##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended November 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___________________ to ______________________
 Commission File No. 0-11488
 PENFORD CORPORATION
  Washington
    
    91-1221360(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)7094 South Revere Parkway,Centennial, Colorado
    
    80112-3932(Address of Principal Executive Offices)
    
    (Zip Code)
 (303) 649-1900
  þ o
  o o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
(Do not check if a smaller reporting company)
    

Smaller Reporting Company o
  o þ




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##### 



PENFORD CORPORATION AND SUBSIDIARIES
 INDEX
 PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets  November 30, 2009 and August 31, 2009
    
    
    3Condensed Consolidated Statements of Operations  Three Months ended November 30, 2009 and 2008
    
    
    4Condensed Consolidated Statements of Cash Flow  Three Months ended November 30, 2009 and 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    30Signatures
    
    
    31EX-10.16EX-31.1EX-31.2EX-32
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PART I  FINANCIAL INFORMATION
 Item 1:
    
    Financial Statements
 PENFORD CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 November 30,
    
    
    August 31,(In thousands, except per share data)
    
    2009
    
    
    2009(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    19,377
    
    
    $
    5,540Trade accounts receivable, net
    
    
    30,362
    
    
    
    32,192Inventories
    
    
    18,461
    
    
    
    18,155Prepaid expenses
    
    
    4,303
    
    
    
    5,081Income tax receivable
    
    
    3,238
    
    
    
    3,892Other
    
    
    3,077
    
    
    
    3,476Current assets of discontinued operations
    
    
    22,291
    
    
    
    38,486Total current assets
    
    
    101,109
    
    
    
    106,822Property, plant and equipment, net
    
    
    116,778
    
    
    
    119,049Restricted cash value of life insurance
    
    
    9,785
    
    
    
    9,761Deferred tax assets
    
    
    12,761
    
    
    
    8,277Other assets
    
    
    1,638
    
    
    
    2,075Other intangible assets, net
    
    
    463
    
    
    
    481Goodwill, net
    
    
    8,171
    
    
    
    7,553Non-current assets of discontinued operations
    
    
    
    
    
    
    4,227Total assets
    
    $
    250,705
    
    
    $
    258,245Liabilities and shareholders equityCurrent liabilities:Current portion of long-term debt and capital
lease obligations (Note 7)
    
    $
    84,879
    
    
    $
    21,241Accounts payable
    
    
    15,530
    
    
    
    14,745Accrued liabilities
    
    
    9,651
    
    
    
    8,972Current liabilities of discontinued operations
    
    
    7,084
    
    
    
    16,028Total current liabilities
    
    
    117,144
    
    
    
    60,986Long-term debt and capital lease obligations
    
    
    2,442
    
    
    
    71,141Other postretirement benefits
    
    
    17,953
    
    
    
    17,678Pension benefit liability
    
    
    18,043
    
    
    
    18,043Other liabilities
    
    
    8,401
    
    
    
    8,187Non-current liabilities of discontinued operations
    
    
    
    
    
    
    2,851Total liabilities
    
    
    163,983
    
    
    
    178,886Shareholders equity:Preferred stock, par value $1.00 per share,
authorized 1,000 shares, none issued
    
    
    
    
    
    
    Common stock, par value $1.00 per share,
authorized 29,000 shares, issued 13,175 and
13,157 shares, respectively, including treasury
shares
    
    
    13,175
    
    
    
    13,157Additional paid-in capital
    
    
    93,964
    
    
    
    93,829Retained earnings
    
    
    12,442
    
    
    
    7,944Treasury stock, at cost, 1,981,016 shares
    
    
    (32,757
    )
    
    
    (32,757
    )Accumulated other comprehensive loss
    
    
    (102
    )
    
    
    (2,814
    )Total shareholders equity
    
    
    86,722
    
    
    
    79,359Total liabilities and shareholders equity
    
    $
    250,705
    
    
    $
    258,245
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PENFORD CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three months endedNovember 30,
    
    
    November 30,(In thousands, except per share data)
    
    2009
    
    
    2008Sales
    
    $
    67,070
    
    
    $
    59,584Cost of sales
    
    
    56,442
    
    
    
    54,179Gross margin
    
    
    10,628
    
    
    
