##### 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 February 28, 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 oAccelerated Filer þNon-Accelerated Filer o(Do not check if a smaller reporting company)Smaller Reporting Company o o þ




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##### 



PENFORD CORPORATION AND SUBSIDIARIES
 INDEX
 PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets  February 28, 2010 and August 31, 2009
    
    
    3Condensed Consolidated Statements of Operations  Three and Six Months ended February 28,
2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flow  Three and Six Months ended February 28,
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 4. Submission of Matters to a Vote of Security Holders
    
    
    32Item 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
 February 28,
    
    
    August 31,(In thousands, except per share data)
    
    2010
    
    
    2009(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    5,540Trade accounts receivable, net
    
    
    26,486
    
    
    
    32,192Inventories
    
    
    20,849
    
    
    
    18,155Prepaid expenses
    
    
    4,049
    
    
    
    5,081Income tax receivable
    
    
    4,102
    
    
    
    3,892Other
    
    
    3,199
    
    
    
    3,476Current assets of discontinued operations
    
    
    3,673
    
    
    
    38,486Total current assets
    
    
    62,358
    
    
    
    106,822Property, plant and equipment, net
    
    
    115,350
    
    
    
    119,049Restricted cash value of life insurance
    
    
    7,860
    
    
    
    9,761Deferred tax assets
    
    
    12,595
    
    
    
    8,277Other assets
    
    
    1,223
    
    
    
    2,075Other intangible assets, net
    
    
    444
    
    
    
    481Goodwill, net
    
    
    7,897
    
    
    
    7,553Non-current assets of discontinued operations
    
    
    
    
    
    
    4,227Total assets
    
    $
    207,727
    
    
    $
    258,245Liabilities and Shareholders equityCurrent liabilities:Cash overdraft, net
    
    $
    2,896
    
    
    $
    Current portion of long-term debt and capital lease obligations
(Note 7)
    
    
    422
    
    
    
    21,241Accounts payable
    
    
    12,527
    
    
    
    14,745Accrued liabilities
    
    
    9,005
    
    
    
    8,972Current liabilities of discontinued operations
    
    
    451
    
    
    
    16,028Total current liabilities
    
    
    25,301
    
    
    
    60,986Long-term debt and capital lease obligations
    
    
    55,530
    
    
    
    71,141Other postretirement benefits
    
    
    18,202
    
    
    
    17,678Pension benefit liability
    
    
    18,043
    
    
    
    18,043Other liabilities
    
    
    6,418
    
    
    
    8,187Non-current liabilities of discontinued operations
    
    
    
    
    
    
    2,851Total liabilities
    
    
    123,494
    
    
    
    178,886Shareholders equity:Preferred stock, par value $1.00 per share, authorized 1,000
shares, none issued
    
    
    
    
    
    
    Common stock, par value $1.00 per share, authorized 29,000
shares, issued 13,190 and 13,157 shares, respectively,
including treasury shares
    
    
    13,190
    
    
    
    13,157Additional paid-in capital
    
    
    94,224
    
    
    
    93,829Retained earnings
    
    
    23,689
    
    
    
    7,944Treasury stock, at cost, 1,981,016 shares
    
    
    (32,757
    )
    
    
    (32,757
    )Accumulated other comprehensive loss
    
    
    (14,113
    )
    
    
    (2,814
    )Total shareholders equity
    
    
    84,233
    
    
    
    79,359Total liabilities and shareholders equity
    
    $
    207,727
    
    
    $
    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
    
    
    Six months endedFebruary 28,
    
    
    February 28,(In thousands, except per share data)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Sales
    
    $
    62,293
    
    
    $
    63,939
    
    
    $
    129,363
    
    
    $
    123,522Cost of sales
    
    
    56,231
    
    
    
    66,519
    
    
    
    112,673
    
    
    
    120,698Gross margin
    
    
    6,062
    
    
    
    (2,580
    )
    
