UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
| | |
(Mark One) | | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
| | for the quarterly period ended May 31, 2008November 30, 2008. |
| | |
| | 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 NumberNumber: 0-50150
CHS Inc.
(Exact name of registrant as specified in its charter)
| | |
Minnesota | | 41-0251095 |
(State or other jurisdiction of incorporation or organization) | | 41-0251095 (I.R.S. Employer Identification Number)Number) |
| | |
5500 Cenex Drive Inver Grove Heights, MN 55077 (Address of principal executive offices, including zip code) | | (651) 355-6000 (Registrant’s telephone number, including area code) |
Include by 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 Registrantregistrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer, or a smaller reporting company. See definitionthe definitions of “accelerated filer”, “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
| | | |
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). YES o NO þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | |
| | Number of shares outstanding at
|
Class | | July 10, 2008January 12, 2009
|
|
NONE | | NONE |
INDEX
| | | | | | |
| | | | Page No. |
|
|
| | Financial Statements (unaudited) | | | 3 | |
| | Consolidated Balance Sheets as of May 31,November 30, 2008, August 31, 20072008 and May 31,November 30, 2007 | | | 3 | |
| | Consolidated Statements of Operations for the three and nine months ended May 31,November 30, 2008 and 2007 | | | 4 | |
| | Consolidated Statements of Cash Flows for the ninethree months ended May 31,November 30, 2008 and 2007 | | | 5 | |
| | Notes to Consolidated Financial Statements | | | 6 | |
| | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | 2019 | |
| | Quantitative and Qualitative Disclosures about Market Risk | | | 4134 | |
| | Controls and Procedures | | | 4135 | |
|
PART II. OTHER INFORMATION |
| | Legal Proceedings | | | 4236 | |
| | Risk Factors | | | 36 | |
| | Exhibits | | | 4236 | |
| | | 4339 | |
Fourth Amendment to 2006 Amended and Restated Credit AgreementEX-10.2 |
First Amendment to Credit AgreementEX-10.3 |
First Amendment to $150 Million Term Loan Credit AgreementEX-10.4 |
$75 Million Uncommitted Demand FacilityEX-10.5 |
Third Amendment to the CHS Inc. Deferred Compensation PlanEX-10.6 |
$60 Million Uncommitted Trade Finance FacilityEX-10.7 |
CertificationEX-10.8 |
CertificationEX-10.9 |
Section 1350 CertificationEX-10.10 |
Section 1350 CertificationEX-10.11 |
EX-10.12 |
EX-10.13 |
EX-10.14 |
EX-10.15 |
EX-10.16 |
EX-10.17 |
EX-10.18 |
EX-10.19 |
EX-10.20 |
EX-10.21 |
EX-10.22 |
EX-10.23 |
EX-10.24 |
EX-10.25 |
EX-10.26 |
EX-10.27 |
EX-10.28 |
EX-10.29 |
EX-10.30 |
EX-31.1 |
EX-31.2 |
EX-32.1 |
EX-32.2 |
1
PART I. FINANCIAL INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report onForm 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that may cause the Company’s actual results to differ materially from the results discussed in the forward-looking statements. These factors include those set forth in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the caption “Cautionary Statement Regarding Forward-Looking Statements” to this Quarterly Report onForm 10-Q for the quarterly period ended May 31,November 30, 2008.
2
| |
Item 1. | Financial Statements |
CHS INC. AND SUBSIDIARIES
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | May 31,
| | August 31,
| | May 31,
| | | November 30,
| | August 31,
| | November 30,
| |
| | 2008 | | 2007 * | | 2007 * | | | 2008 | | 2008 | | 2007 | |
| | (dollars in thousands) | | | (dollars in thousands) | |
|
ASSETS | ASSETS | ASSETS |
Current assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 249,715 | | | $ | 357,712 | | | $ | 245,911 | | | $ | 783,408 | | | $ | 136,540 | | | $ | 186,754 | |
Receivables | | | 2,234,061 | | | | 1,401,251 | | | | 1,440,022 | | | | 1,913,157 | | | | 2,307,794 | | | | 1,966,793 | |
Inventories | | | 2,165,907 | | | | 1,666,632 | | | | 1,197,178 | | | | 2,054,106 | | | | 2,368,024 | | | | 2,235,967 | |
Derivative assets | | | 683,065 | | | | 247,082 | | | | 235,334 | | | | 381,696 | | | | 369,503 | | | | 466,830 | |
Other current assets | | | 532,426 | | | | 264,181 | | | | 325,322 | | | | 762,238 | | | | 667,338 | | | | 697,893 | |
| | | | | | | | | | | | | | |
Total current assets | | | 5,865,174 | | | | 3,936,858 | | | | 3,443,767 | | | | 5,894,605 | | | | 5,849,199 | | | | 5,554,237 | |
Investments | | | 784,091 | | | | 880,592 | | | | 811,037 | | | | 721,499 | | | | 784,516 | | | | 806,610 | |
Property, plant and equipment | | | 1,923,637 | | | | 1,728,171 | | | | 1,625,669 | | | | 1,970,357 | | | | 1,948,305 | | | | 1,836,372 | |
Other assets | | | 231,340 | | | | 208,752 | | | | 287,269 | | | | 251,264 | | | | 189,958 | | | | 241,540 | |
| | | | | | | | | | | | | | |
Total assets | | $ | 8,804,242 | | | $ | 6,754,373 | | | $ | 6,167,742 | | | $ | 8,837,725 | | | $ | 8,771,978 | | | $ | 8,438,759 | |
| | | | | | | | | | | | | | |
| LIABILITIES AND EQUITIES | LIABILITIES AND EQUITIES | LIABILITIES AND EQUITIES |
Current liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Notes payable | | $ | 405,877 | | | $ | 672,571 | | | $ | 528,628 | | | $ | 356,877 | | | $ | 106,154 | | | $ | 443,413 | |
Current portion of long-term debt | | | 111,973 | | | | 98,977 | | | | 60,471 | | | | 105,905 | | | | 118,636 | | | | 96,123 | |
Customer credit balances | | | 164,379 | | | | 110,818 | | | | 94,920 | | | | 303,904 | | | | 224,349 | | | | 123,699 | |
Customer advance payments | | | 623,995 | | | | 161,525 | | | | 88,899 | | | | 562,089 | | | | 644,822 | | | | 697,357 | |
Checks and drafts outstanding | | | 153,639 | | | | 143,133 | | | | 90,032 | | | | 107,974 | | | | 204,896 | | | | 170,038 | |
Accounts payable | | | 1,785,115 | | | | 1,120,822 | | | | 1,029,336 | | | | 1,512,427 | | | | 1,838,214 | | | | 1,785,143 | |
Derivative liabilities | | | 400,482 | | | | 177,209 | | | | 166,303 | | | | 501,436 | | | | 273,591 | | | | 235,743 | |
Accrued expenses | | | 296,215 | | | | 255,631 | | | | 244,674 | | | | 291,908 | | | | 374,898 | | | | 248,579 | |
Dividends and equities payable | | | 263,386 | | | | 374,294 | | | | 199,677 | | | | 374,220 | | | | 325,039 | | | | 488,727 | |
| | | | | | | | | | | | | | |
Total current liabilities | | | 4,205,061 | | | | 3,114,980 | | | | 2,502,940 | | | | 4,116,740 | | | | 4,110,599 | | | | 4,288,822 | |
Long-term debt | | | 1,123,609 | | | | 589,344 | | | | 630,449 | | | | 1,062,472 | | | | 1,076,219 | | | | 975,391 | |
Other liabilities | | | 409,174 | | | | 377,208 | | | | 420,560 | | | | 414,637 | | | | 423,742 | | | | 381,438 | |
Minority interests in subsidiaries | | | 200,924 | | | | 197,386 | | | | 210,649 | | | | 225,962 | | | | 205,732 | | | | 190,936 | |
Commitments and contingencies | | | | | | | | | | | | | | | | | | | | | | | | |
Equities | | | 2,865,474 | | | | 2,475,455 | | | | 2,403,144 | | | | 3,017,914 | | | | 2,955,686 | | | | 2,602,172 | |
| | | | | | | | | | | | | | |
Total liabilities and equities | | $ | 8,804,242 | | | $ | 6,754,373 | | | $ | 6,167,742 | | | $ | 8,837,725 | | | $ | 8,771,978 | | | $ | 8,438,759 | |
| | | | | | | | | | | | | | |
| | |
* | | Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2 |
The accompanying notes are an integral part of the consolidated financial statements (unaudited).
3
CHS INC. AND SUBSIDIARIES
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended
| | For the Nine Months Ended
| | | For the Three Months Ended
| |
| | May 31, | | May 31, | | | November 30, | |
| | 2008 | | 2007 * | | 2008 | | 2007 * | | | 2008 | | 2007 | |
| | (dollars in thousands) | | | (dollars in thousands) | |
|
Revenues | | $ | 9,336,609 | | | $ | 4,732,465 | | | $ | 22,753,340 | | | $ | 12,218,115 | | | $ | 7,733,919 | | | $ | 6,525,386 | |
Cost of goods sold | | | 9,055,967 | | | | 4,401,557 | | | | 21,900,436 | | | | 11,516,832 | | | | 7,413,412 | | | | 6,210,749 | |
| | | | | | | | | | | | | | |
Gross profit | | | 280,642 | | | | 330,908 | | | | 852,904 | | | | 701,283 | | | | 320,507 | | | | 314,637 | |
Marketing, general and administrative | | | 86,571 | | | | 64,871 | | | | 228,035 | | | | 175,564 | | | | 87,741 | | | | 66,459 | |
| | | | | | | | | | | | | | |
Operating earnings | | | 194,071 | | | | 266,037 | | | | 624,869 | | | | 525,719 | | | | 232,766 | | | | 248,178 | |
(Gain) loss on investments | | | (5,305 | ) | | | 251 | | | | (100,483 | ) | | | (16,497 | ) | |
Loss (gain) on investments | | | | 54,976 | | | | (94,948 | ) |
Interest, net | | | 22,183 | | | | 9,272 | | | | 53,786 | | | | 25,963 | | | | 20,175 | | | | 13,537 | |
Equity income from investments | | | (51,820 | ) | | | (67,490 | ) | | | (128,423 | ) | | | (84,336 | ) | | | (20,723 | ) | | | (31,190 | ) |
Minority interests | | | 16,666 | | | | 61,287 | | | | 52,476 | | | | 94,669 | | | | 22,182 | | | | 22,979 | |
| | | | | | | | | | | | | | |
Income before income taxes | | | 212,347 | | | | 262,717 | | | | 747,513 | | | | 505,920 | | | | 156,156 | | | | 337,800 | |
Income taxes | | | 23,631 | | | | 23,121 | | | | 89,866 | | | | 46,272 | | | | 18,905 | | | | 36,900 | |
| | | | | | | | | | | | | | |
Net income | | $ | 188,716 | | | $ | 239,596 | | | $ | 657,647 | | | $ | 459,648 | | | $ | 137,251 | | | $ | 300,900 | |
| | | | | | | | | | | | | | |
| | |
* | | Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2 |
The accompanying notes are an integral part of the consolidated financial statements (unaudited).
4
CHS INC. AND SUBSIDIARIES
(Unaudited)
| | | | | | | | | | | | | | | | |
| | For the Nine Months Ended
| | | For the Three Months Ended
| |
| | May 31, | | | November 30, | |
| | 2008 | | 2007 * | | | 2008 | | 2007 | |
| | (dollars in thousands) | | | (dollars in thousands) | |
|
Cash flows from operating activities: | | | | | | | | | | | | | | | | |
Net income | | $ | 657,647 | | | $ | 459,648 | | | $ | 137,251 | | | $ | 300,900 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 130,005 | | | | 103,374 | | | | 47,671 | | | | 40,517 | |
Amortization of deferred major repair costs | | | 21,652 | | | | 17,581 | | | | 7,494 | | | | 6,664 | |
Income from equity investments | | | (128,423 | ) | | | (84,336 | ) | | | (20,723 | ) | | | (31,190 | ) |
Distributions from equity investments | | | 72,777 | | | | 60,099 | | | | 39,410 | | | | 12,332 | |
Minority interests | | | 52,476 | | | | 94,669 | | | | 22,182 | | | | 22,979 | |
Noncash patronage dividends received | | | (1,619 | ) | | | (1,346 | ) | | | (393 | ) | | | (445 | ) |
Gain on sale of property, plant and equipment | | | (5,707 | ) | | | (4,080 | ) | | | (771 | ) | | | (899 | ) |
Gain on investments | | | (100,483 | ) | | | (16,497 | ) | |
Loss (gain) on investments | | | | 54,976 | | | | (94,948 | ) |
Deferred taxes | | | 89,866 | | | | 15,787 | | | | 672 | | | | 36,900 | |
Other, net | | | 233 | | | | 328 | | | | (8,577 | ) | | | (244 | ) |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | |
Receivables | | | (765,766 | ) | | | (314,184 | ) | | | 675,390 | | | | (545,482 | ) |
Inventories | | | (317,696 | ) | | | (58,834 | ) | | | 320,808 | | | | (394,715 | ) |
Derivative assets | | | (435,983 | ) | | | (161,061 | ) | | | (12,193 | ) | | | (219,748 | ) |
Other current assets and other assets | | | (416 | ) | | | (106,558 | ) | | | (83,912 | ) | | | (184,091 | ) |
Customer credit balances | | | 53,531 | | | | 28,132 | | | | 79,555 | | | | 12,881 | |
Customer advance payments | | | 256,236 | | | | 6,513 | | | | (82,733 | ) | | | 329,580 | |
Accounts payable and accrued expenses | | | 604,352 | | | | 124,654 | | | | (410,680 | ) | | | 658,319 | |
Derivative liabilities | | | 321,084 | | | | 68,493 | | | | 227,845 | | | | 58,535 | |
Other liabilities | | | 8,342 | | | | 38,483 | | | | 4,013 | | | | 6,662 | |
| | | | | | | | | | |
Net cash provided by operating activities | | | 512,108 | | | | 270,865 | | | | 997,285 | | | | 14,507 | |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Acquisition of property, plant and equipment | | | (255,818 | ) | | | (249,648 | ) | | | (61,671 | ) | | | (108,698 | ) |
Proceeds from disposition of property, plant and equipment | | | 8,132 | | | | 9,263 | | | | 941 | | | | 2,653 | |
Expenditures for major repairs | | | (21,662 | ) | | | (8,225 | ) | | | (1 | ) | | | (21,662 | ) |
Investments | | | (336,117 | ) | | | (84,208 | ) | | | (89,889 | ) | | | (267,317 | ) |
Investments redeemed | | | 35,498 | | | | 4,438 | | | | 2,163 | | | | 66 | |
Proceeds from sale of investments | | | 120,758 | | | | 10,918 | | | | 16,109 | | | | 114,198 | |
Joint venture distribution transaction, net | | | (4,737 | ) | | | | | | | | | | | (13,024 | ) |
Changes in notes receivable | | | (62,478 | ) | | | (54,215 | ) | | | 96,296 | | | | (18,912 | ) |
Acquisition of intangibles | | | (2,463 | ) | | | (8,144 | ) | | | (1,320 | ) | | | (850 | ) |
Business acquisitions | | | (45,891 | ) | | | | | |
Business acquisitions, net of cash received | | | | (40,199 | ) | | | (3,871 | ) |
Other investing activities, net | | | (3,813 | ) | | | (2,143 | ) | | | 506 | | | | 432 | |
| | | | | | | | | | |
Net cash used in investing activities | | | (568,591 | ) | | | (381,964 | ) | | | (77,065 | ) | | | (316,985 | ) |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Changes in notes payable | | | (265,299 | ) | | | 506,583 | | | | (137,346 | ) | | | (229,120 | ) |
Long-term debt borrowings | | | 600,000 | | | | | | | | | | | | 400,000 | |
Principal payments on long-term debt | | | (54,639 | ) | | | (54,150 | ) | | | (22,078 | ) | | | (18,675 | ) |
Payments for bank fees on debt | | | (3,486 | ) | | | | | | | | | | | (1,794 | ) |
Changes in checks and drafts outstanding | | | 10,105 | | | | 32,313 | | | | (97,621 | ) | | | 26,906 | |
Distribution to minority owners | | | (55,437 | ) | | | (32,725 | ) | |
Costs incurred — capital equity certificates redeemed | | | (135 | ) | | | (145 | ) | |
Distributions to minority owners | | | | (9,565 | ) | | | (38,409 | ) |
Preferred stock dividends paid | | | (11,764 | ) | | | (9,484 | ) | | | (4,524 | ) | | | (3,620 | ) |
Retirements of equities | | | (75,899 | ) | | | (64,856 | ) | | | (2,218 | ) | | | (3,768 | ) |
Cash patronage dividends paid | | | (194,960 | ) | | | (133,051 | ) | |
| | | | | | | | | | |
Net cash (used in) provided by financing activities | | | (51,514 | ) | | | 244,485 | | | | (273,352 | ) | | | 131,520 | |
| | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (107,997 | ) | | | 133,386 | | |
Net increase (decrease) in cash and cash equivalents | | | | 646,868 | | | | (170,958 | ) |
Cash and cash equivalents at beginning of period | | | 357,712 | | | | 112,525 | | | | 136,540 | | | | 357,712 | |
| | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 249,715 | | | $ | 245,911 | | | $ | 783,408 | | | $ | 186,754 | |
| | | | | | | | | | |
| | |
* | | Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2 |
The accompanying notes are an integral part of the consolidated financial statements (unaudited).
5
CHS INC. AND SUBSIDIARIES
(dollars in thousands)
| |
Note 1. | Accounting Policies |
The unaudited consolidated balance sheets as of May 31,November 30, 2008 and 2007, the statements of operations for the three and nine months ended May 31,November 30, 2008 and 2007, and the statements of cash flows for the ninethree months ended May 31,November 30, 2008 and 2007, reflect in the opinion of our management, all normal recurring adjustments necessary for a fair statement of the financial position and results of operations and cash flows for the interim periods presented. The results of operations and cash flows for interim periods are not necessarily indicative of results for a full fiscal year because of, among other things, the seasonal nature of our businesses. The consolidated balance sheetOur Consolidated Balance Sheet data as of August 31, 20072008 has been derived from our audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
The consolidated financial statements include our accounts and the accounts of all of our wholly-owned and majority-owned subsidiaries and limited liability companies. The effects of all significant intercompany accounts and transactions have been eliminated.
These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended August 31, 2007,2008, included in our Annual Report onForm 10-K, filed with the Securities and Exchange Commission.
Commodity Price Risk
We are exposed to price fluctuations on energy, fertilizer, grain and oilseed transactions due to fluctuations in the market value of inventories and fixed or partially fixed purchase and sales contracts. Our use of derivative instruments reduces the effects of price volatility, thereby protecting against adverse short-term price movements, while, somewhat limiting the benefits of short-term price movements. However, fluctuations in inventory valuations may not be completely hedged, due in part to the absence of satisfactory hedging facilities for certain commodities and geographical areas, and in part, to our assessment of itsour exposure from expected price fluctuations.
WeWhen available, we generally enter into opposite and offsetting positions using futures contracts or options to the extent practical, in order to arrive at a net commodity position within the formal position limits we sethave established and deemdeemed prudent for each of those commodities.commodity. These contracts are purchased and sold through regulated commodity exchanges. The contracts are economic hedges of price risk, but are not currently designated or accounted for as hedging instruments for accounting purposes. These contracts are recorded on theour Consolidated Balance Sheets at fair values based on quotes listed on regulated commodity exchanges. Unrealized gains and losses on these contracts are recognized in cost of goods sold in our Consolidated Statements of Operations using market-based prices.
