##### 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, 2011
 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




---



##### 



PENFORD CORPORATION AND SUBSIDIARIES
 INDEX
 PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets  February 28, 2011 and August 31, 2010
    
    3Condensed Consolidated Statements of Operations  Three and Six Months ended February 28,
2011
and 2010
    
    4Condensed Consolidated Statements of Cash Flows  Six Months ended February 28, 2011 and 2010
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    23Item 4. Controls and Procedures
    
    23PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    25Item 1A. Risk Factors
    
    25Item 6. Exhibits
    
    25Signatures
    
    26EX-31.1EX-31.2EX-32
  2




---



##### 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)
    
    2011
    
    
    2010(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    292
    
    
    $
    315Trade accounts receivable, net
    
    
    29,924
    
    
    
    26,749Inventories
    
    
    26,198
    
    
    
    19,849Prepaid expenses
    
    
    4,544
    
    
    
    5,237Income tax receivable
    
    
    195
    
    
    
    3,678Other
    
    
    7,315
    
    
    
    5,287Total current assets
    
    
    68,468
    
    
    
    61,115Property, plant and equipment, net
    
    
    108,824
    
    
    
    111,930Restricted cash value of life insurance
    
    
    7,981
    
    
    
    7,951Deferred tax assets
    
    
    16,105
    
    
    
    16,493Other assets
    
    
    2,367
    
    
    
    2,615Other intangible assets, net
    
    
    370
    
    
    
    407Goodwill, net
    
    
    7,897
    
    
    
    7,897Total assets
    
    $
    212,012
    
    
    $
    208,408Liabilities and Shareholders EquityCurrent liabilities:Cash overdraft, net
    
    $
    3,419
    
    
    $
    4,385Current portion of long-term debt and capital lease obligations
    
    
    430
    
    
    
    429Accounts payable
    
    
    14,167
    
    
    
    14,650Accrued liabilities
    
    
    6,182
    
    
    
    6,536Total current liabilities
    
    
    24,198
    
    
    
    26,000Long-term debt and capital lease obligations
    
    
    27,324
    
    
    
    21,038Redeemable preferred stock, Series A
    
    
    36,492
    
    
    
    34,104Other postretirement benefits
    
    
    17,208
    
    
    
    16,891Pension benefit liability
    
    
    20,597
    
    
    
    20,597Other liabilities
    
    
    6,406
    
    
    
    6,206Total liabilities
    
    
    132,225
    
    
    
    124,836Shareholders equity:Common stock, par value $1.00 per share, authorized 29,000
shares, issued 13,328 and 13,354 shares, respectively,
including treasury shares
    
    
    13,243
    
    
    
    13,190Preferred stock, Series B
    
    
    100
    
    
    
    100Additional paid-in capital
    
    
    102,584
    
    
    
    102,303Retained earnings
    
    
    13,246
    
    
    
    14,586Treasury stock, at cost, 1,981 shares
    
    
    (32,757
    )
    
    
    (32,757
    )Accumulated other comprehensive loss
    
    
    (16,629
    )
    
    
    (13,850
    )Total shareholders equity
    
    
    79,787
    
    
    
    83,572Total liabilities and shareholders equity
    
    $
    212,012
    
    
    $
    208,408
 The accompanying notes are an integral part of these statements.
 3




---



##### Table of Contents



PENFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three months ended
    
    
    Six months endedFebruary 28,
    
    
    February 28,(In thousands, except per share data)
    
    2011
    
    
    2010
    
    
    2011
    
    
    2010Sales
    
    $
    74,304
    
    
    $
    62,293
    
    
    $
    146,570
    
    
    $
    129,363Cost of sales
    
    
    67,461
    
    
    
    56,231
    
    
    
    130,470
    
    
    
    112,673Gross margin
    
    
    6,843
    
    
    
    6,062
    
    
    
    16,100
    
    
    
    16,690Operating expenses
    
    
    5,235
    
    
    
