##### 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, 2008
 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



PENFORD CORPORATION AND SUBSIDIARIES
 INDEX
 PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets  November 30, 2008 and August 31, 2008
    
    
    3Condensed Consolidated Statements of Operations  Three Months ended November 30, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flow  Three Months ended November 30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 6. Exhibits
    
    
    23Signatures
    
    
    24EX-10.1EX-31.1EX-31.2EX-32
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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)
    
    2008
    
    
    2008(Unaudited)ASSETSCurrent assets:Cash
    
    $
    1,688
    
    
    $
    534Trade accounts receivable, net
    
    
    40,983
    
    
    
    28,752Inventories
    
    
    40,055
    
    
    
    50,200Prepaid expenses
    
    
    4,493
    
    
    
    4,370Insurance recovery receivable
    
    
    8,525
    
    
    
    8,000Income tax receivable
    
    
    7,911
    
    
    
    10,052Other
    
    
    5,384
    
    
    
    3,881Total current assets
    
    
    109,039
    
    
    
    105,789Property, plant and equipment, net
    
    
    157,174
    
    
    
    169,932Restricted cash value of life insurance
    
    
    10,492
    
    
    
    10,465Deferred tax asset
    
    
    2,709
    
    
    
    6,293Goodwill, net
    
    
    19,884
    
    
    
    26,043Other intangible assets, net
    
    
    689
    
    
    
    760Other assets
    
    
    1,068
    
    
    
    1,151Total assets
    
    $
    301,055
    
    
    $
    320,433LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Cash overdraft, net
    
    $
    5,069
    
    
    $
    1,301Current portion of long-term debt and capital lease obligations
    
    
    9,277
    
    
    
    8,029Short-term borrowings
    
    
    911
    
    
    
    676Accounts payable
    
    
    38,750
    
    
    
    46,475Accrued liabilities
    
    
    10,803
    
    
    
    11,195Total current liabilities
    
    
    64,810
    
    
    
    67,676Long-term debt and capital lease obligations
    
    
    64,424
    
    
    
    59,860Other post-retirement benefits
    
    
    12,957
    
    
    
    12,862Other liabilities
    
    
    18,479
    
    
    
    19,673Total liabilities
    
    
    160,670
    
    
    
    160,071Shareholders 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 13,152 and 13,127 shares, respectively
    
    
    13,152
    
    
    
    13,127Additional paid-in capital
    
    
    92,032
    
    
    
    91,443Retained earnings
    
    
    73,047
    
    
    
    74,092Treasury stock, at cost, 1,981 shares
    
    
    (32,757
    )
    
    
    (32,757
    )Accumulated other comprehensive income (loss)
    
    
    (5,089
    )
    
    
    14,457Total shareholders equity
    
    
    140,385
    
    
    
    160,362Total liabilities and shareholders equity
    
    $
    301,055
    
    
    $
    320,433
 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 endedNovember 30,
    
    
    November 30,(In thousands, except per share data)
    
    2008
    
    
    2007Sales
    
    $
    80,690
    
    
    $
    94,861Cost of sales
    
    
    75,302
    
    
    
    78,608Gross
margin
    
    
    5,388
    
    
    
    16,253Operating expenses
    
    
    7,267
    
    
    
    7,240Research and development expenses
    
    
    1,519
    
    
    
    2,022Flood related costs, net of insurance proceeds
    
    
    (4,234
    )
    
    
    Restructuring costs
    
    
    
    
    
    
    1,235Income
from operations
    
    
    836
    
    
    
    5,756Non-operating income (loss), net
    
    
    (210
    )
    
    
    464Interest expense
    
    
    1,492
    
    
    
    1,266Income
(loss) before income taxes
    
    
    (866
    )
    
    
    4,954Income tax expense (benefit)
    
    
    (497
    )
    
    
    1,792Net income (loss)
    
    $
    (369
    )
    
    $
    3,162Weighted average common shares and equivalents outstanding:Basic
    
    
    11,155
    
    
    
    9,118Diluted
    
    
    11,155
    
    
    
    9,549Earnings (loss) per share:Basic
    
    $
    (0.03
    )
    
    $
    0.35Diluted
    
    $
    (0.03
    )
    
    $
    0.33Dividends declared per common share
    
    $
    0.06
    
    
    $
    0.06
 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
  Three Months EndedNovember 30,
    
    
    November 30,(In thousands)
    