    
    16,690
    
    
    
    2,824Operating expenses
    
    
    6,054
    
    
    
    6,121
    
    
    
    12,542
    
    
    
    12,164Research and development expenses
    
    
    1,124
    
    
    
    1,168
    
    
    
    2,121
    
    
    
    2,291Flood related costs, net of insurance proceeds
    
    
    
    
    
    
    (3,800
    )
    
    
    
    
    
    
    (8,034
    )Income (loss) from operations
    
    
    (1,116
    )
    
    
    (6,069
    )
    
    
    2,027
    
    
    
    (3,597
    )Interest expense
    
    
    1,621
    
    
    
    1,177
    
    
    
    3,420
    
    
    
    2,447Other non-operating income (expense), net
    
    
    (27
    )
    
    
    1,554
    
    
    
    609
    
    
    
    948Loss from continuing operations before income taxes
    
    
    (2,764
    )
    
    
    (5,692
    )
    
    
    (784
    )
    
    
    (5,096
    )Income tax benefit
    
    
    (963
    )
    
    
    (1,487
    )
    
    
    (39
    )
    
    
    (1,454
    )Loss from continuing operations
    
    
    (1,801
    )
    
    
    (4,205
    )
    
    
    (745
    )
    
    
    (3,642
    )Income (loss) from discontinued operations, net of tax
    
    
    13,048
    
    
    
    (17,973
    )
    
    
    16,531
    
    
    
    (18,905
    )Net income (loss)
    
    $
    11,247
    
    
    $
    (22,178
    )
    
    $
    15,786
    
    
    $
    (22,547
    )Weighted average common shares and equivalents
outstanding, basic and diluted:
    
    
    11,204
    
    
    
    11,174
    
    
    
    11,193
    
    
    
    11,165Earnings (loss) per common share, basic and diluted:Loss per share from continuing operations
    
    $
    (0.17
    )
    
    $
    (0.38
    )
    
    $
    (0.08
    )
    
    $
    (0.33
    )Earnings (loss) per share from discontinued operations
    
    $
    1.16
    
    
    $
    (1.61
    )
    
    $
    1.48
    
    
    $
    (1.69
    )Earnings (loss) per share
    
    $
    0.99
    
    
    $
    (1.99
    )
    
    $
    1.40
    
    
    $
    (2.02
    )Dividends declared per common share
    
    $
    
    
    
    $
    0.06
    
    
    $
    
    
    
    $
    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 FLOW
 Six Months EndedFebruary 28,
    
    
    February 28,(In thousands)
    
    2010
    
    
    2009Cash flows from operating activities:Net income (loss)
    
    $
    15,786
    
    
    $
    (22,547
    )Less: Income (loss) from discontinued operations
    
    
    16,531
    
    
    
    (18,905
    )Net loss from continuing operations
    
    
    (745
    )
    
    
    (3,642
    )Adjustments to reconcile net income from continuing
operations to net cash provided by (used in) operations:Depreciation and amortization
    
    
    7,518
    
    
    
    7,337Stock-based compensation
    
    
    780
    
    
    
    1,443Gain on sale of dextrose product line
    
    
    
    
    
    
    (1,562
    )Deferred income tax expense
    
    
    79
    
    
    
    1,844Loss on derivative transactions
    
    
    863
    
    
    
    840Foreign currency transaction (gain) loss
    
    
    (417
    )
    
    
    641Other
    
    
    (3
    )
    
    
    3Change in assets and liabilities:Trade receivable
    
    
    5,706
    
    
    
    (19,263
    )Prepaid expenses
    
    
    805
    
    
    
    67Inventories
    
    
    (1,758
    )
    
    
    (275
    )Accounts payable and accrued liabilities
    
    
    (1,861
    )
    
    
    (13,948
    )Taxes payable
    
    
    (245
    )
    
    
    1,093Insurance recovery receivable
    
    
    
