##### 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 May 31, 2006
 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
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)7094 South Revere Parkway,Centennial, Colorado
    
    80112-3932(Address of Principal Executive Offices)
    
    (Zip Code)
 (303) 649-1900
 þ o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
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##### Table of Contents



PENFORD CORPORATION AND SUBSIDIARIES
 INDEX
 PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets  May 31, 2006 and August 31, 2005
    
    
    3Condensed Consolidated Statements of Operations  Three and Nine Months ended May 31, 2006
and May 31, 2005
    
    
    4Condensed Consolidated Statements of Cash Flow  Nine Months ended May 31, 2006 and
May 31, 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART IIOTHER INFORMATIONItem 5. Other Information
    
    
    26Item 6. Exhibits
    
    
    26Signatures
    
    
    27First Amendment to Amended and Restated Credit AgreementCertifications of CEO Purusant to Section 302Certifications of CFO Pursuant to Section 302Certifications of CEO and CFO Pursuant to Section 906
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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1: Financial Statements
 PENFORD CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 May 31,
    
    
    August 31,(In thousands, except per share data)
    
    2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash
    
    $
    1,196
    
    
    $
    5,367Trade accounts receivable, net
    
    
    42,064
    
    
    
    39,653Inventories
    
    
    39,302
    
    
    
    34,801Prepaid expenses
    
    
    5,128
    
    
    
    5,084Other
    
    
    4,659
    
    
    
    4,032Total current assets
    
    
    92,349
    
    
    
    88,937Property, plant and equipment, net
    
    
    126,005
    
    
    
    125,267Restricted cash value of life insurance
    
    
    10,272
    
    
    
    10,132Goodwill, net
    
    
    21,848
    
    
    
    21,420Other intangible assets, net
    
    
    3,034
    
    
    
    3,121Other assets
    
    
    947
    
    
    
    1,040Total assets
    
    $
    254,455
    
    
    $
    249,917LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Cash overdraft, net
    
    $
    820
    
    
    $
    777Current portion of long-term debt and capital lease obligations
    
    
    4,795
    
    
    
    4,022Short-term borrowings
    
    
    10,445
    
    
    
    Accounts payable
    
    
    27,847
    
    
    
    35,941Accrued pension liability
    
    
    1,570
    
    
    
    2,302Accrued liabilities
    
    
    8,728
    
    
    
    10,324Total current liabilities
    
    
    54,205
    
    
    
    53,366Long-term debt and capital lease obligations
    
    
    60,197
    
    
    
    62,107Other post-retirement benefits
    
    
    13,524
    
    
    
    13,091Deferred income taxes
    
    
    6,408
    
    
    
    4,353Other liabilities
    
    
    17,158
    
    
    
    16,974Total liabilities
    
    
    151,492
    
    
    
    149,891Shareholders 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 10,904 and 10,849 shares, respectively
    
    
    10,904
    
    
    
    10,849Additional paid-in capital
    
    
    39,167
    
    
    
    37,728Retained earnings
    
    
    76,114
    
    
    
    76,040Treasury stock, at cost, 1,981 shares
    
    
    (32,757
    )
    
    
    (32,757
    )Accumulated other comprehensive income
    
    
    9,535
    
    
    
    8,166Total shareholders equity
    
    
    102,963
    
    
    
    100,026Total liabilities and shareholders equity
    
    $
    254,455
    
    
    $
    249,917
 The accompanying notes are an integral part of these statements.
 3




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PENFORD CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,(In thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Sales
    
    $
    79,130
    
    
    $
    76,101
    
    
    $
    234,111
    
    
    $
    217,385Cost of sales
    
    
    67,070
    
    
    
    66,061
    
    
    
    203,107
    
    
    
    196,956Gross margin
    
    
    12,060
    
    
    
    10,040
    
    
    
    31,004
    
    
    
    20,429Operating expenses
    
    
    7,020
    
    
    
    6,783
    
    
    
    21,429
    
    
    