    6,054
    
    
    
    10,430
    
    
    
    12,542Research and development expenses
    
    
    1,120
    
    
    
    1,124
    
    
    
    2,214
    
    
    
    2,121Income (loss) from operations
    
    
    488
    
    
    
    (1,116
    )
    
    
    3,456
    
    
    
    2,027Interest expense
    
    
    2,303
    
    
    
    1,621
    
    
    
    4,572
    
    
    
    3,420Other non-operating income (expense), net
    
    
    (1
    )
    
    
    (27
    )
    
    
    88
    
    
    
    609Loss from continuing operations before income taxes
    
    
    (1,816
    )
    
    
    (2,764
    )
    
    
    (1,028
    )
    
    
    (784
    )Income tax expense (benefit)
    
    
    (241
    )
    
    
    (963
    )
    
    
    211
    
    
    
    (39
    )Loss from continuing operations
    
    
    (1,575
    )
    
    
    (1,801
    )
    
    
    (1,239
    )
    
    
    (745
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    13,048
    
    
    
    
    
    
    
    16,531Net income (loss)
    
    $
    (1,575
    )
    
    $
    11,247
    
    
    $
    (1,239
    )
    
    $
    15,786Weighted average common shares and equivalents
outstanding, basic and diluted:
    
    
    12,257
    
    
    
    11,204
    
    
    
    12,239
    
    
    
    11,193Earnings (loss) per common share, basic and diluted:Loss per share from continuing operations
    
    $
    (0.13
    )
    
    $
    (0.17
    )
    
    $
    (0.10
    )
    
    $
    (0.08
    )Earnings per share from discontinued operations
    
    $
    
    
    
    $
    1.16
    
    
    $
    
    
    
    $
    1.48Earnings (loss) per share
    
    $
    (0.13
    )
    
    $
    0.99
    
    
    $
    (0.10
    )
    
    $
    1.40
 The accompanying notes are an integral part of these statements.
 4




---



##### Table of Contents



PENFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months Ended(In thousands)
    
    February 28, 2011
    
    
    February 28, 2010Cash flows from operating activities:Net income (loss)
    
    $
    (1,239
    )
    
    $
    15,786Less: Income from discontinued operations
    
    
    
    
    
    
    16,531Net loss from continuing operations
    
    
    (1,239
    )
    
    
    (745
    )Adjustments to reconcile net income from continuing
operations to net cash provided by (used in) operations:Depreciation and amortization
    
    
    7,261
    
    
    
    7,518Non-cash interest on Series A Preferred Stock
    
    
    1,886
    
    
    
    Stock-based compensation
    
    
    608
    
    
    
    780Deferred income tax expense
    
    
    95
    
    
    
    79Non-cash gains on hedging transactions
    
    
    (2,832
    )
    
    
    (980
    )Foreign currency transaction gain
    
    
    
    
    
    
    (417
    )Other
    
    
    
    
    
    
    (3
    )Change in assets and liabilities:Trade receivable
    
    
    (3,202
    )
    
    
    5,706Prepaid expenses
    
    
    693
    
    
    
    805Inventories
    
    
    (3,517
    )
    
    
    (1,698
    )Decrease (increase) in margin accounts
    
    
    (3,877
    )
    
    
    1,136Accounts payable and accrued liabilities
    
    
    (818
    )
    
    
    (1,861
    )Income tax receivable
    
    
    3,577
    
    
    
    (245
    )Other
    
    
    (594
    )
    
    
    1,538Net cash flow provided by (used in) operating activities 
continuing operations
    
    
    (1,959
    )
    
    
    11,613Cash flows from investing activities:Acquisition of property, plant and equipment, net
    
    
    (3,373
    )
    
    
    (2,910
    )Net proceeds received from sale of discontinued operations
and other
    
    
    (30
    )
    
    
    19,812Net cash provided by (used in) investing activities 
continuing operations
    
    
    (3,403
    )
    
