Penford 10Q 2012 Q1 Quarterly report

Penford (PENX) Inactive 10-Q2012 Q1 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2011

¨	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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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.

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

The net number of shares of the Registrant’s common stock outstanding as of January 4, 2012 was 11,329,567.

PENFORD CORPORATION AND SUBSIDIARIES

INDEX


	Page
PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets – November 30, 2011 and August 31, 2011		3

Condensed Consolidated Statements of Operations – Three Months ended November 30, 2011 and 2010		4

Condensed Consolidated Statements of Cash Flows – Three Months ended November 30, 2011 and 2010		5

Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3. Quantitative and Qualitative Disclosures About Market Risk		22

Item 4. Controls and Procedures		22

PART II—OTHER INFORMATION

Item 1. Legal Proceedings		23

Item 1A. Risk Factors		23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23

Item 6. Exhibits		24

Signatures		25

PART I—FINANCIAL INFORMATION

Item 1:

Financial Statements

PENFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands, except per share data)	November 30, 2011			August 31, 2011
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	264		$	281
Trade accounts receivable, net		30,734			29,482
Inventories		26,024			32,733
Prepaid expenses		2,375			2,502
Material and supplies		3,558			3,489
Income tax receivable		226			92
Other		6,630			5,498

Total current assets		69,811			74,077

Property, plant and equipment, net		106,705			107,372
Restricted cash value of life insurance		7,909			7,909
Deferred tax assets		11,070			12,695
Other assets		2,010			2,132
Other intangible assets, net		315			332
Goodwill, net		7,897			7,897

Total assets	$	205,717		$	212,414

Liabilities and Shareholders’ Equity
Current liabilities:
Cash overdraft, net	$	3,268		$	6,903
Current portion of long-term debt and capital lease obligations		424			421
Accounts payable		18,047			15,268
Accrued liabilities		6,810			7,563

Total current liabilities		28,549			30,155

Long-term debt and capital lease obligations		17,691			23,802
Redeemable preferred stock, Series A		40,260			38,982
Other postretirement benefits		16,323			16,193
Pension benefit liability		11,156			11,217
Other liabilities		6,696			6,600

Total liabilities		120,675			126,949

Shareholders’ equity:
Common stock, par value $1.00 per share, authorized 29,000 shares, issued 13,311 and 13,328 shares, respectively, including treasury shares		13,281			13,243
Preferred stock, Series B		100			100
Additional paid-in capital		102,978			103,070
Retained earnings		9,872			9,368
Treasury stock, at cost, 1,981 shares		(32,757	)		(32,757	)
Accumulated other comprehensive loss		(8,432	)		(7,559	)

Total shareholders’ equity		85,042			85,465

Total liabilities and shareholders’ equity	$	205,717		$	212,414

PENFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three months ended
(In thousands, except per share data)	November 30, 2011			November 30, 2010
Sales	$	90,746		$	72,266
Cost of sales		78,938			63,009

Gross margin		11,808			9,257

Operating expenses		6,109			5,194
Research and development expenses		1,340			1,094

Income from operations		4,359			2,969

Interest expense		(2,397	)		(2,270	)
Other non-operating income, net		20			89

Income from operations before income taxes		1,982			788

Income tax expense		1,390			452

Net income	$	592		$	336


Weighted average common shares and equivalents outstanding:
Basic		12,276			12,222
Diluted		12,330			12,339

Earnings per common share:
Basic earnings per share	$	0.05		$	0.03
Diluted earnings per share	$	0.05		$	0.03

The accompanying notes are an integral part of these statements.

PENFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three months ended
(In thousands)	November 30, 2011			November 30, 2010
Cash flows from operating activities:
Net income	$	592		$	336
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		3,512			3,643
Accrued interest on preferred stock (Series A)		1,019			933
Stock-based compensation		238			359
Gain on sale of fixed assets		(3	)		—
Deferred income tax expense		1,358			410
Non-cash loss (gain) on hedging transactions		3,742			(2,155	)
Change in assets and liabilities:
Trade accounts receivable		(1,238	)		715
Prepaid expenses		127			309
Inventories		2,967			(360	)
Increase in margin accounts		(1,763	)		(3,695	)
Accounts payable and accrued liabilities		2,026			819
Income tax receivable		(210	)		3,520
Other		(185	)		(167	)


Net cash flow provided by operating activities		12,182			4,667


Cash flows from investing activities:
Acquisition of property, plant and equipment, net		(2,458	)		(1,670	)
Other		11			(15	)

Net cash used in investing activities		(2,447	)		(1,685	)


Cash flows from financing activities:
Proceeds from revolving line of credit		3,500			16,500
Payments on revolving line of credit		(9,500	)		(18,500	)
Payments of long-term debt		(50	)		(50	)
Payments under capital lease obligation		(58	)		(61	)
Decrease in cash overdraft		(3,635	)		(908	)
Other		(9	)		38

Net cash used in financing activities		(9,752	)		(2,981	)


Increase (decrease) in cash and cash equivalents		(17	)		1
Cash and cash equivalents, beginning of period		281			315

Cash and cash equivalents, end of period	$	264		$	316

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 food and industrial applications, including fuel grade ethanol. Penford’s products provide convenient and cost-effective solutions derived from renewable sources. Sales of the Company’s products are generated using a combination of direct sales and distributor agreements.

The Company has significant research and development capabilities, which are used in applying 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.