    18,576Research and development expenses
    
    
    1,584
    
    
    
    1,447
    
    
    
    4,592
    
    
    
    4,290Income (loss) from operations
    
    
    3,456
    
    
    
    1,810
    
    
    
    4,983
    
    
    
    (2,437
    )Non-operating income, net
    
    
    563
    
    
    
    1,209
    
    
    
    1,410
    
    
    
    1,661Interest expense
    
    
    1,522
    
    
    
    1,457
    
    
    
    4,388
    
    
    
    4,077Income (loss) before income taxes
    
    
    2,497
    
    
    
    1,562
    
    
    
    2,005
    
    
    
    (4,853
    )Income tax expense (benefit)
    
    
    506
    
    
    
    (1,023
    )
    
    
    330
    
    
    
    (2,620
    )Net income (loss)
    
    $
    1,991
    
    
    $
    2,585
    
    
    $
    1,675
    
    
    $
    (2,233
    )Weighted average common shares and
equivalents outstanding:Basic
    
    
    8,914
    
    
    
    8,825
    
    
    
    8,891
    
    
    
    8,822Diluted
    
    
    9,050
    
    
    
    8,937
    
    
    
    8,978
    
    
    
    8,822Earnings (loss) per share:Basic
    
    $
    0.22
    
    
    $
    0.29
    
    
    $
    0.19
    
    
    $
    (0.25
    )Diluted
    
    $
    0.22
    
    
    $
    0.29
    
    
    $
    0.19
    
    
    $
    (0.25
    )Dividends declared per common share
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.18
    
    
    $
    0.18
 The accompanying notes are an integral part of these statements.
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PENFORD CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
 Nine Months EndedMay 31,
    
    
    May 31,(In thousands)
    
    2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    1,675
    
    
    $
    (2,233
    )Adjustments to reconcile net income (loss) to net cash
provided by operations:Depreciation and amortization
    
    
    11,663
    
    
    
    12,992Stock-based compensation
    
    
    937
    
    
    
    80Gain on sale of investments
    
    
    (51
    )
    
    
    (736
    )Deferred income taxes
    
    
    71
    
    
    
    (2,091
    )Other
    
    
    6
    
    
    
    (175
    )Change in assets and liabilities:Trade accounts receivable
    
    
    (2,373
    )
    
    
    3,988Prepaid expenses
    
    
    (31
    )
    
    
    641Inventories
    
    
    (4,192
    )
    
    
    (5,639
    )Accounts payable and accrued liabilities
    
    
    (8,598
    )
    
    
    9,985Taxes payable
    
    
    (690
    )
    
    
    (1,650
    )Other
    
    
    1,460
    
    
    
    111Net cash provided by (used in) operating activities
    
    
    (123
    )
    
    
    15,273Cash flows from investing activities:Investment in property, plant and equipment, net
    
    
    (12,110
    )
    
    
    (6,553
    )Proceeds from investments
    
    
    612
    
    
    
    3,525Other
    
    
    (107
    )
    
    
    (84
    )Net cash used in investing activities
    
    
    (11,605
    )
    
    
    (3,112
    )Cash flows from financing activities:Proceeds from short-term borrowings
    
    
    11,510
    
    
    
    Payments on short-term borrowings
    
    
    (1,425
    )
    
    
    Proceeds from revolving line of credit
    
    
    17,961
    
    
    
    3,000Payments on revolving line of credit
    
    
    (16,333
    )
    
    
    (13,591
    )Payments of long-term debt
    
    
    (2,983
    )
    
    
    (3,574
    )Payments under capital lease obligation
    
    
    (22
    )
    
    
    Exercise of stock options
    
    
    473
    
    
    
    215Payment of loan fees
    
    
    (74
    )
    
    
    (163
    )Increase in cash overdraft
    
    
    43
    
    
    
    Payment of dividends
    
    
    (1,597
    )
    
    
    (1,588
    )Other
    
    
    84
    
    
    
