##### 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, 2010
 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
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
  o þ




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##### 



PENFORD CORPORATION AND SUBSIDIARIES
 INDEX
 PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets  May 31, 2010 and August 31, 2009
    
    3Condensed Consolidated Statements of Operations  Three and Nine Months ended May 31, 2010 and 2009
    
    4Condensed Consolidated Statements of Cash Flows  Three and Nine Months ended May 31, 2010 and 2009
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    29Item 4. Controls and Procedures
    
    29PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    31Item 1A. Risk Factors
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    31Item 6. Exhibits
    
    32Signatures
    
    33EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1: Financial Statements
 PENFORD CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except per share data)
    
    May 31, 2010
    

    August 31, 2009(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    364
    
    
    $
    5,540Trade accounts receivable, net
    
    
    27,839
    
    
    
    32,192Inventories
    
    
    17,870
    
    
    
    18,155Prepaid expenses
    
    
    6,125
    
    
    
    5,081Income tax receivable
    
    
    3,919
    
    
    
    3,892Other
    
    
    5,519
    
    
    
    3,476Current assets of discontinued operations
    
    
    
    
    
    
    38,486Total current assets
    
    
    61,636
    
    
    
    106,822Property, plant and equipment, net
    
    
    113,524
    
    
    
    119,049Restricted cash value of life insurance
    
    
    7,884
    
    
    
    9,761Deferred tax assets
    
    
    14,678
    
    
    
    8,277Other assets
    
    
    2,734
    
    
    
    2,075Other intangible assets, net
    
    
    425
    
    
    
    481Goodwill, net
    
    
    7,897
    
    
    
    7,553Non-current assets of discontinued operations
    
    
    
    
    
    
    4,227Total assets
    
    $
    208,778
    
    
    $
    258,245Liabilities and Shareholders equityCurrent liabilities:Cash overdraft, net
    
    $
    4,442
    
    
    $
    Current portion of long-term debt and capital lease obligations
    
    
    422
    
    
    
    21,241Accounts payable
    
    
    13,193
    
    
    
    14,745Accrued liabilities
    
    
    8,978
    
    
    
    8,972Current liabilities of discontinued operations
    
    
    
    
    
    
    16,028Total current liabilities
    
    
    27,035
    
    
    
    60,986Long-term debt and capital lease obligations
    
    
    19,833
    
    
    
    71,141Redeemable preferred stock, Series A (Note 7)
    
    
    32,940
    
    
    
    Other postretirement benefits
    
    
    18,461
    
    
    
    17,678Pension benefit liability
    
    
    18,043
    
    
    
    18,043Other liabilities
    
    
    6,124
    
    
    
    8,187Non-current liabilities of discontinued operations
    
    
    
    
    
    
    2,851Total liabilities
    
    
    122,436
    
    
    
    178,886Shareholders equity:Common stock, par value $1.00 per share, authorized 29,000
shares, issued 13,344 and 13,247 shares, respectively,
including treasury shares
    
    
    13,190
    
    
    
    13,157Preferred stock, Series B (Note 7)
    
    
    100
    
    
    
    Additional paid-in capital
    
    
    101,891
    
    
    
    93,829Retained earnings
    
    
    17,713
    
    
    
    7,944Treasury stock, at cost, 1,981 shares
    
    
    (32,757
    )
    
    
    (32,757
    )Accumulated other comprehensive loss
    
    
    (13,795
    )
    
    
    (2,814
    )Total shareholders equity
    
    
    86,342
    
    
    
    79,359Total liabilities and shareholders equity
    
    $
    208,778
    
    
    $
    258,245
 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,(In thousands, except per share data)
    
    2010
    

    2009
    

    2010
    
    
    2009Sales
    
    $
    61,909
    
    
    $
    61,276
    
    
    $
    191,272
    
    
    $
    184,799Cost of sales
    
    
    58,644
    
    
    
