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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended November 30, 2004 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 of Incorporation)
    
    (I.R.S. EmployerIdentification No.)7094 South Revere Parkway,Englewood, Colorado
    
    80112-3932(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (303) 649-1900 Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No o Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act
Yes x No o The net number of shares of the Registrants common stock (the Registrants only outstanding class
of stock) outstanding as of January 3, 2005 was 8,825,133.




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PENFORD CORPORATION AND SUBSIDIARIES INDEX PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets  November 30, 2004 and August 31, 2004
    
    
    3Condensed Consolidated Statements of Operations  Three Months ended November 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flow  Three Months ended November 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    17PART IIOTHER INFORMATIONItem 6. Exhibits
    
    
    17Signatures
    
    
    18First Amendment to Credit AgreementCertifications of CEO Pursuant to Section 302Certifications of CFO Pursuant to Section 302Certifications of CEO and CFO Pursuant to Section 906
  2




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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)
    
    2004
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash
    
    $
    4,347
    
    
    $
    5,915Trade accounts receivable, net
    
    
    38,901
    
    
    
    38,703Inventories
    
    
    31,938
    
    
    
    31,807Prepaid expenses
    
    
    4,355
    
    
    
    4,124Other
    
    
    2,721
    
    
    
    3,031Total current assets
    
    
    82,262
    
    
    
    83,580Property, plant and equipment, net
    
    
    132,435
    
    
    
    130,392Deferred income taxes
    
    
    13,601
    
    
    
    13,462Restricted cash value of life insurance
    
    
    12,693
    
    
    
    12,623Goodwill, net
    
    
    22,290
    
    
    
    20,171Other intangible assets, net
    
    
    2,273
    
    
    
    2,299Other assets
    
    
    3,321
    
    
    
    3,269Total assets
    
    $
    268,875
    
    
    $
    265,796LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    25,961
    
    
    $
    25,169Accrued pension liability
    
    
    1,633
    
    
    
    3,151Accrued liabilities
    
    
    8,160
    
    
    
    10,200Current portion of long-term debt
    
    
    5,078
    
    
    
    4,775Total current liabilities
    
    
    40,832
    
    
    
    43,295Long-term debt
    
    
    79,527
    
    
    
    75,551Other post-retirement benefits
    
    
    12,902
    
    
    
    12,598Deferred income taxes
    
    
    20,388
    
    
    
    20,809Other liabilities
    
    
    17,940
    
    
    
    17,824Total liabilities
    
    
    171,589
    
    
    
    170,077Shareholders 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 10,805 and 10,784 shares, respectively
    
    
    10,805
    
    
    
    10,784Additional paid-in capital
    
    
    37,168
    
    
    
    36,911Retained earnings
    
    
    71,230
    
    
    
    75,585Treasury stock, at cost, 1,981 shares
    
    
    (32,757
    )
    
    
    (32,757
    )Accumulated other comprehensive income
    
    
    10,840
    
    
    
    5,196Total shareholders equity
    
    
    97,286
    
    
    
    95,719Total liabilities and shareholders equity
    
    $
    268,875
    
    
    $
    265,796
 The accompanying notes are an integral part of these statements. 3




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PENFORD CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 For the three months ended November 30
 (Unaudited) (In thousands, except share and per share data)
    
    2004
    
    
    2003Sales
    
    $
    72,065
    
    
    $
    66,170Cost of sales
    
    
    68,836
    
    
    
    56,359Gross margin
    
    
    3,229
    
    
    
    9,811Operating expenses
    
    
    5,808
    
    
    
    5,691Research and development expenses
    
    
    1,412
    
    
    
    1,502Restructuring costs
    
    
    
    
    
    
    253Income (loss) from operations
    
    
    (3,991
    )
    
    
    2,365Non-operating income (expense), net
    
    
    81
    
    
    
    (25
    )Interest expense
    
    
    1,260
    
    
    
    1,107Income (loss) before income taxes
    
    
    (5,170
    )
    
    
    1,233Income tax expense (benefit)
    
    
    (1,344
    )
    
    
    388Net income (loss)
    
    $
    (3,826
    )
    
