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 February 28, 2009


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 Incorporation or Organization)		(I.R.S. Employer Identification No.)

7094 South Revere Parkway, Centennial, Colorado		80112-3932

(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (303) 649-1900

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting Company 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 April 3, 2009 was 11,265,953.

PART I — FINANCIAL INFORMATION

Item 1: Financial Statements

PENFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	February 28,			August 31,
(In thousands, except per share data)	2009			2008
	(Unaudited)
ASSETS
Current assets:
Cash	$	39		$	534
Trade accounts receivable, net		41,002			28,752
Inventories		40,229			50,200
Prepaid expenses		4,102			4,370
Insurance recovery receivable		—			8,000
Income tax receivable		9,722			10,052
Other		5,558			3,881

Total current assets		100,652			105,789

Property, plant and equipment, net		153,127			169,932
Restricted cash value of life insurance		10,519			10,465
Deferred tax asset		2,051			6,293
Goodwill, net		5,833			26,043
Other intangible assets, net		665			760
Other assets		1,538			1,151

Total assets	$	274,385		$	320,433


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Cash overdraft, net	$	6,360		$	1,301
Current portion of long-term debt and capital lease obligations		10,524			8,029
Short-term borrowings		1,340			676
Accounts payable		28,572			46,475
Accrued liabilities		10,396			11,195

Total current liabilities		57,192			67,676

Long-term debt and capital lease obligations		70,306			59,860
Other post-retirement benefits		13,117			12,862
Other liabilities		18,890			19,673

Total liabilities		159,505			160,071

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 13,157 and 13,127 shares, respectively		13,157			13,127
Additional paid-in capital		92,612			91,443
Retained earnings		50,193			74,092
Treasury stock, at cost, 1,981 shares		(32,757	)		(32,757	)
Accumulated other comprehensive income (loss)		(8,325	)		14,457

Total shareholders’ equity		114,880			160,362

Total liabilities and shareholders’ equity	$	274,385		$	320,433

The accompanying notes are an integral part of these statements.

PENFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three months ended					Six months ended
	February 28,			February 29,		February 28,			February 29,
(In thousands, except per share data)	2009			2008		2009			2008
Sales	$	79,808		$	87,889	$	160,499		$	182,750

Cost of sales		83,951			76,384		159,254			154,992

Gross margin		(4,143	)		11,505		1,245			27,758

Operating expenses		7,267			6,666		14,534			13,906
Research and development expenses		1,562			2,073		3,080			4,095
Goodwill impairment		13,828			—		13,828			—
Flood related costs, net of insurance proceeds		(3,800	)		—		(8,034	)		—
Restructure costs		—			95		—			1,329


Income (loss) from operations		(23,000	)		2,671		(22,163	)		8,428

Non-operating income, net		1,924			791		1,714			1,254
Interest expense		1,349			601		2,842			1,867


Income (loss) before income taxes		(22,425	)		2,861		(23,291	)		7,815

Income tax expense (benefit)		(247	)		546		(744	)		2,338


Net income (loss)	$	(22,178	)	$	2,315	$	(22,547	)	$	5,477


Weighted average common shares and equivalents outstanding:
Basic		11,174			10,857		11,165			9,988
Diluted		11,174			11,195		11,165			10,381

Earnings (loss) per share:
Basic	$	(1.98	)	$	0.21	$	(2.02	)	$	0.55
Diluted	$	(1.98	)	$	0.21	$	(2.02	)	$	0.53

Dividends declared per common share	$	0.06		$	0.06	$	0.12		$	0.12

The accompanying notes are an integral part of these statements.

PENFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)


	Six Months Ended
	February 28,			February 29,
(In thousands)	2009			2008
Cash flows from operating activities:
Net income (loss)	$	(22,547	)	$	5,477
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:
Depreciation and amortization		9,267			7,841
Stock-based compensation		1,453			989
Goodwill impairment		13,828			—
Gain on sale of dextrose product line		(1,562	)		—
Deferred income taxes		2,480			(2,530	)
Loss on derivative transactions		840			4,085
Loss (gain) on foreign currency transactions		641			(1,015	)
Other		4			(12	)
Change in assets and liabilities:
Trade accounts receivable		(15,968	)		6,295
Prepaid expenses		(25	)		779
Inventories		143			(5,095	)
Accounts payable and accrued liabilities		(16,448	)		(11,847	)
Income tax		(387	)		(1,874	)
Insurance recovery receivable		8,000			—
Other		2,823			(368	)

Net cash provided by (used in) operating activities		(17,458	)		2,725


Cash flows from investing activities:
Investment in property, plant and equipment, net		(3,270	)		(29,429	)
Proceeds from sale of dextrose product line		2,857			—
Other		(51	)		(60	)

Net cash used in investing activities		(464	)		(29,489	)


Cash flows from financing activities:
Proceeds from short-term borrowings		6,902			2,424
Payments on short-term borrowings		(6,063	)		(8,710	)
Proceeds from revolving line of credit		38,476			40,529
Payments on revolving line of credit		(21,500	)		(25,052	)
Payments of long-term debt		(3,250	)		(25,625	)
Exercise of stock options		—			69
Net proceeds from issuance of common stock		—			46,844
Payment of loan fees		(551	)		—
Increase (decrease) in cash overdraft		5,059			(723	)
Payment of dividends		(1,350	)		(1,100	)
Other		(140	)		(9	)

Net cash provided by financing activities		17,583			28,647


Effect of exchange rate changes on cash and cash equivalents		(156	)		(63	)


Net increase (decrease) in cash and cash equivalents		(495	)		1,820
Cash and cash equivalents, beginning of period		534			—

Cash and cash equivalents, end of period	$	39		$	1,820

The accompanying notes are an integral part of these statements.

PENFORD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1—BUSINESS

Penford Corporation (which, together with its subsidiary companies, is referred to herein as “Penford” or the “Company”) is a developer, manufacturer and marketer of specialty natural-based ingredient systems for industrial and food ingredient applications, and a manufacturer of corn-based ethanol. The Company operates manufacturing facilities in the United States, Australia and New Zealand.

Penford operates in three business segments, each utilizing its carbohydrate chemistry expertise to develop starch-based products for value-added applications that improve the quality and performance of customers’ products. The first two segments, Industrial Ingredients and Food Ingredients, are broad categories of end-market users, primarily served by the Company’s United States operations. The third segment consists of geographically separate operations in Australia and New Zealand. The Australian and New Zealand operations are engaged primarily in the food ingredients business.

The Company has significant research and development capabilities, which are used in understanding the complex chemistry of carbohydrate-based materials and in developing applications to address customer needs. In addition, the Company has specialty processing capabilities for a variety of modified starches. In May 2008, the Company’s Industrial Ingredients — North America segment began commercial production and sales of ethanol from its facility in Cedar Rapids, Iowa.

On June 12, 2008, the Company’s Cedar Rapids, Iowa plant was temporarily shut down due to record flooding of the Cedar River and government-ordered evacuation of the plant and surrounding areas. See Note 3.

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 February 28, 2009 and the condensed consolidated statements of operations and cash flows for the interim periods ended February 28, 2009 and February 29, 2008 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 U.S. 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, 2008.

Use of Estimates

The preparation of the consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions about future events. These estimates and underlying assumptions affect the amounts of assets and liabilities reported, the disclosures in the financial statements and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable, inventories, goodwill and other long-lived assets, and legal contingencies and assumptions used in the calculation of income taxes, pension and other post-retirement benefits, among others. These estimates are based on management’s best estimate and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and adjusts such estimates and assumptions when facts and circumstances dictate. The current credit market and volatile equity, foreign currency, commodity and energy markets have combined to increase the uncertainty inherent in

management’s estimates and assumptions. As future events and their effects cannot be determined with precision, actual results may differ significantly from these estimates.

Accounting Changes

Effective September 1, 2008, the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 157, “Fair Value Measurements” (“SFAS 157”), for financial assets and liabilities carried at fair value that are recognized or disclosed at fair value in the financial statements on a recurring basis. SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. The adoption did not have a material impact on the company’s financial statements. See Note 14. Due to the issuance of FASB Staff Position No. 157-2 (“FSP 157-2”), the effective date of SFAS 157 has been deferred to fiscal years beginning after November 15, 2008 (fiscal 2010 for the Company) for non-recurring, nonfinancial assets and liabilities that are recognized or disclosed at fair value. The Company is continuing to evaluate the impact of adopting these provisions in fiscal 2010. In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 and addresses how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance. The implementation of this standard did not have an impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB No. 115” (“SFAS 159”) which allows companies the option to measure certain financial assets and financial liabilities at fair value at specified election dates. The Company adopted SFAS 159 and elected not to measure any additional financial instruments and other items at fair value.