We also manage our riskrisks by entering into fixed-price purchase and sales contracts with pre-approved producers and by establishing appropriate limits for individual suppliers. Fixed-price contracts are entered into with customers of acceptable creditworthiness, as internally evaluated. We are also exposed to loss in the event of nonperformance by the counterparties to the contracts and, therefore, contract values are reviewed and adjusted to reflect potential nonperformance. Risk of nonperformance by counterparties includes the inability to perform because of counterparty’s financial condition and also the risk that the counterparty will refuse to perform a contract during periods of price fluctuations where contract prices are significantly different than the current market prices. During the three months ended November 30, 2008, the market prices of our input products have significantly decreased, thereby increasing the risk of nonperformance by counterparties. These contracts are recorded on theour Consolidated Balance Sheets at fair values based on the market prices of the underlying products listed on regulated commodity exchanges, except for certain fixed-price contracts related to propane in our Energy segment. The propane contracts within our Energy segment meet the normal
6
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
purchase and sales exemption, and thus are not required to be marked to fair value. Unrealized gains and losses on fixed-price contracts are recognized in cost of goods sold in our Consolidated Statements of Operations using market-based prices.
6
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
Goodwill and Other Intangible Assets
Goodwill was $10.7 million, $3.8 million and $3.8 million on May 31,November 30, 2008, August 31, 2008 and November 30, 2007, and May 31, 2007,respectively, and is included in other assets in theour Consolidated Balance Sheets. Through August 31, 2008, we had a 49% ownership interest in Cofina Financial, LLC (Cofina Financial) included in Corporate and Other. On September 1, 2008, we purchased the remaining 51% ownership interest in Cofina Financial, which resulted in $6.9 million of goodwill from the purchase price allocation.
Intangible assets subject to amortization primarily include trademarks, customer lists, supply contracts and agreements not to compete, and are amortized over the number of years that approximate their respective useful lives (ranging from 12 to 15 years). Excluding goodwill, the gross carrying amount of our intangible assets was $76.0$71.5 million with total accumulated amortization of $21.4$23.2 million as of May 31,November 30, 2008. Intangible assets of $32.2$1.3 million and $11.9 million (includes $9.9$7.2 million related to theour crop nutrients business transaction and $2.3 million other non-cash) and $11.1 million ($3.0 million non-cash)transaction) were acquired during the ninethree months ended May 31,November 30, 2008 and 2007, respectively. During the nine months ended May 31, 2008, acquisitions of intangible assets included $11.4 million related to the purchase of a soy-based food products business in our Processing segment, of which $8.9 million was trademarks. Total amortization expense for intangible assets during the nine-monththree-month periods ended May 31,November 30, 2008 and 2007, was $9.9$2.4 million and $2.1$2.7 million, respectively. The estimated annual amortization expense related to intangible assets subject to amortization for the next five years will approximate $10.6$10.9 million annually for the first two years, $6.8year, $7.3 million for the next twothree years and $3.5$2.8 million for the following year.
Recent Accounting Pronouncements
In September 2006,December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157) which defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial assets and liabilities for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (FSP)157-2, “Effective Date of FASB Statement No. 157.”FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities that are not remeasured at fair value on a recurring basis until fiscal years beginning after November 15, 2008. Any amounts recognized upon adoption of this rule as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. We are in the process of evaluating the effect that the adoption of SFAS No. 157 will have on our consolidated results of operations and financial condition.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value, with changes in fair value reported in earnings, and requires additional disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the effect that the adoption of SFAS No. 159 will have on our consolidated results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” SFAS No. 141R provides companies with principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree, as well as the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS No. 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008. Early adoption of SFAS No. 141R is not permitted. The impact on our consolidated financial statements of adopting SFAS No. 141R will depend on the nature, terms and size of business combinations completed after the effective date.
7
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of Accounting Research Bulletin (ARB) No. 51.” This statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon its adoption, noncontrolling interests will be classified as equity in our Consolidated Balance Sheets. Income and comprehensive income attributed to the noncontrolling interest will be included in our Consolidated Statements of Operations and our Consolidated Statements of Equities and Comprehensive Income. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The provisions of this standard must be applied retrospectively upon adoption. We are in the process of evaluating the impact theThe adoption of SFAS No. 160 will have oneffect the presentation of these items in our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of SFAS No. 133.” SFAS No. 161 requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008,
7
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
with early adoption permitted. We are currently evaluating the impact of the adoption ofAs SFAS No. 161 is only disclosure related, it will not have an impact on our consolidated financial statements.position or results of operations.
In December 2008, the FASB issued FASB Staff Position (FSP)SFAS No. 140-4 and FASB Interpretation (FIN) 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” This FSP amends SFAS No. 140 and FIN 46(R) to require public companies to disclose additional information regarding transfers of financial assets and interests in variable interest entities. It is effective for all reporting periods that end after December 15, 2008. As FSPSFAS No. 140-4 and FIN 46(R)-8 is only disclosure-related, it will not have an impact on our financial position or results of operations.
Reclassifications
Certain reclassifications have been made to prior period’s amounts to conform to current period classifications. These reclassifications had no effect on previously reported net income, equities or total cash flows.
| |
Note 2. | Change in Accounting Principle — TurnaroundsReceivables |
| | | | | | | | | | | | |
| | November 30,
| | | August 31,
| | | November 30,
| |
| | 2008 | | | 2008 | | | 2007 | |
|
Trade accounts receivable | | $ | 1,502,549 | | | $ | 2,181,132 | | | $ | 1,912,160 | |
Cofina Financial notes receivable | | | 405,067 | | | | | | | | | |
Other | | | 87,802 | | | | 200,313 | | | | 118,636 | |
| | | | | | | | | | | | |
| | | 1,995,418 | | | | 2,381,445 | | | | 2,030,796 | |
Less allowances and reserves | | | 82,261 | | | | 73,651 | | | | 64,003 | |
| | | | | | | | | | | | |
| | $ | 1,913,157 | | | $ | 2,307,794 | | | $ | 1,966,793 | |
| | | | | | | | | | | | |
During the
Cofina Financial makes primarily seasonal loans to member cooperatives and businesses and to individual producers of agricultural products.
| | | | | | | | | | | | |
| | November 30,
| | | August 31,
| | | November 30,
| |
| | 2008 | | | 2008 | | | 2007 | |
|
Grain and oilseed | | $ | 798,312 | | | $ | 918,514 | | | $ | 1,301,441 | |
Energy | | | 504,123 | | | | 596,487 | | | | 481,960 | |
Crop nutrients | | | 346,699 | | | | 399,986 | | | | 192,775 | |
Feed and farm supplies | | | 359,946 | | | | 371,670 | | | | 215,570 | |
Processed grain and oilseed | | | 37,707 | | | | 74,537 | | | | 39,932 | |
Other | | | 7,319 | | | | 6,830 | | | | 4,289 | |
| | | | | | | | | | | | |
| | $ | 2,054,106 | | | $ | 2,368,024 | | | $ | 2,235,967 | |
| | | | | | | | | | | | |
The market prices for crop nutrients products fell significantly during our first quarter of fiscal 2009, and due to a wet fall season, we had a higher quantity of inventory on hand at the end of our first quarter than is typical at that time of year. In order to reflect our crop nutrients inventories at net realizable values on November 30, 2008, we changed our accounting method for the costsrecorded $84.1 million of turnarounds from the accrual method to the deferral method. Turnarounds are the scheduled and required shutdowns of refinery processing units for significant overhaul and refurbishment. Under the deferral accounting method, the costs of turnarounds are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until the next turnaround occurs. The new method of accounting for turnarounds was adopted in order to adhere to FSP No. AUG AIR-1 “Accounting for Planned Major Maintenance Activities” which prohibits the accrual method of accounting for planned major maintenance activities. The comparative financial statements for the three months and nine months ended May 31, 2007 have been adjusted to apply the new method retrospectively. These deferred costs are includedlower-of-cost or market adjustments in our Consolidated Balance Sheets in other assets. The amortization expenses are included in cost of goods sold inAg Business segment related to our Consolidated Statements of Operations. The following consolidated financial statement line items as of August 31, 2007crop nutrients and May 31,feed and farm supplies inventories, based on committed sales and current market values.
8
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
As of November 30, 2008, we valued approximately 10% of inventories, primarily related to energy, using the lower of cost, determined on the LIFO method, or market (10% as of November 30, 2007). If the FIFO method of accounting had been used, inventories would have been higher than the reported amount by $230.8 million and $507.1 million at November 30, 2008 and 2007, and for the three months and nine months ended May 31, 2007, were affected by this change in accounting principle:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2007 | | | May 31, 2007 | |
| | As
| | | FSP AUG
| | | | | | As
| | | FSP AUG
| | | | |
| | Previously
| | | AIR-1
| | | As
| | | Previously
| | | AIR-1
| | | As
| |
| | Reported | | | Adjustment | | | Adjusted | | | Reported | | | Adjustment | | | Adjusted | |
|
Consolidated Balance Sheets | | | | | | | | | | | | | | | | | | | | | | | | |
Other assets | | $ | 147,965 | | | $ | 60,787 | | | $ | 208,752 | | | $ | 245,042 | | | $ | 42,227 | | | $ | 287,269 | |
Accrued expenses | | | 261,875 | | | | (6,244 | ) | | | 255,631 | | | | 267,995 | | | | (23,321 | ) | | | 244,674 | |
Other liabilities | | | 359,198 | | | | 18,010 | | | | 377,208 | | | | 400,927 | | | | 19,633 | | | | 420,560 | |
Minority interests in subsidiaries | | | 190,830 | | | | 6,556 | | | | 197,386 | | | | 204,093 | | | | 6,556 | | | | 210,649 | |
Equities | | | 2,432,990 | | | | 42,465 | | | | 2,475,455 | | | | 2,363,785 | | | | 39,359 | | | | 2,403,144 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the
| | | For the
| |
| | Three Months Ended
| | | Nine Months Ended
| |
| | May 31, 2007 | | | May 31, 2007 | |
| | As
| | | FSP AUG
| | | | | | As
| | | FSP AUG
| | | | |
| | Previously
| | | AIR-1
| | | As
| | | Previously
| | | AIR-1
| | | As
| |
| | Reported | | | Adjustment | | | Adjusted | | | Reported | | | Adjustment | | | Adjusted | |
|
Consolidated Statements of Operations | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of goods sold | | $ | 4,404,540 | | | $ | (2,983 | ) | | $ | 4,401,557 | | | $ | 11,522,206 | | | $ | (5,374 | ) | | $ | 11,516,832 | |
Income before income taxes | | | 259,734 | | | | 2,983 | | | | 262,717 | | | | 500,546 | | | | 5,374 | | | | 505,920 | |
Income taxes | | | 21,961 | | | | 1,160 | | | | 23,121 | | | | 44,182 | | | | 2,090 | | | | 46,272 | |
Net income | | | 237,773 | | | | 1,823 | | | | 239,596 | | | | 456,364 | | | | 3,284 | | | | 459,648 | |
Consolidated Statements of Cash Flows | | | | | | | | | | | | | | | | | | | | | | | | |
Operating activities | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | 456,364 | | | | 3,284 | | | | 459,648 | |
Amortization of deferred major repair costs | | | | | | | | | | | | | | | | | | | 17,581 | | | | 17,581 | |
Deferred taxes | | | | | | | | | | | | | | | 13,697 | | | | 2,090 | | | | 15,787 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts payable and accrued expenses | | | | | | | | | | | | | | | 128,584 | | | | (3,930 | ) | | | 124,654 | |
Other liabilities | | | | | | | | | | | | | | | 49,283 | | | | (10,800 | ) | | | 38,483 | |
Net cash provided by operating activities | | | | | | | | | | | | | | | 262,640 | | | | 8,225 | | | | 270,865 | |
Investing activities | | | | | | | | | | | | | | | | | | | | | | | | |
Expenditures for major repairs | | | | | | | | | | | | | | | | | | | (8,225 | ) | | | (8,225 | ) |
Net cash used in investing activities | | | | | | | | | | | | | | | (373,739 | ) | | | (8,225 | ) | | | (381,964 | ) |
9
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
| | | | | | | | | | | | |
| | May 31,
| | | August 31,
| | | May 31,
| |
| | 2008 | | | 2007 | | | 2007 | |
|
Trade | | $ | 2,140,795 | | | $ | 1,366,428 | | | $ | 1,394,391 | |
Other | | | 165,646 | | | | 97,783 | | | | 105,471 | |
| | | | | | | | | | | | |
| | | 2,306,441 | | | | 1,464,211 | | | | 1,499,862 | |
Less allowances for doubtful accounts | | | 72,380 | | | | 62,960 | | | | 59,840 | |
| | | | | | | | | | | | |
| | $ | 2,234,061 | | | $ | 1,401,251 | | | $ | 1,440,022 | |
| | | | | | | | | | | | |
respectively.
| |
Note 4. | InventoriesInvestments |
| | | | | | | | | | | | |
| | May 31,
| | | August 31,
| | | May 31,
| |
| | 2008 | | | 2007 | | | 2007 | |
|
Grain and oilseed | | $ | 887,765 | | | $ | 928,567 | | | $ | 546,938 | |
Energy | | | 617,238 | | | | 490,675 | | | | 422,274 | |
Crop nutrients | | | 289,010 | | | | | | | | | |
Feed and farm supplies | | | 310,696 | | | | 178,167 | | | | 180,267 | |
Processed grain and oilseed | | | 55,147 | | | | 66,407 | | | | 45,023 | |
Other | | | 6,051 | | | | 2,816 | | | | 2,676 | |
| | | | | | | | | | | | |
| | $ | 2,165,907 | | | $ | 1,666,632 | | | $ | 1,197,178 | |
| | | | | | | | | | | | |
Cofina Financial, a joint venture company formed in 2005, makes seasonal and term loans to member cooperatives and businesses and to individual producers of agricultural products. Through August 31, 2008, we held a 49% ownership interest in Cofina Financial and accounted for our investment using the equity method of accounting. On September 1, 2008, we purchased the remaining 51% ownership interest for $53.3 million. The purchase price included net cash of $48.5 million and the assumption of certain liabilities of $4.8 million.
Through March 31, 2008, we were recognizing our share of the earnings of US BioEnergy Corporation (US BioEnergy), included in our Processing segment, using the equity method of accounting. Effective April 1, 2008, US BioEnergy and VeraSun Energy Corporation (VeraSun) completed a merger, and our current ownership interest in the combined entity was reduced to approximately 8%, compared to an approximateapproximately 20% interest in US BioEnergy prior to the merger. As part of the merger transaction, our shares held in US BioEnergy were converted to shares held in the surviving company, VeraSun, at .8100.810 per share. As a result of our change in ownership interest, we no longer havehad significant influence, and therefore account for VeraSun as an available for saleavailable-for-sale investment. AsDue to the continued decline of Maythe ethanol industry and other considerations, we determined that an impairment of our VeraSun investment was necessary, and as a result, based on VeraSun’s market value of $5.76 per share on August 29, 2008, an impairment charge of $71.7 million ($55.3 million net of taxes) was recorded in net gain on investments during the fourth quarter of our year ended August 31, 2008. Subsequent to August 31, 2008, the fairmarket value of our investment inVeraSun’s stock price continued to decline, and on October 31, 2008, VeraSun filed for relief under Chapter 11 of the U.S. Bankruptcy Code. Consequently, we have determined an additional impairment is necessary based on quotedVeraSun’s market prices was $87.8value of $0.28 per share on November 3, 2008, and have recorded an impairment charge of $70.7 million and we recorded a $58.2($64.4 million charge to equity, as other comprehensive (loss) income,net of taxes) during theour three months then ended November 30, 2008. The impairments did not affect our cash flows and did not have a bearing upon our compliance with any covenants under our credit facilities. During the quarter ended November 30, 2008, we provided a valuation allowance related to value our investment accordingly. Management does not consider the decline in market valuecarryforward of certain capital losses of $21.2 million. Coupled with the provision of $11.5 million related to be permanent, but rather reflective of currently high corn prices and relatively low ethanol prices. VeraSun is an ethanol production company and corn is a major inputcapital losses in the production process.
During the nine monthsfiscal year ended MayAugust 31, 2008, we invested $30.3 million in a joint venture (37.5% ownership) included in our Ag Business segment, that acquired production farmland andthe total valuation allowance related operations in Brazil, intended to strengthen our ability to serve customers around the world. The operations include production of soybeans, corn, cotton and sugarcane, as well as cotton processing in four locations.
During the nine months ended May 31, 2007, we sold 540,000 shares of our CF Industries Holdings, Inc. (CF) stock, included in our Ag Business segment, for proceeds of $10.9 million, and recorded a pretax gain of $5.3 million, reducing our ownership interest in CF to approximately 2.9%. During the nine months ended May 31, 2008, we sold all of our remaining 1,610,396 shares of CF stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million.
Agriliance LLC (Agriliance) is owned and governed by United Country Brands, LLC (50%) and Land O’Lakes, Inc. (Land O’Lakes) (50%). United Country Brands, LLC is a 100% owned subsidiary of CHS. We
10
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
account for our share of the Agriliance investment using the equity method of accounting. In June 2007, we announced that two business segments of Agriliance were being repositioned. In September 2007, Agriliance distributed the assets of the crop nutrients business to us, and the assets of the crop protection business to Land O’Lakes. Agriliance continues to exist as a50-50 joint venture and primarily operates an agronomy retail distribution business. We currently are exploring, with Land O’Lakes, the repositioning options for the remaining portions of the Agriliance retail distribution business. During the nine months ended May 31, 2008, our net contribution to Agriliance was $255.0 million which supported their working capital requirements, with Land O’Lakes making equal contributions to Agriliance, primarily for crop nutrient and crop protection product net trade payables that were not assumed by us or Land O’Lakes upon the distribution of the crop nutrients and crop protection assets, as well as Agriliance’s ongoing retail operations.
Due to our 50% ownership interest in Agriliance and the 50% ownership interest of Land O’Lakes, we were each entitled to receive 50% of the distributions from Agriliance. Given the different preliminary values assigned to the assetscarryforward of the crop nutrients and the crop protection businesses of Agriliance,capital losses at the closing of the distribution transactions Land O’Lakes owed us $133.5November 30, 2008 is $32.7 million. Land O’Lakes paid us $32.6 million in cash, and in order to maintain equal capital accounts in Agriliance, they also paid down certain portions of Agriliance’s debt on our behalf in the amount of $100.9 million. Values of the distributed assets were determined after the closing and in October 2007, we made atrue-up payment to Land O’Lakes in the amount of $45.7 million, plus interest. The finaltrue-up is expected to occur during our current fiscal year.
The distribution of assets we received from Agriliance for the crop nutrients business had a book value of $248.2 million. We recorded 50% of the value of the net assets received at book value due to our ownership interest in those assets when they were held by Agriliance, and 50% of the value of the net assets at fair value using the purchase method of accounting. Preliminary values assigned to the net assets acquired were:
| | | | |
Receivables | | $ | 5,219 | |
Inventories | | | 174,620 | |
Other current assets | | | 256,390 | |
Investments | | | 6,096 | |
Property, plant and equipment | | | 29,682 | |
Other assets | | | 11,717 | |
Customer advance payments | | | (206,252 | ) |
Accounts payable | | | (5,584 | ) |
Accrued expenses | | | (3,163 | ) |
| | | | |
Total net assets received | | $ | 268,725 | |
| | | | |
We have a 50% interest in Ventura Foods, LLC, (Ventura Foods), a joint venture which produces and distributes primarily vegetable oil-based products, and is included in our Processing segment.
As We account for Ventura Foods as an equity method investment, and as of May 31,November 30, 2008, theour carrying value of our equity method investees, Agriliance and Ventura Foods exceeded our share of their equity by $42.6 million. Of this basis difference, $3.0$15.5 million, of which $2.6 million is being amortized over thewith a remaining life of the corresponding assets, which is approximately four years. The balance of theremaining basis difference represents equity method goodwill. During the three months ended November 30, 2008, we made a $10.0 million capital contribution to Ventura Foods.
