e10vq

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L2EshMPtHf3HovrWhmI0VuS4Ud67CHeyCPg8CBC/9UOPzJJ88fTUuQmAGGNVnK8p AO5zmnaU785+jAKmDOeSAA== 0000950134-06-012919.txt : 20060710 0000950134-06-012919.hdr.sgml : 20060710 20060710123043 ACCESSION NUMBER: 0000950134-06-012919 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060531 FILED AS OF DATE: 20060710 DATE AS OF CHANGE: 20060710 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENFORD CORP CENTRAL INDEX KEY: 0000739608 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 911221360 STATE OF INCORPORATION: WA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11488 FILM NUMBER: 06953084 BUSINESS ADDRESS: STREET 1: 7094 SOUTH REVERE PARKWAY CITY: CENTENNIAL STATE: CO ZIP: 80112-3932 BUSINESS PHONE: 303-649-1900 MAIL ADDRESS: STREET 1: 7094 SOUTH REVERE PARKWAY CITY: CENTENNIAL STATE: CO ZIP: 80112-3932 FORMER COMPANY: FORMER CONFORMED NAME: PENWEST LTD DATE OF NAME CHANGE: 19920703 10-Q 1 d37706e10vq.htm FORM 10-Q e10vq

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, 2006


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

(Exact name of registrant as specified in its charter)


Washington		91-1221360

(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		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

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 check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o		Accelerated Filer þ		Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

The net number of shares of the Registrant’s common stock (the Registrant’s only outstanding class of stock) outstanding as of July 5, 2006 was 8,928,137.

PENFORD CORPORATION AND SUBSIDIARIES

INDEX


	Page
PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets – May 31, 2006 and August 31, 2005		3

Condensed Consolidated Statements of Operations – Three and Nine Months ended May 31, 2006 and May 31, 2005		4

Condensed Consolidated Statements of Cash Flow – Nine Months ended May 31, 2006 and May 31, 2005		5

Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3. Quantitative and Qualitative Disclosures About Market Risk		25

Item 4. Controls and Procedures		25

PART II—OTHER INFORMATION

Item 5. Other Information		26

Item 6. Exhibits		26

Signatures		27
First Amendment to Amended and Restated Credit Agreement
Certifications of CEO Purusant to Section 302
Certifications of CFO Pursuant to Section 302
Certifications of CEO and CFO Pursuant to Section 906

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)	2006			2005
	(Unaudited)
ASSETS
Current assets:
Cash	$	1,196		$	5,367
Trade accounts receivable, net		42,064			39,653
Inventories		39,302			34,801
Prepaid expenses		5,128			5,084
Other		4,659			4,032

Total current assets		92,349			88,937

Property, plant and equipment, net		126,005			125,267
Restricted cash value of life insurance		10,272			10,132
Goodwill, net		21,848			21,420
Other intangible assets, net		3,034			3,121
Other assets		947			1,040

Total assets	$	254,455		$	249,917


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Cash overdraft, net	$	820		$	777
Current portion of long-term debt and capital lease obligations		4,795			4,022
Short-term borrowings		10,445			—
Accounts payable		27,847			35,941
Accrued pension liability		1,570			2,302
Accrued liabilities		8,728			10,324

Total current liabilities		54,205			53,366

Long-term debt and capital lease obligations		60,197			62,107
Other post-retirement benefits		13,524			13,091
Deferred income taxes		6,408			4,353
Other liabilities		17,158			16,974

Total liabilities		151,492			149,891

Shareholders’ 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 10,904 and 10,849 shares, respectively		10,904			10,849
Additional paid-in capital		39,167			37,728
Retained earnings		76,114			76,040
Treasury stock, at cost, 1,981 shares		(32,757	)		(32,757	)
Accumulated other comprehensive income		9,535			8,166

Total shareholders’ equity		102,963			100,026

Total liabilities and shareholders’ equity	$	254,455		$	249,917

The accompanying notes are an integral part of these statements.

PENFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three months ended					Nine months ended
	May 31,		May 31,			May 31,		May 31,
(In thousands, except per share data)	2006		2005			2006		2005
Sales	$	79,130	$	76,101		$	234,111	$	217,385

Cost of sales		67,070		66,061			203,107		196,956

Gross margin		12,060		10,040			31,004		20,429

Operating expenses		7,020		6,783			21,429		18,576
Research and development expenses		1,584		1,447			4,592		4,290


Income (loss) from operations		3,456		1,810			4,983		(2,437	)

Non-operating income, net		563		1,209			1,410		1,661
Interest expense		1,522		1,457			4,388		4,077


Income (loss) before income taxes		2,497		1,562			2,005		(4,853	)

Income tax expense (benefit)		506		(1,023	)		330		(2,620	)


Net income (loss)	$	1,991	$	2,585		$	1,675	$	(2,233	)


Weighted average common shares and equivalents outstanding:
Basic		8,914		8,825			8,891		8,822
Diluted		9,050		8,937			8,978		8,822

Earnings (loss) per share:
Basic	$	0.22	$	0.29		$	0.19	$	(0.25	)
Diluted	$	0.22	$	0.29		$	0.19	$	(0.25	)

Dividends declared per common share	$	0.06	$	0.06		$	0.18	$	0.18

The accompanying notes are an integral part of these statements.

PENFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)


	Nine Months Ended
	May 31,			May 31,
(In thousands)	2006			2005
Cash flows from operating activities:
Net income (loss)	$	1,675		$	(2,233	)
Adjustments to reconcile net income (loss) to net cash provided by operations:
Depreciation and amortization		11,663			12,992
Stock-based compensation		937			80
Gain on sale of investments		(51	)		(736	)
Deferred income taxes		71			(2,091	)
Other		6			(175	)
Change in assets and liabilities:
Trade accounts receivable		(2,373	)		3,988
Prepaid expenses		(31	)		641
Inventories		(4,192	)		(5,639	)
Accounts payable and accrued liabilities		(8,598	)		9,985
Taxes payable		(690	)		(1,650	)
Other		1,460			111


Net cash provided by (used in) operating activities		(123	)		15,273


Cash flows from investing activities:
Investment in property, plant and equipment, net		(12,110	)		(6,553	)
Proceeds from investments		612			3,525
Other		(107	)		(84	)


Net cash used in investing activities		(11,605	)		(3,112	)


Cash flows from financing activities:
Proceeds from short-term borrowings		11,510			—
Payments on short-term borrowings		(1,425	)		—
Proceeds from revolving line of credit		17,961			3,000
Payments on revolving line of credit		(16,333	)		(13,591	)
Payments of long-term debt		(2,983	)		(3,574	)
Payments under capital lease obligation		(22	)		—
Exercise of stock options		473			215
Payment of loan fees		(74	)		(163	)
Increase in cash overdraft		43			—
Payment of dividends		(1,597	)		(1,588	)
Other		84			—


Net cash provided by (used in) financing activities		7,637			(15,701	)


Effect of exchange rate changes on cash and cash equivalents		(80	)		(45	)


Net decrease in cash and cash equivalents		(4,171	)		(3,585	)
Cash and cash equivalents, beginning of period		5,367			5,915

Cash and cash equivalents, end of period	$	1,196		$	2,330

The accompanying notes are an integral part of these statements.