    
    
    
    8,000Intercompany receivable
    
    
    19,852
    
    
    
    (2,732
    )Other
    
    
    891
    
    
    
    3,403Net cash flow provided by (used in) operating activities 
continuing operations
    
    
    31,465
    
    
    
    (16,751
    )Investing activities:Acquisition of property, plant and equipment, net
    
    
    (2,910
    )
    
    
    (2,798
    )Proceeds from sale of dextrose product line
    
    
    
    
    
    
    2,857Other
    
    
    (40
    )
    
    
    (53
    )Net cash (used in) provided by investing activities 
continuing operations
    
    
    (2,950
    )
    
    
    6Cash flows from financing activities:Proceeds from revolving line of credit
    
    
    
    
    
    
    38,476Payments on revolving line of credit
    
    
    (17,735
    )
    
    
    (21,500
    )Proceeds from long-term debt
    
    
    2,000
    
    
    
    Payments of long-term debt
    
    
    (21,055
    )
    
    
    (3,250
    )Payments under capital lease obligation
    
    
    (123
    )
    
    
    (139
    )Payment of loan fees
    
    
    (38
    )
    
    
    (551
    )Increase in cash overdraft
    
    
    2,896
    
    
    
    5,059Payment of dividends
    
    
    
    
    
    
    (1,350
    )Net cash (used in) provided by financing activities 
continuing activities
    
    
    (34,055
    )
    
    
    16,745Cash flows from discontinued operations:Net cash used in operating activities
    
    
    (13,928
    )
    
    
    (708
    )Net cash provided by (used in) investing activities
    
    
    18,222
    
    
    
    (470
    )Net cash (used in) provided by financing activities
    
    
    (3,399
    )
    
    
    839Effect of exchange rate changes on cash and cash equivalents
    
    
    (275
    )
    
    
    (156
    )Net cash provided by (used in) discontinued operations
    
    
    620
    
    
    
    (495
    )Decrease in cash and cash equivalents
    
    
    (4,920
    )
    
    
    (495
    )Cash 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
    
    
    1,254
    
    
    
    39Less: cash balance of discontinued operations, end of period
    
    
    1,254
    
    
    
    39Cash and cash equivalents of continuing operations, end of period
    
    $
    
    
    
    $
    
 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
  Use of Estimates
  6




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Accounting Changes
      Recent Accounting Pronouncements
  7




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3  DISCONTINUED OPERATIONS
    Three Months Ended
    
    
    Six Months EndedFebruary 28,
    
    
    February 28,
    
    
    February 28,
    
    
    February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009(In Thousands)
    
    
    (In Thousands)Sales
    
    $
    
    
    
    $
    16,068
    
    
    $
    16,963
    
    
    $
    37,428Loss from operations
    
    $
    (183
    )
    
    $
    (16,931
    )
    
    $
    (1,708
    )
    
    $
    (18,567
    )Interest expense
    
    
    133
    
    
    
    172
    
    
    
    448
    
    
    
    395Gain (loss) on sale of assets
    
    
    (152
    )
    
    
    
    
    
    
    199
    
    
    
    Reclassification of currency translation
adjustments into earnings
    
    
    13,849
    
    
    
    
    
    
    
    13,420
    
    
    
    Other non-operating income, net
    
    
    141
    
    
    
    371
    
    
    
    627
    
    
    
    767Loss from discontinued operations before taxes
    
    
    13,522
    
    
    
    (16,732
    )
    
    
    12,090
    
    
    
    (18,195
    )Income tax expense (benefit)
    
    
    474
    
    
    
    1,241
    
    
    
    (4,441
    )
    
    
    710Income (loss) from discontinued operations,
net of tax
    
    $
    13,048
    
    
    $
    (17,973
    )
    
