013				Feb 29, 2012
Derivatives designated as hedging instruments:
Cash Flow Hedges:
Corn Futures (1)		$	(318	)		$	858			$	59			$	(130	)		$	(312	)		$	132
Natural Gas Futures (1)			—				—				—				(181	)			—				—
Ethanol Futures (1)			233				(18	)			191				892				—				—
		$	(85	)		$	840			$	250			$	581			$	(312	)		$	132
Fair Value Hedges:
Corn Futures (1) (2)																		$	(31	)		$	(21	)
Derivatives not designated as hedging instruments:
Natural Gas Futures (1)																		$	89			$	(336	)
FX Contracts (1)																			—				9
Soybean Oil Futures (1)																			—				12
																		$	89			$	(315	)

 

(1)	Gains and losses reported in cost of sales

(2)	Hedged items are firm commitments and inventory

 

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In thousands		Amount of Gain (Loss) Recognized in OCI								Amount of Gain (Loss) Reclassified from AOCI into Income								Amount of Gain (Loss) Recognized in Income
		6 Months Ended								6 Months Ended								6 Months Ended
		Feb 28, 2013				Feb 29, 2012				Feb 28, 2013				Feb 29, 2012				Feb 28, 2013				Feb 29, 2012
Derivatives designated as hedging instruments:
Cash Flow Hedges:
Corn Futures (1)		$	(573	)		$	(750	)		$	3,491			$	1,944			$	(115	)		$	(179	)
Natural Gas Futures (1)			—				—				—				(453	)			—				—
Ethanol Futures (1)			986				1,150				284				58				(11	)			—
		$	413			$	400			$	3,775			$	1,549			$	(126	)		$	(179	)
Fair Value Hedges:
Corn Futures (1) (2)																		$	(16	)		$	78
Derivatives not designated as hedging instruments:
Natural Gas Futures (1)																		$	(82	)		$	(1,048	)
FX Contracts (1)																			—				9
Soybean Oil Futures (1)																			—				12
																		$	(82	)		$	(1,027	)

 

(1)	Gains and losses reported in cost of sales

(2)	Hedged items are firm commitments and inventory

11—SEGMENT REPORTING (Restated)

Financial information for the Company’s two segments, Industrial Ingredients and Food Ingredients, is presented below. These segments serve broad categories of end-market users. The Industrial Ingredients segment provides carbohydrate-based starches for industrial applications, primarily paper and packaging products and fuel grade ethanol. The Food Ingredients segment produces specialty starches for food applications. A third item for “corporate and other” activity has been presented to provide reconciliation to amounts reported in the consolidated financial statements. Corporate and other represents the activities related to the corporate headquarters such as public company reporting, personnel costs of the executive management team, corporate-wide professional services and consolidation entries.

 

		Three months ended								Six months ended
		February 28, 2013				February 29, 2012				February 28, 2013				February 29, 2012
		(As restated, see Note 2)
		(In thousands)
Sales:
Industrial Ingredients
Industrial Starch		$	44,237			$	37,052			$	88,039			$	69,438
Ethanol			18,196				24,232				41,599				56,668
By-products			21,045				17,289				44,208				34,711
			83,478				78,573				173,846				160,817
Food Ingredients			26,604				24,904				54,258				50,828
		$	110,082			$	103,477			$	228,104			$	211,645
Income (loss) from operations:
Industrial Ingredients		$	(452	)		$	(985	)		$	935			$	(242	)
Food Ingredients			5,535				5,247				10,891				11,206
Corporate and other			(2,553	)			(2,612	)			(5,276	)			(4,955	)
		$	2,530			$	1,650			$	6,550			$	6,009

In January 2012, the Company acquired, through purchase or capital lease, the net assets and operations of the business generally known as Carolina Starches, which manufactures and markets industrial potato starch based products for the paper and packaging industries. The acquisition of this business provided an important source of raw material to support continued growth in the Food Ingredients business and it broadened the Company’s portfolio of specialty modified industrial starches.

 

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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 February 28, 2013 included $11.5 million of assets related to the acquisition. Since the primary end markets for Carolina Starches’ products are the paper and packaging industries, the 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. Included in Industrial Ingredients sales is $6.5 million and $11.8 million for the three and six months ended February 28, 2013, respectively, and $3.6 million for both the three- and six-month periods ended February 29, 2012 arising from the acquired operations.