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, 2006 and the condensed consolidated statements of operations and cash flows for the interim periods ended May 31, 2006 and 2005 have been prepared by the Company without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which 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, 2005.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R, which is effective for the first 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 March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS No. 123R. The Company adopted SFAS No. 123R and SAB 107 effective September 1, 2005. See Note 3 for further detail.

3—STOCK-BASED COMPENSATION

Stock Compensation Plans

On January 24, 2006, the shareholders approved the Penford Corporation 2006 Long-Term Incentive Plan (the “2006 Incentive Plan”) pursuant to which various stock-based awards may be granted to employees, directors and consultants. Prior to the approval of the 2006 Incentive Plan, the Company awarded stock options to employees and officers through the Penford Corporation 1994 Stock Option Plan (the “1994 Plan”) and to members of its Board under the Stock Option Plan for Non-Employee Directors (the “Directors’ Plan”). The 1994 Plan was suspended when the 2006 Plan became effective. The Directors’ Plan expired in August 2005. As of May 31, 2006, the aggregate number of shares of the Company’s common stock that may be issued as awards under the 2006 Incentive Plan is 787,976. In addition, any shares previously granted under the 1994 Plan which are subsequently forfeited or not exercised will be available for future grants under the 2006 Incentive Plan.

General Option Information

A summary of the stock option activity for the nine months ended May 31, 2006, is as follows:


						Weighted
				Weighted		Average
	Number of			Average		Remaining		Aggregate
	Shares			Exercise Price		Term (in years)		Intrinsic Value

Outstanding Balance, August 31, 2005		1,107,535		$	13.96
Granted		98,500			13.34
Exercised		—			—
Cancelled		(10,000	)		16.34

Outstanding Balance, November 30, 2005		1,196,035		$	13.88
Granted		—			—
Exercised		(10,000	)		12.79
Cancelled		(7,500	)		12.79

Outstanding Balance, February 28, 2006		1,178,535		$	13.90
Granted		135,000			15.93
Exercised		(35,849	)		9.63
Cancelled		(100,000	)		17.69

Outstanding Balance, May 31, 2006		1,177,686		$	13.94		6.64	$	1,007,200

Options Exercisable at May 31, 2006		664,936		$	13.28		5.69	$	847,600

The aggregate intrinsic value disclosed in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $13.77 as of May 31, 2006 that would have been received by the option holders had all option holders exercised on that date. The intrinsic value of options exercised during the three and nine months ended May 31, 2006 was $221,900 and $236,000, respectively and the intrinsic value of options exercised during the nine months ended May 31, 2005 was $148,000.

The weighted average grant date fair value of stock options granted under the 2006 Incentive Plan during the nine months ended May 31, 2006 was $8.29 and under the 1994 Plan during the nine months ended May 31, 2006 and 2005 was $6.93 and $7.77, respectively. The weighted average grant date fair value of stock options granted under the Directors’ Plan during the nine months ended May 31, 2005 was $10.30. Options granted to directors during the nine months ended May 31, 2005 were cancelled in fiscal 2005 in exchange for cash because of certain changes in the tax laws.

As of May 31, 2006, the Company had $2.2 million of unrecognized compensation costs related to non-vested stock option awards that is expected to be recognized over a weighted average period of 1.7 years.

The following table summarizes information concerning outstanding and exercisable options as of May 31, 2006:


	Options Outstanding						Options Exercisable
			Wtd. Avg.
			Remaining		Wtd. Avg.				Wtd. Avg.
	Number of		Contractual		Exercise		Number of		Exercise
Range of Exercise Prices	Options		Life (years)		Price		Options		Price

$ 6.02 — 12.50		166,745		5.04	$	10.27		146,245	$	10.02
12.51 — 14.00		532,941		6.78		12.99		340,441		12.91
14.01 — 17.69		478,000		7.05		16.28		178,250		16.67

		1,177,686						664,936

Adoption of SFAS No. 123R

On September 1, 2005, the Company adopted SFAS No. 123R which requires the measurement and recognition of compensation cost for all share-based payment awards made to employees and directors based on estimated fair values.

Prior to the adoption of SFAS No. 123R, the Company accounted 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 the disclosure alternative prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Accordingly, the Company presented pro forma information for the periods prior to the adoption of SFAS No. 123R and no compensation cost was recognized for the stock-based compensation plans other than the grant date intrinsic value for the options granted under the Directors’ Plan and restricted stock awards prior to September 1, 2005.

The Company has elected to use the modified prospective transition method for adopting SFAS No. 123R which requires the recognition of stock-based compensation cost on a prospective basis; therefore, prior period financial statements have not been restated. Under this method, the provisions of SFAS No. 123R are applied to all awards granted after the adoption date and to awards not yet vested with unrecognized expense at the adoption date based on the estimated fair value at grant date as determined under the original provisions of SFAS No. 123. Pursuant to the requirements of SFAS No. 123R, the Company will continue to present the pro forma information for periods prior to the adoption date.

Valuation and Assumptions

The Company utilizes the Black-Scholes option-pricing model to determine the fair value of stock options on the date of grant. This model derives the fair value of stock options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield. The Company’s expected volatility is based on the historical volatility of the Company’s stock price over the most recent period commensurate with the expected term of the stock option award. The estimated expected option life is based primarily on historical employee exercise patterns and considers whether and the extent to which the options are in-the-money. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve appropriate for the term of the Company’s stock options awards and the selected dividend yield assumption was determined in view of the Company’s historical and estimated dividend payout. The Company has no reason to believe that the expected volatility of its stock price or its option exercise patterns would differ significantly from historical volatility or option exercises.

For the three months ended May 31, 2006 and 2005, the fair value of the options was estimated on the date of grant using the following assumptions. No stock options were granted under the 1994 Plan in the third quarter of fiscal 2006 and there were no stock options granted under the Directors’ Plan for the three months ended May 31, 2006 and 2005.


	Three Months Ended May 31,
	2006 Incentive Plan					1994 Plan
	2006			2005		2006		2005
Expected volatility		51	%		—		—		58	%
Expected life (years)		5.5			—		—		4.1
Interest rate (percent)		4.9-5.1			—		—		3.7-4.0
Dividend yield		1.6	%		—		—		1.6	%

For the nine months ended May 31, 2006 and 2005, the fair value of the options was estimated on the date of grant using the following assumptions. There were no options granted under the Directors’ Plan in fiscal 2006. Options granted to directors in fiscal 2005 were cancelled in the third quarter of fiscal 2005 in exchange for cash because of changes in the tax laws.


