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Imperial Sugar Company 10-K 2008 Documents found in this filing:
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended September 30, 2008 Commission File No. 000-16674
IMPERIAL SUGAR COMPANY (Exact name of registrant as specified in its charter)
8016 Highway 90-A, P.O. Box 9, Sugar Land, Texas 77487-0009 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (281) 491-9181 Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: (Title of class) None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x 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 ¨ Smaller Reporting Company ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on March 31, 2008, the last business day of registrant’s most recently completed second fiscal quarter, based on the last reported trading price of the registrant’s common stock on the NASDAQ Stock Market LLC on that date, was approximately $157 million. There were 11,682,943 shares of the registrant’s common stock outstanding on December 5, 2008. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive proxy statement for registrant’s 2009 Annual Shareholders Meeting are incorporated by reference into Part III of this report.
Table of ContentsTABLE OF CONTENTS
Forward-Looking Statements Statements regarding future market prices and margins, Port Wentworth construction costs, timelines and operational restart dates, future expenses and liabilities arising from the Port Wentworth refinery incident, future insurance recoveries, future import and export levels, future government and legislative action, future operating results, future availability of raw sugar, operating efficiencies, results of future investments and initiatives, future cost savings, future product innovations, future energy costs, our liquidity and ability to finance our operations and capital investment programs, future pension plan contributions and other statements that are not historical facts contained in this report on Form 10-K are forward-looking statements that involve certain risks, uncertainties and assumptions. These risks, uncertainties and assumptions include, but are not limited to, market factors, farm and trade policy, results of damaged equipment inspections, unforeseen engineering and equipment delays, results of insurance negotiations, our ability to realize planned cost savings and other improvements, the available supply of sugar, energy costs, the effect of weather and economic conditions, results of actuarial assumptions, actual or threatened acts of terrorism or armed hostilities, legislative, administrative and judicial actions and other factors detailed elsewhere in this report and in our other filings with the SEC. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. We identify forward-looking statements in this report by using the following words and similar expressions:
Management cautions against placing undue reliance on forward-looking statements or projecting any future results based on such statements or present or future earnings levels. All forward-looking statements in this report on Form 10-K are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report.
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Table of ContentsPART I
Overview Imperial Sugar Company was incorporated in 1924 and is the successor to a cane sugar plantation and milling operation founded in Sugar Land, Texas in the early 1800s that began producing granulated sugar in 1843. Imperial Sugar Company (which together with its subsidiaries is referred to herein as the “Company”, “we”, “us”, “our” and “ours”) is one of the largest processors and marketers of refined sugar in the United States. We refine, package and distribute sugar at facilities located in Georgia and Louisiana. For the year ended September 30, 2008, we sold approximately 18.5 million hundredweight, or cwt, of refined sugar. We offer a broad product line and sell to a wide range of customers directly and through wholesalers and distributors. Our customers include retailers, foodservice distributors and industrial customers, principally food manufacturers. Our products include granulated, powdered, liquid and brown sugars marketed in a variety of packaging options (6 oz shakers to 100-pound bags and in bulk) under various brands (Dixie Crystals® , Holly® and Imperial® ) or private labels. In addition, we produce selected specialty sugar products. The Company experienced an industrial accident on February 7, 2008, at its sugar refinery in Port Wentworth, Georgia, located near Savannah, Georgia, which constituted approximately 60% of our refining capacity. The refinery’s bulk storage silos and virtually its entire packaging capabilities were destroyed, while the refining and warehousing operations received more limited damage. The Company is rebuilding the damaged portions of the facility and, based on engineering and construction estimates received thus far, the Company expects to begin bulk sugar production early in calendar year 2009, and to complete the restoration of packaging capabilities in the fall of 2009. Overview of the Sugar Industry Refined sugar can be produced by either processing sugar beets or refining raw sugar produced from sugar cane. The profitability of cane and beet sugar operations is affected by government programs designed to support the price of domestic crops of sugar cane and sugar beets. Cane Sugar Production Process Sugar cane is grown in tropical and semitropical climates throughout the world as well as domestically in Florida, Louisiana, Texas and Hawaii. Sugar cane is processed into raw sugar by raw cane mills promptly after harvest. Raw sugar is approximately 98% sucrose and may be stored for long periods and transported over long distances without affecting its quality. Raw sugar imports are limited by United States government programs. Cane sugar refineries like those we operate purify raw sugar to produce refined sugar. Operating results of cane sugar refineries are driven primarily by the spread between raw sugar and refined sugar prices and by the conversion and other costs of the refining process. Government Regulation Federal government programs have existed to support the price of domestic crops of sugar beets and sugar cane almost continually since 1934. The regulatory framework that affects the domestic sugar industry includes the Farm Security and Rural Investment Act of 2002, otherwise known as the 2002 Farm Bill, which expired in September 2008, and its successor the Food Conservation and Energy Act of 2008, known as the 2008 Farm Bill. Both the 2002 Farm Bill and 2008 Farm Bill provide for loans on sugar inventories to first processors (i.e., raw cane sugar mills and beet processors), implements a tariff rate quota that limits the amount of raw and refined sugar that can be imported into the United States, and imposes marketing allotments on sugar beet processors and
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Table of Contentsdomestic raw cane sugar producers except under certain circumstances. Notwithstanding the tariff rate quota mechanism contained in the 2002 Farm Bill, the North American Free Trade Agreement, or NAFTA, adopted in 1994, limited the amount of sugar that could be imported from and exported to Mexico in part through the operation of certain tariffs which declined each year and were totally eliminated in January 2008. Since January 1, 2008, sugar can be imported from or exported to Mexico duty free. The United States Congress approved the Central American -Dominican Republic Free Trade Agreement, or CAFTA-DR, in July 2005. CAFTA-DR increases the amounts of sugar that can be imported from and exported to Guatemala, El Salvador, Nicaragua, Costa Rica, Dominican Republic and Honduras. Please read “—Sugar Legislation and Other Market Factors.” Domestic Supply and Demand Domestic demand for sugar has increased in four of the past five years, including in 2008. Consecutive years of large domestic sugar beet crops and the availability of Mexican surpluses for import, led to surplus domestic sugar market supply conditions entering 2008. Sugar beet acreage planted in the spring of 2008 was reduced 17%, driven by high prices for alternative crops. Yield improvements offset a portion of the acreage reduction resulting in the U.S. Department of Agriculture, or USDA, estimating a 10.5% reduction in beet sugar production in crop year 2008/2009, significantly tightening domestic supply conditions. Domestic Refined Sugar Prices The surplus of domestic sugar supply following consecutive years of increased beet sugar production resulted in low prices at the beginning of fiscal 2008. Historically, large sugar beet crops have led to relatively soft refined sugar prices and small crops have led to relatively strong refined sugar prices. Prospects of a smaller sugar beet crop based on USDA projections beginning in the spring of 2008, resulted in rising domestic prices in the second half of fiscal 2008. We cannot predict the duration of any pricing trend or the effect a sustained trend may have on the sugar industry. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Raw Sugar Availability and Prices Raw sugar is produced domestically or imported under limitations established in trade treaties and administered by the USDA, as implemented in the 2008 Farm Bill. The price and availability of raw sugar to U.S. refiners is dependent on the size of the domestic sugar cane crop and the level of imports allowed entry by the USDA. Raw sugar prices increased during fiscal 2008, and have declined somewhat in early fiscal 2009. We cannot predict the duration of any pricing trend or the effect a sustained trend may have on the sugar industry. Our Products and Customers Sugar Products Imperial Sugar is one of the largest processors and marketers of refined sugar in the United States. Refined sugar is our principal product line and accounted for approximately 97% of our consolidated net sales for the year ended September 30, 2008. We produce refined sugar from raw cane sugar and market our sugar products to retailers, foodservice distributors and industrial food manufacturers directly through our sales force and through independent brokers. No customer accounted for more than 10% of our net sales in fiscal 2008. We maintain sales offices at our headquarters in Sugar Land, Texas, at our office in Port Wentworth, Georgia and at regional locations across the United States. Sales are accomplished through a variety of methods, including direct negotiation, publishing price lists and competitive bidding processes. We consider our marketing and promotional activities important to our overall sales effort and we advertise our brand names in both the print media and radio. We also distribute various promotional materials, including discount coupons and compilations of recipes.
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Table of ContentsOne of our major objectives is to offer new, innovative products to the consumer and foodservice marketplace. Sugar packaging has not experienced as much innovation as some other consumer categories, and we believe that we can increase our share of retail sales as well as our margins by offering consumers value-added products that provide easier usage and storage of sugar products. To this end, we introduced a number of new products in the past few years, including a stand-up pouch line and a shaker line in 2005 and large shakers for foodservice operators in 2007. We introduced a package of pre-measured, one-quarter cup envelopes of brown sugar into the retail trade in the fall of 2008. We are developing new products and packaging innovations which we plan to introduce to the market in the future. We also plan to add to our portfolio of products offered to foodservice distributors with particular emphasis on packaging innovation. The majority of the industrial specialty products discussed below have historically been produced at our Port Wentworth, Georgia refinery, where production has been idled since the February 2008 accident. Additionally, we are not expecting to produce powdered sugar products until the completion of the Port Wentworth rebuild in the fall of 2009. Retail Sales—We produce and sell granulated white, brown and powdered sugar to retailers and distributors in packages ranging from 6 oz shakers to 50-pound bags. Retail packages are marketed under the trade names:
Retail packages are also sold under retailers’ private labels, generally at prices lower than those for branded sugar. Core geographies for our branded sugar and private label products include the Southeast and Southwest United States. Our primary business strategy is to seek to capitalize on our well-known brands. Sales of refined sugar products to retail customers accounted for approximately 34% of our refined sugar sales revenue in fiscal 2008. Of sales made to retail customers in the year ended September 30, 2008, approximately 39% were of our own brands while 61% were sold as private label. Industrial Sales—We produce and sell refined sugar, molasses and other ingredients to industrial customers, principally food manufacturers, in bulk, packaged or liquid form. Food manufacturers purchase sugar for use in the preparation of confections, baked products, frozen desserts, cereal, canned goods and various other food products. Historically, we have made the majority of our sales to industrial customers under fixed price, forward sales contracts with terms of up to one year. Industrial sales generally provide lower margins than retail and foodservice sales. For the year ended September 30, 2008, our sales of refined sugar products to industrial customers accounted for approximately 53% of our refined sugar sales revenue. We also produce specialty sugar products and sell them to industrial customers. Specialty sugar products accounted for 5% of industrial sales in fiscal 2008, or approximately 3% of total sales. Specialty sugar products include:
Foodservice Sales—We sell a variety of sugar products (including granulated, powdered and brown sugar) in package sizes ranging from one-pound packages to 100-pound bags to foodservice distributors who in turn sell those products to restaurants and institutional foodservice establishments. For the year ended September 30, 2008, our sales of refined sugar products to foodservice distributors accounted for approximately 13% of our
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Table of Contentsrefined sugar sales revenue. Under the terms of a non-compete agreement negotiated in connection with the sale of a business, we agreed not to sell individual servings of sugar and certain non-sugar products for a period of time ending in 2012, in exchange for an agreed upon volume purchase requirement of the Company’s refined sugar from the other party. The agreement allows the Company to sell individual servings of sugar and certain non-sugar products upon certain notice requirements and a reduction in the customer’s purchase requirement. Organic Sugar—We have a 50% percent equity interest in Wholesome Sweeteners, Inc., a company with $60 million of sales of organic and other natural sweeteners in the U.S. Wholesome believes that it has the largest share of the organic sugar business in the U.S. and introduced a number of new products in fiscal 2008. We report our share of Wholesome’s earnings on the equity method of accounting. Additionally, we have an option through May 2011 to purchase the remaining 50% of Wholesome’s equity at a fixed multiple of earnings. Mexican Joint Venture—In November 2007, we formed a 50/50 joint venture with Ingenios Santos, S.A. de C.V., or Santos, that markets sugar products in Mexico and the U.S. under the name Comercializadora Santos Imperial S. de R.L. de C.V. With the elimination of certain NAFTA tariffs on sugar imported from and exported to Mexico in January 2008, the U.S. and Mexican markets effectively became a combined market. Santos owns and operates five sugar mills that produce refined sugar and estandar, a less refined sugar traditionally sold in Mexico. The agreement provides that Santos and Imperial will market all their respective sugar products sold in Mexico through the joint marketing entity. The joint venture entity also exports Santos’ sugar products to the U.S., which are marketed by Imperial or may be used as a raw material in our U.S. refineries. Operational Facilities We own and operate two cane sugar refineries. Each facility has packaging and distribution capabilities, is served by adequate transportation and maintained in good operating condition. The Company experienced an industrial accident on February 7, 2008, at its sugar refinery in Port Wentworth, Georgia, which is located near Savannah, Georgia. The refinery’s bulk storage silos and virtually its entire packaging capabilities were destroyed, while the refining and warehousing operations received more limited damage. We are rebuilding the damaged portions of the facility and, based on engineering and construction estimates received thus far, expect to begin bulk sugar production early in calendar year 2009, and to complete the restoration of packaging capabilities in the fall of 2009. The following table shows the location, capacity and production of our cane sugar refineries:
We also operate a distribution facility in Ludlow, Kentucky and we contract for throughput and storage at a number of warehouses and distribution stations. As described below, we are in preliminary discussions to contribute our Gramercy, Louisiana refinery for a one-third interest in a joint venture with a Louisiana sugar cane grower/miller cooperative and Cargill Incorporated, or Cargill.