    $
    845Weighted average common shares and equivalents outstanding:Basic
    
    
    8,816,667
    
    
    
    8,636,255Diluted
    
    
    8,816,667
    
    
    
    8,727,732Earnings (loss) per share:Basic
    
    $
    (0.43
    )
    
    $
    0.10Diluted
    
    $
    (0.43
    )
    
    $
    0.10Dividends 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
 For the three months ended November 30
 (Unaudited) (In thousands)
    
    2004
    
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    (3,826
    )
    
    $
    845Adjustments to reconcile net income (loss) to net cash provided by
(used in) operations:Depreciation and amortization
    
    
    4,290
    
    
    
    4,439Deferred income taxes
    
    
    (716
    )
    
    
    (536
    )Loss on early extinguishment of debt
    
    
    
    
    
    
    665Other
    
    
    (2
    )
    
    
    93Change in assets and liabilities:Trade accounts receivable
    
    
    1,188
    
    
    
    1,864Prepaid expenses
    
    
    (161
    )
    
    
    199Inventories
    
    
    1,738
    
    
    
    1,468Accounts payable and accrued liabilities
    
    
    (3,154
    )
    
    
    (5,123
    )Taxes payable
    
    
    (877
    )
    
    
    393Other
    
    
    480
    
    
    
    1,375Net cash provided by (used in) operating activities
    
    
    (1,040
    )
    
    
    5,682Cash flows from investing activities:Investment in property, plant and equipment, net
    
    
    (1,933
    )
    
    
    (2,438
    )Other
    
    
    (68
    )
    
    
    (88
    )Net cash used in investing activities
    
    
    (2,001
    )
    
    
    (2,526
    )Cash flows from financing activities:Proceeds from revolving line of credit
    
    
    3,000
    
    
    
    35,975Payments on revolving line of credit
    
    
    
    
    
    
    (60,339
    )Proceeds from long-term debt
    
    
    
    
    
    
    50,039Payments of long-term debt
    
    
    (1,009
    )
    
    
    (23,334
    )Exercise of stock options
    
    
    195
    
    
    
    1,051Payment of loan fees
    
    
    (146
    )
    
    
    (1,401
    )Payment of dividends
    
    
    (528
    )
    
    
    (516
    )Net cash provided by financing activities
    
    
    1,512
    
    
    
    1,475Effect of exchange rate changes on cash and cash equivalents
    
    
    (39
    )
    
    
    117Net increase (decrease) in cash and cash equivalents
    
    
    (1,568
    )
    
    
    4,748Cash and cash equivalents, beginning of period
    
    
    5,915
    
    
    
    5,697Cash and cash equivalents, end of period
    
    $
    4,347
    
    
    $
    10,445
 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 Penford Corporation (Penford or the Company) is in the business of developing,
manufacturing and marketing specialty natural-based ingredient systems for various applications,
including papermaking, textiles and food products. The Company operates manufacturing facilities
in the United States, Australia, and New Zealand. Penfords products provide excellent binding and
film-forming characteristics that make customers products better through natural, convenient and
cost effective solutions. Sales of the Companys products are generated using a combination of
direct sales and distributor agreements. The Company has extensive research and development capabilities, which are used in
understanding the complex chemistry of carbohydrate-based materials and their application. In
addition, the Company has specialty processing capabilities for a variety of modified starches. 2BASIS OF PRESENTATION Consolidation The accompanying condensed consolidated financial statements include the accounts of Penford
and its wholly owned subsidiaries. All material intercompany transactions and balances have been
eliminated. The condensed consolidated balance sheet at November 30, 2004 and the condensed
consolidated statements of operations and cash flows for the interim periods ended November 30,
2004 and 2003 have been prepared by the Company without audit. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, that are necessary to present fairly
the financial information have been made. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). The results of operations for interim periods are not necessarily
indicative of the operating results of a full year or of future operations. Certain prior period
amounts have been reclassified to conform with the current period presentation. The accompanying
condensed consolidated financial statements should be read in conjunction with the consolidated
financial statements included in the Companys Annual Report on Form 10-K for the year ended August
31, 2004. Recent Accounting Pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 151,
Inventory Costsan Amendment of ARB No. 43, Chapter 4 (SFAS No. 151). SFAS No. 151, which is
effective for inventory costs incurred during years beginning after June 15, 2005, clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted
material, requiring that those items be recognized as current-period charges. In addition, SFAS
No. 151 requires that allocation of fixed production overheads be based on the normal capacity of
the production facilities. The adoption of SFAS No. 151 beginning September 1, 2005 will not have
a material effect on the Companys results of operation, financial position or liquidity. In December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123R). SFAS No. 123R, which is effective for the first interim or annual period
beginning after June 15, 2005, requires all share-based payments to employees, including grants of
stock options, to be recognized in the financial statements based on their fair values. In
addition, two transition alternatives are permitted at the time of adoption of this statement,
restating prior year financial statements or recognizing adjustments to share-based liabilities as
the cumulative effect of a change in accounting principle. The adoption of SFAS No. 123R will
increase the Companys compensation costs and share-based liabilities. The Company is studying the
requirements of this standard and, at this time, cannot reasonably estimate the impact of SFAS No.
123R on its financial statements. 6