    Net cash provided by (used in) financing activities
    
    
    7,637
    
    
    
    (15,701
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (80
    )
    
    
    (45
    )Net decrease in cash and cash equivalents
    
    
    (4,171
    )
    
    
    (3,585
    )Cash and cash equivalents, beginning of period
    
    
    5,367
    
    
    
    5,915Cash and cash equivalents, end of period
    
    $
    1,196
    
    
    $
    2,330
 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
   2BASIS OF PRESENTATION
 Consolidation
  Recent Accounting Pronouncements
  3STOCK-BASED COMPENSATION
 Stock Compensation Plans
  6




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General Option Information
  WeightedWeighted
    
    AverageNumber of
    
    Average
    
    Remaining
    
    AggregateShares
    
    Exercise Price
    
    Term (in years)
    
    Intrinsic ValueOutstanding Balance, August 31, 2005
    
    
    1,107,535
    
    
    $
    13.96Granted
    
    
    98,500
    
    
    
    13.34Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (10,000
    )
    
    
    16.34Outstanding Balance, November 30, 2005
    
    
    1,196,035
    
    
    $
    13.88Granted
    
    
    
    
    
    
    Exercised
    
    
    (10,000
    )
    
    
    12.79Cancelled
    
    
    (7,500
    )
    
    
    12.79Outstanding Balance, February 28, 2006
    
    
    1,178,535
    
    
    $
    13.90Granted
    
    
    135,000
    
    
    
    15.93Exercised
    
    
    (35,849
    )
    
    
    9.63Cancelled
    
    
    (100,000
    )
    
    
    17.69Outstanding Balance, May 31, 2006
    
    
    1,177,686
    
    
    $
    13.94
    
    
    
    6.64
    
    
    $
    1,007,200Options Exercisable at May 31, 2006
    
    
    664,936
    
    
    $
    13.28
    
    
    
    5.69
    
    
    $
    847,600
     Options Outstanding
    
    Options ExercisableWtd. Avg.Remaining
    
    Wtd. Avg.
    
    
    
    
    
    Wtd. Avg.Number of
    
    Contractual
    
    Exercise
    
    Number of
    
    ExerciseRange of Exercise Prices

    Options
    
    Life (years)
    
    Price
    
    Options
    
    Price$
 6.02  12.50
    
    
    166,745
    
    
    
    5.04
    
    
    $
    10.27
    
    
    
    146,245
    
    
    $
    10.0212.51  14.00
    
    
    532,941
    
    
    
    6.78
    
    
    
    12.99
    
    
    
    340,441
    
    
    
    12.9114.01  17.69
    
    
    478,000
    
    
    
    7.05
    
    
    
    16.28
    
    
    
    178,250
    
    
    
    16.671,177,686
    
    
    
    
    
    
    
    
    
    
    
    664,936
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Adoption of SFAS No. 123R
    Valuation and Assumptions
   Three Months Ended May 31,2006 Incentive Plan
    
    1994 Plan2006
    
    2005
    
    2006
    
    2005Expected volatility
    
    
    51
    %
    
    
    
    
    
    
    
    
    
    
    58
    %Expected life (years)
    
    
    5.5
    
    
    
    
    
    
    
    
    
    
    
    4.1Interest rate (percent)
    
    
    4.9-5.1
    
    
    
    
    
    
    
    
    
    
    
    3.7-4.0Dividend yield
    
    
    1.6
    %
    
    
    
    
    
    
    
    
    
    
    1.6
    %
  8




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Nine Months Ended May 31,2006 Incentive Plan
    
    1994 Plan
    
    Directors Plan2006
    
    2005
    
    2006
    
    2005
    
    2006
    
    2005Expected volatility
    
    
    51
    %
    
    
    
    
    
    
    52
    %
    
    
    58
    %
    
    
    
    
    
    
    58
    %Expected life (years)
    
    
    5.5
    
    
    
    
    
    
    
    5.0
    
    
    
    4.1
    
    
    
    
    
    
    