    
    16,902Cash flows from financing activities:Proceeds from revolving line of credit
    
    
    26,500
    
    
    
    Payments on revolving line of credit
    
    
    (20,000
    )
    
    
    (17,735
    )Proceeds from long-term debt
    
    
    
    
    
    
    2,000Payments of long-term debt
    
    
    (100
    )
    
    
    (21,055
    )Payments under capital lease obligation
    
    
    (123
    )
    
    
    (123
    )Payment of loan fees
    
    
    
    
    
    
    (38
    )Increase (decrease) in cash overdraft
    
    
    (966
    )
    
    
    2,896Other
    
    
    28Net cash provided by (used in) financing activities  continuing operations
    
    
    5,339
    
    
    
    (34,055
    )Cash flows from discontinued operations:Net cash provided by operating activities
    
    
    
    
    
    
    6,150Net cash used in investing activities
    
    
    
    
    
    
    (1,856
    )Net cash used in financing activities
    
    
    
    
    
    
    (3,399
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    (275
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    620Decrease in cash and cash equivalents
    
    
    (23
    )
    
    
    (4,920
    )Cash and cash equivalents of continuing operations, beginning of
period
    
    
    315
    
    
    
    5,540Cash balance of discontinued operations, beginning of period
    
    
    
    
    
    
    634Cash and cash equivalents, end of period
    
    
    292
    
    
    
    1,254Less: cash balance of discontinued operations, end of period
    
    
    
    
    
    
    1,254Cash and cash equivalents of continuing operations, end of period
    
    $
    292
    
    
    $
    
 The accompanying notes are an integral part of these statements.
 5




---



##### Table of Contents



PENFORD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1BUSINESS
    Discontinued Operations
   2BASIS OF PRESENTATION
 Consolidation
  6




---



##### Table of Contents



Use of Estimates
  Recent Accounting Pronouncements
  3INVENTORIES
  February 28,
    
    
    August 31,2011
    
    
    2010(In thousands)Raw materials
    
    $
    11,873
    
    
    $
    8,708Work in progress
    
    
    1,781
    
    
    
    1,299Finished goods
    
    
    12,544
    
    
    
    9,842Total inventories
    
    $
    26,198
    
    
    $
    19,849
 4PROPERTY, PLANT AND EQUIPMENT
  February 28,
    
    
    August 31,2011
    
    
    2010(In thousands)Land
    
    $
    10,435
    
    
    $
    10,307Plant and equipment
    
    
    325,552
    
    
    
    324,904Construction in progress
    
    
    6,880
    
    
    
    4,272342,867
    
    
    
    339,483Accumulated depreciation
    
    
    (234,043
    )
    
    
    (227,553
    )Net property, plant and equipment
    
    $
    108,824
    
    
    $
    111,930
 7




---



##### Table of Contents



5PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
  Shares Issued andOutstandingSeries A 15% Cumulative Non-Voting
Non-Convertible Preferred Stock, redeemable
    
    
    100,000Series B Voting Convertible Preferred Stock
    
    
    100,000
     6DEBT
   8




---



##### Table of Contents



7INCOME TAXES
      9




---



##### Table of Contents



8OTHER COMPREHENSIVE INCOME (LOSS) (OCI)
  Three months ended
    
    
    Six months endedFebruary 28,
    
    
    February 28,2011
    
    
    2010
    
    
    2011
    
    
    2010(In thousands)Net income (loss)
    
    $
    (1,575
    )
    
    $
    11,247
    
    
    $
    (1,239
    )
    
    $
    15,786Foreign currency translation adjustments
    
    
    
    
    
    
    (256
    )
    
    
    
    
    
    
    930Gain 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
    
    
    (733
    )
    
    
    94
    
    
    
    (2,779
    )
    
    
    1,191Total comprehensive income (loss)
    
    $
    (2,308
    )
    
    $
    (2,764
    )
    
    $
    (4,018
    )
    