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Stock-based Compensation The Company accounts for its stock-based employee compensation related to stock options under
the intrinsic value recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees and its various interpretations. Accordingly, no compensation expense
has been recognized for the stock-based compensation plans other than for the Directors Plan and
restricted stock awards. The following table illustrates the effect on net income and earnings per share if the Company
had elected to recognize compensation expense consistent with the provisions prescribed in FASB
Statement No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), as amended. Under
SFAS No. 123, compensation expense is measured at the grant date based on the value of the award
and is recognized over the vesting period. Three months endedNovember 30,(In thousands, except per share data)
    
    2004
    
    
    2003Net income (loss), as reported
    
    $
    (3,826
    )
    
    $
    845Add: Stock-based employee compensation expense
included in reported net income, net of tax
    
    
    17
    
    
    
    18Less: Stock-based employee compensation expense
determined under the fair value method for all
awards, net of tax
    
    
    (267
    )
    
    
    (353
    )Pro forma net income (loss)
    
    $
    (4,076
    )
    
    $
    510Earnings (loss) per share:Reported basic earnings (loss) per common share
    
    $
    (0.43
    )
    
    $
    0.10Reported diluted earnings (loss) per common share
    
    $
    (0.43
    )
    
    $
    0.10Pro forma basic earnings (loss) per common share
    
    $
    (0.46
    )
    
    $
    0.06Pro forma diluted earnings (loss) per common share
    
    $
    (0.46
    )
    
    $
    0.06
 3INVENTORIES The components of inventory are as follows: November 30,
    
    
    August 31,2004
    
    
    2004(In thousands)Raw materials and other
    
    $
    13,096
    
    
    $
    13,996Work in progress
    
    
    927
    
    
    
    687Finished goods
    
    
    17,915
    
    
    
    17,124Total inventories
    
    $
    31,938
    
    
    $
    31,807
 7




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4PROPERTY, PLANT AND EQUIPMENT November 30,
    
    
    August 31,2004
    
    
    2004(In thousands)Land
    
    $
    16,980
    
    
    $
    15,952Plant and equipment
    
    
    298,541
    
    
    
    293,721Construction in progress
    
    
    12,506
    
    
    
    10,526328,027
    
    
    
    320,199Accumulated depreciation
    
    
    (195,592
    )
    
    
    (189,807
    )Net property, plant and equipment
    
    $
    132,435
    
    
    $
    130,392
 Changes in Australian and New Zealand currency exchange rates have increased net property,
plant and equipment in the first three months of fiscal 2005 by approximately $4.3 million. 5DEBT At November 30, 2004, the Company had $37.4 million outstanding under its revolving credit
facilities and $47.2 million in term loans. Effective November 2004, Penford obtained an amendment
to the funded debt ratio covenant, a ratio of earnings before interest, depreciation and taxes, as
defined, to total debt, in its credit facility agreement. The Companys lenders agreed to exclude
$8.4 million, a majority of the nonrecurring strike-related costs, from the calculation of the
funded debt ratio. The agreement was also amended to increase the funded debt ratio threshold to
3.5 for the first half of fiscal 2005, to 3.25 for the third quarter of fiscal 2005, and to 3.0
thereafter. The maximum capital expenditure level was reduced from $20 million to $15 million for
fiscal 2005. Pursuant to the terms of the credit agreement,
Penfords borrowing ability was $17.8 million at November 30, 2004. The Company expects to be in compliance with these revised covenants
for the remainder of fiscal 2005. 6TAXES The Companys effective tax rate for the three months ended November 30, 2004 and 2003 varied
from the U.S. federal statutory rate primarily due to U.S. tax credits related to research and
development and the favorable tax effect of export sales from the U.S. 7OTHER COMPREHENSIVE INCOME The components of total comprehensive income are as follows: Three months endedNovember 30,2004
    
