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EX-32 - EX-32 - PENFORD CORPd72095exv32.htm
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EX-31.1 - EX-31.1 - PENFORD CORPd72095exv31w1.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED February 28, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ______________________
Commission File No. 0-11488
PENFORD CORPORATION
(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 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 o     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 oAccelerated 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 outstanding as of April 5, 2010 was 11,363,272.
 
 

 


 

PENFORD CORPORATION AND SUBSIDIARIES
INDEX
         
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    32  
 
       
    33  
 EX-31.1
 EX-31.2
 EX-32

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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)   2010     2009  
    (Unaudited)          
Assets
               
Current assets:
               
Cash and cash equivalents
  $     $ 5,540  
Trade accounts receivable, net
    26,486       32,192  
Inventories
    20,849       18,155  
Prepaid expenses
    4,049       5,081  
Income tax receivable
    4,102       3,892  
Other
    3,199       3,476  
Current assets of discontinued operations
    3,673       38,486  
 
           
Total current assets
    62,358       106,822  
 
               
Property, plant and equipment, net
    115,350       119,049  
Restricted cash value of life insurance
    7,860       9,761  
Deferred tax assets
    12,595       8,277  
Other assets
    1,223       2,075  
Other intangible assets, net
    444       481  
Goodwill, net
    7,897       7,553  
Non-current assets of discontinued operations
          4,227  
 
           
Total assets
  $ 207,727     $ 258,245  
 
           
 
               
Liabilities and Shareholders’ equity
               
Current liabilities:
               
Cash overdraft, net
  $ 2,896     $  
Current portion of long-term debt and capital lease obligations (Note 7)
    422       21,241  
Accounts payable
    12,527       14,745  
Accrued liabilities
    9,005       8,972  
Current liabilities of discontinued operations
    451       16,028  
 
           
Total current liabilities
    25,301       60,986  
 
               
Long-term debt and capital lease obligations
    55,530       71,141  
Other postretirement benefits
    18,202       17,678  
Pension benefit liability
    18,043       18,043  
Other liabilities
    6,418       8,187  
Non-current liabilities of discontinued operations
          2,851  
 
           
Total liabilities
    123,494       178,886  
 
               
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 13,190 and 13,157 shares, respectively, including treasury shares
    13,190       13,157  
Additional paid-in capital
    94,224       93,829  
Retained earnings
    23,689       7,944  
Treasury stock, at cost, 1,981,016 shares
    (32,757 )     (32,757 )
Accumulated other comprehensive loss
    (14,113 )     (2,814 )
 
           
Total shareholders’ equity
    84,233       79,359  
 
           
Total liabilities and shareholders’ equity
  $ 207,727     $ 258,245  
 
           
The accompanying notes are an integral part of these statements.

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PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
                                 
    Three months ended     Six months ended  
    February 28,     February 28,  
(In thousands, except per share data)   2010     2009     2010     2009  
 
                               
Sales
  $ 62,293     $ 63,939     $ 129,363     $ 123,522  
Cost of sales
    56,231       66,519       112,673       120,698  
 
                       
Gross margin
    6,062       (2,580 )     16,690       2,824  
 
                               
Operating expenses
    6,054       6,121       12,542       12,164  
Research and development expenses
    1,124       1,168       2,121       2,291  
Flood related costs, net of insurance proceeds
          (3,800 )           (8,034 )
 
                       
 
                               
Income (loss) from operations
    (1,116 )     (6,069 )     2,027       (3,597 )
 
                               
Interest expense
    1,621       1,177       3,420       2,447  
Other non-operating income (expense), net
    (27 )     1,554       609       948  
 
                       
Loss from continuing operations before income taxes
    (2,764 )     (5,692 )     (784 )     (5,096 )
 
                               
Income tax benefit
    (963 )     (1,487 )     (39 )     (1,454 )
 
                       
Loss from continuing operations
    (1,801 )     (4,205 )     (745 )     (3,642 )
Income (loss) from discontinued operations, net of tax
    13,048       (17,973 )     16,531       (18,905 )
 
                       
Net income (loss)
  $ 11,247     $ (22,178 )   $ 15,786     $ (22,547 )
 
                       
 
                               
Weighted average common shares and equivalents outstanding, basic and diluted:
    11,204       11,174       11,193       11,165  
 
                               
Earnings (loss) per common share, basic and diluted:
                               
Loss per share from continuing operations
  $ (0.17 )   $ (0.38 )   $ (0.08 )   $ (0.33 )
Earnings (loss) per share from discontinued operations
  $ 1.16     $ (1.61 )   $ 1.48     $ (1.69 )
 
                       
Earnings (loss) per share
  $ 0.99     $ (1.99 )   $ 1.40     $ (2.02 )
 
                       
 
                               
Dividends declared per common share
  $     $ 0.06     $     $ 0.12  
The accompanying notes are an integral part of these statements.

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PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)
                 
    Six Months Ended  
    February 28,     February 28,  
(In thousands)   2010     2009  
Cash flows from operating activities:
               
Net income (loss)
  $ 15,786     $ (22,547 )
Less: Income (loss) from discontinued operations
    16,531       (18,905 )
 
           
Net loss from continuing operations
    (745 )     (3,642 )
Adjustments to reconcile net income from continuing operations to net cash provided by (used in) operations:
               
Depreciation and amortization
    7,518       7,337  
Stock-based compensation
    780       1,443  
Gain on sale of dextrose product line
          (1,562 )
Deferred income tax expense
    79       1,844  
Loss on derivative transactions
    863       840  
Foreign currency transaction (gain) loss
    (417 )     641  
Other
    (3 )     3  
Change in assets and liabilities:
               
Trade receivable
    5,706       (19,263 )
Prepaid expenses
    805       67  
Inventories
    (1,758 )     (275 )
Accounts payable and accrued liabilities
    (1,861 )     (13,948 )
Taxes payable
    (245 )     1,093  
Insurance recovery receivable
          8,000  
Intercompany receivable
    19,852       (2,732 )
Other
    891       3,403  
 
           
Net cash flow provided by (used in) operating activities — continuing operations
    31,465       (16,751 )
 
           
 
               
Investing activities:
               
Acquisition of property, plant and equipment, net
    (2,910 )     (2,798 )
Proceeds from sale of dextrose product line
          2,857  
Other
    (40 )     (53 )
 
           
Net cash (used in) provided by investing activities — continuing operations
    (2,950 )     6  
 
           
 
               
Cash flows from financing activities:
               
Proceeds from revolving line of credit
          38,476  
Payments on revolving line of credit
    (17,735 )     (21,500 )
Proceeds from long-term debt
    2,000        
Payments of long-term debt
    (21,055 )     (3,250 )
Payments under capital lease obligation
    (123 )     (139 )
Payment of loan fees
    (38 )     (551 )
Increase in cash overdraft
    2,896       5,059  
Payment of dividends
          (1,350 )
 
           
Net cash (used in) provided by financing activities — continuing activities
    (34,055 )     16,745  
 
           
 
               
Cash flows from discontinued operations:
               
Net cash used in operating activities
    (13,928 )     (708 )
Net cash provided by (used in) investing activities
    18,222       (470 )
Net cash (used in) provided by financing activities
    (3,399 )     839  
Effect of exchange rate changes on cash and cash equivalents
    (275 )     (156 )
 
           
Net cash provided by (used in) discontinued operations
    620       (495 )
 
           
 
               
Decrease in cash and cash equivalents
    (4,920 )     (495 )
 
           
 
               
Cash and cash equivalents of continuing operations, beginning of period
    5,540        
Cash balance of discontinued operations, beginning of period
    634       534  
 
           
Cash and cash equivalents, end of period
    1,254       39  
Less: cash balance of discontinued operations, end of period
    1,254       39  
 
           
Cash and cash equivalents of continuing operations, end of period
  $     $  
 
           
The accompanying notes are an integral part of these statements.