	Nine Months Ended May 31,
	2006 Incentive Plan					1994 Plan						Directors’ Plan
	2006			2005		2006			2005			2006		2005
Expected volatility		51	%		—		52	%		58	%		—		58	%
Expected life (years)		5.5			—		5.0			4.1			—		5.0
Interest rate (percent)		4.9-5.1			—		4.4-4.5			3.7-4.0			—		3.7-4.0
Dividend yield		1.6	%		—		1.7	%		1.6	%		—		1.6	%

SFAS No. 123R

The Company recognizes stock-based compensation expense utilizing the accelerated multiple option approach over the requisite service period, which equals the vesting period. For the three and nine months ended May 31, 2006, the Company recognized $0.3 million and $0.9 million, respectively, in stock-based compensation costs. For the three and nine months ended May 31, 2005, the Company recognized $4,000 and $80,000, respectively, of stock-based compensation cost related to Director’s discounted stock options and restricted stock awards. The following table summarizes the stock-based compensation cost under SFAS No. 123R for the three and nine months ended May 31, 2006 and the effect on the Company’s Condensed Consolidated Statements of Operations (in thousands):


	Three months ended		Nine months ended
	May 31, 2006		May 31, 2006
Cost of sales	$	29	$	81
Operating expenses		288		794
Research and development expenses		10		31

Total stock-based compensation expense	$	327	$	906
Tax benefit		111		308

Total stock-based compensation expense, net of tax	$	216	$	598

See Note 11 for stock-based compensation costs recognized in the financial statements of each business segment.

Pro-forma Information under SFAS 123 for Periods Prior to Fiscal 2006

If the fair value recognition provisions of SFAS 123 had been applied to stock-based compensation for the three and nine months ended May 31, 2005, the Company’s pro forma net loss and basic and diluted loss per share would have been as follows:


	Three months ended			Nine months ended
(In thousands, except per share data)	May 31, 2005			May 31, 2005

Net income (loss), as reported	$	2,585		$	(2,233	)

Add: Stock-based employee compensation expense included in reported net income, net of tax		35			60
Less: Stock-based employee compensation expense determined under the fair value method for all awards, net of tax		(153	)		(501	)

Net income (loss), pro forma	$	2,467		$	(2,674	)


Earnings (loss) per share:
Basic — as reported	$	0.29		$	(0.25	)

Basic — pro forma	$	0.28		$	(0.30	)


Diluted — as reported	$	0.29		$	(0.25	)

Diluted — pro forma	$	0.28		$	(0.30	)

Restricted Stock

Non-employee directors receive restricted stock under the 1993 Non-Employee Director Restricted Stock Plan, which provides that beginning September 1, 1993 and every three years thereafter, each non-employee director shall receive $18,000 worth of common stock of the Company, based on the last reported sale price of the stock on the preceding trading day. One-third of the shares vest on each anniversary of the date of the award. The Company recognizes compensation cost for restricted stock ratably over the vesting period.

4—INVENTORIES

The components of inventory are as follows:


	May 31,		August 31,
	2006		2005
	(In thousands)
Raw materials	$	20,628	$	17,666
Work in progress		587		614
Finished goods		18,087		16,521

Total inventories	$	39,302	$	34,801

5—PROPERTY, PLANT AND EQUIPMENT


	May 31,			August 31,
	2006			2005
	(In thousands)
Land	$	16,628		$	15,943
Plant and equipment		312,173			304,247
Construction in progress		14,230			11,022

		343,031			331,212
Accumulated depreciation		(217,026	)		(205,945	)

Net property, plant and equipment	$	126,005		$	125,267

Changes in Australian and New Zealand currency exchange rates have increased net property, plant and equipment in the first nine months of fiscal 2006 by approximately $0.8 million.

6—DEBT

At May 31, 2006, the Company had $17.7 million and $47.1 million outstanding, respectively, under the revolving credit and term loan portions of its $105 million credit facility. Pursuant to the terms of the credit agreement, Penford’s additional borrowing ability was $30.0 million at May 31, 2006. The Company was in compliance with the covenants in its credit agreement as of May 31, 2006 and expects to be in compliance with covenants for the remainder of fiscal 2006. In July 2006, the Company amended its credit agreement. See Note 14.

The Company’s short-term borrowings consist of an Australian revolving line of credit. On March 1, 2006, the Company’s Australian subsidiary entered into a variable-rate revolving grain inventory financing facility with an Australian bank for a maximum of $30.5 million U.S. dollars at the exchange rate at May 31, 2006. This facility expires on February 28, 2007 and carries an effective interest rate equal to the Australian one-month bank bill rate (“BBSY”) plus approximately 2%. Payments on this facility are due as the grain financed is withdrawn from storage. The amount outstanding under this arrangement, which is classified as a current liability on the balance sheet, was $10.4 million at May 31, 2006.

denominated term debt at 4.18% and $9.5 million of U.S. dollar equivalent Australian dollar denominated term debt at 5.58%, plus the applicable margin under the Company’s credit agreement.

7—TAXES

The Company’s effective tax rate for the three and nine months ended May 31, 2006 and 2005 varied from the U.S. federal statutory rate primarily due to U.S. and Australian tax incentives related to research and development, the favorable tax effect of export sales from the U.S. through the extraterritorial income exclusion, and, in fiscal 2006, the favorable tax effect of domestic (U.S.) production activities. The income taxes recorded for the third quarter of fiscal 2006 included $0.1 million in additional U.S. tax expense attributable to fiscal 2005.

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 current 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 17%.

8—OTHER COMPREHENSIVE INCOME

The components of total comprehensive income are as follows:


	Three months ended						Nine months ended
	May 31,			May 31,			May 31,		May 31,
	2006			2005			2006		2005
				(In thousands)
Net income (loss)	$	1,991		$	2,585		$	1,675	$	(2,233	)
Foreign currency translation adjustments		1,387			(1,796	)		307		4,657
Change in unrealized gains on derivative instruments that qualify as cash flow hedges, net of tax		(51	)		(137	)		1,062		(121	)

Total comprehensive income	$	3,327		$	652		$	3,044	$	2,303

9—NON-OPERATING INCOME, NET

Non-operating income, net consists of the following:


	Three months ended				Nine months ended
	May 31,		May 31,		May 31,		May 31,
	2006		2005		2006		2005
			(In thousands)
Royalty and licensing income	$	503	$	436	$	1,338	$	963
Gain on sale of investment		—		736		51		736
Other		60		37		21		(38	)

Total	$	563	$	1,209	$	1,410	$	1,661

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. The Company has recognized $5.6 million in royalty income from the inception of the agreement through May 31, 2006.

In February 2006, the Company sold a parcel of land suitable only for agricultural purposes in Tamworth, New South Wales, Australia to a third-party purchaser for $0.7 million. The Company will lease-back the property from the purchaser under two lease terms and arrangements: i) a small parcel of land will be leased for 25 years beginning August 2006 with annual rent of approximately $0.015 million converted to U.S. dollars at the Australian dollar exchange rate at May 31, 2006 and ii) the majority of land sold will be leased for one year beginning August 2006 with annual rental of approximately $0.08 million converted to U.S. dollars at the Australian dollar exchange rate at May 31, 2006. The total gain on the sale was $0.3 million. The gain of $0.1 million in excess of the present value of the lease payments was recognized during the second quarter of fiscal 2006. The remaining gain of $0.2 million will be recognized proportionally over the terms of the leases discussed above.