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB No. 133” (“SFAS 161”). SFAS 161 requires additional disclosures about the objectives for using derivative instruments and hedging activities, method of accounting for such instruments under SFAS 133 and its related interpretations, the effect of derivative instruments and related hedged items on financial position, results of operations, and cash flows, and a tabular disclosure of the fair values of derivative instruments and their gains and losses. Effective December 1, 2008, the Company adopted SFAS 161. See Note 14.

Recent Accounting Pronouncements

In December 2007, the FASB issued Statement No. 141R (revised 2007), “Business Combinations” (“SFAS 141R”) and Statement No. 160, “Non-Controlling Interest in Consolidated Financial Statements, an Amendment of ARB No. 51” (“SFAS 160”). These new standards establish principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, any non-controlling interests, and goodwill acquired in a business combination. This statement also establishes disclosure requirements to enable financial statement users to evaluate the nature and financial effects of the business combination. The requirements of SFAS 141R and SFAS No. 160 are effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company), and, except for the presentation and disclosure requirements of SFAS 160, are to be applied prospectively.

In June 2008, the FASB issued Staff Position FSP Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether unvested share-based payment awards that contain rights to nonforfeitable dividends are participating securities prior to vesting and, therefore, included in the computation of earnings per share. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company). The Company is currently evaluating the impact of adopting FSP EITF 03-6-1 on the Company’s consolidated financial statements.

In December 2008, the FASB issued Staff Position No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP 132(R)-1”). FSP 132(R)-1 requires additional disclosures on a prospective basis about assets held in an employer’s defined benefit pension or other postretirement plan. FSP 132(R)-1 is effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company). The adoption of FSP 132(R)-1 will

not have an effect on the Company’s consolidated financial statements. The Company is currently evaluating the disclosure requirements of this standard.

3—CEDAR RAPIDS FLOOD

On June 12, 2008, the Company’s Cedar Rapids, Iowa plant, operated by the Industrial Ingredients — North America business, was temporarily shut down due to record flooding of the Cedar River and government-ordered mandatory evacuation of the plant and surrounding areas. By the end of the first quarter of fiscal 2009, the facility’s current processing rate had reached pre-flood levels.

During fiscal 2008 and the first six months of fiscal 2009, the Company recorded flood restoration costs of $45.5 million, and insurance recoveries of $26.0 million, as follows:


	Three months ended			Three months ended			Three months ended
	August 31, 2008			November 30, 2008			February 28, 2009			Total

	(In thousands)
Repairs of buildings and equipment	$	17,082		$	5,790		$	454		$	23,326
Site remediation		5,389			348			—			5,737
Write off of inventory and fixed assets		4,016			71			—			4,087
Continuing costs during production shut down		9,771			—			—			9,771
Other		1,797			577			177			2,551

		38,055			6,786			631			45,472
Insurance recoveries		(10,500	)		(11,020	)		(4,431	)		(25,951	)


Net flood costs (recoveries)	$	27,555		$	(4,234	)	$	(3,800	)	$	19,521

The direct costs of the flood in the table above do not include lost profits from the interruption of the business.

Insurance recoveries

During the second quarter and first six months of fiscal 2009, the Company recognized insurance recoveries of $4.4 million and $15.5 million, respectively. These recoveries have been recorded as an offset to the losses caused by the flooding. The Company will continue to process its claims for flood losses under its insurance policies, but is unable to estimate the amount or timing of future recoveries. The amount ultimately recovered from the Company’s insurers may be materially more or less than the Company’s direct costs of the flood.

4—GOODWILL

The Company tests its goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. Penford performed its annual impairment test as of June 1, 2008 and determined that goodwill in its Australia/New Zealand and Food Ingredients — North America reporting units was not impaired at that time. During the second quarter of fiscal 2009, the Company continued to experience a worsening demand outlook, a decline in its sales and operating income, as well as a reduction in its expected future cash flows. In addition, Penford experienced a sustained, significant decline in its stock price. Given these impairment indictors, the Company determined that there was a potential for its goodwill to be impaired.

Accordingly, the Company performed an interim impairment evaluation of its goodwill as of February 28, 2009. The Company completed its interim goodwill impairment evaluation for both its Australia/New Zealand and Food Ingredients — North America reporting units. The estimated fair value of the Food Ingredients — North America reporting unit exceeded the carrying value of its net assets by approximately $43 million, and the Company determined that no adjustment to the recorded amount of goodwill of this reporting unit was required. However, during the second quarter of fiscal 2009, the Company recorded a $13.8 million non-cash goodwill impairment charge, which represented all of the goodwill allocated to its Australia/New Zealand reporting unit.

5—STOCK-BASED COMPENSATION

Stock Compensation Plans

Penford maintains the 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 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 in the second quarter of fiscal 2006. The Directors’ Plan expired in August 2005. As of February 28, 2009, the aggregate number of shares of the Company’s common stock that were available to be issued as awards under the 2006 Incentive Plan was 185,528. 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.

Valuation and Expense Under 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. 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 option 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. No stock options were granted under the 2006 Incentive Plan during the six months ended February 28, 2009.

Stock Option Awards

A summary of the stock option activity for the six months ended February 28, 2009, is as follows:


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

Outstanding Balance, August 31, 2008		1,376,347		$	15.17
Granted		—			—
Exercised		—			—
Cancelled		(1,481	)		—

Outstanding Balance, February 28, 2009		1,374,866		$	15.17		4.79	$	—

Options Exercisable at February 28, 2009		858,991		$	14.08		4.05	$	—

The aggregate intrinsic value disclosed in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $4.88 as of February 28, 2009 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 months ended February 29, 2008 was $10,100. No stock options were exercised during the six months ended February 28, 2009.

As of February 28, 2009, the Company had $2.0 million of unrecognized compensation cost related to non-vested stock option awards that is expected to be recognized over a weighted average period of 1.7 years.

Restricted Stock Awards

The grant date fair value of the Company’s restricted stock awards is equal to the fair value of Penford’s common stock at the grant date. The following table summarizes the restricted stock award activity for the six months ended February 28, 2009 as follows:


				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value

Nonvested at August 31, 2008		109,365		$	34.15
Granted		13,832			10.12
Vested		(33,615	)		31.84
Cancelled		—			—

Nonvested at February 28, 2009		89,582		$	31.31

On January 1, 2009, each non-employee director received an award of 1,976 shares of restricted stock under the 2006 Incentive Plan at the last reported sale price of the stock on the preceding trading day, which will vest one year from grant date of the award. The Company recognizes compensation cost for restricted stock ratably over the vesting period.

As of February 28, 2009, the Company had $1.5 million of unrecognized compensation cost related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 1.5 years.

Compensation Expense

The Company recognizes stock-based compensation expense utilizing the accelerated multiple option approach over the requisite service period, which equals the vesting period. The following table summarizes the total stock-based compensation cost under SFAS No. 123R for the three and six months ended February 28, 2009 and February 29, 2008 and the effect on the Company’s Condensed Consolidated Statements of Operations (in thousands):


	Three Months Ended				Six Months Ended
	February 28,		February 29,		February 28,		February 29,
	2009		2008		2009		2008

Cost of sales	$	74	$	48	$	164	$	86
Operating expenses		529		577		1,258		897
Research and development expenses		15		2		31		6

Total stock-based compensation expense	$	618	$	627	$	1,453	$	989
Tax benefit		235		238		552		376

Total stock-based compensation expense, net of tax	$	383	$	389	$	901	$	613

6—INVENTORIES

The components of inventory are as follows:


	February 28,		August 31,
	2009		2008
	(In thousands)
Raw materials	$	18,424	$	26,578
Work in progress		731		1,139
Finished goods		21,074		22,483

Total inventories	$	40,229	$	50,200

Changes in Australian and New Zealand currency exchange rates have caused a reduction in the recorded amount of inventory in the first six months of fiscal 2009 by approximately $5.6 million. Raw material inventory declined in the first six months of fiscal 2009 primarily due to the consumption of on-site corn inventories and a decline in the price of corn in the Industrial Ingredients — North America business.

7—PROPERTY, PLANT AND EQUIPMENT

The components of property, plant and equipment are as follows:


	February 28,			August 31,
	2009			2008
	(In thousands)
Land	$	18,139		$	20,993
Plant and equipment		369,465			385,632
Construction in progress		7,800			6,808

		395,404			413,433
Accumulated depreciation		(242,277	)		(243,501	)

Net property, plant and equipment	$	153,127		$	169,932

Changes in Australian and New Zealand currency exchange rates have caused a reduction in the recorded amount of net property, plant and equipment in the first six months of fiscal 2009 by approximately $9.9 million.

