##### 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, 2007
 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 þ o
 o þ




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##### 



PENFORD CORPORATION AND SUBSIDIARIES
 INDEX
 PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets  November 30, 2007 and August 31, 2007
    
    
    3Condensed Consolidated Statements of Operations  Three Months ended November 30, 2007
and 2006
    
    
    4Condensed Consolidated Statements of Cash Flow  Three Months ended November 30, 2007 and
2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 6. Exhibits
    
    
    25Signatures
    
    
    26Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certifications of CEO and CFO Pursuant to Section 1350
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##### Table of Contents



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)
    
    2007
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash
    
    $
    2,048
    
    
    $
    Trade accounts receivable, net
    
    
    53,212
    
    
    
    54,333Inventories
    
    
    38,123
    
    
    
    39,537Prepaid expenses
    
    
    4,731
    
    
    
    5,025Other
    
    
    5,419
    
    
    
    6,384Total current assets
    
    
    103,533
    
    
    
    105,279Property, plant and equipment, net
    
    
    163,596
    
    
    
    146,663Restricted cash value of life insurance
    
    
    10,396
    
    
    
    10,366Goodwill, net
    
    
    25,244
    
    
    
    23,477Other intangible assets, net
    
    
    864
    
    
    
    878Other assets
    
    
    1,871
    
    
    
    1,725Total assets
    
    $
    305,504
    
    
    $
    288,388LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Cash overdraft, net
    
    $
    4,490
    
    
    $
    5,468Current portion of long-term debt and capital lease obligations
    
    
    4,072
    
    
    
    4,056Short-term borrowings
    
    
    4,040
    
    
    
    7,218Accounts payable
    
    
    35,186
    
    
    
    32,410Accrued liabilities
    
    
    14,797
    
    
    
    17,094Total current liabilities
    
    
    62,585
    
    
    
    66,246Long-term debt and capital lease obligations
    
    
    75,287
    
    
    
    63,403Other post-retirement benefits
    
    
    12,935
    
    
    
    12,814Deferred income taxes
    
    
    2,821
    
    
    
    3,140Other liabilities
    
    
    17,756
    
    
    
    17,109Total liabilities
    
    
    171,384
    
    
    
    162,712Shareholders 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 11,102 and 11,099 shares, respectively
    
    
    11,102
    
    
    
    11,099Additional paid-in capital
    
    
    44,320
    
    
    
    43,902Retained earnings
    
    
    91,977
    
    
    
    89,486Treasury stock, at cost, 1,981 shares
    
    
    (32,757
    )
    
    
    (32,757
    )Accumulated other comprehensive income
    
    
    19,478
    
    
    
    13,946Total shareholders equity
    
    
    134,120
    
    
    
    125,676Total liabilities and shareholders equity
    
    $
    305,504
    
    
    $
    288,388
 The accompanying notes are an integral part of these statements.
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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)
    
    2007
    
    
    2006Sales
    
    $
    94,861
    
    
    $
    85,500Cost of sales
    
    
    78,608
    
    
    
    72,306Gross margin
    
    
    16,253
    
    
    
    13,194Operating expenses
    
    
    7,240
    
    
    
    7,100Research and development expenses
    
    
    2,022
    
    
    
    1,571Restructuring costs
    
    
    1,235
    
    
    
    Income from operations
    
    
    5,756
    
    
    
    4,523Non-operating income, net
    
    
    464
    
    
    
    521Interest expense
    
    
    1,266
    
    
    
    1,304Income before income taxes
    
    
    4,954
    
    
    
    3,740Income tax expense
    
    
    1,792
    
    
    
    1,167Net income
    
    $
    3,162
    
    
    $
    2,573Weighted average common shares and
equivalents outstanding:Basic
    
    
    9,118
    
    
    
    8,944Diluted
    
    
    9,549
    
    
    
    9,072Earnings per share:Basic
    
    $
    0.35
    
    
    $
    0.29Diluted
    
    $
    0.33
    
    
    $
    0.28Dividends declared per common share
    
    $
    0.06
    
    
    $
    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)
    