    
    2003(In thousands)Net income (loss)
    
    $
    (3,826
    )
    
    $
    845Foreign currency translation adjustments
    
    
    5,701
    
    
    
    5,566Change in unrealized gains on derivative
instruments that qualify as cash flow hedges
    
    
    (57
    )
    
    
    24Total comprehensive income
    
    $
    1,818
    
    
    $
    6,435
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8NON-OPERATING INCOME, NET Non-operating income, net consists of the following: Three months endedNovember 30,2004
    
    
    2003(In thousands)Loss on early extinguishment of debt
    
    $
    
    
    
    $
    (665
    )Gain on sale of investment
    
    
    
    
    
    
    150Royalty and licensing income
    
    
    87
    
    
    
    367Other
    
    
    (6
    )
    
    
    123Total
    
    $
    81
    
    
    $
    (25
    )
 In October 2003, Penford refinanced its existing secured credit and inventory financing credit
agreements and wrote off the unamortized deferred transaction costs related to these credit
agreements. In November 2002, the Company licensed the rights to its resistant starch intellectual
property portfolio for applications in human nutrition. The initial licensing fee of $2.25 million
received in November 2002 is being amortized over the life of the licensing agreement. In
addition, the Company receives royalty income as a percentage of its licensees sales of resistant
starch for a period of seven years or until a maximum of $11 million in royalties has been received
by Penford. The royalty payments are subject to a minimum of $7 million over the first five years
of the licensing agreement. 9  PENSION AND POST-RETIREMENT BENEFIT PLANS The following represents the net periodic pension and post-retirement benefit costs and
related components in accordance with SFAS No. 132 ® for the three months ended November 30, 2004
and 2003. Three months endedDefined benefit pension plans
    
    November 30,2004
    
    
    2003(In thousands)Service cost
    
    $
    250
    
    
    $
    229Interest cost
    
    
    499
    
    
    
    473Expected return on plan assets
    
    
    (467
    )
    
    
    (434
    )Amortization of transition obligation
    
    
    
    
    
    
    30Amortization of prior service cost
    
    
    30
    
    
    
    27Amortization of actuarial losses
    
    
    122
    
    
    
    109Net periodic benefit cost
    
    $
    434
    
    
    $
    434
 Three months endedPost-retirement health care plans
    
    November 30,2004
    
    
    2003(In thousands)Service cost
    
    $
    148
    
    
    $
    126Interest cost
    
    
    250
    
    
    
    213Amortization of actuarial losses
    
    
    15
    
    
    
    15Net periodic benefit cost
    
    $
    413
    
    
    $
    354
 9




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10SEGMENT REPORTING Financial information for the Companys three segments is presented below. The first two
segments, Industrial IngredientsNorth America and Food IngredientsNorth America, are broad
categories of end-market users, primarily served by the Companys U.S. operations. The third
segment is the Companys geographically separate operations in Australia and New Zealand, which are
engaged primarily in the food ingredients business. A fourth item for corporate and other
activity is presented to provide reconciliation to amounts reported in the condensed consolidated
financial statements. Corporate and other represents the activities related to the corporate
headquarters such as public company reporting, personnel costs of the executive management team,
corporate-wide professional services and elimination and consolidation entries. The elimination of
intercompany sales between Australia/New Zealand operations and Food IngredientsNorth America of
$547,000 and $193,000 for the three months ended November 30, 2004 and 2003, respectively, is
presented separately since the chief operating decision maker views segment results prior to
intercompany eliminations. Three months endedNovember 30,2004
    
