##### 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 May 31, 2005 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)
 Registrants telephone number, including area code: (303) 649-1900 Former Address: 7094 South Revere Parkway, Englewood, Colorado 80112-3932 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 þ  No o Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ  No o The net number of shares of the Registrants common stock (the Registrants only outstanding class
of stock) outstanding as of July 7, 2005 was 8,825,133.




---



##### Table of Contents



PENFORD CORPORATION AND SUBSIDIARIES INDEX PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets  May 31, 2005 and August 31, 2004
    
    
    3Condensed Consolidated Statements of Operations  Three and Nine Months ended May 31, 2005
and 2004
    
    
    4Condensed Consolidated Statements of Cash Flow  Nine Months ended May 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19PART IIOTHER INFORMATIONItem 6. Exhibits
    
    
    20Signatures
    
    
    21Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO & CFO Pursuant to Section 906
 2




---



##### Table of Contents



PART I  FINANCIAL INFORMATION 
 Item 1: Financial Statements PENFORD CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 May 31,
    
    
    August 31,(In thousands, except per share data)
    
    2005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash
    
    $
    2,330
    
    
    $
    5,915Trade accounts receivable, net
    
    
    35,841
    
    
    
    38,703Inventories
    
    
    38,872
    
    
    
    31,807Prepaid expenses
    
    
    3,541
    
    
    
    4,124Other
    
    
    2,995
    
    
    
    3,031Total current assets
    
    
    83,579
    
    
    
    83,580Property, plant and equipment, net
    
    
    127,896
    
    
    
    130,392Deferred income taxes
    
    
    13,622
    
    
    
    13,462Restricted cash value of life insurance
    
    
    10,037
    
    
    
    12,623Goodwill, net
    
    
    21,836
    
    
    
    20,171Other intangible assets, net
    
    
    2,222
    
    
    
    2,299Other assets
    
    
    3,059
    
    
    
    3,269Total assets
    
    $
    262,251
    
    
    $
    265,796LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    37,250
    
    
    $
    25,169Accrued pension liability
    
    
    1,589
    
    
    
    3,151Accrued liabilities
    
    
    8,852
    
    
    
    10,200Current portion of long-term debt
    
    
    5,637
    
    
    
    4,775Total current liabilities
    
    
    53,328
    
    
    
    43,295Long-term debt
    
    
    62,421
    
    
    
    75,551Other post-retirement benefits
    
    
    13,092
    
    
    
    12,598Deferred income taxes
    
    
    18,997
    
    
    
    20,809Other liabilities
    
    
    17,632
    
    
    
    17,824Total liabilities
    
    
    165,470
    
    
    
    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 10,806 and 10,784 shares, respectively
    
    
    10,806
    
    
    
    10,784Additional paid-in capital
    
    
    37,236
    
    
    
    36,911Retained earnings
    
    
    71,764
    
    
    
    75,585Treasury stock, at cost, 1,981 shares
    
    
    (32,757
    )
    
    
    (32,757
    )Accumulated other comprehensive income
    
    
    9,732
    
    
    
    5,196Total shareholders equity
    
    
    96,781
    
    
    
    95,719Total liabilities and shareholders equity
    
    $
    262,251
    
    
    $
    265,796
 The accompanying notes are an integral part of these statements. 3




---



##### Table of Contents



PENFORD CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited) Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,(In thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Sales
    
    $
    76,101
    
    
    $
    72,484
    
    
    $
    217,385
    
    
    $
    207,136Cost of sales
    
    
    66,061
    
    
    
    60,461
    
    
    
    196,956
    
    
    
    175,393Gross margin
    
    
    10,040
    
    
    
    12,023
    
    
    
    20,429
    
    
    
    31,743Operating expenses
    
    
    6,783
    
    
    
    6,156
    
    
    
    18,576
    
    
    
    17,330Research and development expenses
    
    
    1,447
    
    
    
    1,595
    
    
    
    4,290
    
    
    
    4,551Restructure costs, net
    
    
    
    
    
    
    384
    
    
    
    
    
    
    
    1,125Income (loss) from operations
    
    
    1,810
    
    
    
    3,888
    
    
    
    (2,437
    )
    