    61,262
    
    
    
    171,317
    
    
    
    181,960Gross margin
    
    
    3,265
    
    
    
    14
    
    
    
    19,955
    
    
    
    2,839Operating expenses
    
    
    6,312
    
    
    
    6,048
    
    
    
    18,854
    
    
    
    18,212Research and development expenses
    
    
    1,044
    
    
    
    1,077
    
    
    
    3,165
    
    
    
    3,368Flood related costs, net of insurance proceeds
    
    
    
    
    
    
    (1,075
    )
    
    
    
    
    
    
    (9,109
    )Loss from operations
    
    
    (4,091
    )
    
    
    (6,036
    )
    
    
    (2,064
    )
    
    
    (9,632
    )Interest expense
    
    
    1,904
    
    
    
    1,400
    
    
    
    5,324
    
    
    
    3,848Other non-operating income (expense), net
    
    
    (2,606
    )
    
    
    515
    
    
    
    (1,997
    )
    
    
    1,464Loss from continuing operations before income taxes
    
    
    (8,601
    )
    
    
    (6,921
    )
    
    
    (9,385
    )
    
    
    (12,016
    )Income tax benefit
    
    
    (2,843
    )
    
    
    (2,578
    )
    
    
    (2,882
    )
    
    
    (4,032
    )Loss from continuing operations
    
    
    (5,758
    )
    
    
    (4,343
    )
    
    
    (6,503
    )
    
    
    (7,984
    )Income (loss) from discontinued operations, net of tax
    
    
    (218
    )
    
    
    (3,072
    )
    
    
    16,312
    
    
    
    (21,978
    )Net income (loss)
    
    $
    (5,976
    )
    
    $
    (7,415
    )
    
    $
    9,809
    
    
    $
    (29,962
    )Weighted average common shares and equivalents
outstanding, basic and diluted:
    
    
    11,796
    
    
    
    11,176
    
    
    
    11,396
    
    
    
    11,169Earnings (loss) per common share, basic and diluted:Loss per share from continuing operations
    
    $
    (0.49
    )
    
    $
    (0.39
    )
    
    $
    (0.58
    )
    
    $
    (0.72
    )Earnings (loss) per share from discontinued operations
    
    $
    (0.02
    )
    
    $
    (0.27
    )
    
    $
    1.43
    
    
    $
    (1.97
    )Earnings (loss) per share
    
    $
    (0.51
    )
    
    $
    (0.66
    )
    
    $
    0.85
    
    
    $
    (2.69
    )Dividends declared per common share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.12
 The accompanying notes are an integral part of these statements.
 4




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PENFORD CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months Ended(In thousands)
    
    May 31, 2010
    
    
    May 31, 2009Cash flows from operating activities:Net income (loss)
    
    $
    9,809
    
    
    $
    (29,962
    )Less: Income (loss) from discontinued operations
    
    
    16,312
    
    
    
    (21,978
    )Net loss from continuing operations
    
    
    (6,503
    )
    
    
    (7,984
    )Adjustments to reconcile net income from continuing
operations to net cash provided by (used in) operations:Depreciation and amortization
    
    
    11,149
    
    
    
    10,799Stock-based compensation
    
    
    1,200
    
    
    
    2,075Gain on sale of dextrose product line
    
    
    
    
    
    
    (1,562
    )Deferred income tax benefit
    
    
    (2,548
    )
    
    
    (474
    )Loss on derivative transactions
    
    
    451
    
    
    
    1,101Foreign currency transaction (gain) loss
    
    
    (218
    )
    
    
    198Loss on early extinguishment of debt
    
    
    1,049
    
    
    
    Other
    
    
    (3
    )
    
    
    12Change in assets and liabilities:Trade accounts receivable
    
    
    4,170
    
    
    
    (18,748
    )Prepaid expenses
    
    
    (1,271
    )
    