    
    2003(In thousands)Sales:Industrial IngredientsNorth America
    
    $
    35,135
    
    
    $
    32,526Food IngredientsNorth America
    
    
    12,273
    
    
    
    11,893Australia/New Zealand operations
    
    
    25,204
    
    
    
    21,944Intercompany sales
    
    
    (547
    )
    
    
    (193
    )$
    72,065
    
    
    $
    66,170Income (loss) from operations:Industrial IngredientsNorth America
    
    $
    (4,390
    )
    
    $
    1,548Food IngredientsNorth America
    
    
    1,392
    
    
    
    1,900Australia/New Zealand operations (1)
    
    
    575
    
    
    
    271Corporate and other
    
    
    (1,568
    )
    
    
    (1,354
    )$
    (3,991
    )
    
    $
    2,365
   (1)
    
    Restructuring costs of $253,000 have been included in income from operations for the
three months ended November 30, 2003. November 30,
    
    
    August 31,2004
    
    
    2004(In thousands)Total assets:Industrial IngredientsNorth America
    
    $
    98,834
    
    
    $
    101,620Food IngredientsNorth America
    
    
    31,183
    
    
    
    32,323Australia/New Zealand operations
    
    
    106,775
    
    
    
    99,344Corporate and other
    
    
    32,083
    
    
    
    32,509$
    268,875
    
    
    $
    265,796
 10




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11EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share reflects only the weighted average common shares outstanding
during the period. Diluted earnings (loss) per share reflects weighted average common shares
outstanding and the effect of any dilutive common stock equivalent shares.The following table
presents the computation of diluted weighted average shares outstanding for the three months ended
November 30, 2004 and 2003. Three months endedNovember 30,2004
    
    
    2003(In thousands)Weighted average common shares outstanding
    
    
    8,817
    
    
    
    8,636Dilutive stock options
    
    
    
    
    
    
    92Weighted average common shares outstanding,
assuming dilution
    
    
    8,817
    
    
    
    8,728
 11




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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 onForm 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 disclaims any intention or obligation
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 above,
and those described from time to time in other filings with the Securities and Exchange Commission
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; 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, including labor 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
and energy cost volatility; foreign currency exchange rate fluctuations; changes in assumptions
used for determining employee benefit expense and obligations; or other unforeseen developments in
the industries in which Penford operates. Results of Operations Executive Overview Penford generates revenues, income and cash flows by developing, manufacturing and marketing
specialty natural-based ingredient systems for industrial and food applications. The Company
develops and manufactures ingredients with starch as a base which provide value-added applications
to its customers. Penfords starch products are manufactured primarily from corn, potatoes, and
wheat, and are used as binders and coatings in paper and food production. In analyzing business trends, management considers a variety of performance and financial
measures, including sales revenue growth, sales volume growth, gross margins and operating income
of the Companys business segments. Penford manages its business in three segments. The first
two, Industrial IngredientsNorth America and Food IngredientsNorth America, are broad categories
of end-market users, served by operations in the United States. The third segment is the Companys
operations in Australia and New Zealand, which operations are engaged primarily in the food
ingredients business. 12