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Table of ContentsRaw Materials and Processing Requirements Raw Cane Sugar We currently purchase raw cane sugar from domestic sources of supply located in Louisiana, as well as from various foreign countries. The availability of foreign raw cane sugar for domestic consumption is determined by the import quota level designated by applicable regulation, as well as the provisions of NAFTA and other treaties. In fiscal 2008, we purchased 21% of our raw sugar needs for our Port Wentworth, Georgia refinery from domestic raw sugar suppliers and the balance from international sources under annual or spot contracts with traders. We expect to purchase the vast majority of our needs for our Port Wentworth facility from foreign sources in 2009. Over 90% of the raw sugar needs for our Gramercy, Louisiana refinery in fiscal 2009 are expected to be supplied by a milling cooperative, Louisiana Sugar Cane Products, Inc., or LSCPI, under contracts that expire on September 30, 2010. In November of 2005, LSCPI members and Cargill announced their intent to enter into a joint venture to construct and operate a million-ton-per-year sugar refinery at Cargill’s Terre Haute Marine Facility in Reserve, Louisiana. To date, construction has not commenced. We are in preliminary discussions to contribute our Gramercy, Louisiana refinery for a one-third interest in the joint venture. The discussions contemplate that the new refinery would be built at the Gramercy site and take advantage of existing infrastructure and operational support. We would continue to own and operate the small bag packaging assets at Gramercy, with refined sugar purchased from the joint venture. If the current discussions do not result in a three-way joint venture and the proposed new refinery is constructed without our participation, we expect to pursue other sources for all or part of the raw sugar requirements for our Gramercy refinery. The Company may pursue the purchase of domestic or foreign raw sugar entering the U.S. through the current tariff rate quota system for use at that facility. Additionally, the Company may purchase raw sugar or estandar and refined sugar from Mexico. Estandar has been used as raw sugar by U.S. refiners in the past. Substantially all of our purchases of domestic raw sugar and raw sugar quota imports are priced based upon the New York Board of Trade (NYBOT) Sugar No. 14 futures contract. Commencing with the January 2009 futures contract, NYBOT began trading in the Sugar No. 16 futures contract designed to replace the No.14 contract for deliveries after September 2009. The No. 16 contract is substantially similar to the No. 14 contract, but contains certain modified provisions primarily related to quality of the raw sugar. Non-quota imports under the re-export program, which constitutes less than 10% of our raw sugar purchases, are priced based on the NYBOT Sugar No. 11 futures contract. The terms of raw cane sugar contracts vary. Raw cane sugar purchase contracts can provide for the delivery of a single cargo or for multiple cargoes over a specified period or a specified quantity over one or more crop years. Contract terms may provide for fixed prices but generally provide for prices based on the futures market during a specified period of time. The contracts provide for a premium if the quality of the raw cane sugar is above a specified grade or a discount if the quality is below a specified grade. Contracts require delivery to the Company’s facility and provide that the seller pays freight, insurance charges and other costs of shipping. Historically, the majority of our industrial sales are under fixed price, forward sales contracts. In order to mitigate price risk in raw and refined sugar commitments, we manage the volume of refined sugar sales contracted for future delivery in relation to the volume of raw cane sugar purchased for future delivery by entering into forward purchase contracts to buy raw cane sugar at fixed prices and by using raw sugar futures contracts. We have access to approximately 259,000 short tons of aggregate raw sugar storage capacity: 80,000 short tons of storage at our Gramercy, Louisiana refinery and 179,000 short tons of storage capacity at our Port Wentworth, Georgia refinery. At Port Wentworth, we have the capability to segregate our raw sugar inventory, which allows us to store bonded sugar. Bonded sugar is sugar that is not entered as an import at the time of arrival, but stored in a bonded warehouse under U.S. federal customs service regulations for entry at a later time.
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Table of ContentsEnergy Sugar refining is an energy intensive process. We use natural gas at our Gramercy, Louisiana refinery and coal, fuel oil and natural gas in the Port Wentworth refinery depending on pricing and availability. Fiscal 2008 energy usage, which was impacted by the extended shutdown of the Port Wentworth refinery, consisted of 2.2 million mmbtu of natural gas, 0.7 million mmbtu of coal, and no consumption of fuel oil. The two facilities used 2.7 million mmbtu of natural gas, 1.8 million mmbtu of coal and 0.1 million mmbtu of fuel oil in fiscal 2007. We have historically purchased natural gas and coal supplies under contracts for terms of one year or less. In December 2007, we entered into a five year, fixed price coal contract (subject to escalation factors based on mining costs and quality adjustments). Rail freight for coal supplies is generally contracted annually. Natural gas contracts are contracted on a monthly basis with minimum requirements for each month set separately. Pricing of natural gas generally is indexed to a spot market index and we use financial tools such as futures, options, swaps and caps in an effort to stabilize the price for gas purchases under indexed contracts. Natural gas prices have been higher in recent years and we cannot predict future energy prices or the effect that rising energy prices may have on our business in the future. Seasonality Sales of refined sugar are somewhat seasonal, normally increasing during the first and fourth fiscal quarters because of increased demand of various food manufacturers and processors. Shipments of brown and powdered sugar increase in the first fiscal quarter due to holiday baking needs. Our second fiscal quarter ending March 31 historically experiences lower revenues and earnings than our other fiscal quarters as a result of reduced demand for refined sugar, margin reduction from product mix changes and lower absorption of fixed costs of our cane refineries. Sugar Legislation and Other Market Factors Our business and results of operations are substantially affected by market factors, principally the domestic prices for refined sugar and raw cane sugar. These market factors are influenced by a variety of forces, including domestic supply, prices of competing crops, weather conditions and United States farm and trade policies. The principal legislation supporting the price of domestic crops of sugar cane and sugar beets is the Farm Security and Rural Investment Act of 2002, otherwise known as the 2002 Farm Bill, which became effective October 1, 2002 and extended the sugar price support program for sugar cane and sugar beets until September 30, 2008. During 2008, Congress enacted the Food Conservation and Energy Act of 2008, otherwise known as the 2008 Farm Bill, which became effective October 1, 2008 and expires September 30, 2013. Imports of raw and refined sugars are controlled via a Tariff Rate Quota (TRQ), which is implemented under Additional U.S. Note 5 of Chapter 17 of the Harmonized Tariff Schedule of the United States and does not expire. The TRQ limits the amount of raw and refined sugar that can be imported into the United States, subject to a minimum amount mandated under the General Agreement on Tariffs and Trade, by imposing a tariff, currently $15.36 per cwt, on over-quota sugar which makes its import uneconomical. The government administers the program by adjusting duties and quotas for imported sugar to maintain domestic sugar prices at a level that discourages loan defaults under the non-recourse loan program. To the extent a processor sells refined sugar for export from the United States, it is entitled to import an equivalent quantity of non-quota eligible foreign raw sugar.
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Table of Contents2002 Farm Bill The 2002 Farm Bill had two important aspects:
The Farm Bill requires that the USDA operate its non-recourse sugar loan program so as to avoid forfeiture of sugar to the CCC to the maximum extent possible. This is normally done by restriction on the amount of sugar imported and if that is not sufficient, by restrictions on the amount of sugar that may be marketed by domestic producers. In a more rarely used option, if the USDA has taken sugar in default under price support loans, the department also has the authority to accept bids from sugar cane and sugar beet processors to obtain raw cane sugar or refined beet sugar in CCC inventory in exchange for reduced production of raw cane sugar or refined beet sugar. This payment-in-kind authority, if employed by the USDA, effectively moves inventories of CCC-owned sugar back into the market without increasing overall supply. 2008 Farm Bill The 2008 Farm Bill continued most of the programs established in the 2002 Farm Bill, including the Non-recourse Loan Program and Marketing Allotments. CCC Loan rates under the 2008 Farm Bill will increase 0.25 cents per pound on October 1, 2009 and 0.25 cents each year until 2011 when it reaches 18.75 cents per pound. The refined beet sugar loan rate will be set at 128.5% of the raw sugar loan rate and will rise to 24.09 cents per pound in 2011. A minimum of 85% of estimated domestic consumption must be allocated to domestic suppliers of beet and cane under the marketing allotments. Provisions of the legislation establish the TRQ at the beginning of any crop year at World Trade Organization minimums and maintain that level until it is clear that imported sugar will not be a competitive threat to domestic producers. This change might affect the timing of imports during the year. In addition, quota holders might delay making shipments in hopes that the USDA would need to increase quotas during the year. Another provision of the current version would divert surplus sugar from the marketplace to the production of ethanol. This could encourage producers to maximize production in order to fulfill their allocations, with assurance that surpluses would be removed into the energy market. Such conditions could result in reduced tariff rate quota levels. Free Trade Initiatives As provided in NAFTA, in January 2008, sugar duties and quotas expired and sugar began to be freely traded without duty between the United States and Mexico. Notwithstanding the existing import restrictions under the Farm Bills, the USDA has the right to re-allocate import levels among foreign countries if it deems the demand/supply situation within the United States warrants such action. Mexican imports into the United States could be higher in the future.
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Table of ContentsIn addition to NAFTA, a number of other trade initiatives and negotiations involving the Americas and other quota holding countries are evolving. In 2005, the United States enacted the Central American-Dominican Republic Free Trade Agreement, or CAFTA-DR. Duty-free access to sugar from CAFTA-DR countries increased 109,000 metric tons over the previous amount during the first year, growing to a 151,000 metric ton increase over the first 15 years and 2,640 metric ton increases each year thereafter. It is impossible to determine the impact of CAFTA-DR on the United States sugar industry at this time, although these duty-free amounts are relatively minor compared to the current 10 million tons of domestic consumption. The United States has also negotiated a trade agreement with Australia, which did not include sugar additional access. The U.S. has negotiated a trade treaty with Peru that includes sugar access which has been ratified but not yet implemented. There are additional agreements signed with Panama and Colombia which await Congressional approval. It is not known at this time when and if that approval will be granted. Additionally, a World Trade Organization round of negotiations continues, although the agricultural talks have currently stalled. It is not clear when discussions may resume. The impact of these negotiations is unknown at this time, they could provide for additional raw sugar and/or refined sugar access into the United States. Generally, to the extent that additional sugar is in the form of raw sugar, such additional access would have a beneficial effect on our access to raw sugar. To the extent that such additional access is in the form of refined sugar, such product will be competitive with our product offerings. Environmental Regulation Our operations are governed by various federal, state and local environmental regulations and these regulations impose effluent and emission limitations, and requirements regarding management of water resources, air resources, toxic substances, solid waste and emergency planning. We make application for environmental permits required under federal, state and local regulations and we have obtained or have filed for environmental permits as required in Georgia and Louisiana. Additional expenditures may be required to comply with future environmental protection standards for current operating facilities, although the amount of any further expenditures cannot be fully estimated. Research We operate research and development centers in Sugar Land, Texas and Port Wentworth, Georgia where we conduct research relating to:
Competition We compete with other cane sugar refiners and with beet sugar processors and, in certain product applications, with producers of other nutritive and non-nutritive sweeteners, such as high-fructose corn syrup, aspartame, saccharin, sucralose and acesulfame-k. We also compete with resellers and packaging operations in distributing bag sugar products. Our principal business is highly competitive, where the selling price and our ability to supply a customer’s needs in a timely fashion are important competitive considerations. The freight costs of transporting sugar long distances can affect our sales. Some of our competitors have a competitive advantage of owning all or part of the agricultural production supplying their sugar refining requirements. We believe our key competitors are Domino® Foods, Inc. and United Sugars Corporation.
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Table of ContentsEmployees On November 30, 2008, we employed 759 employees. Our Port Wentworth, Georgia refinery employs non-union labor. Substantially all of the refinery employees at our Gramercy, Louisiana refinery are covered by a collective bargaining agreement which expires in February 2011. We believe our relationship with our employees is good. Available Information Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports are available free of charge on our web site located at www.imperialsugar.com as soon as reasonably practicable after we file or furnish these reports electronically with the SEC. The information on our website is not incorporated by reference into this Form 10-K.