 

		February 28, 2013				August 31, 2012
		(In thousands)
Total assets:
Industrial Ingredients		$	146,814			$	143,039
Food Ingredients			64,253				63,949
Corporate and other			26,447				29,191
		$	237,514			$	236,179

12—EARNINGS (LOSS) PER SHARE

All outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders and, therefore, are included in computing earnings per share under the two-class method. Under the two-class method, net earnings are reduced by the amount of dividends declared in the period for each class of common stock and participating security. The remaining undistributed earnings are then allocated to common stock and participating securities, based on their respective rights to receive dividends. Restricted stock awards granted to certain employees and directors under the Company’s 2006 Incentive Plan, which contain non-forfeitable rights to dividends at the same rate as common stock, are considered participating securities.

Basic earnings (loss) per share reflect only the weighted average common shares outstanding during the period. Diluted earnings (loss) per share reflect weighted average common shares outstanding and the effect of any dilutive common stock equivalent shares . Diluted earnings (loss) per share is calculated by dividing net income (loss) by the average common shares outstanding plus additional common shares that would have been outstanding assuming the exercise of in-the-money stock options, using the treasury stock method. The following table presents the reconciliation of income from operations to income from operations applicable to common shares and the computation of diluted weighted average shares outstanding.

 

		Three months ended								Six months ended
		February 28, 2013				February 29, 2012				February 28, 2013				February 29, 2012
		(In thousands)								(In thousands)
Numerator:
Net income (loss)		$	1,191			$	(340	)		$	2,897			$	252
Less: Allocation to participating securities			(4	)			—				(10	)			(1	)
Net income (loss) applicable to common shares		$	1,187			$	(340	)		$	2,887			$	251
Denominator:
Weighted average common shares outstanding, basic			12,343				12,300				12,325				12,288
Dilutive stock options and awards			160				—				114				39
Weighted average common shares outstanding, diluted			12,503				12,300				12,439				12,327

For the three months ended February 29, 2012, there were 42,115 weighted-average restricted stock awards excluded from the calculation of diluted earnings (loss) per share because they were antidilutive.

Weighted-average stock options to purchase 987,885 and 972,581 shares of common stock for the three and six months ended February 28, 2013, were excluded from the calculation of diluted earnings (loss) per share because they were antidilutive. Weighted-average stock options to purchase 1,528,779 and 1,414,139 shares of common stock for the three and six months ended February 29, 2012, were excluded from the calculation of diluted earnings (loss) per share because they were antidilutive.

 

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13—LEGAL PROCEEDINGS AND CONTINGENCIES

The Company sold its Australia/New Zealand Operations in fiscal 2010. At February 28, 2013, the remaining net assets of the Australia/New Zealand Operations consisted of $0.2 million of cash. Proceeds from the sale of the Australia/New Zealand Operations included $2.0 million placed in escrow, approximately $1.225 million of which had been distributed to the Company’s subsidiary, Penford Australia Limited (“Penford Australia”) in prior periods. During the second quarter of fiscal 2013, Penford Australia received approximately $775,000 in escrowed funds, which represented the entire remaining amount of escrowed funds that had not previously been paid. In connection with Penford Australia’s complete recovery of all the escrowed funds, the Company reversed a reserve of $163,000 that it had recorded in the first quarter of fiscal 2013 in connection with a dispute over the payment of these funds with the purchaser of a portion of Penford Australia’s assets.

On March 15, 2013, the Company entered into an agreement providing for the payment to the Company of $3.4 million in full settlement of certain claims the Company made against a contractor and its insurer that arose from engineering design work performed in connection with the construction of the Company’s ethanol plant completed in 2008. The Company alleged breach of contract and negligence by the contractor, and sought recovery of its costs and damages from the contractor and its insurer due to errors and delays in the performance of the work. The agreement provides for payment of the settlement amount within 45 days from the date of settlement. The Company expects to record the effect of this settlement in its financial statements in the third quarter of fiscal 2013. The settlement amount, net of contingent legal fees, expert fees and other litigation expenses incurred in the matter, of approximately $2.1 million will be reflected as a reduction of the cost of the ethanol plant.