Penford manages its business in two segments: Industrial Ingredients and Food Ingredients. These segments are based on broad categories of end-market users. The Industrial Ingredients segment is a supplier of chemically modified specialty starches to the paper and packaging industries and a producer of ethanol. The Food Ingredients segment is a developer and manufacturer of specialty starches and dextrin to the food manufacturing and food service industries. See Note 12 for financial information regarding the Company’s business segments.

Discontinued Operations

In fiscal 2010, the Company sold the operating assets of its Australia/New Zealand Operations, which were previously reported in the consolidated financial statements as an operating segment.

The net assets of the Australia/New Zealand Operations as of November 30, 2011 and August 31, 2011 have been reported as assets and liabilities of the continuing operations in the condensed consolidated balance sheets. At November 30, 2011, the remaining net assets of the Australia/New Zealand Operations consist of $0.3 million of cash and $0.8 million of other net assets, primarily a receivable from the purchaser of one of the Company’s Australian manufacturing facilities. See Note 14 for additional information regarding discontinued operations. Unless otherwise indicated, amounts and discussions in these notes pertain to the Company’s continuing operations.

2—BASIS OF PRESENTATION

Consolidation

The accompanying condensed consolidated financial statements include the accounts of Penford and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. The condensed consolidated balance sheet at November 30, 2011 and the condensed consolidated statements of operations and cash flows for the interim periods ended November 30, 2011 and November 30, 2010 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. Certain prior period amounts have been reclassified to conform to the current period presentation. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2011.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used in accounting for, among other things, the allowance for doubtful accounts, accruals, the determination of assumptions for pension and postretirement employee benefit costs, useful lives of property and equipment and the valuation allowance for deferred tax assets. Actual results may differ from previously estimated amounts.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05,Comprehensive Income (“ASU 2011-05”). To increase the prominence of items reported in other comprehensive income, the FASB eliminated the option of presenting components of other comprehensive income as part of the statement of changes in stockholders’ equity. ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Regardless of the presentation of the components of other comprehensive income, ASU 2011-05 requires that the Company present on the face of the financial statements the reclassification adjustments for items that are reclassified from other comprehensive income to net income. In December 2011, the FASB deferred the effective date for certain requirements included in ASU 2011-05 as they relate to presentation of reclassification adjustments for items that are reclassified from other comprehensive income to net income. The requirements of ASU 2011-05 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The implementation of ASU 2011-05 will not have an impact on the Company’s consolidated financial statements, but will require additional disclosures.

In September 2011, the FASB issued amendments to the goodwill impairment testing guidance to allow an entity the option to first assess qualitative factors to determine whether performing the two-step process is necessary. Under the new option, the calculation of the reporting unit’s fair value is not required unless, as a result of the qualitative assessment, it is more likely than not that the fair value of the reporting unit is less than the reporting unit’s carrying amount. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this new guidance will not have an impact on the Company’s consolidated financial statements.

3—INVENTORIES

The components of inventory are as follows:


	November 30, 2011		August 31, 2011
	(In thousands)
Raw materials	$	9,000	$	14,799
Work in progress		1,439		1,752
Finished goods		15,585		16,182

Total inventories	$	26,024	$	32,733

4—PROPERTY, PLANT AND EQUIPMENT

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


	November 30, 2011			August 31, 2010
	(In thousands)
Land	$	10,552		$	10,552
Plant and equipment		330,217			330,273
Construction in progress		8,834			6,375

		349,603			347,200
Accumulated depreciation		(242,898	)		(239,828	)

Property, plant and equipment, net	$	106,705		$	107,372

5—PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION

On April 7, 2010, the Company issued $40 million of Series A 15% cumulative non-voting, non-convertible preferred stock (“Series A Preferred Stock”) and 100,000 shares of Series B voting convertible preferred stock (“Series B Preferred Stock”) in a private placement to Zell Credit Opportunities Master Fund, L.P., an investment fund managed by Equity Group Investments, a private investment firm (the “Investor”). The Company has 1,000,000 shares of authorized preferred stock, $1.00 par value, of which 200,000 shares are issued and outstanding at November 30, 2011 in two series as shown below.


	Shares Issued and Outstanding
Series A 15% Cumulative Non-Voting Non-Convertible Preferred Stock, redeemable		100,000

Series B Voting Convertible Preferred Stock		100,000

The Company recorded the Series A Preferred Stock and the Series B Preferred Stock at their relative fair values at the time of issuance. The Series A Preferred Stock of $32.3 million was recorded as a long-term liability due to its mandatory redemption feature and the Series B Preferred Stock of $7.7 million was recorded as equity. The discount on the Series A Preferred Stock is being amortized into income using the effective interest method over the contractual life of seven years. At November 30, 2011, the carrying value of the Series A Preferred Stock liability of $40.3 million includes $6.3 million of accrued dividends, and $1.7 million of discount accretion for the period from the date of issuance to November 30, 2011. The accrued dividends represent the 9% dividends that may be paid currently or accrued at the option of the Company. Dividends on the Series A Preferred Stock and the discount accretion are recorded as interest expense in the Condensed Consolidated Statements of Operations.

The holders of the Series A Preferred Stock are entitled to cash dividends of 6% on the sum of the outstanding Series A Preferred Stock plus accrued and unpaid dividends. In addition, dividends equal to 9% of the outstanding Series A Preferred Stock may accrue or be paid currently at the discretion of the Company. Dividends are payable quarterly.

The Series A Preferred Stock is mandatorily redeemable on April 7, 2017 at a per share redemption price equal to the original issue price of $400 per share plus any accrued and unpaid dividends. At any time on or after April 7, 2012, the Company may redeem, in whole or in part, the shares of the Series A Preferred Stock at a per share redemption price of the original issue price plus any accrued and unpaid dividends.