In addition to the other information set forth in this report, you should consider the following factors that could materially affect our business, financial condition or operating results. These risks are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. Our future financial condition and future operating results could be adversely impacted by the time and cost to reconstruct our Port Wentworth refinery, insurance recovery efforts, state of the financial markets and the outcome of claims, litigation and regulatory proceedings. Our Port Wentworth refinery is a substantial portion of our production capacity and a prolonged interruption of operations would materially adversely affect our results. Business interruption insurance provides coverage for lost income, subject to certain policy limits, during a reasonable reconstruction period, plus up to a year after such reconstruction period. If reconstruction of the facility extends beyond a reasonable period, or if we experience a business interruption for a longer period of time, business interruption recoveries may not reimburse the full amount of lost income. Our property insurance policy provides for replacement cost coverage, subject to certain policy limits. If the reconstruction costs exceed the policy limits, property insurance may not be available to fund the full reconstruction costs. Undue delay in the receipt of insurance recoveries could have an adverse impact on our liquidity. Current turmoil in the financial markets could make the availability of borrowings to finance any insurance shortfall or other liquidity need difficult, and the cost of such borrowing expensive. The Company is party to a number of claims, including nineteen lawsuits, for injuries and losses suffered as a result of the explosion. If damages in these matters exceed the policy limits, we could be subject to liabilities, which could be material. The U.S. Occupational Safety Health Administration (OSHA) and the U.S. Chemical Safety and Hazard Investigation Board (CSB) initiated investigations related to the Port Wentworth refinery explosion. OSHA also initiated an investigation of our Gramercy, Louisiana refinery. The CSB investigation is ongoing and we are cooperating in the investigation. OSHA concluded its investigations on July 25, 2008, and issued numerous citations with total proposed penalties of $5.1 million in Port Wentworth and $3.7 million in Gramercy. Additionally, OSHA issued requirements for certain abatement actions to be undertaken by us at such facilities. We have contested all of the citations and proposed penalties regarding the Port Wentworth and Gramercy investigations, and these matters have been assigned to the Occupational Safety and Health Review Commission for a review of the merits of the citations, proposed penalties and abatement actions. Because the contest of the citations is in the early stages, there can be no assurance that we will prevail and an adverse result could adversely affect our results of operations and financial condition. In addition, OSHA penalties are not covered by insurance, and are not deductible for federal income tax purposes.
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Table of ContentsThe domestic sugar industry is affected by a number of external forces that we are unable to predict or control that could cause fluctuations in market prices, which may negatively affect our results of operations. Our business and results of operations are closely tied to conditions in the domestic sugar industry, principally the market prices of both refined sugar and raw cane sugar. The sugar industry is affected by a number of external forces that we are unable to predict or control and that historically have been subject to considerable volatility. A variety of external forces that we are unable to predict influence the domestic sugar industry and could adversely affect our business and results of operations, including:
The domestic sugar business has traditionally been subject to periods of high prices and margins, followed by periods of lower prices and margins. In the past, during periods of high prices, growers have tended to increase their production, which has generally caused a drop in sugar prices until the supply and demand return into balance. Our business consists exclusively of the processing and marketing of refined cane sugar. Consequently, we are unable to counteract the fluctuations to which our business may be subject with revenues or income from businesses that are more predictable or that are subject to different market cycles. As discussed below, partially as a result of the volatile nature of the sugar industry, we have at times in the past experienced operating losses and net losses. Our business could be adversely affected by the effects of existing and future United States farm and trade policies, including the elimination of duties on imports of raw and refined sugar from Mexico in 2008 pursuant to the North American Free Trade Agreement. Legislative and regulatory actions also substantially influence the domestic raw sugar industry. The principal current legislation supporting the price of domestic crops of sugar cane and sugar beets is the 2008 Farm Bill, which extends the sugar price support program for sugar cane and sugar beets until September 30, 2013. The USDA operates a tariff-rate quota that effectively limits the amount of raw and refined sugar that can be imported into the United States by imposing a tariff on over-quota sugar that makes its import uneconomical. This tariff-rate quota could adversely affect the supply and price of raw sugar available to our sugar refineries if there is a shortfall in domestic production. In addition, marketing allotments under the 2008 Farm Bill may reduce the amount and affect the cost of domestic raw sugar that is available to us for refining. Beginning in 2008, the duties on raw and refined sugar imported from Mexico were eliminated pursuant to NAFTA. As a result, domestic sugar manufacturers may face greater competition from sugar mills and refineries located in Mexico. Any of these factors could adversely affect our results of operations. If demand for sugar decreases in the future, lower sales volumes and lower prices could result, which could affect us adversely. Domestic demand for refined sugar increased in 2008 after decreasing in 2007. We cannot predict the demand for sugar in the future and this demand could be affected adversely by numerous factors, including:
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There are a limited number of sources of raw sugar available to us, and our results of operations will be adversely affected if we are unable to obtain adequate supplies of raw sugar for our refineries on favorable terms. Over 90% of the raw sugar needs for our Gramercy, Louisiana refinery for the next two years are expected to be supplied by a single supplier, LSCPI, which has announced plans to enter into a joint venture agreement with Cargill to construct and operate a refinery in Louisiana. While we are in discussion about joining that joint venture and contributing our Gramercy refining assets, there can be no assurance that the transaction will be consummated. If those discussions do not result in our participation in the joint venture and the new refinery commences operation, we expect that LSCPI will supply substantially all of its raw sugar to the new refinery, and we will need to find other sources of raw sugar for our Gramercy refinery. There are a limited number of sources of raw sugar and no assurance that we will be able to make alternative supply arrangements or that such arrangements may be secured on favorable terms. Even if we do consummate the transaction, we may not be able to realize the expected benefits from the joint venture, which could adversely affect our business and results of operations. Supplies of raw sugar can also be adversely affected by increased world raw sugar prices. At times in the past, world raw sugar prices increased substantially, before subsequently subsiding. While world raw sugar prices generally do not affect the price of domestic raw sugar, high world raw sugar prices may attract excess production from exporting countries into the world market, potentially making supplies available for import to the U.S. more scarce. If we have an inadequate supply of raw sugar, we may be unable to efficiently operate our refineries or meet domestic demand for refined sugar. If increases in domestic raw sugar prices occur, we may be unable to offset the increased price of refined sugar to our customers to offset such higher costs, which could adversely affect our refined sugar margins, financial condition, results of operations and cash flows. Higher energy costs may result in increased operating expenses and reduced results of operations. Processing raw sugar into refined sugar requires a high level of energy use. We use natural gas, coal and fuel oil to fulfill our energy requirements. Domestic energy prices, particularly natural gas prices, have been higher in recent years although there have been declines in prices in the latter part of 2008. Fuel prices have also led to increased freight costs. We are unable to predict the trend in future prices. Future high energy prices and unforeseen changes in the energy markets could adversely impact our production costs and operating efficiencies. We sell commodity products in highly competitive channels of distribution and face significant price pressure. We sell our products in highly competitive channels of distribution. We compete with other cane sugar refiners, including one which expanded refining capacity during the past several years, and beet sugar processors and, in certain product applications, with producers of other nutritive and non-nutritive sweeteners, such as high-fructose corn syrup, aspartame, saccharin, sucralose and acesulfame-k. We also compete with foodservice companies and resellers in distributing bag sugar products. Competition in these channels is based primarily on price and the ability to meet timely customer quality and quantity requirements. As a result, we may be unable to protect our sales position by product differentiation
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Table of Contentsand may be unable to raise prices. Historically, we have made the majority of our sales to industrial customers under fixed price, forward sales contracts which extend for up to one year. As a result, changes in our realized sales prices tend to lag behind market price changes. Some competitors may be able to further reduce their product prices because their costs are less than ours or because they have greater financial, technological and other resources than us. In addition, most of our competitors own or control their supply of raw materials. This vertical integration may provide these producers a competitive advantage because they are better able to secure a stable supply of raw materials at more favorable costs than we can. Finally, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can. Increased competition and price pressure could adversely affect our financial condition, results of operations and cash flows. Damage to either of our refineries that results in prolonged interruption of operations could materially adversely affect our results. The Company conducts its operations at two refineries and is dependent upon such facilities for production. Because these facilities are located in coastal areas, they are subject to severe weather conditions, including hurricanes and flooding, as well as to normal hazards that could result in material damage. Damage to either of these refineries, or prolonged interruption in the operation of the facilities due to our dependence on ocean-going raw sugar deliveries, or for repairs or other reasons, would have a material effect on the Company’s business, financial condition, results of operations and cash flows. We have had losses in the recent past and may be unable to maintain profitable operations. We have at times in the past experienced operating losses and net losses. Losses in future years could be incurred and could be attributable to a number of factors, including:
We compete in highly competitive labor markets. We operate facilities in competitive labor markets. In the event we are unable to attract and retain qualified personnel, our production efficiencies could be adversely affected. The Company incurs substantial costs with respect to pension benefits and providing healthcare for its employees. The Company’s estimates of liabilities and expenses for pensions and post-retirement healthcare benefits require the use of assumptions related to the rate used to discount future liability, the rate of return on plan assets, and the retirement age and mortality of current and retired employees. Future results may differ from these assumptions. In addition, rising healthcare costs and the costs of other employee benefits may affect the Company’s future benefit costs. Such future events may have a material effect on the Company’s financial condition, results of operations and cash flows. Recent declines in the stock market have reduced assets available to pay retirement benefits and may result in increased costs and funding requirements.
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Table of ContentsOur pursuit of acquisitions and other similar initiatives involves risk. We may in the future acquire or invest in new lines of business or offer our products in new markets. Acquisitions and similar investments involve numerous risks, including:
We may not realize the expected benefits from future acquisitions or similar investments, and the costs of unsuccessful investment efforts could adversely affect our business and results of operations. We are exposed to costs arising from environmental compliance, cleanup and litigation, which may adversely affect our business, financial condition, operating results or cash flows. Our operations are governed by various federal, state and local environmental laws and regulations. These regulations impose limitations on releases of effluents and emissions from our facilities. They also impose requirements on our management of:
We cannot predict with certainty the extent of our future liabilities and costs under environmental, health and safety laws and regulations, or how such regulations could impact our reconstruction of the Port Wentworth refinery, and these impacts could be material. The global financial crisis may have impacts on our business and financial condition that we currently cannot predict. The continued credit crisis and related turmoil in the global financial system may have an impact on our business and our financial condition. Our ability to access the capital markets may be restricted at a time when we would like, or need, to access those markets, which could have an impact on our flexibility to react to changing economic and business conditions. In addition, the cost of debt financing and the proceeds of equity financing may be materially adversely impacted by these market conditions. The credit crisis also could have an impact on our lenders, suppliers, insurers or our customers, causing them to fail to meet their obligations to us. The current economic situation also could lead to reduced demand for refined sugar products, or lower prices for such products, or both, which could have a negative impact on our revenues.
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None.
We own each of our cane sugar refineries and our corporate headquarters in Sugar Land, Texas. We lease the land and own the property improvements and equipment at a distribution facility in Kentucky, and contract for throughput and storage at a number of warehouses and distribution stations. Certain of these properties are subject to liens securing our credit facility. We are in preliminary discussions to contribute our Gramercy, Louisiana refinery for a one-third interest in a joint venture with a Louisiana sugar cane growers/millers cooperative and Cargill. The joint venture is planning to build a new refinery to process up to 1 million tons of raw sugar a year, supplied by the grower/miller cooperative. The discussions contemplate that the new refinery would be built at the Gramercy site and take advantage of existing infrastructure and operational support. We would continue to own and operate the small bag packaging assets at Gramercy, with refined sugar purchased from the joint venture. Please read “Business—Operational Facilities,” “Business—Raw Materials and Processing Requirements—Raw Cane Sugar” and “Risk Factors—There are a limited number of sources of raw sugar available to us, and our results of operations will be adversely affected if we are unable to obtain adequate supplies of raw sugar for our refineries on favorable terms.”
The Company is party to a number of claims, including seventeen lawsuits by employees and two lawsuits by third parties or their families filed in Georgia state court, for injuries and losses of life suffered as a result of the Port Wentworth refinery explosion and fire. The Company believes that its workers compensation and liability insurance coverage is adequate to provide for damages arising from such claims. The Company has recorded a charge for the required deductibles under these policies as part of refinery explosion related charges in the consolidated statements of operations for fiscal 2008. The U.S. Occupational Safety Health Administration (OSHA) and the U.S. Chemical Safety and Hazard Investigation Board (CSB) initiated investigations related to the February 7, 2008 explosion at the Company’s Port Wentworth facility. OSHA also initiated an investigation of the Company’s Gramercy, Louisiana refinery, and the Kentucky Office of Occupational Safety and Health (Kentucky OSHA) inspected the Company’s Ludlow, Kentucky facility. OSHA and Kentucky OSHA have the authority to issue citations alleging violations of the Occupational Safety and Health Act and the Kentucky Occupational Safety and Health Act and the regulations thereunder and to propose penalties for any such violations. The CSB investigation is ongoing and the Company is cooperating in this investigation. OSHA concluded its Port Wentworth and Gramercy investigations on July 25, 2008, and issued numerous citations with total proposed penalties of $5.1 million in Port Wentworth and $3.7 million in Gramercy. Additionally, OSHA issued requirements for certain abatement actions to be undertaken by the Company at the Port Wentworth and Gramercy facilities. The Company has contested all of the citations and proposed penalties regarding the Port Wentworth and Gramercy investigations, and these matters have been assigned to the Occupational Safety and Health Review Commission for a review of the merits of the citations, proposed penalties and abatement actions. Kentucky OSHA has concluded its investigation and informed the Company that no citations will be issued regarding its investigation. The contest of the OSHA citations is in the early stages and the Company is unable to predict the final outcome of this matter with certainty. The Company believes that it is probable that it will incur a loss in the range of $3.5 million to $8.8 million and, accordingly, has recorded a liability in the consolidated financial statements for $3.5 million, the lower end of the range of estimates. OSHA penalties are not covered by insurance, and are not deductible for federal income tax purposes. The Company has voluntarily suspended operation of its powder sugar production in Gramercy.