The Company is involved from time to time in various other claims and litigation arising in the normal course of business. The Company expenses legal costs as incurred. In the judgment of management, which relies in part on information obtained from the Company’s outside legal counsel, the ultimate resolution of these other matters will not materially affect the consolidated financial position, results of operations, or liquidity of the Company, although the outcomes could be material to the Company’s operating results for any particular period, depending, in part, upon the operating results for such period.

The Company regularly evaluates the status of claims and any related legal proceedings in which it is involved in order to assess whether a loss is probable, whether there is a reasonable possibility that a loss may have been incurred and to determine if accruals are appropriate. Management is unable to provide additional information regarding any possible losses arising from such claims because (i) the Company currently believes that the claims are not adequately supported, and (ii) there are significant factual and legal issues to be resolved.

 

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Item 2:    Management’s Discussion and Analysis of Financial Condition and Results of 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 consistent with accounting principles generally accepted in the United States. After several months of consultation and review with the Staff of the Securities and Exchange Commission, 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 Condensed Consolidated Statements of Operations.

The adjustments to sales and cost of sales shown below affect the amounts previously reported for the Company’s consolidated and Industrial Ingredients segment sales and cost of sales. 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 Condensed Consolidated Statements of Operations for the three- and six-month periods ended February 28, 2013 and February 29, 2012 or to any items reported in the Condensed Consolidated Balance Sheets or the Condensed Consolidated Statements of Comprehensive Income (Loss), Cash Flows or Stockholders’ Equity. See Note 2 to the Condensed Consolidated Financial Statements.

 

		As Previously Reported				Adjustment				As Restated
		(Dollars in thousands)
Quarter Ended February 28, 2013
Consolidated sales		$	89,037			$	21,045			$	110,082
Consolidated cost of sales			78,036				21,045				99,081
Industrial Ingredient sales			62,433				21,045				83,478
Quarter Ended February 29, 2012
Consolidated sales		$	86,188			$	17,289			$	103,477
Consolidated cost of sales			76,787				17,289				94,076
Industrial Ingredient sales			61,284				17,289				78,573
Six Months Ended February 28, 2013
Consolidated sales		$	183,896			$	44,208			$	228,104
Consolidated cost of sales			159,637				44,208				203,845
Industrial Ingredient sales			129,638				44,208				173,846
Six Months Ended February 29, 2012
Consolidated sales		$	176,934			$	34,711			$	211,645
Consolidated cost of sales			155,725				34,711				190,436
Industrial Ingredient sales			126,106				34,711				160,817

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 $(893,000) and $(253,000) for the six months ended February 28, 2013 and February 29, 2012, 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 Quarterly Report on Form 10-Q/A (“10-Q/A”) and in Note 2 to the Condensed Consolidated Financial Statements, under the supervision and with the participation of management, including the Chief Executive Officer and the 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 I Item 4 of this 10-Q/A, and the Company concluded that its disclosure controls and procedures and internal control over financial reporting were not effective as of February 28, 2013. See Item 4 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.

 

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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 11 to the Condensed Consolidated Financial Statements for additional information regarding the Company’s business segment operations. In January 2012, the Company acquired, through purchase or lease, the net assets and operations of Carolina Starches, which manufactures and markets industrial potato starch based products for the paper and packaging industries. The net assets and results of operations of the Carolina Starches business 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.

Since the primary end markets for Carolina Starches’ products are the paper and packaging industries, the 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 Condensed Consolidated Financial Statements and this Part I Item 2.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s condensed consolidated financial statements and the accompanying notes. The notes to the Condensed Consolidated Financial Statements referred to in this MD&A are included in Part I Item 1, “Financial Statements.”

Results of Operations

Executive Overview

Quarters ended February 28, 2013 and February 29, 2012:

 

•

Net income for the quarter ended February 28, 2013 was $1.2 million, or $0.10 per diluted share, compared to a net loss of $0.3 million, or $0.03 per diluted share last year.

 

•

Consolidated sales increased 6.4% to $110.1 million from $103.5 million for the same period last year.

 

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Sales growth was driven by a volume increase in the Food Ingredients business, sales contributed by the Carolina Starches operations acquired in January 2012, and improvements in pricing and product mix in all businesses.