The Company may not declare or pay any dividends on its common stock or incur new indebtedness that exceeds a specified ratio without first obtaining approval from the holders of a majority of the Series A Preferred Stock.

6—DEBT

On April 7, 2010, the Company entered into a $60 million Third Amended and Restated Credit Agreement (the “2010 Agreement”) with Bank of Montreal; Bank of America National Association; and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland” New York Branch.

Under the 2010 Agreement, the Company may borrow $60 million under a revolving line of credit. The lenders’ revolving credit loan commitment may be increased under certain conditions. On November 30, 2011, the Company had $16.1 million outstanding under the 2010 Agreement, which is subject to variable interest rates. Under the 2010 Agreement, there are no scheduled principal payments prior to maturity on April 7, 2015. The Company’s obligations under the 2010 Agreement are secured by substantially all of the Company’s assets. Pursuant to the 2010 Agreement, the Company may not declare or pay dividends on, or make any other distributions in respect of, its common stock. The Company was in compliance with the covenants in the 2010 Agreement as of November 30, 2011.

Interest rates under the 2010 Agreement are based on either the London Interbank Offered Rate (“LIBOR”) or the prime rate, depending on the selection of available borrowing options under the 2010 Agreement. The Company may choose a borrowing rate of 1-month, 3-month or 6-month LIBOR. Pursuant to the 2010 Agreement, the interest rate margin over LIBOR ranges between 3% and 4%, depending upon the Total Funded Debt Ratio (as defined). At November 30, 2011, the Company’s borrowing rate was 3.51%.

During the first quarter of fiscal 2010, the Iowa Department of Economic Development (“IDED”) awarded financial assistance to the Company as a result of the temporary shutdown of the Cedar Rapids, Iowa plant in the fourth quarter of fiscal 2008 due to record flooding of the Cedar River. The IDED provided two five-year non interest bearing loans as follows: (1) a $1.0 million loan to be repaid in 60 equal monthly payments of $16,667 beginning December 1, 2009, and (2) a $1.0 million loan which is forgivable if the Company maintains certain levels of employment at the Cedar Rapids plant. At November 30, 2011, the Company had $1.6 million outstanding related to the IDED loans.

7—INCOME TAXES

The Company’s effective tax rate for the first quarter of fiscal 2012 was 70%. The difference between the effective tax rate and the U.S. federal statutory tax rate was primarily due to state income taxes and the non-deductible dividends and accretion of discount on the Series A Preferred Stock which are reported as interest expense in the Condensed Consolidated Statements of Operations.

The Company’s effective tax rate for the three-month period ended November 30, 2010 was 57.3%. The difference between the effective tax rate and the U.S. federal statutory rate for the three months ended November 30, 2010 was primarily due to a $0.7 million benefit associated with the tax credit for small ethanol producers offsetting the effect of non-deductible dividends and accretion of discount of $1.9 million on the Company’s Series A Preferred Stock.

At November 30, 2011, the Company had $12.5 million of net deferred tax assets. A valuation allowance has not been provided on the net U.S. deferred tax assets as of November 30, 2011. The determination of the need for a valuation allowance requires significant judgment and estimates. The Company evaluates the requirement for a valuation allowance each quarter as it has reported losses in recent years. The Company’s losses in fiscal years 2008 and 2009 were incurred as a result of severe flooding in Cedar Rapids, Iowa, which shut down the Company’s manufacturing facility for most of the fourth quarter of fiscal 2008. The federal tax benefits of operating losses incurred in fiscal years prior to 2010 have been carried back to offset taxable income. The Company believes that it is more likely than not that future operations and the reversal of existing taxable temporary differences will generate sufficient taxable income to realize its deferred tax assets. In addition, dividends on the Series A Preferred Stock, as well as accretion of the related discount, which are included in interest expense in the Condensed Consolidated Statements of Operations, are not deductible for U.S. federal income tax purposes. There can be no assurance that management’s current plans will be achieved or that a valuation allowance will not be required in the future.

In reviewing its effective tax rate, the Company uses estimates of the amounts of permanent differences between book and tax accounting. Adjustments to the Company’s estimated tax expense related to the prior fiscal year, amounts recorded to increase or decrease unrecognized tax benefits, changes in tax rates, and the effect of a change in the beginning-of-the-year valuation allowance are generally treated as discrete items and are recorded in the period in which they arise.

In the quarter ended November 30, 2011, the amount of unrecognized tax benefits increased by $41,000. The total amount of unrecognized tax benefits at November 30, 2011 was $1.3 million, all of which, if recognized, would favorably impact the effective tax rate. At November 30, 2011, the Company had $0.2 million of accrued interest and penalties included in the long-term tax liability.

The Company files tax returns in the U.S. federal jurisdiction and various U.S. state jurisdictions, and is subject to examination by taxing authorities in all of those jurisdictions. From time to time, the Company’s tax returns are reviewed or audited by various U.S. state taxing authorities. The Company believes that adjustments, if any, resulting from these reviews or audits would not be material, individually or in the aggregate, to the Company’s financial position, results of operations or liquidity. It is reasonably possible that the amount of unrecognized tax benefits related to certain of the Company’s tax positions will increase or decrease in the next twelve months as audits or reviews are initiated and settled. At this time, an estimate of the range of a reasonably possible change cannot be made. In January 2011, the U.S. Internal Revenue Service (“IRS”) notified the Company that its tax refund of $3.5 million resulting from a carryback of tax losses from fiscal year 2009 to fiscal years 2006 and 2007 is being evaluated to determine whether the refund will be examined or accepted without examination. The Company has also been notified by the state of Alabama of an audit. The Company is not subject to income tax examinations by U.S. federal or state jurisdictions for fiscal years prior to 2007.