10 —PENSION AND POST-RETIREMENT BENEFIT PLANS

The components of the net periodic pension and post-retirement benefit costs for the three and nine months ended May 31, 2006 and 2005 are as follows:


	Three months ended						Nine months ended
	May 31,			May 31,			May 31,			May 31,
Defined benefit pension plans	2006			2005			2006			2005
				(In thousands)
Service cost	$	418		$	266		$	1,254		$	799
Interest cost		526			516			1,578			1,549
Expected return on plan assets		(529	)		(467	)		(1,587	)		(1,401	)
Amortization of prior service cost		46			49			138			146
Amortization of actuarial losses		150			120			450			360

Net periodic benefit cost	$	611		$	484		$	1,833		$	1,453


	Three months ended						Nine months ended
	May 31,			May 31,			May 31,			May 31,
Post-retirement health care plans	2006			2005			2006			2005
				(In thousands)
Service cost	$	98		$	88		$	294		$	264
Interest cost		196			194			588			581
Amortization of prior service cost		(38	)		(38	)		(114	)		(114	)
Amortization of actuarial losses		36			9			108			29

Net periodic benefit cost	$	292		$	253		$	876		$	760

11—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 is presented separately since the chief operating decision maker views segment results prior to intercompany eliminations.


	Three months ended						Nine months ended
	May 31,			May 31,			May 31,			May 31,
	2006			2005			2006			2005
				(In thousands)
Sales:
Industrial Ingredients—North America	$	41,809		$	38,625		$	121,454		$	109,394
Food Ingredients—North America		13,747			13,911			42,404			38,035
Australia/New Zealand operations		23,718			23,728			70,795			70,837
Intercompany sales		(144	)		(163	)		(542	)		(881	)

	$	79,130		$	76,101		$	234,111		$	217,385


Income (loss) from operations:
Industrial Ingredients—North America	$	3,521		$	1,842		$	4,877		$	(1,944	)
Food Ingredients—North America		1,750			1,825			5,636			4,320
Australia/New Zealand operations		276			(105	)		1,071			143
Corporate and other		(2,091	)		(1,752	)		(6,601	)		(4,956	)

	$	3,456		$	1,810		$	4,983		$	(2,437	)


	May 31,		August 31,
	2006		2005
	(In thousands)
Total assets:
Industrial Ingredients–North America	$	102,800	$	101,080
Food Ingredients—North America		32,629		33,193
Australia/New Zealand operations		107,315		105,882
Corporate and other		11,711		9,762

	$	254,455	$	249,917

With the adoption of SFAS No. 123R on September 1, 2005, the Company recognized $0.3 million and $0.9 million in stock-based compensation expense for the three and nine months ended May 31, 2006, respectively. The following table summarizes the stock-based compensation expense related to stock option awards by segment for the three and nine months ended May 31, 2006.


	Three months ended		Nine months ended
	May 31, 2006		May 31, 2006
	(In thousands)
Industrial Ingredients–North America	$	71	$	191
Food Ingredients—North America		33		98
Australia/New Zealand operations		19		32
Corporate		204		585

	$	327	$	906

Prior to September 1, 2005, the Company presented pro forma information for the periods prior to the adoption of SFAS No. 123R and no compensation expense was recognized for the stock-based compensation plans other than for the Directors’ Plan and restricted stock awards. See Note 3.

12—EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share reflect only the weighted average common shares outstanding during the period. Diluted earnings (loss) per share reflect weighted average common shares outstanding and the effect of any dilutive common stock equivalent shares. 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. The following table presents the computation of diluted weighted average shares outstanding for the three and nine months ended May 31, 2006 and 2005.


	Three months ended				Nine months ended
	May 31,				May 31,
	2006		2005		2006		2005
			(In thousands)
Weighted average common shares outstanding		8,914		8,825		8,891		8,822
Dilutive stock options		136		112		87		—


Weighted average common shares outstanding, assuming dilution		9,050		8,937		8,978		8,822

Weighted-average stock options to purchase 500,130 and 523,319 shares of common stock for the three and nine months ended May 31, 2006, and weighted-average stock options to purchase 372,000 and 1,096,065 shares of common stock for the three and nine months ended May 31, 2005, were excluded from the calculation of diluted earnings per share because they were antidilutive.

13—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. During the third quarter of fiscal 2006, the parties continued to conduct discovery. The Company cannot at this time determine the likelihood of any outcome or estimate damages, if any.

14—SUBSEQUENT EVENTS

On June 28, 2006, the Company announced plans to invest $42 million for approximately 40 million gallons of ethanol production capacity per year at its Cedar Rapids, Iowa facility. The Company expects the facility to be producing ethanol by the end of 2007. The initial stages of the ethanol investment will be funded through Penford’s existing bank facility. As discussed below, the Company’s banks have approved an amendment to the current credit agreement to permit additional capital expenditures related to this project.

On July 7, 2006, the Company entered into the First Amendment (“Amendment”) to its $105 million Amended and Restated Credit Agreement (the “Agreement”) dated August 22, 2005, among the Company; Harris N.A.; LaSalle Bank National Association; Cooperative Centrale Raiffeisen-Boorleenbank B.A., “Rabobank Nederland” (New York Branch); Wells Fargo Bank., N.A.; U.S. Bank, National Association; and the Australia and New Zealand Banking Group Limited.

The Amendment increases the maximum capital expenditures allowed under the Agreement for the fiscal year ending August 31, 2007 to $48 million, of which no more than $20 million shall be for capital expenditures not related to the construction of an ethanol production facility in Cedar Rapids, Iowa. In addition, the Amendment deletes certain mark-to-market exposures from the definition of indebtedness under the Agreement.

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 section subtitled “Risks and Uncertainties” in this Quarterly Report, and those described from time to time in other filings with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended August 31, 2005, 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.

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.

On June 28, 2006, the Company announced plans to invest $42 million for approximately 40 million gallons of ethanol production capacity per year at its Cedar Rapids, Iowa facility. The Company expects the facility to be producing ethanol by the end of 2007. The initial stages of the ethanol investment will be funded through Penford’s existing bank facility. The Company’s banks have approved an amendment to the current credit agreement to permit additional capital expenditures related to this project. The Company will be reviewing and evaluating various funding structures and options for the optimal long-term financing of the investment.

Results of Operations

Executive Overview

Consolidated sales for the three months ended May 31, 2006 increased 4% to $79.1 million from $76.1 million in the third quarter of fiscal 2005. Volume increases in the Industrial Ingredients and Australia/New Zealand business segments, accounting for a revenue increase of 5.7%, were partially offset by weaker foreign exchange rates. Gross margin as a percent of sales expanded to 15.2% in the third quarter of fiscal 2006 from 13.2% in the same period last year due to increased sales, including improved unit pricing, higher production yields and improved plant utilization. Income from operations rose by 91% due to the improvements in gross margin.