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Consolidated sales for the three months ended November 30, 2004 increased 9% to $72.1 million
from $66.2 million in fiscal 2004. Higher volumes at Penfords Industrial IngredientsNorth
America business and in Australia contributed approximately 7% of the revenue gain, with the
remaining increase attributable to favorable Australian and New Zealand foreign currency exchange
rates. Gross margin as a percent of sales decreased from 14.8% in the first quarter of fiscal 2004
to 4.5% in the current year quarter primarily due to the effects of the strike in the Companys
Cedar Rapids, Iowa manufacturing facility. The members of the union accepted a five-year contract
on October 17, 2004. The Company believes that the new union contract will bring labor costs in
the Industrial segment more in line with its industry peers over the next few years. Fiscal 2004 workforce reductions in Australia and the Industrial IngredientsNorth America
business and reduced spending have lowered operating expenses to 8.1% of first quarter fiscal 2005
revenue from 8.6% in the same quarter last year. A discussion of segment results of operations
follows. Sales Sales at the Companys Industrial IngredientsNorth America business unit increased by $2.6
million, or 8%, to $35.1 million in the first quarter of fiscal 2005 compared to the prior year
period. Sales volumes, which rose 4%, contributed $1.1 million to the revenue increase, with 2%
and 54% volume improvements in core products and specialty products, respectively. The remaining
increase in sales was due to improved unit pricing and favorable product mix with the growth in
sales of specialty products, which includes Liquid Natural Additives. Sales for the first quarter of fiscal 2005 at the Australia/New Zealand operations expanded by
15% to $25.2 million over the first quarter of fiscal 2004. Stronger foreign currency exchange
rates contributed 8% to the revenue increase. Volume growth was partially offset by pricing
pressures from imported products and unfavorable mix changes caused by softer demand for low
carbohydrate product applications. First quarter fiscal 2005 sales for the Food IngredientsNorth America business grew $0.4
million, or 3%, to $12.3 million compared to the prior year quarter on favorable product mix and
improved unit pricing. Sales improvements were in the new product applications for protein, dairy
and cheeses. Income from operations Income from operations at Penfords Industrial IngredientsNorth America business unit
declined to a $4.4 million loss in the first quarter of fiscal 2005 from $1.5 million of income in
the prior year quarter. Gross margin as a percent of sales was a negative 5.1% in the quarter
ended November 30, 2004, primarily reflecting the effects of an eleven-week union strike at the
segments Cedar Rapids, Iowa manufacturing facility. The strike ended October 17, 2004 with the
ratification of a five-year contract. Higher costs for chemicals, natural gas and raw material
inputs also contributed to the decline in operating income from the first quarter of fiscal 2004. Income from operations at the Companys Australia/New Zealand operations increased $0.3
million to $0.6 million in the first quarter of fiscal 2005 compared to the prior year period.
First quarter 2004 income from operations included $0.3 million of restructuring costs, which have
been reflected as a separate line in the accompanying Condensed Consolidated Statements of
Operations. Gross margin as a percent of sales was comparable to last year at 8%. Lower grain
input costs were offset by incremental costs to reconfigure the manufacturing process in the
Tamworth, New South Wales facility. First quarter income from operations at the Food IngredientsNorth American business unit
decreased $0.5 million to $1.4 million from the comparable quarter last year. In the first quarter
of fiscal 2005, gross margin as a percent of sales declined to 24.4% from 29.3% last year.
Improved product mix was offset by higher costs to manufacture dextrose and corn products during
the Cedar Rapids union strike, as well as higher chemical and recovered starch raw material costs.
Lower plant utilization and inefficiencies caused by softer customer demand for starch applications
for low carbohydrate products also contributed to the decline in operating income. 13




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Corporate operating expenses Corporate operating expenses for the first quarter of fiscal 2005 increased $0.2 million over
the prior year period primarily related to higher professional fees. Interest and taxes Interest expense rose $0.2 million to $1.3 million for the first fiscal quarter of 2005 on
slightly higher interest rates in the U.S. and Australia. The Companys effective tax rate for the three months ended November 30, 2004 and 2003 varied
from the U.S. federal statutory rate primarily due to U.S. tax credits related to research and
development and the favorable tax effect of export sales from the U.S. Non-operating income, net Non-operating income, net consists of the following: Three months endedNovember 30,2004
    
    
    2003(In thousands)Loss on early extinguishment of debt
    
    $
    
    
    
    $
    (665
    )Gain on sale of investment
    
    
    
    
    
    
    150Royalty and licensing income
    
    
    87
    
    
    
    367Other
    
    
    (6
    )
    