    $
    16,531
    
    
    $
    (18,905
    )
   8




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February 28,
    
    
    August 31,2010
    
    
    2009(Dollars in thousands)ASSETSCash
    
    $
    1,254
    
    
    $
    634Trade accounts receivable, net
    
    
    414
    
    
    
    14,482Inventories
    
    
    
    
    
    
    22,129Prepaid expenses
    
    
    
    
    
    
    595Income tax receivable
    
    
    
    
    
    
    190Other
    
    
    2,005
    
    
    
    456Current assets of discontinued operations
    
    
    3,673
    
    
    
    38,486Property, plant and equipment, net
    
    
    
    
    
    
    3,799Other assets
    
    
    
    
    
    
    428Non-current assets of discontinued operations
    
    
    
    
    
    
    4,227Total assets of discontinued operations
    
    $
    3,673
    
    
    $
    42,713LIABILITIESShort-term borrowings
    
    $
    
    
    
    $
    3,327Accounts payable
    
    
    451
    
    
    
    10,697Accrued liabilities
    
    
    
    
    
    
    2,004Current liabilities of discontinued operations
    
    
    451
    
    
    
    16,028Other liabilities
    
    
    
    
    
    
    2,851Non-current liabilities of discontinued operations
    
    
    
    
    
    
    2,851Total liabilities of discontinued operations
    
    $
    451
    
    
    $
    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
    
    
    (65,500
    )
    
    $
    16.35Outstanding Balance, February 28, 2010
    
    
    1,298,271
    
    
    $
    15.13
    
    
    
    3.83
    
    
    $
    104,170Options Exercisable at February 28, 2010
    
    
    989,521
    
    
    $
    14.53
    
    
    
    3.43
    
    
    $
    104,170
    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 February 28, 2010
    
    
    154,707
    
    
    $
    15.67
   Compensation Expense
  10




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Three Months Ended
    
    Six Months EndedFebruary 28,
    
    February 28,2010
    
    2009
    
    2010
    
    2009Cost of sales
    
    $
    39
    
    
    $
    74
    
    
    $
    86
    
    
    $
    163Operating expenses
    
    
    269
    
    
    
    524
    
    
    
    679
    
    
    
    1,249Research and development expenses
    
    
    8
    
    
    
    15
    
    
    
    15
    
    
    
    31Income (loss) from discontinued operations
    
    
    
    
    
    
    5
    
    
    
    (25
    )
    
    
    11Total stock-based compensation expense
    
    $
    316
    
    
    $
    618
    
    
    $
    755
    
    
    $
    1,454Tax benefit
    
    
    120
    
    
    
    235
    
    
    
    287
    
    
    
    553Total stock-based compensation expense,
net of tax
    
    $
    196
    
    
    $
    383
    
    
    $
    468
    
    
    $
    901
 5INVENTORIES
  February 28,
    
    
    August 31,2010
    
    
    2009(In thousands)Raw materials
    
    $
    8,796
    
    
    $
    7,265Work in progress
    
    
    1,335
    
    
    
    1,921Finished goods
    
    
    10,718
    
    
    
    8,969Total inventories
    
    $
    20,849
    
    
    $
    18,155
 6PROPERTY, PLANT AND EQUIPMENT
  February 28,
    
    August 31,2010
    
    2009(In thousands)Land
    
    $
    10,243
    
    
    $
    10,229Plant and equipment
    
    
    322,839
    
    
    
    321,356Construction in progress
    
    
    3,605
    
    
    
    2,214336,687
    
    
    
    333,799Accumulated depreciation
    
    
    (221,337
    )
    
    
    (214,750
    )Net property, plant and equipment
    
    $
    115,350
    
    
    $
    119,049
 7DEBT
    11




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8INCOME TAXES
   12




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9OTHER COMPREHENSIVE INCOME (LOSS) (OCI)
  Three months ended
    
    
    Six months endedFebruary 28,
    
    
    February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Net income (loss)
    
    $
    11,247
    
    
    $
    (22,178
    )
    