    5,405Operating expenses
    
    
    6,488
    
    
    
    6,043Research and development expenses
    
    
    998
    
    
    
    1,123Flood related costs, net of insurance proceeds
    
    
    
    
    
    
    (4,234
    )Income from operations
    
    
    3,142
    
    
    
    2,473Interest expense
    
    
    1,798
    
    
    
    1,270Other non-operating income (expense), net
    
    
    636
    
    
    
    (606
    )Income from continuing operations before income taxes
    
    
    1,980
    
    
    
    597Income tax expense
    
    
    924
    
    
    
    34Income from continuing operations
    
    
    1,056
    
    
    
    563Income (loss) from discontinued operations, net of tax
    
    
    3,482
    
    
    
    (932
    )Net income (loss)
    
    $
    4,538
    
    
    $
    (369
    )Weighted average common shares and equivalents outstanding:Basic
    
    
    11,183
    
    
    
    11,155Diluted
    
    
    11,266
    
    
    
    11,299Earnings (loss) per common share:Basic earnings per share from continuing operations
    
    $
    0.09
    
    
    $
    0.05Basic earnings (loss) per share from discontinued operations
    
    $
    0.31
    
    
    $
    (0.08
    )Basic earnings (loss) per share
    
    $
    0.40
    
    
    $
    (0.03
    )Diluted earnings per share from continuing operations
    
    $
    0.09
    
    
    $
    0.05Diluted earnings (loss) per share from discontinued operations
    
    $
    0.31
    
    
    $
    (0.08
    )Diluted earnings (loss) per share
    
    $
    0.40
    
    
    $
    (0.03
    )Dividends declared per common share
    
    $
    
    
    
    $
    0.06
 The accompanying notes are an integral part of these statements.
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PENFORD CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
  Three Months EndedNovember 30,
    
    
    November 30,(In thousands)
    
    2009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    4,538
    
    
    $
    (369
    )Less: Income (loss) from discontinued operations
    
    
    3,482
    
    
    
    (932
    )Net income from continuing operations
    
    
    1,056
    
    
    
    563Adjustments to reconcile net income from continuing operations to net cash provided by (used in) operations:Depreciation and amortization
    
    
    3,801
    
    
    
    3,678Stock-based compensation
    
    
    463
    
    
    
    829Deferred income tax (expense) benefit
    
    
    (109
    )
    
    
    983Loss (gain) on derivative transactions
    
    
    976
    
    
    
    (6,238
    )Foreign currency transaction (gain) loss
    
    
    (452
    )
    
    
    613Other
    
    
    
    
    
    
    2Change in assets and liabilities:Trade receivable
    
    
    1,830
    
    
    
    (17,693
    )Prepaid expenses
    
    
    778
    
    
    
    (233
    )Inventories
    
    
    539
    
    
    
    11,205Accounts payable and accrued liabilities
    
    
    1,390
    
    
    
    (6,373
    )Taxes payable
    
    
    629
    
    
    
    3,255Insurance recovery receivable
    
    
    
    
    
    
    (525
    )Other
    
    
    9,933
    
    
    
    1,716Net cash flow provided by (used in) operating activities  continuing operations
    
    
    20,834
    
    
    
    (8,218
    )Investing activities:Acquisition of property, plant and equipment, net
    
    
    (1,059
    )
    
    
    (1,271
    )Other
    
    
    (19
    )
    
    
    (27
    )Net cash used in investing activities  continuing operations
    
    
    (1,078
    )
    
    
    (1,298
    )Cash flows from financing activities:Proceeds from revolving line of credit
    
    
    
    
    
    
    20,000Payments on revolving line of credit
    
    
    
    
    
    
    (12,500
    )Proceeds from long-term debt
    
    
    2,000Payments of long-term debt
    
    
    (7,820
    )
    
    
    (1,000
    )Payments under capital lease obligation
    
    
    (61
    )
    
    
    (77
    )Increase in cash overdraft
    
    
    
    
    
    
    3,768Payment of dividends
    
    
    
    
    
    
    (675
    )Other
    
    
    (38
    )
    
    
    Net cash (used in) provided by financing activities  continuing activities
    
    
    (5,919
    )
    
    
    9,516Cash flows from discontinued operations:Net cash from (used in) provided by operating activities
    