Sales for the first nine months of fiscal 2006 rose 8% to $234.1 million from $217.4 million in the same period in fiscal 2005, primarily due to an 8% increase in consolidated volumes. Gross margin as a percent of sales increased to 13.2% from 9.4% last year on growth in sales volumes, improved unit pricing in the Industrial Ingredients business, and better manufacturing yields, partially offset by $7.2 million in higher energy and chemical costs. Year-to-date operating income of $5.0 million also included $0.4 million in increased costs caused by an interruption in the utility steam supply, and non-recurring charges of $0.7 million for consulting services in connection with improving plant utilization. Operating income for the nine months ended May 31, 2005 included $4.1 million of incremental operating costs related to the Cedar Rapids strike settled mid-first quarter of fiscal 2005.

Fiscal 2006 third quarter operating expenses increased slightly to $7.0 million from $6.8 million last year, and quarterly operating expenses as a percent of revenue remained constant at 8.9%. Operating expenses for the nine months ended May 31, 2006 increased $2.9 million, resulting from increased employee costs of $1.8 million, including $0.9 million in stock-based compensation expense and $0.6 million of severance costs related to managerial changes in the Industrial Ingredients and Australia/New Zealand operations, and increased consulting and professional fees of $0.7 million. A discussion of segment results of operations and the effective tax rate follows.

Sales

Sales of $41.8 million for the third quarter of fiscal 2006 at the Company’s Industrial Ingredients—North America business unit rose $3.2 million, or 8%, over the same quarter last year. Quarterly sales growth was primarily driven by volume improvement of 7.5%. Year-to-date sales rose 11% to $121.5 million from $109.4 million last year on a sales volume increase of 10%. Improved unit pricing and mix contributed 1% to the sales increase.

Third quarter and year-to-date fiscal 2006 sales for the Australia/New Zealand operations of $23.7 million and $70.8 million, respectively, were comparable to the same periods in the previous year. Volume driven sales improvements in local currency of 4.2% for the third quarter and 1.6% year-to-date were offset by weaker foreign exchange rates.

Fiscal 2006 third quarter sales for the Food Ingredients—North America business of $13.7 million decreased by $0.2 million from the prior year third quarter, driven by a 1% sales volume decline. Sales of formulations for the processed meat and cheese markets grew 62% over last year’s third quarter. Quarterly sales expansion in these and other end markets partially offset a decrease of $1.9 million in sales of applications for the low-carbohydrate market. Sales for the first nine months of fiscal 2006 grew $4.4 million, or 12%, to $42.4 million over the same period of fiscal 2005 due to a 13% increase in sales volumes, partially offset by an unfavorable product mix.

Income from operations

For the third quarter of fiscal 2006, income from operations at the Company’s Industrial Ingredients—North America business unit increased by $1.7 million, or 91%, to $3.5 million compared to the same period last year. Third quarter fiscal 2006 gross margin as a percent of sales was 15.6% compared to 13.0% for the third quarter of fiscal 2005, primarily driven by volume increases of 7.5%. Income from operations for the first nine months of fiscal 2006 improved by $6.8 million to $4.9 million compared to an operating loss of $1.9 million in the prior year period. Year-to-date gross margin as a percent of sales expanded to 11.4% in fiscal 2006 compared to 6.1% last

year. Improvements in sales volumes and unit pricing were partially offset by $3.0 million and $2.1 million in increased chemical and energy costs, respectively. Operating income for the first nine months of fiscal 2005 included $4.1 million in incremental operating costs associated with the labor strike at the Company’s Iowa manufacturing facility that was settled in the first quarter of fiscal 2005.

Income from operations at the Company’s Australia/New Zealand operations was $0.3 million for the third quarter of fiscal 2006, compared to an operating loss of 0.1 million for the same period last year. Third quarter fiscal 2006 gross margin as a percent of sales improved to 7.9% compared to 5.1% in the third quarter of fiscal 2005. Income from operations for the first nine months of fiscal 2006 was $1.1 million compared to operating income of $0.1 million in the same period in fiscal 2005. Nine-month gross margin as a percent of sales expanded to 8.4% from 5.9% in the previous year. The improvement in gross margin as a percent of sales for the three and nine months ended fiscal 2006 over the prior year periods is primarily due to improvements in production yields and plant performance. Included in operating income for the first nine months of fiscal 2006 were $0.4 million of severance costs related to managerial changes.

Fiscal 2006 third quarter income from operations of $1.8 million at the Food Ingredients—North American was comparable to last year’s quarterly operating income. Year-to-date income from operations for fiscal 2006 increased to $5.6 million from $4.3 million in the same period last year on a 13% increase in sales volume and improved plant efficiencies. Gross margin as a percent of sales for the first nine months of fiscal 2006 grew to 26.4% from 25.4% for the same period last year as sales volume improvements and production efficiencies were partially offset by unfavorable product mix.

Corporate operating expenses

Corporate operating expenses for the third quarter of fiscal 2006 increased $0.3 million over the prior year period due to an increase in professional fees and higher employee costs, including $0.2 million of stock-based compensation expense. For the nine months ended May 31, 2006, corporate operating expenses increased $1.6 million compared to the nine-month period last year due to increased employee costs, including $0.6 million of stock-based compensation expense, as well as a $0.5 million increase in consulting and professional fees.

Interest and taxes

Fiscal 2006 interest expense for the third quarter and year-to-date increased $0.1 million and $0.3 million, respectively, over the same periods last year driven by higher average floating interest rates in the U.S. and Australia, partially offset by the effect of lower average debt balances. At May 31, 2006, the Company’s variable and fixed rate debt was $28.1 million and $47.1 million, respectively. The Company’s variable rate debt includes the amount outstanding under its grain inventory financing facility. See Note 6 to the Condensed Consolidated Financial Statements.

Non-operating income, net

Non-operating income, net consists of the following:


	Three months ended				Nine months ended
	May 31,		May 31,		May 31,		May 31,
	2006		2005		2006		2005
			(In thousands)
Royalty and licensing income	$	503	$	436	$	1,338	$	963
Gain on sale of investment		—		736		51		736
Other		60		37		21		(38	)

Total	$	563	$	1,209	$	1,410	$	1,661

Liquidity and Capital Resources

In July 2006, the Company and its lenders amended the credit agreement to permit additional capital expenditures related to the Company’s plans to invest $42 million for approximately 40 million gallons of ethanol production capacity per year at its Cedar Rapids, Iowa manufacturing plant. The maximum capital expenditures for the fiscal year ended August 31, 2007 is $48 million, of which not more than $20 million shall be for capital expenditures unrelated to the construction of an ethanol production facility in Cedar Rapids.

As of May 31, 2006, approximately $28.1 million of the Company’s outstanding debt, including amounts outstanding under the Australian grain inventory financing facility, is subject to variable interest rates. Under interest rate swap agreements with several banks, the Company’s fixed rate debt is $37.6 million of U.S. dollar denominated term debt at 4.18% and $9.5 million of U.S. dollar equivalent Australian dollar denominated term debt at 5.58%, plus the applicable margin under the Company’s credit agreement. As of May 31, 2006, the fair value of the interest rate swaps was $1.5 million.