8—DEBT

In fiscal 2007, the Company entered into a $145 million Second Amended and Restated Credit Agreement (the “2007 Agreement”) among the Company; Harris N.A.; LaSalle Bank National Association; Cooperative Centrale Raiffeisen-Boorleenbank B.A., (New York Branch) (“Rabobank Nederland”); U.S. Bank National Association; and the Australia and New Zealand Banking Group Limited.

Due to the expected impact of the flood described in Note 3 on the Company’s results of operations during its fourth quarter of fiscal 2008, the Company sought and obtained an amendment to the 2007 Agreement with the banks identified above. Effective July 9, 2008, the 2007 Agreement was amended to temporarily adjust the calculation of selected covenant formulas for the costs of the flood damage and the associated property damage and business interruption insurance recoveries. The Fixed Charge Coverage Ratio was reduced to 1.25 through November 30, 2008 and 1.50 thereafter as defined in the 2007 Agreement.

On February 26, 2009, the Company entered into a second amendment to the 2007 Agreement (the “Second Amendment”). The Second Amendment adjusts certain covenants and other provisions in the 2007 Agreement to provide additional relief from the financial impact of the flood at the Company’s Cedar Rapids, Iowa facility. The amendment provides that the “Total Funded Debt Ratio,” under the 2007 Agreement, which is computed as funded debt divided by EBITDA (which is, generally, earnings before interest, taxes, depreciation and amortization, plus (minus) certain non-cash losses (gains) and costs and insurance recoveries related to the flood in Cedar Rapids, Iowa) shall not exceed 4.00 through August 31, 2009, 3.25 for the first quarter of fiscal 2010 and 3.00 for each fiscal quarter thereafter. In addition, the Second Amendment requires the Company to maintain a consecutive twelve month minimum EBITDA (as defined in the Second Amendment) of $20.0 million for each fiscal quarter through November 2009. The Second Amendment also provides that the Company may not declare or pay dividends on, or make any other distributions in respect of, its common stock in excess of $4 million during its 2009 fiscal year and $8 million in any fiscal year thereafter. The Second Amendment limits the Company’s annual capital expenditures to $12 million for fiscal year 2009 and $20 million thereafter as defined in the 2007 Agreement. Additionally, the Second Amendment increased the maximum commitment fee for undrawn balances by 10 basis points and the maximum LIBOR margin payable on outstanding debt was increased by 100 basis points. The incremental annual interest expense from these pricing changes is estimated at $0.8 million per annum, based on current outstanding borrowings. Pursuant to the Second Amendment, Bank of Montreal became the Administrative agent under the 2007 Agreement, replacing Harris N.A. This description is qualified in its entirety by reference to the Second Amendment, which is attached as Exhibit 10.1 to the Company’s Form 8-K filed on March 3, 2009.

At February 28, 2009, the Company had $29.4 million and $7.4 million outstanding, respectively, under the revolving credit and term loan portions of its credit facility. In addition, the Company had $43.0 million outstanding under its capital expansion credit facility on February 28, 2009. The Company’s ability to borrow under its $60 million revolving credit facility is subject to the Company’s compliance with, and is limited by, the covenants in the 2007 Agreement.

The Company’s short-term borrowings consist of an Australian variable-rate grain inventory financing facility with an Australian bank for a maximum of $26.0 million U.S. dollars at the exchange rate at February 28, 2009. The amount outstanding under this arrangement, which is classified as a current liability on the balance sheet, was $1.3 million at February 28, 2009.

As of February 28, 2009, all 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 has fixed its interest rates on U.S. dollar-denominated debt of $25.6 million at 4.18% and $5.4 million at 5.08%, plus the applicable margin under the 2007 Agreement. At February 28, 2009, the fair value of the interest rate swaps was recorded on the balance sheet as a liability of $1.9 million.

9—INCOME TAXES

The Company’s Australian operations reported a tax loss for fiscal 2008 and for the first half of fiscal 2009. Australian tax law provides for an unlimited carryforward period for net operating losses but does not allow losses to be carried back to previous tax years. Due to the uncertainty related to generating sufficient future taxable income in Australia, the Company currently believes that it is more likely than not that the net deferred tax benefit will not be realized. Accordingly, in the second quarter of fiscal 2009 the Company recorded a $2.1 million valuation allowance against the entire Australian net deferred tax asset. A valuation allowance has not been recognized on the net U.S. deferred tax asset as there is sufficient taxable income in carryback years to realize the net deferred tax asset.

The Company’s effective tax rates for the three- and six-month periods ended February 28, 2009 were 1.1% and 3.2%, respectively. The reduction in the effective tax rates from the U.S. federal statutory rate is primarily due to (1) a $2.1 million valuation allowance recognized against the Australian net deferred tax assets as discussed above, and (2) no recognition of a tax benefit in connection with the Australian goodwill impairment charge of $13.8 million as this charge is not deductible for tax purposes, and (3) an increase in the amount of unrecognized tax benefits as discussed below.

The amount of unrecognized tax benefits determined in accordance with Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), increased by $0.7 million and $0.8 million for the three and six months ended February 28, 2009. The total amount of unrecognized tax benefits at February 28, 2009 was $1.5 million, all of which, if recognized, would favorably impact the effective tax rate. The Company has been notified by one state taxing jurisdiction that its fiscal 2004-2006 tax returns will be audited beginning in the third quarter of fiscal 2009. None of the Company’s other income tax returns are under examination by taxing authorities. The Company does not believe that the total amount of unrecognized tax benefits at February 28, 2009 will change materially in the next 12 months.

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. Adjustments to the Company’s tax expense related to the prior fiscal year, amounts recorded in accordance with FIN 48, changes in tax rates, and the effect of a change in the beginning-of-the-year valuation allowance are treated as discrete items and are recorded in the period in which they arise.

10—STOCKHOLDERS’ EQUITY

In December 2007, the Company completed a public offering of common stock resulting in the issuance of 2,000,000 common shares at a price to the public of $25.00 per share. The Company received approximately $47.2 million of net proceeds (net of $2.8 million of expenses related to the offering) from the sale of the shares. This transaction increased the recorded amounts of common stock by $2.0 million and increased additional paid-in capital by $45.2 million in the second quarter of fiscal 2008.

11—OTHER COMPREHENSIVE INCOME (LOSS) (“OCI”)

The components of total comprehensive income (loss) are as follows:


	Three months ended					Six months ended
	February			February		February			February
	28, 2009			29, 2008		28, 2009			29, 2008
	(In thousands)
Net income (loss)	$	(22,178	)	$	2,315	$	(22,547	)	$	5,477
Foreign currency translation adjustments		(1,346	)		5,598		(20,302	)		11,069
Net unrealized gain (loss) on derivative instruments that qualify as cash flow hedges, net of tax		(1,890	)		1,294		(2,480	)		1,355

Total comprehensive income (loss)	$	(25,414	)	$	9,207	$	(45,329	)	$	17,901

The change in the foreign currency translation adjustments in the first six months of fiscal 2009 is due to the decline of approximately 25% in the Australian and New Zealand dollars compared to the U.S. dollar since August 31, 2008.

12—NON-OPERATING INCOME, NET

Non-operating income, net consists of the following:


	Three months ended						Six months ended
	February 28,			February 29,			February 28,			February 29,
	2009			2008			2009			2008
	(In thousands)
Royalty and licensing income	$	377		$	405		$	787		$	855
Gain on sale of dextrose product line		1,562			—			1,562			—
Gain (loss) on foreign currency transactions		(28	)		434			(641	)		444
Other		13			(48	)		6			(45	)

Total	$	1,924		$	791		$	1,714		$	1,254

In February 2009, the Company’s Food Ingredients — North America business segment sold assets related to its dextrose product line to a third-party purchaser for $2.9 million, net of transaction costs. The Company recorded a $1.6 million gain on the sale.

In fiscal 2003, the Company exclusively licensed to National Starch and Chemical Investment Holdings Corporation (“National Starch”) certain rights to its resistant starch patent portfolio (the “RS Patents”) for applications in human nutrition. Under the terms of the licensing agreement, the Company received an initial licensing fee of $2.25 million ($1.6 million net of transaction expenses) which is being amortized over the life of the royalty agreement. The Company has recognized $11.2 million in royalty income from the inception of the agreement through February 28, 2009.