    
    (9,161
    )
    
    
    1,043Net cash provided by (used in) investing activities
    
    
    18,375
    
    
    
    (233
    )Net cash (used in) provided by financing activities
    
    
    (3,399
    )
    
    
    399Effect of exchange rate changes on cash and cash equivalents
    
    
    55
    
    
    
    (55
    )Net cash provided by discontinued operations
    
    
    5,870
    
    
    
    1,154Increase in cash and cash equivalents
    
    
    19,707
    
    
    
    1,154Cash and cash equivalents of continuing operations, beginning of period
    
    
    5,540
    
    
    
    Cash balance of discontinued operations, beginning of period
    
    
    634
    
    
    
    534Cash and cash equivalents, end of period
    
    
    25,881
    
    
    
    1,688Less: cash balance of discontinued operations, end of period
    
    
    6,504
    
    
    
    1,688Cash and cash equivalents of continuing operations, end of period
    
    $
    19,377
    
    
    $
    
 The accompanying notes are an integral part of these statements.
 5




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PENFORD CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1BUSINESS
    Discontinued Operations
  Subsequent Events
  2BASIS OF PRESENTATION
 Consolidation
  6




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Use of Estimates
  Accounting Changes
      Recent Accounting Pronouncements
  7




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3  DISCONTINUED OPERATIONS
    Quarter Ended November 302009
    
    
    2008(In Thousands)Sales
    
    $
    16,963
    
    
    $
    21,360Loss from operations
    
    $
    (1,525
    )
    
    $
    (1,636
    )Interest expense
    
    
    315
    
    
    
    223Gain on sale of assets
    
    
    351
    
    
    
    Other non-operating income, net
    
    
    57
    
    
    
    396Loss from discontinued operations before taxes
    
    
    (1,432
    )
    
    
    (1,463
    )Income tax benefit
    
    
    (4,914
    )
    
    
    (531
    )Income (loss) from discontinued operations, net of tax
    
    $
    3,482
    
    
    $
    (932
    )
  8




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November 30,
    
    
    August 31,2009
    
    
    2009(Dollars in thousands)ASSETSCash
    
    $
    6,504
    
    
    $
    634Trade accounts receivable, net
    
    
    12,689
    
    
    
    14,482Inventories
    
    
    
    
    
    
    22,129Prepaid expenses
    
    
    
    
    
    
    595Income tax receivable
    
    
    
    
    
    
    190Other
    
    
    3,098
    
    
    
    456Current assets of discontinued operations
    
    
    22,291
    
    
    
    38,486Property, plant and equipment, net
    
    
    
    
    
    
    3,799Other assets
    
    
    
    
    
    
    428Non-current assets of discontinued operations
    
    
    
    
    
    
    4,227Total assets of discontinued operations
    
    $
    22,291
    
    
    $
    42,713LIABILITIESShort-term borrowings
    
    $
    
    
    
    $
    3,327Accounts payable
    
    
    7,084
    
    
    
    10,697Accrued liabilities
    
    
    
    
    
    
    2,004Current liabilities of discontinued operations
    
    
    7,084
    
    
    
    16,028Other liabilities
    
    
    
    
    
    
    2,851Non-current liabilities of discontinued operations
    
    
    
    
    
    
    2,851Total liabilities of discontinued operations
    
    $
    7,084
    
    
    $
    18,879
 4STOCK-BASED COMPENSATION
 Stock Compensation Plans
  9




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Stock Option Awards
  WeightedWeighted
    
    
    AverageNumber of
    
    
    Average
    
    
    Remaining
    
    
    AggregateShares
    
    
    Exercise Price
    
    
    Term (in years)
    
    
    Intrinsic ValueOutstanding Balance, August 31, 2009
    
    
    1,363,771
    
    
    $
    15.18Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (20,950
    )
    
    $
    13.37Outstanding Balance, November 30, 2009
    
    
    1,342,821
    
    
    $
    15.21
    
    
    
    4.08
    
    
    $
    10,680Options Exercisable at November 30, 2009
    
    
    1,015,321
    
    
    $
    14.54
    
    
    
    3.66
    
    
    $
    10,680
    Restricted Stock Awards
  WeightedAverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueNonvested at August 31, 2009
    