Penford had working capital of $38.1 million and $35.6 million at May 31, 2006 and August 31, 2005, respectively. Accounts payable declined by $8.1 million at May 31, 2006 as disbursements were made to Australian suppliers for raw material inventories purchased prior to fiscal 2005 year end, and, in the third quarter of fiscal 2006, Penford Australia obtained a revolving credit facility to finance grain inventory purchases which replaced vendor financing arrangements in fiscal 2005. Cash used in operations was $0.1 million for the nine months ended May 31, 2006 and cash flow from operations was $15.3 million for the nine months ended May 31 2005. The decline in cash flow from operations is primarily related to the decrease in payables and the establishing of the grain facility discussed above. See Note 6 to the Condensed Consolidated Financial Statements. Total debt outstanding increased by $9.3 million during the first nine months of fiscal 2006 primarily to fund $12 million of capital expenditures related to improvements in manufacturing productivity and new products and markets.

The Company paid dividends of $1.6 million during the nine months ended May 31, 2006, which represents a quarterly rate of $0.06 per share. On April 24, 2006, the Board of Directors declared a dividend of $0.06 per common share payable on June 2, 2006 to shareholders of record as of May 12, 2006. 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.

Contractual Obligations

The Company is a party to various debt and lease agreements at May 31, 2006 that contractually commit the Company to pay certain amounts in the future. The Company also has open purchase orders entered into in the ordinary course of business for raw materials, capital projects and other items, for which significant terms have been confirmed. There have been no material changes in the Company’s contractual obligations since August 31, 2005. The Company has no off-balance sheet arrangements at May 31, 2006.

Recent Accounting Pronouncements

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require management to make estimates, judgments and assumptions to fairly present results of operations and financial position. Note 1 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the fiscal year ended August 31, 2005 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Management believes that its estimates, judgments and assumptions are reasonable based upon information available at the time this report was prepared. To the extent there are material differences between estimates, judgments and assumptions and the actual results, the financial statements will be affected.

In many cases, the accounting treatment of a particular transaction is significantly dictated by generally accepted accounting principles and does not require judgment or estimates. There are also areas in which management’s judgments in selecting among available alternatives would not produce a materially different result. Management

has reviewed the accounting policies and related disclosures with the Audit Committee. The accounting policies that management believes are the most important to the financial statements and that require the most difficult, subjective and complex judgments include the following:

	•		Evaluation of the allowance for doubtful accounts receivable

	•		Hedging activities

	•		Benefit plans

	•		Valuation of goodwill

	•		Self-insurance program

	•		Income taxes

	•		Stock-based compensation

A description of each of these follows:

Evaluation of the Allowance for Doubtful Accounts Receivable

Management makes judgments about the Company’s ability to collect outstanding receivables and provide allowances for the portion of receivables that the Company may not be able to collect. Penford estimates the allowance for uncollectible accounts based on historical experience, known troubled accounts, industry trends, economic conditions, how recently payments have been received, and ongoing credit evaluations of its customers. If the estimates do not reflect the Company’s future ability to collect outstanding invoices, Penford may experience losses in excess of the reserves established. At May 31, 2006, the allowance for doubtful accounts receivable was $0.7 million.

Hedging Activities

Penford uses derivative instruments, primarily futures contracts, to reduce exposure to price fluctuations of commodities used in the manufacturing processes in the United States. Penford has elected to designate these activities as hedges. This election allows the Company to defer gains and losses on those derivative instruments until the underlying commodity is used in the production process. To reduce exposure to variable short-term interest rates, Penford uses interest rate swap agreements.

The requirements for the designation of hedges are very complex, and require judgments and analyses to qualify as hedges as defined by Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS No. 133”). These judgments and analyses include an assessment that the derivative instruments used are effective hedges of the underlying risks. If the Company were to fail to meet the requirements of SFAS No. 133, or if these derivative instruments are not designated as hedges, the Company would be required to mark these contracts to market at each reporting date. Penford had deferred gains, net of tax, of $1.3 million at May 31, 2006 which are reflected in accumulated other comprehensive income.

Benefit Plans

Penford has defined benefit plans for its U.S. employees providing retirement benefits and coverage for retiree health care. Qualified actuaries determine the estimated cost of these plans annually. These actuarial estimates are based on assumptions of the discount rate used to calculate the present value of future payments, the expected investment return on plan assets, the estimate of future increases in compensation rates and the estimate of increases in the cost of medical care. The Company makes judgments about these assumptions based on historical investment results and experience as well as available historical market data and trends. However, if these assumptions are wrong, it could materially affect the amounts reported in the financial statements.

Valuation of Goodwill

Penford is required to assess whether the value of goodwill reported on the balance sheet has been impaired on an annual basis, or more often if conditions exist that indicate that there might be an impairment. These assessments require extensive and subjective judgments to assess the fair value of goodwill. While the Company engages qualified valuation experts to assist in this process, their work is based on the Company’s estimates of future operating results and allocation of goodwill to the business units. If future operating results differ materially from the estimates, the value of goodwill could be adversely impacted.

Self-insurance Program

The Company maintains a self-insurance program covering portions of workers’ compensation and group health liability costs. The amounts in excess of the self-insured levels are fully insured by third party insurers. Liabilities associated with these risks are estimated in part by considering historical claims experience, severity factors and other actuarial assumptions. Projections of future losses are inherently uncertain because of the random nature of insurance claims occurrences and changes that could occur in actuarial assumptions. The financial results of the Company could be significantly affected if future claims and assumptions differ from those used in determining these liabilities.

Income Taxes

The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The Company’s provision for income taxes reflects a combination of income earned and taxed in the various U.S. federal and state, as well as Australian and New Zealand, taxing jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the Company’s change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.

In evaluating the exposures connected with the various tax filing positions, the Company establishes an accrual, when, despite management’s belief that the Company’s tax return positions are supportable, management believes that certain positions may be successfully challenged and a loss is probable. When facts and circumstances change, these accruals are adjusted.

Stock-Based Compensation

Beginning September 1, 2005, the Company recognizes stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment.” Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of the share-based awards at the date of grant requires judgment, including estimating stock price volatility, forfeiture rates, the risk-free interest rate, dividends and expected option life.

If circumstances change, and the Company uses different assumptions for volatility, interest, dividends and option life in estimating the fair value of stock-based awards granted in future periods, stock-based compensation expense may differ significantly from the expense recorded in the current period. SFAS No. 123R requires forfeitures to be estimated at the date of grant and revised in subsequent periods if actual forfeitures differ from those estimated. Therefore, if actual forfeiture rates differ significantly from those estimated, the Company’s results of operations could be materially impacted.

Risks and Uncertainties

Increases in energy and chemical costs will reduce the Company’s profitability.