In the first quarter of fiscal 2007, in connection with the settlement of litigation in which Penford’s Australian subsidiary companies were plaintiffs, Penford received a one-time payment of $625,000 and granted a license to one of the defendants in this litigation under Penford’s RS Patents for applications not related to human nutrition. In addition, as part of the settlement agreement, Penford became entitled to receive additional royalties under a license of rights under the RS Patents in human nutrition applications and to receive certain other benefits, including an acceleration and extension of royalties under its license with National Starch. At the time of the settlement, the Company began recognizing license income of $625,000 ratably over the remaining life of the patent license, which at the time of the settlement was estimated to be seven years.

13 — PENSION AND POST-RETIREMENT BENEFIT PLANS

The components of the net periodic pension and post-retirement benefit costs for the three and six months ended February 28, 2009 and February 29, 2008 are as follows:


	Three months ended						Six months ended
	February 28,			February 29,			February 28,			February 29,
Defined benefit pension plans	2009			2008			2009			2008
	(In thousands)
Service cost	$	355		$	371		$	710		$	742
Interest cost		645			623			1,290			1,246
Expected return on plan assets		(607	)		(663	)		(1,214	)		(1,326	)
Amortization of prior service cost		63			63			126			126
Amortization of actuarial losses		53			13			106			26

Net periodic benefit cost	$	509		$	407		$	1,018		$	814


	Three months ended						Six months ended
	February 28,			February 29,			February 28,			February 29,
Post-retirement health care plans	2009			2008			2009			2008
	(In thousands)
Service cost	$	65		$	78		$	130		$	156
Interest cost		228			213			456			426
Amortization of prior service cost		(38	)		(38	)		(76	)		(76	)

Net periodic benefit cost	$	255		$	253		$	510		$	506

14—DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASURMENTS

Effective September 1, 2008, the Company adopted SFAS 157, “Fair Value Measurements” (SFAS 157), which defines fair value, establishes a framework for its measurement, and expands disclosures concerning fair value measurements. The Company adopted the provisions of SFAS 157 with respect to financial assets and liabilities. In February 2008, the FASB issued Staff Position No. 157-2, “Effective Date of FASB Statement No. 157,” which delayed the effective date of SFAS 157 for nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis at least annually. The major categories of assets and liabilities that are measured at fair value, for which the Company has not applied the provisions of SFAS 157, are as follows: reporting units measured at fair value in the first step of a goodwill impairment test under SFAS No. 142 and the initial recognition of asset retirement obligations. The adoption of SFAS 157 did not have a material impact on the Company’s results of operations, financial position or cash flow, but did result in additional disclosures.

SFAS 157 defines fair value as the price that would be received from selling an asset or paid to transfer a liability (an exit price) in Penford’s principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtain from sources outside the reporting entity.

Unobservable inputs are inputs that reflect Penford’s own assumptions based on market data and on assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three levels of inputs that may be used to measure fair value are:

	•		Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

	•		Level 2 inputs are other than quoted prices included within Level 1 that are observable for assets and liabilities such as (1) quoted prices for similar assets or liabilities in active markets, (2) quoted prices for identical or similar assets or liabilities in markets that are not active, or (3) inputs that are derived principally or corroborated by observable market date by correlation or other means.

	•		Level 3 inputs are unobservable inputs to the valuation methodology for the assets or liabilities.

Presented below are the fair values of the Company’s financial instruments at February 28, 2009.


	Quoted Prices
	In Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Instruments		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Current assets (Other Current Assets):
Commodity derivatives	$	1,329	$	—	$	—	$	1,329


Current liabilities (Accrued Liabilities):
Interest rate swaps	$	—	$	1,929	$	—	$	1,929
Foreign currency contracts		—		272		—		272

Total Liabilities	$	—	$	2,201	$	—	$	2,201

Derivative Instruments

Effective December 1, 2008, the Company adopted FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB No. 133” (“SFAS 161”). SFAS 161 requires additional disclosures about the objectives for using derivative instruments and hedging activities, method of accounting for such instruments under SFAS 133 and its related interpretations, the effect of derivative instruments and related hedged items on financial position, results of operations, and cash flows, and a tabular disclosure of the fair values of derivative instruments and their gains and losses.

Interest Rate Swap Agreements

The Company uses interest rate swaps to manage the variability of interest payments associated with its floating-rate long-term debt obligations. The interest payable on the long-term debt effectively becomes fixed at a certain rate and reduces the impact of future interest rate changes on future interest expense. As of February 28, 2009, the Company had three interest rate swaps which fixed the interest payable on $25.6 million of long-term debt at 4.18% and on $5.4 million of long-term debt at 5.08%, plus the applicable margin under the 2007 Agreement. The notional amounts, interest rate reset dates, underlying benchmark rates and interest payment dates match the terms of the long-term debt. The Company has designated the swap agreements as cash flow hedges and accounts for them pursuant to FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The unrealized losses on the interest rate swaps are included in accumulated other comprehensive income (loss). The periodic settlements on the swaps are recorded as interest expense.

Foreign Currency Contracts

The Company’s Food Ingredients — North America business purchases certain raw materials in a foreign currency, the Czech koruna (CZK), the monetary unit of the Czech Republic. In order to manage the variability in forecasted cash flows due to the foreign currency risk associated with settlement of accounts payable denominated

in CZK, the Company purchases foreign currency forward contracts. The Company has designated these contracts as cash flow hedges and accounts for them pursuant to FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” To the extent the amounts and timing of the forecasted cash flows and the forward contracts continue to match, the unrealized losses on the foreign currency purchase contracts are included in accumulated other comprehensive income (loss). The gain or loss on the contracts is recorded in cost of goods sold at the time the inventory is sold. At February 28, 2009, the Company had contracts to purchase CZK 31,420,146 at various dates between April and August 2009 at a weighted average exchange rate of 18.63 CZK per U.S. $1.

Commodity Contracts

The Company uses forward contracts and readily marketable exchange-traded futures on corn and natural gas to manage the price risk of those inputs to its manufacturing process. The Company has designated these instruments as hedges and accounts for them pursuant to FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

For derivative instruments designated as fair value hedges, the gain or loss on the derivative instruments as well as the offsetting loss or gain on the hedged firm commitments and/or inventory are recognized in current earnings as a component of cost of goods sold. For derivative instruments designated as cash flow hedges, the effective portion of the gain or loss on the derivative instruments is reported as a component of other comprehensive income, net of applicable income taxes, and recognized in earnings when the hedged exposure affects earnings. The Company recognizes the gain or loss on the derivative instrument as a component of cost of goods sold in the period when the finished goods produced from the hedged item are sold. If it is determined that the derivative instruments used are no longer effective at offsetting changes in the price of the hedged item, then the changes in market value would be recognized in current earnings as a component of cost of good sold or interest expense.

To reduce the price volatility of corn used in fulfilling some of its starch sales contracts, Penford from time to time uses readily marketable exchange-traded futures as well as forward cash corn purchases. The exchange-traded futures are not purchased or sold for trading or speculative purposes and are designated as hedges. The changes in market value of such contracts have historically been, and are expected to continue to be, effective in offsetting the price changes of the hedged commodity. Penford also at times uses exchange-traded futures to hedge corn inventories and firm corn purchase contracts. Hedged transactions are expected to occur within 12 months of the time the hedge is established.

As of February 28, 2009, the Company had the following outstanding forward futures contracts:


Corn Futures		2,895,000 Bushels
Natural Gas Futures		1,200,000 mmbtu (millions of British thermal units)
Interest Rate Contracts		31,000,000 US Dollars
Foreign Exchange Contracts		31,420,146 CZK

The fair values of our financial assets, liabilities, and statement of derivative positions in the scope of SFAS 161 as of February 28, 2009, were as follows:

Fair Value of Derivative Instruments

Derivatives Designated as Hedging

as of the Quarter Ended February 28, 2009

Instruments under SFAS 133

(in thousands)

2009 Asset Derivatives

2009 Liability Derivatives

Balance Sheet

Location

Fair Value

Location

Fair Value

Cash Flow Hedges:

Corn Futures

Other Current Assets

235

Other Current Assets

($2,176

)

Natural Gas Futures

Other Current Assets

—

Other Current Assets

(4,902

)

Interest Rate Contracts

Other Current Assets

—

Accrued Liabilities

(1,929

)

Foreign Exchange Contracts

Other Current Assets

—

Accrued Liabilities

(272

)

Total Cash Flow Hedges

235

(9,279

)

Fair Value Hedges:

Corn Futures

Other Current Assets

2,954

Other Current Assets

(339

)

Total Fair Value Hedges

2,954

(339

)

Total Derivatives Designated as Hedging Instruments under SFAS 133

3,189

($9,618

)