    $
    15,786
    
    
    $
    (22,547
    )Foreign currency translation adjustments
    
    
    (256
    )
    
    
    (1,346
    )
    
    
    930
    
    
    
    (20,302
    )Gain from foreign currency translation
reclassified into earnings
    
    
    (13,849
    )
    
    
    
    
    
    
    (13,420
    )
    
    
    Net unrealized gain (loss) on derivative
instruments that qualify as cash flow
hedges,
net of tax
    
    
    94
    
    
    
    (1,890
    )
    
    
    1,191
    
    
    
    (2,480
    )Total comprehensive income (loss)
    
    $
    (2,764
    )
    
    $
    (25,414
    )
    
    $
    4,487
    
    
    $
    (45,329
    )
  13




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10NON-OPERATING INCOME (LOSS), NET
  Three months ended
    
    
    Six months endedFebruary 28,
    
    
    February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Gain on sale of dextrose product line
    
    $
    
    
    
    $
    1,562
    
    
    $
    
    
    
    $
    1,562Gain (loss) on foreign currency
transactions
    
    
    (35
    )
    
    
    (28
    )
    
    
    417
    
    
    
    (641
    )Other
    
    
    8
    
    
    
    20
    
    
    
    192
    
    
    
    27Total
    
    $
    (27
    )
    
    $
    1,554
    
    
    $
    609
    
    
    $
    948
   11  PENSION AND POST-RETIREMENT BENEFIT PLANS
  Defined benefit pension plans
 Three months ended
    
    
    Six months endedFebruary 28,
    
    
    February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Service cost
    
    $
    389
    
    
    $
    355
    
    
    $
    778
    
    
    $
    710Interest cost
    
    
    641
    
    
    
    645
    
    
    
    1,282
    
    
    
    1,290Expected return on plan assets
    
    
    (506
    )
    
    
    (607
    )
    
    
    (1,012
    )
    
    
    (1,214
    )Amortization of prior service cost
    
    
    61
    
    
    
    63
    
    
    
    122
    
    
    
    126Amortization of actuarial losses
    
    
    304
    
    
    
    53
    
    
    
    608
    
    
    
    106Net periodic benefit cost
    
    $
    889
    
    
    $
    509
    
    
    $
    1,778
    
    
    $
    1,018
 Post-retirement health care plans
 Three months ended
    
    
    Six months endedFebruary 28,
    
    
    February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Service cost
    
    $
    88
    
    
    $
    65
    
    
    $
    176
    
    
    $
    130Interest cost
    
    
    269
    
    
    
    228
    
    
    
    538
    
    
    
    456Amortization of prior service cost
    
    
    (38
    )
    
    
    (38
    )
    
    
    (76
    )
    
    
    (76
    )Amortization of actuarial losses
    
    
    74
    
    
    
    
    
    
    
    148
    
    
    
    Net periodic benefit cost
    
    $
    393
    
    
    $
    255
    
    
    $
    786
    
    
    $
    510
 14




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12DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASURMENTS
 Fair Value Measurements
   
    
    Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the entity has the ability to access at the measurement date.
    
    Level 2 inputs are other than quoted prices included within Level 1 that are observable
for assets and liabilities such as (1) quoted prices for similar assets or liabilities in
active markets, (2) quoted prices for identical or similar assets or liabilities in markets
that are not active, or (3) inputs that are derived principally or corroborated by
observable market date by correlation or other means.
    