    
    89,582
    
    
    $
    31.31Granted
    
    
    97,600
    
    
    
    6.25Vested
    
    
    (25,250
    )
    
    
    35.18Cancelled
    
    
    (1,500
    )
    
    
    35.18Nonvested at November 30, 2009
    
    
    160,432
    
    
    $
    15.42
   Compensation Expense
  10




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Three Months EndedNovember    30,2009
    
    
    2008Cost of sales
    
    $
    47
    
    
    $
    89Operating expenses
    
    
    408
    
    
    
    724Research and development expenses
    
    
    8
    
    
    
    16Income (loss) from discontinued operations
    
    
    (25
    )
    
    
    6Total stock-based compensation expense
    
    $
    438
    
    
    $
    835Tax benefit
    
    
    166
    
    
    
    317Total stock-based compensation expense, net of tax
    
    $
    272
    
    
    $
    518
 5INVENTORIES
  November 30,
    
    
    August 31,2009
    
    
    2009(In thousands)Raw materials
    
    $
    7,983
    
    
    $
    7,265Work in progress
    
    
    1,918
    
    
    
    1,921Finished goods
    
    
    8,560
    
    
    
    8,969Total inventories
    
    $
    18,461
    
    
    $
    18,155
 6PROPERTY, PLANT AND EQUIPMENT
  November 30,
    
    
    August 31,2009
    
    
    2009(In thousands)Land
    
    $
    10,243
    
    
    $
    10,229Plant and equipment
    
    
    321,454
    
    
    
    321,356Construction in progress
    
    
    3,136
    
    
    
    2,214334,833
    
    
    
    333,799Accumulated depreciation
    
    
    (218,055
    )
    
    
    (214,750
    )Net property, plant and equipment
    
    $
    116,778
    
    
    $
    119,049
 7DEBT
   11




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8INCOME TAXES
      9OTHER COMPREHENSIVE INCOME (LOSS) (OCI)
  Three months endedNovember 30,
    
    
    November 30,2009
    
    
    2008(In thousands)Net income (loss)
    
    $
    4,538
    
    
    $
    (369
    )Foreign currency translation adjustments
    
    
    1,615
    
    
    
    (18,956
    )Net unrealized gain (loss) on derivative
instruments that qualify as cash flow hedges,
net of tax
    
    
    1,097
    
    
    
    (590
    )Total comprehensive income (loss)
    
    $
    7,250
    
    
    $
    (19,915
    )
  13




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10NON-OPERATING INCOME (LOSS), NET
  Three months endedNovember 30,
    
    
    November 30,2009
    
    
    2008(In thousands)Gain (loss) on foreign currency transactions
    
    
    452
    
    
    
    (613
    )Other
    
    
    184
    
    
    
    7Total
    
    $
    636
    
    
    $
    (606
    )
  11  PENSION AND POST-RETIREMENT BENEFIT PLANS
  Three months endedNovember 30,
    
    
    November 30,Defined benefit pension plans
    
    2009
    
    
    2008(in thousands)Service cost
    
    $
    389
    
    
    $
    355Interest cost
    
    
    641
    
    
    
    645Expected return on plan assets
    
    
    (506
    )
    
    
    (607
    )Amortization of prior service cost
    
    
    61
    
    
    
    63Amortization of actuarial losses
    
    
    304
    
    
    
    53Net periodic benefit cost
    
    $
    889
    
    
    $
    509
 Three months endedNovember 30,
    
    
    November 30,Post-retirement health care plans
    
    2009
    
    
    2008(in thousands)Service cost
    
    $
    88
    
    
    $
    65Interest cost
    
    
    269
    
    
    
    228Amortization of prior service cost
    
    
    (38
    )
    
    
    (38
    )Amortization of actuarial losses
    
    
    74
    
    
    
    Net periodic benefit cost
    
    $
    393
    
    
    $
    255
 14




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12DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASURMENTS
 Fair Value Measurements
   
    
    Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the entity has the ability to access at the measurement date.
 
    
    Level 2 inputs are other than quoted prices included within Level 1 that are observable
for assets and liabilities such as (1) quoted prices for similar assets or liabilities in
active markets, (2) quoted prices for identical or similar assets or liabilities in markets
that are not active, or (3) inputs that are derived principally or corroborated by
observable market date by correlation or other means.
 