    
    8,737Non-operating income, net
    
    
    1,209
    
    
    
    505
    
    
    
    1,661
    
    
    
    1,010Interest expense
    
    
    1,457
    
    
    
    1,060
    
    
    
    4,077
    
    
    
    3,352Income (loss) before income taxes
    
    
    1,562
    
    
    
    3,333
    
    
    
    (4,853
    )
    
    
    6,395Income tax expense (benefit)
    
    
    (1,023
    )
    
    
    1,014
    
    
    
    (2,620
    )
    
    
    2,196Net income (loss)
    
    $
    2,585
    
    
    $
    2,319
    
    
    $
    (2,233
    )
    
    $
    4,199Weighted average common shares and
equivalents outstanding:Basic
    
    
    8,825
    
    
    
    8,771
    
    
    
    8,822
    
    
    
    8,713Diluted
    
    
    8,937
    
    
    
    8,933
    
    
    
    8,822
    
    
    
    8,835Earnings (loss) per share:Basic
    
    $
    0.29
    
    
    $
    0.26
    
    
    $
    (0.25
    )
    
    $
    0.48Diluted
    
    $
    0.29
    
    
    $
    0.26
    
    
    $
    (0.25
    )
    
    $
    0.48Dividends declared per common share
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.18
    
    
    $
    0.18
 The accompanying notes are an integral part of these
statements. 4




---



##### Table of Contents



PENFORD CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
 (Unaudited) Nine Months EndedMay 31,
    
    
    May 31,(In thousands)
    
    2005
    
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    (2,233
    )
    
    $
    4,199Adjustments to reconcile net income (loss) to net cash provided by
operations:Depreciation and amortization
    
    
    12,992
    
    
    
    13,374Deferred income taxes
    
    
    (2,091
    )
    
    
    (753
    )Loss on early extinguishment of debt
    
    
    
    
    
    
    665Gain on sale of investment
    
    
    (736
    )
    
    
    Other
    
    
    (95
    )
    
    
    1,136Change in assets and liabilities:Trade accounts receivable
    
    
    3,988
    
    
    
    (4,198
    )Prepaid expenses
    
    
    641
    
    
    
    512Inventories
    
    
    (5,639
    )
    
    
    (3,984
    )Accounts payable and accrued liabilities
    
    
    9,985
    
    
    
    4,002Taxes payable
    
    
    (1,650
    )
    
    
    88Other
    
    
    111
    
    
    
    879Net cash provided by operating activities
    
    
    15,273
    
    
    
    15,920Cash flows from investing activities:Investment in property, plant and equipment, net
    
    
    (6,553
    )
    
    
    (8,007
    )Proceeds from investments
    
    
    3,525
    
    
    
    Other
    
    
    (84
    )
    
    
    (210
    )Net cash used in investing activities
    
    
    (3,112
    )
    
    
    (8,217
    )Cash flows from financing activities:Proceeds from revolving line of credit
    
    
    3,000
    
    
    
    35,975Payments on revolving line of credit
    
    
    (13,591
    )
    
    
    (65,083
    )Proceeds from long-term debt
    
    
    
    
    
    
    50,039Payments of long-term debt
    
    
    (3,574
    )
    
    
    (24,934
    )Exercise of stock options
    
    
    215
    
    
    
    1,922Payment of loan fees
    
    
    (163
    )
    
    
    (1,733
    )Payment of dividends
    
    
    (1,588
    )
    
    
    (1,563
    )Net cash used in financing activities
    
    
    (15,701
    )
    
    
    (5,377
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (45
    )
    
    
    (729
    )Net increase (decrease) in cash and cash equivalents
    
    
    (3,585
    )
    
    
    1,597Cash and cash equivalents, beginning of period
    
    
    5,915
    
    
    
    5,697Cash and cash equivalents, end of period
    
    $
    2,330
    
    
    $
    7,294
 The accompanying notes are an integral part of these statements. 5




---



##### Table of Contents



PENFORD CORPORATION AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1BUSINESS 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 May 31, 2005 and the condensed
consolidated statements of operations and cash flows for the interim periods ended May 31, 2005 and
2004 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. 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 is not
expected to 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. In April 2005, the SEC postponed the
effective date of SFAS No. 123R until the issuers first fiscal year beginning after June 15, 2005.
Under the current rules, the Company will be required to adopt SFAS No. 123R effective September
1, 2005. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the
SECs interpretation of SFAS No. 123R. The Company is currently
evaluating the requirements of SFAS No. 123R and SAB 107. The Company expects that the
adoption of 6




