Penford Corporation

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Penford Corporation

7094 South Revere Parkway
Englewood, Colorado 80112
U.S.A.
Telephone: (303) 649-1900
Toll Free: (800) 204-7369
Fax: (303) 649-1700
Web site: http://www.penx.com

Public Company
Incorporated: 1983
Employees: 700
Sales: $231 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: PENX
NAIC: 311211 Flour Milling; 325199 All Other Basic Organic Chemical Manufacturing; 311999 All Other Miscellaneous Food Manufacturing

Penford Corporation develops, produces, and markets specialty natural-based ingredients for industrial and food applications. The company uses carbohydrate chemistry to develop functional starch-based ingredients for applications in several markets, including papermaking, textiles, and food products. The company focuses on three business segments. The first two, industrial and food ingredients, encompass broad categories of end-market users and are primarily served by the company’s U.S. operations. The company’s operations in Australia and New Zealand comprise the third segment, which focuses primarily on the food ingredient business, although the industrial market is also becoming a growth area. Penford’s specialty products for industrial applications are made with carbohydrate-based starches that possess binding and film-forming attributes. The products are designed to improve the strength, quality, and efficiencies in the manufacture of coated and uncoated paper and paper packaging products. These products are based principally on ethylated and cationic starches. The company uses ethylated starches to produce coatings and binders, providing strength and printability to fine white, magazine, and catalog paper. Cationic and other liquid starches are used primarily in the paper-forming process in paper production, providing strong bonding of paper fibers. Penford’s products provide a cost-effective alternative to more synthetic ingredients. In addition, the company produces starches for food applications, which are used in coatings to provide crispness, improved taste and texture, and increased product life for such items as French fries sold in fast-food restaurants. The company uses food-grade starch products as moisture binders to reduce fat levels, modify texture and improve color and consistency in a variety of foods, including whole and processed meats, dry powdered mixes and other food and bakery products.

Company Beginnings: 1895–1919

The company’s origins date to 1895, when the incorporation of the Iowa Mill & Elevator Company was amended to become Douglas & Company. The change was made by brothers Walter D. and George B. Douglas, who shared their father’s interest in the milling industry. Their father, George Douglas, Sr. was a Scottish immigrant who came to America to build railroads. After settling down in Cedar Rapids, Iowa, he invested in various business ventures, one of which was Northstar Milling, the 1874 predecessor of Quaker Oats. George B. was involved in the Northstar Mill and Walter in the Iowa Mill and Elevator Company, a linseed milling business. In 1895, the brothers assumed control of the Iowa Mill & Elevator Company, amended the company’s incorporation, and changed its name to Douglas & Company. The Douglas brothers sold the mill four years later in 1899, seeing their future in corn milling. In 1903, they formed the Douglas Starch Works in Cedar Rapids, Iowa, the largest starch industry west of the Mississippi River. The Douglas Starch Works processed 6,000 bushels of corn a day and produced consumer goods, including food products, soap stock, brewer’s grits, and paper ingredients. In May 1919, a massive explosion of unknown origin destroyed the entire plant, killing 48 workers. Stockholders subsequently pulled their money out of the insurance settlements until only the Douglas interest remained. Despite this setback, George B. Douglas managed to keep the business together until he sold it to Penick & Ford, Ltd., in December 1919.