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PENFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     1—BUSINESS
     Penford Corporation (“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 fuel grade ethanol. The Food Ingredients segment is a developer and manufacturer of specialty starches to the food manufacturing and food service industries.
Discontinued Operations
     In August 2009, the Company committed to a plan to exit from the business conducted by the Company’s Australia/New Zealand Operations. On September 2, 2009, the Company completed the sale of Penford New Zealand Limited (“Penford New Zealand”). On November 27, 2009, the Company completed the sale of the operating assets of its subsidiary company Penford Australia Limited (“Penford Australia”), including its two remaining Australian plants. The financial results of the Australia/New Zealand Operations have been classified as discontinued operations in the condensed consolidated statement of operations for all periods presented. The remaining assets and liabilities of this business are reflected as assets and liabilities of discontinued operations in the condensed consolidated balance sheets for all periods presented. See Note 3 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 material intercompany transactions and balances have been eliminated. The condensed consolidated balance sheet at February 28, 2010 and the condensed consolidated statements of operations and cash flows for the interim periods ended February 28, 2010 and February 28, 2009 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, 2009.
     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

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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, and the useful lives of property and equipment. Actual results may differ from previously estimated amounts.
     Accounting Changes
     In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification (“ASC” or the “Codification”) as the source of authoritative U.S. generally accepted accounting principles recognized by the FASB. SFAS 168 was effective for financial statements issued for interim and annual periods ending after September 15, 2009. Beginning in the first quarter of fiscal 2010, all references made to U.S. generally accepted accounting principles will use the new Codification numbering system prescribed by the FASB. The FASB will issue new standards in the form of Accounting Standards Updates (“ASU”) which will serve to update the Codification.
     In April 2009, the FASB issued new authoritative guidance requiring disclosures regarding financial instruments for interim reporting periods of publicly traded companies. The guidance requires that disclosures provide quantitative and qualitative information on fair value estimates for all financial instruments not measured on the balance sheet at fair value, when practicable, with the exception of certain financial instruments listed in ASC 825 “Financial Instruments.” The Company adopted this guidance in the first quarter of fiscal 2010 and has included the required disclosures in this Form 10-Q.
     In December 2008, the FASB issued new authoritative guidance regarding employer disclosures about postretirement benefit plan assets. The new guidance requires an employer to disclose information regarding its investment policies and strategies for its categories of plan assets, its fair value measurements of plan assets and any significant concentrations of risk in plan assets. The new guidance, which was effective September 1, 2009 for the Company, only requires the revised annual disclosures on a prospective basis. Accordingly, the Company will provide the additional disclosures in its fiscal 2010 Annual Report on Form 10-K.
     In June 2008, the FASB issued new authoritative guidance for determining 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 pursuant to the two-class method. The Company adopted the new guidance in the first quarter of fiscal 2010 and was required to retrospectively adjust all prior-period earnings per share data. The resulting impact of the adoption of the new guidance was to include unvested restricted shares in the computation of basic earnings per share pursuant to the two-class method which did not have a material impact on the Company’s earnings per share for the three- and six-month periods ended February 28, 2010. See Note 14.
     In February 2008, the FASB issued new authoritative guidance delaying the portions of ASC 820, “Fair Value Measurements and Disclosures,” which required fair value measurements for non-recurring, nonfinancial assets and liabilities that are recognized or disclosed at fair value until the Company’s fiscal year 2010. The adoption of this guidance on September 1, 2009 had no effect on the Company’s financial position or results of operations. See Note 12.
     Recent Accounting Pronouncements
     In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605) — Multiple Deliverable Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13 eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and expands the disclosures related to multiple-deliverable revenue arrangements. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010 (fiscal 2011 for the Company). The adoption of ASU 2009-13 is not expected to have any impact on the Company’s financial position or results of operations.

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     3 — DISCONTINUED OPERATIONS
     On August 27, 2009, the Company committed to a plan to exit from the business conducted by its Australia/New Zealand Operations. As a result, the Company’s financial statements reflect the Australia/New Zealand Operations as discontinued operations for all periods presented in compliance with the provisions of the Financial Accounting Standards Board Accounting Standards Codification 205-10, “Presentation of Financial Statements — Discontinued Operations” (“ASC 205-10”). The Australia/New Zealand Operations segment was previously reported as the Company’s third operating segment. The following tables summarize the financial information for discontinued operations related to the Australia/New Zealand Operations. Interest expense on debt directly attributable to the Australia/New Zealand Operations has been allocated to discontinued operations.
     Penford Australia completed the sale of the shares of its wholly-owned subsidiary, Penford New Zealand, on September 2, 2009. Proceeds from the sale, net of transaction costs, were $4.8 million. On November 27, 2009, Penford Australia completed the sale of substantially all of its operating assets, including property, plant and equipment, intellectual property, and inventories in two transactions to unrelated parties. Proceeds from the sales, net of transaction costs, were $15.3 million. Additionally, at November 30, 2009, the Company recorded $1.3 million of severance costs associated with the asset sales.
     Proceeds from the sales include $2.0 million in escrow to be released in four equal installments payable at six months, ten months, twenty months and thirty months from November 27, 2009. Escrowed payments are subject to the buyer’s right to make warranty claims under the sale contract. Penford Australia currently expects that all warranties will be satisfied and that it will receive the proceeds from the escrow account as scheduled. In addition, approximately $0.8 million is to be paid by a purchaser in six equal monthly installments beginning December 1, 2009 as further compensation for grain inventory on hand on the date of sale. Penford Australia has received five installments and expects to receive the final installment as scheduled for May 2010.
                                 
    Three Months Ended     Six Months Ended  
    February 28,     February 28,     February 28,     February 28,  
    2010     2009     2010     2009  
    (In Thousands)     (In Thousands)  
 
Sales
  $     $ 16,068     $ 16,963     $ 37,428  
 
                       
Loss from operations
  $ (183 )   $ (16,931 )   $ (1,708 )   $ (18,567 )
 
                               
Interest expense
    133       172       448       395  
Gain (loss) on sale of assets
    (152 )           199        
Reclassification of currency translation adjustments into earnings
    13,849             13,420        
Other non-operating income, net
    141       371       627       767  
 
                       
Loss from discontinued operations before taxes
    13,522       (16,732 )     12,090       (18,195 )
Income tax expense (benefit)
    474       1,241       (4,441 )     710  
 
                       
Income (loss) from discontinued operations, net of tax
  $ 13,048     $ (17,973 )   $ 16,531     $ (18,905 )
 
                       
     During the six months ended February 28, 2010, the Company determined that intercompany loans made by its U.S. operations to its Australian subsidiaries would not be fully collectible from the proceeds of the Australian asset sales and the liquidation of the remaining net financial assets. Accordingly, the Company recorded an impairment charge in the U.S. of $13.6 million, which was recorded in discontinued operations. The tax benefit of the impairment was also recorded in discontinued operations. The liquidation of the remaining net assets of Penford Australia was substantially completed in the second quarter of fiscal 2010 and, as a result, $13.8 of currency translation adjustments were reclassified from accumulated other comprehensive income into second quarter earnings.
     In 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.

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     In fiscal years 2008 and 2009, the Company’s Australian operations reported tax losses. As of August 31, 2009, the Company’s discontinued Australian operations had recorded a valuation allowance of $14.6 million against the entire Australian net deferred tax asset because of the uncertainty of generating sufficient future taxable income. During the six months ended February 28, 2010, the Australian operations recorded $13.6 million of income related to the U.S. impairment discussed above. Accordingly, the Company decreased its deferred tax asset related to the carryfoward of net operating losses and reversed the corresponding tax valuation allowance. At February 28, 2010, the valuation allowance related to the Australian net deferred tax asset was $10.8 million.
                 
    February 28,     August 31,  
    2010     2009  
    (Dollars in thousands)  
ASSETS
               
Cash
  $ 1,254     $ 634  
Trade accounts receivable, net
    414       14,482  
Inventories
          22,129  
Prepaid expenses
          595  
Income tax receivable
          190  
Other
    2,005       456  
 
           
Current assets of discontinued operations
    3,673       38,486  
 
           
 
               
Property, plant and equipment, net
          3,799  
Other assets
          428  
 
           
Non-current assets of discontinued operations
          4,227  
 
           
 
Total assets of discontinued operations
  $ 3,673     $ 42,713  
 
           
 
               
LIABILITIES
               
Short-term borrowings
  $     $ 3,327  
Accounts payable
    451       10,697  
Accrued liabilities
          2,004  
 
           
Current liabilities of discontinued operations
    451       16,028  
 
           
 
               
Other liabilities
          2,851  
 
           
Non-current liabilities of discontinued operations
          2,851  
 
           
 
               
Total liabilities of discontinued operations
  $ 451     $ 18,879  
 
           
     4—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 February 28, 2010, 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 86,767. 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.

