##### Table of Contents



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




---



##### 



PENFORD CORPORATION AND SUBSIDIARIES
 INDEX
 PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets  November 30, 2005 and August 31, 2005
    
    
    3Condensed Consolidated Statements of Operations  Three Months ended November 30, 2005
and 2004
    
    
    4Condensed Consolidated Statements of Cash Flow  Three Months ended November 30, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    23PART IIOTHER INFORMATIONItem 6. Exhibits
    
    
    24Signatures
    
    
    25Certifications of CEO Pursuant to Section 302Certifications of CFO Pursuant to Section 302Certifications of CEO and 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
 November 30,
    
    
    August 31,(In thousands, except per share data)
    
    2005
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash
    
    $
    4,020
    
    
    $
    5,367Trade accounts receivable, net
    
    
    41,517
    
    
    
    39,653Inventories
    
    
    34,701
    
    
    
    34,801Prepaid expenses
    
    
    4,381
    
    
    
    5,084Other
    
    
    4,425
    
    
    
    4,032Total current assets
    
    
    89,044
    
    
    
    88,937Property, plant and equipment, net
    
    
    126,393
    
    
    
    125,267Restricted cash value of life insurance
    
    
    10,179
    
    
    
    10,132Goodwill, net
    
    
    21,157
    
    
    
    21,420Other intangible assets, net
    
    
    3,101
    
    
    
    3,121Other assets
    
    
    1,003
    
    
    
    1,040Total assets
    
    $
    250,877
    
    
    $
    249,917LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Cash overdraft, net
    
    $
    1,517
    
    
    $
    777Current portion of long-term debt and capital lease obligations
    
    
    4,272
    
    
    
    4,022Accounts payable
    
    
    32,671
    
    
    
    35,941Accrued pension liability
    
    
    2,606
    
    
    
    2,302Accrued liabilities
    
    
    7,899
    
    
    
    10,324Total current liabilities
    
    
    48,965
    
    
    
    53,366Long-term debt and capital lease obligations
    
    
    67,333
    
    
    
    62,107Other post-retirement benefits
    
    
    13,231
    
    
    
    13,091Deferred income taxes
    
    
    4,598
    
    
    
    4,353Other liabilities
    
    
    16,943
    
    
    
    16,974Total liabilities
    
    
    151,070
    
    
    
    149,891Shareholders 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 10,858 and 10,849 shares, respectively
    
    
    10,858
    
    
    
    10,849Additional paid-in capital
    
    
    38,023
    
    
    
    37,728Retained earnings
    
    
    75,703
    
    
    
    76,040Treasury stock, at cost, 1,981 shares
    
    
    (32,757
    )
    
    
    (32,757
    )Accumulated other comprehensive income
    
    
    7,980
    
    
    
    8,166Total shareholders equity
    
    
    99,807
    
    
    
    100,026Total liabilities and shareholders equity
    
    $
    250,877
    
    
    $
    249,917
 The accompanying notes are an integral part of these statements.
 3




---



##### Table of Contents



PENFORD CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  Three months endedNovember 30,
    
    
    November 30,(In thousands, except per share data)
    
    2005
    
    
    2004Sales
    
    $
    77,903
    
    
    $
    72,065Cost of sales
    
    
    67,503
    
    
    
    68,836Gross margin
    
    
    10,400
    
    
    
    3,229Operating expenses
    
    
    7,738
    
    
    
    5,808Research and development expenses
    
    
    1,437
    
    
    
    1,412Income (loss) from operations
    
    
    1,225
    
    
    
    (3,991
    )Non-operating income, net
    
    
    362
    
    
    
    81Interest expense
    
    
    1,333
    
    
    
    1,260Income (loss) before income taxes
    
    
    254
    
    
    
    (5,170
    )Income tax expense (benefit)
    
    
    58
    
    
    
    (1,344
    )Net income (loss)
    
    $
    196
    
    
    $
    (3,826
    )Weighted average common shares and
equivalents outstanding:Basic
    
    
    8,877
    
    
    
    8,817Diluted
    
    
    8,923
    
    
    
    8,817Earnings (loss) per share:Basic
    
    $
    0.02
    
    
    $
    (0.43
    )Diluted
    
    $
    0.02
    
    
    $
    (0.43
    )Dividends declared per common share
    
    $
    0.06
    
    
    $
    0.06
 The accompanying notes are an integral part of these statements.
 4




---



##### Table of Contents



PENFORD CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
  Three Months EndedNovember 30,
    
    
    November 30,(In thousands)
    