Penick & Ford/Bedford Era: 1920–65

Penick & Ford was founded by William Snydor Penick and his brother-in-law, James Polk Ford, who formed a partnership in Shreveport, Louisiana, to sell barreled syrups and molasses in canned form. With increasing sales of corn syrup and can syrups, the monopolistic Corn Products Refining Company purchased a 25 percent stake in Penick & Ford. Nevertheless, in 1913, the Corn Products Refining Company was forced to divest its interest in Penick & Ford after a Supreme Court ruling resulting from President Theodore Roosevelt’s trust-busting campaign. The interest was subsequently acquired by F.T. (Fred) Bedford, son of E.T. Bedford, who ran the Corn Products Refining Company. But F.T. Bedford was determined to build his own company. After purchasing the Douglas plant, F.T. Bedford incorporated it as Penick & Ford, Ltd on February 7, 1920. As a result, by 1921 the newly rebuilt plant was producing corn syrup. When the company quickly came under financial duress due to a precipitous drop in the price of sugar, a key ingredient in the production of syrup, Bedford converted most of its production to starch. By 1922, the company made a complete recovery, wielding 30,000 bushels a day, and by 1923 began paying preferred dividends to shareholders. In subsequent years throughout the 1920s and 1930s, the company prospered by producing numerous private labels—Brer Rabbit Molasses, Brer Rabbit Syrup, Penick Syrup, Penick Salad Oil, Douglas Starch, Penford Corn Syrup, Penford Corn Sugar, and Douglas Feed. Under Bedford’s direction, the company further diversified by acquiring other grocery lines, such as Vermont Maid Syrup in 1928 and My-T-Fine Desserts in 1934.

In 1921, Penick & Ford hired J.D. Widmer, an émigré from Switzerland who instituted the company’s first research and development program. With the grocery business booming, Widmer saw the vital importance of research and development in creating new products. Initially a technical director for F.T. Bedford’s newly acquired Douglas plant, he later rose to become company president in 1952. Widmer developed several innovative processes, including a method of recovering corn by-products (corn gluten for feed), furthered advances in the production of crystalline dextrose and corn oil, and patented the bottling-up process, which became the industry standard. Widmer also hired several innovative chemists with considerable knowledge of the paper industry. In the 1940s, the company began manufacturing and supplying oxidized starches for paper applications. The company’s chemists also innovated a dry starch from normal dent corn that performed as well as potato or tapioca starches. The process led to the development and patenting of Penford Gums, which commanded a major share of the dry starch specialty market in the paper industry.

Despite these innovative developments, throughout the 1950s and early 1960s the company largely maintained a conservative business approach. Rather than risk capital to develop and introduce new products to its grocery line, the company elected to acquire other businesses, such as New Orleans Coffee Co., W.H. Cargill Co., R.B. Davis Co., Six O’Clock Foods, and Illinois Foods Products Co. Nonetheless, the company proved profitable enough, with steadily improving sales each year.

The RJ. Reynolds/Univar Era: 1965–71

In 1963, Penick & Ford took a dramatic turn with the deaths of its dominant stockholders, including Joseph Jones and his wife, Eugene Penick Jones, William Penick, and F.T. Bedford. With a leadership gap and mediocre growth rate, the company was acquired in 1965 by the R.J. Reynolds Tobacco Company. Penick & Ford offered R.J. Reynolds opportunities for increased sales in grocery lines, which comprised about 40 percent of Penick & Ford’s business. Nonetheless, because of concerns by the Federal Trade Commission that R.J Reynolds would compel its boxboard suppliers to buy only Penick & Ford starch, and because of pressure by the U.S. Justice Department, R.J. Reynolds decided to sell the bulk starch and syrup segments of the business in 1971 to VWR United (later renamed the Univar Corporation). The sale included the Cedar Rapids corn starch and syrup plant, three potato starch plants in Idaho, and one potato starch plant in Colorado. In the late 1970s, the company’s corn syrup business was downsized and idled, but the Univar Corporation continued producing a full line of specialty starches.

Company Perspectives:

Penford is a leading developer, manufacturer, and marketer of specialty ingredient systems based on natural, renewable resources. We leverage our ever-expanding expertise and technologies in carbohydrate chemistry to provide value-added, customer-specific applications in the global food products, papermaking, packaging, and textile industries.