    2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (369
    )
    
    $
    3,162Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations:Depreciation and amortization
    
    
    4,692
    
    
    
    3,908Stock-based compensation
    
    
    835
    
    
    
    362Deferred income tax expense (benefit)
    
    
    1,602
    
    
    
    (374
    )(Gain) loss on derivative transactions
    
    
    (6,238
    )
    
    
    801Foreign currency transaction loss
    
    
    613
    
    
    
    Other
    
    
    2
    
    
    
    (20
    )Change in assets and liabilities:Trade accounts receivable
    
    
    (15,735
    )
    
    
    2,450Prepaid expenses
    
    
    (336
    )
    
    
    366Inventories
    
    
    10,869
    
    
    
    3,521Accounts payable and accrued liabilities
    
    
    (5,612
    )
    
    
    (2,311
    )Income tax
    
    
    2,702
    
    
    
    1,426Insurance recovery receivable
    
    
    (525
    )
    
    
    Other
    
    
    325
    
    
    
    368Net cash provided by (used in) operating activities
    
    
    (7,175
    )
    
    
    13,659Cash flows from investing activities:Investment in property, plant and equipment, net
    
    
    (1,504
    )
    
    
    (17,411
    )Other
    
    
    (27
    )
    
    
    (30
    )Net cash used in investing activities
    
    
    (1,531
    )
    
    
    (17,441
    )Cash flows from financing activities:Proceeds from short-term borrowings
    
    
    4,456
    
    
    
    1,340Payments on short-term borrowings
    
    
    (4,057
    )
    
    
    (5,091
    )Proceeds from revolving line of credit
    
    
    20,000
    
    
    
    13,774Payments on revolving line of credit
    
    
    (12,500
    )
    
    
    (1,500
    )Payments of long-term debt
    
    
    (1,000
    )
    
    
    (1,000
    )Payments under capital lease obligation
    
    
    (77
    )
    
    
    (17
    )Exercise of stock options
    
    
    
    
    
    
    47Increase (decrease) in cash overdraft
    
    
    3,768
    
    
    
    (978
    )Payment of dividends
    
    
    (675
    )
    
    
    (547
    )Other
    
    
    
    
    
    
    (103
    )Net cash provided by financing activities
    
    
    9,915
    
    
    
    5,925Effect of exchange rate changes on cash and cash equivalents
    
    
    (55
    )
    
    
    (95
    )Net increase in cash and cash equivalents
    
    
    1,154
    
    
    
    2,048Cash and cash equivalents, beginning of period
    
    
    534
    
    
    
    Cash and cash equivalents, end of period
    
    $
    1,688
    
    
    $
    2,048
 The accompanying notes are an integral part of these statements.
 5




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PENFORD CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1BUSINESS
     2BASIS OF PRESENTATION
 Consolidation
  Accounting Changes
  6




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Recent Accounting Pronouncements
     3CEDAR RAPIDS FLOOD
  7




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Three months ended
    
    Three months endedAugust 31, 2008
    
    November 30, 2008
    
    Total(Dollars in
thousands)Repairs of buildings and equipment
    
    $
    17,082
    
    
    $
    5,790
    
    
    $
    22,872Site remediation
    
    
    5,389
    
    
    
    348
    
    
    
    5,737Write off of inventory and fixed assets
    
    
    4,016
    
    
    
    71
    
    
    
    4,087Continuing costs during production
shut down
    
    
    9,771
    
    
    
    
    
    
    
    9,771Other
    
    
    1,797
    
    
    
    577
    
    
    
    2,37438,055
    
    
    
    6,786
    
    
    
    44,841Insurance recoveries
    
    
    (10,500
    )
    
    
    (11,020
    )
    
    
    (21,520
    )Net flood costs (recoveries)
    
    $
    27,555
    
    
    $
    (4,234
    )
    
    $
    23,321
  Insurance recoveries
   4STOCK-BASED COMPENSATION
 Stock Compensation Plans
  Valuation and Expense Under SFAS No. 123R
  8




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Stock Option Awards
  WeightedWeighted
    
    AverageNumber of
    
    Average
    
    Remaining
    
    AggregateShares
    
    Exercise Price
    
    Term (in years)
    
    Intrinsic ValueOutstanding Balance, August 31, 2008
    
    
    1,376,347
    
    
    $
    15.17Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Outstanding Balance, November 30, 2008
    