During the three months ended November 30, 2008 and 2007, we invested an additional $76.3 million and $30.3 million, respectively, in Multigrain AG (Multigrain), included in our Ag Business segment. The investment during the current fiscal year was for Multigrain’s increased capital needs resulting from expansion of their operations. Our current ownership interest in Multigrain is 39.35%.
During the three months ended November 30, 2008 and 2007, we sold ouravailable-for-sale investments of common stock in the New York Mercantile Exchange (NYMEX Holdings) and CF Industries Holdings, Inc., respectively, for proceeds of $16.1 million and $108.3 million, respectively, and recorded pretax gains of $15.7 million and $91.7 million, respectively.
119
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
In March 2008, we learned that Agriliance would restate its financial statements because of what they considered to be a misapplication of Emerging Issues Task Force IssueNo. 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor”(EITF 02-16). We have determined that the effects of Agriliance’s restatement on our consolidated financial statements for fiscal 2007 were not material.
The following provides summarized unaudited financial information as reported, excluding restatements, for our unconsolidated significant equity investment in Agriliance for the balance sheets as of May 31,November 30, 2008, August 31, 20072008 and May 31,November 30, 2007, and statements of operations for the three-month and nine-month periods as indicated below.below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended
| | For the Nine Months Ended
| | | For the Three Months Ended
| |
| | May 31, | | May 31, | | | November 30, | |
| | 2008 | | 2007 | | 2008 | | 2007 | | | 2008 | | 2007 | |
|
Net sales | | $ | 389,113 | | | $ | 1,832,590 | | | $ | 787,363 | | | $ | 3,000,107 | | | $ | 96,378 | | | $ | 210,590 | |
Gross profit | | | 59,414 | | | | 208,656 | | | | 113,651 | | | | 300,200 | | | | 14,300 | | | | 33,874 | |
Net income (loss) | | | 20,893 | | | | 108,036 | | | | (26,293 | ) | | | 49,255 | | |
Net loss | | | | (11,742 | ) | | | (23,516 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | May 31,
| | August 31,
| | May 31,
| | | November 30,
| | August 31,
| | November 30,
| |
| | 2008 | | 2007 | | 2007 | | | 2008 | | 2008 | | 2007 | |
|
Current assets | | $ | 678,267 | | | $ | 1,549,691 | | | $ | 1,754,732 | | | $ | 429,042 | | | $ | 456,385 | | | $ | 732,209 | |
Non-current assets | | | 42,044 | | | | 115,087 | | | | 162,822 | | | | 41,987 | | | | 40,946 | | | | 66,850 | |
Current liabilities | | | 322,813 | | | | 1,214,774 | | | | 1,468,437 | | | | 100,425 | | | | 119,780 | | | | 392,483 | |
Non-current liabilities | | | 10,201 | | | | 137,417 | | | | 141,932 | | | | 12,146 | | | | 12,421 | | | | 35,698 | |
| |
Note 6.5. | Notes Payable and Long-term Debt |
| | | | | | | | | | | | |
| | November 30,
| | | August 31,
| | | November 30,
| |
| | 2008 | | | 2008 | | | 2007 | |
|
Notes payable | | $ | 6,459 | | | $ | 106,154 | | | $ | 443,413 | |
Cofina Financial notes payable | | | 350,418 | | | | | | | | | |
| | | | | | | | | | | | |
| | $ | 356,877 | | | $ | 106,154 | | | $ | 443,413 | |
| | | | | | | | | | | | |
As
Cofina Funding, LLC (Cofina Funding), a wholly-owned subsidiary of August 31, 2007, we had a five-year revolving lineCofina Financial, has available credit totaling $403.0 million as of creditNovember 30, 2008, under note purchase agreements with various purchasers, through the issuance of notes payable with maturity dates of less than one year. Cofina Financial sells eligible commercial loans receivable it has originated to Cofina Funding, which are then pledged as collateral under the note purchase agreements. The notes payable issued by Cofina Funding bear interest at variable rates priced and determined using commercial paper rates, with a syndication of domestic and international banks in the amount of $1.1 billion, with the ability to expand the facility an additional $200.0 million. In October 2007, we expanded that facility, receiving additional commitments of $200.0 million from certain lenders under the agreement. The additional commitments increased the total borrowing capacity to $1.3 billion on the facility, and on May 31, 2008, we had $400.0 million outstanding.
In October 2007, we entered into a private placement with several insurance companies and banks for long-term debt of $400.0 million with anweighted average interest rate of 6.18%. The debt3.367% on November 30, 2008. Borrowings by Cofina Funding under the note purchase agreements totaled $256.8 million as of November 30, 2008, of which $119.8 million is dueshown net of the loans receivable on our Consolidated Balance Sheet, as the transfer of those loans receivable were accounted for as sales when they were surrendered in equal annual installmentsaccordance with SFAS No. 140, “Accounting for Transfers and Servicing of $80.0 million during years 2013 through 2017.Financial Assets and Extinguishments of Liabilities.”
In December 2007, we establishedCofina Financial also sells loan commitments it has originated to ProPartners Financial (ProPartners) on a ten-year $150.0recourse basis. The total capacity for commitments under the ProPartners program is $120.0 million. The total outstanding commitments under the program totaled $81.7 million long-term credit agreement through a syndicationas of cooperative banks,November 30, 2008, of which $56.6 million was borrowed under these commitments with an interest rate of 5.59%rates ranging from 2.15% to 2.85%. Repayments are due in equal semi-annual installments of $15.0 million each, starting in June 2013 through December 2018.
We have an existing Note PurchaseCofina Financial also borrows funds under short-term notes issued as part of a surplus funds program. Borrowings under this program are unsecured and Private Shelf Agreement with Prudential Investment Management, Inc. and several other participating insurance companies with an uncommitted shelf facility. We borrowed $50.0 million under the shelf arrangement in February 2008, for which the aggregate long-term notes have anbear interest rate of 5.78% and are due in equal annual installments of $10.0 million during the years 2014 through 2018.
In February 2008, we increased our short-term borrowing capacity by establishing a $500.0 million committed line of credit with a syndication of banks consisting of a364-day revolving facility. There was no amount outstanding on this facility on May 31, 2008.
Interest, net for the three and nine months ended May 31, 2008 and 2007 is as follows:
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended
| | | For the Nine Months Ended
| |
| | May 31, | | | May 31, | |
| | 2008 | | | 2007 | | | | | | 2007 | |
|
Interest expense | | $ | 24,798 | | | $ | 13,567 | | | $ | 65,227 | | | $ | 37,694 | |
Interest income | | | 2,615 | | | | 4,295 | | | | 11,441 | | | | 11,731 | |
| | | | | | | | | | | | | | | | |
Interest, net | | $ | 22,183 | | | $ | 9,272 | | | $ | 53,786 | | | $ | 25,963 | |
| | | | | | | | | | | | | | | | |
at variable rates (ranging from 2.00% to 2.50%
12
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
Effective September 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). This interpretation clarifies the criteria for recognizing income tax benefits under FASB Statement 109, “Accounting for Income Taxes”, and requires additional disclosures about uncertain tax positions. FIN 48 requires a taxpayer to determine whether a tax position is more likely than not (greater than 50 percent) to be sustained based solely on the technical merits of the position. If this threshold is met, the tax benefit is measured and recognized at the largest amount that is greater than 50 percent likely of being realized.
The total amount of unrecognized tax benefits as of September 1, 2007 and May 31, 2008, were $7.5 million and $6.1 million, respectively. There was no impact to our equity as a result of adoption of FIN 48. Recognition of all or a portion of the unrecognized tax benefits would affect our effective income tax rate in the respective period of change.
Any applicable interest and penalties on uncertain tax positions were included as a component of income tax expense prior to the adoption of FIN 48, and we have continued this classification subsequent to the adoption. The liability for uncertain income taxes as of September 1, 2007 and May 31, 2008, includes estimated interest and penalties of $0.3 million.
We file income tax returns in the U.S. federal jurisdiction and various U.S. state and foreign jurisdictions. The U.S. income tax returns for periods ended after August 31, 2004, remain subject to examination. With limited exceptions, we are not subject to state and local income tax examinations for years before August 31, 2001. We do not expect that the amount of unrecognized tax benefits will significantly change within the next twelve months.
The federal and state statutory rate applied to nonpatronage business activity is 38.9%. The income taxes and effective tax rate vary based on profitability and nonpatronage business activity each period.
Changes in equity for the nine-month periods ended May 31, 2008 and 2007 are as follows:
| | | | | | | | |
| | Fiscal 2008* | | | Fiscal 2007* | |
|
Balances, September 1, 2007 and 2006 | | $ | 2,475,455 | | | $ | 2,053,466 | |
Net income | | | 657,647 | | | | 459,648 | |
Other comprehensive (loss) income | | | (95,424 | ) | | | 44,706 | |
Patronage distribution | | | (555,419 | ) | | | (379,838 | ) |
Patronage accrued | | | 550,000 | | | | 374,000 | |
Equities retired | | | (75,899 | ) | | | (64,856 | ) |
Equity retirements accrued | | | 165,511 | | | | 100,755 | |
Equities issued in exchange for elevator properties | | | 1,909 | | | | 4,652 | |
Preferred stock dividends | | | (11,764 | ) | | | (9,484 | ) |
Preferred stock dividends accrued | | | 2,413 | | | | 1,955 | |
Accrued dividends and equities payable | | | (249,516 | ) | | | (183,513 | ) |
Other, net | | | 561 | | | | 1,653 | |
| | | | | | | | |
Balances, May 31, 2008 and 2007 | | $ | 2,865,474 | | | $ | 2,403,144 | |
| | | | | | | | |
| | |
* | | Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2 |
1310
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
on November 30, 2008) and are due upon demand. Borrowings under these notes totaled $156.8 million on November 30, 2008.
During
| | | | | | | | |
| | For the
| |
| | Three Months Ended
| |
| | November 30, | |
| | 2008 | | | 2007 | |
|
Interest expense | | $ | 21,466 | | | $ | 18,371 | |
Interest income | | | 1,291 | | | | 4,834 | |
| | | | | | | | |
Interest, net | | $ | 20,175 | | | $ | 13,537 | |
| | | | | | | | |
Changes in equity for the nine monthsthree-month periods ended May 31,November 30, 2008 and 2007 we redeemed $46.4 million and $35.9 million, respectively, of our capital equity certificates by issuing shares of our 8% Cumulative Redeemable Preferred Stock.are as follows:
| | | | | | | | |
| | Fiscal 2009 | | | Fiscal 2008 | |
|
Balances, September 1, 2008 and 2007 | | $ | 2,955,686 | | | $ | 2,475,455 | |
Net income | | | 137,251 | | | | 300,900 | |
Other comprehensive loss | | | (19,029 | ) | | | (52,460 | ) |
Equities retired | | | (2,218 | ) | | | (3,768 | ) |
Equity retirements accrued | | | 2,218 | | | | 3,768 | |
Preferred stock dividends | | | (4,524 | ) | | | (3,620 | ) |
Preferred stock dividends accrued | | | 3,016 | | | | 2,413 | |
Accrued dividends and equities payable | | | (54,416 | ) | | | (120,613 | ) |
Other, net | | | (70 | ) | | | 97 | |
| | | | | | | | |
Balances, November 30, 2008 and 2007 | | $ | 3,017,914 | | | $ | 2,602,172 | |
| | | | | | | | |
| |
Note 10.8. | Comprehensive Income |
Total comprehensive income was $149.5$118.2 million and $245.1$284.4 million for the three months ended May 31,November 30, 2008 and 2007, respectively. For the nine months ended May 31, 2008 and 2007, total comprehensive income was $562.2 million and $504.4 million, respectively. Total comprehensive income primarily consisted of net income and unrealized net gains or losses on available for saleavailable-for-sale investments for the three-month and nine-month periods in fiscal 2008.foreign currency translation adjustments. Accumulated other comprehensive loss on MayNovember 30, 2008, August 31, 2008 and November 30, 2007 was $82.4$87.1 million, $68.0 million and $39.4 million, respectively. On November 30, 2008, accumulated other comprehensive loss primarily consisted of pension liability adjustments, foreign currency translation adjustments and unrealized net gains or losses on available for saleavailable-for-sale investments. On August 31, 2007 and May 31, 2007, accumulated other comprehensive income was $13.0 million and $57.8 million, respectively.
11
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
| |
Note 11.9. | Employee Benefit Plans |
Employee benefits information for the three and nine months ended May 31,November 30, 2008 and 2007 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Qualified
| | Non-Qualified
| | | | | Qualified
| | Non-Qualified
| | | |
| | Pension Benefits | | Pension Benefits | | Other Benefits | | | Pension Benefits | | Pension Benefits | | Other Benefits | |
| | 2008 | | 2007 | | 2008 | | 2007 | | 2008 | | 2007 | | | 2008 | | 2007 | | 2008 | | 2007 | | 2008 | | 2007 | |
|
Components of net periodic benefit costs for the three months ended May 31: | | | | | | | | | | | | | | | | | | | | | | | | | |
Components of net periodic benefit costs for the three months ended November 30: | | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 3,847 | | | $ | 3,590 | | | $ | 312 | | | $ | 255 | | | $ | 358 | | | $ | 239 | | | $ | 4,061 | | | $ | 3,773 | | | $ | 296 | | | $ | 308 | | | $ | 278 | | | $ | 261 | |
Interest cost | | | 5,311 | | | | 4,816 | | | | 548 | | | | 361 | | | | 510 | | | | 417 | | | | 5,690 | | | | 5,213 | | | | 594 | | | | 545 | | | | 560 | | | | 425 | |
Expected return on plan assets | | | (7,824 | ) | | | (7,296 | ) | | | | | | | | | | | | | | | | | | | (7,588 | ) | | | (7,804 | ) | | | | | | | | | | | | | | | | |
Unrecognized net asset obligation amortization | | | | | | | | | | | | | | | | | | | 184 | | | | | | | | | | | | | | | | | | | | | | | | 184 | | | | 184 | |
Prior service cost amortization | | | 541 | | | | 217 | | | | 144 | | | | 115 | | | | (79 | ) | | | (127 | ) | | | 529 | | | | 541 | | | | 136 | | | | 145 | | | | (49 | ) | | | (80 | ) |
Actuarial loss (gain) amortization | | | 1,218 | | | | 1,442 | | | | 210 | | | | 27 | | | | 5 | | | | (9 | ) | | | 1,245 | | | | 1,100 | | | | 162 | | | | 206 | | | | (42 | ) | | | (65 | ) |
Transition amount amortization | | | | | | | | | | | | | | | | | | | 50 | | | | 233 | | | | | | | | | | | | | | | | | | | | 51 | | | | 51 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net periodic benefit cost | | $ | 3,093 | | | $ | 2,769 | | | $ | 1,214 | | | $ | 758 | | | $ | 1,028 | | | $ | 753 | | | $ | 3,937 | | | $ | 2,823 | | | $ | 1,188 | | | $ | 1,204 | | | $ | 982 | | | $ | 776 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Components of net periodic benefit costs for the nine months ended May 31: | | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 11,540 | | | $ | 10,770 | | | $ | 935 | | | $ | 767 | | | $ | 881 | | | $ | 718 | | |
Interest cost | | | 15,935 | | | | 14,450 | | | | 1,643 | | | | 1,083 | | | | 1,360 | | | | 1,252 | | |
Expected return on plan assets | | | (23,475 | ) | | | (21,887 | ) | | | | | | | | | | | | | | | | | |
Unrecognized net asset obligation amortization | | | | | | | | | | | | | | | | | | | 551 | | | | | | |
Prior service cost amortization | | | 1,623 | | | | 650 | | | | 433 | | | | 346 | | | | (239 | ) | | | (383 | ) | |
Actuarial loss (gain) amortization | | | 3,653 | | | | 4,325 | | | | 631 | | | | 82 | | | | (124 | ) | | | (29 | ) | |
Transition amount amortization | | | | | | | | | | | | | | | | | | | 151 | | | | 701 | | |
| | | | | | | | | | | | | | |
Net periodic benefit cost | | $ | 9,276 | | | $ | 8,308 | | | $ | 3,642 | | | $ | 2,278 | | | $ | 2,580 | | | $ | 2,259 | | |
| | | | | | | | | | | | | | |
14
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
Employer Contributions:
Contributions to our pension plans during fiscal 2009, including the National Cooperative Refinery Association (NCRA), of which we own approximately 74.5%, expects to contribute $3.3 million to its plan, will depend primarily on market returns on the pension plan during fiscal 2008.assets and minimum funding level requirements. We contributed $22.0 millioncurrently are in the process of completing our analysis as to the CHS pension plans in June 2008.amounts we intend to contribute.
| |
Note 12.10. | Segment Reporting |
We have aligned our business segments based on an assessment of how our businesses operate and the products and services they sell. Our three business segments: Energy, Ag Business and Processing, create vertical integration to link producers with consumers. Our Energy segment produces and provides primarily for the wholesale distribution of petroleum products and transportation of those products. Our Ag Business segment purchases and resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties, and also serves as wholesaler and retailer of crop inputs. Our Processing segment converts grains and oilseeds into value-added products. Corporate and Other primarily represents our business solutions operations, which consists of commodities hedging, insurance and financial services related to crop production.
Corporate administrative expenses are allocated to all three business segments, and Corporate and Other, based on direct usage for services that can be tracked, such as information technology and legal, and other factors or considerations relevant to the costs incurred.
Many of our business activities are highly seasonal and operating results will vary throughout the year. Overall, our income is generally lowest during the second fiscal quarter and highest during the third fiscal quarter. Our business segments are subject to varying seasonal fluctuations. For example, in our Ag Business segment, agronomy and country operations businesses experience higher volumes and income during the spring planting season and in the fall, which corresponds to harvest. Also in our Ag Business segment, our grain marketing operations are subject to fluctuations in volumes and earnings based on producer harvests, world grain prices and demand. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products, in the summer and early fall when gasoline and diesel fuel
12
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
usage is highest and is subject to global supply and demand forces. Other energy products, such as propane, may experience higher volumes and profitability during the winter heating and crop drying seasons.
Our revenues, assets and cash flows can be significantly affected by global market prices for commodities such as petroleum products, natural gas, grains, oilseeds, crop nutrients and flour. Changes in market prices for commodities that we purchase without a corresponding change in the selling prices of those products can affect revenues and operating earnings. Commodity prices are affected by a wide range of factors beyond our control, including the weather, crop damage due to disease or insects, drought, the availability and adequacy of supply, government regulations and policies, world events, and general political and economic conditions.
While our revenues and operating results are derived from businesses and operations which are wholly-owned and majority-owned, a portion of our business operations are conducted through companies in which we hold ownership interests of 50% or less and do not control the operations. We account for these investments primarily using the equity method of accounting, wherein we record our proportionate share of income or loss reported by the entity as equity income from investments, without consolidating the revenues and expenses of the entity in our Consolidated Statements of Operations. These investments principally include our 50% ownership in each of the following companies: Agriliance LLC (Agriliance), TEMCO, LLC (TEMCO) and United Harvest, LLC (United Harvest), and our 37.5%39.35% ownership in Multigrain S.A., included in our Ag Business segment; and our 50% ownership in Ventura Foods, LLC (Ventura Foods), and our 24% ownership in Horizon Milling, LLC (Horizon Milling) and Horizon Milling G.P., and US BioEnergy prior to the decrease in equity ownership on April 1, 2008, as described in Note 5, included in our Processing segment; and our 49% ownership in Cofina Financial, LLC (Cofina Financial) included in Corporate and Other.
15
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)segment.
The consolidated financial statements include the accounts of CHS and all of our wholly-owned and majority-owned subsidiaries and limited liability companies, including NCRA in our Energy segment. The effects of all significant intercompany transactions have been eliminated.
Reconciling Amounts represent the elimination of revenues between segments. Such transactions are executed at market prices to more accurately evaluate the profitability of the individual business segments.