---



##### Table of Contents



SFAS No. 123R will have a material effect on its results of operations and earnings per
share. The Company has not yet determined the method of adoption or the effect of adopting SFAS
No. 123R, and it has not determined whether the adoption will result in amounts that are similar to
the current proforma disclosures pursuant to SFAS No. 123. In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations (FIN No. 47), which requires an entity to recognize a liability for the
fair value of a conditional asset retirement obligation when incurred if the liabilitys fair value
can be reasonably estimated. FIN No. 47 is effective for fiscal years ending after December 15,
2005. The Company is currently evaluating the effect that the adoption will have on its results of
operations and financial position, but does not believe it will have a material impact. In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections
(SFAS No. 154), which is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The Company would be required to adopt SFAS No.
154 in fiscal 2007. SFAS No. 154 provides guidance for and reporting of accounting changes and
error corrections. It states that retrospective application, or the latest practicable date, is
the required method for reporting a change in accounting principle and the reporting of a
correction of an error. The Company is evaluating the effect that the adoption of SFAS No. 154
will have on its results of operations and financial position, but does not believe it will have a
material impact. 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 ended
    
    
    Nine months ended(In thousands, except per share data)
    
    May 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss), as reported
    
    $
    2,585
    
    
    $
    2,319
    
    
    $
    (2,233
    )
    
    $
    4,199Add: Stock-based employee compensation expense
included in reported net income, net of tax
    
    
    35
    
    
    
    21
    
    
    
    60
    
    
    
    58Less: Stock-based employee compensation expense
determined under the fair value method for all
awards, net of tax
    
    
    (153
    )
    
    
    (263
    )
    
    
    (501
    )
    
    
    (953
    )Pro forma net income (loss)
    
    $
    2,467
    
    
    $

    2,077
    
    
    $
    (2,674
    )
    
    $
    3,304Earnings (loss) per share:Reported basic earnings (loss) per common share
    
    $
    0.29
    
    
    $
    0.26
    
    
    $
    (0.25
    )
    
    $
    0.48Reported diluted earnings (loss) per common share
    
    $
    0.29
    
    
    $
    0.26
    
    
    $
    (0.25
    )
    
    $
    0.48Pro forma basic earnings (loss) per common share
    
    $
    0.28
    
    
    $
    0.24
    
    
    $
    (0.30
    )
    
    $
    0.38Pro forma diluted earnings (loss) per common share
    
    $
    0.28
    
    
    $
    0.23
    
    
    $
    (0.30
    )
    
    $
    0.37
 7




---



##### Table of Contents



3INVENTORIES The components of inventory are as follows: May 31,
    
    
    August 31,2005
    
    
    2004(In thousands)Raw materials
    
    $
    19,443
    
    
    $
    13,996Work in progress
    
    
    681
    
    
    
    687Finished goods
    
    
    18,748
    
    
    
    17,124Total inventories
    
    $
    38,872
    
    
    $
    31,807
 4PROPERTY, PLANT AND EQUIPMENT May 31,
    
    
    August 31,2005
    
    
    2004(In thousands)Land
    
    $
    16,820
    
    
    $
    15,952Plant and equipment
    
    
    298,364
    
    
    
    293,721Construction in progress
    
    
    15,203
    
    
    
    10,526330,387
    
    
    
    320,199Accumulated depreciation
    
    
    (202,491
    )
    