    2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    3,162
    
    
    $
    2,573Adjustments to reconcile net income to net cash provided by
(used in) operations:Depreciation and amortization
    
    
    3,908
    
    
    
    3,843Stock-based compensation
    
    
    362
    
    
    
    299Deferred income taxes
    
    
    (374
    )
    
    
    (463
    )Loss on derivative transactions
    
    
    801
    
    
    
    1,115Other
    
    
    (20
    )
    
    
    (26
    )Change in assets and liabilities:Trade accounts receivable
    
    
    2,450
    
    
    
    (3,535
    )Prepaid expenses
    
    
    366
    
    
    
    385Inventories
    
    
    3,521
    
    
    
    (3,992
    )Accounts payable and accrued liabilities
    
    
    (2,311
    )
    
    
    (4,486
    )Taxes payable
    
    
    1,426
    
    
    
    1,231Other
    
    
    368
    
    
    
    115Net cash provided by (used in) operating activities
    
    
    13,659
    
    
    
    (2,941
    )Cash flows from investing activities:Investment in property, plant and equipment, net
    
    
    (17,411
    )
    
    
    (7,430
    )Other
    
    
    (30
    )
    
    
    (33
    )Net cash used in investing activities
    
    
    (17,441
    )
    
    
    (7,463
    )Cash flows from financing activities:Proceeds from short-term borrowings
    
    
    1,340
    
    
    
    3,892Payments on short-term borrowings
    
    
    (5,091
    )
    
    
    (3,879
    )Proceeds from revolving line of credit
    
    
    13,774
    
    
    
    12,989Payments on revolving line of credit
    
    
    (1,500
    )
    
    
    (8,820
    )Proceeds from long-term debt
    
    
    
    
    
    
    4,200Payments of long-term debt
    
    
    (1,000
    )
    
    
    (1,248
    )Payments under capital lease obligation
    
    
    (17
    )
    
    
    (12
    )Exercise of stock options
    
    
    47
    
    
    
    319Payment of loan fees
    
    
    
    
    
    
    (805
    )Increase (decrease) in cash overdraft
    
    
    (978
    )
    
    
    3,178Payment of dividends
    
    
    (547
    )
    
    
    (536
    )Other
    
    
    (103
    )
    
    
    27Net cash provided by financing activities
    
    
    5,925
    
    
    
    9,305Effect of exchange rate changes on cash and cash equivalents
    
    
    (95
    )
    
    
    160Net increase (decrease) in cash and cash equivalents
    
    
    2,048
    
    
    
    (939
    )Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    939Cash and cash equivalents, end of period
    
    $
    2,048
    
    
    $
    
 The accompanying notes are an integral part of these statements.
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PENFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1BUSINESS
      2BASIS OF PRESENTATION
 Consolidation
  Accounting Changes
  6




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Recent Accounting Pronouncements
   3STOCK-BASED COMPENSATION
 Stock Compensation Plans
  Valuation and Expense Under SFAS No. 123R
   7




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Expected volatility
    
    
    45
    %Expected life (years)
    
    
    5.5Interest rate (percent)
    
    
    4.4-4.9Dividend yield
    
    
    1.5
    %Weighted-average fair values
    
    $
    6.74
 Stock Option Awards
  WeightedWeighted
    
    AverageNumber of
    
    Average
    
    Remaining
    
    Aggregate IntrinsicShares
    
    Exercise Price
    
    Term (in years)
    
    ValueOutstanding Balance, August 31, 2007
    
    
    1,033,977
    
    
    $
    14.25Granted
    
    
    
    
    
    
    Exercised
    
    
    (3,075
    )
    
    
    15.17Cancelled
    
    
    (1,000
    )
    
    
    16.34Outstanding Balance, November 30, 2007
    
    
    1,029,902
    
    
    $
    14.25
    
    
    
    5.37
    
    
    $
    10,247,400Options Exercisable at November 30, 2007
    
    
    763,402
    
    
    $
    13.77
    
    
    
    5.06
    
    
    $
    7,964,200
    Options Outstanding
    
    Options ExercisableWtd. Avg. Remaining
    
    Wtd. Avg.
    
