Penford's Q3 net income up 49.2% year-over-year to US$3.1M due to one-time US$1M non-operating gain in industrial ingredients division; sales down 1.9% to US$119.4M due to lower corn prices that were passed through to paper industry customers

Penford Corporation (Nasdaq:PENX), a leader in ingredient systems for food and industrial markets, today reported third quarter and year-to-date fiscal year 2014 results.

The Company reported net income of $3.1 million, or $0.24 per diluted share, for the third quarter ended May 31, 2014. Consolidated sales for the quarter were $119.4 million compared with $121.7 million last year, primarily because lower corn prices that were passed through to paper industry customers reduced industrial starch and by-products revenue. The Company’s gross margin improved, benefiting from higher Industrial Ingredients profitability. Consolidated operating income increased 15% to $4.9 million.

Third quarter results included a one-time $1.0 million non-operating gain in the Industrial Ingredients division. The Company satisfied conditions of a forgivable government loan and had the remaining repayment obligations waived. The loan was extended following the 2008 flood event that impacted the Company’s operations in Cedar Rapids. Results in the division were also slightly improved by a change in the estimated service lives used to calculate depreciation expense, as explained below. In addition, the Company incurred one-time costs associated with the acquisition of Gum Technology, which are included in the quarterly results of the Food Ingredients division.

Highlights for the quarter are as follows:

Food Ingredients Division

• Revenue increased to a record $35.3 million on double-digit increases in starch volumes across several application segments.
• The Company completed the acquisition of Gum Technology during the quarter, and integration is proceeding as planned.
• RS&A expenses rose 25% on investments in R&D, sales and business development, and from the acquisition of Gum Technology.
• Operating income was $6.0 million, including $0.4 million of margin reduction due to costs incurred from the Gum Technology acquisition that closed on March 25, 2014. Operating income was $6.2 million for the same period last year.

Industrial Ingredients Division

• Sales declined 10% from last year as a 36% decline in corn prices reduced by-products and paper starch revenues.
• The bio-products platform continued to grow with 15 new product applications commercialized over the last nine months.
• Higher bio-products sales, better ethanol crush margins, and stronger starch shipments overcame $2.5 million in additional production costs due to higher natural gas prices (by 69%) and electricity rates (by 23%) brought on by harsh winter weather. The result was a 28% improvement in gross margin.
• Operating income increased from $0.6 million to $2.0 million. Depreciation expenses were reduced by $0.2 million in the quarter after the Company determined that the useful lives of certain long term manufacturing assets should be extended. The Company expects, based on its current level of operations and investments in property, plant and equipment, that this change in the estimated useful lives of these assets will increase operating income in the fourth quarter by approximately $1.0 million and, on an annualized basis, in the range of approximately $4.4 million to $4.6 million.

Consolidated Results

• Earnings per share of $0.24 are the highest quarterly result since the 2008 flood damaged operations in Cedar Rapids.
• The Company reported the highest gross margins in the last eight quarters at 12.4%.
• Cash flows from operations provided $2.9 million in cash. Total debt declined $1.2 million from last year.
• Sequential performance was also strong with sales increasing 13%, gross margins up 22%, and operating income rising by 69% compared with the second quarter of fiscal 2014.

Conference Call

The Company will host a conference call to discuss fiscal 2014 third quarter results today, July 7, 2014, at 8:00 a.m. Mountain Time (10:00 a.m. Eastern Time). Access information for the call and web-cast can be found at www.penx.com. To participate in the call on July 7, 2014, please phone 1-877-407-9205 at 7:50 a.m. Mountain Time. A replay will be available at www.penx.com.

About Penford Corporation

Penford Corporation develops, manufactures and markets specialty, natural-based ingredient systems for a variety of food and industrial products. Penford operates six manufacturing facilities and three research and development centers in the U.S.

The statements contained in this release that are not historical facts are forward-looking statements that represent management’s beliefs and assumptions based on currently available information. Forward-looking statements can be identified by the use of words such as “believes,” “may,” “will,” “looks,” “should,” “could,” “anticipates,” “expects,” or comparable terminology or by discussions of strategies or trends. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such forward-looking statements, and the Company does not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in this release and those described from time to time in other filings with the Securities and Exchange Commission which include, but are not limited to: competition; the possibility of interruption of business activities due to equipment problems, accidents, strikes, weather or other factors; product development risk; changes in corn and other raw material prices and availability; the Company’s inability to comply with the terms of instruments governing the Company’s debt; changes in general economic conditions or developments with respect to specific industries or customers affecting demand for the Company’s products, including changes in government rules or incentives affecting ethanol consumption, unfavorable shifts in product mix; unanticipated costs, expenses or third party claims; impairment of the Company’s long-lived assets that could result in a noncash charge to reported earnings; interest rate, chemical and energy cost volatility; changes in returns on pension plan assets and/or assumptions used for determining employee benefit expense and obligations; unforeseen developments in the industries in which Penford operates; and other factors described in the “Risk Factors” section in reports filed with the Securities and Exchange Commission.

Penford Corporation
Reconciliation of Non-GAAP Measure

To supplement the segment and consolidated financial results prepared in accordance with generally accepted accounting principles (“GAAP”), the Company utilizes a non-GAAP financial measure, net income (loss), before interest, taxes, depreciation and amortization expense (“EBITDA”). The Company uses EBITDA to evaluate performance and establish goals. The Company believes that this measure is valuable to investors in assessing the Company’s operating results when viewed in conjunction with GAAP results. This non-GAAP measure is not a substitute for, or an alternative to, the corresponding measure calculated in accordance with GAAP.