    5.0Interest rate (percent)
    
    
    4.9-5.1
    
    
    
    
    
    
    
    4.4-4.5
    
    
    
    3.7-4.0
    
    
    
    
    
    
    
    3.7-4.0Dividend yield
    
    
    1.6
    %
    
    
    
    
    
    
    1.7
    %
    
    
    1.6
    %
    
    
    
    
    
    
    1.6
    %
 SFAS No. 123R
  Three months ended
    
    Nine months endedMay 31, 2006
    
    May 31, 2006Cost of sales
    
    $
    29
    
    
    $
    81Operating expenses
    
    
    288
    
    
    
    794Research and development expenses
    
    
    10
    
    
    
    31Total stock-based compensation expense
    
    $
    327
    
    
    $
    906Tax benefit
    
    
    111
    
    
    
    308Total stock-based compensation expense, net of tax
    
    $
    216
    
    
    $
    598
  Pro-forma Information under SFAS 123 for Periods Prior to Fiscal 2006
  Three months ended
    
    Nine months ended(In thousands, except per share data)
    
    May 31, 2005
    
    May 31, 2005Net income (loss), as reported
    
    $
    2,585
    
    
    $
    (2,233
    )Add: Stock-based employee
compensation expense included in
reported net income, net of tax
    
    
    35
    
    
    
    60Less: Stock-based employee
compensation expense determined under
the fair value method for all awards,
net of tax
    
    
    (153
    )
    
    
    (501
    )Net income (loss), pro forma
    
    $
    2,467
    
    
    $
    (2,674
    )Earnings (loss) per share:Basic  as reported
    
    $
    0.29
    
    
    $
    (0.25
    )Basic  pro forma
    
    $
    0.28
    
    
    $
    (0.30
    )Diluted  as reported
    
    $
    0.29
    
    
    $
    (0.25
    )Diluted  pro forma
    
    $
    0.28
    
    
    $
    (0.30
    )
 9




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Restricted Stock
  4INVENTORIES
  May 31,
    
    
    August 31,2006
    
    
    2005(In thousands)Raw materials
    
    $
    20,628
    
    
    $
    17,666Work in progress
    
    
    587
    
    
    
    614Finished goods
    
    
    18,087
    
    
    
    16,521Total inventories
    
    $
    39,302
    
    
    $
    34,801
 5PROPERTY, PLANT AND EQUIPMENT
 May 31,
    
    
    August 31,2006
    
    
    2005(In thousands)Land
    
    $
    16,628
    
    
    $
    15,943Plant and equipment
    
    
    312,173
    
    
    
    304,247Construction in progress
    
    
    14,230
    
    
    
    11,022343,031
    
    
    
    331,212Accumulated depreciation
    
    
    (217,026
    )
    
    
    (205,945
    )Net property, plant and equipment
    
    $
    126,005
    
    
    $
    125,267
  6DEBT
    10




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7TAXES
   8OTHER COMPREHENSIVE INCOME
  Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net income (loss)
    
    $
    1,991
    
    
    $
    2,585
    
    
    $
    1,675
    
    
    $
    (2,233
    )Foreign currency translation adjustments
    
    
    1,387
    
    
    
    (1,796
    )
    
    
    307
    
    
    
    4,657Change in unrealized gains on
derivative instruments that qualify as
cash flow hedges, net of tax
    
    
    (51
    )
    
    
    (137
    )
    
    
    1,062
    
    
    
    (121
    )Total comprehensive income
    
    $
    3,327
    
    
    $
    652
    
    
    $
    3,044
    
    
    $
    2,303
 9NON-OPERATING INCOME, NET
  Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Royalty and licensing income
    
    $
    503
    
    
    $
    436
    
    
    $
    1,338
    
    
    $
    963Gain on sale of investment
    
    
    
    
    
    
    736
    
    
    
    51
    
    
    
    736Other
    
    
    60
    
    
    
    37
    
    
    
    21
    
    
    