Derivatives in SFAS 133 Cash

The Effect of Derivative Instruments on the Statement of Financial Performance

Flow Hedging Relationships

for the Quarter Ended February 28, 2009

(in thousands)

Amount of Gain or

Location of Gain or

Amount of Gain or

(Loss) Recognized

Amount of Gain or

(Loss) Reclassified

Location of Gain or (Loss)

in Income on

(Loss)

from Accum OCI into

Recognized in Income on

Derivative

Recognized in OCI

Income

Income (Effective

Derivative (Ineffective

(Ineffective

(Effective Portion)

Portion)

Income Statement

Location

Cash Flow Hedging Relationships:

Corn Futures

(905

)

Cost of goods sold

6,981

Cost of goods sold

618

Natural Gas Futures

(4,902

)

Cost of goods sold

(795

)

Cost of goods sold

—

Interest Rate Contracts

(1,929

)

Interest expense

(47

)

Interest Expense

—

Foreign Exchange Contracts

(290

)

Cost of goods sold

—

Cost of goods sold

—

Total

(8,026

)

6,139

618

Derivatives in SFAS 133 Fair

The Effect of Derivative Instruments on the Statement of Financial Performance

Value Hedging Relationships

for the Quarter Ended February 28, 2009

(in thousands)

Location of

Amount of Gain

Location of

Gain/(Loss)

Location of Gain /

/ (Loss)

Hedged Item in

Gain/(Loss)

Recognized in

(Loss) Recognized

Recognized in

SFAS 133 Fair

Recognized in

Income on

in Income on

Income on

Value Hedge

Income on Related

Related Hedged

Derivative

Relationships

Hedged Item

Item

Income Statement

Location

Fair Value Hedge Relationships:

Corn Futures

Cost of goods sold

—

Firm Commitments/Inventory

Cost of goods sold

337

Total

—

337

15—RESTRUCTURING COSTS

In the first quarter of fiscal 2008, in connection with reconfiguring the Company’s Australian business, a workforce reduction was implemented in the Company’s two Australian operating facilities. In connection therewith, $1.2 million in employee severance costs and related benefits were charged to operating income in the first quarter. In the second quarter of fiscal 2008, the Company’s Australian business recorded a restructuring charge of $0.1 million related to a workforce reduction implemented at its New Zealand operations. These costs are shown as “Restructure Costs” in the statement of operations.

16—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 Industrial Ingredients segment provides carbohydrate-based products for industrial applications, primarily in the paper and packaging products and fuel grade ethanol industries. The Food Ingredients segment produces specialty starches for food applications. 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						Six months ended
	February			February			February			February
	28, 2009			29, 2008			28, 2009			29, 2008
	(In thousands)
Sales:
Industrial Ingredients—North America	$	47,315		$	49,076		$	89,157		$	98,286
Food Ingredients—North America		16,623			15,642			34,365			31,718
Australia/New Zealand Operations		16,068			23,458			37,428			53,402
Intercompany sales		(198	)		(287	)		(451	)		(656	)

	$	79,808		$	87,889		$	160,499		$	182,750


Income (loss) from operations:
Industrial Ingredients—North America	$	(6,652	)	$	4,568		$	(4,852	)	$	10,265
Food Ingredients—North America		2,813			2,207			6,211			4,859
Australia/New Zealand Operations		(16,787	)		(2,045	)		(18,320	)		(2,120	)
Corporate and other		(2,374	)		(2,059	)		(5,202	)		(4,576	)

	$	(23,000	)	$	2,671		$	(22,163	)	$	8,428

In the second quarter of fiscal 2009, the Company recorded a $13.8 million non-cash goodwill impairment charge related to its Australian/New Zealand Operations. See Note 4 for further details.


	February 28,		August 31,
	2009		2008
	(In thousands)
Total assets:
Industrial Ingredients-North America	$	144,830	$	141,618
Food Ingredients—North America		33,530		35,100
Australia/New Zealand Operations		64,192		111,255
Corporate and other		31,833		32,460

	$	274,385	$	320,433

17—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 (loss) per share is calculated by dividing net income (loss) 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 six months ended February 28, 2009 and February 29, 2008.


	Three months ended				Six months ended
	February		February		February		February
	28, 2009		29, 2008		28, 2009		29, 2008
	(In thousands)
Weighted average common shares outstanding		11,174		10,857		11,165		9,988
Dilutive stock options and awards		—		338		—		393

Weighted average common shares outstanding, assuming dilution		11,174		11,195		11,165		10,381

For the three and six months ended February 28, 2009, there were 86,701 and 92,174 weighted-average restricted stock awards excluded from the calculation of diluted earnings (loss) per share because they were antidilutive. Weighted-average restricted stock awards of 104,605 and 70,061 shares for the three and six months ended February 29, 2008, were excluded from the calculation of diluted earnings (loss) per share because they were antidilutive. Weighted-average stock options to purchase 1,375,788 and 1,376,069 shares of common stock for the three and six months ended February 28, 2009, were excluded from the calculation of diluted earnings (loss) per share because they were antidilutive. For the three and six months ended February 29, 2008, there were no stock options excluded from the calculation of diluted earnings (loss) per share.

18—LEGAL PROCEEDINGS

The Company is involved from time to time in various claims and litigation arising in the normal course of business. In the judgment of management, which relies in part on information from the Company’s outside legal counsel, the ultimate resolution of these matters will not materially affect the consolidated financial position, results of operations or liquidity of the Company.

19—GUARANTEE

In February 2009, Penford Corporation entered into an agreement with a supplier of grain to the Company’s subsidiary company, Penford New Zealand Limited. Pursuant to this agreement, the Company has guaranteed the trade payable obligations of Penford New Zealand arising from the purchase of grain from this supplier up to a limit of 9.0 million New Zealand Dollars or the New Zealand Dollar equivalent of $5.0 million U.S. Dollars, whichever is less. The guarantee continues for the period during which the supplier sells grain to Penford New Zealand. As of February 28, 2009, the outstanding payable balance related to this guarantee is 2.8 million New Zealand Dollars, which was equivalent to $1.4 million U.S. Dollars on that date. This outstanding balance is included in accounts payable in the Condensed Consolidated Balance Sheet.

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

Forward-looking Statements

This Quarterly Report on Form 10-Q (“Quarterly Report”), including, but not limited, to statements found in the Notes to Consolidated Financial Statements and in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements that are forward-looking statements within the meaning of the federal securities laws. In particular, statements pertaining to anticipated operations and business strategies contain forward-looking statements. Likewise, statements regarding anticipated changes in the Company’s business and anticipated market conditions are forward-looking statements. Forward-looking statements involve numerous risks and uncertainties and should not be relied upon as predictions of future events. Forward-looking statements depend on assumptions, dates or methods that may be incorrect or imprecise, and the Company may not be able to realize them. Forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates,” or the negative use of these words and phrases or similar words or phrases. Forward-looking statements can be identified by discussions of strategy, plans or intentions. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in this Quarterly Report, including those referenced in Item 1A in this Quarterly Report, and those described from time to time in other filings with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended August 31, 2008, 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;

	§		the amount and timing of expenditures for flood restoration costs and related insurance recoveries;

	§		changes in general economic conditions or developments with respect to specific industries or customers affecting demand for the Company’s products including unfavorable shifts in product mix;

	§		unanticipated costs, expenses or third-party claims;

	§		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, chemical and energy cost volatility;

	§		foreign currency exchange rate fluctuations;

	§		changes in returns on pension plan assets and/or assumptions used for determining employee benefit expense and obligations;

	§		other unforeseen developments in the industries in which Penford operates, or

	§		other factors described in Part I, Item 1A “Risk Factors.”

Overview

Penford generates revenues, income and cash flows by developing, manufacturing and marketing specialty natural-based ingredient systems for industrial and food applications and for fuel grade ethanol. The Company develops and manufactures ingredients with starch as a base, providing value-added applications to its customers. Penford’s starch products are manufactured primarily from corn, potatoes, and wheat.

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 comprised of the Company’s operations in Australia and New Zealand, which operations are engaged primarily in the food ingredients business. See Notes 1 and 16 to the Condensed Consolidated Financial Statements for additional information regarding the Company’s business segment operations.

Impact of Cedar Rapids Flood

On June 12, 2008, the Company’s Industrial Ingredients — North America plant in Cedar Rapids, Iowa was temporarily shut down due to record flooding of the Cedar River and government-ordered mandatory evacuation of the plant and surrounding areas. By the end of the first quarter of fiscal 2009, the facility’s processing rate had reached pre-flood levels.