    $
    4,487
  9  DISCONTINUED OPERATIONS
  10




---



##### Table of Contents



10STOCK-BASED COMPENSATION
 Stock Compensation Plans
  General Option Information
  Number of
    
    
    Weighted Average
    
    
    Weighted Average
    
    
    Aggregate IntrinsicShares
    
    
    Exercise Price
    
    
    Remaining Term (in years)
    
    
    ValueOutstanding Balance, August 31, 2010
    
    
    1,264,564
    
    
    $
    15.07Granted
    
    
    95,000
    
    
    
    6.62Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (12,170
    )
    
    
    12.26Outstanding Balance, February 28, 2011
    
    
    1,347,394
    
    
    
    14.50
    
    
    
    3.19
    
    
    $
    12,900Options Exercisable at February 28, 2011
    
    
    1,079,394
    
    
    $
    14.75
    
    
    
    2.67
    
    
    $
    
  Expected volatility
    
    
    72
    %Expected life (years)
    
    
    4.2Interest rate
    
    
    1.1-2.4
    %Weighted-average fair value
    
    $
    3.63
   11




---



##### Table of Contents



Restricted Stock Awards
  WeightedAverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueNonvested at August 31, 2010
    
    
    154,707
    
    
    $
    15.67Granted
    
    
    
    
    
    
    Vested
    
    
    (70,475
    )
    
    
    16.87Cancelled
    
    
    
    
    
    
    Nonvested at February 28, 2011
    
    
    84,232
    
    
    $
    14.67
  Compensation Expense
  Three Months Ended
    
    
    Six Months EndedFebruary 28,
    
    
    February 28,2011
    
    
    2010
    
    
    2011
    
    
    2010Cost of sales
    
    $
    33
    
    
    $
    39
    
    
    $
    62
    
    
    $
    86Operating expenses
    
    
    204
    
    
    
    269
    
    
    
    527
    
    
    
    679Research and development expenses
    
    
    13
    
    
    
    8
    
    
    
    19
    
    
    
    15Income (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25
    )Total stock-based compensation expense
    
    $
    250
    
    
    $
    316
    
    
    $
    608
    
    
    $
    755Income tax benefit
    
    
    95
    
    
    
    120
    
    
    
    231
    
    
    
    287Total stock-based compensation expense,
net of tax
    
    $
    155
    
    
    $
    196
    
    
    $
    377
    
    
    $
    468
 11NON-OPERATING INCOME (LOSS), NET
  Three months ended
    
    
    Six months endedFebruary 28,
    
    
    February 28,2011
    
    
    2010
    
    
    2011
    
    
    2010(In thousands)Gain (loss) on
foreign currency transactions
    
    $
    
    
    
    $
    (35
    )
    
    $
    
    
    
    $
    417Other
    
    
    (1
    )
    
    
    8
    
    
    
    88
    
    
    
    192Total
    
    $
    (1
    )
    
    $
    (27
    )
    
    $
    88
    
    
    $
    609
  12  PENSION AND POST-RETIREMENT BENEFIT PLANS
  12




---



##### Table of Contents



Three months ended
    
    
    Six months endedFebruary 28,
    
    
    February 28,Defined benefit pension plans
    
    2011
    
    
    2010
    
    
    2011
    
    
    2010(In thousands)Service cost
    
    $
    404
    
    
    $
    389
    
    
    $
    808
    
    
    $
    778Interest cost
    
    
    674
    
    
    
    641
    
    
    
    1,348
    
    
    
    1,282Expected return on plan assets
    
    
    (558
    )
    
    
    (506
    )
    
    
    (1,116
    )
    
    
    (1,012
    )Amortization of prior service cost
    
    
    57
    
    
    
    61
    
    
    
    114
    
    
    
    122Amortization of actuarial losses
    
    
    360
    
    
    
    304
    
    
    
    720
    
    
    