    2005
    
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    196
    
    
    $
    (3,826
    )Adjustments to reconcile net income (loss) to net cash used
in operations:Depreciation and amortization
    
    
    3,844
    
    
    
    4,290Stock-based compensation
    
    
    304
    
    
    
    33Deferred income taxes
    
    
    (141
    )
    
    
    (716
    )Other
    
    
    (158
    )
    
    
    (35
    )Change in assets and liabilities:Trade accounts receivable
    
    
    (1,968
    )
    
    
    1,188Prepaid expenses
    
    
    702
    
    
    
    (161
    )Inventories
    
    
    (54
    )
    
    
    1,738Accounts payable and accrued liabilities
    
    
    (4,784
    )
    
    
    (3,154
    )Taxes payable
    
    
    (673
    )
    
    
    (877
    )Other
    
    
    736
    
    
    
    480Net cash used in operating activities
    
    
    (1,996
    )
    
    
    (1,040
    )Cash flows from investing activities:Investment in property, plant and equipment, net
    
    
    (5,243
    )
    
    
    (1,933
    )Other
    
    
    (58
    )
    
    
    (68
    )Net cash used in investing activities
    
    
    (5,301
    )
    
    
    (2,001
    )Cash flows from financing activities:Proceeds from revolving line of credit
    
    
    6,719
    
    
    
    3,000Payments of long-term debt
    
    
    (1,000
    )
    
    
    (1,009
    )Exercise of stock options
    
    
    
    
    
    
    195Payment of loan fees
    
    
    (15
    )
    
    
    (146
    )Increase in cash overdraft
    
    
    740
    
    
    
    Payment of dividends
    
    
    (531
    )
    
    
    (528
    )Other
    
    
    (4
    )
    
    
    Net cash provided by financing activities
    
    
    5,909
    
    
    
    1,512Effect of exchange rate changes on cash and cash equivalents
    
    
    41
    
    
    
    (39
    )Net decrease in cash and cash equivalents
    
    
    (1,347
    )
    
    
    (1,568
    )Cash and cash equivalents, beginning of period
    
    
    5,367
    
    
    
    5,915Cash and cash equivalents, end of period
    
    $
    4,020
    
    
    $
    4,347
 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
   2BASIS OF PRESENTATION
 Consolidation
  Recent Accounting Pronouncements
    6




---



##### Table of Contents



3STOCK-BASED COMPENSATION
 Stock Option Plans
   General Option Information
  WeightedWeighted
    
    AverageNumber of
    
    Average
    
    Remaining
    
    AggregateShares
    
    Exercise Price
    
    Term (in years)
    
    Intrinsic ValueOutstanding Balance, August 31, 2005
    
    
    1,107,535
    
    
    
    13.96Granted
    
    
    93,500
    
    
    
    13.34Exercised
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Outstanding Balance, November 30, 2005
    
    
    1,201,035
    
    
    
    13.91
    
    
    
    6.87
    
    
    $
    856,500Options Exercisable at November 30, 2005
    
    
    741,285
    
    
    
    13.73
    
    
    
    5.92
    
    
    $
    746,900
    7




---



##### Table of Contents



Options Outstanding
    
    Options ExercisableWtd. Avg.Remaining
    
    Wtd. Avg.
    
    
    
    
    
    Wtd. Avg.Number of
    
    Contractual
    
    Exercise
    
    Number of
    
    ExerciseRange of Exercise Prices
    
    Options
    
    Life (years)
    
    Price
    
    Options
    
    Price$    6.02  11.00
    
    
    131,898
    
    
    
    5.13
    
    
    $
    9.21
    
    
    
    131,898
    
    
    $
    9.2111.01  14.00
    
    
    616,137
    
    
    
    7.17
    
    
    
    12.86
    
    
    
    338,137
    
    
    
    12.7714.01  17.69
    
    
    453,000
    
    
    
    6.96
    
    
    
    16.70
    
    
    
    271,250
    
    
    
    17.101,201,035
    
    
    
    
    
    
    
    
    
    
    
    741,285
 Adoption of SFAS No. 123R
    Valuation and Assumptions
  8




---



##### Table of Contents



1994 Plan
    
    Directors Plan2005
    
    2004
    
    2005
    
    2004Expected volatility
    
    
    52
    %
    
    
    58
    %
    
    
    
    
    
    
    58
    %Expected life (years)
    
    
    5.0
    
    
    
    4.1
    
    
    
    
    
    
    
    5.0Interest rate (percent)
    
    
    4.4-4.5
    
    
    
    3.7-4.0
    
    
    
    
    
    
    
    3.7-4.0Dividend yield
    
    
    1.7
    %
    
    
    1.6
    %
    
    
    