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

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


	Three months ended
	November 30, 2011			November 30, 2010
	(In thousands)
Net income	$	592		$	336
Net unrealized loss on derivative instruments that qualify as cash flow hedges, net of tax		(873	)		(2,046	)

Total comprehensive loss	$	(281	)	$	(1,710	)

The components of accumulated other comprehensive losses are as follows:


	November 30, 2011			August 31, 2011
	(Dollars in thousands)
Net unrealized gain (loss) on derivatives, net of tax	$	(142	)	$	731
Postretirement obligations, net of tax		(8,290	)		(8,290	)

	$	(8,432	)	$	(7,559	)

9—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. As of November 30, 2011, 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 31,017. In addition, any shares previously granted under the 1994 Stock Option Plan which are subsequently forfeited or not exercised will be available for future grants under the 2006 Incentive Plan. Non-qualified stock options granted under the 2006 Incentive Plan generally vest ratably over one to four years and expire seven years from the date of grant.

General Option Information

A summary of the stock option activity for the three months ended November 30, 2011, is as follows:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Term (in years)		Aggregate Intrinsic Value
Outstanding Balance, August 31, 2011		1,333,885		$	14.52
Granted		—			—
Exercised		—			—
Cancelled		(15,047	)		7.73

Outstanding Balance, November 30, 2011		1,318,838			14.60		2.46	$	3,400

Options Exercisable at November 30, 2011		1,219,088		$	14.54		2.33	$	850

The aggregate intrinsic value disclosed in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $5.00 as of November 30, 2011 that would have been received by the option holders had all option holders exercised on that date. No stock options were exercised during the three months ended November 30, 2011.

Under the 2006 Incentive Plan, the Company granted 90,000 stock options during the first quarter of fiscal 2011 consisting of (i) 80,000 stock options which vest one year from the date of grant, and (ii) 10,000 stock options which vest ratably over four years. The Company estimated the fair value of stock options granted during the first quarter of fiscal 2011 using the following weighted-average assumptions and resulting in the following weighted-average grant date fair values:


Expected volatility	72	%
Expected life (years)	4.2
Interest rate	1.1-2.1	%

Weighted-average fair values	$3.63

As of November 30, 2011, the Company had $0.2 million of unrecognized compensation cost related to non-vested stock option awards that is expected to be recognized over a weighted average period of 1.1 years.

Restricted Stock Awards

The grant date fair value of each share 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 three months ended November 30, 2011 as follows:


	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested at August 31, 2011		84,232	$	14.67
Granted		—		—
Vested		54,367		19.29
Cancelled		—		—

Nonvested at November 30, 2011		29,865	$	6.25

As of November 30, 2011, the Company had $60,000 of unrecognized compensation cost related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 0.9 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 for the three months ended November 30, 2011 and 2010 and the effect on the Company’s Condensed Consolidated Statements of Operations (in thousands):


	Three months ended November 30,
	2011		2010
Cost of sales	$	25	$	29
Operating expenses		203		325
Research and development expenses		10		5

Total stock-based compensation expense	$	238	$	359
Income tax benefit		90		136

Total stock-based compensation expense, net of tax	$	148	$	223

10—PENSION AND POST-RETIREMENT BENEFIT PLANS

The components of the net periodic pension and post-retirement benefit costs for the three months ended November 30, 2011 and 2010 are as follows:


Defined benefit pension plans	Three months ended
Defined benefit pension plans	November 30, 2011			November 30, 2010
	(in thousands)
Service cost	$	380		$	404
Interest cost		682			674
Expected return on plan assets		(729	)		(558	)
Amortization of prior service cost		57			57
Amortization of actuarial losses		193			360

Net periodic benefit cost	$	583		$	937


	Three months ended
Post-retirement health care plans	November 30, 2011			November 30, 2010
	(in thousands)
Service cost	$	57		$	68
Interest cost		243			243
Amortization of prior service cost		(38	)		(38	)
Amortization of actuarial losses		—			16

Net periodic benefit cost	$	262		$	289

11—FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS

Fair Value Measurements

Presented below are the fair values of the Company’s derivatives as of November 30, 2011 and August 31, 2011:


As of November 30, 2011	(Level 1)			(Level 2)		(Level 3)		Total
	(in thousands)
Current assets (Other Current Assets):
Commodity derivatives⁽¹⁾	$	(443	)	$	—	$	—	$	(443	)

(1)

On the condensed consolidated balance sheet, commodity derivative assets and liabilities have been offset by cash collateral due and paid under master netting arrangements which are recorded together in Other Current Assets. The cash collateral offset was $2.8 million at November 30, 2011.


As of August 31, 2011	(Level 1)			(Level 2)		(Level 3)		Total
	(in thousands)
Current assets (Other Current Assets):
Commodity derivatives⁽¹⁾	$	(3,153	)	$	—	$	—	$	(3,153	)

(1)

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.

Other Financial Instruments

The carrying value of cash and cash equivalents, receivables and payables approximates fair value because of their short maturities. The Company’s bank debt reprices with changes in market interest rates and, accordingly, the carrying amount of such debt approximates fair value.

In fiscal 2010, the Company received two non-interest bearing loans from the State of Iowa totaling $2.0 million. The carrying value of the debt at November 30, 2011 was $1.6 million and the fair value of the debt was estimated to be $1.3 million. See Note 6.