Energy and chemicals comprise approximately 14% and 12%, respectively, of the cost of manufacturing the Company’s products in the first nine months of fiscal 2006. Natural gas is used extensively in the Industrial Ingredients – North America business to dry the starch products, and, to a lesser extent, in the Company’s other business segments. Chemicals are used in all of Penford’s businesses to modify starch for specific product applications and customer requirements. 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, including petroleum. Penford may use short-term purchase contracts or exchange traded futures or option contracts to reduce the price volatility of natural gas; however, these strategies are not available for the chemicals the Company purchases. Penford may not be able to pass on increases in energy and chemical costs to its customers and margins and profitability would be adversely affected.

The availability and cost of agricultural products Penford purchases are vulnerable to weather and other factors beyond its control.

In the first nine months of fiscal 2006, approximately 26% 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.

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 years. However, in the first nine months of fiscal 2006, sales to the top ten customers and sales to the largest customer represented 44% and 8%, 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.

Changes in interest rates will affect Penford’s profitability.

At May 31, 2006, $28.1 million of the Company’s outstanding debt is subject to variable interest rates which move in direct proportion to the U.S. or Australian London InterBank Offered Rate (“LIBOR”), the Australian bank bill rate (“BBSY”), or the prime rate in the U.S., depending on the selection of borrowing options. 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 paid is subject to the Company’s interpretation of applicable tax laws in the jurisdictions in which Penford operates. The Company is subject to audits by tax authorities. While the Company believes it has complied with all applicable income tax laws, there can be no assurance that a tax authority will not have a different interpretation of the law or that any additional taxes imposed as a result of tax audits will not have an adverse effect on the Company’s results of operations.

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 nine months of fiscal 2006, approximately 30% 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 other currencies.

Provisions of Washington law could discourage or prevent a potential takeover.

Washington law imposes restrictions on certain transactions between a corporation and certain significant shareholders. The Washington Business Corporation Act generally prohibits a “target corporation” from engaging in certain significant business transactions with an “acquiring person,” which is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the target corporation, for a period of five years after such acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the target corporation’s board of directors prior to the time of the acquisition. Such prohibited transactions include, among other things, (1) a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person; (2) a termination of 5% or more of the employees of the target corporation as a result of the acquiring person’s acquisition of 10% or more of the shares; and (3) allowing the acquiring person to receive any disproportionate benefit as a shareholder.

After the five year period, a “significant business transaction” may occur if it complies with “fair price” provisions specified in the statute. A corporation may not “opt out” of this statute. This provision may have the effect of delaying, deterring or preventing a change of control in the ownership of the Company.

The Company may not be able to implement ethanol production as planned or at all.

Penford’s ability to implement ethanol production as planned is subject to uncertainty. The Company recently announced this project and a considerable amount of work is only in preliminary stages. The Company has not yet secured all necessary permits and has not entered into necessary engineering, construction and procurement contracts. The Company may need additional financing to implement ethanol production, and so could face financial risks associated with incurring additional indebtedness and/or equity. The Company may be adversely affected by environmental, health and safety laws, regulations and liabilities in implementing ethanol production. Changes in the markets for ethanol or legislation and regulations could materially and adversely affect ethanol demand.

Other uncertainties

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require management to make estimates, judgments and assumptions to fairly present results of operations and financial position. Management believes that its estimates, judgments and assumptions are reasonable based upon information available at the time this report was prepared. To the extent there are material differences between estimates, judgments and assumptions and actual results, the financial statements will be affected. See “Critical Accounting Policies” in this Item 2.

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. There have been no significant changes in the Company’s exposure to market risks since August 31, 2005. See Note 6 to the Condensed Consolidated Financial Statements for details on interest rate swaps.

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 required by Rule 13a-15(b) of 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 as of May 31, 2006. There were no changes in the Company’s internal control over financial reporting during the quarter ended May 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 5: Other Information.

The foregoing is intended to provide general information about the Amendment and does not constitute a full description of the Amendment. Reference is made to the Amendment attached hereto as Exhibit 10.1 and incorporated herein by reference.

Item 6: Exhibits.

(d) Exhibits

	10.1		First Amendment to Amended and Restated Credit Agreement

	31.1		Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2		Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32		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

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 10, 2006		/s/ Steven O. Cordier Steven O. Cordier
		Senior Vice President and Chief Financial Officer

EXHIBIT INDEX


Exhibit No.		Description
10.1		First Amendment to Amended and Restated Credit Agreement

31.1		Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		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

EX-10.1 2 d37706exv10w1.htm FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT exv10w1

Exhibit 10.1

Penford Corporation

First Amendment to Amended and Restated Credit Agreement

This First Amendment to Amended and Restated Credit Agreement (herein, the “Amendment”) is entered into as of July 7, 2006, by and among Penford Corporation, a Washington corporation (the “Borrower”), the direct and indirect Subsidiaries of the Borrower from time to time party to the Credit Agreement, as Guarantors, the several financial institutions from time to time party to this Agreement, as Lenders, and Harris N.A., successor by merger to Harris Trust and Savings Bank, as Administrative Agent as provided herein.

Preliminary Statements

A. The Borrower, the Guarantors, the Lenders and the Administrative Agent are parties to that certain Amended and Restated Credit Agreement dated as of August 22, 2005 (the “Credit Agreement”). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement.

B. The Borrower and the Lenders have agreed to make certain amendments to the Credit Agreement, in each case under the terms and conditions set forth in this Amendment.

Now, Therefore, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

Section 1. Amendments to the Credit Agreement.

Subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, the Credit Agreement shall be and hereby is amended as follows:

1.1. The definition of the term “Indebtedness for Borrowed Money” appearing in Section 5.1 of the Credit Agreement shall be amended to read as follows:

“Indebtedness for Borrowed Money” means for any Person (without duplication) (a) all indebtedness of such Person for borrowed money, whether current or funded, or secured or unsecured, (b) all indebtedness for the deferred purchase price of Property or services, (c) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to Property acquired by such Person (even though the rights and remedies of the seller or Lender under such agreement in the event of a default are limited to repossession or sale of such Property), (d) all indebtedness secured by a purchase money mortgage or other Lien to secure all or part of the purchase price of Property subject to such mortgage or Lien, (e) all obligations under leases which shall have been or must be, in accordance with GAAP, recorded as Capital Leases in respect of

which such Person is liable as lessee, (f) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, standby or documentary letter of credit or any other instrument issued by a bank or financial institution, (g) any indebtedness, whether or not assumed, secured by Liens on Property acquired by such Person at the time of acquisition thereof, (h) any shares which are expressed to be redeemable and (i) any liability in respect of any guarantee or indemnity for any of the items referred to above, and (j) all indebtedness secured by any Lien upon Property of such Person, whether or not such Person has assumed or become liable for the payment of such indebtedness; it being understood that the term “Indebtedness for Borrowed Money” shall not include trade payables arising in the ordinary course of business.