    608Net periodic benefit cost
    
    $
    937
    
    
    $
    889
    
    
    $
    1,874
    
    
    $
    1,778
 Three months ended
    
    
    Six months endedFebruary 28,
    
    
    February 28,Post-retirement health care plans
    
    2011
    
    
    2010
    
    
    2011
    
    
    2010(In thousands)Service cost
    
    $
    68
    
    
    $
    88
    
    
    $
    136
    
    
    $
    176Interest cost
    
    
    243
    
    
    
    269
    
    
    
    486
    
    
    
    538Amortization of prior service cost
    
    
    (38
    )
    
    
    (38
    )
    
    
    (76
    )
    
    
    (76
    )Amortization of actuarial losses
    
    
    16
    
    
    
    74
    
    
    
    32
    
    
    
    148Net periodic benefit cost
    
    $
    289
    
    
    $
    393
    
    
    $
    578
    
    
    $
    786
 13FAIR VALUE MEASURMENTS AND DERIVATIVE INSTRUMENTS
 Fair Value Measurements
  As of February 28, 2011
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Total(in thousands)Current assets (Other Current Assets):Commodity derivatives (1)
    
    $
    (4,048
    )
    
    $
    
    
    
    $
    
    
    
    $
    (4,048
    )
 
 (1)
    
    Commodity derivative assets and liabilities have been offset by cash collateral due and paid under master
netting arrangements which are recorded together in Other Current Assets on the condensed consolidated balance
sheet. The cash collateral offset was $5.3 million at February 28, 2011. As of August 31, 2010
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Total(in thousands)Current assets (Other Current Assets):Commodity derivatives (1)
    
    $
    (2,789
    )
    
    $
    
    
    
    $
    
    
    
    $
    (2,789
    )
 
 (1)
    
    Commodity derivative assets and liabilities have been offset by cash collateral due and paid under master
netting arrangements which are recorded together in Other Current Assets on the condensed consolidated balance
sheet. The cash collateral offset was $4.5 million at August 31, 2010.  
    
    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.
 13




---



##### Table of Contents



Other Financial Instruments
    Interest Rate Swap Agreements
  Commodity Contracts
     14




---



##### Table of Contents



Corn Futures
    
    2,880,000
    
    BushelsNatural Gas Futures
    
    1,270,000
    
    mmbtu (millions of British thermal units)Ethanol Swaps
    
    2,131,500
    
    Gallons
  Asset Derivatives
    
    
    Liability DerivativesFair Value
    
    
    
    
    
    
    Fair ValueBalance Sheet
    
    Feb, 28
    
    
    Aug. 31
    
    
    Balance Sheet
    
    Feb, 28
    
    
    Aug. 31In thousands
    
    Location
    
    2011
    
    
    2010
    
    
    Location
    
    2011
    
    
    2010Cash Flow Hedges:Corn Futures
    
    Other Current Assets
    
    $
    197
    
    
    $
    
    
    
    Other Current Assets
    
    $
    4
    
    
    $
    Natural Gas Futures
    
    Other Current Assets
    
    
    
    
    
    
    
    
    
    Other Current Assets
    
    
    516
    
    
    
    1,082Ethanol Gas Futures
    
    Other Current Assets
    
    
    4
    
    
    
    
    
    
    Other Current Assets
    
    
    1,015
    
    
    
    Fair Value Hedges:Corn Futures
    
    Other Current Assets
    
    
    6
    
    
    
    28
    
    
    Other Current Assets
    
    
    2,720
    
    
    
    1,735Total DerivativesDesignated as HedgingInstruments
    
    
    
    
    
    $
    207
    
    
    $
    28
    
    
    
    
    
    
    $
    4,255
    
    
    $
    2,817
  Amount of Gain (Loss)Amount of Gain (Loss)
    