    
    (1,637
    )Inventories
    
    
    430
    
    
    
    3,591Accounts payable and accrued liabilities
    
    
    933
    
    
    
    (14,978
    )Income taxes
    
    
    (372
    )
    
    
    4,290Insurance recovery receivable
    
    
    
    
    
    
    6,757Other
    
    
    1,292
    
    
    
    4,267Net cash flow provided by (used in) operating
activities  continuing operations
    
    
    9,759
    
    
    
    (12,293
    )Investing activities:Acquisition of property, plant and equipment, net
    
    
    (4,342
    )
    
    
    (4,048
    )Proceeds from sale of dextrose product line
    
    
    
    
    
    
    2,857Proceeds from investments
    
    
    
    
    
    
    1,276Net proceeds received from sale of discontinued operations
and other
    
    
    20,580
    
    
    
    (8,066
    )Net cash (used in) provided by investing activities  continuing
operations
    
    
    16,238
    
    
    
    (7,981
    )Cash flows from financing activities:Proceeds from revolving line of credit
    
    
    23,200
    
    
    
    55,931Payments on revolving line of credit
    
    
    (51,833
    )
    
    
    (24,500
    )Proceeds from issuance of long-term debt
    
    
    2,000
    
    
    
    Payments on long-term debt
    
    
    (45,942
    )
    
    
    (5,500
    )Proceeds from issuance of preferred stock
    
    
    40,000
    
    
    
    Issuance costs of preferred stock
    
    
    (1,995
    )
    
    
    Payments on capital lease obligations
    
    
    (182
    )
    
    
    (202
    )Payment of loan fees
    
    
    (1,227
    )
    
    
    (551
    )Increase (decrease) in cash overdraft
    
    
    4,442
    
    
    
    (1,301
    )Payment of dividends
    
    
    
    
    
    
    (2,027
    )Net cash (used in) provided by financing activities  continuing
operations
    
    
    (31,537
    )
    
    
    21,850Cash flows from discontinued operations:Net cash used in operating activities
    
    
    (14,740
    )
    
    
    (1,416
    )Net cash provided by (used in) investing activities
    
    
    18,222
    
    
    
    (580
    )Net cash (used in) provided by financing activities
    
    
    (3,399
    )
    
    
    2,449Effect of exchange rate changes on cash and cash equivalents
    
    
    (353
    )
    
    
    (71
    )Net cash provided by (used in) discontinued operations
    
    
    (270
    )
    
    
    382Decrease (increase) in cash and cash equivalents
    
    
    (5,810
    )
    
    
    1,958Cash 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
    
    
    364
    
    
    
    2,492Less: cash balance of discontinued operations, end of period
    
    
    
    
    
    
    915Cash and cash equivalents of continuing operations, end of period
    
    $
    364
    
    
    $
    1,577
 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
  2BASIS OF PRESENTATION
 Consolidation
  Cash Flows
  6




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Use of Estimates
  Accounting Changes
      7




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3  DISCONTINUED OPERATIONS
    Three Months Ended
    
    
    Nine Months EndedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,2010
    
    
    2009
    
    
    2010
    
    
    2009(In Thousands)
    
    
    (In Thousands)Sales
    
    $
    
    
    
    $
    17,613
    
    
    $
    16,992
    
    
    $
    55,041Loss from operations
    
    $
    (140
    )
    
    $
    (3,155
    )
    
    $
    (1,848
    )
    
    $
    (21,722
    )Interest expense (income)
    
    
    (4
    )
    
    
    203
    
    
    
    444
    
    
    
    598Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    199
    
    
    
    Reclassification of currency
translation adjustments into earnings
    
    
    
    
    
    
    
    
    
    
    13,420
    
    
    
    Other non-operating income (loss), net
    
    
    (137
    )
    
    
    398
    
    
    
    490
    
    
    
    1,164Income (loss) from discontinued
operations before taxes
    
    
    (273
    )
    
