##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended November 30, 2006
 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
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)7094 South Revere Parkway,Centennial, Colorado
    
    80112-3932(Address of Principal Executive Offices)
    
    (Zip Code)
 (303) 649-1900
 þ o
  o þ o
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##### Table of Contents



PENFORD CORPORATION AND SUBSIDIARIES
 INDEX
 PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets  November 30, 2006 and August 31, 2006
    
    
    3Condensed Consolidated Statements of Operations  Three Months ended November 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flow  Three Months ended November 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22PART IIOTHER INFORMATIONItem 1A. Risk Factors
    
    
    23Item 6. Exhibits
    
    
    25Signatures
    
    
    26Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to Section 906
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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1: Financial Statements
 PENFORD CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 November 30,
    
    
    August 31,(In thousands, except per share data)
    
    2006
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash
    
    $
    
    
    
    $
    939Trade accounts receivable, net
    
    
    48,640
    
    
    
    44,593Inventories
    
    
    37,419
    
    
    
    34,953Prepaid expenses
    
    
    4,287
    
    
    
    4,649Other
    
    
    4,912
    
    
    
    4,782Total current assets
    
    
    95,258
    
    
    
    89,916Property, plant and equipment, net
    
    
    129,387
    
    
    
    124,829Restricted cash value of life insurance
    
    
    10,311
    
    
    
    10,278Goodwill, net
    
    
    22,491
    
    
    
    21,871Other intangible assets, net
    
    
    2,786
    
    
    
    2,785Other assets
    
    
    1,725
    
    
    
    989Total assets
    
    $
    261,958
    
    
    $
    250,668LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Cash overdraft, net
    
    $
    4,140
    
    
    $
    961Current portion of long-term debt and capital lease obligations
    
    
    4,051
    
    
    
    4,295Short-term borrowings
    
    
    9,850
    
    
    
    9,541Accounts payable
    
    
    29,165
    
    
    
    31,686Accrued liabilities
    
    
    11,658
    
    
    
    11,360Total current liabilities
    
    
    58,864
    
    
    
    57,843Long-term debt and capital lease obligations
    
    
    61,005
    
    
    
    53,171Other post-retirement benefits
    
    
    13,663
    
    
    
    13,606Deferred income taxes
    
    
    4,563
    
    
    
    5,924Other liabilities
    
    
    12,861
    
    
    
    12,672Total liabilities
    
    
    150,956
    
    
    
    143,216Shareholders 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 10,935 and 10,909 shares, respectively
    
    
    10,935
    
    
    
    10,909Additional paid-in capital
    
    
    40,046
    
    
    
    39,427Retained earnings
    
    
    80,166
    
    
    
    78,131Treasury stock, at cost, 1,981 shares
    
    
    (32,757
    )
    
    
    (32,757
    )Accumulated other comprehensive income
    
    
    12,612
    
    
    
    11,742Total shareholders equity
    
    
    111,002
    
    
    
    107,452Total liabilities and shareholders equity
    
    $
    261,958
    
    
    $
    250,668
 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 endedNovember 30,
    
    
    November 30,(In thousands, except per share data)
    
    2006
    
    
    2005Sales
    
    $
    85,500
    
    
    $
    77,903Cost of sales
    
    
    72,306
    
    
    
    67,503Gross margin
    
    
    13,194
    
    
    
    10,400Operating expenses
    
    
    7,100
    
    
    
    7,738Research and development expenses
    
    
    1,571
    
    
    
    1,437Income from operations
    
    
    4,523
    
    
    
    1,225Non-operating income, net
    
    
    521
    
    
    
    362Interest expense
    
    
    1,304
    
    
    
    1,333Income before income taxes
    
    
    3,740
    
    
    
    254Income tax expense
    
    
    1,167
    
    
    
    58Net income
    
    $
    2,573
    
    
    $
    196Weighted average common shares and
equivalents outstanding:Basic
    
    
    8,944
    
    
    
    8,877Diluted
    
    
    9,072
    
    
    
    8,923Earnings per share:Basic
    
    $
    0.29
    
    
    $
    0.02Diluted
    
    $
    0.28
    
    
    $
    0.02Dividends declared per common share
    
    $
    0.06
    
    
    $
    0.06
 The accompanying notes are an integral part of these
statements.
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PENFORD CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
  Three Months EndedNovember 30,
    
    
    November 30,(In thousands)
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    2,573
    
    
    $
    196Adjustments to reconcile net income to net cash used in
operations:Depreciation and amortization
    
    
    3,843
    
    
    
    3,844Stock-based compensation
    
    
    299
    
    
    
    304Deferred income taxes
    
    
    (463
    )
    
    
    (141
    )Other
    
    
    (761
    )
    
    
    (158
    )Change in assets and liabilities:Trade accounts receivable
    
    
    (3,535
    )
    