    
    1,376,347
    
    
    $
    15.17
    
    
    
    5.03
    
    
    $
    122,000Options Exercisable at November 30, 2008
    
    
    860,472
    
    
    $
    14.08
    
    
    
    4.29
    
    
    $
    122,000
   Restricted Stock Awards
  WeightedAverageNumber of
    
    Grant DateShares
    
    Fair ValueNonvested at August 31, 2008
    
    
    109,365
    
    
    $
    34.15Granted
    
    
    
    
    
    
    Vested
    
    
    (28,148
    )
    
    
    33.05Cancelled
    
    
    
    
    
    
    Nonvested at November 30, 2008
    
    
    81,217
    
    
    $
    34.53
    9




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Compensation Expense
  Three Months Ended November 30,2008
    
    2007Cost of sales
    
    $
    90
    
    
    $
    37Operating expenses
    
    
    729
    
    
    
    320Research and development expenses
    
    
    16
    
    
    
    5Total stock-based compensation expense
    
    
    835
    
    
    
    362Tax benefit
    
    
    317
    
    
    
    138Total stock-based compensation expense,
net of tax
    
    $
    518
    
    
    $
    224
 5INVENTORIES
  November 30,
    
    
    August 31,2008
    
    
    2008(In thousands)Raw materials
    
    $
    10,645
    
    
    $
    26,578Work in progress
    
    
    911
    
    
    
    1,139Finished goods
    
    
    28,499
    
    
    
    22,483Total inventories
    
    $
    40,055
    
    
    $
    50,200
   6PROPERTY, PLANT AND EQUIPMENT
  10




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November 30,
    
    
    August 31,2008
    
    
    2008(In thousands)Land
    
    $
    18,297
    
    
    $
    20,993Plant and equipment
    
    
    370,000
    
    
    
    385,632Construction in progress
    
    
    7,754
    
    
    
    6,808396,051
    
    
    
    413,433Accumulated depreciation
    
    
    (238,877
    )
    
    
    (243,501
    )Net property, plant and equipment
    
    $
    157,174
    
    
    $
    169,932
  7DEBT
      8INCOME TAXES
   11




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9OTHER COMPREHENSIVE INCOME (LOSS)
  Three months endedNovember 30,
    
    
    November 30,2008
    
    
    2007(In thousands)Net income (loss)
    
    $
    (369
    )
    
    $
    3,162Foreign currency translation adjustments
    
    
    (18,956
    )
    
    
    5,471Net unrealized gain (loss) on derivative
instruments
that qualify as cash flow hedges
    
    
    (590
    )
    
    
    61Total comprehensive income (loss)
    
    $
    (19,915
    )
    
    $
    8,694
  10NON-OPERATING INCOME (LOSS), NET
  Three months endedNovember 30,
    
    
    November 30,2008
    
    
    2007(In thousands)Royalty and licensing income
    
    $
    410
    
    
    $
    451Loss on foreign currency transactions
    
    
    (613
    )
    
    
    Other
    
    
    (7
    )
    
    
    13Total
    
    $
    (210
    )
    
    $
    464
    12




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11  PENSION AND POST-RETIREMENT BENEFIT PLANS
  Three months endedNovember 30,
    
    
    November 30,Defined benefit pension plans
    
    2008
    
    
    2007(in thousands)Service cost
    
    $
    355
    
    
    $
    371Interest cost
    
    
    645
    
    
    
    623Expected return on plan assets
    
    
    (607
    )
    
    
    (663
    )Amortization of prior service cost
    
    
    63
    
    
    
    63Amortization of actuarial losses
    
    
    53
    
    
    
    13Net periodic benefit cost
    
    $
    509
    
    
    $
    407
 Three months endedNovember 30,
    
    
    November 30,Post-retirement health care plans
    
    2008
    
    
    2007(in thousands)Service cost
    
    $
    65
    
    
    $
    78Interest cost
    
    
    228
    
    
    
    213Amortization of prior service cost
    
    
    (38
    )
    
    
    (38
    )Net periodic benefit cost
    
    $
    255
    
    
    $
    253
 12FAIR VALUE MEASURMENTS
   
    
    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.
 13




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
    
    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.
  Quoted PricesIn Active
    
    SignificantMarkets for
    
    Other
    
    SignificantIdentical
    
    Observable
    
    UnobservableInstruments
    
    Inputs
    
    Inputs(Level 1)
    