    
    Level 3 inputs are unobservable inputs to the valuation methodology for the assets or
liabilities.
 Quoted PricesIn Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableInstruments
    
    
    Inputs
    
    
    InputsAs of November 30, 2009
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Total(in thousands)Current assets (Other Current Assets):Commodity derivatives (1)
    
    $
    1,016
    
    
    $
    
    
    
    $
    
    
    
    $
    1,016Current liabilities (Accrued Liabilities):Interest rate swaps
    
    $
    
    
    
    $
    1,891
    
    
    $
    
    
    
    $
    1,891
 
 (1)
    
    Commodity derivative assets and liabilities have been offset by cash collateral due and paid under master netting arrangements. The cash collateral offset was $2.2 million at November 30, 2009. 15




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Quoted PricesIn Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableInstruments
    
    
    Inputs
    
    
    InputsAs of August 31, 2009
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Total(in thousands)Current assets (Other Current Assets):Commodity derivatives (1)
    
    $
    430
    
    
    $
    
    
    
    $
    
    
    
    $
    430Current liabilities (Accrued Liabilities):Interest rate swaps
    
    $
    
    
    
    $
    1,829
    
    
    $
    
    
    
    $
    1,829
 
 (1)
    
    Commodity derivative assets and liabilities have been offset by cash collateral due and paid under master netting arrangements. The cash collateral offset was $0.4 million at August 31, 2009. Other Financial Instruments
  Interest Rate Swap Agreements
  Foreign Currency Contracts
  Commodity Contracts
   16




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Corn Futures
    
    4,890,000 BushelsNatural Gas Futures
    
    630,000 mmbtu (millions of British thermal units)Ethanol Futures
    
    3,871,500 GallonsInterest Rate Swap Contracts
    
    28,000,000 US Dollars (Notional Amount)
  Fair Value of Derivative Instrumentsas of November 30, 2009(in thousands)Asset Derivatives
    
    
    Liability DerivativesDerivatives Designated as Hedging
    
    Balance Sheet
    
    
    
    
    
    
    Balance SheetInstruments under ASC 815
    
    Location
    
    
    Fair Value
    
    
    Location
    
    
    Fair ValueCash Flow Hedges:Corn Futures
    
    Other Current Assets
    
    $
    1,238
    
    
    Other Current Assets
    
    $
    (399
    )Natural Gas Futures
    
    Other Current Assets
    
    
    
    
    
    Other Current Assets
    
    
    (696
    )Interest Rate Contracts
    
    Other Current Assets
    
    
    
    
    
    Accrued Liabilities
    
    
    (1,891
    )Ethanol Futures
    
    Other Current Assets
    
    
    
    
    
    Other Current Assets
    
    
    (709
    )Total Cash Flow Hedges
    
    
    
    
    
    
    1,238
    
    
    
    
    
    
    
    (3,695
    )Fair Value Hedges:Corn Futures
    
    Other Current Assets
    
    
    94
    
    
    Other Current Assets
    
    
    (168
    )Total Fair Value Hedges
    
    
    
    
    
    
    94
    
    
    
    
    
    
    
    (168
    )Total Derivatives
Designated as Hedging
Instruments under ASC
815
    
    
    
    
    
    $
    1,332
    
    
    
    
    
    
    $
    (3,863
    )
 17




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##### Table of Contents



Fair Value of Derivative Instrumentsas of August 31, 2009(in thousands)Asset Derivatives
    
    
    Liability DerivativesDerivatives Designated as Hedging
    
    Balance Sheet
    
    
    
    
    
    
    Balance SheetInstruments under ASC 815
    
    Location
    
    
    Fair Value
    
    
    Location
    
    
    Fair ValueCash Flow Hedges:Corn Futures
    
    Other Current Assets
    
    $
    82
    
    
    Other Current Assets
    
    $
    (916
    )Natural Gas Futures
    
    Other Current Assets
    
    
    
    
    
    Other Current Assets
    
    
    (1,301
    )Interest Rate Contracts
    
    Other Current Assets
    
    
    
    
    
    Accrued Liabilities
    
    
    (1,829
    )Foreign Exchange Contracts
    
    Other Current Assets
    
    
    