 

•

Consolidated gross margin as a percent of sales was 10.0% compared to 9.1% a year ago. Gross margin was higher by $1.6 million.

 

•

Interest expense dropped by $1.4 million due to lower interest rates available under the Company’s bank credit facility compared with the higher borrowing costs under the Company’s 15% Series A Preferred Stock which was redeemed in the third and fourth quarters of fiscal 2012.

 

•

Income tax expense for the second quarter and first half of fiscal 2013 was 27% and 34%, respectively, of pre-tax income. The difference between the effective tax rates and the statutory rate is due to state income taxes, offset by the tax benefit associated with the research and development (“R&D”) tax credit. On January 2, 2013, the R&D tax credit was retroactively reinstated to January 1, 2012. The retroactive R&D credit reduced the effective tax rate by 9% and 3%, respectively, for the second quarter and first half of 2013.

Six months ended February 28, 2013 and February 29, 2012:

 

•

Net income for the six months ended February 28, 2013 rose to $2.9 million from $0.3 million in the same period last year. Earnings per diluted share were $0.23 compared to $0.02 for the first half of fiscal 2012.

 

•

Consolidated sales increased 7.8% to $228.1 million from $211.6 million last year on pricing and mix improvements in both business segments.

 

•

Consolidated gross margin as a percent of sales was 10.6% in fiscal 2013 compared to 10.0% in fiscal 2012 on improvements in corn starch manufacturing yields and costs and lower energy costs.

 

•

As discussed above for the second quarter of fiscal 2013, interest expense declined due to the redemption of the Company’s preferred stock, and the Company’s effective tax rate for the first half of fiscal 2013 was 34%.

 

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Industrial Ingredients

Second quarter fiscal 2013 sales at the Company’s Industrial Ingredients business unit increased $4.9 million, or 6.2%, to $83.5 million from $78.6 million during the second quarter of fiscal 2012. This increase was primarily due to:

 

•

Second quarter fiscal 2013 included $2.8 million of additional revenue from the operations of Carolina Starches which were acquired mid-second quarter of fiscal 2012.

 

•

Industrial corn starch sales, excluding sales contributed by Carolina Starches, in the three months ended February 28, 2013 increased $4.3 million, or 13%, to $37.7 million from $33.4 million last year. Industrial starch volume expanded 4%. The remaining amount of the increase is attributable to favorable product mix and pricing, including the pass-through of net corn cost increases to customers.

 

•

Ethanol sales declined $6.0 million, or 24.9%, to $18.2 million from $24.2 million on a 28% decrease in volume, partially offset by a 4.6% increase in average unit selling prices.

 

•

Sales of by-products increased $3.8 million on favorable pricing.

Revenues for the first half of fiscal 2013 increased $13.0 million, or 8.1%, to $173.8 million from $160.8 million in the prior year. The increase was primarily due to:

 

•

Sales increased $8.2 million attributable to the operations of Carolina Starches which were acquired in January 2012.

 

•

Industrial corn starch sales, excluding sales contributed by Carolina Starches, rose $10.4 million on a 9% increase in volume and a 6% improvement in product mix and pricing, including the pass-through of increases in the net cost of corn.

 

•

Ethanol sales declined $15.1 million as volume declined 22% and pricing decreased 6%.

 

•

Sales of by-products increased $9.5 million on favorable pricing.

 

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Industrial Ingredients’ loss from operations for the second quarter of fiscal 2013 was $0.5 million compared to an operating loss of $1.0 million in fiscal 2012. Gross margin for the second quarter of fiscal 2013 increased $1.1 million to $2.9 million. The increase was due to improvements in product mix and average unit pricing of $1.7 million and margin from the acquired Carolina Starches business of $0.4 million, partially offset by lower volume of $1.0 million. Operating and research and development expenses increased $0.6 million in the second quarter of fiscal 2013 split equally between additional expenses attributable to the acquired Carolina Starches operations and increased employee costs for bioproducts sales and marketing resources.

Industrial Ingredients’ income from operations for the first half of fiscal 2013 improved $1.2 to $0.9 million. Gross margin during this period increased $2.7 million to $8.0 million. Approximately $0.9 million of the margin increase is attributable to the Carolina Starches business. Improvements in manufacturing costs and yields of $2.5 million, lower energy and chemical costs of $1.8 million, and the effect of higher starch sales of $2.6 million were partially offset by the effect of lower ethanol sales of $4.5 million and higher maintenance and other expenses of $0.6 million.