    (Level 2)
    
    (Level 3)
    
    Total(in thousands)Current assets (Other Current Assets):Commodity derivatives
    
    $
    1,448
    
    
    $
    
    
    
    $
    
    
    
    $
    1,448Current liabilities (Accrued Liabilities):Interest rate swaps
    
    $
    
    
    
    $
    1,696
    
    
    $
    
    
    
    $
    1,696Foreign currency contracts
    
    
    
    
    
    
    41
    
    
    
    
    
    
    
    41Total Liabilities
    
    $
    
    
    
    $
    1,737
    
    
    $
    
    
    
    $
    1,737
 13RESTRUCTURING COSTS
  14SEGMENT REPORTING
  Three months endedNovember 30,
    
    
    November 30,2008
    
    
    2007(In thousands)Sales:Industrial IngredientsNorth America
    
    $
    41,841
    
    
    $
    49,209Food IngredientsNorth America
    
    
    17,742
    
    
    
    16,076Australia/New Zealand operations
    
    
    21,360
    
    
    
    29,944Intercompany sales
    
    
    (253
    )
    
    
    (368
    )$
    80,690
    
    
    $
    94,861
 14




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Three months endedNovember 30,
    
    
    November 30,2008
    
    
    2007(In thousands)Income (loss) from operations:Industrial IngredientsNorth America
    
    $
    1,799
    
    
    $
    5,696Food IngredientsNorth America
    
    
    3,398
    
    
    
    2,652Australia/New Zealand operations
    
    
    (1,533
    )
    
    
    (75
    )Corporate and other
    
    
    (2,828
    )
    
    
    (2,517
    )$
    836
    
    
    $
    5,756
 November 30,
    
    
    August 31,2008
    
    
    2008(In thousands)Total assets:Industrial IngredientsNorth America
    
    $
    152,395
    
    
    $
    141,618Food IngredientsNorth America
    
    
    34,075
    
    
    
    35,100Australia/New Zealand operations
    
    
    84,191
    
    
    
    111,255Corporate and other
    
    
    30,394
    
    
    
    32,460$
    301,055
    
    
    $
    320,433
 15EARNINGS (LOSS) PER SHARE
 .
 Three months endedNovember 30, 2008
    
    November 30, 2007(In thousands)Weighted average common shares outstanding
    
    
    11,155
    
    
    
    9,118Dilutive stock options and awards
    
    
    
    
    
    
    431Weighted average common shares outstanding,
assuming dilution
    
    
    11,155
    
    
    
    9,549
  15




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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 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. 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, 2008, 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 expenditures for flood restoration costs and related
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, or§
    
    other factors described in Part I, Item 1A Risk Factors.
 Overview
  16




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Impact of Cedar Rapids Flood
     Accounting Changes
   17




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Results of Operations
 Executive Overview
   Industrial IngredientsNorth America
    Food IngredientsNorth America
  18




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Australia/New Zealand Operations
   Corporate operating expenses
  Interest expense
  Income taxes
    19




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Non-operating income (loss), net
  Three months endedNovember 30, 2008
    
    
    November 30, 2007(In thousands)Royalty and licensing income
    
    $
    410
    
    
    $
    451Loss on foreign currency transactions
    
    
    (613
    )
    
    
    Other
    
    
    (7
    )
    
    
    13Total
    
    $
    (210
    )
    
    $
    464
  Liquidity and Capital Resources
        20




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Contractual Obligations
  Pension Contributions
  Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
    21




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Critical Accounting Policies
  Goodwill
  
 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
  22




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PART II  OTHER INFORMATION
 
 Item 1: Legal Proceedings
  
 Item 1A: Risk Factors
  
 Item 6: Exhibits.
  10.1
    
    Form of Amendment to Change in Control Agreement. The form of the Change in Control Agreement
was filed as an exhibit to the Companys Form 10-Q for the quarter ended February 28, 2006, filed
on April 10, 200631.1
    
    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
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##### Table of Contents



SIGNATURES
  Penford Corporation
(Registrant)January 9, 2009
    /s/ Steven O. CordierSteven O. CordierSenior Vice President and Chief Financial Officer 24




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description10.1
    
    Form of Amendment to Change in Control Agreement. The form of
the Change in Control Agreement was filed as an exhibit to the
Companys Form 10-Q for the quarter ended February 28, 2006,
filed on April 10, 200631.1
    
    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