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     Stock Option Awards
     A summary of the stock option activity for the six months ended February 28, 2010, is as follows:
                                 
                    Weighted    
            Weighted   Average    
    Number of   Average   Remaining   Aggregate
    Shares   Exercise Price   Term (in years)   Intrinsic Value
 
                               
Outstanding Balance, August 31, 2009
    1,363,771     $ 15.18                  
Granted
                           
Exercised
                           
Cancelled
    (65,500 )   $ 16.35                  
 
                               
Outstanding Balance, February 28, 2010
    1,298,271     $ 15.13       3.83     $ 104,170  
 
                               
Options Exercisable at February 28, 2010
    989,521     $ 14.53       3.43     $ 104,170  
     No stock options were granted under the 2006 Incentive Plan during the six months ended February 28, 2010 and 2009.
     The aggregate intrinsic value disclosed in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $11.14 as of February 28, 2010 that would have been received by the option holders had all option holders exercised on that date. No stock options were exercised during the six months ended February 28, 2010.
     As of February 28, 2010, the Company had $0.9 million of unrecognized compensation cost related to non-vested stock option awards that is expected to be recognized over a weighted average period of 1.5 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 six months ended February 28, 2010 as follows:
                 
            Weighted
            Average
    Number of   Grant Date
    Shares   Fair Value
Nonvested at August 31, 2009
    89,582     $ 31.31  
Granted
    113,707       6.60  
Vested
    (39,082 )     26.31  
Cancelled
    (9,500 )     10.82  
 
               
Nonvested at February 28, 2010
    154,707     $ 15.67  
     On January 1, 2010, each non-employee director received an award of 2,301 shares of restricted stock under the 2006 Incentive Plan at the last reported sale price of the stock on the preceding trading day. The shares vested one year from the grant date of the award. The Company recognizes compensation cost for restricted stock ratably over the vesting period.
     As of February 28, 2010, the Company had $1.2 million of unrecognized compensation cost related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 1.3 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 and six months ended February 28, 2010 and 2009 and the effect on the Company’s Condensed Consolidated Statements of Operations (in thousands):

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    Three Months Ended   Six Months Ended
    February 28,   February 28,
    2010   2009   2010   2009
Cost of sales
  $ 39     $ 74     $ 86     $ 163  
Operating expenses
    269       524       679       1,249  
Research and development expenses
    8       15       15       31  
Income (loss) from discontinued operations
          5       (25 )     11  
     
Total stock-based compensation expense
  $ 316     $ 618     $ 755     $ 1,454  
Tax benefit
    120       235       287       553  
     
Total stock-based compensation expense, net of tax
  $ 196     $ 383     $ 468     $ 901  
     
     5—INVENTORIES
     The components of inventory are as follows:
                 
    February 28,     August 31,  
    2010     2009  
    (In thousands)  
Raw materials
  $ 8,796     $ 7,265  
Work in progress
    1,335       1,921  
Finished goods
    10,718       8,969  
 
           
Total inventories
  $ 20,849     $ 18,155  
 
           
     6—PROPERTY, PLANT AND EQUIPMENT
     The components of property, plant and equipment are as follows:
                 
    February 28,   August 31,
    2010   2009
    (In thousands)
Land
  $ 10,243     $ 10,229  
Plant and equipment
    322,839       321,356  
Construction in progress
    3,605       2,214  
 
           
 
    336,687       333,799  
Accumulated depreciation
    (221,337 )     (214,750 )
 
           
Net property, plant and equipment
  $ 115,350     $ 119,049  
 
           
     7—DEBT
     In fiscal year 2007, Penford entered into a $145 million Second Amended and Restated Credit Agreement (the “2007 Agreement”) among the Company; Harris N.A. (which has been replaced by the Bank of Montreal); LaSalle Bank National Association (now Bank of America); Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland” New York Branch; U.S. Bank National Association; and the Australia and New Zealand Banking Group Limited.
     Substantially all of the Company’s U.S. assets secured the 2007 Agreement. Under the covenants of the 2007 Agreement, as amended, the Company was required to maintain a minimum EBITDA (as defined in the amended 2007 Agreement), tangible net worth and fixed charge coverage ratio each fiscal quarter. The amended 2007 Agreement also provided that the Company may not declare or pay dividends on, or make any other distributions in respect of, its common stock. Annual capital expenditures were limited to $6.5 million.
     On April 7, 2010, the Company issued $40 million of preferred stock and, on April 8, 2010, used the proceeds to pay a portion of the outstanding bank debt obligations under the 2007 Agreement. Also on April 7, 2010, the Company refinanced its bank debt. The Company entered into a

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$60 million Third Amended and Restated Credit Agreement (the “2010 Agreement”) among the Company; Penford Products Co.; Bank of Montreal; Bank of America National Association; and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland” New York Branch. The 2010 Agreement is secured by substantially all of the Company’s assets, including the stock of Penford Products Co., the Company’s principal U.S. subsidiary company, and 65% of the stock of Penford Holdings Pty. Ltd., which owns Penford Australia.
     The 2010 Agreement refinanced the unpaid debt remaining under the 2007 Agreement. Under the 2010 Agreement, the Company may borrow $60 million in revolving lines of credit. The lenders’ revolving credit loan commitment may be increased under certain conditions. On April 8, 2010, the Company had $15.1 million outstanding under the 2010 Agreement. Under the 2010 Agreement, there are no scheduled principal payments prior to maturity on April 7, 2015. As a result of the refinancing, the Company’s short-term debt obligations at February 28, 2010 have been classified as long-term debt on the balance sheet. See Note 16 to the Condensed Consolidated Financial Statements for further details on the transactions.
     On September 2, 2009, the Company completed the sale of Penford New Zealand Limited. Proceeds from the sale, net of transaction costs, of approximately $4.8 million, were used to repay debt outstanding in the first quarter of fiscal 2010.
     On November 27, 2009, the Company’s Australian operating subsidiary, Penford Australia Limited, completed the sale of substantially all of its operating assets to two unrelated parties. In accordance with the 2007 Agreement, the net sale proceeds received through March 31, 2010 of $12.3 million were used to repay outstanding debt. The Company prepaid the term and capital expansion loans under the 2007 Agreement, beginning with the principal installment due on December 15, 2009 and then to the remaining principal installments on the capital expansion loans in the inverse order of maturity. The prepayments were sufficient to cover the principal installments on the term and capital expansion loans due on December 15, 2009.
     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. The proceeds of these Iowa loans were used to repay outstanding debt under the 2007 Agreement in the first quarter of fiscal 2010. At February 28, 2010, the Company had $1.9 million outstanding related to the IDED loans.
     At February 28, 2010, the Company had $28.4 million and $24.8 million outstanding, respectively, under the revolving credit and capital expansion portions of the 2007 Agreement. The Company was in compliance with the covenants in the 2007 Agreement, as amended, as of February 28, 2010.
     As of February 28, 2010, all of the Company’s outstanding debt under the 2007 Agreement 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 term debt of $20.8 million at 4.18% and $6.2 million at 5.08%, plus the applicable margin under the 2007 Agreement. In connection with the refinancing, the Company expects to record a pre-tax non-cash charge to earnings of approximately $1.0 million in the third quarter of fiscal 2010 related to unamortized transaction fees associated with the prior credit facility.
     8—INCOME TAXES
     The Company’s effective tax rates for the three- and six-month periods ended February 28, 2010 were 34.8% and 5.0%, respectively. The difference between the effective tax rate and the U.S. federal statutory rate was due to state income taxes offset by adjustments to prior years’ tax expense and an increase in unrecognized tax benefits of $0.1 million and $0.2 million, respectively, for the three- and six-month periods ended February 28, 2010. The decrease in the effective tax rate for the six-month period compared with the effective rate for the second quarter is due to the change in the proportion of the prior year tax adjustments and increase in unrecognized tax benefits to pretax income or loss.
     The Company’s effective tax rates for the three- and six-month periods ended February 28, 2009 were 26.1% and 28.5%, respectively. The difference between the effective tax rate and the U.S. federal statutory rate for the three- and six-month periods was due to the favorable tax benefit of a retroactive research and development tax