    (38
    )Total
    
    $
    563
    
    
    $
    1,209
    
    
    $
    1,410
    
    
    $
    1,661
  11




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10 PENSION AND POST-RETIREMENT BENEFIT PLANS
  Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,Defined benefit pension plans
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Service cost
    
    $
    418
    
    
    $
    266
    
    
    $
    1,254
    
    
    $
    799Interest cost
    
    
    526
    
    
    
    516
    
    
    
    1,578
    
    
    
    1,549Expected return on plan assets
    
    
    (529
    )
    
    
    (467
    )
    
    
    (1,587
    )
    
    
    (1,401
    )Amortization of prior service cost
    
    
    46
    
    
    
    49
    
    
    
    138
    
    
    
    146Amortization of actuarial losses
    
    
    150
    
    
    
    120
    
    
    
    450
    
    
    
    360Net periodic benefit cost
    
    $
    611
    
    
    $
    484
    
    
    $
    1,833
    
    
    $
    1,453
 Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,Post-retirement health care plans
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Service cost
    
    $
    98
    
    
    $
    88
    
    
    $
    294
    
    
    $
    264Interest cost
    
    
    196
    
    
    
    194
    
    
    
    588
    
    
    
    581Amortization of prior service cost
    
    
    (38
    )
    
    
    (38
    )
    
    
    (114
    )
    
    
    (114
    )Amortization of actuarial losses
    
    
    36
    
    
    
    9
    
    
    
    108
    
    
    
    29Net periodic benefit cost
    
    $
    292
    
    
    $
    253
    
    
    $
    876
    
    
    $
    760
 12




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11SEGMENT REPORTING
  Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Sales:Industrial IngredientsNorth America
    
    $
    41,809
    
    
    $
    38,625
    
    
    $
    121,454
    
    
    $
    109,394Food IngredientsNorth America
    
    
    13,747
    
    
    
    13,911
    
    
    
    42,404
    
    
    
    38,035Australia/New Zealand operations
    
    
    23,718
    
    
    
    23,728
    
    
    
    70,795
    
    
    
    70,837Intercompany sales
    
    
    (144
    )
    
    
    (163
    )
    
    
    (542
    )
    
    
    (881
    )$
    79,130
    
    
    $
    76,101
    
    
    $
    234,111
    
    
    $
    217,385Income (loss) from operations:Industrial IngredientsNorth America
    
    $
    3,521
    
    
    $
    1,842
    
    
    $
    4,877
    
    
    $
    (1,944
    )Food IngredientsNorth America
    
    
    1,750
    
    
    
    1,825
    
    
    
    5,636
    
    
    
    4,320Australia/New Zealand operations
    
    
    276
    
    
    
    (105
    )
    
    
    1,071
    
    
    
    143Corporate and other
    
    
    (2,091
    )
    
    
    (1,752
    )
    
    
    (6,601
    )
    
    
    (4,956
    )$
    3,456
    
    
    $
    1,810
    
    
    $
    4,983
    
    
    $
    (2,437
    )
 May 31,
    
    
    August 31,2006
    
    
    2005(In thousands)Total assets:Industrial IngredientsNorth America
    
    $
    102,800
    
    
    $
    101,080Food IngredientsNorth America
    
    
    32,629
    
    
    
    33,193Australia/New Zealand operations
    
    
    107,315
    
    
    
    105,882Corporate and other
    
    
    11,711
    
    
    
    9,762$
    254,455
    
    
    $
    249,917
 13




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##### Table of Contents



Three months ended
    
    Nine months endedMay 31, 2006
    
    May 31, 2006(In thousands)Industrial IngredientsNorth America
    
    $
    71
    
    
    $
    191Food IngredientsNorth America
    
    
    33
    
    
    
    98Australia/New Zealand operations
    
    
    19
    
    
    
    32Corporate
    
    
    204
    
    
    
    585$
    327
    
    
    $
    906
  12EARNINGS (LOSS) PER SHARE
 .
 Three months ended
    
    Nine months endedMay 31,
    
    May 31,2006
    
    2005
    
    2006
    
    2005(In thousands)Weighted average
common shares
outstanding
    
    
    8,914
    
    
    