    
    (2,960
    )
    
    
    11,817
    
    
    
    (21,156
    )Income tax expense (benefit)
    
    
    (55
    )
    
    
    112
    
    
    
    (4,495
    )
    
    
    822Income (loss) from discontinued
operations, net of tax
    
    $
    (218
    )
    
    $
    (3,072
    )
    
    $
    16,312
    
    
    $
    (21,978
    )
   8




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August 31,2009(in thousands)ASSETSCash
    
    $
    634Trade accounts receivable, net
    
    
    14,482Inventories
    
    
    22,129Prepaid expenses
    
    
    595Income tax receivable
    
    
    190Other
    
    
    456Current assets of discontinued operations
    
    
    38,486Property, plant and equipment, net
    
    
    3,799Other assets
    
    
    428Non-current assets of discontinued operations
    
    
    4,227Total assets of discontinued operations
    
    $
    42,713LIABILITIESShort-term borrowings
    
    $
    3,327Accounts payable
    
    
    10,697Accrued liabilities
    
    
    2,004Current liabilities of discontinued operations
    
    
    16,028Other liabilities
    
    
    2,851Non-current liabilities of discontinued operations
    
    
    2,851Total liabilities of discontinued operations
    
    $
    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
    
    
    (77,305
    )
    
    $
    16.50Outstanding Balance, May 31, 2010
    
    
    1,286,466
    
    
    $
    15.11
    
    
    
    3.58
    
    
    $
    8,230Options Exercisable at May 31, 2010.
    
    
    1,012,716
    
    
    $
    14.57
    
    
    
    3.16
    
    
    $
    8,230
    Restricted Stock Awards
  WeightedAverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueNonvested at August 31, 2009
    
    
    89,582
    
    
    $
    31.31Granted
    
    
    113,707
    
    
    
    6.60Vested
    
    
    (39,082
    )
    
    
    26.31Cancelled
    
    
    (9,500
    )
    
    
    10.82Nonvested at May 31, 2010
    
    
    154,707
    
    
    $
    15.67
   Compensation Expense
  10




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Three Months Ended
    
    
    Nine Months EndedMay 31,
    
    
    May 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Cost of sales
    
    $
    39
    
    
    $
    75
    
    
    $
    125
    
    
    $
    239Operating expenses
    
    
    374
    
    
    
    544
    
    
    
    1,053
    
    
    
    1,792Research and development expenses
    
    
    7
    
    
    
    13
    
    
    
    22
    
    
    
    44Income (loss) from discontinued operations
    
    
    
    
    
    
    5
    
    
    
    (25
    )
    
    
    16Total stock-based compensation expense
    
    $
    420
    
    
    $
    637
    
    
    $
    1,175
    
    
    $
    2,091Tax benefit
    
    
    160
    
    
    
    242
    
    
    
    447
    
    
    
    795Total stock-based compensation expense,
net of tax
    
    $
    260
    
    
    $
    395
    
    
    $
    728
    
    
    $
    1,296
 5INVENTORIES
  May 31,
    
    
    August 31,2010
    
    
    2009(In thousands)Raw materials
    
    $
    7,871
    
    
    $
    7,265Work in progress
    
    
    1,025
    
    
    
    1,921Finished goods
    
    
    8,974
    
    
    
    8,969Total inventories
    
    $
    17,870
    
    
    $
    18,155
 6PROPERTY, PLANT AND EQUIPMENT
  May 31,
    
    
    August 31,2010
    
    
    2009(In thousands)Land
    
    $
    10,243
    
    
    $
    10,229Plant and equipment
    
    
    323,517
    
    
    
    321,356Construction in progress
    
    
    4,359
    
    
    
    2,214338,119
    
    
    
    333,799Accumulated depreciation
    
    
    (224,595
    )
    