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credit offset by an increase in the amount of unrecognized tax benefits. Unrecognized tax benefits increased by $0.7 million and $0.8 million for the three- and six-month periods ended February 28, 2009.
     In the six months ended February 28, 2010, the amount of unrecognized tax benefits increased by $0.2 million, including interest and penalties. The total amount of unrecognized tax benefits at February 28, 2010 was $1.2 million, all of which, if recognized, would impact the effective tax rate. At February 28, 2010, the Company had $0.2 million of accrued interest and penalties included in the long-term tax liability. None of the Company’s income tax returns are currently under examination by taxing authorities. The Company does not believe that the total amount of unrecognized tax benefits at February 28, 2010 will change materially in the next 12 months.
     At February 28, 2010, the Company had $13.3 million of net deferred tax assets. In the first half of fiscal 2010, the Company recorded a tax benefit related to an impairment charge related to a loan to the Company’s Australian subsidiary which was considered not fully collectible. See Note 3 to the Condensed Consolidated Financial Statements. A valuation allowance has not been provided on the net deferred tax assets as the Company expects to recover its tax assets through future taxable income. 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.
     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. 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.
     9—OTHER COMPREHENSIVE INCOME (LOSS) (“OCI”)
     The components of total comprehensive income (loss) are as follows:
                                 
    Three months ended     Six months ended  
    February 28,     February 28,  
    2010     2009     2010     2009  
            (In thousands)          
 
                               
Net income (loss)
  $ 11,247     $ (22,178 )   $ 15,786     $ (22,547 )
Foreign currency translation adjustments
    (256 )     (1,346 )     930       (20,302 )
Gain from foreign currency translation reclassified into earnings
    (13,849 )           (13,420 )      
Net unrealized gain (loss) on derivative instruments that qualify as cash flow hedges, net of tax
    94       (1,890 )     1,191       (2,480 )
 
                       
Total comprehensive income (loss)
  $ (2,764 )   $ (25,414 )   $ 4,487     $ (45,329 )
 
                       
     The liquidation of the remaining net assets of Penford Australia was substantially completed in the second quarter of fiscal 2010 and, as a result, currency translation adjustments were reclassified from accumulated other comprehensive income into second quarter earnings.

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     10—NON-OPERATING INCOME (LOSS), NET
     Non-operating income (loss), net consists of the following:
                                 
    Three months ended     Six months ended  
    February 28,     February 28,  
    2010     2009     2010     2009  
    (In thousands)  
 
                               
Gain on sale of dextrose product line
  $     $ 1,562     $     $ 1,562  
Gain (loss) on foreign currency transactions
    (35 )     (28 )     417       (641 )
Other
    8       20       192       27  
 
                       
Total
  $ (27 )   $ 1,554     $ 609     $ 948  
 
                       
     During the three and six months ended February 28, 2010 and 2009, the Company recognized a gain (loss) on foreign currency transactions on Australian dollar denominated assets and liabilities as disclosed in the table above.
     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.
     11 — 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, 2010 and 2009 are as follows:
Defined benefit pension plans
                                 
    Three months ended     Six months ended  
    February 28,     February 28,  
    2010     2009     2010     2009  
    (In thousands)  
 
                               
Service cost
  $ 389     $ 355     $ 778     $ 710  
Interest cost
    641       645       1,282       1,290  
Expected return on plan assets
    (506 )     (607 )     (1,012 )     (1,214 )
Amortization of prior service cost
    61       63       122       126  
Amortization of actuarial losses
    304       53       608       106  
 
                       
Net periodic benefit cost
  $ 889     $ 509     $ 1,778     $ 1,018  
 
                       
Post-retirement health care plans
                                 
    Three months ended     Six months ended  
    February 28,     February 28,  
    2010     2009     2010     2009  
            (In thousands)          
 
                               
Service cost
  $ 88     $ 65     $ 176     $ 130  
Interest cost
    269       228       538       456  
Amortization of prior service cost
    (38 )     (38 )     (76 )     (76 )
Amortization of actuarial losses
    74             148        
 
                       
Net periodic benefit cost
  $ 393     $ 255     $ 786     $ 510  
 
                       

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     12—DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASURMENTS
     Fair Value Measurements
     The provisions of ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), which defines fair value, establishes a framework for its measurement, and expands disclosures concerning fair value measurements, were effective as of the beginning of the second quarter of fiscal 2009 for the Company’s financial assets and liabilities, as well as for other assets and liabilities carried at fair value on a recurring basis. As of September 1, 2009, the Company adopted the provisions of ASC 820 relating to nonrecurring fair value measurement requirements for nonfinancial assets and liabilities. These include long-lived assets which are considered to be other than temporarily impaired, reporting units measured at fair value in the first step of a goodwill impairment test, and the initial recognition of asset retirement obligations. In the three- and six-month periods ended February 28, 2010, there were no required fair value measurements for assets and liabilities measured at fair value on a nonrecurring basis.
     ASC 820 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. ASC 820 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 obtained 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.
                                 
As of February 28, 2010    (Level 1)   (Level 2)   (Level 3)   Total
    (in thousands)
 
                               
Current assets (Other Current Assets):
                               
Commodity derivatives (1)
  $ 1,077     $     $     $ 1,077  
     
 
                               
Current liabilities (Accrued Liabilities):
                               
Interest rate swaps
  $     $ 1,717     $     $ 1,717  
     
 
(1)   Commodity derivative assets and liabilities have been offset by cash collateral due and paid under master netting arrangements. The cash collateral offset was $1.4 million at February 28, 2010.
     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 the first quarter of fiscal 2010, the Company received two non interest bearing loans from the State of Iowa totaling $2.0 million. The fair value of this debt at February 28, 2010 was estimated to be $1.5 million. See Note 7.
     Interest Rate Swap Agreements

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     The Company uses interest rate swaps to manage the variability of interest payments associated with its floating-rate debt obligations. The interest payable on the 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, 2010, the Company had three interest rate swaps which fixed the interest payable on $20.8 million of debt at 4.18% and on $6.2 million of debt at 5.08%, plus the applicable margin under the Company’s credit agreement, as amended. The notional amounts, interest rate reset dates, underlying benchmark rates and interest payment dates match the terms of the debt. The Company has designated the swap agreements as cash flow hedges and accounts for them pursuant to ASC 815, “Derivatives and Hedging” (“ASC 815”). 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. In the third quarter of fiscal 2010, the Company expects to terminate its interest rate swaps and reclassify approximately $1.7 million of losses from accumulated other comprehensive income to earnings.
     Foreign Currency Contracts
     In fiscal year 2009, the Company’s Food Ingredients business purchased 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 purchased foreign currency forward contracts. The Company designated these contracts as cash flow hedges and accounted for them pursuant to ASC 815. To the extent the amounts and timing of the forecasted cash flows and the forward contracts continued to match, the unrealized losses on the foreign currency purchase contracts were included in accumulated other comprehensive income (loss). The gain or loss on the contracts was recorded in cost of sales at the time the inventory was sold. At February 28, 2010, the Company had no outstanding foreign currency contracts and no gains or losses remaining in other comprehensive income (loss).
     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 ASC 815.
     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 market value would be recognized in current earnings as a component of cost of goods 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, 2010, Penford had purchased corn positions of 7.4 million bushels, of which 5.1 million bushels represented equivalent firm priced starch sales contract volume, resulting in an open position of 2.3 million bushels.
     As of February 28, 2010, the Company had the following outstanding forward contracts, futures contracts and interest rate swaps:
     
Corn Futures
  5,955,000 Bushels
Natural Gas Futures
  1,390,000 mmbtu (millions of British thermal units)
Interest Rate Swap Contracts
  27,000,000 US Dollars (Notional Amount)