    Level 3 inputs are unobservable inputs to the valuation methodology for the assets or
liabilities.
 As of February 28, 2010
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    Total(in thousands)Current assets (Other Current Assets):Commodity derivatives (1)
    
    $
    1,077
    
    
    $
    
    
    
    $
    
    
    
    $
    1,077Current liabilities (Accrued Liabilities):Interest rate swaps
    
    $
    
    
    
    $
    1,717
    
    
    $
    
    
    
    $
    1,717
 
 (1)
    
    Commodity derivative assets and liabilities have been offset by cash collateral due and paid under master
netting arrangements. The cash collateral offset was $1.4 million at February 28, 2010. Other Financial Instruments
  Interest Rate Swap Agreements
 15




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##### Table of Contents



Foreign Currency Contracts
  Commodity Contracts
      Corn Futures
    
    5,955,000 BushelsNatural Gas Futures
    
    1,390,000 mmbtu (millions of British thermal units)Interest Rate Swap Contracts
    
    27,000,000 US Dollars (Notional Amount)
 16




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##### Table of Contents



Asset Derivatives
    
    Liability DerivativesFair Value
    
    
    
    
    
    Fair ValueBalance Sheet
    
    Feb. 28,
    
    Aug. 31,
    
    Balance Sheet
    
    Feb. 28,
    
    Aug. 31,In thousands
    
    Location
    
    2010
    
    2009
    
    Location
    
    2010
    
    2009Cash Flow Hedges:Corn Futures
    
    Other Current Assets
    
    $
    402
    
    
    $
    82
    
    
    Other Current Assets
    
    $
    221
    
    
    $
    916Natural Gas Futures
    
    Other Current Assets
    
    
    
    
    
    
    
    
    
    Other Current Assets
    
    
    547
    
    
    
    1,301Interest Rate Contracts
    
    Other Current Assets
    
    
    
    
    
    
    
    
    
    Accrued Liabilities
    
    
    1,717
    
    
    
    1,829Fair Value Hedges:Corn Futures
    
    Other Current Assets
    
    
    351
    
    
    
    1,303
    
    
    Other Current Assets
    
    
    246
    
    
    
    174Total DerivativesDesignated as Hedging
Instruments
    
    
    
    
    
    $
    753
    
    
    $
    1,385
    
    
    
    
    
    
    $
    2,731
    
    
    $
    4,220
  Amount of Gain (Loss)Amount of Gain (Loss)
    
    Reclassified from
    
    Amount of Gain (Loss)Recognized in OCI
    
    AOCI into Income
    
    Recognized in IncomeQuarter Ended February 28
    
    Quarter Ended February 28
    
    Quarter Ended February 28In thousands
    
    2010
    
    2009
    
    2010
    
    2009
    
    2010
    
    2009Cash Flow Hedges:Corn Futures (1)
    
    $
    43
    
    
    $
    (905
    )
    
    $
    1,119
    
    
    $
    6,981
    
    
    $
    (80
    )
    
    $
    618Natural Gas Futures (1)
    
    
    (547
    )
    
    
    (4,902
    )
    
    
    (241
    )
    
    
    (795
    )
    
    
    
    
    
    
    Ethanol Futures (1)
    
    
    119
    
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    Interest Rate
Contracts(2)
    
    
    (108
    )
    
    
    (448
    )
    
    
    (283
    )
    
    
    (164
    )
    
    
    
    
    
    
    FX Contracts (1)
    
    
    
    
    
    
    (290
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (493
    )
    
    $
    (6,545
    )
    
    $
    733
    
    
    $
    6,022
    
    
    $
    (80
    )
    
    $
    618Fair Value Hedges:Corn Futures (1) (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    27
    
    
    $
    337
 Amount of Gain (Loss)Amount of Gain (Loss)
    
    Reclassified from
    
    Amount of Gain (Loss)Recognized in OCI
    
    AOCI into Income
    
    Recognized in Income6 Months Ended February 28
    
    6 Months Ended February 28
    
    6 Months Ended February 28In thousands
    
    2010
    
    2009
    
    2010
    
    2009
    
    2010
    
    2009Cash Flow Hedges:Corn Futures (1)
    
    $
    344
    
    
    $
    (2,155
    )
    
    $
    1,096
    
    
    $
    1,650
    
    
    $
    175
    
    
    $
    (659
    )Natural Gas Futures (1)
    