During the second quarter of fiscal 2009, the Company recorded $0.6 million of flood restoration costs which are recognized, net of insurance recoveries of $4.4 million, in loss from operations in the financial statements. For the six months ended February 28, 2009, the Company recorded $7.4 million of flood restoration costs which are recognized, net of insurance recoveries of $15.5 million, in loss from operations in the financial statements. The total direct costs of the flood since June 2008 were $45.5 million, which included ongoing expenses during the time the plant was shut down, but did not include lost profits. See Note 3 to the Condensed Consolidated Financial Statements for details of the restoration costs.

During the second quarter of fiscal 2009, the Company recognized $4.4 million of insurance recoveries. These recoveries have been recorded as an offset to the losses caused by the flooding. The insurance recoveries recognized to date total $26.0 million.

The effect of the flood on the financial results of the Company on a quarter-to-quarter basis in fiscal 2009 will depend on the timing and amount of the remaining expenditures and insurance recoveries. The Company will continue to process its claim for flood losses under its insurance policies, but is unable to estimate the amount or timing of future recoveries. The amount ultimately recovered from the Company’s insurers may be materially more or less than the Company’s direct costs of the flood.

Goodwill

During the second quarter of fiscal 2009, the Company continued to experience a worsening demand outlook, a decline in its sales and operating income, as well as a reduction in its expected future cash flows. In addition, Penford experienced a sustained, significant decline in its stock price. During the second quarter of fiscal 2009, the Company concluded that there were sufficient indicators to perform an interim goodwill impairment analysis in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Based on the analysis, the Company recorded a $13.8 million non-cash goodwill impairment charge, which represented all of the goodwill allocated to its Australia/New Zealand Operations segment. See Note 4 to the Condensed Consolidated Financial Statements.

Accounting Changes

Effective September 1, 2008, the Company adopted FASB Statement No. 157, “Fair Value Measurements” (“SFAS 157”), for financial assets and liabilities carried at fair value that are recognized or disclosed at fair value in the financial statements on a recurring basis. SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. The adoption did not have a material impact on the company’s financial statements. See Note 14 to the Condensed Consolidated Financial Statements. Due to the issuance of FASB Staff Position No. 157-2 (“FSP 157-2”), the effective date of SFAS 157 has been deferred to fiscal years beginning after November 15, 2008 (fiscal 2010 for the Company) for non-recurring, nonfinancial assets and liabilities that are recognized or disclosed at fair value. The Company is continuing to evaluate the impact of adopting these provisions in fiscal 2010. In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 and addresses how the fair value of a financial asset is determined when the

market for that financial asset is inactive. FSP 157-3 was effective upon issuance. The implementation of this standard did not have an impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB No. 133” (“SFAS 161”). SFAS 161 requires additional disclosures about the objectives for using derivative instruments and hedging activities, the method of accounting for such instruments under SFAS 133 and its related interpretations, the effect of derivative instruments and related hedged items on financial position, results of operations, and cash flows, and a tabular disclosure of the fair values of derivative instruments and their gains and losses. Effective December 1, 2008, the Company adopted SFAS 161. See Note 14 to the Condensed Consolidated Financial Statements.

Results of Operations

Executive Overview

Consolidated sales for the three months ended February 28, 2009 declined 9.2% to $79.8 million from $87.9 million in the second quarter of fiscal 2008, primarily due to a significant decline in the demand for paper and writing products, a shift in the manufacturing mix in the Industrial Ingredients — North America business to produce ethanol which sells at lower average prices than industrial starches, and lower foreign currency exchange rates in the Australia/New Zealand operations. These factors were partially offset by favorable unit pricing in the Australia/New Zealand operations and the Food Ingredients — North America segments. Consolidated second quarter gross margin declined $15.6 million to a loss of $4.1 million, primarily due to a decline in ethanol selling prices which caused a gross margin loss at the Industrial Ingredients — North America segment, as well as lower plant utilization in the Australia/New Zealand business. Loss from operations was $23.0 million, $25.7 million lower than the second quarter operating income of $2.7 million for fiscal 2008 due to gross margin declines and a $13.8 million non-cash goodwill impairment charge related to its Australian and New Zealand business segment. See Note 4 to the Condensed Consolidated Financial Statements.

Consolidated sales for the six months ended February 28, 2009 decreased 12.2% to $160.5 million from $182.7 million in the same period last year on lower foreign currency exchange rates and a decline in sales volumes in the Australia/New Zealand Operations, and, in the Industrial Ingredients — North America business, on lower average unit selling prices for ethanol than for industrial starches. These factors were partially offset by higher average unit pricing in the Australia/New Zealand and Food Ingredients — North America businesses. Gross margin as a percent of sales was 0.8%, compared to 15.2% last year, on higher grain costs in Australia and New Zealand, revenue declines, and lower plant utilization in the Australia/New Zealand business. Operating loss for the first half of fiscal 2009 declined to $22.2 million from operating income of $8.4 million for the first half of fiscal 2008 due to decreased gross margins and a $13.8 million non-cash goodwill impairment charge related to its Australian and New Zealand business segment. See Note 4 to the Condensed Consolidated Financial Statements. Included in operations for the three- and six-month periods ended February 28, 2009 were net insurance proceeds of $3.8 million and $8.0 million, respectively. See Note 3 to the Condensed Consolidated Financial Statements. Operating income for the first six months of fiscal 2008 included $1.3 million of severance costs related to reconfiguring the Australia/New Zealand business. See Note 15 to the Condensed Consolidated Financial Statements. A discussion of segment results of operations and the effective tax rate follows.

Industrial Ingredients—North America

In the second quarter of fiscal 2009, U.S. economic activity contracted significantly and demand for our customers’ paper and packaging products declined sharply. The paper industry balanced manufacturing capacity with decreased demand by taking downtime or permanently closing mills and operating rates at paper mills decreased. Declines in the prices for gasoline and other fuels have also depressed prices for ethanol.

Second quarter fiscal 2009 sales at the Company’s Industrial Ingredients—North America business unit declined $1.8 million, or 3.6%, to $47.3 million. Starch volumes decreased as demand declined for paper and packaging products. Average unit selling prices improved for the core starch product lines by 8.5% and sales and pricing for the

Company’s specialty Liquid Natural Additives applications improved modestly from a year ago. Sales of ethanol, which the Company began producing in the third quarter of last fiscal year, were $14.3 million in the second quarter of fiscal 2009. Sales for the first half of fiscal 2009 decreased 9% to $89.2 million as double-digit improvements in unit pricing in all starch categories were not able to offset volume declines. Sales of ethanol, which was not produced in the first half of fiscal 2008, were $24.0 million for the first six months of fiscal 2009.

Income from operations for the second quarter of fiscal 2009 at the Company’s Industrial Ingredients—North America business unit decreased from $4.6 million a year ago to an operating loss of $6.7 million in fiscal 2009. Second quarter fiscal 2009 gross margin was a loss of $7.4 million compared to positive margin of $7.4 million for the second quarter of fiscal 2008. Unit margins on ethanol are lower than industrial starch and the decline in ethanol selling prices as well as the unfavorable mix in revenues decreased gross margin for the industrial business. Margin and operating losses of $7.3 million and $4.9 million, respectively, for the six months ended February 28, 2009 were also driven by the increase in lower margin ethanol sales and the reduction in starch sales to the paper markets. See Note 3 to the Condensed Consolidated Financial Statements for a discussion of the insurance recoveries and costs associated with the flooding in the summer of 2008. The Company recorded net insurance recoveries of $3.8 million and $8.0 million for the second quarter and first half of fiscal 2009, respectively.

Food Ingredients—North America

Fiscal 2009 second quarter sales for the Food Ingredients—North America segment of $16.6 million increased 6.3%, or $1.0 million, from the second quarter of fiscal 2008, due to higher average unit pricing and improved mix with 18% growth in potato coating sales and higher sales of pet chew and treats product lines. Sales for the six months ended February 28, 2009 rose 8.3%, or $2.6 million, to $34.4 million over the same period last year. Sales growth was driven by improvements in potato coatings and the pet chew and treats product lines and a 27% increase in sales of applications for the dairy/cheese end market and higher sales in the sauces and gravies end markets.

Income from operations for the second quarter of fiscal 2009 at the Food Ingredients—North America segment was $2.8 million, a 28% increase over the same period last year. Second quarter gross margin improved 15.3% to $4.8 million on favorable pricing and product mix and lower distribution costs, partially offset by lower volumes. Income from operations for the first half of fiscal 2009 improved to $6.2 million, a $1.4 million increase compared to the same period of fiscal 2008. Gross margin increased by $1.4 million, and gross margin as a percent of sales expanded 180 basis points over last year’s period on improved pricing and lower distribution costs, partially offset by lower volumes. Operating expenses and research activities were comparable to the same period last year as higher employee-related costs were offset by lower expenditures for product trials.