    
    
    Accrued Liabilities
    
    
    Total Cash Flow Hedges
    
    
    
    
    
    
    82
    
    
    
    
    
    
    
    (4,046
    )Fair Value Hedges:Corn Futures
    
    Other Current Assets
    
    
    1,303
    
    
    Other Current Assets
    
    
    (174
    )Total Fair Value Hedges
    
    
    
    
    
    
    1,303
    
    
    
    
    
    
    
    (174
    )Total Derivatives
Designated as Hedging
Instruments under ASC 815
    
    
    
    
    
    $
    1,385
    
    
    
    
    
    
    $
    (4,220
    )
 The Effect of Derivative Instruments on the Statement of Financial Performancefor the Quarter Ended November 30, 2009(in thousands)Location of Gain or(Loss) Reclassified
    
    
    
    
    
    
    Location of Gain or (Loss)
    
    
    Amount of Gain orfrom Accum OCI into
    
    
    Amount of Gain or
    
    
    Recognized in Income on
    
    
    (Loss) RecognizedAmount of Gain or
    
    
    Income
    
    
    (Loss) Reclassified
    
    
    Derivative (Ineffective
    
    
    in Income on(Loss)
    
    

(Effective Portion)
    
    
    from Accum OCI into
    
    
    Portion)
    
    
    DerivativeDerivatives in ASC 815 Cash Flow
    
    Recognized in OCI
    
    
    Income Statement
    
    
    Income (Effective
    
    
    Income Statement
    
    
    (IneffectiveHedging Relationships
    
    (Effective Portion)
    
    
    Location
    
    
    Portion)
    
    
    Location
    
    
    Portion)Cash Flow Hedging Relationships:Corn Futures
    
    $
    301
    
    
    Cost of sales
    
    $
    (23
    )
    
    Cost of sales
    
    $
    95Natural Gas Futures
    
    
    (696
    )
    
    Cost of sales
    
    
    (865
    )
    
    Cost of sales
    
    
    Ethanol Futures
    
    
    (709
    )
    
    Cost of Sales
    
    
    (577
    )
    
    Cost of Sales
    
    
    Interest Rate Contracts
    
    
    (349
    )
    
    Interest expense
    
    
    (287
    )
    
    Interest Expense
    
    
    Foreign Exchange Contracts
    
    
    
    
    
    Cost of sales
    
    
    (26
    )
    
    Cost of sales
    
    
    Total
    
    $
    (1,453
    )
    
    
    
    
    
    $
    (1,778
    )
    
    
    
    
    
    $
    95The Effect of Derivative Instruments on the Statement of Financial Performancefor the Quarter Ended November 30, 2009(in thousands)Location ofLocation of Gain /
    
    
    
    
    
    
    
    
    
    
    Gain/(Loss)(Loss) Recognized
    
    
    Amount of Gain /
    
    
    
    
    
    
    Recognized in
    
    
    Location ofin Income on
    
    
    (Loss)
    
    
    
    
    
    
    Income on Related
    
    
    Gain/(Loss)Derivative
    
    
    Recognized
    
    
    Hedged Item in ASC
    
    
    Hedged Item
    
    
    Recognized inDerivatives in ASC 815 Fair Value
    
    Income Statement
    
    
    in Income on
    
    
    815 Fair Value
    
    
    Income Statement
    
    
    Income on RelatedHedging Relationships
    
    Location
    
    
    Derivative
    
    
    Hedge Relationships
    
    
    Location
    
    
    Hedged ItemFair Value Hedge Relationships:Corn Futures
    
    Cost of sales
    
    
    
    
    
    Firm Commitments/Inventory
    
    Cost of sales
    
    $
    33Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    33
 18




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##### Table of Contents



13SEGMENT REPORTING
  Three months endedNovember 30,
    
    
    November 30,2009
    
    
    2008(In thousands)Sales:Industrial Ingredients
    
    $
    50,308
    
    
    $
    41,842Food Ingredients
    
    
    16,762
    
    
    
    17,742$
    67,070
    
    
    $
    59,584Income (loss) from operations:Industrial Ingredients
    
    $
    2,154
    
    
    $
    1,799Food Ingredients
    
    
    3,581
    
    
    