    Reclassified from
    
    Amount of Gain (Loss)Recognized in OCI
    
    AOCI into Income
    
    Recognized in IncomeQuarter Ended Feb, 28
    
    Quarter Ended Feb, 28
    
    Quarter Ended Feb, 28In thousands
    
    2011
    
    2010
    
    2011
    
    2010
    
    2011
    
    2010Cash Flow Hedges:Corn Futures (1)
    
    $
    (3,049
    )
    
    $
    43
    
    
    $
    (2,580
    )
    
    $
    1,119
    
    
    $
    11
    
    
    $
    (80
    )Natural Gas Futures (1)
    
    
    (315
    )
    
    
    (547
    )
    
    
    (337
    )
    
    
    (241
    )
    
    
    
    
    
    
    Ethanol Futures (1)
    
    
    (548
    )
    
    
    119
    
    
    
    188
    
    
    
    138
    
    
    
    
    
    
    
    Interest Rate Contracts(2)
    
    
    
    
    
    
    (108
    )
    
    
    
    
    
    
    (283
    )
    
    
    
    
    
    
    $
    (3,912
    )
    
    $
    (493
    )
    
    $
    (2,729
    )
    
    $
    733
    
    
    $
    11
    
    
    $
    (80
    )Fair Value Hedges:Corn Futures (1) (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    56
    
    
    $
    27
 Amount of Gain (Loss)Reclassified from
    
    Amount of Gain (Loss)Amount of Gain (Loss)Recognized in OCI
    
    AOCI into Income
    
    Recognized in Income6 Months Ended Feb 28
    
    6 Months Ended Feb 28
    
    6 Months Ended Feb 28In thousands
    
    2011
    
    2010
    
    2011
    
    2010
    
    2011
    
    2010Cash Flow Hedges:Corn Futures (1)
    
    $
    (6,756
    )
    
    $
    344
    
    
    $
    (2,263
    )
    
    $
    1,096
    
    
    $
    (171
    )
    
    $
    175Natural Gas Futures (1)
    
    
    (549
    )
    
    
    (1,243
    )
    
    
    (1,056
    )
    
    
    (1,106
    )
    
    
    
    
    
    
    Ethanol Futures (1)
    
    
    (315
    )
    
    
    (590
    )
    
    
    182
    
    
    
    (439
    )
    
    
    
    
    
    
    Interest Rate Contracts(2)
    
    
    
    
    
    
    (457
    )
    
    
    
    
    
    
    (569
    )
    
    
    
    
    
    
    FX Contracts (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    
    
    
    
    $
    (7,620
    )
    
    $
    (1,946
    )
    
    $
    (3,137
    )
    
    $
    (1,044
    )
    
    $
    (171
    )
    
    $
    175Fair Value Hedges:Corn Futures (1) (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    42
    
    
    $
    61
 
 (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 15




---



##### Table of Contents



14SEGMENT REPORTING
  Three months ended
    
    
    Six months endedFebruary 28,
    
    
    February 28,2011
    
    
    2010
    
    
    2011
    
    
    2010(In thousands)Sales:Industrial IngredientsIndustrial Starch
    
    $
    30,818
    
    
    $
    27,983
    
    
    $
    60,187
    
    
    $
    60,331Ethanol
    
    
    25,773
    
    
    
    18,082
    
    
    
    50,334
    
    
    
    36,04256,591
    
    
    
    46,065
    
    
    
    110,521
    
    
    
    96,373Food Ingredients
    
    
    17,713
    
    
    
    16,228
    
    
    
    36,049
    
    
    
    32,990$
    74,304
    
    
    $
    62,293
    
    
    $
    146,570
    
    
    $
    129,363Income (loss) from operations:Industrial Ingredients
    
    $
    (1,103
    )
    
    $
    (1,721
    )
    
    $
    (961
    )
    
    $
    433Food Ingredients
    
    
    3,576
    
    
    
    2,848
    
    
    
    8,385
    
    
    
    6,429Corporate and other
    
    
    (1,985
    )
    
    
    (2,243
    )
    
    
    (3,968
    )
    