Food Ingredients

Fiscal 2013 second quarter sales for the Food Ingredients segment of $26.6 million increased 6.8%, or $1.7 million, over the second quarter of fiscal 2012, due to 5% higher volume and a 2% improvement in average unit pricing. Strong sales in non-coating applications, led by sales to the protein, dairy and gluten-free end markets, contributed almost 70% of total segment revenues and accounted for all of the sales growth in the second quarter.

Sales for the first half of fiscal 2013 increased $3.4 million, 6.7% over the previous year’s sales of $50.8 million. Sales volume improved 5.7% and average unit pricing rose 1%. Higher sales of non-coating applications to the protein, soups/sauces/gravies and dairy end markets constituted over 60% of total food ingredient sales and all of the segment revenue growth.

Operating income for the second quarter of fiscal 2013 at the Company’s Food Ingredients segment increased 5.5% to $5.5 million from $5.2 million in the same period last year due to an increase in gross margin of $0.5 million, partially offset by an increase in operating and research and development expenses of $0.2 million. Second quarter gross margin improved primarily due to higher sales. Operating and research and development expenses increased due to higher employee and legal costs.

Segment operating income for the first half of fiscal 2013 declined 2.8% to $10.9 million from $11.2 million in the same period last year. Gross margin improved $0.4 million on the effect of volume increases of $0.9 million, offset by increased manufacturing input costs of $0.5 million. Operating and research and development expenses increased $0.7 million due to higher employee and legal costs.

Corporate operating expenses

Corporate operating expenses of $2.5 million for the second quarter of fiscal 2013 were comparable to the prior year. Corporate operating expenses for the first six months of fiscal 2013 increased $0.3 million to $5.2 million from $4.9 million in the same period last year due to an increase in employee costs.

Non-operating income (expense)

Non-operating income in the second quarter of fiscal 2013 consisted primarily of the reversal of an allowance for a claim against escrow funds made by the purchaser of the Company’s Lane Cove, New South Wales, Australia operating assets which were sold in fiscal 2010. See Note 13 to the Condensed Consolidated Financial Statements.

Interest expense

In the third and fourth quarters of fiscal 2012, the Company redeemed $40.0 million of its outstanding Series A 15% Cumulative Preferred Stock (the “Preferred Stock”). The redemptions were funded with available balances on the Company’s revolving credit facility. Dividends and discount accretion on the Preferred Stock were recorded as interest expense in fiscal 2012. Interest expense for the three- and six-month periods ended February 28, 2013 decreased $1.4 million and $2.8 million, respectively, from the same periods in fiscal 2012. The decrease was primarily due to the lower interest rates available to the Company under its credit facility compared with the higher dividend rate on the Preferred Stock. The interest rate on the Company bank debt was based on a margin over LIBOR (London Interbank Offered Rate).

 

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Income taxes

The Company’s effective tax rates for the three- and six-month periods ended February 28, 2013 were 27% and 34%, respectively. The difference between the effective tax rates and the U.S. federal statutory tax rate was primarily due to state income taxes, offset by the tax benefit associated with the research and development tax credit. On January 2, 2013, the American Taxpayer Relief Act of 2012 was enacted, which retroactively reinstated, to January 1, 2012, several corporate tax provisions that had expired, including the research and development tax credit. The Company recorded $0.15 million in the second quarter of fiscal 2013 related to this tax credit for research and development activities in fiscal 2012, which reduced the effective tax rates by 9% and 3% for the three- and six-month periods ended February 28, 2013.

The Company’s effective tax rate for the first half of fiscal 2012 was 82%. The difference between the effective tax rate and the U.S. federal statutory tax rate was primarily due to state income taxes and dividends and accretion of discount on the Company’s 15% Series A Preferred Stock. The dividends and accretion of discount were reported as interest expense in the Condensed Consolidated Statements of Operations but were not deductible for tax return purposes. The Series A Preferred Stock was redeemed in the third and fourth quarters of fiscal 2012.

In fiscal 2012, the Company recorded a $1.8 million valuation allowance primarily 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.