    
    (1,968
    )Prepaid expenses
    
    
    385
    
    
    
    702Inventories
    
    
    (1,763
    )
    
    
    (54
    )Accounts payable and accrued liabilities
    
    
    (4,486
    )
    
    
    (4,784
    )Taxes payable
    
    
    852
    
    
    
    (673
    )Other
    
    
    115
    
    
    
    736Net cash used in operating activities
    
    
    (2,941
    )
    
    
    (1,996
    )Cash flows from investing activities:Investment in property, plant and equipment, net
    
    
    (7,430
    )
    
    
    (5,243
    )Other
    
    
    (33
    )
    
    
    (58
    )Net cash used in investing activities
    
    
    (7,463
    )
    
    
    (5,301
    )Cash flows from financing activities:Proceeds from short-term borrowings
    
    
    3,892
    
    
    
    Payments on short-term borrowings
    
    
    (3,879
    )
    
    
    Proceeds from revolving line of credit
    
    
    12,989
    
    
    
    6,719Payments on revolving line of credit
    
    
    (8,820
    )
    
    
    Proceeds from long-term debt
    
    
    4,200
    
    
    
    Payments of long-term debt
    
    
    (1,248
    )
    
    
    (1,000
    )Payments under capital lease obligation
    
    
    (12
    )
    
    
    Exercise of stock options
    
    
    319
    
    
    
    Payment of loan fees
    
    
    (805
    )
    
    
    (15
    )Increase in cash overdraft
    
    
    3,178
    
    
    
    740Payment of dividends
    
    
    (536
    )
    
    
    (531
    )Other
    
    
    27
    
    
    
    (4
    )Net cash provided by financing activities
    
    
    9,305
    
    
    
    5,909Effect of exchange rate changes on cash and cash equivalents
    
    
    160
    
    
    
    41Net decrease in cash and cash equivalents
    
    
    (939
    )
    
    
    (1,347
    )Cash and cash equivalents, beginning of period
    
    
    939
    
    
    
    5,367Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    4,020
 The accompanying notes are an integral part of these statements.
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PENFORD CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1BUSINESS
    2BASIS OF PRESENTATION
 Consolidation
  Recent Accounting Pronouncements
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3STOCK-BASED COMPENSATION
 Stock Compensation Plans
  General Option Information
  WeightedWeighted
    
    
    AverageNumber of
    
    
    Average
    
    
    Remaining
    
    
    AggregateShares
    
    
    Exercise Price
    
    
    Term (in years)
    
    
    Intrinsic ValueOutstanding Balance, August 31, 2006
    
    
    1,171,063
    
    
    $
    13.98Granted
    
    
    65,000
    
    
    
    16.25Exercised
    
    
    (26,250
    )
    
    
    12.14Cancelled
    
    
    (10,750
    )
    
    
    12.92Outstanding Balance, November 30, 2006
    
    
    1,199,063
    
    
    $
    14.16
    
    
    
    6.16
    
    
    $
    2,952,700Options Exercisable at November 30, 2006
    
    
    762,563
    
    
    $
    13.58
    
    
    
    5.53
    
    
    $
    2,358,200
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Options Outstanding
    
    
    Options ExercisableWtd. Avg.Remaining
    
    
    Wtd. Avg.
    
    
    
    
    
    
    Wtd. Avg.Number of
    
    
    Contractual
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseRange of Exercise Prices
    
    Options
    
    
    Life (years)
    
    
    Price
    
    
    Options
    
    
    Price$  6.18  13.00
    
    
    469,893
    
    
    
    5.43
    
    
    $
    11.93
    
    
    
    421,018
    
    
    $
    11.8413.01  16.00
    
    
    390,670
    
    
    
    6.71
    
    
    
    14.61
    
    
    
    155,045
    
    
    
    14.1016.01  17.69
    
    
    338,500
    
    
    
    6.55
    
    
    
    16.71
    
    
    
    186,500
    
    
    
    17.081,199,063
    
    
    
    
    
    
    
    
    
    
    
    762,563
 Valuation and Expense Under SFAS No. 123R
    Three Months Ended November 30,2006 Incentive Plan
    
    
    1994 Plan2006
    
    
    2005
    
    
    2006
    
    
    2005Expected volatility
    
    
    45
    %
    
    
    
    
    
    
    
    
    
    
    52
    %Expected life (years)
    
    
    5.5
    
    
    
    
    
    
    
    
    
    
    
    5.0Interest rate (percent)
    
    
    4.4-4.9
    
    
    
    
    
    
    
    
    
    
    
    4.4-4.5Dividend yield
    
    
    1.5
    %
    
    
    
    
    
    
    
    
    
    
    1.7
    %
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Three Months Ended November 30,2006
    
    
    2005Cost of sales
    
    $
    24
    
    
    $
    20Operating expenses
    
    
    258
    
    
    