    
    
    
    1.6
    %
 SFAS No. 123R
  Cost of sales
    
    $
    20Operating expenses
    
    
    262Research and development expenses
    
    
    12Total stock-based compensation expense
    
    $
    294Tax benefit
    
    
    100Total stock-based compensation expense, net of tax
    
    $
    194
  Pro-forma Information under SFAS 123 for Periods Prior to Fiscal 2006
  Three monthsended(In thousands, except per share data)
    
    November 30, 2004Net loss, as reported
    
    $
    (3,826
    )Add: Stock-based employee compensation expense
included in reported net income, net of tax
    
    
    17Less: Stock-based employee compensation expense
determined under the fair value method for all
awards, net of tax
    
    
    (267
    )Pro forma net loss
    
    $
    (4,076
    )Loss per share:Reported basic loss per common share
    
    $
    (0.43
    )Reported diluted loss per common share
    
    $
    (0.43
    )Pro forma basic loss per common share
    
    $
    (0.46
    )Pro forma diluted loss per common share
    
    $
    (0.46
    )
 9




---



##### Table of Contents



Restricted Stock
  4INVENTORIES
  November 30,
    
    
    August 31,2005
    
    
    2005(In thousands)Raw materials
    
    $
    15,629
    
    
    $
    17,666Work in progress
    
    
    582
    
    
    
    614Finished goods
    
    
    18,490
    
    
    
    16,521Total inventories
    
    $
    34,701
    
    
    $
    34,801
 5PROPERTY, PLANT AND EQUIPMENT
 November 30,
    
    
    August 31,2005
    
    
    2005(In thousands)Land
    
    $
    15,987
    
    
    $
    15,943Plant and equipment
    
    
    307,567
    
    
    
    304,247Construction in progress
    
    
    12,287
    
    
    
    11,022335,841
    
    
    
    331,212Accumulated depreciation
    
    
    (209,448
    )
    
    
    (205,945
    )Net property, plant and equipment
    
    $
    126,393
    
    
    $
    125,267
  6DEBT
   7TAXES
  10




---



##### Table of Contents



8OTHER COMPREHENSIVE INCOME
  Three months endedNovember 30,
    
    
    November 302005
    
    
    2004(In thousands)Net income (loss)
    
    $
    196
    
    
    $
    (3,826
    )Foreign currency translation adjustments
    
    
    (492
    )
    
    
    5,701Change in unrealized gains on derivative
instruments that qualify as cash flow hedges, net of tax
    
    
    306
    
    
    
    (57
    )Total comprehensive income
    
    $
    10
    
    
    $
    1,818
 9NON-OPERATING INCOME, NET
  Three months endedNovember 30,
    
    
    November 30,2005
    
    
    2004(In thousands)Royalty and licensing income
    
    $
    423
    
    
    $
    87Other
    
    
    (61
    )
    
    
    (6
    )Total
    
    $
    362
    
    
    $
    81
  11




---



##### Table of Contents



10  PENSION AND POST-RETIREMENT BENEFIT PLANS
  Three months endedNovember 30,
    
    
    November 30,Defined benefit pension plans
    
    2005
    
    
    2004(In thousands)Service cost
    
    $
    418
    
    
    $
    250Interest cost
    
    
    525
    
    
    
    499Expected return on plan assets
    
    
    (529
    )
    
    
    (467
    )Amortization of prior service cost
    
    
    47
    
    
    
    30Amortization of actuarial losses
    
    
    151
    
    
    
    122Net periodic benefit cost
    
    $
    612
    
    
    $
    434
 Three months endedNovember 30,
    
    
    November 30,Post-retirement health care plans
    
    2005
    
    
    2004(In thousands)Service cost
    
    $
    98
    
    
    $
    148Interest cost
    
    
    196
    
    
    
    250Amortization of prior service cost
    
    
    (38
    )
    
    
    Amortization of actuarial losses
    
    
    36
    
    
    
    15Net periodic benefit cost
    
    $
    292
    
    
    $
    413
 12




---



##### Table of Contents



11SEGMENT REPORTING
  Three months endedNovember 30,
    
    
    November 30,2005
    
    
    2004(In thousands)Sales:Industrial IngredientsNorth America
    
    $
    38,480
    
    
    $
    35,135Food IngredientsNorth America
    
    
    15,090
    
    
    
    12,273Australia/New Zealand operations
    
    
    24,635
    
    
    
    25,204Intercompany sales
    
    
    (302
    )
    