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Table of ContentsOn July 31, 2008, the Board of Directors received a letter from an attorney representing a stockholder of the Company requesting, among other things, that the Board cause an independent investigation to be made with respect to alleged mismanagement and breaches of fiduciary duty by the Company’s officers, directors and employees relating to the February 7, 2008 explosion at the Company’s refinery in Port Wentworth, Georgia. On October 2, 2008, the Board received a similar letter requesting that the Company commence legal actions against specified officers and directors. The Board of Directors established a committee of independent and disinterested directors with full authority to investigate and address the allegations contained in the shareholder letters described above. On September 26, 2008, an officer of the Company filed a complaint with OSHA alleging discriminatory employment practices in violation of the Sarbanes-Oxley Act and the Occupational Safety and Health Act in connection with the officer’s cooperation with the OSHA and CSB investigations of the Port Wentworth refinery explosion. The Company has provided information to OSHA in connection with the complaint for purposes of its investigation, and the Company is cooperating in this investigation. The Company intends to vigorously defend against the charges, as it believes it has no liability. Additionally, the Company is party to litigation and claims which are normal in the course of its operations. While the results of such litigation and claims cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a materially adverse effect on its consolidated results of operations, financial position or cash flows. In connection with the sales of certain businesses, the Company made customary representations and warranties, and undertook indemnification obligations with regard to certain of these representations and warranties including financial statements, environmental and tax matters, and the conduct of the businesses prior to the sale. These indemnification obligations are subject to certain deductibles, caps and expiration dates and, in some cases, may be deducted from the related escrow balance. The Company along with other sugar industry participants was party to a pending lawsuit with McNeil Nutritional, which was settled in November 2008. The Company received $16.1 million in connection with the settlement, which it expects to report as a gain in the first quarter of fiscal 2009.
None.
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Table of ContentsEXECUTIVE OFFICERS OF THE REGISTRANT The table below sets forth the name, age and position of our executive officers as of December 8, 2008. Our by-laws provide that each officer shall hold office until the officer’s successor is elected or appointed and qualified or until the earlier of the officer’s death, resignation or removal by the Board of Directors.
Mr. Sheptor became President and Chief Executive Officer of the Company in January 2008, after serving as Executive Vice President and Chief Operating Officer since joining the Company in February 2007. Prior to joining Imperial, Mr. Sheptor was Executive Vice President of Merisant Worldwide, Inc., the distributor of Equal®, from 2001 to 2004. Prior to that position, he held supply chain and manufacturing positions for Monsanto Company. Immediately before joining the Company, he was Project Deputy Director for the Partnership for Supply Chain Management, a non-governmental organization funded by the President’s Emergency Plan for Aids Relief. Mr. Peiser reduced his involvement with the Company, and assumed the role of Vice Chairman of the Company effective January 29, 2008, and will remain in that capacity through January 2009. Mr. Peiser served as President, Chief Executive Officer and a member of our Board of Directors of the Company from April 2002 until January 2008. Prior to joining Imperial, Mr. Peiser served as Chairman and Chief Executive Officer of Vitality Beverages, Inc. of Tampa, Florida, a privately owned beverage company, from July 1999 to February 2002. Mr. Bolognini joined the Company as Senior Vice President, General Counsel and Secretary in June 2008. Prior to joining the Company, he was Vice President and General Counsel of BioLab, Inc., a pool and spa manufacturing and marketing company from 1999 to 2008. Mr. Bolognini served as Assistant General Counsel to BioLab’s parent company, Great Lakes Chemical Corporation from 1990 to 1999. Mr. Henneberry joined Imperial as Senior Vice President in July 2002. Prior to joining Imperial, he was employed by Louis Dreyfus Corporation from 1984 to 2002. His more recent positions with Louis Dreyfus were: Vice President, Alcohol Division September 2001 to July 2002, Vice President, Louis Dreyfus eBusiness Ventures from May 2000 to March 2002 and Executive Vice President, Louis Dreyfus Sugar Company from April 1996 to April 2000. Mr. Mechler became Senior Vice President and Chief Financial Officer in March 2005. He served as Vice President—Accounting and Finance since February 2003 and was Vice President—Accounting from April 1997 to February 2003. Mr. Mechler had been Controller since joining Imperial in 1988. Mr. Muller became Vice President—Administration in October 2008. He served as Vice President and Chief Information Officer from November 2002 to October 2008. Mr. Muller joined the Company in March 1997 as Director of Management Information Systems. Mr. Story was promoted to Vice President and Treasurer in September 2004 and previously served as Treasurer of Imperial since February 2003. He joined Savannah Foods & Industries, Inc. in 1987, which we acquired in 1997, and has held a number of finance and accounting positions within both Savannah Foods & Industries and Imperial. He became corporate controller for Savannah in 1994 and director of planning and analysis for Imperial in 2002.
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Table of ContentsPART II
Market Price of Common Equity and Related Shareholder Matters Our common stock currently is listed on The NASDAQ Stock Market LLC (NASDAQ) under the symbol “IPSU”. As of November 30, 2008, there were approximately 1,690 shareholders of record of our common stock. The following table contains information about the high and low sales price per share of our common stock for fiscal years 2008 and 2007 as reported by NASDAQ.
Dividend Policy Our current credit agreement limits the payment of dividends, other than dividends payable solely in our capital stock, if our average total liquidity (defined as the average of the borrowing base less average actual borrowings and letters of credit), after adjustment on a pro forma basis for such payment, is less than $20 million. In December 2004, our Board of Directors instituted a regular quarterly dividend of $0.05 per share. The regular quarterly dividend was increased to $0.06 per share in January 2006 and to $0.07 per share in January 2007. In addition, our Board of Directors in the past has declared special dividends of $2.50 per share, $3.00 per share and $2.50 per share which were paid in November 2005, January 2007 and January 2008, respectively. The determination to declare or pay future dividends out of funds legally available for that purpose will be at the discretion of our Board of Directors and will depend on our future earnings, results of operations, financial condition, capital requirements, any future contractual restrictions and other factors our Board of Directors deems relevant. Unregistered Sales of Equity Securities Under the Company’s August 2001 plan of reorganization, warrants to purchase an aggregate of 1,111,111 shares of common stock exercisable through August 2008 were issued to persons who were common shareholders of the Company immediately prior to effectiveness of the plan of reorganization. Warrant holders exercised a total of 4,275 warrants to purchase shares of the Company’s common stock, at an average effective exercise price of $21.66 per share, prior to their expiration in August 2008. The issuance of the shares and the conversion of the warrants were exempt from registration under Section 1145 of the U.S. Bankruptcy Code. Shareholder Return Performance Graph The following graph compares the cumulative total stockholder return on the Company’s common stock to the cumulative total return of the Standard & Poor’s 500 Stock Index and the American Stock Exchange Consumer Staple Index (IXR) for the period from September 30, 2003 to September 30, 2008. The graph
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Table of Contentsassumes that the value of the investment in the common stock and each index was $1.00 at September 30, 2003 and that all dividends were reinvested on a quarterly basis.
The following selected consolidated financial information is derived from our audited consolidated financial statements. This consolidated financial data should be read in conjunction with our consolidated financial statements including the related notes thereto, and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report. Selected financial data for the last five years is as follows (in thousands of dollars, except per share data):
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This discussion is intended to provide the reader with information that will assist in understanding our consolidated financial statements, the changes in certain key items in those consolidated financial statements from year to year, and the primary factors that accounted for those changes. This discussion should be read in conjunction with information contained in the consolidated financial statements and the related notes thereto. Overview We operate in a single domestic business segment, which produces and sells refined sugar and related products. Our results of operations substantially depend on market factors, including the demand for and price of refined sugar, the price of raw cane sugar and the availability and price of energy and other resources. These market factors are influenced by a variety of external forces that we are unable to predict, including the number of domestic acres contracted to grow sugar cane and sugar beets, prices of competing crops, domestic dietary trends, competing sweeteners, weather conditions, production outages at key industry facilities and United States farm and trade policy. The domestic sugar industry is subject to substantial influence by legislative and regulatory actions. The 2008 Farm Bill limits the importation of raw cane sugar and the marketing of refined beet and raw cane sugar, potentially affecting refined sugar sales prices and volumes as well as the supply and cost of raw material available to our cane refineries. The Company experienced an explosion and fire on February 7, 2008, at its sugar refinery in Port Wentworth, Georgia, which is located near Savannah, Georgia. A number of employees and contractors were injured and there were 14 fatalities. The refinery’s bulk storage silos and virtually its entire packaging capabilities were destroyed, while the refining and warehousing operations received more limited damage. Demolition efforts at the site have been completed and the rebuilding effort has begun. Limited production of liquid sugar began in early November 2008 and the Company expects to begin bulk sugar production in early calendar year 2009. The complete restoration of packaging capabilities is expected to be finished in the fall of 2009. Results of Operations Fiscal Year Ended September 30, 2008 compared to Fiscal Year Ended September 30, 2007 Continuing Operations Loss from continuing operations was $21.2 million in fiscal 2008 as compared to income from continuing operations of $43.6 million in fiscal 2007. Lower sales volumes and higher costs due to the loss of the Port Wentworth refinery production capacity, as well as lower domestic sugar prices were the primary drivers of lower profitability from the prior year. Refinery explosion related charges (as described in Note 2 to the Consolidated Financial Statements) resulted in net pre-tax charges of $27.2 million in fiscal 2008. We discuss these and other factors in more detail below. These results do not include any recoveries for lost income under the business interruption portion of the Company’s property insurance policy.
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Table of ContentsSugar sales comprised approximately 97% of our net sales in fiscal 2008 and 2007. Sugar sales volumes and prices were:
Net sales decreased 32.3% in fiscal 2008 driven by an overall sugar volume decrease of 30.3% primarily due to the lost production volume from the Port Wentworth refinery, partially offset by increased production in our Gramercy refinery and sugar purchased from producers. Domestic prices decreased 4.7% and gross margin (after depreciation) as a percentage of sales was 1.1% for fiscal 2008 as compared to 10.7% for fiscal 2007. Domestic sugar supply conditions, driven by a large domestic sugar beet crop in the fall of 2007, led to lower refined sugar prices and reduced sales margins in fiscal 2008. Lower prices were experienced across all sales channels, although average consumer prices were bolstered by a higher mix of branded sales as we made significant efforts to maintain brand share of the Dixie Crystal label in the Southeast which has predominantly been produced at the Port Wentworth refinery. The Company has voluntarily suspended operation of its powdered sugar production in Gramercy. We are not expecting to produce powdered sugar products until the completion of the Port Wentworth rebuild in the fall of 2009. Sales of powdered sugar from Gramercy were approximately $9.9 million in fiscal 2008 and $27.6 million in fiscal 2007. The majority of industrial channel sales are made under fixed price contracts which generally extend up to a year, many of which are on a calendar year basis. As a result, industrial sales prices tend to lag market trends. The Company declared force majeure on the industrial contracts sourced from the Port Wentworth refinery and is allocating product from excess available production and product purchased from other producers to customers under those contracts. The unfilled contracts expected to ship as additional production capacity is available in fiscal 2009, amount to about one-third of our anticipated fiscal 2009 industrial sales volume. The beet crop being harvested during the fall of 2008 is estimated by the USDA to be 12% smaller than the prior year crop with lower acreage more than offsetting improved yields. This tighter supply has increased prices and we expect to benefit from these higher prices in fiscal 2009, after fulfilling contracts carried over from fiscal 2008. Partially offsetting the margin impact of lower refined prices, the cost of raw sugar was lower than the prior year. Our cost of domestic raw cane sugar decreased from $21.00 per cwt (on a raw market basis) for last year to $20.86 per cwt this year. The lower domestic raw cane sugar cost increased our gross margin percentage by 0.5%. Based on existing priced purchase commitments and current market conditions, we expect our raw sugar costs per cwt in fiscal 2009 to approximate fiscal 2008. Energy costs per cwt for fiscal 2008 were higher than the prior year due to a negative mix of energy sources caused by the curtailment of sugar production in Port Wentworth, as well as higher natural gas prices. Higher energy costs reduced gross margin as a percent of sales by 0.9%. The Port Wentworth refinery utilizes lower priced coal as its primary energy source while the Gramercy refinery exclusively uses natural gas. As reflected in the table below, natural gas provided approximately 59% of the energy for our plants in fiscal 2007, while the remainder of our energy usage was comprised of coal and fuel oil. Natural gas usage increased to
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Table of Contents75% of the total energy usage in fiscal 2008. Our average NYMEX basis cost of natural gas after applying gains and losses from hedging activity increased to $9.13 per mmbtu in the current year as compared to $7.90 last year.