    
    (214,750
    )Net property, plant and equipment
    
    $
    113,524
    
    
    $
    119,049
 7PREFERRED STOCK
  Shares Issued andOutstandingSeries A 15% Cumulative Non-Voting
Non-Convertible Preferred Stock, redeemable
    
    
    100,000Series B Voting Convertible Preferred Stock
    
    
    100,000
 11




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8DEBT
  12




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9INCOME TAXES
    13




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10OTHER COMPREHENSIVE INCOME (LOSS) (OCI)
  Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Net income (loss)
    
    $
    (5,976
    )
    
    $
    (7,415
    )
    
    $
    9,809
    
    
    $
    (29,962
    )Foreign currency translation adjustments
    
    
    
    
    
    
    8,585
    
    
    
    930
    
    
    
    (11,717
    )Gain from foreign currency translation
reclassified into earnings
    
    
    
    
    
    
    
    
    
    
    (13,420
    )
    
    
    Net unrealized gain (loss) on derivative
instruments that qualify as cash flow
hedges,
net of tax
    
    
    318
    
    
    
    233
    
    
    
    1,509
    
    
    
    (2,247
    )Total comprehensive income (loss)
    
    $
    (5,658
    )
    
    $
    1,403
    
    
    $
    (1,172
    )
    
    $
    (43,926
    )
  11NON-OPERATING INCOME (LOSS), NET
  Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Loss on extinguishment of debt
    
    $
    (1,049
    )
    
    $
    
    
    
    $
    (1,049
    )
    
    $
    Loss on interest rate swap termination
    
    
    (1,562
    )
    
    
    
    
    
    
    (1,562
    )
    
    
    Gain on sale of dextrose product line
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,562Gain (loss) on foreign currency
transactions
    
    
    
    
    
    
    442
    
    
    
    417
    
    
    
    (198
    )Other
    
    
    5
    
    
    
    73
    
    
    
    197
    
    
    
    100Total
    
    $
    (2,606
    )
    
    $
    515
    
    
    $
    (1,997
    )
    
    $
    1,464
 14




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12
 PENSION AND POST-RETIREMENT BENEFIT PLANS
  Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,Defined benefit pension plans
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Service cost
    
    $
    389
    
    
    $
    355
    
    
    $
    1,167
    
    
    $
    1,065Interest cost
    
    
    641
    
    
    
    646
    
    
    
    1,923
    
    
    
    1,936Expected return on plan assets
    
    
    (506
    )
    
    
    (607
    )
    
    
    (1,518
    )
    
    
    (1,821
    )Amortization of prior service cost
    
    
    61
    
    
    
    64
    
    
    
    183
    
    
    
    190Amortization of actuarial losses
    
    
    304
    
    
    
    52
    
    
    
    912
    
    
    
    158Net periodic benefit cost
    
    $
    889
    
    
    $
    510
    
    
    $
    2,667
    
    
    $
    1,528
 Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,Post-retirement health care plans
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Service cost
    
    $
    88
    
    
    $
    64
    
    
    $
    264
    
    
    $
    194Interest cost
    
    
    269
    
    
    
    229
    
    
    
    807
    
    
    
    685Amortization of prior service cost
    
    
    (38
    )
    
    
    (38
    )
    
    
    (114
    )
    
    
    (114
    )Amortization of actuarial losses
    
    
    74
    
    
    
    
    
    
    
    222
    
    
    
    Net periodic benefit cost
    
    $
    393
    
    
    $
    255
    
    
    $
    1,179
    
    
    $
    765
 13DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASURMENTS
 Fair Value Measurements
  15




---



##### Table of Contents




    
    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.
 As of May 31, 2010
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Total(in thousands)Current assets (Other Current Assets):Commodity derivatives (1)
    
    $
    1,534
    
    
    $
    
    
    
    $
    
    
    
    $
    1,534
 
 (1)
    