The Penwest Era: 1984–98

On March 1, 1984, the Univar Corporation spun off its manufacturing divisions, including Penick & Ford, which was producing specialty chemical products for the paper, food, and textile industries, and Great Western Malting Company, a manufacturer of brewers malt for the beer industry, into a separate, independent, publicly-held corporation. Univar had first incorporated these manufacturing operations as a subsidiary company under the name Penwest, Ltd. on September 20, 1983, for the purpose of carrying out the divestiture. On November 19, 1987, the Penick & Ford division was renamed Penford Products Company. The two operating divisions served the company well for five years as Great Western generated positive cash flow, which was reinvested in Penick & Ford’s faster growing specialty products. On March 13, 1989, the company sold Great Western to focus exclusively on its growing expertise in value-added carbohydrate chemistry for the specialty products industry. Proceeds from the sale were used to pay down debt, repurchase shares, and make two strategic acquisitions—the Alpha Biochemical Company in 1990 and the Penwest Pharmaceutical Company in 1991. Alpha Biochemical enabled the company to augment its potato starch business, while Penwest Pharmaceuticals provided entry to the pharmaceutical ingredients area. With these two acquisitions, the company began to focus exclusively on carbohydrate chemistry, leading to the strengthening of its market positions for specialty chemical products. The largest payoff came with the development of a highly modified starch for use in papermaking, especially in the coated and uncoated free sheet sectors. The consequent rise in demand for the company’s products led to corporate profits nearly tripling from 1985 to 1991. During the same period, the company’s stock rose from $5 to $37 per share.

In 1991, Penford Food Ingredients Company was established as a division of Penford Products to develop, manufacture, and market specialty carbohydrate-based ingredients to the food and confectionary industries. These ingredients comprised food grade potato and tapioca starch products as well as dextrose-based products, including specialty dried corn syrup. The division’s modified starches were used in coatings to provide crispness, improved taste and texture, and increased product life for goods such as french fries sold in fast food restaurants. In addition, the division’s food-grade products were used as moisture binders to reduce fat levels, modify texture and improve color and consistency in a variety of food applications.

The Penford Corporation Era: 1984–2002

Between 1992 and 1998, the company reported mostly flat profits as the paper industry fell into an extended recession. The company responded by sharply increasing investment in commercial applications in pharmaceuticals and foods for its carbohydrate technology. At the same time, on October 9, 1997, the company announced that it was spinning off 100 percent of the stock of its pharmaceuticals subsidiary to its shareholders. The sale of Penwest Pharmaceuticals was designed to foster growth of its Penford Products division as well as the company’s specialty paper, chemical, and food ingredients businesses. The tax-free distribution to shareholders was completed on August 31, 1998. Following the announcement to divest its pharmaceuticals operation, on October 20, 1997, the company changed its name to the Penford Corporation. Because the divestiture essentially split the company in two, Penford’s stock immediately fell by nearly half its value to little more than $13 a share. In addition, after spinning off Penwest Pharmaceuticals as a separate company, Penford experienced depressed sales in 1999, forcing it to layoff 20 employees in the paper-making division.

In April 2000, the company entered into a strategic product development alliance with Dow Chemical Company’s Emulsion Polymers global business for coated paper and other applications. The agreement provided for Penford to license its patented starch copolymer (SCP) technology to Dow, which was interested in developing new products for its coated paper customers. Penford saw such alliances as key to developing its science into new growth areas. Other alliances included partnerships with Process Chemicals in textiles, Swedish-based Lyckeby Starkelsen in global food-grade potato starch applications, as well as an emerging relationship with Novartis in the world of biological sciences. Penford also announced in April 2000 that it would construct a new $4.7 million research and applications facility in Cedar Rapids, Iowa. The company considered this investment a significant expansion of its ability to develop new ingredient products for customers.