Segment information for the three and nine months ended May 31,November 30, 2008 and 2007 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Ag
| | | | Corporate
| | Reconciling
| | | | | | | Ag
| | | | Corporate
| | Reconciling
| | | |
| | Energy* | | Business | | Processing | | and Other | | Amounts | | Total* | | | Energy | | Business | | Processing | | and Other | | Amounts | | Total | |
|
For the Three Months Ended May 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Three Months Ended November 30, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 3,058,367 | | | $ | 6,005,755 | | | $ | 353,475 | | | $ | 7,095 | | | $ | (88,083 | ) | | $ | 9,336,609 | | | $ | 2,550,552 | | | $ | 4,953,722 | | | $ | 310,890 | | | $ | 15,125 | | | $ | (96,370 | ) | | $ | 7,733,919 | |
Cost of goods sold | | | 3,000,380 | | | | 5,811,948 | | | | 332,188 | | | | (466 | ) | | | (88,083 | ) | | | 9,055,967 | | | | 2,328,652 | | | | 4,889,570 | | | | 292,582 | | | | (1,022 | ) | | | (96,370 | ) | | | 7,413,412 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 57,987 | | | | 193,807 | | | | 21,287 | | | | 7,561 | | | | — | | | | 280,642 | | | | 221,900 | | | | 64,152 | | | | 18,308 | | | | 16,147 | | | | — | | | | 320,507 | |
Marketing, general and administrative | | | 28,250 | | | | 44,126 | | | | 6,704 | | | | 7,491 | | | | | | | | 86,571 | | | | 27,832 | | | | 39,563 | | | | 6,749 | | | | 13,597 | | | | | | | | 87,741 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating earnings | | | 29,737 | | | | 149,681 | | | | 14,583 | | | | 70 | | | | — | | | | 194,071 | | | | 194,068 | | | | 24,589 | | | | 11,559 | | | | 2,550 | | | | — | | | | 232,766 | |
(Gain) loss on investments | | | (18 | ) | | | (5,848 | ) | | | 562 | | | | (1 | ) | | | | | | | (5,305 | ) | | | (15,748 | ) | | | | | | | 70,724 | | | | | | | | | | | | 54,976 | |
Interest, net | | | 1,739 | | | | 15,310 | | | | 6,471 | | | | (1,337 | ) | | | | | | | 22,183 | | | | 4,195 | | | | 13,726 | | | | 3,757 | | | | (1,503 | ) | | | | | | | 20,175 | |
Equity income from investments | | | (753 | ) | | | (40,101 | ) | | | (9,593 | ) | | | (1,373 | ) | | | | | | | (51,820 | ) | | | (1,236 | ) | | | (8,890 | ) | | | (10,230 | ) | | | (367 | ) | | | | | | | (20,723 | ) |
Minority interests | | | 16,265 | | | | 401 | | | | | | | | | | | | | | | | 16,666 | | | | 22,165 | | | | 17 | | | | | | | | | | | | | | | | 22,182 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | $ | 12,504 | | | $ | 179,919 | | | $ | 17,143 | | | $ | 2,781 | | | $ | — | | | $ | 212,347 | | |
Income (loss) before income taxes | | | $ | 184,692 | | | $ | 19,736 | | | $ | (52,692 | ) | | $ | 4,420 | | | $ | — | | | $ | 156,156 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Intersegment revenues | | $ | (75,557 | ) | | $ | (11,671 | ) | | $ | (855 | ) | | | | | | $ | 88,083 | | | $ | — | | | $ | (84,030 | ) | | $ | (11,781 | ) | | $ | (559 | ) | | | | | | $ | 96,370 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | |
For the Three Months Ended May 31, 2007 | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 2,186,568 | | | $ | 2,411,945 | | | $ | 193,553 | | | $ | 6,121 | | | $ | (65,722 | ) | | $ | 4,732,465 | | |
Cost of goods sold | | | 1,926,275 | | | | 2,354,272 | | | | 187,502 | | | | (770 | ) | | | (65,722 | ) | | | 4,401,557 | | |
Goodwill | | | $ | 3,654 | | | $ | 150 | | | | | | | $ | 6,898 | | | | | | | $ | 10,702 | |
| | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 260,293 | | | | 57,673 | | | | 6,051 | | | | 6,891 | | | | — | | | | 330,908 | | |
Marketing, general and administrative | | | 23,938 | | | | 27,381 | | | | 5,928 | | | | 7,624 | | | | | | | | 64,871 | | |
Capital expenditures | | | $ | 41,742 | | | $ | 16,975 | | | $ | 2,123 | | | $ | 831 | | | | | | | $ | 61,671 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating earnings (losses) | | | 236,355 | | | | 30,292 | | | | 123 | | | | (733 | ) | | | — | | | | 266,037 | | |
Loss on investments | | | | | | | | | | | 251 | | | | | | | | | | | | 251 | | |
Interest, net | | | (1,925 | ) | | | 8,956 | | | | 4,151 | | | | (1,910 | ) | | | | | | | 9,272 | | |
Equity income from investments | | | (952 | ) | | | (55,826 | ) | | | (9,431 | ) | | | (1,281 | ) | | | | | | | (67,490 | ) | |
Minority interests | | | 61,268 | | | | 19 | | | | | | | | | | | | | | | | 61,287 | | |
Depreciation and amortization | | | $ | 29,474 | | | $ | 12,162 | | | $ | 4,139 | | | $ | 1,896 | | | | | | | $ | 47,671 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | $ | 177,964 | | | $ | 77,143 | | | $ | 5,152 | | | $ | 2,458 | | | $ | — | | | $ | 262,717 | | |
Total identifiable assets at November 30, 2008 | | | $ | 2,987,219 | | | $ | 4,035,230 | | | $ | 617,678 | | | $ | 1,197,598 | | | | | | | $ | 8,837,725 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Intersegment revenues | | $ | (54,936 | ) | | $ | (10,677 | ) | | $ | (109 | ) | | | | | | $ | 65,722 | | | $ | — | | |
| | | | | | | | | | | | |
13
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Ag
| | | | | | Corporate
| | | Reconciling
| | | | |
| | Energy | | | Business | | | Processing | | | and Other | | | Amounts | | | Total | |
|
For the Three Months Ended November 30, 2007 | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 2,521,688 | | | $ | 3,835,251 | | | $ | 243,296 | | | $ | 7,626 | | | $ | (82,475 | ) | | $ | 6,525,386 | |
Cost of goods sold | | | 2,374,735 | | | | 3,686,458 | | | | 233,117 | | | | (1,086 | ) | | | (82,475 | ) | | | 6,210,749 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 146,953 | | | | 148,793 | | | | 10,179 | | | | 8,712 | | | | — | | | | 314,637 | |
Marketing, general and administrative | | | 22,566 | | | | 30,688 | | | | 5,497 | | | | 7,708 | | | | | | | | 66,459 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating earnings | | | 124,387 | | | | 118,105 | | | | 4,682 | | | | 1,004 | | | | — | | | | 248,178 | |
(Gain) loss on investments | | | (17 | ) | | | (94,545 | ) | | | 611 | | | | (997 | ) | | | | | | | (94,948 | ) |
Interest, net | | | (5,846 | ) | | | 15,128 | | | | 5,024 | | | | (769 | ) | | | | | | | 13,537 | |
Equity income from investments | | | (1,163 | ) | | | (7,193 | ) | | | (21,138 | ) | | | (1,696 | ) | | | | | | | (31,190 | ) |
Minority interests | | | 22,921 | | | | 58 | | | | | | | | | | | | | | | | 22,979 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | $ | 108,492 | | | $ | 204,657 | | | $ | 20,185 | | | $ | 4,466 | | | $ | — | | | $ | 337,800 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Intersegment revenues | | $ | (77,964 | ) | | $ | (4,421 | ) | | $ | (90 | ) | | | | | | $ | 82,475 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | | $ | 3,654 | | | $ | 150 | | | | | | | | | | | | | | | $ | 3,804 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 90,748 | | | $ | 16,040 | | | $ | 1,279 | | | $ | 631 | | | | | | | $ | 108,698 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 23,745 | | | $ | 11,513 | | | $ | 3,808 | | | $ | 1,451 | | | | | | | $ | 40,517 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total identifiable assets at November 30, 2007 | | $ | 2,732,125 | | | $ | 4,322,309 | | | $ | 741,777 | | | $ | 642,548 | | | | | | | $ | 8,438,759 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
Note 11. | Fair Value Measurements |
Effective September 1, 2008, we partially adopted SFAS No. 157, “Fair Value Measurements” as it relates to financial assets and liabilities. FSP No.157-2, “Effective Date of SFAS No. 157” delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities that are not remeasured at fair value on a recurring basis until fiscal years beginning after November 15, 2008. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements. SFAS No. 157 also eliminates the deferral of gains and losses at inception associated with certain derivative contracts whose fair value was not evidenced by observable market data and requires the impact of this change in accounting for derivative contracts be recorded as a cumulative effect adjustment to the opening balance of retained earnings in the year of adoption. We did not have any deferred gains or losses at the inception of derivative contracts, and therefore no cumulative adjustment to the opening balance of retained earnings was made upon adoption.
SFAS No. 157 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in our principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
We determine the fair market values of our readily marketable inventories, derivative contracts and certain other assets, based on the fair value hierarchy established in SFAS No. 157, which 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 the best information available in the circumstances. The standard describes three levels within its hierarchy that may be used to measure fair value which are:
Level 1: Values are based on unadjusted quoted prices in active markets for identical assets or liabilities. These assets and liabilities include our exchange-traded derivative contracts, Rabbi Trust investments andavailable-for-sale investments.
14
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
Level 2: Values are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. These assets and liabilities include our readily marketable inventories, interest rate swap, forward commodity and freight purchase and sales contracts, flat price or basis fixed derivative contracts and otherover-the-counter (OTC) derivatives whose value is determined with inputs that are based on exchange traded prices, adjusted for location specific inputs that are primarily observable in the market or can be derived principally from, or corroborated by, observable market data.
Level 3: Values are generated from unobservable inputs that are supported by little or no market activity and that are a significant component of the fair value of the assets or liabilities. These unobservable inputs would reflect our own estimates of assumptions that market participants would use in pricing related assets or liabilities. Valuation techniques might include the use of pricing models, discounted cash flow models or similar techniques. These assets include certain short-term investments at NCRA.
The following table presents assets and liabilities, included in our Consolidated Balance Sheet that are recognized at fair value on a recurring basis and, indicates the fair value hierarchy utilized to determine such fair value. As required by SFAS No. 157, assets and liabilities are classified, in their entirety, based on the lowest level of input that is a significant component of the fair value measurement. The lowest level of input is considered Level 3. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the classification of fair value assets and liabilities within the fair value hierarchy levels.
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements at November 30, 2008 | |
| | Quoted Prices in
| | | | | | | | | | |
| | Active Markets for
| | | Significant Other
| | | Significant
| | | | |
| | Identical Assets
| | | Observable Inputs
| | | Unobservable Inputs
| | | | |
| | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total | |
|
Assets: | | | | | | | | | | | | | | | | |
Readily marketable inventories | | | | | | $ | 836,019 | | | | | | | $ | 836,019 | |
Commodity, freight and foreign currency derivatives | | $ | 1,186 | | | | 380,510 | | | | | | | | 381,696 | |
Short-term investments | | | | | | | | | | $ | 4,721 | | | | 4,721 | |
Rabbi Trust assets | | | 41,006 | | | | | | | | | | | | 41,006 | |
Available-for-sale investments | | | 4,191 | | | | | | | | | | | | 4,191 | |
| | | | | | | | | | | | | | | | |
Total Assets | | $ | 46,383 | | | $ | 1,216,529 | | | $ | 4,721 | | | $ | 1,267,633 | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Commodity, freight and foreign currency derivatives | | $ | 64,676 | | | $ | 436,612 | | | | | | | $ | 501,288 | |
Interest rate swap derivative | | | | | | | 148 | | | | | | | | 148 | |
| | | | | | | | | | | | | | | | |
Total Liabilities | | $ | 64,676 | | | $ | 436,760 | | | | | | | $ | 501,436 | |
| | | | | | | | | | | | | | | | |
Readily marketable inventories — Our readily marketable inventories primarily include our grain and oilseed inventories that are stated at net realizable values which approximate market values. These commodities are readily marketable, have quoted market prices and may be sold without significant additional processing. We estimate the fair market values of these inventories included in Level 2 primarily based on exchange-quoted prices, adjusted for differences in local markets. Changes in the fair market values of these inventories are recognized in our Consolidated Statements of Operations as a component of cost of goods sold.
15
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
Commodity, freight and foreign currency derivatives — Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified within Level 1. Our forward commodity purchase and sales contracts, flat price or basis fixed derivative contracts, ocean freight derivative contracts and other OTC derivatives are determined using inputs that are generally based on exchange traded pricesand/or recent market bids and offers, adjusted for location specific inputs, and are classified within Level 2. The location specific inputs are generally broker or dealer quotations, or market transactions in either the listed or OTC markets. Changes in the fair values of these contracts are recognized in our Consolidated Statements of Operations as a component of cost of goods sold.
Short-term investments — Our short-term investments represent an enhanced cash fund closed due to credit-market turmoil, classified as Level 3. The investments are valued using an outside service to determine the fair market value based on what like investments are selling for.
Available-for-sale investments — Ouravailable-for-sale investments in common stock of other companies that are valued based on unadjusted quoted prices on active exchanges and are classified within Level 1.
Rabbi Trust assets — Our Rabbi Trust assets are valued based on unadjusted quoted prices on active exchanges and are classified within Level 1.
Interest rate swap derivative — During fiscal 2009, we entered into an interest rate swap classified within Level 2, with a notional amount of $150.0 million, expiring in 2010, to lock in the interest rate for $150.0 million of our $1.3 billion five-year revolving line of credit. The rate is based on the London Interbank Offered Rate (LIBOR) and settles monthly. We have not designated or accounted for the interest rate swap as a hedging instrument for accounting purposes. Changes in fair value are recognized in our Consolidated Statements of Operations as interest expense.
The table below represents a reconciliation for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3). This consists of our short-term investments that were carried at fair value prior to the adoption of SFAS No. 157 and reflect assumptions a marketplace participant would use at November 30, 2008:
| | | | |
| | Level 3 Instruments
| |
| | Short-Term Investments | |
|
Balance, September 1, 2008 | | $ | 7,154 | |
Total losses (realized/unrealized) included in marketing, general and administrative expense | | | (790 | ) |
Purchases, issuances and settlements | | | (1,643 | ) |
Transfer in (out) of Level 3 | | | | |
| | | | |
Balance, November 30, 2008 | | $ | 4,721 | |
| | | | |
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, provides entities with an option to report financial assets and liabilities and certain other items at fair value, with changes in fair value reported in earnings, and requires additional disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 was effective for us on September 1, 2008, and we made no elections to measure any assets or liabilities at fair value, other than those instruments already carried at fair value.
16
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Ag
| | | | | | Corporate
| | | Reconciling
| | | | |
| | Energy* | | | Business | | | Processing | | | and Other | | | Amounts | | | Total* | |
|
For the Nine Months Ended May 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 7,979,099 | | | $ | 14,114,990 | | | $ | 886,820 | | | $ | 23,868 | | | $ | (251,437 | ) | | $ | 22,753,340 | |
Cost of goods sold | | | 7,696,745 | | | | 13,618,477 | | | | 838,947 | | | | (2,296 | ) | | | (251,437 | ) | | | 21,900,436 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 282,354 | | | | 496,513 | | | | 47,873 | | | | 26,164 | | | | — | | | | 852,904 | |
Marketing, general and administrative | | | 75,650 | | | | 110,722 | | | | 18,722 | | | | 22,941 | | | | | | | | 228,035 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating earnings | | | 206,704 | | | | 385,791 | | | | 29,151 | | | | 3,223 | | | | — | | | | 624,869 | |
(Gain) loss on investments | | | (35 | ) | | | (100,393 | ) | | | 943 | | | | (998 | ) | | | | | | | (100,483 | ) |
Interest, net | | | (7,845 | ) | | | 47,855 | | | | 16,936 | | | | (3,160 | ) | | | | | | | 53,786 | |
Equity income from investments | | | (3,069 | ) | | | (66,775 | ) | | | (54,051 | ) | | | (4,528 | ) | | | | | | | (128,423 | ) |
Minority interests | | | 51,948 | | | | 528 | | | | | | | | | | | | | | | | 52,476 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | $ | 165,705 | | | $ | 504,576 | | | $ | 65,323 | | | $ | 11,909 | | | $ | — | | | $ | 747,513 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Intersegment revenues | | $ | (224,880 | ) | | $ | (25,521 | ) | | $ | (1,036 | ) | | | | | | $ | 251,437 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | | $ | 3,654 | | | $ | 150 | | | | | | | | | | | | | | | $ | 3,804 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 207,527 | | | $ | 40,970 | | | $ | 4,015 | | | $ | 3,306 | | | | | | | $ | 255,818 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 76,134 | | | $ | 37,374 | | | $ | 11,720 | | | $ | 4,777 | | | | | | | $ | 130,005 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total identifiable assets at May 31, 2008 | | $ | 3,097,313 | | | $ | 4,197,684 | | | $ | 710,419 | | | $ | 798,826 | | | | | | | $ | 8,804,242 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
For the Nine Months Ended May 31, 2007 | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 5,753,660 | | | $ | 6,100,397 | | | $ | 526,513 | | | $ | 21,869 | | | $ | (184,324 | ) | | $ | 12,218,115 | |
Cost of goods sold | | | 5,258,380 | | | | 5,942,916 | | | | 501,541 | | | | (1,681 | ) | | | (184,324 | ) | | | 11,516,832 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 495,280 | | | | 157,481 | | | | 24,972 | | | | 23,550 | | | | — | | | | 701,283 | |
Marketing, general and administrative | | | 67,149 | | | | 70,369 | | | | 17,928 | | | | 20,118 | | | | | | | | 175,564 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating earnings | | | 428,131 | | | | 87,112 | | | | 7,044 | | | | 3,432 | | | | — | | | | 525,719 | |
Gain on investments | | | | | | | (5,348 | ) | | | (11,149 | ) | | | | | | | | | | | (16,497 | ) |
Interest, net | | | (2,164 | ) | | | 21,538 | | | | 10,917 | | | | (4,328 | ) | | | | | | | 25,963 | |
Equity income from investments | | | (3,089 | ) | | | (37,027 | ) | | | (40,626 | ) | | | (3,594 | ) | | | | | | | (84,336 | ) |
Minority interests | | | 94,677 | | | | (8 | ) | | | | | | | | | | | | | | | 94,669 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | $ | 338,707 | | | $ | 107,957 | | | $ | 47,902 | | | $ | 11,354 | | | $ | — | | | $ | 505,920 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Intersegment revenues | | $ | (171,188 | ) | | $ | (12,853 | ) | | $ | (283 | ) | | | | | | $ | 184,324 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | | $ | 3,654 | | | $ | 150 | | | | | | | | | | | | | | | $ | 3,804 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 212,450 | | | $ | 24,754 | | | $ | 10,657 | | | $ | 1,787 | | | | | | | $ | 249,648 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 63,719 | | | $ | 24,847 | | | $ | 10,862 | | | $ | 3,946 | | | | | | | $ | 103,374 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total identifiable assets at May 31, 2007 | | $ | 2,669,680 | | | $ | 2,320,757 | | | $ | 634,745 | | | $ | 542,560 | | | | | | | $ | 6,167,742 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | |
* | | Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2 |
17
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
| |
Note 13.12. | Commitments and Contingencies |
Guarantees
We are a guarantor for lines of credit for related companies. As of May 31,November 30, 2008, our bank covenants allowed maximum guarantees of $500.0 million, of which $43.0$15.5 million was outstanding. All outstanding loans with respective creditors are current as of May 31,November 30, 2008.