We have purchased or hedged approximately 68% of our expected natural gas requirements for fiscal 2009 at prices higher than fiscal 2008 levels. If the balance of our anticipated natural gas purchases were priced in the futures market on December 10, 2008, our natural gas costs would be $0.6 million lower than fiscal 2008. Gross margin was significantly impacted by higher transportation costs. Increased distances on deliveries to customer locations caused by servicing Port Wentworth-based customers, as well as higher fuel and rail fleet costs, have had an adverse effect on our transportation costs reducing gross margin percentage by 2.3% for the year. A shift in delivery mix with fewer customer pickups and increased deliveries from outside warehouses accounted for 1% of the 2.3% gross margin reduction. Increased distances to customers accounted for 0.7% of the gross margin reduction and higher fuel and freight rates drove the remaining 0.6% gross margin change. Manufacturing costs increased over fiscal 2007 due to continuing fixed costs in Port Wentworth as well as higher labor and packaging materials cost in Gramercy. Gross margin percentage for the year was reduced by 1.5% as a result of these increased costs. We purchased 1.2 million cwt of refined product from other producers and re-negotiated certain industrial contract volumes in fiscal 2008 to help mitigate the impact on industrial customers of supply disruptions under existing industrial contracts. The cost of those purchases was higher than our cost of production, negatively impacting gross margin as a percent of sales by 0.8% for the year. Recent declines in the stock market have reduced assets available to pay pension benefits and may result in increased costs in the future. Selling, general and administrative expense for fiscal 2008 decreased $6.9 million from fiscal 2007 primarily due to lower litigation costs of $1.6 million, lower advertising costs of $1.6 million, lower workers compensation costs of $0.9 million, lower professional services fees related to corporate development activities of $0.9 million, and reduced bad debt and brokerage costs as a result of lower sales volumes. The decrease in litigation costs was primarily in connection with the Southern Minnesota Beet Sugar Cooperative (SMBSC) arbitration case in fiscal 2007. Legal and consulting costs of $7.7 million related to the February 2008 refinery accident are not in selling, general and administrative expense, but rather are included in Refinery Explosion Related Charges, Net. We incurred $63.3 million of costs related to the refinery explosion and have accrued insurance recoveries totaling $36.1 million, resulting in a net charge of $27.2 million to operations. Details of the costs incurred and the status of insurance recoveries is provided in Note 2 to the Consolidated Financial Statements. In fiscal 2007, we reported several significant gains:
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As a result of the foregoing, our operating loss was $66.2 million in fiscal 2008 compared to operating income of $53.7 million in fiscal 2007. Interest expense decreased by $0.3 million in fiscal 2008 primarily as a result of lower fees on our revolving credit facility, which was renegotiated in July 2007, as well as lower debt levels. Interest income decreased by $1.3 million in fiscal 2008 primarily due to lower invested balances. In October 2007, the Company received an $11.2 million cash distribution from its long-term limited partnership investment as a result of the partnership selling its principal asset, an interest in a fuel oil terminal in the Port of Houston. In November 2007, the Company formed a 50/50 joint venture with a Monterrey, Mexico based sugar producer, which markets sugar products in Mexico and facilitates cross-border transactions (to the extent such transactions are economically viable) under the provisions of NAFTA. We own a 50% share of Wholesome Sweeteners, Inc, an organic and fair trade sweetener company. Other income included the following (in thousands of dollars):
Detail of our provision for income taxes, including reconciliation to the statutory federal rates, is provided in Note 7 to the Consolidated Financial Statements. Discontinued Operations Discontinued operations in fiscal 2008 is the gain resulting from the settlement of certain escrow arrangements for a previously sold business. The loss from discontinued operations in fiscal 2007 resulted primarily from a $3.1 million award in the SMBSC arbitration proceedings in connection with SMBSC’s claims against the Company for breach of warranties and covenants. Fiscal Year Ended September 30, 2007 compared to Fiscal Year Ended September 30, 2006 Continuing Operations Income from continuing operations was $43.6 million in fiscal 2007, a 10.0% decrease from a year earlier, primarily due to lower sales and reduced gross margin, offset in part by an arbitration settlement and certain other gains. Net sales decreased 7.5% as a result of lower sales volumes and prices. Tight domestic sugar supply conditions in fiscal 2006 abated in fiscal 2007 as a result of a record sugar beet crop and the restoration of
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Table of Contentshurricane-related reductions in cane refining capacity. Prospects of another large sugar beet crop forecasted for the fall of 2007 led to further declines in prices in the second half of fiscal 2007.
Sugar sales comprised approximately 97% of our net sales in fiscal 2007 and 2006. Sugar sales volumes and prices were:
Domestic sugar volumes decreased 5.8% and domestic prices decreased 3.9% in fiscal 2007. The tight domestic sugar supply conditions, driven by a smaller domestic sugar beet crop and delays in the start of the harvest in some sugar beet areas, along with the impact of Gulf Coast hurricanes on the cane sugar industry in the fall of 2005, led to rapidly rising refined sugar prices during fiscal 2006. Additionally, in fiscal 2006, certain channels experienced higher volumes caused by shortages in the domestic industry’s refining capacity in the months immediately following the hurricanes. Beginning late in fiscal 2006 and continuing in fiscal 2007, prices declined from the high levels reached in 2006 due to the restoration of refining capacity and a 12.6% increase in beet sugar production from the crop which commenced harvest in the fall of 2006. A significant portion of our industrial sales are made under fixed price forward sales contracts for generally up to a year, many of which are on a calendar year basis. As a result, industrial sales prices tend to lag market trends. The lag effect of rising industrial contract prices largely matured in the second half of fiscal 2006, and the impact of falling prices was realized more fully each quarter of fiscal 2007 as old contracts were completed. As a result, fiscal 2007 industrial prices were 2.6% lower than the prior fiscal year, but 11.5% lower in the fourth quarter. Industrial volumes were essentially flat in fiscal 2007 and include a shift of a toll contract to industrial sales beginning in the second quarter. Branded consumer volume in the current fiscal year increased from levels achieved in the previous year due to an aggressive sales effort to restore business volumes with the existing customer base as well as to establish sales with new customers. On the other hand, private label consumer volume was down due to both the increased availability of sugar this past fall and increased private label competition, including Mexican imports. Overall, consumer prices in fiscal 2007 were only slightly below the prior year level.
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Table of ContentsRestoration of the domestic cane production capacity and competitive pressure negatively impacted foodservice price and volume. Foodservice prices declined significantly in fiscal 2007, primarily in the earlier part of the year, from the peak prices reached at the end of fiscal 2006. World and toll sales volumes were lower in fiscal 2007 compared to the prior year as the conversion of a toll contract to domestic industrial sales largely offset higher world sales. World and toll sales price increased significantly compared to the prior year with the shift of volumes to higher priced world sales. Partially offsetting the margin impact of lower refined prices, the cost of raw sugar was lower than the prior year. Our cost of domestic raw cane sugar decreased from $21.98 per cwt (on a raw market basis) for last year to $21.00 per cwt in fiscal 2007. The lower domestic raw cane sugar cost increased our gross margin percentage by 2.7%. Lower world raw sugar costs in fiscal 2007 positively impacted gross margin by 0.9%. Our sugar manufacturing operations are an energy intensive process, consuming approximately 4.5 million mmbtu of energy in fiscal 2007. Natural gas provides approximately half of the energy for our plants, while the remainder of our energy usage is comprised of coal and fuel oil. We purchased approximately 2.7 million mmbtu of natural gas and our average NYMEX basis cost after applying gains and losses from hedging activity decreased to $7.90 per mmbtu in fiscal 2007 compared to $9.92 per mmbtu in 2006. Coal purchased in fiscal 2007 was approximately 1.8 million mmbtu at a price of $3.62 per mmbtu compared to $3.86 per mmbtu in 2006. Energy costs were $2.9 million lower in fiscal 2007 compared to the prior year amounting to an increase of gross margin percentage of 0.3%. Gross margin as a percentage of sales for the twelve months ended September 30, 2007, decreased to 10.7% compared to 12.6% in the prior year, primarily a result of lower sales prices. In addition to the effects of sales prices, raw sugar costs and energy costs described above, gross margin was impacted by higher manufacturing costs. Manufacturing costs increased in fiscal 2007 due to increased costs for labor, repair and maintenance costs, property insurance expense, fringe benefit costs and the influence of lower production volumes on unit costs. Increased manufacturing costs in fiscal 2007 (excluding energy) negatively impacted gross margin by approximately 2.4% compared to the prior year. Selling, general and administrative expense for fiscal 2007 increased $4.9 million from fiscal 2006 primarily due to higher employee benefit costs of $4.6 million, litigation costs of $1.4 million and professional services fees related to corporate development activities of $0.5 million, partially offset by lower compensation costs of $1.6 million. Employee benefit costs were higher in fiscal 2007 primarily as a result of higher medical, workers compensation, pension and post-employment benefits costs. The increase in litigation costs in the current year was primarily in connection with the Southern Minnesota Beet Sugar Cooperative (SMBSC) arbitration case. Overall compensation costs decreased in the current year due to lower incentive compensation, offset in part by higher salary and equity-based compensation costs. In June 2007, we were awarded damages of $6.1 million plus interest in connection with an arbitration claim concerning breach of contract under a supply option agreement with SMBSC. In January 2007, Intercontinental Commodity Exchange, Inc. (NYSE: ICE) merged with the New York Board of Trade (NYBOT) in exchange for a combination of cash and ICE common stock. The merger consideration received for our NYBOT membership interests included cash of $0.8 million and restricted and unrestricted ICE stock, a substantial portion of which has subsequently been sold. A gain of approximately $3.7 million was recorded in connection with this transaction as gain on commodity exchange seats. In fiscal 2007, we sold the site of a former refinery in Sugar Land, Texas, which ceased operations in 2003, for proceeds of $6.5 million and recorded a gain of approximately $1.9 million. We also sold land and remaining buildings at a former refinery in Clewiston, Florida, which ceased operations in 2000 for proceeds of $0.9 million, and recorded a gain of approximately $0.7 million. No significant asset sales occurred in fiscal 2006. As a result of the foregoing, operating income was $53.7 million in fiscal 2007 compared to $71.7 million in fiscal 2006.
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Table of ContentsInterest expense decreased by $0.3 million in fiscal 2007 primarily as a result of our lower debt level. Interest income increased by $1.7 million in fiscal 2007 primarily due to higher invested balances. Other income, which includes equity investment earnings from a 45% interest in Wholesome Sweeteners, and distributions from cost basis investments, decreased $0.5 million in fiscal 2007 primarily due to lower equity investment earnings. Detail of our provision for income taxes, including reconciliation to the statutory federal rates, is provided in Note 7 to the Consolidated Financial Statements. Discontinued Operations The loss from discontinued operations in fiscal 2007 resulted primarily from a $3.1 million award in the SMBSC arbitration proceedings discussed above, in connection with SMBSC’s claims against the Company for breach of warranties and covenants. Liquidity and Capital Resources We are currently rebuilding portions of the Port Wentworth refinery damaged or destroyed in the industrial accident in February 2008. The Company has property damage insurance, which provides replacement cost coverage for affected facilities or a reduced amount to the extent not replaced. The policy also provides for business interruption insurance based on lost income and certain costs incurred during a reasonable period of reconstruction. The combined policy coverage for property damage and business interruption is subject to deductibles and a number of exclusions and sub-limits, as well as an overall policy limit of $350 million per event. Based on engineering reports and construction estimates received to date, the Company believes its insurance coverage is adequate to provide for the replacement of the damaged facilities at the Port Wentworth refinery, estimated in the range of $200 million to $220 million. The Company is in continuous communication with representatives of the insurers to assure a smooth flow of information in an effort to expedite the claims processing effort. Through September 30, 2008, we have received advances on our property insurance claims totaling $100 million. Additionally, the Company has workers compensation insurance and general liability insurance. Workers compensation insurance provides for coverage equal to the statutory benefits provided under state law. The general liability insurance provides coverage for damage to third parties or their property, up to a policy limit of $100 million. Each of these policies is subject to sub-limits and exclusions and required deductibles. At September 30, 2008, the Company had cash and cash equivalents of $74.7 million. Additionally, as more fully described below, the Company has a revolving credit agreement with Bank of America, N.A. (the “Revolver”) which provides for up to $100 million (subject to a borrowing base) of senior secured revolving credit loans. At September 30, 2008, we had no outstanding borrowings and had the capacity under the borrowing base formula to borrow $51.8 million against inventory and receivables, after deducting outstanding letters of credit totaling $5.9 million. We believe that our available liquidity and capital resources including cash from operations, insurance recoveries, cash balances and existing revolving credit agreement, are sufficient to meet our operating and capital needs, including estimated reconstruction costs and ongoing capital improvements, through fiscal 2009. The amount and timing of insurance recoveries, including the availability of additional advances, is subject to continuing progress on our claims with the insurers. Should the amounts of the recoveries be insufficient to fully fund the Port Wentworth refinery reconstruction project and other needs, or should the timing of the receipt of insurance recoveries be unduly delayed, our liquidity could be strained. The continued credit crisis and related turmoil in the global financial system could make the availability of borrowings available to finance any insurance shortfall or other liquidity needs difficult, and the cost of such borrowings expensive.