The fair value of the Series A Preferred Stock was determined using the market approach in comparing yields on similar debt securities. The discount on the Series A Preferred Stock is being amortized into income using the effective interest method over the contractual life of seven years. The carrying value of the Series A Preferred Stock at November 30, 2011 was $40.3 million and the estimated fair value was $43.4 million.

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 also uses futures contracts to manage the variability of the cash flows from the forecasted sales of ethanol. The Company has designated these instruments as hedges.

For derivative instruments designated as fair value hedges, the gain or loss on the derivative instruments as well as the offsetting gain or loss on the hedged firm commitments and/or inventory are recognized in current earnings as a component of cost of sales. 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 (loss), 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 sales 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 fair value would be recognized in current earnings as a component of cost of goods sold.

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. Penford also at times uses exchange-traded futures to hedge corn inventories and firm corn purchase contracts. Hedged transactions are generally expected to occur within 12 months of the time the hedge is established. The deferred loss, net of tax, recorded in other comprehensive income at November 30, 2011 that is expected to be reclassified into income within 12 months is $0.1 million.

As of November 30, 2011, Penford had purchased corn positions of 8.5 million bushels, of which 5.0 million bushels represented equivalent firm priced starch and ethanol sales contract volume, resulting in an open position of 3.5 million bushels.

In September 2011, the Company discontinued hedge accounting treatment for natural gas futures contracts as the hedging relationship no longer met the requirements for hedge accounting in accordance with GAAP. Through August 31, 2011, the gains and losses on natural gas futures contracts were deferred in accumulated other comprehensive income. At the time hedge accounting was discontinued, $0.5 million of pretax losses continued to be deferred in accumulated other comprehensive income for these natural gas futures contracts. These losses will be reclassified to cost of sales during fiscal 2012 as the future forecasted cash flows under these natural gas futures occur. Gains and losses on natural gas futures contracts since August 31, 2011 have been recognized in cost of sales on the Condensed Consolidated Statement of Operations.

As of November 30, 2011, the Company had the following outstanding futures contracts:


Corn Futures	3,975,000	Bushels
Natural Gas Futures	590,000	mmbtu (millions of British thermal units)
Ethanol Swaps	6,510,000	Gallons

The following tables provide information about the fair values of the Company’s derivatives, by contract type, as of November 30, 2011 and August 31, 2011.


	Assets						Liabilities
In thousands			Fair Value						Fair Value
In thousands	Balance Sheet Location		Nov 30 2011		Aug. 31 2011		Balance Sheet Location		Nov 30 2011		Aug. 31 2011
Derivatives designated as hedging instruments:

Cash Flow Hedges:
Corn Futures		Other Current Assets	$	—	$	137		Other Current Assets	$	649	$	—
Natural Gas Futures		Other Current Assets		—		—		Other Current Assets		—		454
Ethanol Futures		Other Current Assets		605		—		Other Current Assets		—		1,289

Fair Value Hedges:
Corn Futures		Other Current Assets		58		—		Other Current Assets		—		1,547

				663		137
Derivatives not designated as hedging instruments:

Natural Gas Futures		Other Current Assets		—		—		Other Current Assets		457		—

			$	663	$	137			$	1,106	$	3,290

The following tables provide information about the effect of derivative instruments on the financial performance of the Company for the three-month periods ended November 30, 2011 and 2010.


In thousands	Amount of Gain (Loss) Recognized in OCI						Amount of Gain (Loss) Reclassified from AOCI into Income						Amount of Gain (Loss) Recognized in Income
	3 Months Ended Nov 30						3 Months Ended Nov 30						3 Months Ended Nov 30
	2011			2010			2011			2010			2011			2010
Derivatives designated as hedging instruments:

Cash Flow Hedges:
Corn Futures⁽¹⁾	$	(1,609	)	$	44		$	2,074		$	(2,398	)	$	(311	)	$	(182	)
Natural Gas Futures⁽¹⁾		—			(452	)		(272	)		(812	)		—			—
Ethanol Futures⁽¹⁾		1,168			17			(834	)		(155	)		—			—

	$	(441	)	$	(391	)	$	968		$	(3,365	)	$	(311	)	$	(182	)

Fair Value Hedges:
Corn Futures^{(1) (2)}													$	(99	)	$	(14	)

Derivatives not designated as hedging instruments:

Natural Gas Futures⁽¹⁾													$	(712	)	$	—

(1)

Gains and losses reported in cost of sales

(2)

Hedged items are firm commitments and inventory

12—SEGMENT REPORTING

Financial information for the Company’s two segments, Industrial Ingredients and Food Ingredients, is presented below. These segments serve broad categories of end-market users. The Industrial Ingredients segment provides carbohydrate-based starches for industrial applications, primarily in the paper and packaging products and ethanol industries. The Food Ingredients segment produces specialty starches for food applications. A third item for “corporate and other” activity has been presented to provide reconciliation to amounts reported in the 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 consolidation entries.


	Three months ended
	November 30, 2011			November 30, 2010
	(In thousands)
Sales:
Industrial Ingredients
Industrial Starch	$	32,386		$	29,369
Ethanol		32,436			24,561

		64,822			53,930
Food Ingredients		25,924			18,336

	$	90,746		$	72,266

Income (loss) from operations:
Industrial Ingredients	$	743		$	142
Food Ingredients		5,959			4,808
Corporate and other		(2,343	)		(1,981	)

	$	4,359		$	2,969


	November 30, 2011		August 31, 2011
	(In thousands)
Total assets:
Industrial Ingredients	$	133,377	$	138,412
Food Ingredients		42,298		42,252
Corporate and other		30,042		31,750

	$	205,717	$	212,414

At November 30, 2011, the remaining net assets of the Australia/New Zealand Operations, consisting of $0.3 million of cash and $0.8 million of other net assets, have been reported as assets of the continuing operations in “Corporate and other.” All other assets are located in the United States.