    
    (4,835
    )$
    488
    
    
    $
    (1,116
    )
    
    $
    3,456
    
    
    $
    2,027
 February 28,
    
    
    August 31,2011
    
    
    2010(In thousands)Total assets:Industrial Ingredients
    
    $
    140,661
    
    
    $
    133,738Food Ingredients
    
    
    37,897
    
    
    
    36,542Corporate and other
    
    
    33,454
    
    
    
    38,128$
    212,012
    
    
    $
    208,408
  15EARNINGS PER SHARE
   16




---



##### Table of Contents



.
 Three months ended
    
    Six months endedFebruary 28,
    
    February 28,2011
    
    2010
    
    2011
    
    2010(In thousands)
    
    (In thousands)Numerator:Loss from continuing operations
    
    $
    (1,575
    )
    
    $
    (1,801
    )
    
    $
    (1,239
    )
    
    $
    (745
    )Less: Allocation to participating securities
    
    
    
    
    
    
    (147
    )
    
    
    
    
    
    
    (162
    )Loss from continuing operations applicable
to common shares
    
    $
    (1,575
    )
    
    $
    (1,948
    )
    
    $
    (1,239
    )
    
    $
    (907
    )Income from discontinued operations
    
    $
    
    
    
    $
    13,048
    
    
    $
    
    
    
    $
    16,531Less: Allocation to participating securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income from discontinued operations
applicable to common shares
    
    $
    
    
    
    $
    13,048
    
    
    $
    
    
    
    $
    16,531Net income (loss)
    
    $
    (1,575
    )
    
    $
    11,247
    
    
    $
    (1,239
    )
    
    $
    15,786Less: Allocation to participating securities
    
    
    
    
    
    
    (147
    )
    
    
    
    
    
    
    (162
    )Net income (loss) applicable to common shares
    
    $
    (1,575
    )
    
    $
    11,100
    
    
    $
    (1,239
    )
    
    $
    15,624Denominator:Weighted average common shares outstanding, basic
    
    
    12,257
    
    
    
    11,204
    
    
    
    12,239
    
    
    
    11,193Dilutive stock options and awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares outstanding, diluted
    
    
    12,257
    
    
    
    11,204
    
    
    
    12,239
    
    
    
    11,193
   17




---



##### Table of Contents



Item 2: Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Overview
     Results of Operations
 Executive Overview
      Industrial Ingredients
  18




---



##### Table of Contents



Food Ingredients
   Corporate operating expenses
  Interest expense
   19




---



##### Table of Contents



Income taxes
       20




---



##### Table of Contents



Liquidity and Capital Resources
  Operating Activities
  Investing Activities
  Financing Activities
      21




---



##### Table of Contents



Contractual Obligations
  Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
  Critical Accounting Policies and Estimates
  Forward-looking Statements
  22




---



##### Table of Contents




    
    competition;
    
    the possibility of interruption of business activities due to equipment problems,
accidents, strikes, weather or other factors;
    
    product development risk;
    
    changes in corn and other raw material prices and availability;
    
    changes in general economic conditions or developments with respect to specific
industries or customers affecting demand for the Companys products including
unfavorable shifts in product mix;
    
    unanticipated costs, 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;
    
    changes in returns on pension plan assets and/or assumptions used for determining
employee benefit expense and obligations;
    
    other unforeseen developments in the industries in which Penford operates,
    
    the Companys ability to successfully operate under and comply with the terms of its
debt instruments;
    
    other factors described in the Companys Form 10-K Part I, Item 1A Risk Factors.
 
 Item 3: Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 4: Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
   23




---



##### Table of Contents



Changes in Internal Control over Financial Reporting
  24




---



##### Table of Contents



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




---



##### Table of Contents



SIGNATURES
  Penford Corporation(Registrant)April 7, 2011
    /s/ Steven O. CordierSteven O. CordierSenior Vice President and Chief Financial Officer 26




---



##### 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
 27