    
    123Total
    
    $
    81
    
    
    $
    (25
    )
 In October 2003, Penford refinanced its existing secured credit and inventory financing credit
agreements and wrote off the unamortized deferred transaction costs related to these credit
agreements. In November 2002, the Company licensed the rights to its resistant starch intellectual
property portfolio for applications in human nutrition. The initial licensing fee of $2.25 million
received in November 2002 is being amortized over the life of the licensing agreement. In
addition, the Company receives royalty income as a percentage of its licensees sales of resistant
starch for a period of seven years or until a maximum of $11 million in royalties has been received
by Penford. The royalty payments are subject to a minimum of $7 million over the first five years
of the licensing agreement. Liquidity and Capital Resources At November 30, 2004, Penford had working capital of $41.4 million compared to $40.3 million
at August 31, 2004. Cash used by operating activities was $1.0 million for the three months ended
November 30, 2004, resulting from a net loss of $3.8 million in the first quarter. At November 30, 2004, the Company had $37.4 million outstanding under its revolving credit
facilities and $47.2 million in term loans. Effective November 2004, Penford obtained an amendment
to the funded debt ratio covenant, a ratio of earnings before interest, depreciation and taxes, as
defined, to total debt, in its credit facility agreement. The Companys lenders agreed to exclude
$8.4 million, a majority of the nonrecurring strike-related costs, from the calculation of the
funded debt ratio. The agreement was also amended to increase the funded debt ratio threshold to
3.5 for the first half of fiscal 2005, to 3.25 for the third quarter of fiscal 2005, and to 3.0
thereafter. The maximum capital expenditure level was reduced from $20 million to $15 million for
fiscal 2005. Pursuant to the terms of the credit agreement,
Penfords borrowing ability was $17.8 million at November 30, 2004. The Company expects to be in compliance with these revised covenants
for the remainder of fiscal 2005. In the quarter ended November 30, 2004, the Company paid dividends of $0.5 million
representing $0.06 per share, the same per share dividend rate as the first quarter of fiscal 2004.
On November 3, 2004, the Board of Directors declared a dividend of $0.06 per common share payable
on December 3, 2004 to shareholders of record as 14




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of November 12, 2004. Any future dividends will be paid at the discretion of the Companys
board of directors and will depend upon, among other things, earnings, financial condition, cash
requirements and availability, and contractual requirements. Recent Accounting Pronouncements In November 2004, the FASB issued Statement No. 151, Inventory Costsan Amendment of ARB No.
43, Chapter 4 (SFAS No. 151). SFAS No. 151, which is effective for inventory costs incurred
during years beginning after June 15, 2005, clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material, requiring that those items be
recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed
production overheads be based on the normal capacity of the production facilities. The adoption of
SFAS No. 151 beginning September 1, 2005 will not have a material effect on the Companys results
of operation, financial position or liquidity. In December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123R). SFAS No. 123R, which is effective for the first interim or annual period
beginning after June 15, 2005, requires all share-based payments to employees, including grants of
stock options, to be recognized in the financial statements based on their fair values. In
addition, two transition alternatives are permitted at the time of adoption of this statement,
restating prior year financial statements or recognizing adjustments to share-based liabilities as
the cumulative effect of a change in accounting principle. The adoption of SFAS No. 123R will
increase the Companys compensation costs and share-based liabilities. The Company is studying the
requirements of this standard and, at this time, cannot reasonably estimate the impact of SFAS No.
123R on its financial statements. Risks and Uncertainties The availability and cost of agricultural products Penford purchases are vulnerable to weather and
other factors beyond its control. Approximately 30% of Penfords manufacturing costs are the costs of agricultural raw
materials, corn, wheat flour and maize. Weather conditions, plantings and global supply, among
other things, have historically caused volatility in the supply and prices of these agricultural
products. The Company may not be able to pass through any increases in the cost of agricultural
raw materials to its customers. To manage the price volatility in the commodity markets, the
Company may purchase inventory in advance or enter into exchange traded futures or options
contracts. Despite these hedging activities, Penford may not be successful in limiting its
exposure to market fluctuations in the cost of agricultural raw materials. Increases in the cost
of corn, wheat flour, maize and potato starch due to weather conditions or other factors beyond
Penfords control and that cannot be passed through to customers will reduce Penfords future
profitability. Increases in energy costs will reduce the Companys profitability. Electricity and natural gas comprise approximately 15% of the cost of manufacturing the
Companys products in North America. Natural gas is used extensively in the Industrial Ingredients
 North America business to dry the starch products. The prices of these inputs to the
manufacturing process fluctuate based on anticipated changes in supply and demand, weather and the
prices of alternative fuels. Penford may use short-term purchase contracts or exchange traded
futures or option contracts to reduce the price volatility of natural gas. Penford may not be able
to pass on increases in energy costs to its customers and margins and profitability would be
adversely affected. The loss of a major customer could have an adverse effect on Penfords results of operations. None of the Companys customers constituted 10% of sales in the last three fiscal years.
However, in the first quarter of fiscal 2005, sales to the top ten customers and sales to the
largest customer represented 46% and 8.5%, respectively, of total consolidated net sales.
Customers place orders on an as-needed basis and generally can change their suppliers without
penalty. If the Company lost one or more of its major customers, or if one or more of its
customers significantly reduced its orders, sales and results of operations would be adversely
affected. 15