13—EARNINGS PER SHARE

All outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders and, therefore, are included in computing earnings per share under the two-class method. Under the two-class method, net earnings are reduced by the amount of dividends declared in the period for each class of common stock and participating security. The remaining undistributed earnings are then allocated to common stock and participating securities, based on their respective rights to receive dividends. Restricted stock awards granted to certain employees and directors under the Company’s 2006 Incentive Plan which contain non-forfeitable rights to dividends at the same rate as common stock, are considered participating securities.

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 reconciliation of income from operations to income from operations applicable to common shares and the computation of diluted weighted average shares outstanding for the three months ended November 30, 2011 and 2010.


	Three months ended
	November 30, 2011			November 30, 2010
	(In thousands)
Numerator:
Net income	$	592		$	336
Less: Allocation to participating securities		(3	)		(3	)

Net income applicable to common shares	$	589		$	333

Denominator:
Weighted average common shares outstanding, basic		12,276			12,222
Dilutive stock options and awards		54			117

Weighted average common shares outstanding, diluted		12,330			12,339

Weighted-average stock options to purchase 1,309,499 and 1,278,266 shares of common stock for the three months ended November 30, 2011 and 2010, respectively, were excluded from the calculation of diluted earnings (loss) per share because they were antidilutive.

On April 7, 2010, the Company issued 100,000 shares of its Series B voting convertible preferred stock. See Note 5 for further details. At any time prior to April 7, 2020, at the option of the holder, the outstanding Series B Preferred Stock may be converted into shares of the Company’s common stock at a conversion rate of ten shares of common stock per one share of Series B Preferred Stock, subject to adjustment in the event of stock dividends, distributions, splits, reclassifications and the like. If any shares of Series B Preferred Stock have not been converted into shares of common stock prior to April 7, 2020, the shares of Series B Preferred Stock will automatically convert into shares of common stock. The holders of the Series B Preferred Stock shall have the right to one vote for each share of common stock into which the Series B Preferred Stock is convertible. These shares are convertible into common shares for no cash consideration; therefore the weighted average shares are included in the computation of basic earnings per share.

14—LEGAL PROCEEDINGS AND CONTINGENCIES

The Company previously reported its appeal of the dismissal of the suit against two insurance companies arising from their denial of the Company’s claim for certain insurance coverage in connection with the flood that struck the Company’s Cedar Rapids, Iowa plant in June 2008. On November 29, 2011, the United States Court of Appeals for the Eighth Circuit issued an opinion denying the Company’s appeal. On December 13, 2011, the Company filed a Petition for Panel Rehearing, which was denied on December 19, 2011.

In June 2011, the Company was notified that a complaint had been filed in the United States District Court for the District of New Jersey alleging that certain pet products supplied to a customer by the Company’s subsidiary, Penford Products Co. (“Penford Products”), infringe upon a patent owned by T.F.H. Publications, Inc. The customer tendered the defense of this lawsuit to Penford Products pursuant to the terms of its supply agreement with Penford Products. The Company believes that its products do not infringe upon the patent in suit and has commenced a defense of the lawsuit. The Company cannot at this time determine the likelihood of any outcome or estimate any damages that might be awarded.

As discussed in Note 1, the Company sold its Australia/New Zealand operations in fiscal 2010. At November 30, 2011, the remaining net assets of the Australia/New Zealand Operations consist of $0.3 million of cash and $0.8 million of other net assets, primarily a receivable from the purchaser of one of the Company’s Australian manufacturing facilities. Proceeds from the sale included $2.0 million in escrow to be released in four equal installments. Penford Australia received the first two installments of $0.5 million each. The remaining escrowed payments of $1.0 million are subject to the buyer’s right to make warranty claims under the sale contract. In July 2011, the purchaser of the Company’s Lane Cove, New South Wales, Australia operating assets filed a claim for $787,000 pursuant to the sale agreement. The Company believes that the claim is without merit and intends to contest the claim vigorously. At November 30, 2011, no allowance relating to this $1.0 million receivable has been established.

The Company regularly evaluates the status of claims and legal proceedings in which it is involved in order to assess whether a loss is probable or there is a reasonable possibility that a loss may have been incurred and to determine if accruals are appropriate. For the matters identified in the preceding two paragraphs, management is unable to provide additional information regarding any possible loss because, among other reasons, (i) the matters are in early stages; (ii) the Company currently believes that the claims are not adequately supported; and (iii) there are significant factual issues to be resolved. With regard to these matters, management does not believe, based on currently available information, that the eventual outcomes will have a material adverse effect on the Company’s financial condition, although the outcomes could be material to the Company’s operating results for any particular period, depending, in part, upon the operating results for such period.

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 obtained from the Company’s outside legal counsel, the ultimate resolution of these other matters will not materially affect the consolidated financial position, results of operations or liquidity of the Company.