Cofina Financial, in which we have a 49% ownership interest, makes seasonal and term loans to cooperatives and individual agricultural producers. We may, at our own discretion, choose to guarantee certain loans made by Cofina Financial. In addition, we also guaranteeOur guarantees for certain debt and obligations under contracts for our subsidiaries and members.
Our obligations pursuant to our guaranteesmembers as of May 31,November 30, 2008 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Guarantee/
| | Exposure on
| | | | | | | | | | | | Guarantee/
| | Exposure on
| | | | | | | | | | |
| | Maximum
| | May 31,
| | | | | | Triggering
| | Recourse
| | Assets Held
| | Maximum
| | November 30,
| | Nature of
| | | | Triggering
| | Recourse
| | Assets Held
|
Entities | | Exposure | | 2008 | | Nature of Guarantee | | Expiration Date | | Event | | Provisions | | as Collateral | | Exposure | | 2008 | | Guarantee | | Expiration Date | | Event | | Provisions | | as Collateral |
|
Mountain Country, LLC | | $ | 150 | | | $ | 80 | | | Obligations by Mountain Country, LLC under credit agreement | | None stated, but may be terminated upon 90 days prior notice in regard to future obligations | | Credit agreement default | | Subrogation against borrower | | Some or all assets of borrower are held as collateral and should be sufficient to cover guarantee exposure | | $ | 150 | | | $ | 20 | | | Obligations by Mountain Country, LLC under credit agreement | | None stated, but may be terminated upon 90 days prior notice in regard to future obligations | | Credit agreement default | | Subrogation against Mountain Country, LLC | | Some or all assets of borrower are held as collateral and should be sufficient to cover guarantee exposure |
Morgan County Investors, LLC | | $ | 400 | | | | 400 | | | Obligations by Morgan County Investors, LLC under credit agreement | | When obligations are paid in full, scheduled for year 2018 | | Credit agreement default | | Subrogation against borrower | | Some or all assets of borrower are held as collateral and should be sufficient to cover guarantee exposure | | $ | 389 | | | | 389 | | | Obligations by Morgan County Investors, LLC under credit agreement | | When obligations are paid in full, scheduled for year 2018 | | Credit agreement default | | Subrogation against Morgan County Investors, LLC | | Some or all assets of borrower are held as collateral and should be sufficient to cover guarantee exposure |
Horizon Milling, LLC | | $ | 5,000 | | | | | | | Indemnification and reimbursement of 24% of damages related to Horizon Milling, LLC’s performance under a flour sales agreement | | None stated, but may be terminated by any party upon 90 days prior notice in regard to future obligations | | Nonperformance under flour sale agreement | | Subrogation against Horizon Milling, LLC | | None | | $ | 5,000 | | | | | | | Indemnification and reimbursement of 24% of damages related to Horizon Milling, LLC’s performance under a flour sales agreement | | None stated, but may be terminated by any party upon 90 days prior notice in regard to future obligations | | Nonperformance under flour sales agreement | | Subrogation against Horizon Milling, LLC | | None |
TEMCO, LLC | | $ | 35,000 | | | | 5,000 | | | Obligations by TEMCO, LLC under credit agreement | | None stated | | Credit agreement default | | Subrogation against TEMCO, LLC | | None | | $ | 35,000 | | | | 6,500 | | | Obligations by TEMCO under credit agreement | | None stated | | Credit agreement default | | Subrogation against TEMCO, LLC | | None |
TEMCO, LLC | | $ | 1,000 | | | | 1,000 | | | Obligations by TEMCO, LLC under counterparty agreement | | None stated, but may be terminated upon 5 days prior notice in regard to future obligations | | Nonpayment | | Subrogation against TEMCO, LLC | | None | | $ | 1,000 | | | | | | | Obligations by TEMCO under counterparty agreement | | None stated, but may be terminated upon 5 days prior notice in regard to future obligations | | Nonpayment | | Subrogation against TEMCO, LLC | | None |
Third parties | | | | * | | | 1,000 | | | Surety for, or indemnificaton of surety for sales contracts between affiliates and sellers of grain under deferred payment contracts | | Annual renewal on December 1 in regard to surety for a third party, otherwise none stated and may be terminated by the Company at any time in regard to future obligations | | Nonpayment | | Subrogation against affiliates | | Some or all assets of borrower are held as collateral but might not be sufficient to cover guarantee exposure | | | | * | | | 1,000 | | | Surety for, or indemnificaton of surety for sales contracts between affiliates and sellers of grain under deferred payment contracts | | Annual renewal on December 1 in regard to surety for one third party, otherwise none stated and may be terminated by the Company at any time in regard to future obligations | | Nonpayment | | Subrogation against affiliates | | Some or all assets of borrower are held as collateral but might not be sufficient to cover guarantee exposure |
Third parties | | | $ | 296 | | | | 296 | | | Obligations by individual producers under credit agreements for which CHS guarantees a certain percentage. Obligations are for livestock production facilities where CHS supplies the nutrition products | | Various | | Credit agreement default by individual producers | | Subrogation against borrower | | None |
Cofina Financial, LLC | | $ | 17,131 | | | | 11,175 | | | Loans to our customers that are originated by Cofina and then sold to ProPartners, which is an affiliate of CoBank | | None stated | | Credit agreement default | | Subrogation against borrower | | Some or all assets of borrower are held as collateral but might not be sufficient to cover guarantee exposure | | $ | 4,000 | | | | 1,078 | | | Loans made by Cofina to our customers that are participated with other lenders | | None stated | | Credit agreement default | | Subrogation against borrower | | Some or all assets of borrower are held as collateral but might not be sufficient to cover guarantee exposure |
1817
CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Guarantee/
| | Exposure on
| | | | | | | | | | | | Guarantee/
| | Exposure on
| | | | | | | | | | |
| | Maximum
| | May 31,
| | | | | | Triggering
| | Recourse
| | Assets Held
| | Maximum
| | November 30,
| | Nature of
| | | | Triggering
| | Recourse
| | Assets Held
|
Entities | | Exposure | | 2008 | | Nature of Guarantee | | Expiration Date | | Event | | Provisions | | as Collateral | | Exposure | | 2008 | | Guarantee | | Expiration Date | | Event | | Provisions | | as Collateral |
|
Cofina Financial, LLC | | $ | 18,200 | | | | 18,200 | | | Loans made by Cofina to our customers | | None stated | | Credit agreement default | | Subrogation against borrower | | Some or all assets of borrower are held as collateral but might not be sufficient to cover guarantee exposure | |
Agriliance LLC | | $ | 5,674 | | | | 5,674 | | | Outstanding letter of credit from CoBank to Agriliance LLC | | None stated | | Default under letter of credit reimbursement agreement | | Subrogation against borrower | | None | | $ | 5,674 | | | | 5,674 | | | Outstanding letter of credit from CoBank to Agriliance LLC | | None stated | | Default under letter of credit reimbursement agreement | | Subrogation against borrower | | None |
Agriliance LLC | | $ | 500 | | | | 500 | | | Vehicle operating lease obligations of Agriliance LLC | | None stated, but may be terminated upon 90 days prior notice in regard to future obligations | | Lease agreement default | | Subrogation against Agriliance LLC | | None | | $ | 500 | | | | 500 | | | Vehicle operating lease obligations of Agriliance LLC | | None stated, but may be terminated upon 90 days prior notice in regard to future obligations | | Lease agreement default | | Subrogation against Agriliance LLC | | None |
Ag Business segment subsidiaries | | $ | 4,993 | | | | | | | Contribution obligations as a participating employer in the Co-op Retirement Plan | | None stated | | Nonpayment | | None | | None | |
| | | | | | |
| | | | | | $ | 43,029 | | | | | | | | | | | | | | | | | $ | 15,457 | | | | | | | | | | | |
| | | | | | |
| | |
* | | The maximum exposure on any givengive date is equal to the actual guarantees extended as of that date.date, not to exceed $1.0 million. |
1918
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
General
The following discussions of financial condition and results of operations should be read in conjunction with the unaudited interim financial statements and notes to such statements and the cautionary statement regarding forward-looking statements found at the beginning of Part I, Item 1, of this Quarterly Report onForm 10-Q, as well as our consolidated financial statements and notes thereto for the year ended August 31, 2007,2008, included in our Annual Report onForm 10-K, filed with the Securities and Exchange Commission. This discussion contains forward-looking statements based on current expectations, assumptions, estimates and projections of management. Actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, as more fully described in the cautionary statement and elsewhere in this Quarterly Report onForm 10-Q.
CHS Inc. (CHS, we or us) is a diversified company, which provides grain, foods and energy resources to businesses and consumers on a global basis. As a cooperative, we are owned by farmers, ranchers and their member cooperatives fromacross the Great Lakes to the Pacific Northwest and from the Canadian border to Texas.United States. We also have preferred stockholders that own shares of our 8% Cumulative Redeemable Preferred Stock.
We provide a full range of production agricultural inputs such as refined fuels, propane, farm supplies, animal nutrition and agronomy products, as well as services, which include hedging, financing and insurance services. We own and operate petroleum refineries and pipelines, and market and distribute refined fuels and other energy products, under the Cenex® brand through a network of member cooperatives and independents. We purchase grains and oilseeds directly and indirectly from agricultural producers primarily in the midwestern and western United States. These grains and oilseeds are either sold to domestic and international customers, or further processed into a variety of grain-based food products.
The consolidated financial statements include the accounts of CHS and all of our wholly-owned and majority-owned subsidiaries and limited liability companies, including National Cooperative Refinery Association (NCRA) in our Energy segment. The effects of all significant intercompany transactions have been eliminated.
We operate three business segments: Energy, Ag Business and Processing. Together, our three business segments create vertical integration to link producers with consumers. Corporate and Other primarily represents our business solutions operations, which consists of commodities hedging, insurance and financial services related to crop production. Our Energy segment produces and provides for the wholesale distribution of petroleum products and transports those products. Our Ag Business segment purchases and resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties, and also serves as wholesaler and retailer of crop inputs. Our Processing segment converts grains and oilseeds into value-added products. Corporate and Other primarily represents our business solutions operations, which consists of commodities hedging, insurance and financial services related to crop production.
Corporate administrative expenses are allocated to all three business segments, and Corporate and Other, based on direct usage for services that can be tracked, such as information technology and legal, and other factors or considerations relevant to the costs incurred.
Many of our business activities are highly seasonal and operating results will vary throughout the year. Overall, our income is generally lowest during the second fiscal quarter and highest during the third fiscal quarter. Our business segments are subject to varying seasonal fluctuations. For example, in our Ag Business segment, our retail agronomy, crop nutrients and country operations businesses generally experience higher volumes and income during the spring planting season and in the fall, which corresponds to harvest. Also in our Ag Business segment, our grain marketing operations are subject to fluctuations in volume and earnings based on producer harvests, world grain prices and demand. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products, in the summer and early fall when gasoline and diesel fuel usage is highest and is subject to global supply and demand forces. Other energy products, such as propane, may experience higher volumes and profitability during the winter heating and crop drying seasons.
2019
Our revenues, assets and cash flows can be significantly affected by global market prices for commodities such as petroleum products, natural gas, grains, oilseeds, crop nutrients and flour. Changes in market prices for commodities that we purchase without a corresponding change in the selling prices of those products can affect revenues and operating earnings. Commodity prices are affected by a wide range of factors beyond our control, including the weather, crop damage due to disease or insects, drought, the availability and adequacy of supply, government regulations and policies, world events, and general political and economic conditions.
While our revenues and operating results are derived from businesses and operations which are wholly-owned and majority-owned, a portion of our business operations are conducted through companies in which we hold ownership interests of 50% or less and do not control the operations. We account for these investments primarily using the equity method of accounting, wherein we record our proportionate share of income or loss reported by the entity as equity income from investments, without consolidating the revenues and expenses of the entity in our Consolidated Statements of Operations. These investments principally include our 50% ownership in each of the following companies: Agriliance LLC (Agriliance), TEMCO, LLC (TEMCO) and United Harvest, LLC (United Harvest), and our 37.5%39.35% ownership in Multigrain S.A., included in our Ag Business segment; and our 50% ownership in Ventura Foods, LLC (Ventura Foods), and our 24% ownership in Horizon Milling, LLC (Horizon Milling) and Horizon Milling G.P., and US BioEnergy Corporation (US BioEnergy) prior to the decrease in equity ownership on April 1, 2008, included in our Processing segment; and our 49% ownership in segment.
Cofina Financial, LLC (Cofina Financial) included, a joint venture company formed in Corporate2005, makes seasonal and Other.
Agriliance is ownedterm loans to member cooperatives and governed by United Country Brands, LLC (50%)businesses and Land O’Lakes, Inc. (Land O’Lakes) (50%). United Country Brands, LLC isto individual producers of agricultural products. Through August 31, 2008, we held a 100% owned subsidiary of CHS. We account49% ownership interest in Cofina Financial and accounted for our share of the Agriliance investment using the equity method of accounting. In June 2007,On September 1, 2008, we announced that two business segmentspurchased the remaining 51% ownership interest for $53.3 million. The purchase price included cash of Agriliance were being repositioned. In September 2007, Agriliance distributed the assets of the crop nutrients business to us,$48.5 million and the assetsassumption of the crop protection business to Land O’Lakes. Agriliance continues to exist as a50-50 joint venture and primarily operates an agronomy retail distribution business. We currently are exploring, with Land O’Lakes, the repositioning options for the remaining portionscertain liabilities of the Agriliance retail distribution business. During the nine months ended May 31, 2008, we contributed $255.0 million, net to Agriliance to support their working capital requirements, with Land O’Lakes making equal contributions to Agriliance, primarily for crop nutrient and crop protection product net trade payables that were not assumed by us or Land O’Lakes upon the distribution of the crop nutrients and crop protection assets, as well as Agriliance’s ongoing retail operations.
Due to our 50% ownership interest in Agriliance and the 50% ownership interest of Land O’Lakes, we were each entitled to receive 50% of the distributions from Agriliance. Given the different preliminary values assigned to the assets of the crop nutrients and the crop protection businesses of Agriliance, at the closing of the distribution transactions Land O’Lakes owed us $133.5 million. Land O’Lakes paid us $32.6 million in cash, and in order to maintain equal capital accounts in Agriliance, they also paid down certain portions of Agriliance debt on our behalf in the amount of $100.9 million. Values of the distributed assets were determined after the closing and in October 2007, we made atrue-up payment to Land O’Lakes in the amount of $45.7 million, plus interest. The finaltrue-up is expected to occur during our current fiscal year.
The distribution of assets we received from Agriliance for the crop nutrients business had a book value of $248.2 million. We recorded 50% of the value of the net assets received at book value due to our ownership interest in those assets when they were held by Agriliance, and 50% of the value of the net assets at fair value using the purchase method of accounting. Preliminary values assigned to the net assets acquired totaled $268.7$4.8 million.
Certain reclassifications have been made to prior period’s amounts to conform to current period classifications. These reclassifications had no effect on previously reported net income, equities or total cash flows.
During the first quarter of fiscal 2008, we changed our accounting method for the costs of turnarounds from the accrual method to the deferral method. Turnarounds are the scheduled and required shutdowns of refinery processing units for significant overhaul and refurbishment. Under the deferral accounting method, the
21
costs of turnarounds are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until the next turnaround occurs. The new method of accounting for turnarounds was adopted in order to adhere to FASB Staff Position (“FSP”) No. AUG AIR-1 “Accounting for Planned Major Maintenance Activities” which prohibits the accrual method of accounting for planned major maintenance activities. The affect of this change in accounting principle to our Consolidated Statements of Operations for the three and nine months ended May 31, 2007, was to increase net income by $1.8 million and $3.3 million, respectively. In addition, equity was increased by $42.5 million and $39.4 million as of August 31, 2007 and May 31, 2007, respectively.
Effective September 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). This interpretation clarifies the criteria for recognizing income tax benefits under FASB Statement 109, “Accounting for Income Taxes”, and requires additional disclosures about uncertain tax positions. FIN 48 requires a taxpayer to determine whether a tax position is more likely than not (greater than 50 percent) to be sustained based solely on the technical merits of the position. If this threshold is met, the tax benefit is measured and recognized at the largest amount that is greater than 50 percent likely of being realized. The total amount of unrecognized tax benefits as of September 1, 2007 and May 31, 2008, were $7.5 million and $6.1 million, respectively. There was no impact to our equity as a result of adoption of FIN 48. Recognition of all or a portion of the unrecognized tax benefits would affect our effective income tax rate in the respective period of change. Any applicable interest and penalties on uncertain tax positions were included as a component of income tax expense prior to the adoption of FIN 48, and we have continued this classification subsequent to the adoption. The liability for uncertain income taxes as of September 1, 2007 and May 31, 2008, includes estimated interest and penalties of $0.3 million. We file income tax returns in the U.S. federal jurisdiction and various U.S. state and foreign jurisdictions. The U.S. income tax returns for periods ended after August 31, 2004, remain subject to examination. With limited exceptions, we are not subject to state and local income tax examinations for years before August 31, 2001. We do not expect that the amount of unrecognized tax benefits will significantly change within the next twelve months.
Recent Events
On June 11, 2008 we entered into a Purchase Agreement with Cenex Finance Association (CFA) to purchase their 51% interest in Cofina Financial. The sale was subject to approval by the members of CFA, and on July 7, 2008, the members approved the sale. The final purchase price for CFA’s interest in Cofina Financial has not been determined, but the amount should range between approximately $48.0 million and $50.0 million, with an anticipated closing date of September 1, 2008. We will be the sole owner of Cofina Financial as of the closing date.
Results of Operations
Comparison of the three months ended May 31,November 30, 2008 and 2007
General. We recorded income before income taxes of $212.3$156.2 million during the three months ended May 31,November 30, 2008 compared to $262.7$337.8 million during the three months ended May 31,November 30, 2007, a decrease of $50.4$181.6 million (19%(54%). TheseIncluded in the results for the first fiscal quarter of 2008 was a $91.7 million gain on the sale of all of our 1,610,396 shares of CF Industries Holdings stock. Included in the results for the first fiscal quarter of 2009 was a $15.7 million gain on the sale of all of our 180,000 shares of NYMEX Holdings stock, and a $70.7 million impairment loss on our investment in VeraSun Energy Corporation (VeraSun). Operating results reflected lower pretax earnings in our Energy segmentAg Business and Processing segments which were partially offset by increased pretax earnings in our Ag Business and Processing segments and Corporate and Other.Energy segment.
Our Energy segment generated income before income taxes of $12.5$184.7 million for the three months ended May 31,November 30, 2008 compared to $178.0$108.5 million in the three months ended May 31,November 30, 2007. This decreaseincrease in earnings of $165.5$76.2 million (93%(70%) is primarily from a net reduction tohigher margins on refined fuels which resulted mainly from lower margins at both our Laurel, Montana refinery and at our NCRA refinery in McPherson, Kansas. In our first quarter of fiscal 2009, we sold all of our 180,000 shares of NYMEX Holdings stock for proceeds of $16.1 million and recorded a pretax gain of $15.7 million. Earnings in our propane, lubricants, and renewable fuels marketing businesses increased, whileand transportation operations earnings slightlybusinesses decreased during the three months ended May 31,November 30, 2008 when compared to the same three-month period of the previous year.