    
    (1,243
    )
    
    
    (7,994
    )
    
    
    (1,106
    )
    
    
    (1,853
    )
    
    
    
    
    
    
    Ethanol Futures (1)
    
    
    (590
    )
    
    
    
    
    
    
    (439
    )
    
    
    
    
    
    
    
    
    
    
    Interest Rate
Contracts(2)
    
    
    (457
    )
    
    
    (1,250
    )
    
    
    (569
    )
    
    
    (237
    )
    
    
    
    
    
    
    FX Contracts (1)
    
    
    
    
    
    
    (580
    )
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    $
    (1,946
    )
    
    $
    (11,979
    )
    
    $
    (1,044
    )
    
    $
    (440
    )
    
    $
    175
    
    
    $
    (659
    )Fair Value Hedges:Corn Futures (1) (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    61
    
    
    $
    (891
    )
 
 (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 17




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13SEGMENT REPORTING
  Three months ended
    
    
    Six months endedFebruary 28,
    
    
    February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Sales:Industrial IngredientsNorth AmericaIndustrial Starch
    
    $
    27,983
    
    
    $
    32,997
    
    
    $
    60,331
    
    
    $
    65,205Ethanol
    
    
    18,082
    
    
    
    14,319
    
    
    
    36,042
    
    
    
    23,95246,065
    
    
    
    47,316
    
    
    
    96,373
    
    
    
    89,157Food IngredientsNorth America
    
    
    16,228
    
    
    
    16,623
    
    
    
    32,990
    
    
    
    34,365$
    62,293
    
    
    $
    63,939
    
    
    $
    129,363
    
    
    $
    123,522Income (loss) from operations:Industrial IngredientsNorth America
    
    $
    (1,721
    )
    
    $
    (6,652
    )
    
    $
    433
    
    
    $
    (4,852
    )Food IngredientsNorth America
    
    
    2,848
    
    
    
    2,813
    
    
    
    6,429
    
    
    
    6,211Corporate and other
    
    
    (2,243
    )
    
    
    (2,230
    )
    
    
    (4,835
    )
    
    
    (4,956
    )$
    (1,116
    )
    
    $
    (6,069
    )
    
    $
    2,027
    
    
    $
    (3,597
    )
 February 28,
    
    
    August 31,2010
    
    
    2009(In thousands)Total assets:Industrial Ingredients
    
    $
    135,547
    
    
    $
    139,609Food Ingredients
    
    
    37,531
    
    
    
    37,387Discontinued Operations
    
    
    3,673
    
    
    
    42,713Corporate and other
    
    
    30,976
    
    
    
    38,536$
    207,727
    
    
    $
    258,245
  14EARNINGS (LOSS) PER SHARE
  18




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.
 Three months ended
    
    
    Six months endedFebruary 28,
    
    
    February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)
    
    
    (In thousands)Numerator:Loss from continuing operations
    
    $
    (1,801
    )
    
    $
    (4,205
    )
    
    $
    (745
    )
    
    $
    (3,642
    )Less: Allocation to participating securities
    
    
    (157
    )
    
    
    (5
    )
    
    
    (168
    )
    
    
    (10
    )Loss from continuing operations applicable
to common shares
    
    $
    (1,958
    )
    
    $
    (4,210
    )
    
    $
    (913
    )
    
    $
    (3,652
    )Income (loss) from discontinued operations
    
    $
    13,048
    
    
    $
    (17,973
    )
    
    $
    16,531
    
    
    $
    (18,905
    )Less: Allocation to participating securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from discontinued operations
applicable to common shares
    
    $
    13,048
    
    
    $
    (17,973
    )
    
    $
    16,531
    
    
    $
    (18,905
    )Net income (loss)
    
    $
    11,247
    
    
    $
    (22,178
    )
    
    $
    15,786
    
    
    $
    (22,547
    )Less: Allocation to participating securities
    
    
    (147
    )
    