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In order to be successful, Penford must retain and motivate key employees. In order to be successful, the Company must retain and motivate executives and other key
employees. In particular, hiring and retaining qualified personnel in management, research and
development, sales and marketing, manufacturing and finance is critical to Penfords future.
Penford faces intense competition for its personnel needs. The loss of key employees could have a
significant impact on the Companys results of operations and stock price. Changes in interest rates will affect Penfords profitability. At November 30, 2004, approximately $74.2 million of the Companys outstanding debt is subject
to variable interest rates which move in direct proportion to the London InterBank Offered Rate
(LIBOR) or the Australian Bank Bill Buying Rate (BBSY). Significant changes in these interest
rates would materially affect Penfords profitability. Unanticipated changes in tax rates or exposure to additional income tax liabilities could affect
Penfords profitability. Penford is subject to income taxes in the United States, Australia and New Zealand. The
effective tax rates could be adversely affected by changes in the mix of earnings in countries with
differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities or
changes in tax laws. The carrying value of deferred tax assets, which are predominantly in the
United States, is dependent on Penfords ability to generate future taxable income in the United
States. Profitability is subject to risks associated with changes in foreign exchange currency rates. In the ordinary course of business, Penford is subject to risks associated with changing
foreign exchange rates. In the first quarter of fiscal 2005, approximately 35% of the Companys
revenue is denominated in currencies other than the U.S. dollar. Penfords revenues and results of
operations are affected by fluctuations in exchange rates between the U.S. dollar and the
Australian and New Zealand dollars. Provisions of Washington law could discourage or prevent a potential takeover. Penford is incorporated in the State of Washington and subject to the anti-takeover provisions
of the Washington Business Corporation Act (the Act), which prohibits the Company from engaging
in a business combination with an interested shareholder for a period of three years after the
date of the transaction in which the person became an interested shareholder, unless the business
combination is approved in a prescribed manner. The application of the anti-takeover provisions of
the Act could have the effect of delaying or preventing a change of control in the ownership of the
Company. 
 Item 3: Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to market risks from adverse changes in interest rates, foreign
currency exchange rates and commodity prices. Since August 31, 2004, there have been no
significant changes in the Companys exposure to market risks. 16




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Item 4: Controls and Procedures. Under the supervision and with the participation of management, including the Chief Executive
Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and
operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective such that information related
to the Company required to be disclosed in the Securities and Exchange Commission (SEC) reports
(i) is recorded, processed, summarized and reported within the time periods specified in SEC rules
and forms, and (ii) is accumulated and communicated to the Companys management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. 
 PART II  OTHER INFORMATION 
 Item 6: Exhibits. Exhibits  10.1
    First Amendment to Credit Agreement dated November 26, 2004, by and among
Penford Corporation, Penford Australia Limited and Penford Holdings Pty.
Limited as borrowers, and Harris Trust and Savings Bank, as
administrative agent31.1
    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 17




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. Penford Corporation(Registrant)January 7, 2005
    
    /s/ Steven O. CordierSteven O. CordierSenior Vice President, Chief Financial Officer andCorporate Secretary
 18




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EXHIBIT INDEX Exhibit No.
    
    Description10.1
    
    First Amendment to Credit Agreement dated November 26, 2004,
by and among Penford Corporation, Penford Australia Limited
and Penford Holdings Pty. Limited as borrowers, and Harris
Trust and Savings Bank, as administrative agent31.1
    
    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
 19