    
    (189,807
    )Net property, plant and equipment
    
    $
    127,896
    
    
    $
    130,392
 Changes in Australian and New Zealand currency exchange rates have increased net property,
plant and equipment in the first nine months of fiscal 2005 by approximately $3.4 million. 5DEBT At May 31, 2005, the Company had $23.5 million outstanding under its revolving credit
facilities and $44.5 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 $12.4
million at May 31, 2005. The Company was in compliance as of May 31, 2005 and 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- and nine-month periods ended May 31, 2005 and
2004 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. On a quarterly
basis, the Company reviews its estimate of the effective income tax rate expected to be applicable
for the full fiscal year. This rate is used to calculate income tax expense or benefit on
year-to-date pre-tax income or loss. Income tax expense or benefit for the current interim period
is the difference between the computed year-to-date income tax amount and the tax expense or
benefit reported for previous quarters. In reviewing its effective tax rate, the Company uses
estimates of the amounts of permanent differences between book and tax accounting and projections
of fiscal year pre-tax income or loss. Currently, the Companys best estimate of the annual
effective tax rate is 54%. This rate differs from that used in the first half of fiscal 2005
because permanent differences and credits had a greater impact on the tax rate due to changes in
projected financial results for the full fiscal year. The tax benefit recognized in the third
quarter of fiscal 8




---



##### Table of Contents



2005 reflects the Companys current estimated tax rate applied to year-to-date
pre-tax losses, and includes an adjustment increasing its tax benefit related to its first half
pre-tax losses by $1.9 million. 7OTHER COMPREHENSIVE INCOME The components of total comprehensive income (loss) are as follows: Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Net income (loss)
    
    $
    2,585
    
    
    $
    2,319
    
    
    $
    (2,233
    )
    
    $
    4,199Foreign currency translation adjustments
    
    
    (1,796
    )
    
    
    (4,122
    )
    
    
    4,657
    
    
    
    4,283Change in unrealized gains on derivative
instruments that qualify as cash flow
hedges
    
    
    (137
    )
    
    
    82
    
    
    
    (121
    )
    
    
    823Total comprehensive income (loss)
    
    $
    652
    
    
    $
    (1,721
    )
    
    $
    2,303
    
    
    $
    9,305
 8NON-OPERATING INCOME, NET Non-operating income, net consists of the following: Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Loss on early extinguishment of debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (665
    )Gain on sale of investment
    
    
    736
    
    
    
    
    
    
    
    736
    
    
    
    150Royalty and licensing income
    
    
    436
    
    
    
    434
    
    
    
    963
    
    
    
    1,197Other
    
    
    37
    
    
    
    71
    
    
    
    (38
    )
    
    
    328Total
    
    $
    1,209
    
    
    $
    505
    
    
    $
    1,661
    
    
    $
    1,010
 In the third quarter of fiscal 2005, the Company sold a majority of its investment in a small
Australian start-up company and recognized a $0.7 million pre-tax gain on the transaction. 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




---



##### Table of Contents



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 (R) for the three and nine months ended May 31,
2005 and 2004. Defined benefit pension plans
    
    Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Service cost
    
    $
    266
    
    
    $
    229
    
    
    $
    799
    
    
    $
    686Interest cost
    
    
    516
    
    
    
    472
    
    
    
    1,549
    
    
    
    1,417Expected return on plan assets
    
    
    (467
    )
    
    
    (434
    )
    
    
    (1,401
    )
    
    
    (1,302
    )Amortization of transition
obligation
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    90Amortization of prior service cost
    
    
    49
    
    
    
    27
    
    
    
    146
    
    
    
    82Amortization of actuarial losses
    
    
    120
    
    
    
    110
    
    
    
    360
    
    
    
    328Net periodic benefit cost
    
    $
    484
    
    
    $
    434
    
    
    $
    1,453
    
    
    $
    1,301
 Post-retirement health care plans
    
    Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Service cost
    
    $
    88
    
    
    $
    126
    
    
    $
    264
    
    
    $
    379Interest cost
    
    
    194
    
    
    
    213
    
    
    
    581
    
    
    
    639Amortization of prior service cost
    
    
    (38
    )
    
    
    
    
    
    
    (114
    )
    
    
    Amortization of actuarial losses
    
    
    9
    
    
    
    15
    
    
    
    29
    
    
    
    44Net periodic benefit cost
    
    $
    253
    
    
    $
    354
    
    
    $
    760
    
    
    $
    1,062
 The net post-retirement benefit costs for the three and nine months ended May 31, 2005
declined compared to the same periods last year due to plan changes retroactive to September 1,
2004 pursuant to a new union contract at the Companys Iowa manufacturing facility. 10