In the second quarter of fiscal 2009, the Company’s Food Ingredients — North America business segment sold assets related to its dextrose product line to a third-party purchaser for $2.9 million, net of transaction costs. The Company recorded a $1.6 million gain on the sale, reflected in “Non-operating income, net” in the statement of operations.

Australia/New Zealand Operations

Sales at the Australia/New Zealand operations declined 31.5%, or $7.4 million, in the second quarter of fiscal 2009 over the same period of fiscal 2008 primarily due to the decline in the foreign currency exchange rates compared to the U.S. dollar. Lower sales volume of 11% due to rationalization of lower-margin products, partially offset by higher average unit pricing also contributed to the decline in second quarter revenues. Second quarter sales in local currency declined by 8.8% over the same quarter of fiscal 2008 and average unit pricing in local currency increased 2.7%. Sales for the six months ended February 28, 2009 decreased 29.9% to $37.4 million from $53.4 million last year, primarily due to a 21% decrease in the average foreign currency exchange rate and an 18% decline in sales volumes, partially offset by higher average unit pricing. Sales in local currency decreased 11% and average unit pricing increased 8.7% in local currency.

In the second quarter of fiscal 2009, the Company recorded a $13.8 million non-cash goodwill impairment charge. See Note 4 to the Condensed Consolidated Financial Statements. Fiscal 2009 second quarter loss from operations at the Company’s Australia/New Zealand operations was $16.8 million compared to an operating loss of $2.0 million in the same period of fiscal 2008. Second quarter fiscal 2009 gross margin declined by $1.5 million to a loss of $1.6 million. Grain costs in the quarter were $1.0 million higher than a year ago as the drought in the region continued. Unit manufacturing costs rose on lower manufacturing throughput due to product rationalization as well as lower yields and

supply interruptions on non-local grain as the Company shifts to grain produced in northern Australia. Operating loss for the six months ended February 28, 2009 was $18.3 million, compared to an operating loss of $2.1 million for the same period last year. First half 2009 gross margin declined $4.6 million from last year, from positive margin of $3.0 million to a loss of $1.6 million as raw material grain costs rose $5.4 million and unit manufacturing costs rose $2.7 million. Favorable average unit pricing of $3.4 million partially offset the increased input and production costs. Operating expenses, excluding restructuring costs, decreased $0.9 million over the second half of fiscal 2008 primarily due to the effect of a lower foreign currency exchange rate. Included in the segment’s operating loss for the first half of fiscal 2008 were restructuring costs of $1.3 million. See Note 15 to the Condensed Consolidated Financial Statements.

Corporate operating expenses

Corporate operating expenses for the second quarter of fiscal 2009 were $2.4 million, a $0.3 million increase compared to the same quarter last year, primarily due to higher employee-related costs. For the six months ended February 28, 2009, corporate operating expenses increased $0.6 million to $5.2 million over the same period a year ago due to an increase in professional fees and employee-related costs.

Interest expense

Interest expense for the three and six months ended February 28 2009 increased $0.7 million and $1.0 million, respectively, compared to the same periods last year due to higher average debt balances. In addition, interest costs related to construction of the ethanol manufacturing plant were capitalized until May 2008, when the facility began commercial production. Interest costs capitalized were $0.5 million and $0.8 million for the three and six months ended February 29, 2008. In February 2009, the Company entered into the Second Amendment to the 2007 Agreement. This amendment adjusts certain covenants and other provisions in the 2007 Agreement to provide additional relief from the financial impact of the flood at the Company’s Cedar Rapids, Iowa facility. Additionally, the maximum commitment fee for undrawn balances will increase by 10 basis points. The maximum LIBOR margin payable on outstanding debt will increase by 100 basis points. The incremental annual interest expense from these pricing changes is estimated at $0.8 million per annum, based on current outstanding borrowings. See Note 8 to the Condensed Consolidated Financial Statements.

Income taxes

The amount of unrecognized tax benefits determined in accordance with Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), increased by $0.7 million and $0.8 million for the three and six months ended February 28, 2009. The total amount of unrecognized tax benefits at February 28, 2009 was $1.5 million, all of which, if recognized, would favorably impact the effective tax rate. The Company has been notified by one state taxing jurisdiction that its tax return will be audited beginning in the third quarter of fiscal 2009. None of the Company’s other income tax returns are under examination by taxing authorities. The Company does not believe that the total amount of unrecognized tax benefits at February 28, 2009 will change materially in the next 12 months.

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. Adjustments to the Company’s tax expense related to the prior fiscal year, amounts recorded in accordance with FIN 48 and changes in tax rates are treated as discrete items and are recorded in the period in which they arise.

The determination of the annual effective tax rate applied to current year income or loss before income tax is based upon a number of estimates and judgments, including the estimated annual pretax income of the Company in each tax jurisdiction and the amounts of permanent differences between the book and tax accounting for various items. The Company’s interim tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits, judgments regarding uncertain tax positions and other items that cannot be estimated with any certainty. Therefore, there can be significant volatility in the interim provision for income tax expense.

Non-operating income, net

Non-operating income, net consists of the following:


	Three months ended						Six months ended
	February 28,			February 29,			February 28,			February 29,
	2009			2008			2009			2008
				(In thousands)
Royalty and licensing income	$	377		$	405		$	787		$	855
Gain on sale of dextrose product line		1,562			—			1,562			—
Gain (loss) on foreign currency transactions		(28	)		434			(641	)		444
Other		13			(48	)		6			(45	)

Total	$	1,924		$	791		$	1,714		$	1,254

During the three and six months ended February 28, 2009, the Company recognized a net foreign currency transaction loss on Australian dollar denominated assets and liabilities as disclosed in the table above. See Note 12 to the Condensed Consolidated Financial Statements for information on the Company’s royalty and licensing income.

Liquidity and Capital Resources

The Company’s primary sources of short- and long-term liquidity are cash flow from operations and its revolving line of credit, which expires in 2011. In the first half of fiscal 2009, the Company received $15.5 million of insurance proceeds related to the damages sustained in the flooding in Cedar Rapids, Iowa in June 2008. Costs incurred in the same period associated with the flood recovery were $7.4 million. See the “Overview” section of this Part I, Item 2 and Note 3 to the Condensed Consolidated Financial Statements for a discussion of the impact of the flooding on the Company’s liquidity. The Company also sold its assets related to its dextrose product line in the second quarter of fiscal 2009 for cash proceeds of $2.9 million. In February and March 2009, the Company’s Industrial Ingredients business reduced its workforce by nearly 20%.

Penford had working capital of $43.5 million and $38.1 million at February 28, 2009 and August 31, 2008, respectively. Cash used in operations was $17.5 million for the six months ended February 28, 2009 compared to cash provided by operations of $2.7 million for the six months ended February 29, 2008. The decline in cash flow from operations is primarily due to a decrease in earnings over the same period last year and the impact of higher working capital balances. Trade receivables expanded as the Company’s Industrial Ingredients sales recovered after operations were restarted in the first quarter of fiscal 2009 and accounts payable and accrued liabilities declined during the six months ended February 28, 2009 as a result of payments for flood restoration services accrued for in the fourth quarter of fiscal 2008.

In fiscal 2007, the Company entered into a $145 million Second Amended and Restated Credit Agreement (the “2007 Agreement”). See Note 8 to the Condensed Consolidated Financial Statements. At February 28, 2009, the Company had $29.4 million and $7.4 million outstanding, respectively, under the revolving credit and term loan portions of its credit facility. In addition, the Company had $43.0 million outstanding on February 28, 2009 under its capital expansion credit facility related to the construction of the ethanol facility. During the six months ended February 28, 2009, debt, including the effects of foreign currency exchange rates, expanded by $13.6 million to fund flood restoration costs and other working capital requirements. The Company’s ability to borrow under its $60 million revolving credit facility is subject to the Company’s compliance with, and is limited by, the covenants in the 2007 Agreement, as amended.

During the fourth quarter of fiscal 2008, the Company sought and obtained an amendment to the 2007 Agreement to address the impact of the Cedar Rapids flood. Effective July 9, 2008, the 2007 Agreement was amended to temporarily adjust the calculation of selected covenant formulas for the costs of the flood damage and the associated property damage and business interruption insurance recoveries. The Fixed Charge Coverage Ratio (as defined in the 2007 Agreement, as amended) was reduced to 1.25 through November 30, 2008 and 1.50 thereafter.