On September 29, 2000, the company completed the acquisition of Starch Australasia Limited from Goodman Fielder Limited for $54.5 million in cash. Starch Australasia, renamed Penford Australia Limited, was Australia’s sole producer of corn starch products and a world leader in the research, development, and commercialization of starch based products. The acquisition, with two manufacturing facilities in Australia and one in New Zealand, provided Penford with new opportunities to develop and produce specialty carbohydrate-based ingredient systems for the food products, paper, and textile industries. Penford immediately added a product line of high growth potential, food-grade corn starch products to its portfolio of offerings, which up until the acquisition included primarily potato-based products. The acquisition also gave Penford expanded access to global markets in Asia and Africa. The addition of new operating facilities in Australia and New Zealand complemented Penford’s four North American manufacturing operations, including its corn wet milling plant in Cedar Rapids, Iowa, and facilities in Idaho Falls, Idaho, Richland, Washington, and Plover, Wisconsin, which produced modified potato starches. Penford Australia brought with it fiscal 2000 revenues of approximately $70 million and 300 employees.

In fiscal 2000, the company’s sales totaled $158.1 million, an increase of only $3 million or 1.9 percent compared to $155.1 million in 1999. The slight increase came primarily from higher company-wide sales volume of specialty starches and starch-based ingredients. Nevertheless, pricing pressure and lower corn costs pertaining to certain paper ingredient products dampened overall sales growth. In 2001, product sales of $205.1 million increased $46.9 million or 29.7 percent over sales of the previous year. The dramatic increase was largely attributed to the acquisition of Penford Australia and higher sales of specialty starch products to the food industry.

Key Dates:

1903:: The Douglas brothers form Douglas Starch Works in Cedar Rapids, Iowa.
1919:: Douglas Starch Works is sold to Penick & Ford, Ltd.
1965:: Penick & Ford is purchased by R.J. Reynolds Tobacco Company.
1971:: RJ. Reynolds sells Penick & Ford to the Univar Corporation.
1984:: Penick & Ford and Great Western Malting, set up as divisions of Penwest Ltd., are spun off from Univar.
1989:: Great Western is divested.
1997:: The company changes its name to Penford Corporation.
1998:: Penwest Pharmaceuticals Co. is divested.
2002:: Penford relocates headquarters to Denver, Colorado.

In January 2001, Penford and Minneapolis-based Cargill Corporation announced a joint venture to combine their industrial starch businesses in North America. The companies intended to create an enhanced specialty-starch ingredient manufacturing and distribution business with estimated annual sales of about $200 million focusing primarily on the paper and textile industry. The joint venture was also anticipated to generate significant cost-efficiencies. The two companies anticipated creating a limited liability corporation with Penford as managing partner. Nonetheless, on May 4, 2001, the companies called off the proposed joint venture after discussions failed to produce a final agreement.

In January 2002, Penford announced a strategic restructuring of business operations, including the relocation of its corporate headquarters from Bellevue, Washington, to Denver, Colorado. Penford’s decision to move its corporate headquarters aimed to consolidate senior management, which was spread among Bellevue, Denver, and Iowa. Denver was the base of its food ingredients business and was more centrally located to its customers in the paper business. As part of the restructuring, Penford’s board of directors named Thomas D. Malkoski to serve as the company’s new CEO, replacing Jeffrey T. Cook. Before joining Penford, Malkoski was president and CEO of North American operations for Griffith Laboratories, a specialty food ingredients business. Under Malkoski, the company continued to focus on expanding sales of specialty food and industrial ingredients, which served to enhance Penford’s growth prospects. As a result, on June 24, 2002, Penford announced that it had been selected on a preliminary basis to join the Russell 3000 Index, reflecting the growth in its market capitalization. This was a promising sign amidst a protracted economic downturn that began in late 2000 and extended into 2003. By the end of 2002, the company had reported overall sales of some $231 million compared to $226 million in 2001. These results appeared to presage further growth ahead even in the most difficult of economic times.

Principal Subsidiaries

Penford Products Company; Penford Food Ingredients Company; Penford Holdings Pty. Ltd. (Australia); Penford Australia Ltd.; Penford New Zealand Ltd.; Penford Export Corporation (U.S. Virgin Islands).