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Table of ContentsThe Revolver, which expires December 31, 2011, is secured by substantially all of our current assets, certain investments and certain property, plant and equipment. Each of our subsidiaries is either a borrower or a guarantor under the facility. Interest on borrowings under the Revolver is at LIBOR plus a margin that varies (with liquidity, as defined) from 1.00% to 1.75%, or the base rate (Bank of America prime rate) plus a margin of negative 0.25% to positive 0.25%. The agreement contains covenants limiting our ability to, among other things:
In addition, in the event that our average total liquidity (defined as the average of the borrowing base, less average actual borrowings and letters of credit) falls below $20 million, the Revolver requires that we comply with a quarterly covenant which establishes a minimum level of earnings before interest, taxes, depreciation and amortization, as defined (EBITDA). The Revolver limits our ability to pay dividends or repurchase stock if our average total liquidity, after adjustment on a pro forma basis for such transaction, is less than $20 million. Average total liquidity for fiscal 2008 was $138 million. The Revolver also includes customary events of default, including a change of control. Borrowings will generally be available subject to a borrowing base and to the accuracy of all representations and warranties, including the absence of a material adverse change and the absence of any default or event of default. Although the facility has a final maturity date of December 31, 2011, we classify debt under the Revolver as current, pursuant to Emerging Issues Task Force Issue 95-22 as the agreement contains a subjective acceleration clause if in the opinion of the lenders there is a material adverse effect, and provides the lenders direct access to our cash receipts. Our capital expenditures for the twelve months ended September 30, 2008 were $17.7 million including $8.3 million relating to the Port Wentworth rebuild. Capital expenditures in fiscal 2009, excluding the Port Wentworth rebuild, are expected to total between $12 million and $20 million, related primarily to normal equipment replacement, product quality and safety improvements. Pension liabilities of $48.5 million, along with a $10.9 million liability for postretirement and post employment medical benefits and deferred compensation liabilities of $8.5 million comprised the substantial portion of the non-current deferred employee benefits and other liabilities at September 30, 2008. Our contributions to company-sponsored pension plans totaled $7.7 million in fiscal 2008 and are expected to total approximately $9.0 million in fiscal 2009. Based on the fair value of plan assets and interest rates as of September 30, 2008, assuming no change in future interest rates and assuming the plans’ assets grow at 8% per year, we estimate that our required contributions in future fiscal years will approximate $15 million in 2010, $13 million in 2011, $13 million in 2012 and $12 million in 2013. Recent declines in the stock market have reduced assets available to pay pension benefits and may result in increased funding requirements.
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Table of ContentsIn fiscal 2008, we paid dividends totaling $2.78 per share, including a special dividend of $2.50 per share paid in January 2008. Contractual Obligations and Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. The following table provides a summary of contractual commitments as of September 30, 2008, for the periods indicated:
Critical Accounting Policies and Estimates The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may materially differ from these estimates and our estimates may change materially if our assumptions or conditions change and as additional information becomes available in future periods. Management has discussed the selection of critical accounting policies and estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosure relating to critical accounting policies and estimates in this Form 10-K. Management considers an accounting estimate to be critical if it involves significant estimates or judgments and if the results of the estimation process could materially affect the financial statements. Our significant accounting policies are more fully described in Note 1 to our Consolidated Financial Statements for fiscal 2008. The following is a summary of the more significant judgments and estimates used in the preparation of the consolidated financial statements. Allowance for Credit Losses: We extend trade credit to customers on substantially all of our sales and are subject to credit risk in the event of non-payment. We provide an allowance for estimated credit losses based on a review of prior loss history, a review of the trend in credit quality statistics about the receivable portfolio such as past due percentages, a review of individual credit extensions and other factors. As of September 30, 2008, the
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Table of Contentsallowance for estimated credit losses, which is reported as a reduction of accounts receivable in the consolidated balance sheet, was $0.3 million. Actual credit losses in the future may vary from this estimate. Allowance for Trade Promotions and Coupon Redemptions: Trade promotions are an important component of the sales and marketing of our products, and are critical to the support of our business. Trade promotion costs include amounts paid to encourage retailers to offer temporary price reduction for the sale of our products to consumers, reimbursement of customer paid advertising and amounts paid to obtain favorable display positions in retailers’ stores. Accruals for trade promotions are recorded at the time of sale of product to the customer based on expected levels of performance. Settlement of these liabilities typically occurs in subsequent periods primarily through an authorized process for deductions taken by a customer from amounts otherwise due to us or by direct payment to customers. From time to time, we distribute coupons to consumers for our branded retail products, and accrue a liability for the estimated redemption costs based on historical rates. As a result, the ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions taken by our customers and the actual cost of coupon programs is dependent on actual consumer redemption rates. Allowances for trade promotions and coupon redemptions recorded in the balance sheet at September 30, 2008 totaled $3.3 million. Final determination of trade promotion allowances and coupon redemption may result in adjustments in future periods. Defined Benefit and Medical Retirement Plans: The plan obligations and related assets of defined benefit and medical retirement plans are presented in Note 8 to the Consolidated Financial Statements. Pension plan assets, which consist primarily of marketable equity and debt instruments, are valued using market quotations. Plan obligations and the annual pension expense are determined based on consultation with actuaries and are based in part on a number of assumptions we provide. Key assumptions in measuring the plan obligations include the discount rate, retirement rates, the long-term healthcare cost trend rate, mortality rates and the estimated future return on plan assets. In determining the discount rate, we use the yield on Moody’s AA rated, fixed-income investments currently available with maturities corresponding to the anticipated timing of the benefit payments. Asset returns are based upon the anticipated average rate of earnings expected on the invested funds of the plans based on the results of historical statistical studies performed by our advisors. At September 30, 2008, the actuarial assumption for our plans were: discount rate of 6.75%; long-term rate of return on plan assets of 8.00%; and healthcare cost trend rate ranging from 5% to 8%. A 1% change in the discount rate would change our recorded retirement obligations by approximately $18.9 million, while a 1% change in the assumed rate of return on assets would change annual costs by $1.5 million. The impact of changes in healthcare trend rates is described in Note 8 to the Consolidated Financial Statements. Insurance Recoveries: Insurance recoveries that are deemed to be probable and reasonably estimable are recognized to the extent of the related loss. Insurance recoveries which result in gains, including recoveries under business interruption coverage, are recognized only when realized by settlement with the insurers. Advances on insurance settlements are recorded as liabilities or offsets to accrued probable recoveries. The evaluation of insurance recoveries requires estimates and judgments about future results which affect reported amounts and certain disclosures. Actual results could differ from those estimates. We have recognized $36.1 million of insurance recoveries in the September 30, 2008 income statement. Interim LIFO Accruals: Our raw sugar inventories, which are accounted for on the LIFO basis of accounting, are periodically reduced at interim dates to levels below that of the beginning of the fiscal year. When such interim LIFO liquidations are expected to be restored prior to fiscal year end, the estimated replacement cost of the liquidated layers is utilized as the basis of cost of sugar sold from beginning of the year inventory. Changes in the estimated replacement cost are recognized in subsequent interim fiscal periods as they arise. These changes in estimates have no effect on results for the full fiscal year. Accounting for Income Taxes: Accounting for income taxes requires significant judgment in estimating the probability of the future tax benefit expected to be realized from future tax deductions attributable to temporary differences and loss carryforwards. We concluded that future tax benefits of all tax deductions from temporary
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Table of Contentsbook/tax differences and loss carryforwards are more likely than not to be realized in future years. The ultimate realization of these tax benefits is dependent on our operations generating sufficient taxable income during the future periods to offset the deductions and carryforwards. Additionally, the final resolution of certain tax positions we have taken or expect to take in filed tax returns is sometimes uncertain, and may be subject to adjustment in future periods. We evaluate the likelihood that a filed position will ultimately be sustained, and have recorded a liability of $5.8 million for such uncertainties. The ultimate resolution of these uncertainties may require an adjustment to this recorded amount. New Accounting Pronouncements The Financial Accounting Standards Board (FASB) has issued a number of new accounting standards discussed in Note 1 to the Consolidated Financial Statements. These standards establish additional accounting and disclosure requirements. Management has evaluated, as described in Note 1 to the Consolidated Financial Statements, the effects such requirements will have on our consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 provides a common definition of fair value and establishes a framework to make the measurement of fair value in generally accepted accounting principles more consistent and comparable. SFAS 157 also requires expanded disclosures to provide information about the extent to which fair value is used to measure assets and liabilities, the methods and assumptions used to measure fair value, and the effect of fair value measures on earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 157 to have a material effect on its consolidated financial statements. In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158). This statement amends SFAS No. 87, Employers’ Accounting for Pensions , SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits , SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other than Pensions , and SFAS No. 132 (revised 2003), Employers’ Disclosure about Pension and Other Postretirement Benefits. SFAS 158 requires measurement of the funded status of a plan as of the balance sheet date. The measurement date provisions are effective for fiscal years ending after December 15, 2008. The Company expects to adopt the measurement date provisions of SFAS 158 in fiscal 2009 and will record a reduction to the opening balance of equity of $0.6 million in its balance sheet at October 1, 2008. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment to FASB Statement No. 115 (SFAS 159) . SFAS 159 permits an entity to choose to measure many financial instruments and certain other items at fair value that are currently not required to be measured at fair value. Under SFAS 159, entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by instrument basis, with a few exceptions, as long as it is applied to the instrument in its entirety. The fair value option election is irrevocable, unless a new election date occurs. The statement establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company does not expect the adoption of SFAS 159 to have a material effect on its consolidated financial statements. In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS 141R), which replaces SFAS No. 141, Business Combinations. SFAS 141R establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including non-controlling interests, contingent consideration, and certain acquired contingencies. SFAS 141R also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. SFAS 141R will be applicable prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting
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Table of Contentsperiod beginning on or after December 15, 2008. SFAS 141R would have an impact on accounting for any businesses acquired after the effective date of this pronouncement. In December 2007, the FASB also issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements —An Amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary (previously referred to as minority interests). SFAS 160 also requires that a retained non-controlling interest upon the deconsolidation of a subsidiary be initially measured at its fair value. Upon adoption of SFAS 160, the Company would be required to report any non-controlling interests as a separate component of stockholders’ equity. The Company would also be required to present any net income allocable to non-controlling interests and net income attributable to the stockholders of the Company separately in its consolidated statements of operations. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. The Company expects the adoption of SFAS 160 to have no impact on its consolidated financial statements. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 requires entities with derivative instruments to disclose information to enable financial statement users to understand how and why the entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect the entity’s financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact, if any, that SFAS 161 will have on its consolidated financial statements. In April 2008, the FASB issued FASB Staff Position SFAS 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets. FSP 142-3 also requires expanded disclosure regarding the determination of intangible asset useful lives. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact, if any, that FSP 142-3 will have on its consolidated financial statements.
We use raw sugar futures and options in our raw sugar purchasing programs and natural gas futures and options to hedge natural gas purchases used in our manufacturing operations. Gains and losses on raw sugar futures and options are matched to inventory purchases and charged or credited to cost of sales as such inventory is sold. Gains and losses on natural gas futures are matched to the natural gas purchases and charged to cost of sales in the period the forecasted purchase impacts earnings. Our derivatives hedging activity is supervised by a senior risk management committee which monitors and reports compliance with our risk management policy to the Audit Committee of the Board of Directors. The information in the table below presents our domestic and world raw sugar futures positions outstanding as of September 30, 2008.
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The above information does not include either our physical inventory or our fixed price purchase commitments for raw sugar. At September 30, 2007, our domestic futures position was a net long position of 1.7 million cwt at an average contract price of $21.33 and an average fair value price of $21.08. Our world futures position at September 30, 2007 was a net long position of 1.3 million cwt at an average contract price of $9.84 and an average fair value price of $10.15. The information in the table below presents our natural gas futures positions outstanding as of September 30, 2008.
At September 30, 2007, our natural gas futures position was a long position of 0.8 million mmbtu with an average contract price of $8.54 and an average fair value price of $7.69. At September 30, 2008 and 2007, we had no financial instruments which were sensitive to interest rate changes.
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See the index of financial statements and financial statement schedules under “Item 15. Exhibits, Financial Statement Schedules.” Unaudited quarterly financial data for the last eight fiscal quarters is as follows (in thousands of dollars, except per share amounts):
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None.