    
    
    
    
    Wtd. Avg.Contractual Life
    
    Exercise
    
    Number of
    
    ExerciseRange of Exercise Prices
    
    Number of Options
    
    (years)
    
    Price
    
    Options
    
    Price$7.59  13.00
    
    
    397,307
    
    
    
    4.58
    
    
    $
    12.01
    
    
    
    397,307
    
    
    $
    12.0113.01  16.00
    
    
    339,920
    
    
    
    5.94
    
    
    
    14.71
    
    
    
    176,420
    
    
    
    14.4216.01  19.77
    
    
    292,675
    
    
    
    5.78
    
    
    
    16.75
    
    
    
    189,675
    
    
    
    16.841,029,902
    
    
    
    
    
    
    
    
    
    
    
    763,402
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Restricted Stock Awards
  WeightedAverageNumber of
    
    Grant DateShares
    
    Fair ValueNonvested at August 31, 2007
    
    
    5,796
    
    
    $
    14.50Granted
    
    
    101,000
    
    
    
    35.18Vested
    
    
    (2,898
    )
    
    
    14.50Cancelled
    
    
    
    
    
    
    Nonvested at November 30, 2007
    
    
    103,898
    
    
    $
    34.60
    Compensation Expense
  Three Months Ended November 30,2007
    
    2006Cost of sales
    
    $
    37
    
    
    $
    24Operating expenses
    
    
    320
    
    
    
    268Research and development expenses
    
    
    5
    
    
    
    7Total stock-based compensation expense
    
    $
    362
    
    
    $
    299Tax benefit
    
    
    138
    
    
    
    114Total stock-based compensation expense,
net of tax
    
    $
    224
    
    
    $
    185
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4INVENTORIES
  November 30,
    
    
    August 31,2007
    
    
    2007(In thousands)Raw materials
    
    $
    15,501
    
    
    $
    17,438Work in progress
    
    
    726
    
    
    
    720Finished goods
    
    
    21,896
    
    
    
    21,379Total inventories
    
    $
    38,123
    
    
    $
    39,537
 5PROPERTY, PLANT AND EQUIPMENT
  November 30,
    
    
    August 31,2007
    
    
    2007(In thousands)Land
    
    $
    18,676
    
    
    $
    17,694Plant and equipment
    
    
    346,358
    
    
    
    338,496Construction in progress
    
    
    41,730
    
    
    
    27,433406,764
    
    
    
    383,623Accumulated depreciation
    
    
    (243,168
    )
    
    
    (236,960
    )Net property, plant and equipment
    
    $
    163,596
    
    
    $
    146,663
   6DEBT
    10




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7INCOME TAXES
 FIN 48
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Effective Tax Rate
   8OTHER COMPREHENSIVE INCOME
  Three months endedNovember 30,
    
    
    November 30,2007
    
    
    2006(In thousands)Net income
    
    $
    3,162
    
    
    $
    2,573Foreign currency translation adjustments
    
    
    5,471
    
    
    
    1,938Change in unrealized gains on derivative
instruments
that qualify as cash flow hedges, net of tax
    
    
    61
    
    
    
    (1,068
    )Total comprehensive income
    
    $
    8,694
    
    
    $
    3,443
 9NON-OPERATING INCOME, NET
  Three months endedNovember 30,
    
    
    November 30,2007
    
    
    2006(In thousands)Royalty and licensing income
    
    $
    451
    
    
    $
    518Other
    
    
    13
    
    
    
    3Total
    
    $
    464
    
    
    $
    521
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10  PENSION AND POST-RETIREMENT BENEFIT PLANS
  Defined
benefit pension plans
 Three months endedNovember 30,
    
    
    November 30,2007
    
    
    2006Service cost
    
    $
    371
    
    
    $
    388Interest cost
    
    
    623
    
    
    
    584Expected return on plan assets
    
    
    (663
    )
    
    
    (593
    )Amortization of prior service cost
    
    
    63
    
    
    
    46Amortization of actuarial losses
    
    
    13
    
    
    