    Commodity derivative assets and liabilities have been offset by cash collateral due and paid
under master netting arrangements. The cash collateral offset was $1.9 million at May 31, 2010. Other Financial Instruments
   Interest Rate Swap Agreements
  16




---



##### Table of Contents



Foreign Currency Contracts
  Commodity Contracts
      Corn Futures
    
    4,760,000 BushelsNatural Gas Futures
    
    1,530,000 mmbtu (millions of British thermal units)
  Asset Derivatives
    
    
    Liability DerivativesFair Value
    
    
    
    
    Fair ValueBalance Sheet
    
    May 31,
    
    
    Aug. 31,
    
    
    Balance Sheet
    
    May 31,
    
    
    Aug. 31,In thousands
    
    Location
    
    2010
    
    
    2009
    
    
    Location
    
    2010
    
    
    2009Cash Flow Hedges:Corn Futures
    
    Other Current Assets
    
    $
    23
    
    
    $
    82
    
    
    Other Current Assets
    
    $
    281
    
    
    $
    916Natural Gas Futures
    
    Other Current Assets
    
    
    
    
    
    
    
    
    
    Other Current Assets
    
    
    854
    
    
    
    1,301Interest Rate Contracts
    
    Other Current Assets
    
    
    
    
    
    
    
    
    
    Accrued Liabilities
    
    
    
    
    
    
    1,829Fair Value Hedges:Corn Futures
    
    Other Current Assets
    
    
    582
    
    
    
    1,303
    
    
    Other Current Assets
    
    
    21
    
    
    
    174Total DerivativesDesignated as Hedging
Instruments
    
    
    
    $
    605
    
    
    $
    1,385
    
    
    
    
    $
    1,156
    
    
    $
    4,220
 17




---



##### Table of Contents



Amount of Gain (Loss)Amount of Gain (Loss)
    
    
    Reclassified from
    
    
    Amount of Gain (Loss)Recognized in OCI
    
    
    AOCI into Income
    
    
    Recognized in IncomeQuarter Ended May 31
    
    
    Quarter Ended May 31
    
    
    Quarter Ended May 31In thousands
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Cash Flow Hedges:Corn Futures (1)
    
    $
    40
    
    
    $
    72
    
    
    $
    594
    
    
    $
    (1,401
    )
    
    $
    288
    
    
    $
    48Natural Gas Futures (1)
    
    
    (845
    )
    
    
    (3,308
    )
    
    
    (618
    )
    
    
    (2,418
    )
    
    
    
    
    
    
    Ethanol Futures (1)
    
    
    
    
    
    
    
    
    
    
    (75
    )
    
    
    
    
    
    
    
    
    
    
    Interest Rate
Contracts(2)(4)
    
    
    61
    
    
    
    (287
    )
    
    
    (93
    )
    
    
    (233
    )
    
    
    (1,562
    )
    
    
    FX Contracts (1)
    
    
    
    
    
    
    (66
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (744
    )
    
    $
    (3,589
    )
    
    $
    (192
    )
    
    $
    (4,052
    )
    
    $
    (1,274
    )
    
    $
    48Fair Value Hedges:Corn Futures (1) (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (117
    )
    
    $
    328
 Amount of Gain (Loss)Amount of Gain (Loss)
    
    
    Reclassified from
    
    
    Amount of Gain (Loss)Recognized in OCI
    
    
    AOCI into Income
    
    
    Recognized in Income9 Months Ended May 31
    
    
    9 Months Ended May 31
    
    
    9 Months Ended May 31In thousands
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Cash Flow Hedges:Corn Futures (1)
    
    $
    384
    
    
    $
    (2,083
    )
    
    $
    1,690
    
    
    $
    249
    
    
    $
    113
    
    
    $
    (611
    )Natural Gas Futures (1)
    
    
    (2,088
    )
    
    
    (11,302
    )
    
    
    (1,724
    )
    
    
    (4,271
    )
    
    
    
    
    
    
    Ethanol Futures (1)
    