15—CAROLINA STARCHES, LLC TRANSACTION

On November 9, 2011, Penford Carolina, LLC, a Delaware limited liability company (“Purchaser”) and a wholly-owned subsidiary of Penford Corporation, entered into a Business Sale and Membership Interest Purchase Agreement (the “Purchase Agreement”) with each of R. Bentley Cheatham, Dwight Carlson and Steven P. Brower (collectively, the “Sellers”) together with three limited liability companies owned by the Sellers. Penford anticipates completing the transaction in January 2012.

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Penford generates revenues, income and cash flows by developing, manufacturing and marketing specialty natural-based ingredient systems for food and industrial applications, including 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 and potatoes and are used principally as binders and coatings in paper and food production and as an ingredient in fuel.

Penford manages its business in two segments: Industrial Ingredients and Food Ingredients. These segments are based on broad categories of end-market users. See Note 12 to the Condensed Consolidated Financial Statements for additional information regarding the Company’s business segment operations.

In analyzing business trends, management considers a variety of performance and financial measures, including sales revenue growth, sales volume growth, and gross margins and operating income of the Company’s business segments.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s condensed consolidated financial statements and the accompanying notes. The notes to the Condensed Consolidated Financial Statements referred to in this MD&A are included in Part I Item 1, “Financial Statements.”

Results of Operations

Executive Overview

Consolidated sales for the three months ended November 30, 2011 increased 25.6%, or $18.5 million, to $90.7 million compared with $72.3 million for the three months ended November 30, 2010. Improvements in pricing and product mix in both the Food Ingredients and Industrial Ingredients businesses drove the sales increase. Average unit selling prices in the Industrial Ingredients segment improved 28%; volume declined 6%. Higher volume from new business and favorable pricing and product mix contributed about equally to revenue growth in the Food Ingredients business.

Consolidated income from operations for the quarter ended November 30, 2011 increased $1.4 million to $4.4 million on gross margin expansion, partially offset by higher operating and research and development expenses. Consolidated gross margin as a percent of sales of 13% was comparable to the prior year. Gross margin increased due to improvements in pricing which outpaced higher raw material costs. Consolidated operating expenses increased $1.2 million on higher employee costs and professional fees.

Industrial Ingredients

First quarter fiscal 2012 sales at the Company’s Industrial Ingredients business unit increased $10.9 million, or 20.2% to $64.8 million from $53.9 million during the first quarter of fiscal 2011. Ethanol sales expanded 32% to $32.4 million from $24.6 million on a 4% increase in volume and an average unit selling price increase of 27%. Industrial starch sales in the three months ended November 30, 2011 increased 10% to $32.4 million from $29.4 million last year on higher average selling prices. Sales volume of industrial starch declined 17% compared to the prior year’s first quarter. Sales of the Company’s Liquid Natural Additives products, included in the industrial sales amount, grew 42%, driven by a volume increase of 27% and an 11% improvement in average unit pricing.

Income from Industrial Ingredients’ operations for the first quarter of fiscal 2012 increased to $0.7 million from $0.1 million a year ago on improvements in gross margin. First quarter fiscal 2012 gross margin expanded due to improvements in ethanol and industrial starch pricing and product mix of $8.3 million and higher manufacturing yields of $0.6 million, offset by higher raw material costs of $7.8 million and lower volumes of $0.5 million. Total operating and research and development expenses for 2012 were comparable to the first quarter last year.

Food Ingredients

Fiscal 2012 first quarter sales for the Food Ingredients segment of $25.9 million increased 41.4%, or $7.6 million, over the first quarter of fiscal 2011. Higher sales volume and favorable pricing and product mix contributed about equally to revenue growth. Sales of non-coating applications expanded 56%, led by sales of gluten free and companion pet products.

Operating income for the first quarter of fiscal 2012 at the Company’s Food Ingredients segment increased 24% to $6.0 million from $4.8 million in the same period last year due to an improvement in gross margin of $1.9 million, offset by an increase in operating and research and development expenses of $0.7 million. First quarter gross margin improved 29.4% to $8.2 million from $6.3 million last year primarily on favorable average unit pricing and product mix. Operating and research and development expenses increased due to higher employee costs and lower expenses in last year’s first quarter due to the collection of a receivable included in the Company’s reserve for uncollectible accounts.

Corporate operating expenses

Corporate operating expenses for the first quarter of fiscal 2012 were $2.3 million, a $0.4 million increase compared to the same quarter last year, primarily due to higher professional fees and employee costs.

Interest expense

Interest expense for the three months ended November 30, 2011 increased $0.1 million compared to the same period last year, primarily due to the increasing unpaid accrued dividends on the Company’s Series A Preferred Stock upon which interest expense is computed. See Note 5 to the Condensed Consolidated Financial Statements and “Financing Activities” below.

Income taxes

At November 30, 2011, the Company had $12.5 million of net deferred tax assets. A valuation allowance has not been provided on the net U.S. deferred tax assets as of November 30, 2011. The determination of the need for a valuation allowance requires significant judgment and estimates. The Company evaluates the requirement for a valuation allowance each quarter as it has reported losses in recent years. The Company’s losses in fiscal years 2008 and 2009 were incurred as a result of severe flooding in Cedar Rapids, Iowa, which shut down the Company’s manufacturing facility for most of the fourth quarter of fiscal 2008. The federal tax benefits of operating losses incurred in fiscal years prior to 2010 have been carried back to offset previous years’ taxable income. The Company believes that it is more likely than not that future operations and the reversal of existing taxable temporary differences will generate sufficient taxable income to realize its deferred tax assets. In addition, dividends on the Series A Preferred Stock, as well as accretion of the related discount, which are included in interest expense in the Condensed Consolidated Statements of Operations, are not deductible for U.S. federal income tax purposes. There can be no assurance that management’s current plans will be achieved or that a valuation allowance will not be required in the future.