Management’s Evaluation of Disclosure Controls and Procedures In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2008 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Management’s Report on Internal Control over Financial Reporting Management’s report on internal control over financial reporting as of September 30, 2008 can be found on page 39 of the Financial Section of this report. Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
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Table of ContentsPART III
Information regarding our executive officers is included in Part I of this report. The other information required by Items 10, 11, 12, 13 and 14 will be included in our definitive proxy statement for the 2009 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days after September 30, 2008, and is incorporated in this report by reference. PART IV
(a)(1) Financial Statements.
(a)(2) Financial Statement Schedules. All schedules and other statements for which provision is made in the applicable regulations of the SEC have been omitted because they are not required under the relevant instructions or are inapplicable. (a)(3) Exhibits.
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Table of ContentsSIGNATURES Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on December 12, 2008.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 12, 2008.
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Table of ContentsMANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management, including Imperial Sugar Company’s principal executive officer and principal financial and accounting officer, is responsible for establishing and maintaining adequate internal control over Imperial Sugar Company’s financial reporting. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that Imperial Sugar Company’s internal control over financial reporting was effective as of September 30, 2008. The effectiveness of our internal control over financial reporting as of September 30, 2008, was audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
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Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Imperial Sugar Company Sugar Land, Texas We have audited the internal control over financial reporting of Imperial Sugar Company and subsidiaries (the “Company”) as of September 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended September 30, 2008 of the Company and our report dated December 12, 2008 expressed an unqualified opinion on those financial statements and included an explanatory paragraph relating to the explosion and fire on February 7, 2008 at the Company’s sugar refinery in Port Wentworth, Georgia. /s/ DELOITTE & TOUCHE LLP Houston, Texas December 12, 2008
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Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Imperial Sugar Company Sugar Land, Texas We have audited the accompanying consolidated balance sheets of Imperial Sugar Company and subsidiaries (the “Company”) as of September 30, 2008 and 2007, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with the standards of the public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Imperial Sugar Company and subsidiaries at September 30, 2008 and 2007 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2008, in conformity with accounting principles generally accepted in the United States of America. As discussed in Notes 2 and 13 to the consolidated financial statements, the Company experienced an explosion and fire on February 7, 2008 at its sugar refinery in Port Wentworth, Georgia, in which the refinery’s bulk storage silos and virtually its entire packaging capabilities were destroyed. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 30, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 12, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP Houston, Texas December 12, 2008
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
See notes to consolidated financial statements.
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2008, 2007 and 2006 1. ACCOUNTING POLICIES The Company/Basis of Presentation The consolidated financial statements include the accounts of Imperial Sugar Company and its wholly owned subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated. The Company operates its business as one domestic segment—the production and sale of refined sugar and related products. Business Risks The Company is significantly affected by market factors, including demand for and price of refined sugar and raw cane sugar and the price and availability of energy. These market factors are influenced by a variety of external forces, including the number of domestic acres contracted to grow sugar cane and sugar beets, prices of competing crops, domestic health and eating trends, competing sweeteners, weather conditions and United States farm and trade policy. Federal legislation and regulations provide for mechanisms designed to support the price of domestic sugar crops, principally through the limitations on importation of raw cane sugar for domestic consumption and marketing allotments. A significant portion of the Company’s industrial sales are made under fixed price, forward sales contracts, which generally extend up to one year and occasionally longer. The Company also contracts to purchase raw cane sugar substantially in advance of the time it delivers the refined sugar produced from the purchase. To mitigate its exposure to future price changes, the Company attempts to manage the volume of refined sugar sales contracted for future delivery in relation to the volume of raw cane sugar contracted for future receipt and utilizes traded raw sugar futures, when feasible. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires estimates and assumptions that affect the reported amounts as well as certain disclosures. The Company’s financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from those estimates. Cash and Cash Equivalents Cash equivalents consist of short-term, highly liquid investments with maturities of 90 days or less at the time of purchase. Marketable Securities The Company’s marketable securities which are classified as “available for sale” are reflected in the Consolidated Balance Sheet at fair market value, with the aggregate unrealized gains or losses, net of related deferred taxes, included as a separate component of comprehensive income within shareholders’ equity. Trade Receivables The Company accounts for trade receivables balances net of allowances for doubtful accounts. The allowance balance is determined on an overall percentage basis of historical bad debts and a review of individual credit exposures.
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
Advertising and Promotion Cost of developing and distributing advertisements is expensed as incurred. Coupon redemptions are estimated based on historical redemption rates and accrued for during the coupon distribution period. Advertising expenses are reported in Selling, General and Administrative Expense. Customer advertising reimbursements and other customer promotional activities are accrued as the related sales are made and recorded as reductions of Net Sales. Inventories Inventories are stated at the lower of cost or market. Cost of sugar is determined under the last-in, first-out (LIFO) method. All other costs are determined under the first-in, first-out (FIFO) or average method. LIFO inventory was not materially different than would be reported on the FIFO inventory valuation method. Supplies inventory includes operating and packaging supplies as well as maintenance parts utilized in the Company’s manufacturing operations. Obsolescence reserve for supplies inventory was $2.4 million at September 30, 2008 primarily due to potential obsolescence resulting from replacing Port Wentworth packaging lines. Obsolescence reserve for supplies inventory was $0.6 million at September 30, 2007. Revenue Recognition The Company recognizes revenues when products are shipped under contract terms or approved purchase orders at stated prices and all significant obligations of the Company have been satisfied. Risk of loss passes at time of shipment. Provisions are made for estimated returns and estimated credit losses. Insurance Recoveries Insurance recoveries that are deemed to be probable and reasonably estimable are recognized to the extent of the related loss. Insurance recoveries which result in gains, including recoveries under business interruption coverage, are recognized only when realized by settlement with the insurers. Advances on insurance settlements are recorded as liabilities or offsets to accrued probable recoveries. The evaluation of insurance recoveries requires estimates and judgments about future results which affect reported amounts and certain disclosures. Actual results could differ from those estimates. Hedge Accounting The Company uses raw sugar futures and options in its raw sugar purchasing programs and uses natural gas futures, options and basis swaps to hedge natural gas purchases used in its manufacturing operations. The Company applies the hedge accounting provisions of Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activity, for these cash flow hedge instruments. Eligible gains and losses on raw sugar futures and options are deferred and recognized as part of the cost of inventory purchases and charged or credited to cost of sales as such inventory is sold. Eligible gains and losses on natural gas futures, options and basis swaps are deferred and recognized as part of the cost of the natural gas purchases and charged to cost of sales in the period the forecasted purchase impacts earnings. Property and Depreciation Property is stated at cost and includes expenditures for renewals and improvements and capitalized interest. Maintenance and repairs are charged to current operations. The Company capitalizes certain costs in connection
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
with the development of internal-use computer software. When property is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts, and any gain or loss on disposition is included in income. Depreciation is provided principally on the straight-line method over the estimated service lives of the assets. In general, buildings are depreciated over 10 to 20 years and machinery, equipment and software over 3 to 25 years. Impairment of Long-Lived Assets Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset or its disposition. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use are based on the fair value of the asset. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value, less cost to sell. Fair Value of Financial Instruments The fair value of financial instruments is estimated based upon market trading information, where available. Absent published market values for an instrument, management estimates the fair value of long-term debt based on quotations from broker/dealers or interest rate information for similar instruments. The carrying amount of cash and cash equivalents, auction rate securities, accounts receivable, accounts payable and other current liabilities approximates fair value because of the short maturity and/or frequent repricing of those instruments. Federal Income Taxes Federal income tax expense includes the current tax obligation or benefit and the change in deferred income tax liability for the period. Deferred income taxes result from temporary differences between financial and tax bases of certain assets and liabilities. The Company evaluates the realizability of deferred tax assets quarterly. Stock-Based Compensation The Company adopted the provisions of the revised SFAS No. 123, Share-Based Payment (SFAS 123R) in fiscal 2006. SFAS 123R requires that companies recognize compensation expense for awards of equity instruments based on the grant date fair value of those awards. Environmental Matters The Company provides for environmental remediation costs based on estimates of known environmental remediation exposure when such amounts are probable and estimable. Ongoing environmental compliance costs, including maintenance and monitoring costs, are expensed as incurred. Capital costs incurred to prevent future environmental contamination are capitalized. New Accounting Pronouncements In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 provides a common definition of fair value and establishes a framework to make the measurement of fair value in generally accepted accounting principles more consistent and comparable. SFAS 157 also requires expanded
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
disclosures to provide information about the extent to which fair value is used to measure assets and liabilities, the methods and assumptions used to measure fair value, and the effect of fair value measures on earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 157 to have a material effect on its consolidated financial statements. In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158). This statement amends SFAS No. 87, Employers’ Accounting for Pensions , SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits , SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other than Pensions , and SFAS No. 132 (revised 2003), Employers’ Disclosure about Pension and Other Postretirement Benefits . It requires measurement of the funded status of a plan as of the balance sheet date. The measurement date provisions are effective for fiscal years ending after December 15, 2008. The Company expects to adopt the measurement date provisions of SFAS 158 in fiscal 2009 and will record a reduction to the opening balance of equity of $0.6 million in its balance sheet at October 1, 2008. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment to FASB Statement No. 115 (SFAS 159) . SFAS 159 permits an entity to choose to measure many financial instruments and certain other items at fair value that are currently not required to be measured at fair value. Under SFAS 159, entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by instrument basis, with a few exceptions, as long as it is applied to the instrument in its entirety. The fair value option election is irrevocable, unless a new election date occurs. The statement establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company does not expect the adoption of SFAS 157 to have a material effect on its consolidated financial statements. In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS 141R), which replaces SFAS No. 141, Business Combinations. SFAS 141R establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including non-controlling interests, contingent consideration, and certain acquired contingencies. SFAS 141R also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. SFAS 141R will be applicable prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141R would have an impact on accounting for any businesses acquired after the effective date of this pronouncement. In December 2007, the FASB also issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary (previously referred to as minority interests). SFAS 160 also requires that a retained non-controlling interest upon the deconsolidation of a subsidiary be initially measured at its fair value. Upon adoption of SFAS 160, the Company would be required to report any non-controlling interests as a separate component of stockholders’ equity. The Company would also be required to present any net income allocable to non-controlling interests and net income attributable to the stockholders of the Company separately in its consolidated statements of operations. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. The Company expects the adoption of SFAS 160 to have no impact on its consolidated financial statements.
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 requires entities with derivative instruments to disclose information to enable financial statement users to understand how and why the entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect the entity’s financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact, if any, that SFAS 161 will have on its consolidated financial statements. In April 2008, the FASB issued FASB Staff Position SFAS 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets. FSP 142-3 also requires expanded disclosure regarding the determination of intangible asset useful lives. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact, if any, that FSP 142-3 will have on its consolidated financial statements. 2. REFINERY EXPLOSION RELATED CHARGES The Company experienced an explosion and fire on February 7, 2008, at its sugar refinery in Port Wentworth, Georgia, which is located near Savannah, Georgia. The refinery’s bulk storage silos and virtually its entire packaging capabilities were destroyed, while the refining and warehousing operations received more limited damage. The Company is rebuilding the damaged portions of the facility and based on engineering and construction estimates received thus far, the Company expects to begin bulk sugar production in early calendar year 2009, and to complete the restoration of packaging capabilities in the fall of 2009. Charges and insurance recoveries included in the consolidated statements of operations for the year ended September 30, 2008, are as follows (in thousands):
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
The Company has property damage insurance, which provides replacement cost coverage for the affected facilities. The policy also provides for business interruption insurance based on lost income and certain costs incurred during a reasonable period of reconstruction. The OSHA fines and most of the legal fees reflected in the table above are not covered by insurance. Insurance recoveries that are deemed probable and are reasonably estimable have been recognized in the consolidated statements of operations to the extent of the related losses. Such recognized recoveries totaled $36.1 million year ended September 30, 2008. Recoveries which are possible, but not yet probable and reasonably estimable, have not been recognized. The Company has provided preliminary claims information for property damage, incurred costs and business interruption coverage and is in discussions with the insurers about those claims. Of the remaining $27.2 million net charges, the Company estimates that insurance recoveries for property damage and incurred costs which are possible, but not yet probable and therefore are not recognized at September 30, 2008, are in the range of $8 million to $11 million. Insurance recoveries that result in gains, including business interruption claims and replacement costs in excess of net book value of property, will be recognized in income only when realized. The Company estimates that business interruption claims for lost income during the fiscal 2008 will total approximately $30 million to $37 million. Business interruption recoveries will be recognized in revenues upon settlement with the insurance carriers. No business interruption claim periods have yet been settled. The Company’s property insurance policy provides for replacement cost coverage for destroyed property, if replaced within a two-year period. Based on engineering reports and construction estimates received to date, the Company estimates that the replacement cost of the destroyed buildings and equipment is in the range of $200 million to $220 million, compared to the $13.0 million net book value recognized above as impaired. Accordingly, the Company expects to recognize a substantial gain in future periods when the property claims are settled. Such gain may not be recognized for tax purposes to the extent the Company makes elections under the involuntary conversion rules of the Internal Revenue Code, if the insurance proceeds are reinvested in replacement property within a specified period of time. The replacement cost will establish a new basis in the assets for financial reporting purposes, which will result in higher depreciation charges in future years. The tax basis in the replaced assets will be reduced by the amount of the gain not recognized under the involuntary conversion rules to the extent elected. As of September 30, 2008, the Company had received advances on its property insurance claims totaling $100 million. 3. MARKETABLE SECURITIES AND OTHER INVESTMENTS The Company’s marketable securities at September 30, 2008 and 2007 consisted of (in thousands):
The Company has an investment in a $7.5 million federally insured student loan backed auction rate security for which the auction failed in mid-February 2008 and in subsequent periods. The Company recorded a loss of $0.4 million in the second quarter of 2008 to reflect an other-than-temporary impairment of the security. The security was sold at par in October 2008 and the Company expects to record a gain of $0.4 million in the first quarter of fiscal 2009.