Our Ag Business segment generated income before income taxes of $179.9$19.7 million for the three months ended May 31,November 30, 2008 compared to $77.1$204.7 million in the three months ended May 31,November 30, 2007, an increasea decrease in earnings of $185.0 million (90%). In our first fiscal quarter of 2008, we sold all of our 1,610,396 shares of CF Industries Holdings stock for proceeds of $108.3 million and recorded a pretax gain of
2220
earnings of $102.8 million (133%). As previously discussed,$91.7 million. Earnings from our wholesale crop nutrients business decreased $50.1 million. The market prices for crop nutrients products fell significantly during theour first quarter of fiscal 2008,2009, and due to a wet fall season, we had a higher quantity of inventories on hand at the end of our first quarter than is typical at that time of year. In order to reflect our wholesale crop nutrients business ofinventories at net-realizable values on November 30, 2008, we had $56.8 millionlower-of-cost or market adjustment in this business. Improved performance primarily by Agriliance, was distributed to us and generated $54.9an agronomy joint venture in which we hold a 50% interest, resulted in a $3.6 million increase in earnings for the three months ended May 31, 2008. Prior to the distribution, we reflected 50% of these earnings through our equity income from our investment in Agriliance. We are not recording wholesale earningsAgriliance, net of crop protection products, which along with other reduced Agriliance margins, decreased our net earnings in Agriliance by $43.5 million. Strong demanda Canadian agronomy joint venture and increased volumes for grain and oilseed products, much of it driven by increased U.S. ethanol production, contributed to improved performances by both our grain marketing and country operations businesses.allocated internal expenses. Our grain marketing operations improved earnings decreased by $65.5$32.6 million during the three months ended May 31,November 30, 2008 compared with the same three-month period in fiscal 2007,2008, primarily from increasednet decreased grain volumes, greaterproduct margins on those grains, and strong earning performancesreduced earnings from our joint ventures. Volatility in the grain markets created opportunities for increased grain margins during the first quarter of fiscal 2008. Our country operations earnings increased $25.9decreased $14.2 million, primarily as a result of overall improved product margins, including historically highreduced volumes and margins ondecreased agronomy and grain and improved margins on agronomy, feed and energy transactions. Continued market expansion into Colorado, Oklahoma and Kansas also increased country operations volumes. Volatility in the grain markets creates opportunities for increased grain margins, and additionally during fiscal 2007 and 2008, increased interest in renewable fuels, and changes in transportation costs, shifted marketing patterns and dynamics for our grain marketing business.margins.
Our Processing segment generated incomea net loss before income taxes of $17.1$52.7 million for the three months ended May 31,November 30, 2008 compared to $5.2income of $20.2 million in the three months ended May 31,November 30, 2007, an increasea decrease in earnings of $11.9 million (233%). Oilseed processing earnings increased $13.4 million during the three months ended May 31, 2008 compared to the same period in the prior year, primarily due to improved margins in our crushing operations, partially offset by slightly decreased margins in our refining operations.$72.9 million. Our share of earnings, net of allocated internal expenses,losses related to US BioEnergy,VeraSun, an ethanol manufacturing company in which we heldhold a minority ownership interest, decreased $0.6increased $71.5 million for the three months ended May 31,November 30, 2008 compared to the same period in the prior year. Effective April 1, 2008, US BioEnergy and VeraSun completed a merger, and as a result of our change in ownership interest, we no longer have significant influence, and therefore account for VeraSun, the surviving entity, as an available for saleavailable-for-sale investment. During the first fiscal quarter ended November 30, 2008, we recorded a $70.7 million impairment on our investment in VeraSun, as further discussed below in loss (gain) on investments. Oilseed processing earnings increased $7.2 million during the three months ended November 30, 2008 compared to the same period in the prior year, primarily due to improved margins in our crushing and refining operations, partially offset by lower volumes mainly in our refining operations. Our share of earnings from our wheat milling joint ventures, net of allocated internal expenses, generated improved net earnings of $6.0decreased by $3.1 million for the three months ended May 31,November 30, 2008 compared to the same period in the prior year. Our share of earnings from Ventura Foods, our packaged foods joint venture, net of allocated internal expenses, decreased $6.5$5.5 million during the three months ended May 31,November 30, 2008, compared to the same period in the prior year, primarily as a result of increased commodity prices, reducing margins on the products sold.
Corporate and Other generated income before income taxes of $2.8$4.4 million for the three months ended May 31,November 30, 2008 compared to $2.5$4.5 million in the three months ended May 31,November 30, 2007, an increasea decrease in earnings of $0.3 million (13%$46 thousand (1%). This improvement in earningsdecrease is primarily attributable to our business solutions’ financial services, partially offset by our hedging and insurance services.
Net Income. Consolidated net income for the three months ended May 31,November 30, 2008 was $188.7$137.3 million compared to $239.6$300.9 million for the three months ended May 31,November 30, 2007, which represents a $50.9$163.6 million (21%(54%) decrease.
Revenues. Consolidated revenues were $9.3$7.7 billion for the three months ended May 31,November 30, 2008 compared to $4.7$6.5 billion for the three months ended May 31,November 30, 2007, which represents a $4.6$1.2 billion (97%(19%) increase.
Total revenues include other revenues generated primarily within our Ag Business segment and Corporate and Other. Our Ag Business segment’s country operations elevators and agri-service centers derive other revenues from activities related to production agriculture, which include grain storage, grain cleaning, fertilizer spreading, crop protection spraying and other services of this nature, and our grain marketing operations receive other revenues at our export terminals from activities related to loading vessels. Corporate and Other derives revenues primarily from our financing, hedging and insurance operations.
Our Energy segment revenues, after elimination of intersegment revenues, of $3.0$2.5 billion increased by $851.2$22.8 million (40%(1%) during the three months ended May 31,November 30, 2008 compared to the three months ended May 31,November 30, 2007. During the three months ended May 31,November 30, 2008 and 2007, our Energy segment recorded revenues from our Ag Business segment of $75.6$84.0 million and $54.9$78.0 million, respectively. The net increase in revenues
23
of $851.2$22.8 million is comprised of a net increase of $715.1$47.4 million related to price
21
appreciation on refinedpropane and renewable fuels and propanemarketing products and $136.1a $24.6 million net increase is related to higherdecrease in sales volume. Refined fuels revenues increased $669.4decreased $6.5 million (45%(less than 1%), of which $648.1$0.9 million was related to a net average selling price increasedecrease and $21.3$5.6 million was attributable to increaseddecreased volumes, compared to the same period in the previous year. The sales price and volumes of refined fuels increased $0.95 per gallon (43%) and volumes increasedboth decreased less than 1% when comparing the three months ended May 31,November 30, 2008 with the same period a year ago. Higher crude oil prices, strong global demand and limited refining capacity contributed to the increase in refined fuels selling prices. Renewable fuels marketing revenues increased $77.0decreased $72.8 million (32%), mostly from a 22% increase37% decrease in volumes alongpartially offset with an increase of $0.17 (8%$0.14 (7%) per gallon, when compared with the same three-month period in the previous year. The decrease in renewable fuels marketing volumes was primarily attributable to the loss of two customers. Propane revenues increased by $39.8$100.2 million (44%(60%), of which $34.8$14.7 million related to an increase in the net average selling price and $5.0$85.5 million related to an increase in volumes, when compared to the same period in the previous year. The average selling price of propane increased $0.43$0.08 per gallon (38%(6%) and sales volume increased 4%51% in comparison to the same period of the prior year. Propane prices tend to follow the prices of crude oil and natural gas, both of which increased during the three months ended May 31, 2008 compared to the same period in 2007. Propane prices are also affected by changes in propane demand and domestic inventory levels. The decreaseincrease in propane volumes primarily reflects reducedincreased demand caused by higher prices.an earlier home heating and an improved crop drying season.
Our Ag Business segment revenues, after elimination of intersegment revenues, of $6.0$4.9 billion, increased $3.6$1.1 billion (150%(29%) during the three months ended May 31,November 30, 2008 compared to the three months ended May 31,November 30, 2007. Grain revenues in our Ag Business segment totaled $4,288.0 million$3.8 billion and $1,863.9 million$2.9 billion during the three months ended May 31,November 30, 2008 and 2007, respectively. Of the grain revenues increase of $2,424.1 million (130%$0.9 billion (31%), $945.6$62.5 million is attributable to increased volumes and $1,478.5$832.5 million is due to increased average grain selling prices during the three months ended May 31,November 30, 2008 compared to the same period last fiscal year. The average sales price of all grain and oilseed commodities sold reflected an increase of $4.51$1.85 per bushel (79%(28%), over the same three-month period in fiscal 2007.2008. The 20072008 fall harvest produced good yields throughout most of the United States, with the quality of most grains rated as excellent or good. Despite the good harvest, prices for nearly all grain commodity prices increased because of strong demand, particularly for corn, which is used as the feedstock for most ethanol plants as well as for livestock feed. The average month-end market price per bushel of spring wheat, soybeans and corn increased approximately $6.18, $5.22 and $2.15, respectively,$0.35 when compared to the prices of those same grains for the three months ended May 31, 2007.November 30, 2007, while the average month-end market price for spring wheat and soybeans decreased $2.32 and $0.76, respectively. Volumes increased 28%2% during the three months ended May 31,November 30, 2008 compared with the same period of a year ago. Corn, soybeans
Wholesale crop nutrient revenues in our Ag Business segment totaled $633.6 million and barley reflected the largest volume increases compared to$533.5 million during the three months ended May 31, 2007. Beginning in SeptemberNovember 30, 2008 and 2007, we began recordingrespectively. Of the wholesale crop nutrient revenues from our crop nutrients business reflecting $935.1increase of $100.1 million for(19%), $310.4 million is due to increased average fertilizer selling prices and $210.3 million is attributable to decreased volumes during the three months ended May 31,November 30, 2008 compared to the same period last fiscal year. The average sales price of all fertilizers sold reflected an increase of $326 per ton (96%) over the same three-month period in fiscal 2008. Volumes decreased 39% during the three months ended November 30, 2008 compared with the same period of a year ago mainly due to higher fertilizer prices and a wetter fall, making it difficult for farmers to spread fertilizers.
Our Ag Business segment non-grain or non-wholesale crop nutrients product revenues of $729.3$483.6 million increased by $225.6$110.6 million (45%(30%) during the three months ended May 31,November 30, 2008 compared to the three months ended May 31,November 30, 2007, primarily the result of increased revenues in our country operations business of retail crop nutrients, energy, feed, seed, crop protection and processed sunflowerenergy products. Other revenues within our Ag Business segment of $41.7$47.6 million during the three months ended May 31,November 30, 2008 increased $8.0$5.4 million (24%(13%) compared to the three months ended May 31,November 30, 2007, primarily from grain handling and service revenues.
Our Processing segment revenues, after elimination of intersegment revenues, of $352.6$310.3 million increased $159.2$67.1 million (82%(28%) during the three months ended May 31,November 30, 2008 compared to the three months ended May 31,November 30, 2007. Because our wheat milling and packaged foods operations are operated through non-consolidated joint ventures, revenues reported in our Processing segment are entirely from our oilseed processing operations. Higher average sales prices of processed oilseed increased revenues by $80.3 million, while processed soybean volumes increased 10%, accounting for an increase in revenues of $16.6 million. Oilseed refiningprocessing revenues increased $56.9$20.3 million (60%(17%), of which $76.7$21.7 million was due to higher average sales prices, partially offset by a $19.8$1.4 million (12%(1%) net decrease in sales volume. Oilseed refining revenues increased $40.6 million (35%), of which $52.0 million was due to higher average sales prices, partially offset by an $11.4 million (10%) net decrease in sales volume. The average selling price of processed oilseed increased $159$42 per ton (86%(18%) and the average selling price of refined oilseed products
22
increased $0.26$0.21 per pound (81%(49%) compared to the same three-month period of fiscal 2007.2008. The changes in the average selling price of products are primarily driven by the average higher price of soybeans.
24
Cost of Goods Sold. Consolidated cost of goods sold were $9.1$7.4 billion for the three months ended May 31,November 30, 2008 compared to $4.4$6.2 billion for the three months ended May 31,November 30, 2007, which represents a $4.7$1.2 billion (106%(19%) increase.
Our Energy segment cost of goods sold, after elimination of intersegment costs, of $2.9$2.2 billion increaseddecreased by $1,053.5$52.1 million (56%(2%) during the three months ended May 31,November 30, 2008 compared to the same period of the prior year. The increasedecrease in cost of goods sold is primarily due to increaseddecreased per unit costs for refined fuels and propane products. On a more product-specific basis, the average cost of refined fuels increased $1.07 (51%decreased $0.08 (3%) per gallon and volumes increaseddecreased less than 1% compared to the three months ended May 31,November 30, 2007. We process approximately 55,000 barrels of crude oil per day at our Laurel, Montana refinery and 80,000 barrels of crude oil per day at NCRA’s McPherson, Kansas refinery. The average cost increasedecrease is primarily related to higherlower input costs at our two crude oil refineries and higherlower average prices on the refined products that we purchased for resale compared to the three months ended May 31,November 30, 2007. The average per unit cost of crude oil purchased for the two refineries increased 86%decreased 7% compared to the three months ended May 31,November 30, 2007. Renewable fuels marketing cost increased $77.0costs decreased $72.1 million (32%), mostly from a 22% increase37% decrease in volumes driven by the loss of two customers, when compared with the same three-month period in the previous year. The average cost of propane increased $0.41 (37%$0.07 (5%) per gallon and volumes increased 4%51% compared to the three months ended May 31,November 30, 2007. The increase in propane volumes primarily reflects increased demand caused by an earlier home heating season and an improved crop drying season.
Our Ag Business segment cost of goods sold, after elimination of intersegment costs, of $5.8$4.9 billion, increased $3.5$1.2 billion (148%(33%) during the three months ended May 31,November 30, 2008 compared to the same period of the prior year. Grain cost of goods sold in our Ag Business segment totaled $4,234.9 million$3.7 billion and $1,846.4 million$2.8 billion during the three months ended May 31,November 30, 2008 and 2007, respectively. The cost of grains and oilseed procured through our Ag Business segment increased $2,388.5$923.4 million (129%(33%) compared to the three months ended May 31,November 30, 2007. This is primarily the result of a 42% net$1.92 (30%) increase in bushels sold and an increase of $3.45 (61%) in the average cost per bushel and a 2% net increase in bushels sold as compared to the prior year. Corn and soybeans and barley reflected the largest volume increases compared to the three months ended May 31,November 30, 2007. Commodity prices on spring wheat, soybeans andThe average month-end market price per bushel of corn have increased compared to the prices that were prevalentsame three-month period a year ago, while the average month-end market price for spring wheat and soybeans decreased.
Wholesale crop nutrients cost of goods sold in our Ag Business segment totaled $656.2 million and $510.2 million during the three months ended November 30, 2008 and 2007, respectively. Of this $146.0 million (29%) increase in wholesale crop nutrients cost of goods sold, $56.8 million is due to thelower-of-cost or market adjustment on inventories, as previously discussed. The average cost per ton of fertilizer increased $309 (95%), excluding the lower-of-cost or market adjustment, while net volumes decreased 39% when compared to the same three-month period in 2007. Beginning in September 2007, we began recording cost of goods sold from our crop nutrients business reflecting $866.8 millionthe prior year. The net volume decrease is mainly due to higher fertilizer prices and a wetter fall, making it difficult for the three months ended May 31, 2008. farmers to spread fertilizers.
Our Ag Business segment cost of goods sold, excluding the cost of grains and wholesale crop nutrients procured through this segment, increased during the three months ended May 31,November 30, 2008 compared to the three months ended May 31,November 30, 2007, primarily due to higher volumes and price per unit costs for retail crop nutrients, seed, feed, energy, crop protection, feed and processed sunflowerenergy products. The volume increases resulted primarily from acquisitions made and reflected in the reporting periods.
Our Processing segment cost of goods sold, after elimination of intersegment costs, of $331.3$292.0 million increased $143.9$59.0 million (77%(25%) compared to the three months ended May 31,November 30, 2007, which was primarily due to increased costs of soybeans, in addition topartially offset by volume increases in soybean crushing.decreases.
Marketing, General and Administrative. Marketing, general and administrative expenses of $86.6$87.7 million for the three months ended May 31,November 30, 2008 increased by $21.7$21.3 million (34%(32%) compared to the three months ended May 31,November 30, 2007. The net increase of $21.7$21.3 million includes $11.3 million from our crop nutrients business reflected in our Ag Business segment, which in fiscal 2007 were previously recorded in our equity investment reported earningsacquisitions, expansion of Agriliance. The remaining net change of $10.4 million (16%) includesforeign operations, increased performance-based incentive plan expense in addition to other employee benefits (primarily medical and pension), general inflation and acquisitions.inflation.
23
Loss (Gain) Loss on Investments. (Gain)Net loss on investments of $5.3$55.0 million for the three months ended May 31,November 30, 2008 increased by $5.6compared to a net gain on investments of $94.9 million compared tofor the three months ended May 31, 2007.November 30, 2007, reflects a decrease in earnings of $149.9 million (158%). During our first quarter of fiscal 2009, we recorded a $70.7 million impairment on our investment in VeraSun in our Processing segment. The majorityimpairment was based on VeraSun’s market value of this increase is from gains received$0.28 per share on its last day of trading, November 3, 2008. This loss was partially offset by a gain on investments in the three months ended May 31,our Energy segment. We sold all of our 180,000 shares of NYMEX Holdings stock for proceeds of $16.1 million and recorded a pretax gain of $15.7 million.
In our first fiscal quarter of 2008, on several investmentswe sold during that period, primarilyall of our 1,610,396 shares of CF Industries Holdings stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million. Also included in our Energy and Ag Business segment. During the three months ended May 31, 2008segments and May 31, 2007, our investment in US BioEnergy, prior to the merger with VeraSun, reflected netCorporate and Other were gains onavailable-for-sale securities sold of $17 thousand, $2.9 million and $1.0 million, respectively. These gains were partially offset by losses on investments of $0.6 million and $0.3 million, respectively, and is reflected in our Processing segment.
Interest, net. Net interest of $22.2$20.2 million for the three months ended May 31,November 30, 2008 increased $12.9$6.6 million (139%(49%) compared to the same period inlast fiscal 2007.year. Interest expense for the three months ended May 31,November 30, 2008 and 2007 was $24.8$21.5 million and $13.6$18.4 million, respectively. Interest income, generated
25
primarily from marketable securities, was $2.6$1.3 million and $4.3$4.9 million, for the three months ended May 31,November 30, 2008 and 2007, respectively. The interest expense increase of $11.2$3.1 million (83%(17%) includes an increase$2.6 million from the consolidation of Cofina Financial. Through August 31, 2008, we held a 49% ownership interest in borrowings, primarily created by higher working capital needsCofina Financial and accounted for our investment using the equity method of accounting. On September 1, 2008, we purchased Cenex Finance Association’s 51% ownership interest. In addition, interest expense increased from a decrease in capitalized interest of $2.8 million, and$3.4 million. It was partially offset by a decreasedecreases in the average short-term interest rate.rate and short-term borrowings for loans excluding Cofina Financial. For the three months ended May 31,November 30, 2008 and 2007, we capitalized interest of $0.6$0.9 million and $3.4$4.3 million, respectively, primarily related to construction projects in our Energy segmentsegment. The average short-term interest rate decreased 3.26% for financing interest on our coker project. Theloans excluding Cofina Financial, while the average level of short-term borrowings increased $549.0decreased $625.9 million during the three months ended May 31,November 30, 2008, compared to the same three-month period in fiscal 2007, while the average short-term interest rate2008, mostly due to decreased 2.47%. Higher volumes and commodity prices within our Ag Business segment in addition to increased volumes and working capital needs from our crop nutrients business increased that segment’s interest, net by $6.4 million.needs. Also, in October 2007, we entered into a private placement with several insurance companies and banks for additional long-term debt in the amount of $400.0 million with an interest rate of 6.18%, which primarily replaced short-term debt. The net decrease in interest income of $1.7$3.6 million (39%(73%) was primarily in Corporate and Other relating to a decrease of interest income on our hedging and other services, which were partially offset by increased interest income at NCRA within our Energy segment, which primarily relates to marketable securities.