At February 28, 2013, the Company had $12.7 million of net deferred tax assets. Other than for the ethanol tax credit carryforwards discussed above, a valuation allowance has not been provided on the net U.S. deferred tax assets as of February 28, 2013. The determination of the need for a valuation allowance requires significant judgment and estimates. The Company evaluates the requirement for a valuation allowance each quarter. The Company believes that it is more likely than not that future operations and the reversal of existing taxable temporary differences will generate sufficient taxable income to realize its deferred tax assets, except for the small ethanol producer tax credit carryforwards, for which a valuation allowance has been provided.

Liquidity and Capital Resources

The Company’s primary sources of short- and long-term liquidity are cash flow from operations and its bank credit facility.

Operating Activities

Cash provided by operations was $3.4 million for the six months ended February 28, 2013 compared with $9.3 million for the same period last year. The decline in operating cash flow was primarily due to higher working capital requirements. The Company has increased its inventories of corn and corn starch finished goods in response to last year’s drought conditions.

Investing Activities

Cash used in investing activities of $5.0 million was for investments in capital projects. See Note 4 to the Condensed Consolidated Financial Statements. The Company expects total capital expenditures for fiscal 2013 to be approximately $12-$15 million.

Financing Activities

As of February 28, 2013, the Company had $84.0 million outstanding on its $130 million secured revolving credit facility (the “2012 Agreement”) with a syndicate of banks. The lenders’ loan commitment may be increased under certain circumstances.

There are no scheduled principal payments prior to maturity of the credit facility on July 9, 2017. Interest rates under the 2012 Agreement are based on either LIBOR or the prime rate, depending on the selection of available borrowing options under the 2012 Agreement. Pursuant to the 2012 Agreement, the interest rate margin over LIBOR ranges between 2% and 4%, depending upon the Total Leverage Ratio, which is computed as funded debt divided by earnings before interest, taxes, depreciation and amortization (as set forth in the 2012 Agreement).

The 2012 Agreement provides that the Total Leverage Ratio shall not exceed 3.50 through November 30, 2013; 3.25 through May 31, 2014; and 3.0 thereafter. In addition, the Company must maintain a Fixed Charge Coverage Ratio, as defined in the 2012 Agreement, of not less than 1.35. Annual capital expenditures will be restricted to $15 million if the Total Leverage Ratio is greater than 2.50 for two consecutive fiscal quarters. The Company’s obligations under the 2012 Agreement are secured by substantially all of the Company’s assets.

 

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Pursuant to the 2012 Agreement, the Company may declare and pay dividends on its common stock in an amount not to exceed, in any consecutive four quarters, the lesser of $10 million or 50% of Free Cash Flow, as defined in the 2012 Agreement. As of February 28, 2013, the Company was not permitted to pay dividends.

Contractual Obligations

The Company is a party to various debt and lease agreements at February 28, 2013 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. There have been no material changes in the Company’s contractual obligations since August 31, 2012.

Off-Balance Sheet Arrangements

The Company had no off-balance sheet arrangements at February 28, 2013.

Recent Accounting Pronouncements

In February 2013, the FASB issued guidance requiring entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Entities are required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. This guidance, which is effective prospectively for reporting periods beginning after December 15, 2012, does not change the current requirements for reporting net income or other comprehensive income. The Company is evaluating the impact this guidance will have on its disclosures.

In December 2011, the FASB issued guidance creating new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements are effective for annual reporting periods, and interim reporting periods within those years, beginning on or after January 1, 2013 (fiscal 2014 for Penford). The Company is evaluating the impact this update will have on its disclosures.

Critical Accounting Policies and Estimates

The Company’s 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 Company’s financial position and results of operations. These estimates, judgments and assumptions are based on the Company’s historical experience and management’s knowledge and understanding of the current facts and circumstances. See the Company’s Annual Report on Form 10-K/A for the fiscal year ended August 31, 2012 for a description of critical 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.