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.

Operating Activities

Cash provided by continuing operations was $12.2 million for the three months ended November 30, 2011 compared with $4.7 million for the same period last year. The increase in operating cash flow was primarily due to lower working capital requirements.

Investing Activities

Capital expenditures for the first quarter of fiscal 2012 were $2.5 million. The Company expects total capital expenditures for fiscal 2012 to be approximately $16 million.

Financing Activities

In April 2010, the Company issued $40 million of preferred stock and also entered into a $60 million Third Amended and Restated Credit Agreement (the “2010 Agreement”). See Notes 5 and 6 to the Condensed Consolidated Financial Statements for details of the refinancing and preferred stock issuance.

At November 30, 2011, the carrying value of the Series A Preferred Stock liability of $40.3 million includes $6.3 million of accrued dividends and $1.7 million of discount accretion for the period from the date of issuance to November 30, 2011. The accrued dividends represent dividends at the rate of 9% that may be paid or accrued at the option of the Company. Dividends on the Series A Preferred Stock and the discount accretion are recorded as interest expense in the Condensed Consolidated Statements of Operations.

The Company may not declare or pay any dividends on its common stock without first obtaining approval from the holders of a majority of the Series A Preferred Stock. The holders of the Series A Preferred Stock are entitled to cash dividends of 6% on the sum of the outstanding Series A Preferred Stock plus accrued and unpaid dividends. In addition, dividends equal to 9% of the outstanding Series A Preferred Stock may be accrued or paid in cash currently at the discretion of the Company.

Contractual Obligations

The Company is a party to various debt and lease agreements at November 30, 2011 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. Except as disclosed in Note 15 to the Condensed Consolidated Financial Statements, as of November 30, 2011, there have been no material changes in the Company’s contractual obligations since August 31, 2011.

Off-Balance Sheet Arrangements

The Company had no off-balance sheet arrangements at November 30, 2011.

Recent Accounting Pronouncements

statement of changes in stockholders’ equity. ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Regardless of the presentation of the components of other comprehensive income, ASU 2011-05 requires that the Company present on the face of the financial statements the reclassification adjustments for items that are reclassified from other comprehensive income to net income. In December 2011, the FASB deferred the effective date for certain requirements included in ASU 2011-05 as they relate to presentation of reclassification adjustments for items that are reclassified from other comprehensive income to net income. The requirements of ASU 2011-05 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The implementation of ASU 2011-05 will not have an impact on the Company’s consolidated financial statements, but will require additional disclosures.

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, 2011 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.

Forward-looking Statements

This Quarterly Report on Form 10-Q (“Quarterly Report”), including but not limited to statements found in the Notes to Condensed Consolidated Financial Statements and in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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. Readers are cautioned not to place undue reliance on these forward-looking statements which are based on information available as of the date of this report. The Company does not take any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of the filing of this Quarterly Report. 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 Part II Item 1A of this Quarterly Report, and those described from time to time in other filings made with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended August 31, 2011, which include but are not limited to:

•

competition;

•

the possibility of interruption of business activities due to equipment problems, accidents, strikes, weather or other factors;

•

product development risk;

•

changes in corn and other raw material prices and availability;

•

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

•

unanticipated costs, 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;

•

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,

•

the Company’s ability to successfully operate under and comply with the terms of its bank credit agreement and preferred stock instruments;

•

other factors described in the Company’s Form 10-K Part I, Item 1A “Risk Factors.”

Item 3:

Quantitative and Qualitative Disclosures about Market Risk.

The Company is exposed to market risks from adverse changes in interest 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, 2011.

Item 4:

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that material information required to be disclosed in the Company’s periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Company’s disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of November 30, 2011. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of November 30, 2011.

Changes in Internal Control over Financial Reporting

There were no changes 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 November 30, 2011 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1:

Legal Proceedings

From time to time, the Company is named as a defendant in other legal actions. See Note 14 to the Company’s financial statements as to several other pending cases. The Company’s current assessment of the pending legal actions referenced in Note 14 has caused it to conclude that none of the other actions is material. Further, the Company has determined that no need exists to record a loss provision for these other actions. It is possible, however, that subsequent events in any litigation may cause the Company to reconsider its assessments and determinations, including the need to increase loss provisions.

Item 1A:

Risk Factors

The information set forth in this report should be read in conjunction with the risk factors discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended August 31, 2011. These risks could materially impact the Company’s business, financial condition and/or future results. The risks described in the Annual Report on Form 10-K and in this Item IA 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 2:

Unregistered Sales of Equity Securities and Use of Proceeds

None

Issuer Purchases of Equity Securities


	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
November 1 – November 30, 2011		17,034	$	5.17		—		—
October 1 – October 31, 2011		—		—		—		—
September 1 – September 30, 2011		—		—		—		—

Total		17,034	$	5.17		—		—

(1)

Represents shares repurchased to satisfy tax withholding obligations on vesting shares of restricted stock awards.

Item 6:

Exhibits.

(d) Exhibits



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

101		Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended November 30, 2011, filed on January 9, 2012, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) the Notes to Condensed Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		Penford Corporation
		(Registrant)


January 9, 2012		/s/ Steven O. Cordier
		Steven O. Cordier
		Senior Vice President and Chief Financial Officer

EXHIBIT INDEX


Exhibit No.		Description

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

101		Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended November 30, 2011, filed on January 9, 2012, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) the Notes to Condensed Consolidated Financial Statements.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
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