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     The following tables provide information about the fair values of the Company’s derivatives, by contract type, as of February 28, 2010 and August 31, 2009.
                                                 
    Asset Derivatives   Liability Derivatives
            Fair Value           Fair Value
    Balance Sheet   Feb. 28,   Aug. 31,   Balance Sheet   Feb. 28,   Aug. 31,
In thousands   Location   2010   2009   Location   2010   2009
Cash Flow Hedges:
                                               
Corn Futures
  Other Current Assets   $ 402     $ 82     Other Current Assets   $ 221     $ 916  
Natural Gas Futures
  Other Current Assets               Other Current Assets     547       1,301  
Interest Rate Contracts
  Other Current Assets               Accrued Liabilities     1,717       1,829  
 
                                               
Fair Value Hedges:
                                               
Corn Futures
  Other Current Assets     351       1,303     Other Current Assets     246       174  
                         
 
                                               
Total Derivatives
                                               
Designated as Hedging Instruments
          $ 753     $ 1,385             $ 2,731     $ 4,220  
                         
     The following tables provide information about the effect of derivative instruments on the financial performance of the Company for the three- and six-month periods ended February 28, 2010.
                                                 
                    Amount of Gain (Loss)    
    Amount of Gain (Loss)   Reclassified from   Amount of Gain (Loss)
    Recognized in OCI   AOCI into Income   Recognized in Income
    Quarter Ended February 28   Quarter Ended February 28   Quarter Ended February 28
In thousands   2010   2009   2010   2009   2010   2009
Cash Flow Hedges:
                                               
Corn Futures (1)
  $ 43     $ (905 )   $ 1,119     $ 6,981     $ (80 )   $ 618  
Natural Gas Futures (1)
    (547 )     (4,902 )     (241 )     (795 )            
Ethanol Futures (1)
    119             138                    
Interest Rate Contracts(2)
    (108 )     (448 )     (283 )     (164 )            
FX Contracts (1)
          (290 )                        
     
 
  $ (493 )   $ (6,545 )   $ 733     $ 6,022     $ (80 )   $ 618  
     
 
                                               
Fair Value Hedges:
                                               
Corn Futures (1) (3)
                                  $ 27     $ 337  
                                     
                                                 
                    Amount of Gain (Loss)    
    Amount of Gain (Loss)   Reclassified from   Amount of Gain (Loss)
    Recognized in OCI   AOCI into Income   Recognized in Income
    6 Months Ended February 28   6 Months Ended February 28   6 Months Ended February 28
In thousands   2010   2009   2010   2009   2010   2009
Cash Flow Hedges:
                                               
Corn Futures (1)
  $ 344     $ (2,155 )   $ 1,096     $ 1,650     $ 175     $ (659 )
Natural Gas Futures (1)
    (1,243 )     (7,994 )     (1,106 )     (1,853 )            
Ethanol Futures (1)
    (590 )           (439 )                  
Interest Rate Contracts(2)
    (457 )     (1,250 )     (569 )     (237 )            
FX Contracts (1)
          (580 )     (26 )                  
     
 
  $ (1,946 )   $ (11,979 )   $ (1,044 )   $ (440 )   $ 175     $ (659 )
     
 
                                               
Fair Value Hedges:
                                               
Corn Futures (1) (3)
                                  $ 61     $ (891 )
                                     
 
(1)   Gains and losses reported in cost of goods sold
 
(2)   Gains and losses reported in interest expense
 
(3)   Hedged items are firm commitments and inventory

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      13—SEGMENT REPORTING
     Financial information from continuing operations for the Company’s two segments, Industrial Ingredients and Food Ingredients, is presented below. Industrial Ingredients and Food Ingredients are broad categories of end-market users served by the Company’s U.S. operations. The Industrial Ingredients segment provides carbohydrate-based starches for industrial applications, primarily in the paper and packaging products and fuel 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     Six months ended  
    February 28,     February 28,  
    2010     2009     2010     2009  
    (In thousands)  
Sales:
                               
Industrial Ingredients—North America
                               
Industrial Starch
  $ 27,983     $ 32,997     $ 60,331     $ 65,205  
Ethanol
  18,082     14,319     36,042     23,952  
 
                       
    46,065     47,316     96,373     89,157  
Food Ingredients—North America
    16,228       16,623       32,990       34,365  
 
                       
 
  $ 62,293     $ 63,939     $ 129,363     $ 123,522  
 
                       
 
                               
Income (loss) from operations:
                               
Industrial Ingredients—North America
  $ (1,721 )   $ (6,652 )   $ 433     $ (4,852 )
Food Ingredients—North America
    2,848       2,813       6,429       6,211  
Corporate and other
    (2,243 )     (2,230 )     (4,835 )     (4,956 )
 
                       
 
  $ (1,116 )   $ (6,069 )   $ 2,027     $ (3,597 )
 
                       
                 
    February 28,     August 31,  
    2010     2009  
    (In thousands)  
Total assets:
               
Industrial Ingredients
  $ 135,547     $ 139,609  
Food Ingredients
    37,531       37,387  
Discontinued Operations
    3,673       42,713  
Corporate and other
    30,976       38,536  
 
           
 
  $ 207,727     $ 258,245  
 
           
     Included in the Industrial Ingredients — North America loss from operations for the three- and six-month periods ended February 28, 2010 were $3.8 million and $8.0 million, respectively, of insurance recoveries related to the fiscal 2008 flooding in Cedar Rapids, Iowa. Assets of discontinued operations are located in Australia and New Zealand. All other assets are located in the United States.
     14—EARNINGS (LOSS) PER SHARE
     Effective September 1, 2009, the Company adopted ASC 260-10-45, “Participating Securities and the Two-Class Method” (“ASC 260-10-45”) which requires 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. The Company has applied the provisions of ASC 260-10-45 retrospectively to all periods presented.

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     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 continuing operations to income from continuing operations applicable to common shares and the computation of diluted weighted average shares outstanding for the three and six months ended February 28, 2010 and 2009.
                                 
    Three months ended     Six months ended  
    February 28,     February 28,  
    2010     2009     2010     2009  
    (In thousands)     (In thousands)  
Numerator:
                               
Loss from continuing operations
  $ (1,801 )   $ (4,205 )   $ (745 )   $ (3,642 )
Less: Allocation to participating securities
    (157 )     (5 )     (168 )     (10 )
 
                       
Loss from continuing operations applicable to common shares
  $ (1,958 )   $ (4,210 )   $ (913 )   $ (3,652 )
 
                       
 
                               
Income (loss) from discontinued operations
  $ 13,048     $ (17,973 )   $ 16,531     $ (18,905 )
Less: Allocation to participating securities
                       
 
                       
Income (loss) from discontinued operations applicable to common shares
  $ 13,048     $ (17,973 )   $ 16,531     $ (18,905 )
 
                       
 
                               
Net income (loss)
  $ 11,247     $ (22,178 )   $ 15,786     $ (22,547 )
Less: Allocation to participating securities
    (147 )     (5 )     (162 )     (10 )
 
                       
Net income (loss) applicable to common shares
  $ 11,100     $ (22,183 )   $ 15,624     $ (22,557 )
 
                       
 
                               
Denominator:
                               
Weighted average common shares outstanding, basic
    11,204       11,174       11,193       11,165  
Dilutive stock options and awards
                       
 
                       
Weighted average common shares outstanding, diluted
    11,204       11,174       11,193       11,165  
 
                       
     For the three and six months ended February 28, 2010, there were 159,282 and 138,508 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 86,701 and 92,174 shares 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. Weighted-average stock options to purchase 1,330,080 and 1,324,408 shares of common stock for the three and six months ended February 28, 2010, 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.
     15—LEGAL PROCEEDINGS
     On January 23, 2009 the Company filed suit in the U.S. 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, related to insurance coverage arising out of the flood that struck the Company’s Cedar Rapids, Iowa plant in June 2008. The Company is currently seeking in this litigation additional payment from the insurers of more than $25 million for business interruption losses that occurred as a result of the flood, as well as various damages. The Company cannot at this time determine the likelihood of any outcome or estimate the amount of any judgment 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.