Equity Income from Investments. Equity income from investments of $51.8$20.7 million for the three months ended May 31,November 30, 2008 decreased $15.7$10.5 million (23%(34%) compared to the three months ended May 31,November 30, 2007. We record equity income or loss from the investments in which we have an ownership interest of 50% or less and have significant influence, but not control, for our proportionate share of income or loss reported by the entity, without consolidating the revenues and expenses of the entity in our Consolidated Statements of Operations. The net decrease in equity income from investments was attributable to reduced earnings from investments in our Ag BusinessProcessing segment of $10.9 million and Energy segments,Corporate and Other of $1.4 million, and was partially offset by improved equity income from investments in our Processing segmentEnergy and Corporate and Other. The reduction in earnings included $15.7 million for Ag Business segments of $0.1 million and $0.2$1.7 million, for Energy segments, and was partially offset by improved earnings of $0.2 million for our Processing segment and $92 thousand for Corporate and Other.
Our Ag Business segment generated reduced earnings of $15.7 million from equity investments. Our share of equity investment earnings or losses in Agriliance decreased earnings by $43.5 million. In September 2007, Agriliance distributed the assets of the crop nutrients business to us, and the assets of the crop protection business to Land O’Lakes, Inc. Agriliance continues to exist as a50-50 joint venture and primarily operates an agronomy retail distribution business. We had a net improvement of $27.2 million from our share of equity investment earnings in our grain marketing joint ventures during the three months ended May 31, 2008 compared to the same period the previous year. The improvement in earnings is primarily related to increased volumes at export terminals. Our country operations business reported an aggregate increase in equity investment earnings of $0.6 million from several small equity investments.respectively.
Our Processing segment generated improvedreduced earnings of $0.2$10.9 million from equity investments. Ventura Foods, our vegetable oil-based products and packaged foods joint venture, recorded reduced earnings of $6.1$5.5 million and Horizon Milling, our domestic and Canadian wheat milling joint ventures, recorded improved earnings of $6.5 million, net compared to the same three-month period in fiscal 2007.2008. Ventura Foods’ decrease in earnings was primarily due to higher commodity prices resulting in lower margins on the products sold. A shifting demand balance for soybeans for both food and renewable fuels meant addressing supply and price challenges for both CHS and our Ventura Foods joint venture. Horizon Milling’s improved results were related to merchandisingMilling, our domestic and Canadian wheat milling joint ventures, recorded reduced earnings of $3.2 million, net. Volatility in the grain markets created opportunities for increased wheat margins for Horizon Milling during the three months ended May 31, 2008.first quarter of fiscal 2008 and have continued with reduced margins in fiscal 2009. Typically results are affected by U.S. dietary habits and although the preference for a low carbohydrate diet appears to have reached the bottom of its cycle, milling capacity, which had been idled over the past few years because of lack of demand for flour products, can easily be put back
24
into production as consumption of flour products increases, which may depress gross margins in the milling industry.
Our Energy segment generated decreased During our first fiscal quarter of 2008, we recorded equity investment earnings of $0.2$2.3 million related to reduced marginsUS BioEnergy, an ethanol manufacturing company in an equity investmentwhich we held by NCRA,a minority ownership interest. Effective April 1, 2008, US BioEnergy and VeraSun completed a merger, and as a result of our change in ownership interest we no longer have significant influence, and therefore account for VeraSun, the surviving entity, as anavailable-for-sale investment.
Corporate and Other generated improvedreduced earnings of $92 thousand$1.4 million from equity investment earnings, as compared to the three months ended May 31, 2007.November 30, 2007, primarily due to our consolidating Cofina Financial.
26
Our Energy segment generated increased equity investment earnings of $0.1 million related to an equity investment held by NCRA.
Our Ag Business segment generated improved earnings of $1.7 million from equity investments. Our share of equity investment earnings or losses in Agriliance increased earnings by $6.2 million, net of a Canadian agronomy joint venture from improved retail margins. We had a net decrease of $4.1 million from our share of equity investment earnings in our grain marketing joint ventures during the three months ended November 30, 2008 compared to the same period the previous year, which is primarily related to decreased export margins. Our country operations business reported an aggregate decrease in equity investment earnings of $0.4 million from several small equity investments.
Minority Interests. Minority interests of $16.7$22.2 million for the three months ended May 31,November 30, 2008 decreased by $44.6$0.8 million (73%(4%) compared to the three months ended May 31,November 30, 2007. This net decrease was a result of less profitable operations within our majority-owned subsidiaries compared to the samethree-month period in the prior year. Substantially all minority interests relate to NCRA, an approximately 74.5% owned subsidiary, which we consolidate in our Energy segment.
Income Taxes. Income tax expense of $23.6$18.9 million for the three months ended May 31,November 30, 2008 comparescompared with $23.1$36.9 million for the three months ended May 31,November 30, 2007, resulting in effective tax rates of 11.1%12.1% and 8.8%10.9%, respectively. During the quarter ended November 30, 2008, we provided a valuation allowance related to the carryforward of certain capital losses of $21.2 million. The federal and state statutory rate applied to nonpatronage business activity was 38.9% for the three-month periods ended May 31, 2008 and 2007. The income taxes and effective tax rate vary each year based upon profitability and nonpatronage business activity during each of the comparable years.
Comparison of the nine months ended May 31, 2008 and 2007
General. We recorded income before income taxes of $747.5 million during the nine months ended May 31, 2008 compared to $505.9 million during the nine months ended May 31, 2007, an increase of $241.6 million (48%). These results reflected increased pretax earnings in each of our Ag Business and Processing segments and in Corporate and Other, and were partially offset by decreased pretax earnings in our Energy segment.
Our Energy segment generated income before income taxes of $165.7 million for the nine months ended May 31, 2008 compared to $338.7 million in the nine months ended May 31, 2007. This decrease in earnings of $173.0 million (51%) is primarily from lower margins at the NCRA refinery in McPherson, Kansas and at our Laurel refinery, in addition to reduced margins on refined fuels from a planned major maintenance, during which time our production was reduced at our Laurel, Montana refinery. Earnings in our lubricants, propane, renewable fuels marketing and transportation businesses improved during the nine months ended May 31, 2008 when compared to the same nine-month period of the previous year.
Our Ag Business segment generated income before income taxes of $504.6 million for the nine months ended May 31, 2008 compared to $108.0 million in the nine months ended May 31, 2007, an increase in earnings of $396.6 million. In our first fiscal quarter of 2007, we sold approximately 25% of our investment in CF, a domestic fertilizer manufacturer in which we held a minority interest, for which we received cash of $10.9 million and recorded a gain of $5.3 million. During the first quarter of fiscal 2008, we sold all of our remaining 1,610,396 shares of CF stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million. As previously discussed, during the first quarter of fiscal 2008, the crop nutrients business of Agriliance was distributed to us and generated $75.0 million in earnings for the nine months ended May 31, 2008. Prior to the distribution, we reflected 50% of these earnings through our equity income from our investment in Agriliance. Strong demand and increased volumes for grain and oilseed products, much of it driven by increased U.S. ethanol production, contributed to improved performances by our grain marketing, crop nutrients and country operations businesses. Our country operations earnings increased $70.7 million, primarily as a result of overall improved product margins, including historically high margins on grain and agronomy transactions. Continued market expansion into Colorado, Oklahoma and Kansas also increased country operations volumes. Our grain marketing operations improved earnings by $199.6 million during the nine months ended May 31, 2008 compared with the same nine-month period in fiscal 2007, primarily from increased grain volumes and improved margins on those grains, and also included strong earning performances from our joint ventures. Volatility in the grain markets creates opportunities for increased grain margins, and additionally during fiscal 2007 and 2008, increased interest in renewable fuels, and changes in transportation costs, shifted marketing patterns and dynamics for our grain marketing business. Due to the distribution by Agriliance of the wholesale and some of the retail businesses to us and Land O’Lakes, the operating performance remaining within the Agriliance operations for the nine-months ended May 31, 2008 is primarily the retail business. Our share of the distributed operations of Agriliance resulted in a decrease in equity income from investments of $27.9 million. Our remaining share of the agronomy operations, net of allocated internal expenses, reported reduced retail margins generated by Agriliance of $7.1 million for our share of those joint venture’s earnings.
27
Our Processing segment generated income before income taxes of $65.3 million for the nine months ended May 31, 2008 compared to $47.9 million in the nine months ended May 31, 2007, an increase in earnings of $17.4 million (36%). Oilseed processing earnings increased $19.1 million during the nine months ended May 31, 2008 compared to the same period in the prior year, primarily due to improved margins in our crushing operations, partially offset by slightly reduced margins in our refining operations. Our share of earnings from our wheat milling joint ventures, net of allocated internal expenses, reported improved net earnings of $24.2 million for the nine months ended May 31, 2008 compared to the same period in the prior year. Our share of earnings, net of allocated internal expenses, related to US BioEnergy, an ethanol manufacturing company in which we held a minority ownership interest, decreased $7.0 million for the nine months ended May 31, 2008 compared to the same period in the prior year. Effective April 1, 2008, US BioEnergy and VeraSun completed a merger, and as a result of our change in ownership interest we no longer have significant influence, and account for VeraSun, the surviving entity, as an available for sale investment. Also, in August 2006, US BioEnergy filed a registration statement with the Securities and Exchange Commission to register shares of common stock for sale in an initial public offering (IPO), and in December 2006, the IPO was completed. The affect of the issuance of additional shares of US BioEnergy was to dilute our ownership interest down from approximately 25% to 21%. Due to US BioEnergy’s increase in equity, we recognized a non-cash net gain of $11.4 million during fiscal 2007 on our investment to reflect our proportionate share of the increase in the underlying equity of US BioEnergy. Our share of earnings from Ventura Foods, our packaged foods joint venture, net of allocated internal expenses, had decreased $6.9 million during the nine months ended May 31, 2008, compared to the same period in the prior year, primarily as the result of increased commodity prices reducing margins on the products sold.
Corporate and Other generated income before income taxes of $11.9 million for the nine months ended May 31, 2008 compared to $11.4 million in the nine months ended May 31, 2007, an increase in earnings of $0.5 million (5%). This improvement is primarily attributable to our business solutions’ financial services.
Net Income. Consolidated net income for the nine months ended May 31, 2008 was $657.6 million compared to $459.6 million for the nine months ended May 31, 2007, which represents a $198.0 million (43%) increase.
Revenues. Consolidated revenues were $22.8 billion for the nine months ended May 31, 2008 compared to $12.2 billion for the nine months ended May 31, 2007, which represents a $10.6 billion (86%) increase.
Total revenues include other revenues generated primarily within our Ag Business segment and Corporate and Other. Our Ag Business segment’s country operations elevators and agri-service centers derive other revenues from activities related to production agriculture, which include grain storage, grain cleaning, fertilizer spreading, crop protection spraying and other services of this nature, and our grain marketing operations receive other revenues at our export terminals from activities related to loading vessels. Corporate and Other derives revenues primarily from our hedging and insurance operations.
Our Energy segment revenues, after elimination of intersegment revenues, of $7.8 billion increased by $2.2 billion (39%) during the nine months ended May 31, 2008 compared to the nine months ended May 31, 2007. During the nine months ended May 31, 2008 and 2007, our Energy segment recorded revenues from our Ag Business segment of $224.9 million and $171.2 million, respectively. The net increase in revenues of $2,171.7 million is comprised of a net increase of $1,739.9 million related to price appreciation and a $431.8 million net increase in sales volume primarily on refined fuels and propane products. Refined fuels revenues increased $1,603.5 million (42%), of which $1,501.3 million was related to a net average selling price increase and $102.2 million was attributable to increased volumes, compared to the same period in the previous year. The sales price of refined fuels increased $0.77 per gallon (40%) and volumes increased 2% when comparing the nine months ended May 31, 2008 with the same period a year ago. Higher crude oil prices, strong global demand and limited refining capacity contributed to the increase in refined fuels selling prices. Renewable fuels marketing revenues increased $233.9 million (40%), mostly from a 41% increase in volumes when compared with the same nine-month period in the previous year. Propane revenues increased by $106.4 million (20%), of which $162.3 million related to an increase in the net average selling price, and were partially offset by $55.9 million related to a decrease in volumes, when compared to the same period in the
28
previous year. Propane sales volume decreased 8% in comparison to the same period of the prior year, while the average selling price increased $0.34 per gallon (31%). Propane prices tend to follow the prices of crude oil and natural gas, both of which increased during the nine months ended May 31, 2008 compared to the same period in 2007. Propane prices are also affected by changes in propane demand and domestic inventory levels. The decrease in propane volumes primarily reflects a loss of crop drying season with less moisture in the fall 2007 crop and reduced demand due to higher prices.
Our Ag Business segment revenues, after elimination of intersegment revenues, of $14.1 billion, increased $8.0 billion (131%) during the nine months ended May 31, 2008 compared to the nine months ended May 31, 2007. Grain revenues in our Ag Business segment totaled $10,746.3 million and $5,031.5 million during the nine months ended May 31, 2008 and 2007, respectively. Of the grain revenues increase of $5,714.8 million (114%), $2,689.7 million is attributable to increased volumes and $3,025.1 million is due to increased average grain selling prices during the nine months ended May 31, 2008 compared to the same period last fiscal year. The average sales price of all grain and oilseed commodities sold reflected an increase of $3.10 per bushel (60%). The 2007 fall harvest produced good yields throughout most of the United States, with the quality of most grains rated as excellent or good. Despite the good harvest, prices for nearly all grain commodities increased because of strong demand, particularly for corn, which is used as the feedstock for most ethanol plants as well as for livestock feed. The average month-end market price per bushel of spring wheat, soybeans and corn increased approximately $6.42, $5.12 and $1.22, respectively, when compared to the prices of those same grains for the nine months ended May 31, 2007. Volumes increased 33% during the nine months ended May 31, 2008 compared with the same period of a year ago. Wheat, corn, soybeans and barley reflected the largest volume increases compared to the nine months ended May 31, 2007. Beginning in September 2007, we began recording revenues from the distributed crop nutrients business of Agriliance reflecting $1,866.4 million for the nine months ended May 31, 2008. Our Ag Business segment non-grain or non-wholesale crop nutrients product revenues of $1,360.4 million increased by $394.8 million (41%) during the nine months ended May 31, 2008 compared to the nine months ended May 31, 2007, primarily the result of increased revenues of retail crop nutrients, energy, feed, crop protection and processed sunflower products. Other revenues within our Ag Business segment of $116.3 million during the nine months ended May 31, 2008 increased $25.9 million (29%) compared to the nine months ended May 31, 2007, primarily from grain handling and service revenues.
Our Processing segment revenues, after elimination of intersegment revenues, of $885.8 million increased $359.6 million (68%) during the nine months ended May 31, 2008 compared to the nine months ended May 31, 2007. Because our wheat milling and packaged foods operations are operated through non-consolidated joint ventures, revenues reported in our Processing segment are entirely from our oilseed processing operations. Higher average sales prices of processed oilseed increased revenues by $166.3 million, while processed soybean volumes increased 11%, accounting for an increase in revenues of $44.8 million. Oilseed refining revenues increased $140.1 million (56%), of which $141.7 million was due to higher average sales prices and were partially offset by $1.6 million due to a less than 1% net decrease in sales volume. Oilseed flour revenues increased $4.9 million (41%). The average selling price of processed oilseed increased $110 per ton (64%) and the average selling price of refined oilseed products increased $0.18 per pound (56%) compared to the same nine-month period of fiscal 2007. The changes in the average selling price of products are primarily driven by the higher price of soybeans.
Cost of Goods Sold. Consolidated cost of goods sold were $21.9 billion for the nine months ended May 31, 2008 compared to $11.5 billion for the nine months ended May 31, 2007, which represents a $10.4 billion (90%) increase.
Our Energy segment cost of goods sold, after elimination of intersegment costs, of $7.5 billion increased by $2.4 billion (47%) during the nine months ended May 31, 2008 compared to the same period of the prior year. The increase in cost of goods sold is primarily due to increased per unit costs for refined fuels and propane products. On a more product-specific basis, the average cost of refined fuels increased $0.84 (44%) per gallon and volumes increased 2% compared to the nine months ended May 31, 2007. We process approximately 55,000 barrels of crude oil per day at our Laurel, Montana refinery and 80,000 barrels of crude oil per day at NCRA’s McPherson, Kansas refinery. The average cost increase is primarily related to higher input costs at our two crude oil refineries and higher average prices on the refined products that we purchased
29
for resale compared to the nine months ended May 31, 2007. The average per unit cost of crude oil purchased for the two refineries increased 62% compared to the nine months ended May 31, 2007. The average cost of propane increased $0.33 (31%) per gallon, while volumes decreased 8% compared to the nine months ended May 31, 2007.
Our Ag Business segment cost of goods sold, after elimination of intersegment costs, of $13.6 billion increased $7.7 billion (129%) during the nine months ended May 31, 2008 compared to the same period of the prior year. Grain cost of goods sold in our Ag Business segment totaled $10.5 billion and $5.0 billion during the nine months ended May 31, 2008 and 2007, respectively. The cost of grains and oilseed procured through our Ag Business segment increased $5.5 billion (112%) compared to the nine months ended May 31, 2007. This is the result of an increase of $2.98 (59%) in the average cost per bushel along with a 33% net increase in bushels sold as compared to the prior year. Wheat, corn, soybeans and barley reflected the largest volume increases compared to the nine months ended May 31, 2007. Commodity prices on soybeans, spring wheat and corn have increased compared to the prices that were prevalent during the same nine-month period in 2007. In September 2007, we began recording cost of goods sold from the distributed crop nutrients business of Agriliance reflecting $1,755.4 million for the nine months ended May 31, 2008. Our Ag Business segment cost of goods sold, excluding the cost of grains procured through this segment, increased during the nine months ended May 31, 2008 compared to the nine months ended May 31, 2007, primarily due to higher volumes and price per unit costs for crop nutrients, energy, feed, seed and processed sunflower products. The volume increases resulted primarily from acquisitions made and reflected in the reporting periods.
Our Processing segment cost of goods sold, after elimination of intersegment costs, of $837.9 million, increased $336.7 million (67%) compared to the nine months ended May 31, 2007, which was primarily due to increased costs of soybeans in addition to volume increases in soybean crushing.
Marketing, General and Administrative. Marketing, general and administrative expenses of $228.0 million for the nine months ended May 31, 2008 increased by $52.5 million (30%) compared to the nine months ended May 31, 2007. The net increase of $52.5 million includes $25.5 million from our crop nutrients business reflected in our Ag Business segment, which were previously recorded in our equity investment reported earnings of Agriliance. The remaining net change of $27.0 million (15%) includes increased performance-based incentive plan expense, in addition to other employee benefits (primarily medical and pension), general inflation and acquisitions.
(Gain) Loss on Investments. During our first fiscal quarter in 2007, we sold 540,000 shares of our CF Industries Holdings, Inc. (CF) stock, included in our Ag Business segment, for proceeds of $10.9 million, and recorded a pretax gain of $5.3 million, reducing our ownership interest in CF to approximately 2.9%. During the nine months ended May 31, 2008, we sold all of our remaining 1,610,396 shares of CF stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million. Also during the nine months ended May 31, 2008 included in our Energy and Ag Business segments and Corporate and Other were gains on available for sale securities sold of $35 thousand, $8.7 million and $1.0 million, respectively. These gains were partially offset by losses on investments of $0.9 million in our Processing segment. In August 2006, US BioEnergy, now VeraSun, filed a registration statement with the Securities and Exchange Commission to register shares of common stock for sale in an initial public offering (IPO), and in December 2006, the IPO was completed. The affect of the issuance of additional shares of US BioEnergy was to dilute our ownership interest down from approximately 25% to 21%. Due to US BioEnergy’s increase in equity, we recognized a non-cash net gain of $11.1 million on our investment to reflect our proportionate share of the increase in the underlying equity of US BioEnergy.