    8,825
    
    
    
    8,891
    
    
    
    8,822Dilutive stock options
    
    
    136
    
    
    
    112
    
    
    
    87
    
    
    
    Weighted average
common shares
outstanding,
assuming dilution
    
    
    9,050
    
    
    
    8,937
    
    
    
    8,978
    
    
    
    8,822
  13LITIGATION
  14




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14SUBSEQUENT EVENTS
    15




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##### Table of Contents



Item 2: Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Forward-looking Statements
 The statements contained in this Quarterly Report on Form 10-Q (Quarterly Report) that are
not historical facts, 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, 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 Quarterly Report, including those referenced below and in the
section subtitled Risks and Uncertainties in this Quarterly Report, and those described from time
to time in other filings with the Securities and Exchange Commission, including the Companys
Annual Report on Form 10-K for the year ended August 31, 2005, 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; 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, including labor 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 and energy cost volatility; foreign currency exchange
rate fluctuations; changes in assumptions used for determining employee benefit expense and
obligations; changes in the assumptions used to determine the effective income tax rate; or other
unforeseen developments in the industries in which Penford operates.
 Overview
    16




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##### Table of Contents



Results of Operations
 Executive Overview
    Sales
    Income from operations
  17




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##### Table of Contents



Corporate operating expenses
  Interest and taxes
    18




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##### Table of Contents



Non-operating income, net
  Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Royalty and licensing income
    
    $
    503
    
    
    $
    436
    
    
    $
    1,338
    
    
    $
    963Gain on sale of investment
    
    
    
    
    
    
    736
    
    
    
    51
    
    
    
    736Other
    
    
    60
    
    
    
    37
    
    
    
    21
    
    
    
    (38
    )Total
    
    $
    563
    
    
    $
    1,209
    
    
    $
    1,410
    
    
    $
    1,661
   Liquidity and Capital Resources
    19




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##### Table of Contents



Contractual Obligations
  Recent Accounting Pronouncements
  Critical Accounting Policies
   20




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##### Table of Contents




    
    Evaluation of the allowance for doubtful accounts receivable
    
    Hedging activities
    
    Benefit plans
    
    Valuation of goodwill
    
    Self-insurance program
    
    Income taxes
    
    Stock-based compensation
  Evaluation of the Allowance for Doubtful Accounts Receivable
  Hedging Activities
   Benefit Plans
  21




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##### Table of Contents



Valuation of Goodwill
  Self-insurance Program
  Income Taxes
   Stock-Based Compensation
   22




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##### Table of Contents



Risks and Uncertainties
 Increases in energy and chemical costs will reduce the Companys profitability.
  The availability and cost of agricultural products Penford purchases are vulnerable to weather and
other factors beyond its control.
  The loss of a major customer could have an adverse effect on Penfords results of operations.
  Changes in interest rates will affect Penfords profitability.
  Unanticipated changes in tax rates or exposure to additional income tax liabilities could affect
Penfords profitability.
  23




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##### Table of Contents



Profitability is subject to risks associated with changes in foreign exchange currency rates.
  Provisions of Washington law could discourage or prevent a potential takeover.
   The Company may not be able to implement ethanol production as planned or at all.
  Other uncertainties
  24




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##### Table of Contents



Item 3: Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4: Controls and Procedures.
  25




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 5: Other Information.
    
 Item 6: Exhibits.
  10.1
    
    First Amendment to Amended and Restated Credit Agreement31.1
    
    Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certifications 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
 26




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##### Table of Contents



SIGNATURES
  Penford Corporation

(Registrant)July 10, 2006
    
    /s/ Steven O. Cordier

Steven O. CordierSenior Vice President and Chief Financial
Officer
 27




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description10.1
    
    First Amendment to Amended and Restated Credit Agreement31.1
    
    Certifications of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certifications 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
 28