    48Net periodic benefit cost
    
    $
    407
    
    
    $
    473
 Post-retirement health care plans
 Three months endedNovember 30,
    
    
    November 30,2007
    
    
    2006Service cost
    
    $
    78
    
    
    $
    77Interest cost
    
    
    213
    
    
    
    205Amortization of prior service cost
    
    
    (38
    )
    
    
    (38
    )Net periodic benefit cost
    
    $
    253
    
    
    $
    244
  11RESTRUCTURING COSTS
  13




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12SEGMENT REPORTING
  Three months endedNovember 30,
    
    
    November 30,2007
    
    
    2006(In thousands)Sales:Industrial IngredientsNorth America
    
    $
    49,209
    
    
    $
    43,972Food IngredientsNorth America
    
    
    16,076
    
    
    
    15,240Australia/New Zealand operations
    
    
    29,944
    
    
    
    26,524Intercompany sales
    
    
    (368
    )
    
    
    (236
    )$
    94,861
    
    
    $
    85,500Income (loss) from operations:Industrial IngredientsNorth America
    
    $
    5,696
    
    
    $
    3,182Food IngredientsNorth America
    
    
    2,652
    
    
    
    2,853Australia/New Zealand operations
    
    
    (75
    )
    
    
    808Corporate and other
    
    
    (2,517
    )
    
    
    (2,320
    )$
    5,756
    
    
    $
    4,523November 30,
    
    
    August 31,2007
    
    
    2007(In thousands)Total assets:Industrial IngredientsNorth America
    
    $
    143,222
    
    
    $
    133,187Food IngredientsNorth America
    
    
    33,441
    
    
    
    33,684Australia/New Zealand operations
    
    
    116,174
    
    
    
    108,084Corporate and other
    
    
    12,667
    
    
    
    13,433$
    305,504
    
    
    $
    288,388
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Three months endedNovember 30, 2007
    
    November 30, 2006(In thousands)Industrial IngredientsNorth America
    
    $
    88
    
    
    $
    68Food IngredientsNorth America
    
    
    56
    
    
    
    43Australia/New Zealand operations
    
    
    10
    
    
    
    20Corporate
    
    
    208
    
    
    
    168$
    362
    
    
    $
    299
 13EARNINGS PER SHARE
 .
 Three months endedNovember 30, 2007
    
    November 30, 2006(In thousands)Weighted average common shares outstanding
    
    
    9,118
    
    
    
    8,944Dilutive stock options and awards
    
    
    431
    
    
    
    128Weighted average common shares outstanding,
assuming dilution
    
    
    9,549
    
    
    
    9,072
  14LEGAL PROCEEDINGS
    15




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15SUBSEQUENT EVENT
  16




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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 this 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 in Item 1A 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, 2007, 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;
    
    expectations regarding the construction cost of the ethanol facility and the timing
of ethanol production;
    
    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 assumptions used for determining employee benefit expense and obligations; or
    
    other unforeseen developments in the industries in which Penford operates.
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Overview
   Accounting Changes
   Results of Operations
 Executive Overview
  18




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Sales
     Income from operations
    Corporate operating expenses
  Interest and taxes
   19




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Non-operating income, net
  Three months endedNovember 30, 2007
    
    
    November 30, 2006(In thousands)Royalty and licensing income
    
    $
    451
    
    
    $
    518Other
    
    
    13
    
    
    
    3Total
    
    $
    464
    
    
    $
    521
   Liquidity and Capital Resources
   20




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Contractual Obligations
   Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
  21




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Critical Accounting Policies
   
    
    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
  22




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Hedging Activities
   Benefit Plans
  Valuation of Goodwill
  Self-insurance Program
  Income Taxes
   23




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Stock-Based Compensation
   
 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
  24




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PART II  OTHER INFORMATION
 
 Item 1: Legal Proceedings
     
 Item 1A: Risk Factors
  
 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
 25




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SIGNATURES
  Penford Corporation(Registrant)January 9, 2008
    /s/ Steven O. CordierSteven O. CordierSenior Vice President and Chief Financial Officer 26




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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