1.2. Section 8.22(d) of the Credit Agreement shall be amended to read as follows:

(d) Capital Expenditures. The Borrower shall not, nor shall it permit any of its Subsidiaries to, incur Capital Expenditures (but excluding Capital Expenditures made with the Net Cash Proceeds of any Event of Loss as permitted by Section 1.9(b)(i) hereof and Capital Expenditures made with the proceeds of grants from governmental entities) in an amount in excess of:

(i) $20,000,000 (or the Australian Dollar Equivalent or NZ Dollar Equivalent) in the aggregate during the fiscal year ending August 31, 2006;

(ii) $48,000,000 (or the Australian Dollar Equivalent or NZ Dollar Equivalent with respect to not more than $20,000,000) during the fiscal year ending August 31, 2007, of which not more than $20,000,000 (or the Australian Dollar Equivalent or NZ Dollar Equivalent) shall be for Capital Expenditures that are unrelated to the construction (including the acquisition and installation of equipment) of an ethanol production facility in Cedar Rapids, Iowa; and

(iii) $20,000,000 (or the Australian Dollar Equivalent or NZ Dollar Equivalent) in the aggregate during any fiscal year thereafter;

provided, however, for any fiscal year when Total Senior Funded Debt/EBITDA Ratio is less than 2.0 to 1.0 for each fiscal quarter of such fiscal year, Capital Expenditures for such year (or in the case of the fiscal year ending August 31, 2007, Capital Expenditures that are unrelated to the construction (including the acquisition and installation of equipment) of an ethanol production facility in Cedar Rapids, Iowa) shall not exceed $25,000,000 (or the Australian Dollar Equivalent or NZ Dollar Equivalent) for such fiscal year.

1.3. The Required Lenders hereby agree that the construction and operation of an ethanol production facility in Cedar Rapids, Iowa shall not be a violation of Section 8.18 of the Credit Agreement.

-2-

Section 2. Conditions Precedent.

The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent:

2.1. The Borrower, the Guarantors, and the Required Lenders shall have executed and delivered this Amendment.

2.2. Each of the representations and warranties set forth in Section 6 of the Credit Agreement shall be true and correct in all material respects, except that the representations and warranties made under Section 6.5 shall be deemed to refer to the most recent financial statements of the Borrower delivered to the Lenders.

2.3. Upon giving effect to this Amendment, (a) the Borrower shall be in full compliance with all of the terms and conditions of the Loan Documents and (b) no Default or Event of Default shall have occurred and be continuing thereunder or shall result after giving effect to this Amendment.

Section 3. Representations.

In order to induce the Required Lenders to execute and deliver this Amendment, the Borrower hereby represents to the Lenders that as of the date hereof, and after giving effect to the amendments called for hereby, the representations and warranties set forth in Section 6 of the Credit Agreement are and shall be and remain true and correct in all material respects (except that for purposes of this paragraph the representations contained in Section 6.5 shall be deemed to refer to the most recent financial statements of the Borrower delivered to the Lenders) and after giving effect to this Amendment (a) the Borrower is in compliance with all of the terms and conditions of the Loan Documents and (b) no Default or Event of Default exists under the Credit Agreement or shall result after giving effect to this Amendment.

Section 4. Miscellaneous.

4.1. The Borrower and the Guarantors heretofore executed and delivered to the Agent and the Lenders the Collateral Documents to which it is a party. Each of the Borrower and the Guarantors hereby acknowledges and agrees that the Liens created and provided for by the Collateral Documents to which it is a party continue to secure, among other things, the indebtedness, obligations and liabilities described therein; and the Collateral Documents to which it is a party and the rights and remedies of the Agents and the Lenders thereunder, the obligations of the Borrower and the Guarantors thereunder, and the Liens created and provided for thereunder remain in full force and effect and shall not be affected, impaired or discharged hereby. Nothing herein contained shall in any manner affect or impair the priority of the Liens created and provided for by the Collateral Documents to which it is a party as to the indebtedness, obligations and liabilities which would be secured thereby prior to giving effect to this Amendment.

4.2. Except as specifically amended herein or waived hereby, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this

-3-

specific Amendment need not be made in the Credit Agreement, the other Loan Documents, or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby.

4.3. This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Amendment shall be governed by the internal laws of the State of Illinois.

4.4. The Borrower agrees to pay all reasonable out-of-pocket costs and expenses incurred by the Administrative Agent in connection with the credit facilities and the preparation, execution and delivery of this Amendment, and the documents and transactions contemplated hereby, including the reasonable fees and expenses of counsel for the Administrative Agent with respect to the foregoing.

[Remainder of Page Intentionally Left Blank]

-4-

This First Amendment to Amended and Restated Credit Agreement is entered into as of the date and year first above written.


		“Borrower”

		Penford Corporation

		By

				Name

				Title


		“Guarantors”

		Penford Products Co.

		By

				Name

				Title

Penford Corporation
Signature Page to First Amendment
to Amended and Restated Credit Agreement

Accepted and agreed to as of the date and year last above written.


		“Lenders”

		Harris N.A., in its individual capacity as a Lender, as L/C Issuer, and as Administrative Agent

		By

				Name

				Title


		Wells Fargo Bank, N.A.

		By

				Name

				Title


		U.S. Bank National Association

		By

				Name

				Title


		LaSalle Bank National Association

		By

				Name

				Title

Penford Corporation
Signature Page to First Amendment
to Amended and Restated Credit Agreement


		Cooperative Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland,” New York Branch

		By

				Name

				Title


		By

				Name

				Title


		Australia and New Zealand Banking Group Limited

		By

				Name

				Title

Penford Corporation
Signature Page to First Amendment
to Amended and Restated Credit Agreement

EX-31.1 3 d37706exv31w1.htm CERTIFICATIONS OF CEO PURUSANT TO SECTION 302 exv31w1

Exhibit 31.1

CERTIFICATIONS

I, Thomas D. Malkoski, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Penford Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financing reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


	PENFORD CORPORATION
Date: July 10, 2006	/s/ Thomas D. Malkoski
	Thomas D. Malkoski
	Chief Executive Officer

EX-31.2 4 d37706exv31w2.htm CERTIFICATIONS OF CFO PURSUANT TO SECTION 302 exv31w2

Exhibit 31.2

CERTIFICATIONS

I, Steven O. Cordier, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Penford Corporation;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


	PENFORD CORPORATION
Date: July 10, 2006	/s/ Steven O. Cordier
	Steven O. Cordier
	Chief Financial Officer

EX-32 5 d37706exv32.htm CERTIFICATIONS OF CEO AND CFO PURSUANT TO SECTION 906 exv32

Exhibit 32

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C.SECTION 1350)

In connection with the Quarterly Report of Penford Corporation (the “Company”) on Form 10-Q for the quarter ended May 31, 2006, as filed with the Securities and Exchange Commission (the “Report”), Thomas D. Malkoski, Chief Executive Officer of the Company, and Steven O. Cordier, Chief Financial Officer of the Company, respectively, do each hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that to his knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Thomas D. Malkoski
Thomas D. Malkoski
Chief Executive Officer

Dated: July 10, 2006

/s/ Steven O. Cordier
Steven O. Cordier
Chief Financial Officer

Dated: July 10, 2006

[A signed original of this written statement required by Section 906 has been provided to Penford Corporation and will be retained by Penford Corporation and furnished to the Securities and Exchange Commission or its staff upon request.]

-----END PRIVACY-ENHANCED MESSAGE-----

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