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      16 — SUBSEQUENT EVENT
     Preferred Stock
     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. Proceeds from the preferred stock issuance of $40.0 million were used to repay bank debt on April 8, 2010.
     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 beginning May 31, 2010.
     The Series A Preferred Stock is mandatorily redeemable on April 7, 2017 at a per share redemption price equal to the original issue price 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.
     On April 7, 2010, the Company also issued, without proceeds, 100,000 shares of Series B Preferred Stock to Zell Credit Opportunities Master Fund, L.P. The holders of the Series B Preferred Stock are entitled to dividends equal to the per share dividend declared and paid on the Company’s common stock times the number of shares of common stock into which the Series B Preferred Stock is then convertible. The Series B Preferred Stock is not redeemable and dividends on the Series B Preferred Stock are non-cumulative.
     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.
     In connection with this investment, the Company also agreed to register the shares of Common Stock issuable upon conversion of the Series B Preferred Stock. The Company also granted to the investor certain information and inspection rights and the right to elect one director to the Company’s Board of Directors while any shares of Series A Preferred Stock remain outstanding. On April 9, 2010, the Board of Directors, upon the recommendation of the investor, elected Matthew Zell, a Managing Director of Equity Group Investments, to be the director designated by the holders of the Series A Preferred Stock.
     Bank Debt
     On April 7, 2010, in connection with the issuance of preferred stock, the Company refinanced its bank debt. The Company entered into a $60 million Third Amended and Restated Credit Agreement (the “2010 Agreement”) among the Company; Penford Products Co.; Bank of Montreal; Bank of America National Association; and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland” New York Branch.
     The 2010 Agreement replaced the Company’s previous $145 million secured term and revolving credit facilities. Under the 2010 Agreement, the Company may borrow $60 million in revolving lines of credit. The lenders’ revolving credit loan commitment may be increased under certain conditions.

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     The maturity date for the revolving loans under the 2010 Agreement is April 7, 2015. Interest rates under the 2010 Agreement are based on either the London Interbank Offering Rates (“LIBOR”) or the prime rate, depending on the selection of available borrowing options under the 2010 Agreement. Pursuant to the 2010 Agreement, the interest rate margin over LIBOR ranges between 3% and 4%, depending upon the Total Funded Debt Ratio. At April 7, 2010, the interest rate margin was 3.25%.
     The 2010 Agreement provides that the Total Funded Debt Ratio, which is computed as funded debt divided by earnings before interest, taxes, depreciation and amortization (as defined in the 2010 Agreement) shall not exceed 3.00. In addition, the Company must maintain a Fixed Charge Coverage Ratio, as defined in the 2010 Agreement, of not less than 1.35. Annual capital expenditures would be restricted to $15 million (excluding certain capital expenditures specified in the 2010 Agreement) if the Total Funded Debt Ratio is greater than 2.00 for two consecutive fiscal quarters. The Company’s obligations under the 2010 Agreement are secured by substantially all of the Company’s assets.
     At April 8, 2010, the Company had $15.1 million outstanding pursuant to the 2010 Agreement.

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     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 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, 2009, 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 flood 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,
    other factors described in Part I, Item 1A “Risk Factors.”
Overview

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     Penford generates revenues, income and cash flows by developing, manufacturing and marketing specialty natural-based ingredient systems for industrial and food applications and by producing and selling 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 13 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.
     On August 27, 2009, the Company’s Board of Directors made a determination that the Company would exit from the business conducted by the Company’s Australia/New Zealand Operations. This determination was made upon completion of a process involving the examination of a range of strategic and operating choices for the Company’s Australia/New Zealand Operations. The process was undertaken as part of a continuing program to maximize the Company’s asset values and returns. On September 2, 2009, the Company completed the sale of Penford New Zealand Limited. On November 27, 2009, the Company’s Australian operating subsidiary, Penford Australia Limited, completed the sale of substantially all of its operating assets to two unrelated parties.
     The financial data for the Australia/New Zealand Operations have been presented as discontinued operations. The financial statements have been prepared in compliance with the provisions of the Accounting Standards Codification 205-10, “Presentation of Financial Statements — Discontinued Operations” (“ASC 205-10”). Accordingly, for all periods presented herein, the Condensed Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows have been conformed to this presentation. The Australia/New Zealand Operations was previously reported as the Company’s third operating segment. See Note 3 to the Condensed Consolidated Financial Statements for further details.
     This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s 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.” Unless otherwise noted, all amounts and analyses are based on continuing operations.
     Accounting Changes
     In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification (“ASC” or the “Codification”) as the source of authoritative U.S. generally accepted accounting principles recognized by the FASB. SFAS 168 was effective for financial statements issued for interim and annual periods ending after September 15, 2009. Beginning in the first quarter of fiscal 2010, all references made to U.S. generally accepted accounting principles will use the new Codification numbering system prescribed by the FASB. The FASB will issue new standards in the form of Accounting Standards Updates (“ASU”) which will serve to update the Codification.
     In April 2009, the FASB issued new authoritative guidance requiring disclosures regarding financial instruments for interim reporting periods of publicly traded companies. The guidance requires that disclosures provide quantitative and qualitative information on fair value estimates for all financial instruments not measured on the balance sheet at fair value, when practicable, with the exception of certain financial instruments listed in ASC 825 “Financial Instruments.” The Company adopted this guidance in the first quarter of fiscal 2010 and has included the required disclosures in this Form 10-Q.
     In December 2008, the FASB issued new authoritative guidance regarding employer disclosures about postretirement benefit plan assets. The new guidance requires an employer to disclose information regarding its investment policies and strategies for its categories of plan assets, its fair value measurements of plan assets and any significant concentrations of risk in plan assets. The new guidance, which was effective September 1, 2009 for the

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Company, only requires the revised annual disclosures on a prospective basis. Accordingly, the Company will provide the additional disclosures in its fiscal 2010 Annual Report on Form 10-K.
     In June 2008, the FASB issued new authoritative guidance for determining 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 pursuant to the two-class method. The Company adopted the new guidance in the first quarter of fiscal 2010 and was required to retrospectively adjust all prior-period earnings per share data. The resulting impact of the adoption of the new guidance was to include unvested restricted shares in the computation of basic earnings per share pursuant to the two-class method which did not have a material impact on the Company’s earnings per share for the three- and six-month periods ended February 28, 2010. See Note 14 to the Condensed Consolidated Financial Statements.
     In February 2008, the FASB issued new authoritative guidance delaying the portions of ASC 820, “Fair Value Measurements and Disclosures,” which required fair value measurements for non-recurring, nonfinancial assets and liabilities that are recognized or disclosed at fair value until the Company’s fiscal year 2010. The adoption of this guidance on September 1, 2009 had no effect on the Company’s financial position or results of operations. See Note 12 to the Condensed Consolidated Financial Statements.
Results of Operations
     Executive Overview
     Consolidated sales for the three months ended February 28, 2010 decreased 2.5%, or $1.6 million, to $62.3 million compared with $63.9 million for the three months ended February 28, 2010. Consolidated sales in the first half of fiscal 2010 increased $5.8 million over last year to $129.4 million. While volumes expanded during the three- and six-month periods ending February 28, 2010, the Company also experienced unfavorable product mix and mixed pricing results in both the food ingredients and industrial ingredients businesses. Sales of divested products were $1.0 million and $1.9 million, respectively, in the second quarter and first half of fiscal 2009. See the discussion by business segment below for details of changes in revenues.
     Consolidated gross margin as a percent of sales rose to 9.7% for the quarter ended February 28, 2010 from a negative margin of 4% in the prior year’s second quarter. Consistent with the second quarter results, year-to-date fiscal 2010 consolidated gross margin rose to 12.9% from 2.2% last year. Expanded 2010 margins were due to lower raw material, chemical and energy costs and improved manufacturing yields in the industrial ingredients business. In addition, during the first half of fiscal 2009, the industrial business was recovering from severe flooding at its Cedar Rapids, Iowa facility, and was phasing in the restart of production.
     Consolidated loss from operations for the three months ended February 28, 2010 and 2009 was $1.1 million and $6.1 million, respectively. Consolidated operating income for the first half of fiscal 2010 was $2.0 million compared with an operating loss of $3.6 million in the first half of fiscal 2009. Included in operating results for fiscal 2009 were net insurance recoveries of $3.8 million and $8.0 million, respectively, for the three- and six-month periods ended February 28, 2009.
     The Company maintains property damage and business interruption insurance coverage applicable to the Cedar Rapids plant. The Company is seeking additional payments from its insurers for damages arising from the flooding that occurred in June 2008 and has filed a lawsuit against the insurers. The Company does not provide assurance as to any amount or timing of the potential recoveries under its insurance policies. The effect of the flood on the financial results of the Company on a quarter-to-quarter basis in fiscal 2010 will depend on the timing and amount of additional insurance proceeds received, if any, which the Company is currently unable to estimate. The amount ultimately recovered from the Company’s insurers may be materially more or less than the Company’s direct costs of the flood.
      Industrial Ingredients
     Second quarter fiscal 2010 sales at the Company’s Industrial Ingredients business unit declined $1.3 million, or 2.6%, to $46.1 million from $47.3 million in the second quarter of fiscal 2009. Industrial starch sales of $28.0 million for the quarter ended February 28, 2010 decreased $5.0 million from a year ago on a decline in average unit pricing, including the effect of a decrease in the cost of corn which is passed through to customers, partially offset