Forward-looking Statements

This Quarterly Report on Form 10-Q/A (“Quarterly Report”), including but not limited to statements found in the Notes to Condensed Consolidated Financial Statements and in Item 2 – Management’s 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 Company’s 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. Readers are cautioned not to place undue reliance on these forward-looking statements which are based on information available as of the date of this report. The Company does not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of the filing of this Quarterly Report. 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 Part II Item 1A of this Quarterly Report, and those described from time to time in other filings made with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K/A for the year ended August 31, 2012, 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;

 

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•

product development risk;

 

•

changes in corn and other raw material prices and availability;

 

•

changes in general economic conditions or developments with respect to specific industries or customers affecting demand for the Company’s products including unfavorable shifts in product mix or changes in government rules or incentives affecting ethanol consumption;

 

•

unanticipated costs, expenses or third-party claims;

 

•

the risk that results may be affected by construction delays, cost overruns, technical difficulties, nonperformance by contractors or changes in capital improvement project requirements or specifications;

 

•

interest rate, chemical and energy cost volatility;

 

•

changes in returns on pension plan assets and/or assumptions used for determining employee benefit expense and obligations;

 

•

other unforeseen developments in the industries in which Penford operates,

 

•

the Company’s ability to successfully operate under and comply with the terms of its bank credit agreement, as amended; and

 

•

other factors described in the Company’s Form 10-K/A Part I, Item 1A “Risk Factors.”

Item 3:     Quantitative and Qualitative Disclosures about Market Risk.

The Company is exposed to market risks from adverse changes in interest rates and commodity prices. There have been no material changes in the Company’s exposure to market risks from the disclosure in the Company’s Annual Report on Form 10-K/A for the year ended August 31, 2012.

Item 4:     Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that material information required to be disclosed in the Company’s periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Company’s disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

In connection with the restatement discussed in Note 2 to the Condensed Consolidated Financial Statements under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer (“Certifying Officers”), the Company reevaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that reevaluation, a material weakness was identified and the Certifying Officers concluded that, as a result, the Company’s disclosure controls and procedures were not effective as of February 28, 2013.

The identified material weakness related to the Company’s controls over the accounting for the proceeds from the sale of by-products. The Company did not have an effective control to monitor the change in significance of on-going accounting policies where direct authoritative accounting guidance was not available. As a result, proceeds from the sale of by-products were incorrectly classified as a reduction of cost of sales rather than as sales in the Condensed Consolidated Statements of Operations. This material weakness resulted in a restatement of the Company’s previously issued financial statements more fully described in Note 2 to the Condensed Consolidated Financial Statements set forth herein.

Remediation of the Material Weakness

To remediate the material weakness in the Company’s internal control over financial reporting, the Company implemented additional review procedures over the monitoring and continued evaluation of the appropriateness of significant accounting policies in accordance with U.S. generally accepted accounting principles.

The Company’s remediation plan has been implemented; however, the above material weakness will not be considered remediated until the additional review procedures over the monitoring of the significance of on-going accounting policies have been

 

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operating effectively for an adequate period of time. The Company will consider the status of this remedial effort when assessing the effectiveness of the Company’s internal controls over financial reporting and other disclosure controls and procedures as of August 31, 2013. While the Company believes that the remedial efforts will resolve the identified material weakness, there is no assurance that the Company’s remedial efforts conducted to date will be sufficient or that additional remedial actions will not be necessary.

Changes in Internal Controls over Financial Reporting

Other than the identification of the material weakness as noted above, there were no significant changes in the Company’s internal control over financial reporting that occurred during the quarter ended February 28, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II—OTHER INFORMATION

Item 1:     Legal Proceedings

The Company resolved or settled certain matters during or after the quarter that did not individually or in the aggregate have a material impact on the Company’s financial condition or results of operations in the quarter. For further information, see Note 13 to the Company’s financial statements.

Item 1A:     Risk Factors

The information set forth in this report should be read in conjunction with the risk factors discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K/A for the year ended August 31, 2012. These risks could materially impact the Company’s business, financial condition and/or future results. The risks described in the Annual Report on Form 10-K/A 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 Company’s business, financial condition and/or operating results.

Item 6:     Exhibits.

 

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		Financial statements from the quarterly report on Form 10-Q/A of the Company for the three and six months ended February 28, 2013, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) the Condensed Consolidated Statements of Operations, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements

 

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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.

 

		Penford Corporation
		(Registrant)
July 8, 2013		/s/ Steven O. Cordier
		Steven O. Cordier
		Senior Vice President and Chief Financial Officer

 

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