---



##### Table of Contents



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
$163,000 and $881,000 for the three and nine month periods ended May 31, 2005, respectively, and
$192,000 and $459,000 in the three and nine month periods ended May 31, 2004, respectively, is
presented separately since the chief operating decision maker views segment results prior to
intercompany eliminations. Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Sales:Industrial IngredientsNorth America
    
    $
    38,625
    
    
    $
    38,679
    
    
    $
    109,394
    
    
    $
    107,006Food IngredientsNorth America
    
    
    13,911
    
    
    
    11,417
    
    
    
    38,035
    
    
    
    34,283Australia/New Zealand operations
    
    
    23,728
    
    
    
    22,580
    
    
    
    70,837
    
    
    
    66,306Intercompany sales
    
    
    (163
    )
    
    
    (192
    )
    
    
    (881
    )
    
    
    (459
    )$
    76,101
    
    
    $
    72,484
    
    
    $
    217,385
    
    
    $
    207,136Income (loss) from operations:Industrial IngredientsNorth America (1)
    
    $
    1,842
    
    
    $
    2,964
    
    
    $
    (1,944
    )
    
    $
    6,079Food IngredientsNorth America
    
    
    1,825
    
    
    
    1,096
    
    
    
    4,320
    
    
    
    3,714Australia/New Zealand operations (2)
    
    

    (105
    )
    
    
    1,692
    
    
    
    143
    
    
    
    3,500Corporate and other
    
    
    (1,752
    )
    
    
    (1,864
    )
    
    
    (4,956
    )
    
    
    (4,556
    )$
    1,810
    
    
    $
    3,888
    
    
    $
    (2,437
    )
    
    $
    8,737
 
 (1)
    
    Restructuring costs of $487,000 have been included in income from operations in the nine
month periods ended May 31, 2004.(2)
    
    Restructuring costs of $384,000 and $638,000 have been included in income from
operations in the three and nine months ended May 31, 2004, respectively. May 31,
    
    
    August 31,2005
    
    
    2004(In thousands)Total assets:Industrial IngredientsNorth America
    
    $
    97,377
    
    
    $
    101,620Food IngredientsNorth America
    
    
    32,399
    
    
    
    32,323Australia/New Zealand operations
    
    
    107,067
    
    
    
    99,344Corporate and other
    
    
    25,408
    
    
    
    32,509$
    262,251
    
    
    $
    265,796
 11




---



##### Table of Contents



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 and nine
months ended May 31, 2005 and 2004. Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Weighted average common shares
outstanding
    
    
    8,825
    
    
    
    8,771
    
    
    
    8,822
    
    
    
    8,713Net effect of dilutive stock options
    
    
    112
    
    
    
    162
    
    
    
    
    
    
    
    122Weighted average common shares,
outstanding, assuming dilution
    
    
    8,937
    
    
    
    8,933
    
    
    
    8,822
    
    
    
    8,835
 Diluted earnings per share is calculated by dividing net income by the average common shares
outstanding plus additional common shares that would have been outstanding assuming the exercise
of in-the-money stock options, using the treasury stock method. Weighted-average stock options
to purchase 372,000 and 1,096,065 common stock for the three and nine months ended May 31, 2005
and 210,000 and 254,820 options to purchase common stock for the three and nine months ended May
31, 2004 were excluded from the calculation of diluted earnings per share because they were
antidilutive. 12LITIGATION In October 2004, Penford Products Co. (Penford Products), a wholly-owned subsidiary of the
Company, was served with a lawsuit filed by Graphic Packaging International, Inc. (Graphic) in
the Fourth Judicial District, Ouachita Parish, State of Louisiana. The petition seeks monetary
damages for alleged breach of contract, negligence and tortious misrepresentation. These claims
arise out of an alleged agreement obligating Penford Products to supply goods to Graphic and
Penford Products alleged breach of such agreement, together with conduct related to such alleged
breach. Penford has filed an answer generally denying all liability and has countersued for
damages. Discovery is proceeding in this case. The Company cannot at this time determine the
likelihood of any outcome or estimate damages, if any. 12