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by a slight increase in sales volume. Sales of specialty industrial starches increased 10% on an increase in volume, offset by lower unit pricing. Sales of ethanol increased 26% from $14.3 million in the second quarter of fiscal 2009 to $18.1 million in the second quarter of fiscal 2010. Both sales volume and average unit pricing of ethanol rose at double-digit rates over the prior year quarter.
     Industrial sales for the first half of fiscal 2010 increased 8.1% to 96.4 million from $89.2 million in fiscal 2009. Industrial starch sales decreased $4.9 million to $60.3 million from $65.2 million in fiscal 2009 while volumes increased 10%. Average unit pricing of industrial starches declined. Sales of specialty industrial starches for the six months ended February 28, 2010 rose 22% on volume increases, partially offset by pricing declines. First half fiscal 2010 ethanol sales expanded 51% to $36.0 million from $24.0 million a year ago on an increase in volume and pricing improvements. Volumes in the first half of fiscal 2010 increased over the prior year as the Company was still recovering from the June 2008 flooding in Cedar Rapids, Iowa in the first quarter of fiscal 2009. Ethanol production was not restarted until the end of September 2008.
     The Industrial Ingredients business unit reported a loss from operations for the second quarter of fiscal 2010 of $1.7 million compared to an operating loss of $6.7 million for the second quarter of fiscal 2009. Included in the loss for fiscal 2009 was $3.8 million of net insurance recoveries related to the Cedar Rapids flooding. Excluding the financial effects of the flood in the second quarter of fiscal 2009, the Industrial Ingredients business reduced its operating loss by $8.7 million through cost and yield improvements. Manufacturing yields contributed $6.5 million and favorable energy, corn, chemical and other costs contributed $4.0 million to improved financial results in the quarter ended February 28, 2010. The effect of unfavorable starch pricing and a larger percentage of lower margin ethanol sales reduced gross margin by $1.8 million.
     The Industrial Ingredients business reported income from operations of $0.4 million for the six months ended February 28, 2010 compared to an operating loss of $4.9 million for the same period of fiscal 2009. Net insurance recoveries of $8.0 million related to the 2008 flooding in Cedar Rapids were recorded in the first six months of fiscal 2009. Gross margin expanded $13.5 million on improvements in manufacturing yields of $8.4 million, $8.9 million of reductions in the costs of chemicals, corn, energy and other manufacturing inputs, and the effect of volume increases of $2.8 million. Unfavorable starch pricing and an increase in sales of ethanol, which has a lower margin than starch, reduced gross margin by $6.6 million.
     Food Ingredients
     Fiscal 2010 second quarter sales for the Food Ingredients segment of $16.2 million decreased 2.4%, or $0.4 million, from the second quarter of fiscal 2009. Sales for the six months ended February 28, 2010 of $33.0 million decreased 4%, or $1.4 million, from last year. Sales declines were primarily due to the sale of the dextrose product line in the second quarter of fiscal 2009. Sales of dextrose products were $1.0 million and $1.9 million, respectively, for the three- and six-month periods ended February 28, 2009. For the second quarter and the first half of fiscal 2010, sales of applications to growth end markets, such as protein and pet chews, improved by 29% and 14%, respectively. Sales of potato coatings applications decreased for the three- and six-month periods ended February 28, 2010 due to declining same store sales at the Company’s quick service restaurant customers.
     Income from operations and gross margin for the second quarter of fiscal 2010 of $2.8 million and $4.8 million, respectively, were comparable to the same periods a year ago. Operating income for the first half of fiscal 2010 of $6.4 million improved $0.2 million over the prior year on lower manufacturing and raw material costs.
     Corporate operating expenses
     Corporate operating expenses declined $0.1 million for the second quarter of fiscal 2010 to $2.3 million, and declined $0.4 million for the first half of fiscal 2010 to $4.8 million, primarily due to lower professional fees and travel costs.
     Interest expense
     Interest expense for the three- and six-month periods ended February 28, 2010 increased $0.4 million and $1.0 million, respectively, compared to the same periods last year. In connection with the third amendment to the Company’s credit agreement in the fourth quarter of fiscal 2009, the Company paid additional arrangement and commitment fees to its lenders of $1.0 million. The amortization of these costs and existing deferred loan fees over the shortened maturity of

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the debt increased interest expense by approximately $0.3 million and $0.7 million during the three- and six-month periods ended February 28, 2010, respectively. The remaining increase in interest expense is due to an increase in the applicable margin over LIBOR as a result of the third amendment. See Note 7 to the Condensed Consolidated Financial Statements.
     Income taxes
     The Company’s effective tax rates for the three- and six-month periods ended February 28, 2010 were 34.8% and 5.0%, respectively. The difference between the effective tax rate and the U.S. federal statutory rate was due to state income taxes offset by adjustments to prior years’ tax expense and an increase in unrecognized tax benefits of $0.1 million and $0.2 million, respectively, for the three- and six-month periods ended February 28, 2010. The decrease in the effective tax rate for the six-month period compared with the effective rate for the second quarter is due to the change in the proportion of the prior year tax adjustments and increase in unrecognized tax benefits to pretax income or loss.
     The Company’s effective tax rates for the three- and six-month periods ended February 28, 2009 were 26.1% and 28.5%, respectively. The difference between the effective tax rate and the U.S. federal statutory rate for the three- and six-month periods was due to the favorable tax benefit of a retroactive research and development tax credit offset by an increase in the amount of unrecognized tax benefits. Unrecognized tax benefits increased by $0.7 million and $0.8 million for the three- and six-month periods ended February 28, 2009.
     At February 28, 2010, the Company had $13.3 million of net deferred tax assets. In the first half of fiscal 2010, the Company recorded a tax benefit related to an impairment charge related to a loan to the Company’s Australian subsidiary which was considered not fully collectible. See Note 3 to the Condensed Consolidated Financial Statements. A valuation allowance has not been provided on the net deferred tax assets as the Company expects to recover its tax assets through future taxable income. 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.
     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. 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 (loss), net
     Non-operating income (loss), net consists of the following:
                                 
    Three months ended     Six months ended  
    February 28,     February 28,  
    2010     2009     2010     2009  
    (In thousands)  
 
                               
Gain on sale of dextrose product line
  $     $ 1,562     $     $ 1,562  
Gain (loss) on foreign currency transactions
    (35 )     (28 )     417       (641 )
Other
    8       20       192       27  
 
                       
Total
  $ (27 )   $ 1,554     $ 609     $ 948  
 
                       
     During the three and six months ended February 28, 2010 and 2009, the Company recognized a gain (loss) on foreign currency transactions on Australian dollar denominated assets and liabilities as disclosed in the table above.