    3,398Corporate and other
    
    
    (2,593
    )
    
    
    (2,724
    )$
    3,142
    
    
    $
    2,473
 November 30,
    
    
    August 31,2009
    
    
    2009(In thousands)Total assets:Industrial Ingredients
    
    $
    135,148
    
    
    $
    139,609Food Ingredients
    
    
    37,642
    
    
    
    37,387Discontinued Operations
    
    
    22,291
    
    
    
    42,713Corporate and other
    
    
    55,624
    
    
    
    38,536$
    250,705
    
    
    $
    258,245
  14EARNINGS (LOSS) PER SHARE
   19




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##### Table of Contents



.
 Three months endedNovember 30, 2009
    
    
    November 30, 2008(In thousands)Numerator:Income from continuing operations
    
    $
    1,056
    
    
    $
    563Less: Allocation to participating securities
    
    
    (40
    )
    
    
    (5
    )Income from continuing operations applicable to
common shares
    
    $
    1,016
    
    
    $
    558Income (loss) from discontinued operations
    
    $
    3,482
    
    
    $
    (932
    )Less: Allocation to participating securities
    
    
    
    
    
    
    Income (loss) from discontinued operations
applicable to common shares
    
    $
    3,482
    
    
    $
    (932
    )Net income (loss)
    
    $
    4,538
    
    
    $
    (369
    )Less: Allocation to participating securities
    
    
    (40
    )
    
    
    (5
    )Net income (loss) applicable to common shares
    
    $
    4,498
    
    
    $
    (374
    )Denominator:Weighted average common shares outstanding, basic
    
    
    11,183
    
    
    
    11,155Dilutive stock options and awards
    
    
    83
    
    
    
    144Weighted average common shares outstanding, diluted
    
    
    11,266
    
    
    
    11,299
  15LEGAL PROCEEDINGS
   20




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##### Table of Contents



Item 2:
    
    Managements Discussion and Analysis of
Financial Condition and Results of Operations
 Forward-looking Statements
 This Quarterly Report on Form 10-Q (Quarterly Report), including, but not limited, to
statements found in the Notes to Condensed Consolidated Financial Statements and in Item 2 
Managements Discussion and Analysis of Financial Condition and Results of Operations, contains
statements that are forward-looking statements within the meaning of the federal securities laws.
In particular, statements pertaining to anticipated operations and business strategies contain
forward-looking statements. Likewise, statements regarding anticipated changes in the Companys
business and anticipated market conditions are forward-looking statements. Forward-looking
statements involve numerous risks and uncertainties and should not be relied upon as predictions of
future events. Forward-looking statements depend on assumptions, dates or methods that may be
incorrect or imprecise, and the Company may not be able to realize them. Forward-looking
statements can be identified by the use of forward-looking terminology such as believes,
expects, may, will, should, seeks, approximately, intends, plans, estimates, or
anticipates, or the negative use of these words and phrases or similar words or phrases.
Forward-looking statements can be identified by discussions of strategy, plans or intentions.
Readers are cautioned not to place undue reliance on these forward-looking statements which are
based on information available as of the date of this report. The Company does not take any
obligation to publicly update or revise any forward-looking statements to reflect future events,
information or circumstances that arise after the date of the filing of this Quarterly Report.
Among the factors that could cause actual results to differ materially are the risks and
uncertainties discussed in this Quarterly Report, including those referenced in Part II Item 1A of
this Quarterly Report, and those described from time to time in other filings made with the
Securities and Exchange Commission, including the Companys Annual Report on Form 10-K for the year
ended August 31, 2009, 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 amount and timing of flood insurance recoveries;
 
    
    changes in general economic conditions or developments with respect to specific
industries or customers affecting demand for the Companys products including
unfavorable shifts in product mix;
 
    
    unanticipated costs, expenses or third-party claims;
 
    
    the risk that results may be affected by construction delays, cost overruns,
technical difficulties, nonperformance by contractors or changes in capital improvement
project requirements or specifications;
 
    
    interest rate, chemical and energy cost volatility;
 
    
    foreign currency exchange rate fluctuations;
 
    
    changes in returns on pension plan assets and/or assumptions used for determining
employee benefit expense and obligations;
 
    
    other unforeseen developments in the industries in which Penford operates,
 
    
    the Companys ability to successfully operate under and comply with the terms of its
bank credit agreement, as amended;
 
    
    the Companys ability to renew or replace its bank credit agreement for periods
following the agreements November 30, 2010 maturity date; or
 21