---



##### Table of Contents



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; changes in the assumptions used to
determine the effective income tax rate; 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. 13




---



##### Table of Contents



Consolidated sales for the three months ended May 31, 2005 increased 5% to $76.1 million from
$72.5 million in the third quarter of fiscal 2004. Quarterly sales increases were driven by higher
volumes in the Food IngredientsNorth America and Australian operations, improved pricing in the
Industrial IngredientsNorth America segment and a stronger Australian dollar. Quarterly gross
margin as a percent of sales declined to 13.2% in the third quarter of fiscal 2005 from 16.6% in
the same quarter last year due to higher energy, freight and petroleum-based chemical costs in all
business segments. Third quarter 2004 operating income included a $0.4 million pre-tax charge
related to restructuring costs in the Australian business segment. Year-to-date sales rose 5% to $217.4 million from $207.1 million last year, reflecting
favorable foreign exchange rates, which contributed 2% of the consolidated sales growth, sales
volume improvement in the Australia/New Zealand and Food IngredientsNorth America business
segments, and improved pricing and mix in the North American operations. Operating loss for the
nine months ended May 31, 2005 was $2.4 million compared to income of $8.7 million for the same
nine-month period last year. Gross margin as a percent of sales declined to 9.4% from 15.3% last
year on $4 million of incremental operating costs related to the Cedar Rapids strike which was
settled mid-first quarter, higher energy and chemical costs, and higher manufacturing expenses in
Australia. Year-to-date operating income for fiscal 2004 included $1.1 million in pre-tax
restructuring costs in the Australian and Industrial IngredientsNorth America businesses. Fiscal 2005 third quarter and year-to-date operating expenses increased by $0.6 million and
$1.2 million, respectively, primarily due to increases in professional fees associated with the
initial attestation on internal controls as required by the Sarbanes-Oxley Act of 2002 and higher
employee costs. A discussion of segment results of operations and the effective tax rate follows. Sales Fiscal 2005 third quarter sales of $38.6 million at the Industrial IngredientsNorth America
business unit were comparable to sales in the third quarter of last year. Sales volumes declined
6% due to reduced shipments of lower value-added formulations. The reduction in sales volumes was
offset by improvements in product mix and unit pricing in core, international and specialty product
categories. Sales of specialty starches rose 10% in the third quarter of fiscal 2005 over the same
period last year. Sales for the nine-month period ended May 31, 2005 increased by 2% over the same
period in fiscal 2004 to $109.4 million. The favorable effects of product mix, higher average
selling prices and a 35% increase in sales of higher margin specialty starches were offset by a 3%
year-to-date sales volume decline. Sales of $23.7 million for the third quarter of fiscal 2005 at the Australia/New Zealand
operations rose 5% over the same period of fiscal 2004 on strong foreign currency exchange rates
and a sales volume increase of 3%. Third quarter sales in local currency were comparable to the
same quarter last year. These positive impacts were offset by competitive pricing pressures from
imported products as the Australian dollar continued to appreciate. Fiscal 2005 year-to-date sales
of $70.8 million grew 7% over the same period last year. Strong Australian and New Zealand foreign
currency exchange rates contributed 6% of the revenue increase, with the remainder attributable to
volume growth of 7% offset by unfavorable product mix and continued offshore competition. In local
currency, sales rose 2%. Third quarter fiscal 2005 sales for the Food IngredientsNorth America business of $13.9
million expanded $2.5 million, or 22%, compared to the third quarter of last year on volume
increases of 21%. Sales of high-margin formulations for the nutrition, or low-carbohydrate, market
were strong, accounting for approximately $1.8 million of the sales growth in the third quarter.
The Company expects that fourth quarter sales for nutrition food applications will approximate
third quarter sales, but that this order level will not be sustained into fiscal 2006. Sales for
the nine months ended May 31, 2005 grew $3.8 million, or 11%, to $38.0 million compared to $34.3
million in the same period in fiscal 2004. Volume increases contributed 8% of the sales growth and
the remainder is due to favorable product mix. Sales of nutrition applications represented $2.7
million of the nine-month revenue increase. 14