    
    (5
    )
    
    
    (162
    )
    
    
    (10
    )Net income (loss) applicable to common shares
    
    $
    11,100
    
    
    $
    (22,183
    )
    
    $
    15,624
    
    
    $
    (22,557
    )Denominator:Weighted average common shares outstanding, basic
    
    
    11,204
    
    
    
    11,174
    
    
    
    11,193
    
    
    
    11,165Dilutive stock options and awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares outstanding,
diluted
    
    
    11,204
    
    
    
    11,174
    
    
    
    11,193
    
    
    
    11,165
  15LEGAL PROCEEDINGS
   19




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16  SUBSEQUENT EVENT
 Preferred Stock
        Bank Debt
   20




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21




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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.
 Overview
 22




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Accounting Changes
    23




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Results of Operations
 Executive Overview
     Industrial Ingredients
  24




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Food Ingredients
   Corporate operating expenses
  Interest expense
  25




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Income taxes
     Non-operating income (loss), net
  Three months ended
    
    
    Six months endedFebruary 28,
    
    
    February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Gain on sale of dextrose product line
    
    $
    
    
    
    $
    1,562
    
    
    $
    
    
    
    $
    1,562Gain
(loss) on foreign currency transactions
    
    
    (35
    )
    
    
    (28
    )
    
    
    417
    
    
    
    (641
    )Other
    
    
    8
    
    
    
    20
    
    
    
    192
    
    
    
    27Total
    
    $
    (27
    )
    
    $
    1,554
    
    
    $
    609
    
    
    $
    948
  26




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##### Table of Contents



Results of Discontinued Operations
 Three Months Ended
    
    
    Six Months EndedFebruary 28,
    
    
    February 28,
    
    
    February 28,
    
    
    February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009(In Thousands)
    
    
    (In Thousands)Sales
    
    $
    
    
    
    $
    16,068
    
    
    $
    16,963
    
    
    $
    37,428Loss from operations
    
    $
    (183
    )
    
    $
    (16,931
    )
    
    $
    (1,708
    )
    
    $
    (18,567
    )Interest expense
    
    
    133
    
    
    
    172
    
    
    
    448
    
    
    
    395Gain (loss) on sale of assets
    
    
    (152
    )
    
    
    
    
    
    
    199
    
    
    
    Reclassification of currency translation
adjustments into earnings
    
    
    13,849
    
    
    
    
    
    
    
    13,420
    
    
    
    Other non-operating income, net
    
    
    141
    
    
    
    371
    
    
    
    627
    
    
    
    767Loss from discontinued operations before taxes
    
    
    13,522
    
    
    
    (16,732
    )
    
    
    12,090
    
    
    
    (18,195
    )Income tax expense (benefit)
    
    
    474
    
    
    
    1,241
    
    
    
    (4,441
    )
    
    
    710Income (loss) from discontinued operations,
net of tax
    
    $
    13,048
    
    
    $
    (17,973
    )
    
    $
    16,531
    
    
    $
    (18,905
    )
    Liquidity and Capital Resources
   27




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28




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##### Table of Contents



Contractual Obligations
  Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
  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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Changes in Internal Control over Financial Reporting
  30




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




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Item  4: Submission of Matters to a Vote of Security Holders
  Director
    
    Votes For
    
    Votes WithheldJeffrey T. Cook
    
    
    3,728,003
    
    
    
    4,207,677Thomas D. Malkoski
    
    
    7,493,112
    
    
    
    442,568Sally G. Narodick
    
    
    7,476,471
    
    
    
    459,209
   VotesVotes For
    
    Against
    
    Abstain9,519,629
    
    258,688
    
    1,135
 
 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




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SIGNATURES
  Penford Corporation(Registrant)April 9, 2010
    /s/ Steven O. CordierSteven O. CordierSenior Vice President and Chief Financial Officer 33




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##### 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