The Company entered into the Second Amendment to the 2007 Agreement dated February 26, 2009. This amendment adjusts certain covenants and other provisions in the 2007 Agreement to provide additional relief from the financial impact of the flood at the Company’s Cedar Rapids, Iowa facility. The amendment provides that the Total Funded Debt Ratio, which is computed as funded debt divided by earnings before interest, taxes, depreciation and amortization, plus (minus) certain non-cash losses (gains) and costs and insurance recoveries related to the flood in Cedar Rapids, Iowa (“EBITDA” as defined in the Second Amendment) shall not exceed 4.00 through August 31, 2009, 3.25 for the first quarter of fiscal 2010 and 3.00 for each fiscal quarter thereafter. In addition, the Company is required to maintain a consecutive twelve month minimum EBITDA (as defined in the Second Amendment) of $20.0 million for each fiscal quarter through November 2009 and limit its annual capital expenditures to $12 million for fiscal year 2009 and $20 million thereafter as defined in the 2007 Agreement. There is no assurance that the Company will be able to obtain any additional amendments of the 2007 Agreement should the Company make any such request in the future.

As of February 28, 2009, all 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 has fixed its interest rates on U.S. dollar-denominated debt of $25.6 million at 4.18% and $5.4 million at 5.08%, plus the applicable margin under the 2007 Agreement. At February 28, 2009, the fair value of the interest rate swaps was recorded in the balance sheet as a liability of $1.9 million.

The Company paid dividends of $1.4 million during the six months ended February 28, 2009, which represents a quarterly rate of $0.06 per share. On January 26, 2009, the Board of Directors declared a dividend of $0.06 per common share payable on March 6, 2009 to shareholders of record as of February 13, 2009. 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. Pursuant to the Second Amendment to the 2007 Agreement, the Company may not declare or pay dividends on, or make any other distributions in respect of, its common stock in excess of $4 million during the 2009 fiscal year or if there exists a default or event of default as defined in the 2007 Agreement and $8 million in any fiscal year thereafter.

Guaranteed Obligations

Contractual Obligations

The Company is a party to various debt and lease agreements at February 28, 2009 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. As of February 28, 2009, there have been no material changes in the Company’s contractual obligations disclosed in the Company’s Annual Report on Form 10-K for the year ended August 31, 2008.

Pension Contributions

In light of the temporary pension funding relief provided by the Worker, Retiree and Employer Recovery Act of 2008 (the “Act”), which was enacted in December 2008, the Company currently estimates that the minimum funding contributions to its defined benefit pension plans for plan year 2009 (calendar year 2009) will be $2.4 million and that the minimum contributions for 2009 will be paid as follows: $0.6 million in each of fiscal years 2009 and 2010 and $1.2 million in fiscal year 2011. The amount and timing of contributions will depend on the funding and cost elections allowed under the Act and selected by the Company.

Off-Balance Sheet Arrangements

The Company had no off-balance sheet arrangements at February 28, 2009.

Recent Accounting Pronouncements

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The process of preparing financial statements requires management to make estimates, judgments and assumptions that affect the Company’s financial position and results of operations. These estimates, judgments and assumptions are based on the Company’s historical experience and management’s knowledge and understanding of the current facts and circumstances. Note 1 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the fiscal year ended August 31, 2008 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.

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 material changes in the Company’s exposure to market risks from the disclosure in the Company’s Annual Report on Form 10-K for the year ended August 31, 2008.

Item 4: Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Penford’s management, with the participation of its chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of February 28, 2009. Based on management’s evaluation, the chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended February 28, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1: Legal Proceedings

On January 23, 2009 the Company filed suit in the United States District Court for the Northern District of Iowa, Cedar Rapids Division, against two insurance companies, National Union Fire Insurance Company of Pittsburgh, Pennsylvania and ACE American Insurance Company. This is an insurance coverage suit that arises out of the flood that struck the Company’s Cedar Rapids, Iowa plant in June 2008. The Company seeks additional payments from the insurers of more than $30 million for property damage, time element and various other exposures due to costs and losses incurred as a result of the flood. The litigation is at an early stage and the Company cannot at this time determine the likelihood of any outcome or estimate any damages that might be awarded.

On August 28, 2008, the Company filed an arbitration demand with the American Arbitration Association alleging breach of contract and negligence by C.J. Schneider Engineering Co. (“CJS”) in connection with engineering design work that CJS performed with respect to the Company’s ethanol plant, which was completed in mid-2008. The Company is seeking recovery of costs and damages arising from alleged errors and delays in the performance of the work. Subsequent to the initiation of this proceeding and as a result of it, on March 9, 2009, the Company filed suit in the United States District Court for the Northern District of Iowa against CJS’s unrelated subcontractor, Schneider Structural Engineering, Inc. (“SSE”), seeking an order to compel arbitration of the Company’s claims against SSE or to recover damages and restitution arising from SSE’s acts and omissions in the design of the ethanol plant. In the arbitration involving CJS and the litigation against SSE the Company is seeking to recover losses of approximately $10 million. The arbitration and the litigation are at early stages and the Company cannot at this time determine the likelihood of any outcome or estimate any damages that might be awarded.

The Company is involved from time to time in various other claims and litigation arising in the normal course of business. In the judgment of management, which relies in part on information from the Company’s outside legal counsel, the ultimate resolution of these matters will not materially affect the consolidated financial position, results of operations or liquidity of the Company.

Item 1A: Risk Factors

The information set forth in this report should be read in conjunction with the risk factors discussed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended August 31, 2008, which could materially impact the Company’s business, financial condition and future results. The risks described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known by the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

Item 4: Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Shareholders on January 26, 2009. The first item voted upon at the meeting was the election of directors. The results of the election are shown below.


Director	Votes For		Votes Withheld
R. Randolph Devening		7,883,117		2,391,745
Paul H. Hatfield		8,779,781		1,495,081

Directors not elected at this meeting and whose term of office continued after the meeting are William E. Buchholz, Jeffrey T. Cook, John C. Hunter III, Thomas D. Malkoski and Sally G. Narodick and James E. Warjone.

The second item voted upon at the meeting was the ratification of Ernst & Young LLP as the Company’s independent registered public accounting firm. The results of the voting on the proposal are as follows:


	Votes
Votes For	Against	Abstain
10,017,888	256,974	0

Item 6: Exhibits.

(d) Exhibits


10.1		Second Amendment to Second Amended and Restated Credit, Resignation of Agent and Appointment of Successor Agent dated as of February 26, 2009 (filed as an exhibit to Registrant’s File No. 000-11488, Form 8-K dated February 26, 2009, filed March 3, 2009)

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

31.2		Certification 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

EXHIBIT INDEX

In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please note that they are included to provide information regarding their terms and are not intended to provide any other factual or disclosure information about Penford or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other party or parties to the applicable agreement and:

	•		should not in all instances be treated as categorical statements of fact, but rather as a means of allocating the risk to one of the parties if those statements prove to be inaccurate;

	•		may have been qualified by disclosures that were made to the other party or parties in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

	•		may apply standards of materiality in a manner that is different from what may be viewed as material to investors; and

	•		were made only as of the date of the applicable agreement or other date or dates that may be specified in the agreement and are subject to more recent developments.

Accordingly, the representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Penford may be found elsewhere in this Quarterly Report on Form 10-Q, Penford’s Annual Report on Form 10-K for the year ended August 31, 2008 and in Penford’s other public filings, which are available without charge through the Securities and Exchange Commission’s website at http://sec.gov.


Exhibit No.		Description

	10.1	Second Amendment to Second Amended and Restated Credit, Resignation of Agent and Appointment of Successor Agent dated as of February 26, 2009 (filed as an exhibit to Registrant’s File No. 000-11488, Form 8-K dated February 26, 2009, filed March 3, 2009)

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

	31.2	Certification 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


	Page
PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets — February 28, 2009 and August 31, 2008		3

Condensed Consolidated Statements of Operations — Three and Six Months ended February 28, 2009 and February 29, 2008		4

Condensed Consolidated Statements of Cash Flow — Six Months ended February 28, 2009 and February 29, 2008		5

Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

Item 3. Quantitative and Qualitative Disclosures About Market Risk		28

Item 4. Controls and Procedures		28

PART II—OTHER INFORMATION

Item 1. Legal Proceedings		29

Item 1A. Risk Factors		29

Item 4. Submission of Matters to a Vote of Security Holders		29

Item 6. Exhibits		29

Signatures		30
EX-31.1
EX-31.2
EX-32



	Penford Corporation
	(Registrant)

April 9, 2009	/s/ Steven O. Cordier
	Steven O. Cordier
	Senior Vice President and Chief Financial Officer

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