---



##### Table of Contents



Income from operations Income from operations for the third quarter of 2005 at Penfords Industrial IngredientsNorth
America business unit declined to $1.8 million from $3.0 million for the prior year quarter. Gross
margin as a percent of sales was 13.0% in the quarter ended May 31, 2005 compared to 15.0% for the
same period last year. The positive impact of improved unit pricing and sales of higher margin
specialty starches was offset by continued high chemical and energy costs, which increased by $2.1
million over the prior year quarter, and by increases in other manufacturing expenses. Losses from
operations for the first nine months of fiscal 2005 were $1.9 million compared to income of $6.1
million in fiscal 2004. The primary factors contributing to this decrease were incremental costs
of approximately $4 million related to the labor strike at the Companys Iowa manufacturing
facility which ended mid-first quarter of fiscal 2005, and increased energy and chemical costs of
$4.5 million. Included in year-to-date fiscal 2004 operating income was a $0.5 million pre-tax
charge related to a workforce reduction in this business segment. Income from operations at the Companys Australia/New Zealand operations was a loss of $0.1
million for the quarter ended May 31, 2005 compared to income of $1.7 million last year. Third
quarter gross margin as a percent of sales decreased from 15.0% last year to 5.1% in the current
year quarter. Approximately one-half of the margin decline was attributable to rising costs of
oil-based manufacturing inputs, primarily freight, energy and chemicals. The remainder of the
decrease is due to lower plant yields and utilization as processes and equipment are being
reconfigured to manufacture different product lines. Fiscal 2005 year-to-date operating income
decreased by $3.4 million to $0.1 million compared to the prior year period and gross margin as a
percent of sales was 5.9% compared to 12.0% last year. The declines in gross margin and operating
income for the nine-month period compared to last year are due to the same factors and cost
increases as for the third quarter. Included in fiscal 2004 year-to-date operating results was
$0.6 million of severance costs related to workforce reductions. Third quarter 2005 income from operations at the Food IngredientsNorth American business unit
grew 67% from $1.1 million last year to $1.8 million. Gross margin as a percent of sales improved
to 27.4% from 24.8% last year on a quarterly sales volume increase of 21%, higher margins generated
by sales of low carbohydrate product applications, and improved plant utilization. Fiscal 2005
year-to-date operating income increased $0.6 million to $4.3 million compared to the same period
last year and gross margin as a percent of sales for both nine-month periods was 25.4%. Corporate operating expenses Corporate operating expenses for the three months ended May 31, 2005 declined $0.1 million
compared to the prior year period as a result of lower overall discretionary spending. Operating
expenses for fiscal 2005 year-to-date increased by $0.4 million over the prior year period
primarily due to increases in professional fees associated with the initial attestation on internal
controls required by the Sarbanes-Oxley Act of 2002. Interest and taxes Fiscal 2005 interest expense increased by $0.4 million and $0.7 million, respectively, for the
three- and nine-month periods ended May 31, 2005 compared to the same periods last year on higher
short-term interest rates in the United States. The Companys effective tax rate for the three- and nine-month periods ended May 31, 2005 and
2004 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. On a quarterly
basis, the Company reviews its estimate of the effective income tax rate expected to be applicable
for the full fiscal year. This rate is used to calculate income tax expense or benefit on
year-to-date pre-tax income or loss. Income tax expense or benefit for the current interim period
is the difference between the computed year-to-date income tax amount and the tax expense or
benefit reported for previous quarters. In reviewing its effective tax rate, the Company uses
estimates of the amounts of permanent differences between book and tax accounting and projections
of fiscal year pre-tax income or loss. Currently, the Companys best estimate of the annual
effective tax rate is 54%. This rate differs from that used in the first half of fiscal 2005
because permanent differences and credits had a greater impact on the tax rate due to changes in
projected financial results for the full fiscal year. The tax benefit recognized in the third
quarter of fiscal 15




---



##### Table of Contents



2005
reflects the Companys current estimated tax rate applied to year-to-date pre-tax losses, and
includes an adjustment increasing its tax benefit related to its first half pre-tax losses by $1.9
million. Non-operating income, net Non-operating income, net consists of the following: Three months ended
    