    262Research and development expenses
    
    
    7
    
    
    
    12Total stock-based compensation expense
    
    $
    289
    
    
    $
    294Tax benefit
    
    
    107
    
    
    
    100Total stock-based compensation
expense, net of tax
    
    $
    182
    
    
    $
    194
  Restricted Stock
  4INVENTORIES
  November 30,
    
    
    August 31,2006
    
    
    2006(In thousands)Raw materials
    
    $
    19,425
    
    
    $
    18,531Work in progress
    
    
    560
    
    
    
    449Finished goods
    
    
    17,434
    
    
    
    15,973Total inventories
    
    $
    37,419
    
    
    $
    34,953
 5PROPERTY, PLANT AND EQUIPMENT
  November 30,
    
    
    August 31,2006
    
    
    2006(In thousands)Land
    
    $
    16,968
    
    
    $
    16,659Plant and equipment
    
    
    324,512
    
    
    
    322,169Construction in progress
    
    
    13,489
    
    
    
    7,078354,969
    
    
    
    345,906Accumulated depreciation
    
    
    (225,582
    )
    
    
    (221,077
    )Net property, plant and equipment
    
    $
    129,387
    
    
    $
    124,829
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6DEBT
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7TAXES
   8OTHER COMPREHENSIVE INCOME
  Three months endedNovember 30,
    
    
    November 30,2006
    
    
    2005(In thousands)Net income
    
    $
    2,573
    
    
    $
    196Foreign currency translation adjustments
    
    
    1,938
    
    
    
    (492
    )Change in unrealized gains on derivative
instruments
that qualify as cash flow hedges, net of tax
    
    
    (1,068
    )
    
    
    306Total comprehensive income
    
    $
    3,443
    
    
    $
    10
 9NON-OPERATING INCOME, NET
  Three months endedNovember 30,
    
    
    November 30,2006
    
    
    2005(In thousands)Royalty and licensing income
    
    $
    518
    
    
    $
    423Other
    
    
    3
    
    
    
    (61
    )Total
    
    $
    521
    
    
    $
    362
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10  PENSION AND POST-RETIREMENT BENEFIT PLANS
  Defined benefit pension plans
 Three months endedNovember 30,
    
    
    November 30,2006
    
    
    2005Service cost
    
    $
    388
    
    
    $
    418Interest cost
    
    
    584
    
    
    
    525Expected return on plan assets
    
    
    (593
    )
    
    
    (529
    )Amortization of prior service cost
    
    
    46
    
    
    
    47Amortization of actuarial losses
    
    
    48
    
    
    
    151Net periodic benefit cost
    
    $
    473
    
    
    $
    612
 Post-retirement health care plans
 Three months endedNovember 30,
    
    
    November 30,2006
    
    
    2005Service cost
    
    $
    77
    
    
    $
    98Interest cost
    
    
    205
    
    
    
    196Amortization of prior service cost
    
    
    (38
    )
    
    
    (38
    )Amortization of actuarial losses
    
    
    
    
    
    
    36Net periodic benefit cost
    
    $
    244
    
    
    $
    292
 11SEGMENT REPORTING
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Three months endedNovember 30,
    
    
    November 30,2006
    
    
    2005(In thousands)Sales:Industrial IngredientsNorth America
    
    $
    43,972
    
    
    $
    38,480Food IngredientsNorth America
    
    
    15,240
    
    
    
    15,090Australia/New Zealand operations
    
    
    26,524
    
    
    
    24,635Intercompany sales
    
    
    (236
    )
    
    
    (302
    )$
    85,500
    
    
    $
    77,903Income (loss) from operations:Industrial IngredientsNorth America
    
    $
    3,182
    
    
    $
    574Food IngredientsNorth America
    
    
    2,853
    
    
    
    2,401Australia/New Zealand operations
    
    
    808
    
    
    
    697Corporate and other
    
    
    (2,320
    )
    
    
    (2,447
    )$
    4,523
    
    
    $
    1,225
 November 30,
    
    
    August 31,2006
    
    
    2006(In thousands)Total assets:Industrial IngredientsNorth America
    
    $
    108,443
    
    
    $
    98,733Food IngredientsNorth America
    
    
    31,886
    
    
    
    31,714Australia/New Zealand operations
    
    
    105,381
    
    
    
    104,491Corporate and other
    
    
    16,248
    
    
    
    15,730$
    261,958
    
    
    $
    250,668
  Three months endedNovember 30, 2006
    
    November 30, 2005(In thousands)Industrial IngredientsNorth America
    
    $
    68
    
    
    $
    66Food IngredientsNorth America
    
    
    43
    
    
    
    33Australia/New Zealand operations
    
    
    20
    
    
    
    11Corporate
    
    
    158
    
    
    