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     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.
Results of Discontinued Operations
                                 
    Three Months Ended     Six Months Ended  
    February 28,     February 28,     February 28,     February 28,  
    2010     2009     2010     2009  
    (In Thousands)     (In Thousands)  
 
                               
Sales
  $     $ 16,068     $ 16,963     $ 37,428  
 
                       
Loss from operations
  $ (183 )   $ (16,931 )   $ (1,708 )   $ (18,567 )
 
                               
Interest expense
    133       172       448       395  
Gain (loss) on sale of assets
    (152 )           199        
Reclassification of currency translation adjustments into earnings
    13,849             13,420        
Other non-operating income, net
    141       371       627       767  
 
                       
Loss from discontinued operations before taxes
    13,522       (16,732 )     12,090       (18,195 )
Income tax expense (benefit)
    474       1,241       (4,441 )     710  
 
                       
Income (loss) from discontinued operations, net of tax
  $ 13,048     $ (17,973 )   $ 16,531     $ (18,905 )
 
                       
     On August 27, 2009, the Company’s Board of Directors made a determination that the Company would exit from the business conducted by the Company’s Australia/New Zealand Operations. On September 2, 2009, the Company completed the sale of Penford New Zealand Limited. On November 27, 2009, the Company’s Australian operating subsidiary, Penford Australia Limited, completed the sale of substantially all of its operating assets to two unrelated parties. The Australia/New Zealand Operations was previously reported in the consolidated financial statements as an operating segment. See Note 3 to the Condensed Consolidated Financial Statements.
     During the six months ended February 28, 2010, the Company determined that intercompany loans made by its U.S. operations to its Australian subsidiaries would not be fully collectible from the proceeds of the Australian asset sales and the liquidation of the remaining net financial assets. Accordingly, the Company recorded an impairment charge in the U.S. of $13.6 million, which was recorded in discontinued operations. The tax benefit of the impairment was also recorded in discontinued operations. The liquidation of the remaining net assets of Penford Australia was substantially completed in the second quarter of fiscal 2010 and, as a result, $13.8 of currency translation adjustments were reclassified from accumulated other comprehensive income into second quarter earnings.
     In fiscal years 2008 and 2009, the Company’s Australian operations reported tax losses. As of August 31, 2009, the Company’s discontinued Australian operations had recorded a valuation allowance of $14.6 million against the entire Australian net deferred tax asset because of the uncertainty of generating sufficient future taxable income. In the six months ended February 28, 2010, the Australian operations recorded $13.6 million of income related to the U.S. impairment discussed above. Accordingly, the Company decreased its deferred tax asset related to the carryfoward of net operating losses and reversed the corresponding tax valuation allowance. At February 28, 2010, the valuation allowance related to the Australian net deferred tax asset was $10.8 million.
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.
     At February 28, 2010, the Company had $28.4 million and $24.8 million outstanding, respectively, under the revolving credit and capital expansion portions of its credit facility.

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     On April 7, 2010, the Company issued $40 million of preferred stock and, on April 8, 2010, used the proceeds to pay a portion of the outstanding bank debt obligations under the 2007 Agreement. Also on April 7, 2010, the Company entered into a $60 million Third Amended and Restated Credit Agreement (the “2010 Agreement”) among the Company; Penford Products Co.; Bank of Montreal; Bank of America National Association; and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland” New York Branch. See Note 16 to the Condensed Consolidated Financial Statements for details of the refinancing and preferred stock issuance.
     The 2010 Agreement replaced the Company’s previous $145 million secured term and revolving credit facilities. Under the 2010 Agreement, the Company may borrow $60 million in revolving lines of credit. The lenders’ revolving credit loan commitment may be increased under certain conditions. On April 8, 2010, the Company had $15.1 million outstanding under its new $60 million credit facility. Under the 2010 Agreement, there are no scheduled principal payments prior to maturity on April 7, 2015. In connection with the refinancing, the Company expects to record a pre-tax non-cash charge to earnings of approximately $1.0 million in the third quarter of fiscal 2010 related to unamortized transaction fees associated with the prior credit facility.
     The Company may not declare or pay any dividends on its common stock without first obtaining approval from the holders of the 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 will be accrued or may be paid currently at the discretion of the Company. Dividends are payable quarterly beginning May 31, 2010.
     As of February 28, 2010, all of the Company’s outstanding debt under its credit facility was subject to variable interest rates. Under interest rate swap agreements with several banks, the Company had fixed its interest rates on U.S. dollar denominated term debt of $20.8 million at 4.18% and $6.2 million at 5.08%, plus the applicable margin pursuant to its credit agreement. In the third quarter of fiscal 2010, the Company expects to terminate its interest rate swaps and reclassify approximately $1.7 million of losses from accumulated other comprehensive income to earnings.
     Cash provided by continuing operations was $31.5 million for the six months ended February 28, 2010 compared with cash used in continuing operations of $16.8 million for the first quarter last year. The improvement in operating cash flow was primarily due to changes in working capital and intercompany cash receipts related to sale of Penford New Zealand Limited and substantially all of Penford Australia’s operating assets. During the first six months of fiscal 2009, trade receivables expanded as the Company’s Industrial Ingredients business restarted production and recovered from the flooding that occurred in Iowa in June 2008. Also, accounts payable and accrued liabilities declined during last year’s six-month period as a result of payments for flood restoration services.
     On September 2, 2009, the Company completed the sale of Penford New Zealand Limited. Proceeds from the sale, net of transaction costs, of approximately $4.8 million, were used to repay debt outstanding in the first quarter of fiscal 2010.
     On November 27, 2009, the Company’s Australian operating subsidiary, Penford Australia Limited, completed the sale of substantially all of its operating assets to two unrelated parties. In accordance with the Company’s then current credit facility, the net proceeds received through March 31, 2010 of $12.3 million were used to repay outstanding debt. Additional proceeds from the sale to be received are (1) $2.0 million payable from an escrow account in four equal installments over thirty months from the date of sale, and (2) the final monthly installment in May 2010 of approximately $0.14 million as further compensation for grain inventory on hand on the date of sale.
     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 caused by 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. The proceeds of these Iowa loans were used to repay outstanding debt in the first quarter of fiscal 2010. At February 28, 2010, the Company had $1.9 million outstanding related to the IDED loans.

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Contractual Obligations
     The Company is a party to various debt and lease agreements at February 28, 2010 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, 2010, there have been no material changes in the Company’s contractual obligations since August 31, 2009, except for the change in principal payments pursuant to the new credit agreement discussed above. The 2010 Agreement does not require principal payments until maturity on April 7, 2015.
Off-Balance Sheet Arrangements
     The Company had no off-balance sheet arrangements at February 28, 2010.
Recent Accounting Pronouncements
     In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605) — Multiple Deliverable Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13 eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and expands the disclosures related to multiple-deliverable revenue arrangements. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010 (fiscal 2011 for the Company). The adoption of ASU 2009-13 is not expected to have any impact on the Company’s financial position or results of operations.
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, 2009 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, 2009.
     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

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Exchange Act Rule 13a-15(b) as of February 28, 2010. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of February 28, 2010.
     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 February 28, 2010 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION
     Item  1: Legal Proceedings
     On January 23, 2009 the Company filed suit in the U.S. 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, related to insurance coverage arising out of the flood that struck the Company’s Cedar Rapids, Iowa plant in June 2008. The Company is currently seeking in this litigation additional payment from the insurers of more than $25 million for business interruption losses that occurred as a result of the flood, as well as various damages. The Company cannot at this time determine the likelihood of any outcome or estimate the amount of any judgment 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 Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended August 31, 2009, which could materially impact the Company’s business, financial condition and 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

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     Item  4: Submission of Matters to a Vote of Security Holders
     The Company held its Annual Meeting of Shareholders on January 26, 2010. 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
 
               
Jeffrey T. Cook
    3,728,003       4,207,677  
Thomas D. Malkoski
    7,493,112       442,568  
Sally G. Narodick
    7,476,471       459,209  
     Directors not elected at this meeting and whose term of office continued after the meeting are William E. Buchholz, R. Randolph Devening, Paul H. Hatfield, John C. Hunter III and James E. Warjone. Edward F. Ryan was subsequently elected to the Board on March 4, 2010.
     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
9,519,629
  258,688   1,135
     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

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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)   
     
April 9, 2010  /s/ Steven O. Cordier    
  Steven O. Cordier   
  Senior Vice President and Chief Financial Officer   

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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

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