    
    Nine months endedMay 31,
    
    
    May 31,
    
    
    May 31,
    
    
    May 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Loss on early extinguishment of debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (665
    )Gain on sale of investment
    
    
    736
    
    
    
    
    
    
    
    736
    
    
    
    150Royalty and licensing income
    
    
    436
    
    
    
    434
    
    
    
    963
    
    
    
    1,197Other
    
    
    37
    
    
    
    71
    
    
    
    (38
    )
    
    
    328Total
    
    $
    1,209
    
    
    $
    505
    
    
    $
    1,661
    
    
    $
    1,010
 In the third quarter of fiscal 2005, the Company sold a majority of its investment in a small
Australian start-up company and recognized a $0.7 million pre-tax gain on the transaction. 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 Penford had working capital of $30.3 million and $40.3 million at May 31, 2005 and August 31,
2004, respectively. Cash flow from operations was $12.0 million and $7.1 million, respectively,
for the quarters ended May 31, 2005 and 2004. The increase in operating cash flow was due to the
positive impacts of programs to improve assets returns and working capital balances. At May 31,
2005, the Company had $68.0 million outstanding under its revolving credit facilities and term
loans, a reduction of $12.3 million since August 31, 2004. At May 31, 2005, the Company had $23.5 million outstanding under its revolving credit
facilities and $44.5 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
3.50 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 $12.4
million at May 31, 2005. The Company was in compliance as of May 31, 2005 and expects to be in
compliance with these revised covenants for the remainder of fiscal 2005. The Company paid dividends of $1.6 million during the nine months ended May 31, 2005, which
represents a quarterly rate of $0.06 per share, the same per share dividend rate as the nine months
ended May 31, 2004. On June 28, 2005, the Board of Directors declared a dividend of $0.06 per
common share payable on September 2, 2005 to shareholders of record as of August 12, 2005. 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. 16




---



##### Table of Contents



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 is not expected to 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. In April 2005, the SEC postponed the
effective date of SFAS No. 123R until the issuers first fiscal year beginning after June 15, 2005.
Under the current rules, the Company will be required to adopt SFAS No. 123R effective September
1, 2005. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the
SECs interpretation of SFAS No. 123R. The Company is currently evaluating the requirements of
SFAS No. 123R and SAB 107. The Company expects that the adoption of SFAS No. 123R will have a
material effect on its results of operations and earnings per share. The Company has not yet
determined the method of adoption or the effect of adopting SFAS No. 123R, and it has not
determined whether the adoption will result in amounts that are similar to the current proforma
disclosures pursuant to SFAS No. 123. In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations (FIN No. 47), which requires an entity to recognize a liability for the
fair value of a conditional asset retirement obligation when incurred if the liabilitys fair value
can be reasonably estimated. FIN No. 47 is effective for fiscal years ending after December 15,
2005. The Company is currently evaluating the effect that the adoption will have on its results of
operations and financial position, but does not believe it will have a material impact. In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections
(SFAS No. 154), which is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The Company would be required to adopt SFAS No.
154 in fiscal 2007. SFAS No. 154 provides guidance for and reporting of accounting changes and
error corrections. It states that retrospective application, or the latest practicable date, is
the required method for reporting a change in accounting principle and the reporting of a
correction of an error. The Company is evaluating the effect that the adoption of SFAS No. 154
will have on its results of operations and financial position, but does not believe it will have a
material impact. 17




---



##### Table of Contents



Risks and Uncertainties The availability and cost of the 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 potato starch. 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, 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 nine months of fiscal 2005, sales to the top ten customers and sales to the largest
customer represented 44% and 9.0%, 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. 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 May 31, 2005, approximately $58.3 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. The amount of income taxes Penford pays is subject to audit and a material assessment by a
governing tax authority could affect profitability. 18




---



##### Table of Contents



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. For the nine months ended May 31, 2005, approximately 33% 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. 
 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 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. 19




---



##### Table of Contents



PART II  OTHER INFORMATION 
 Item 6: Exhibits. Exhibits  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 20




---



##### Table of Contents



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)July 11, 2005
    
    
    
    /s/ Steven O. CordierSteven O. CordierSenior Vice President and Chief Financial
Officer
 21




---



##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    Description31.1
    
    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
 22