    184$
    289
    
    
    $
    294
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12EARNINGS PER SHARE
 .
 Three months endedNovember 30, 2006
    
    November 30, 2005(In thousands)Weighted average common shares outstanding
    
    
    8,944
    
    
    
    8,877Dilutive stock options
    
    
    128
    
    
    
    46Weighted average common shares outstanding,
assuming dilution
    
    
    9,072
    
    
    
    8,923
  13LEGAL PROCEEDINGS
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Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-looking Statements
 The statements contained in this Quarterly Report on Form 10-Q (Quarterly Report) that are
not historical facts, including, but not limited to statements found in the Notes to Condensed
Consolidated Financial Statements and in Item 2  Managements Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements that represent managements
beliefs and assumptions based on currently available information. Forward-looking statements can
be identified by the use of words such as believes, may, will, looks, should, could,
anticipates, expects, or comparable terminology or by discussions of strategies or trends.
 Although the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it cannot give any assurances that these expectations will prove to be
correct. Such statements by their nature involve substantial risks and uncertainties that could
significantly affect expected results. Actual future results could differ materially from those
described in such forward-looking statements, and the Company does not intend to update or revise
any forward-looking statements, whether as a result of new information, future events or otherwise.
Among the factors that could cause actual results to differ materially are the risks and
uncertainties discussed in this Quarterly Report, including those referenced in Item 1A in this
Quarterly Report, and those described from time to time in other filings with the Securities and
Exchange Commission, including the Companys Annual Report on Form 10-K for the year ended August
31, 2006, 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;
unanticipated ethanol facility construction or procurement delays that could result in delay in the
timing of the commencement of ethanol production; technical difficulties, nonperformance by
contractors or mandated changes in project requirements or specifications; 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; interest rate, chemical and energy cost volatility; foreign
currency exchange rate fluctuations; changes in assumptions used for determining employee benefit
expense and obligations; changes in the assumptions used to determine the effective income tax
rate; or other unforeseen developments in the industries in which Penford operates.
 Overview
   Results of Operations
 Executive Overview
  15




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Sales
    Income from operations
    Corporate operating expenses
  16




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Interest and taxes
      Non-operating income, net
  Three months endedNovember 30, 2006
    
    
    November 30, 2005(In thousands)Royalty and licensing income
    
    $
    518
    
    
    $
    423Other
    
    
    3
    
    
    
    (61
    )Total
    
    $
    521
    
    
    $
    362
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Liquidity and Capital Resources
        Contractual Obligations
  18




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2007
    
    2008-2009
    
    2010-2011
    
    2012 & After
    
    TotalLong-term Debt and Capital
Lease Obligations
    
    $
    3,040
    
    
    $
    8,098
    
    
    $
    8,018
    
    
    $
    45,900
    
    
    $
    65,056
  Recent Accounting Pronouncements
      Critical Accounting Policies
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
    
    Evaluation of the allowance for doubtful accounts receivable
    
    Hedging activities
    
    Benefit plans
    
    Valuation of goodwill
    
    Self-insurance program
    
    Income taxes
    
    Stock-based compensation
  Evaluation of the Allowance for Doubtful Accounts Receivable
  Hedging Activities
   Benefit Plans
  20




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Valuation of Goodwill
  Self-insurance Program
  Income Taxes
   Stock-Based Compensation
   21




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Item 3: Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4: Controls and Procedures.
  22




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PART II  OTHER INFORMATION
 
 Item 1A Risk Factors
 Increases in energy and chemical costs may reduce the Companys profitability.
  The availability and cost of agricultural products Penford purchases are vulnerable to weather
and other factors beyond its control.
  The loss of a major customer could have an adverse effect on Penfords results of operations.
  Changes in interest rates will affect Penfords profitability.
  Unanticipated changes in tax rates or exposure to additional income tax liabilities could
affect Penfords profitability.
  23




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Profitability is subject to risks associated with changes in foreign currency exchange rates.
  The Company may not be able to implement ethanol production as planned or at all.
  Provisions of Washington law could discourage or prevent a potential takeover.
   Other uncertainties
  24




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Item 6: Exhibits.
  10.1
    
    Second Amended and Restated Credit Agreement dated as of October 5, 2006 (filed as an exhibit to
Registrants File No. 000-11488, Form 8-K dated October 5, 2006, filed October 10, 2006)31.1
    
    Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certifications 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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SIGNATURES
  Penford Corporation(Registrant)January 9, 2007
    
    /s/ Steven O. CordierSteven O. CordierSenior Vice President and Chief Financial
Officer
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EXHIBIT INDEX
 Exhibit No.
    
    Description10.1
    
    Second Amended and Restated Credit Agreement dated as of
October 5, 2006 (filed as an exhibit to Registrants File No.
000-11488, Form 8-K dated October 5, 2006, filed October 10,
2006)31.1
    
    Certifications of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certifications 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