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
The U.S. Treasury securities and certificate of deposit are pledged to secure certain insurance obligations. Other investments at September 30, 2008 and 2007 consisted of (in thousands):
In fiscal 2008, the Company received an $11.9 million cash distribution from its long-term limited partnership investment, as a result of the partnership selling its principal asset, an interest in a fuel oil terminal in the Port of Houston. The Company reported $0.5 million of the distribution as a return of investment and the remaining $11.4 million as income. The remaining $0.5 million investment was received in cash in October 2008 when the partnership was dissolved. In January 2007, Intercontinental Commodity Exchange, Inc. (ICE) merged with the New York Board of Trade (NYBOT) in exchange for a combination of cash and ICE common stock. The Company was a member of NYBOT and has two seats on the exchange, which gives the Company trading privileges in the sugar futures and options contracts traded on the exchange. The merger consideration received for the Company’s membership interests included cash of $0.8 million and restricted and unrestricted ICE stock. A gain of approximately $3.7 million was recorded in connection with this transaction. At September 30, 2007, the Company owned $0.4 million of restricted stock, recorded in marketable securities, which it sold in October 2007, and an additional $0.4 million of restricted stock, recorded in other investments, which it intends to hold in order to retain its trading privileges on the exchange. 4. ACCOUNTS RECEIVABLE Accounts receivable are reported net of an allowance for credit losses of $0.3 million at September 30, 2008 and $0.8 million at September 30, 2007. The provision for credit losses charged to selling, general and administrative expenses was a credit of $0.6 million in fiscal 2008 and a credit of $0.1 million in fiscal 2007 and fiscal 2006. 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following (in thousands of dollars):
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
6. DEBT The Company has a senior secured revolving credit facility (Revolver) providing for loans of up to $100 million (subject to a borrowing base). This facility is used to finance various ongoing capital needs of the Company as well as for other general corporate purposes. The Revolver matures on December 31, 2011 and will have no financial covenants so long as average total liquidity (defined as the average of the borrowing base, less average actual borrowings and letters of credit) exceeds $20 million; otherwise a minimum EBITDA test would apply. The Revolver limits the Company’s ability to pay dividends if average total liquidity, after adjustment on a pro forma basis for such payment, is less than $20 million. Average total liquidity during fiscal 2008 was $138 million. The facility is secured by the Company’s cash and cash equivalents, accounts receivable, inventory, certain investments and certain plant, property, and equipment. All subsidiaries of the Company are borrowers or guarantors under the facility. Interest rates on the Revolver are LIBOR plus a margin that varies (with liquidity as defined) from 1.00% to 1.75%, or the base rate (Bank of America prime rate) plus a margin of negative 0.25% to positive 0.25%. Although the final maturity of the Revolver is December 31, 2011, the Company classifies debt under the Revolver as current, pursuant to Emerging Issues Task Force Issue 95-22. The agreement contains a subjective acceleration clause which can be exercised, if, in the opinion of the lender, there is a material adverse effect, and provides the lenders direct access to our cash receipts. The Company repaid a $1.5 million industrial revenue bond in fiscal 2008. Non-interest bearing notes were issued in 2001 to certain former employees and directors who were participants in non-qualified pension and deferred compensation plans. The notes were fully paid in fiscal 2007. Cash paid for interest on debt and other long-term liabilities was $1.0 million, $1.4 million and $1.6 million for the years ended September 30, 2008, 2007 and 2006, respectively. Interest capitalized as part of the cost of constructing assets was $0.1 million and $0.1 million for the years ended September 30, 2007 and 2006; no interest was capitalized in fiscal 2008. 7. INCOME TAXES The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 (FIN 48) as of October 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
The following table reflects the impacts to the Company’s Consolidated Balance Sheet (in millions) at adoption of FIN 48:
A reconciliation of the change in the amount of unrecognized tax benefits for the twelve months ended September 30, 2008, is as follows (in thousands):
Substantially all of the $4.9 million unrecognized benefits would affect the Company’s effective tax rate if recognized. The Company recorded $0.5 million of interest expense in the year ended September 30, 2008 as a result of positions taken in prior years. Interest and penalties recognized in the Consolidated Balance Sheet at September 30, 2008 were $1.4 million. The Company classifies interest and penalties related to unrecognized tax benefits as interest and tax expense, respectively. The Company files tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the fiscal years 2005 through 2007. The Company or its subsidiaries’ state tax returns are open to audit under the statute of limitations for the fiscal years 2004 through 2007. The components of the consolidated income tax provision (benefit) were as follows (in thousands of dollars):
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
The consolidated income tax provision from continuing operations is different from the amount which would be provided by applying the statutory federal income tax rate of 35% to the Company’s income before taxes. The reasons for the differences from the statutory rate are as follows (in thousands of dollars):
Income taxes paid were $0.5 million, $16.4 million and $1.2 million in fiscal 2008, 2007 and 2006, respectively. The tax effects of temporary differences which give rise to the Company’s deferred tax assets and liabilities were as follows (in thousands of dollars):
The Company has a net operating loss carryforward for federal income tax purposes of $6.3 million which expires in 2028. Additionally, the Company has a capital loss carryforward of $18.8 million, which expires in 2010. Previously the Company had provided a valuation allowance for $12.4 million of future benefit of capital loss carryforward, since the Company believed it was more likely than not to expire unrealized. At year-end fiscal 2008, the Company released the allowance previously taken based on the current expectation that the capital loss carryforward will be utilized prior to its expiration.
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
8. PENSION AND OTHER BENEFIT PROGRAMS Defined Benefit Pension Plans and Postretirement Benefits Other Than Pensions Substantially all of the Company’s employees are covered by retirement plans. In 2003, the Company froze the benefits under the salaried pension plan resulting in reductions in future pension obligations. Retirement benefits are primarily a function of years of service and the employee’s compensation for a defined period of employment. The Company funds pension costs at an actuarially determined amount based on normal cost and the amortization of prior service costs, gains and losses over the remaining service periods. Additionally, the Company previously provided a supplemental non-qualified, unfunded pension plan for certain officers whose benefits under the qualified plan are limited by federal tax law as well as a non-qualified retirement plan for non-employee directors, which provided benefits based upon years of service as a director and the retainer in effect at the date of a director’s retirement. Certain of the Company’s employees who meet the applicable eligibility requirements are covered by benefit plans that provide postretirement health care and life insurance benefits to employees. The Company’s actuary prepares a valuation as of a June 30 measurement date each year. The Company adopted the funded status recognition provisions of SFAS 158 effective September 30, 2006 and recorded a credit of $5.6 million in accumulated comprehensive income.
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
The following tables present the benefit obligations, changes in plan assets, the funded status of the pension and postretirement benefits plans and the assumptions used (in thousands of dollars):
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
The assumptions used and the annual cost related to these plans consist of the following:
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Aggregated accumulated benefit obligations for all plans were $190.7 million and $198.7 million at September 30, 2008 and 2007, respectively. Accumulated benefit obligations were in excess of plan assets for all plans for both periods. The reduction of participants in the Company’s salaried pension plan resulting from the sale a subsidiary in September 2005 was accounted for as a curtailment in fiscal 2006. Pension plan contributions, which are based on regulatory requirements, totaled $7.7 million and $12.2 million during fiscal 2008 and 2007; contributions during fiscal 2009 are expected to be approximately $9.0 million. The assumed health care cost trend rate used in measuring the accumulated benefit obligation for postretirement benefits other than pensions as of September 30, 2008 was 8% for 2008. The rate was assumed to decrease gradually to 5% for 2015 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
The Company amended its post retirement medical plan to eliminate prescription drug coverage effective January 1, 2006. This amendment was accounted for as a plan modification in fiscal 2006. Plan assets of the Company sponsored defined benefit pension plans at September 30, 2008 were invested primarily in marketable securities. The Company’s plan assets were allocated as follows:
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
The assumed rate of return is based on the results of historical statistical return studies. 401(k) Plans Substantially all of the employees may elect to defer a portion of their annual compensation in the Company-sponsored 401(k) tax deferred savings plans. The Company makes matching contributions in some of these plans. The amount charged to expense for these plans was $1.3 million, $1.4 million and $1.2 million for the years ended September 30, 2008, 2007 and 2006, respectively. Deferred Compensation The Company has non-current liabilities for an inactive deferred compensation plan aggregating $8.5 million and $9.1 million at September 30, 2008 and 2007, respectively. Interest expense includes $0.6 million in each of fiscal 2008, 2007 and 2006, for such plans. 9. SHAREHOLDERS’ EQUITY Previously, the Company had outstanding warrants to purchase shares of the Company’s common stock. In fiscal 2008 and 2007, 2,352 and 1,765 warrants were exercised, respectively. In fiscal 2006, 61,215 warrants were retired and 158 warrants were exercised. Unexercised warrants expired in August 2008. 10. STOCK-BASED COMPENSATION The Company has a long-term incentive plan which provides for the granting of incentive awards in the form of stock options, restricted stock, stock appreciation rights (SARs), cash award performance units and performance shares at the discretion of the Executive Compensation Committee of the Board of Directors. The plan authorizes the granting of up to 2,534,568 shares of common stock. As of September 30, 2008, shares available for future grants totaled 389,076. Stock Options Stock options granted to date have an exercise price equal to the fair market value of the shares of the Company’s common stock at the date of grant. Options become exercisable in annual increments over a three-year period from grant date and expire ten years from date of grant.
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
Effective October 1, 2005, the Company adopted the provisions of SFAS 123R using the modified prospective method. The revised statement requires that companies recognize compensation expense for awards of equity instruments based on the grant date fair value of those awards. In fiscal 2008, 2007 and 2006, the Company recorded compensation expense of $0.1 million, $0.2 million and $0.5 million, respectively, for stock options based on the methods and assumptions noted below. For the purpose of estimating the fair value of options on their date of grant, the Company began using a binomial lattice option pricing model in fiscal 2005 and used a Black-Scholes option-pricing model previously. The following assumptions were used in those models:
A summary of stock option activity in the plan is as follows:
No options were granted in fiscal 2008 or 2007 however adjustments were made to certain outstanding grants in accordance with their terms for a special dividend paid in fiscal 2008 and 2007. The total intrinsic value of options exercised in fiscal 2008 and 2007 was $0.1 million and $10.5 million, respectively. During fiscal 2008 and 2007, cash received from the exercise of stock options was $0.1 million and 2.1 million, and the tax benefit realized from the exercise of stock options was $0.5 million and $2.1 million. As of September 30, 2008, there was $6,000 total unrecognized compensation expense related to nonvested stock options which is expected to be recognized over the remaining two months of the vesting period.
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
Restricted Stock Restricted stock grants consist of the Company’s common stock and generally vest over a three or four-year period from the date of grant. Restricted stock awards are valued at the average market price of the Company’s stock at the date of grant, and the Company records the compensation expense over the vesting term. In fiscal 2008 and 2007, the Company granted restricted stock units (RSUs) to non-employee directors. The RSUs have no requisite service period and were immediately expensed. The Company recorded compensation expense of $2.2 million, $1.6 million and $0.6 million in fiscal 2008, 2007 and 2006, respectively, related to restricted stock grants. A summary of restricted stock activity in the plan is as follows:
The total fair value of shares vested during fiscal 2008 and 2007 was $1.2 million and $1.6 million, respectively. As of September 30, 2008, there was approximately $4.2 million of total unrecognized compensation expense related to nonvested restricted stock which is expected to be recognized over a weighted-average period of 2.4 years. Stock Appreciation Rights In prior years, the Company granted SARs to certain employees which provided the right to receive, at the date the rights were exercised, cash equal to the market appreciation between the stated price and the current market value to a maximum appreciation value. The SARs vested over a three-year period. The Company accrued for the value of the SARs over the vesting term. SARs totaling 5,000 and 58,750 were exercised during fiscal 2007 and 2006. At September 30, 2008, there were no SARs remaining.
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Table of ContentsIMPERIAL SUGAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2008, 2007 and 2006
11. EARNINGS PER SHARE The following table presents information necessary to calculate basic and diluted earnings per share (in thousands of dollars, except share and per share amounts):
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