    
    (590
    )
    
    
    
    
    
    
    (514
    )
    
    
    
    
    
    
    
    
    
    
    Interest Rate
Contracts(2)(4)
    
    
    (395
    )
    
    
    (1,537
    )
    
    
    (662
    )
    
    
    (470
    )
    
    
    (1,562
    )
    
    
    FX Contracts (1)
    
    
    
    
    
    
    (646
    )
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    $
    (2,689
    )
    
    $
    (15,568
    )
    
    $
    (1,236
    )
    
    $
    (4,492
    )
    
    $
    (1,449
    )
    
    $
    (611
    )Fair Value Hedges:Corn Futures (1) (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (56
    )
    
    $
    (563
    )
 
 (1)
    
    Gains and losses reported in cost of goods sold(2)
    
    Gains and losses reported in interest expense.(3)
    
    Hedged items are firm commitments and inventory(4)
    
    Amount of loss recognized in income was reported in non-operating income (expense) 18




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##### Table of Contents



14SEGMENT REPORTING
  Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Sales:Industrial IngredientsIndustrial Starch
    
    $
    27,409
    
    
    $
    29,895
    
    
    $
    87,740
    
    
    $
    95,101Ethanol
    
    
    14,601
    
    
    
    14,775
    
    
    
    50,643
    
    
    
    38,72742,010
    
    
    
    44,670
    
    
    
    138,383
    
    
    
    133,828Food Ingredients
    
    
    19,899
    
    
    
    16,606
    
    
    
    52,889
    
    
    
    50,971$
    61,909
    
    
    $
    61,276
    
    
    $
    191,272
    
    
    $
    184,799Income (loss) from operations:Industrial Ingredients
    
    $
    (6,847
    )
    
    $
    (7,047
    )
    
    $
    (6,414
    )
    
    $
    (11,899
    )Food Ingredients
    
    
    5,018
    
    
    
    3,365
    
    
    
    11,447
    
    
    
    9,576Corporate and other
    
    
    (2,262
    )
    
    
    (2,354
    )
    
    
    (7,097
    )
    
    
    (7,309
    )$
    (4,091
    )
    
    $
    (6,036
    )
    
    $
    (2,064
    )
    
    $
    (9,632
    )
 May 31,
    
    
    August 31,2010
    
    
    2009(In thousands)Total assets:Industrial Ingredients
    
    $
    133,637
    
    
    $
    139,609Food Ingredients
    
    
    38,290
    
    
    
    37,387Discontinued Operations
    
    
    
    
    
    
    42,713Corporate and other
    
    
    36,851
    
    
    
    38,536$
    208,778
    
    
    $
    258,245
  15EARNINGS (LOSS) PER SHARE
  19




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##### Table of Contents



.
 Three months ended
    
    Nine months endedMay 31,
    
    May 31,2010
    
    2009
    
    2010
    
    2009(In thousands)
    
    (In thousands)Numerator:Loss from continuing operations
    
    $
    (5,758
    )
    
    $
    (4,343
    )
    
    $
    (6,503
    )
    
    $
    (7,984
    )Less: Allocation to participating securities
    
    
    
    
    
    
    
    
    
    
    (110
    )
    
    
    (10
    )Loss from continuing operations applicable
to common shares and equivalents
    
    $
    (5,758
    )
    
    $
    (4,343
    )
    
    $
    (6,613
    )
    
    $
    (7,994
    )Income (loss) from discontinued operations
    
    $
    (218
    )
    
    $
    (3,072
    )
    
    $
    16,312
    
    
    $
    (21,978
    )Less: Allocation to participating securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from discontinued operations
applicable to common shares and equivalents
    
    $
    (218
    )
    
    $
    (3,072
    )
    
    $
    16,312
    
    
    $
    (21,978
    )Net income (loss)
    
    $
    (5,976
    )
    
    $
    (7,415
    )
    