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##### Table of Contents




    
    other factors described in Part I, Item 1A Risk Factors.
 Overview
        Accounting Changes
   22




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##### Table of Contents



Results of Operations
 Executive Overview
     23




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##### Table of Contents



Industrial Ingredients
   Food
Ingredients
   Corporate operating expenses
  Interest expense
  Income taxes
   24




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##### Table of Contents



Non-operating income (loss), net
  Three months endedNovember 30, 2009
    
    
    November 30, 2008(In thousands)Gain (loss) on foreign currency
transactions
    
    
    452
    
    
    
    (613
    )Other
    
    
    184
    
    
    
    7Total
    
    $
    636
    
    
    $
    (606
    )
  25




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##### Table of Contents



Results of Discontinued Operations
 Quarter EndedNovember 302009
    
    
    2008Sales
    
    $
    16,963
    
    
    $
    21,360Cost of sales
    
    
    15,877
    
    
    $
    21,376Gross margin
    
    
    1,086
    
    
    
    (16
    )Operating expenses
    
    
    2,326
    
    
    
    1,224Research and development expenses
    
    
    285
    
    
    
    396Loss from operations
    
    
    (1,525
    )
    
    
    (1,636
    )Non-operating income
    
    
    57
    
    
    
    396Interest expense
    
    
    315
    
    
    
    223Gain on sale of assets
    
    
    351
    
    
    
    Loss on discontinued operations before income taxes
    
    
    (1,432
    )
    
    
    (1,463
    )Income tax benefit
    
    
    (4,914
    )
    
    
    (531
    )Income (loss) on discontinued operations
    
    $
    3,482
    
    
    $
    (932
    )
     Liquidity and Capital Resources
   26




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##### Table of Contents



Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
  27




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##### Table of Contents



Critical Accounting Policies and Estimates
  
 Item 3: Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 4: Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  28




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1: Legal Proceedings
   
 Item 1A: Risk Factors
  The
Companys  bank credit agreement matures on November 30, 2010, at which time the debt outstanding under
the  agreement must be repaid, refinanced or extended.
  
 Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
 a.
    
    Noneb.
    
    Nonec.
    
    Issuer Purchases of Equity Securities
 Total Number ofShares Purchased as
    
    
    Maximum Number ofTotal Number of
    
    
    
    
    
    
    Part of Publicly
    
    
    Shares that May Yet BeShares
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    Purchased Under thePurchased (1)
    
    
    per Share
    
    
    Programs
    
    
    Plans or ProgramsNovember 1 - November 30, 2009
    
    
    6,888
    
    
    $
    5.90
    
    
    
    
    
    
    
    October 1 - October 31, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    September 1 - September 30, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    6,888
    
    
    $
    5.90
    
    
    
    
    
    
    
    
 
 (1)
    
    Represents shares repurchased to satisfy tax withholding obligations on vesting shares of
restricted stock awards. 29




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##### Table of Contents



Item 5: Other Information.
  
 Item 6: Exhibits.
  10.16
    
    Form of Performance Based Cash Award Agreement under the 2006 Long-Term Incentive Plan31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 30




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SIGNATURES
  Penford Corporation(Registrant)January 8, 2010
    /s/ Steven O. CordierSteven O. CordierSenior Vice President and Chief Financial Officer 31




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EXHIBIT INDEX
  
    
    should not in all instances be treated as categorical statements of fact, but rather as
a means of allocating the risk to one of the parties if those statements prove to be
inaccurate;
    
    may have been qualified by disclosures that were made to the other party or parties in
connection with the negotiation of the applicable agreement, which disclosures are not
necessarily reflected in the agreement;
    
    may apply standards of materiality in a manner that is different from what may be
viewed as material to investors; and
    
    were made only as of the date of the applicable agreement or other date or dates that
may be specified in the agreement and are subject to more recent developments.
 http://sec.gov.
 Exhibit No.
    
    Description10.16
    
    Form of Performance Based Cash Award Agreement under the 2006 Long-Term Incentive Plan31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
 32