    
    (547
    )$
    77,903
    
    
    $
    72,065Income (loss) from operations:Industrial IngredientsNorth America
    
    $
    574
    
    
    $
    (4,390
    )Food IngredientsNorth America
    
    
    2,401
    
    
    
    1,392Australia/New Zealand operations
    
    
    697
    
    
    
    575Corporate and other
    
    
    (2,447
    )
    
    
    (1,568
    )$
    1,225
    
    
    $
    (3,991
    )
  November 30,2005(In thousands)Industrial IngredientsNorth America
    
    $
    66Food IngredientsNorth America
    
    
    33Australia/New Zealand operations
    
    
    11Corporate
    
    
    184$
    294
  13




---



##### Table of Contents



November 30,
    
    
    August 31,2005
    
    
    2005(In thousands)Total assets:Industrial IngredientsNorth America
    
    $
    102,258
    
    
    $
    101,080Food IngredientsNorth America
    
    
    32,949
    
    
    
    33,193Australia/New Zealand operations
    
    
    104,935
    
    
    
    105,882Corporate and other
    
    
    10,735
    
    
    
    9,762$
    250,877
    
    
    $
    249,917
 12EARNINGS (LOSS) PER SHARE
 .
 Three months endedNovember 30,
    
    
    November 30,2005
    
    
    2004(In thousands)Weighted average common shares outstanding
    
    
    8,877
    
    
    
    8,817Net effect of dilutive stock options
    
    
    46
    
    
    
    Weighted average common shares,
outstanding, assuming dilution
    
    
    8,923
    
    
    
    8,817
  13LITIGATION
  14




---



##### 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 on Form 10-Q (Quarterly Report) that are
not historical facts, including, but not limited to statements found in the Notes to Condensed
Consolidated Financial Statements and in Item 2  Managements Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements that represent managements
beliefs and assumptions based on currently available information. Forward-looking statements can
be identified by the use of words such as believes, may, will, looks, should, could,
anticipates, expects, or comparable terminology or by discussions of strategies or trends.
 Although the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it cannot give any assurances that these expectations will prove to be
correct. Such statements by their nature involve substantial risks and uncertainties that could
significantly affect expected results. Actual future results could differ materially from those
described in such forward-looking statements, and the Company does not intend to update or revise
any forward-looking statements, whether as a result of new information, future events or otherwise.
Among the factors that could cause actual results to differ materially are the risks and
uncertainties discussed in this Quarterly Report, including those referenced below and in the Risk
Factors section of this Quarterly Report, 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
   15




---



##### Table of Contents



Sales
    Income from operations
   16




---



##### Table of Contents



Corporate operating expenses
  Interest and taxes
   Non-operating income, net
  Three months endedNovember 30,
    
    
    November 30,2005
    
    
    2004(In thousands)Royalty and licensing income
    
    $
    423
    
    
    $
    87Other
    
    
    (61
    )
    
    
    (6
    )Total
    
    $
    362
    
    
    $
    81
  17




---



##### Table of Contents



Liquidity and Capital Resources
     Contractual Obligations
  Recent Accounting Pronouncements
    18




---



##### Table of Contents



Critical Accounting Policies
   
    
    Evaluation of the allowance for doubtful accounts receivable
    
    Hedging activities
    
    Benefit plans
    
    Valuation of goodwill
    
    Self-insurance program
    
    Income taxes
    
    Stock-based compensation
  Evaluation of the Allowance for Doubtful Accounts Receivable
  Hedging Activities
   19




---



##### Table of Contents



Benefit Plans
  Valuation of Goodwill
  Self-insurance Program
  Income Taxes
   Stock-Based Compensation
  20




---



##### Table of Contents



Risks and Uncertainties
 The availability and cost of agricultural products Penford purchases are vulnerable to weather and
other factors beyond its control.
  Increases in energy and chemical costs will reduce the Companys profitability.
  The loss of a major customer could have an adverse effect on Penfords results of operations.
  Changes in interest rates will affect Penfords profitability.
  Unanticipated changes in tax rates or exposure to additional income tax liabilities could affect
Penfords profitability.
  21




---



##### Table of Contents



Profitability is subject to risks associated with changes in foreign exchange currency rates.
  Provisions of Washington law could discourage or prevent a potential takeover.
   Other uncertainties
  
 Item 3: Quantitative and Qualitative Disclosures About Market Risk.
  22




---



##### Table of Contents



Item 4: Controls and Procedures.
  23




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 6: 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
 24




---



##### Table of Contents



SIGNATURES
  Penford Corporation(Registrant)January 9, 2006
    
    /s/ Steven O. CordierSteven O. CordierSenior Vice President and Chief Financial Officer
 25




---



##### 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
 26