    $
    9,809
    
    
    $
    (29,962
    )Less: Allocation to participating securities
    
    
    
    
    
    
    
    
    
    
    (110
    )
    
    
    (10
    )Net income (loss) applicable to common
shares and equivalents
    
    $
    (5,976
    )
    
    $
    (7,415
    )
    
    $
    9,699
    
    
    $
    (29,972
    )Denominator:Weighted average common shares and equivalents
outstanding, basic
    
    
    11,796
    
    
    
    11,176
    
    
    
    11,396
    
    
    
    11,169Dilutive stock options and awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares and
equivalents outstanding, diluted
    
    
    11,796
    
    
    
    11,176
    
    
    
    11,396
    
    
    
    11,169
   20




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##### Table of Contents



16LEGAL PROCEEDINGS
   21




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




---



##### Table of Contents



Overview
    Recapitalization
   Discontinued Operations
    23




---



##### Table of Contents



Accounting Changes
      Results of Operations
 Executive Overview
   24




---



##### Table of Contents



Industrial Ingredients
     Food Ingredients
  25




---



##### Table of Contents



Corporate operating expenses
  Interest expense
  Income taxes
     26




---



##### Table of Contents



Non-operating income (loss), net
  Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Loss on extinguishment of debt
    
    $
    (1,049
    )
    
    $
    
    
    
    $
    (1,049
    )
    
    $
    Loss on interest rate swap termination
    
    
    (1,562
    )
    
    
    
    
    
    
    (1,562
    )
    
    
    Gain on sale of dextrose product line
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,562Gain
(loss) on foreign currency transactions
    
    
    
    
    
    
    442
    
    
    
    417
    
    
    
    (198
    )Other
    
    
    5
    
    
    
    73
    
    
    
    197
    
    
    
    100Total
    
    $
    (2,606
    )
    
    $
    515
    
    
    $
    (1,997
    )
    
    $
    1,464
    Results of Discontinued Operations
 Three Months Ended
    
    
    Nine Months EndedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,2010
    
    
    2009
    
    
    2010
    
    
    2009(In Thousands)
    
    
    (In Thousands)Sales
    
    $
    
    
    
    $
    17,613
    
    
    $
    16,992
    
    
    $
    55,041Loss from operations
    
    $
    (140
    )
    
    $
    (3,155
    )
    
    $
    (1,848
    )
    
    $
    (21,722
    )Interest expense (income)
    
    
    (4
    )
    
    
    203
    
    
    
    444
    
    
    
    598Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    199
    
    
    
    Reclassification of currency
translation adjustments into earnings
    
    
    
    
    
    
    
    
    
    
    13,420
    
    
    
    Other non-operating income (loss), net
    
    
    (137
    )
    
    
    398
    
    
    
    490
    
    
    
    1,164Income (loss) from discontinued
operations before taxes
    
    
    (273
    )
    
    
    (2,960
    )
    
    
    11,817
    
    
    
    (21,156
    )Income tax expense (benefit)
    
    
    (55
    )
    
    
    112
    
    
    
    (4,495
    )
    
    
    822Income (loss) from discontinued
operations, net of tax
    
    $
    (218
    )
    
    $
    (3,072
    )
    
    $
    16,312
    
    
    $
    (21,978
    )
  27




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##### Table of Contents



Liquidity and Capital Resources
       28




---



##### Table of Contents



Contractual Obligations
  Off-Balance Sheet Arrangements
  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
 29




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  30




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1: Legal Proceedings
   
 Item 1A: Risk Factors
  
 Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
  31




---



##### Table of Contents



Item 6: Exhibits.
  31.1
    
    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




---



##### Table of Contents



SIGNATURES
  Penford Corporation(Registrant)July 8, 2010
    /s/ Steven O. CordierSteven O. CordierSenior Vice President and Chief Financial Officer 33




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description31.1
    
    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
 34