Interest, net. Net interest of $53.8 million for the nine months ended May 31, 2008 increased $27.8 million (107%) compared to the same period in fiscal 2007. Interest expense for the nine months ended May 31, 2008 and 2007 was $65.2 million and $37.7 million, respectively. Interest income, generated primarily from marketable securities, was $11.4 million and $11.7 million, for the nine months ended May 31, 2008 and 2007, respectively. The interest expense increase of $27.5 million (73%) primarily relates to an increase in borrowings, which was created by higher working capital, partially offset by a decrease in the average short-term interest rate and an increase in capitalized interest of $1.3 million. For the nine months
November 30,
ended May 31, 2008 and 2007, we capitalized interest of $9.1 million and $7.8 million, respectively, primarily related to construction projects in our Energy segment for financing interest on our coker project. The average level of short-term borrowings increased $568.3 million during the nine months ended May 31, 2008 compared to the same nine-month period in fiscal 2007, while the average short-term interest rate decreased 1.32%. Higher volumes and commodity prices primarily within our Ag Business segment in addition to increased volumes and working capital needs from our crop nutrients business increased that segment’s interest, net by $26.3 million. Also, in October, 2007, we entered into a private placement with several insurance companies and banks for additional long-term debt in the amount of $400.0 million with an interest rate of 6.18%, which primarily replaced short-term debt. The net decrease in interest income of $0.3 million (2%), was primarily Corporate and Other relating to a decrease of interest income on our hedging and other services, and were partially offset by increased interest income at NCRA within our Energy segment, which primarily relates to marketable securities.
Equity Income from Investments. Equity income from investments of $128.4 million for the nine months ended May 31, 2008 increased $44.1 million (52%) compared to the nine months ended May 31, 2007. We record equity income or loss from the investments in which we have an ownership interest of 50% or less and have significant influence, but not control, for our proportionate share of income or loss reported by the entity, without consolidating the revenues and expenses of the entity in our Consolidated Statements of Operations. The net increase in equity income from investments was attributable to improved earnings from investments in our Ag Business and Processing segments and Corporate and Other, and was partially offset by a slight reduction in earnings within our Energy segment. These improvements included $29.7 million for Ag Business, $13.4 million for Processing and $0.9 million for Corporate and Other, with a reduction of $20 thousand for Energy.
Our Ag Business segment generated improved earnings of $29.7 million from equity investments. Our share of equity investment earnings or losses in Agriliance and a Canadian agronomy joint venture decreased earnings by $38.5 million and includes decreased margins for their retail operations, in addition to the loss of their wholesale crop nutrient and crop protection products businesses. In September 2007, Agriliance distributed the assets of the crop nutrients business to us, and the assets of the crop protection business to Land O’Lakes. Agriliance continues to exist as a50-50 joint venture and primarily operates an agronomy retail distribution business. We had an improvement of $65.9 million from our share of equity investment earnings in our grain marketing joint ventures during the nine months ended May 31, 2008 compared to the same period the previous year. The improvement in earnings is primarily related to increased volumes at export terminals. Our country operations business reported an aggregate increase in equity investment earnings of $2.3 million from several small equity investments.
Our Processing segment generated improved earnings of $13.4 million from equity investments. Our equity investment earnings from US BioEnergy, prior to the merger with VeraSun, were $5.1 million less during the nine months ended May 31, 2008 compared to the same period in the previous year, primarily from reduced margins resulting from higher input costs. Ventura Foods, our vegetable oil-based products and packaged foods joint venture, recorded reduced earnings of $6.6 million, and Horizon Milling, our domestic and Canadian wheat milling joint ventures, recorded improved earnings of $25.5 million, net compared to the same nine-month period in fiscal 2007. Ventura Foods’ decrease in earnings was primarily due to higher commodity prices resulting in lower margins on the products sold. A shifting demand balance for soybeans for both food and renewable fuels meant addressing supply and price challenges for both CHS and our Ventura Foods joint venture. Horizon Milling’s improved results were related to merchandising margins during the nine months ended May 31, 2008. Typically results are affected by U.S. dietary habits and although the preference for a low carbohydrate diet appears to have reached the bottom of its cycle, milling capacity, which had been idled over the past few years because of lack of demand for flour products, can easily be put back into production as consumption of flour products increases, which may depress gross margins in the milling industry.
Our Energy segment generated decreased equity investment earnings of $20 thousand related to reduced margins in an equity investment held by NCRA, and Corporate and Other generated improved earnings of
31
$0.9 million from equity investment earnings, primarily from Cofina Financial, our financial services equity investment, as compared to the nine months ended May 31, 2007.
Minority Interests. Minority interests of $52.5 million for the nine months ended May 31, 2008 decreased by $42.2 million (45%) compared to the nine months ended May 31, 2007. This net decrease was a result of less profitable operations within our majority-owned subsidiaries compared to the same nine-month period in the prior year. Substantially all minority interests relate to NCRA, an approximately 74.5% owned subsidiary, which we consolidate in our Energy segment.
Income Taxes. Income tax expense of $89.9 million for the nine months ended May 31, 2008 compares with $46.3 million for the nine months ended May 31, 2007, resulting in effective tax rates of 12.0% and 9.1%, respectively. The federal and state statutory rate applied to nonpatronage business activity was 38.9% for the nine-month periods ended May 31, 2008 and 2007. The income taxes and effective tax rate vary each year based upon profitability and nonpatronage business activity during each of the comparable years.
Liquidity and Capital Resources
On May 31,November 30, 2008, we had working capital, defined as current assets less current liabilities, of $1,660.1$1,777.9 million and a current ratio, defined as current assets divided by current liabilities, of 1.4 to 1.0, compared to working capital of $1,738.6 million and a current ratio of 1.4 to 1.0 on August 31, 2008. On November 30, 2007, we had working capital of $1,265.4 million and a current ratio of 1.3 to 1.0 compared to working capital of $821.9 million and a current ratio of 1.3 to 1.0 on August 31, 2007. On May 31, 2007, we had working capital of $940.8 million and a current ratio of 1.4 to 1.0 compared to working capital of $848.3 million and a current ratio of 1.5 to 1.0 on August 31, 2006. During the ninethree months ended May 31, 2008,November 30, 2007, increases in working capital included the impact of the cash received from additional long-term borrowings of $600.0$400.0 million and the distribution of crop nutrients net assets from Agriliance, our agronomy joint venture, as previously discussed.venture.
On May 31,November 30, 2008, our committed lines of credit consisted of a five-year revolving facility in the amount of $1.3 billion which expires in May 2011 and a364-day revolving facility in the amount of $500.0 million which expires in February 2009. We are currently in the process of renewing our364-day revolver with a planned committed amount of $300.0 million. These credit facilities are established with a syndicatesyndication of domestic and international banks, and our inventories and receivables financed with itthem are highly liquid. On May 31,November 30, 2008, we had $400.0 millionno outstanding balance on the five-year revolver compared with $475.0$425.0 million outstanding on May 31,November 30, 2007. On May 31,November 30, 2008, we had no outstanding balance on the364-day revolver. In addition, we have two commercial paper programs totaling $125.0 million with banks participating in our five-year revolver. On May 31,November 30, 2008, we had no commercial paper outstanding compared with $44.1$10.9 million outstanding on May 31,November 30, 2007. Due to the recent appreciationdecline in commodity
25
prices during the three months ended November 30, 2008, as further discussed in “Cash Flows from Operations”, our average borrowings during the current fiscal year have been much higherlower in comparison to prior years.the three months ended November 30, 2007. With our recent long-term borrowings andcurrent available capacity on our additional short-term borrowing capacity,committed lines of credit, we believe that we have adequate liquidity to cover any increase in net operating assets and liabilities and expected capital expenditures in the foreseeable future.
In addition, our wholly-owned subsidiary, Cofina Financial, makes seasonal and term loans to member cooperatives, businesses and individual producers of agricultural products included in our cash flows from investing activities, and has its own financing explained in further detail below in our cash flows from financing activities.
Cash Flows from Operations
Cash flows from operations are generally affected by commodity prices and the seasonality of our businesses. These commodity prices are affected by a wide range of factors beyond our control, including weather, crop conditions, drought, the availability and the adequacy of supply and transportation, government regulations and policies, world events, and general political and economic conditions. These factors are described in the preceding cautionary statements and may affect net operating assets and liabilities, and liquidity.
Our cash flows provided by operating activities were $512.1$997.3 million and $270.9$14.5 million for the ninethree months ended May 31,November 30, 2008 and 2007, respectively. The fluctuation in cash flows when comparing the two periods is primarily from greatera net income and gains on investments, and a smaller net increasedecrease in operating assets and liabilities during the ninethree months ended May 31,November 30, 2008, compared to a net increase in 2007. Commodity prices have been volatile,declined significantly during the three months ended November 30, 2008, and have resulted in lower working capital needs compared to August 31, 2008. During the three months ended November 30, 2007, volatility in commodity prices had the opposite affect, and increased prices resulted in higher prices affect inventory and receivable balances which consume cash until inventories are sold and receivables are collected.working capital needs when compared to August 31, 2007.
32
Our operating activities provided net cash of $512.1$997.3 million during the ninethree months ended May 31,November 30, 2008. Net income of $657.6$137.3 million, and net non-cash expenses and cash distributions from equity investments of $130.8$141.9 million were partially offset by an increaseand a decrease in net operating assets and liabilities of $276.3 million.$718.1 million provided the cash flows from operating activities. The primary components of net non-cash expenses and cash distributions from equity investments included depreciation and amortization, including major repair costs, of $151.7$55.2 million, deferred tax expenseloss on investments of $89.9$55.0 million, and minority interests of $52.5$22.2 million and redemptions from equity investments, net of income from those investments of $18.7 million. Loss on investments was previously discussed in “Results of Operations”, and primarily includes the impairment of our VeraSun investment, partially offset by the gain on the sale of our NYMEX Holdings common stock. The decrease in net operating assets and liabilities was caused primarily by a decline in commodity prices reflected in decreased receivables and inventories, and an increase in derivative liabilities, partially offset by a decrease in accounts payable and accrued expenses on November 30, 2008, when compared to August 31, 2008. On November 30, 2008, the per bushel market prices of our three primary grain commodities, corn, soybeans and spring wheat, decreased by $2.19 (39%), $4.49 (34%) and $2.62 (30%), respectively, when compared to the prices on August 31, 2008. Crude oil market prices decreased $61.03 (53%) per barrel on November 30, 2008 when compared to August 31, 2008. In addition, on November 30, 2008, fertilizer commodity prices affecting our wholesale crop nutrients and country operations retail businesses generally had decreases between 9% and 59%, depending on the specific products, compared to prices on August 31, 2008.
Our operating activities provided net cash of $14.5 million during the three months ended November 30, 2007. Net income of $300.9 million was partially offset by net non-cash gains and cash distributions from equity investments of $8.3 million and an increase in net operating assets and liabilities of $278.1 million. The primary components of net non-cash gains and cash distributions from equity investments included gains on investments of $100.5$94.9 million and income from equity investments, net of redemptions from those investments, of $55.6$18.9 million, partially offset by depreciation and amortization, including major repair costs, of $47.2 million, deferred taxes of $36.9 million and minority interests of $23.0 million. Gains on investments were previously discussed in “Results of Operations”, and primarily includes the gain on the sale of all of our
26
shares of CF common stock. The increase in net operating assets and liabilities was caused primarily by increased commodity prices reflected in increased receivables, inventories, derivative assets and derivativehedging deposits included in other current assets, partially offset by an increase in accounts payable and accrued expenses, derivative liabilities and customer advance payments on May 31, 2008,November 30, 2007, when compared to August 31, 2007. On May 31, 2008,November 30, 2007, the per bushel market prices of our three primary grain commodities, corn,spring wheat, soybeans and spring wheat,corn, increased by $2.75 (85%$2.58 (37%), $2.12 (24%) per bushel, $4.96 (57%) per bushel and $3.63 (52%$0.61 (19%) per bushel,, respectively, when compared to the prices on August 31, 2007. Crude oil market prices increased $53.31 (72%) per barrel on May 31, 2008 when compared to August 31, 2007. In addition, on May 31, 2008, fertilizer commodity prices affecting our wholesale crop nutrients and country operations retail businesses generally had increases between 43% and 139%, depending on the product, compared to prices on August 31, 2007.
Our operating activities provided net cash of $270.9 million during the nine months ended May 31, 2007. Net income of $459.6 million and net non-cash expenses and cash distributions from equity investments of $185.6 million were partially offset by an increase in net operating assets and liabilities of $374.3 million. The primary components of net non-cash expenses and cash distributions from equity investments included depreciation and amortization, including major repair costs, of $121.0 million, minority interests of $94.7 million and deferred taxes of $15.8 million, which were partially offset by income from equity investments, net of redemptions from those investments, of $24.2 million, a pretax gain of $5.3 million from the sale of 540,000 shares of our CF stock included in our Ag Business segment, and an $11.2 million non-cash gain in our Processing segment from our ownership changes in US BioEnergy and their IPO transaction as previously discussed in “Results of Operations”. The increase in net operating assets and liabilities was primarily caused by an increase in trade receivables as well as derivative assets and hedging deposits (included in other current assets) of $337.9 million and $246.8 million, respectively, partially offset by an increase in accounts payable and derivative liabilities of $125.2 million and $68.5 million, respectively, due to increases in grain prices on May 31, 2007 when compared to August 31, 2006. Increases in inventories also caused an increase in net operating assets and liabilities. On May 31, 2007, the market prices of our three primary grain commodities, corn, soybeans and spring wheat, increased by $1.58 per bushel (68%), $2.64 per bushel (49%) and $0.82 per bushel (18%), respectively, when compared to August 31, 2006. In addition to grain prices affecting grain inventories, our feed and farm supplies inventories in our Ag Business segment increased by 23.0 million bushels (15%) when comparing inventories at November 30, 2007 and August 31, 2007, as well during the period (31%fall 2007 harvest took place. In general, crude oil prices increased $14.67 (20%), primarily at our country operations retail locations mainly due per barrel on November 30, 2007 when compared to the spring planting season and also acquisitions.August 31, 2007.
Crude oil prices are expected to be volatileremain relatively low in the foreseeable future, but related inventories and receivables turn over in a relatively short period, thus somewhat mitigating the effects on operating assets and liabilities.future. Grain prices are influenced significantly by global projections of grain stocks available until the next harvest. Demand for cornharvest, which has been affected by demand from the ethanol industry created an incentive to divert acres from soybeans and wheat to corn this past planting year. The effect has been to stabilize corn prices at a relatively high level, with soybeans and wheat also showing price appreciation.in recent years. Grain prices were volatile during fiscal 2008 and 2007, and although they have continued to be volatiledeclined significantly during our first fiscal 2008. Wequarter of 2009, we anticipate that high demand for all grains and oilseeds, in addition to recent flooding in the midwest, will likely continue to create higher prices andcontinued price volatility, for those commodities.but within a narrower band of real values.
Cash usage inWe expect our net operating activities has generally been the lowest duringassets and liabilities to increase through our fourth fiscal quarter. Historically by this time we have sold a large portion of our seasonal agronomy related inventories in our Ag Business segment operations and continue to collect cash from the related receivables. Although this trend is likely to continue, we expect that the current high commodity prices will cause our cash usage to be higher
33
during the fourthsecond quarter of fiscal 2008 compared2009, resulting in increased cash needs. Our second quarter has typically been the period of our highest short-term borrowings. We expect to increase crop nutrient and crop protection product inventories and prepayments to suppliers of these products in our crop nutrients and country operations businesses during our second quarter of fiscal 2009. At the same time, we expect this increase in net operating assets and liabilities to be partially offset by the collection of prepayments from our own customers for these products. Prepayments are frequently used for agronomy products to assure supply and at times to guarantee prices. In addition, during our second fiscal quarter of 2009, we will make payments on deferred payment contracts for those producers that sold grain to us during prior years.quarters and requested payment after the end of the calendar year. We believe that we have adequate capacity through our committed credit facilities to meet any likely increase in net operating assets and liabilities.
Cash Flows from Investing Activities
For the ninethree months ended May 31,November 30, 2008 and 2007, the net cash flows used in our investing activities totaled $568.6$77.1 million and $382.0$317.0 million, respectively.
Excluding investments, in Agriliance, further discussed below, the acquisition of property, plant and equipment comprised the primary use of cash totaling $255.8$61.7 million and $249.6$108.7 million for the ninethree months ended May 31,November 30, 2008 and 2007, respectively. For the year ending August 31, 2008, we expect to spend approximately $355.0 million for the acquisition of property, plant and equipment. Included in our projected capital spending through fiscal 2008 is completionacquisitions for the three months ended November 30, 2007, were expenditures of $62.0 million for the installation of a coker unit at our Laurel, Montana refinery, along with other refinery improvements, whichthat were completed during fiscal 2008.
For the year ending August 31, 2009, we expect to spend approximately $503.9 million for the acquisition of property, plant and equipment. The EPA has passed a regulation that requires the reduction of the benzene level in gasoline to be less than 0.62% volume by January 1, 2011. As a result of this regulation, our refineries will allow usincur capital expenditures to extract a greater volume of higher valuereduce the current gasoline benzene levels to the regulated levels. We anticipate the combined capital expenditures for benzene removal for our Laurel and diesel fuel from a barrel of crude oil and less relatively lower value asphalt, that is expectedNCRA refineries to increase yields by about 14 percent. The coker unit is currently operational with total expenditures of $411.0be approximately $130 million, as of May 31, 2008, of which $126.7$73 million and $151.8 million were incurredis included in budgeted capital expenditures for fiscal 2009.
Expenditures for major repairs related to our refinery turnarounds during the ninethree months ended May 31, 2008 and 2007, respectively.
During the first fiscal quarter of 2008, we retrospectively changed our accounting method for the costs of turnarounds from the accrual method to the deferral method, as previously discussed. Turnarounds are the scheduled and required shutdowns of refinery processing units for significant overhaul and refurbishment. Expenditures for these major repairs during the nine months ended May 31,November 30, 2008 and 2007, were $21.7 millionapproximately $1 thousand and $8.2$21.7 million, respectively.
In October 2003, we and NCRA reached agreements with the EPA and the State of Montana’s Department of Environmental Quality and the State of Kansas Department of Health and Environment regarding the terms of settlements with respect to reducing air emissions at our Laurel, Montana and NCRA’s McPherson, Kansas refineries. These settlements are part of a series of similar settlements that the EPA has negotiated with major refiners under the EPA’s Petroleum Refinery Initiative. The settlements take the form of consent decrees filed with the U.S. District Court for the District of Montana (Billings Division) and the
27
U.S. District Court for the District of Kansas. Each consent decree details potential capital improvements, supplemental environmental projects and operational changes that we and NCRA have agreed to implement at the relevant refinery over several years. The consent decrees also required us and NCRA to pay approximately $0.5 million in aggregate civil cash penalties. As of May 31,November 30, 2008, the aggregate capital expenditures for us and NCRA related to these settlements was approximately $24$35 million, and we anticipate spending an additional $8$6 million before December 2011. We do not believe that the settlements will have a material adverse effect on us or NCRA.
The Montana Department of Environmental Quality (MDEQ) issued a Notice of Violation to us dated September 4, 2007 alleging that our refinery in Laurel, Montana exceeded nitrogen oxides (NOx) limits under a refinery operating permit. Following receipt of the letter, we provided certain facts and explanations regarding the matter to the MDEQ. By letter dated June 27, 2008, the MDEQ has proposed a civil penalty of approximately $0.2 million with respect to the incident. We intend to enter into settlement discussions with the MDEQ in an attempt to alleviate the civil penalty. We believe we are currently in compliance with the NOx limits under the permit, and do not believe that the civil penalty will have a material adverse affect on us.
Investments made during the ninethree months ended May 31,November 30, 2008 and 2007, totaled $336.1$89.9 million and $84.2$267.3 million, respectively. As previously discussed,During the three months ended November 30, 2008 and 2007, we invested $76.3 million and $30.3 million, respectively, in Multigrain AG (Multigrain), included in our Ag Business segment. The investment during the current fiscal year was for Multigrain’s increased capital needs resulting from expansion of their operations. Our current ownership interest in Multigrain is 39.35%. Also during the three months ended November 30, 2008, we made an additional $10.0 million capital contribution to Ventura Foods, included in our Processing segment. In September 2007, Agriliance distributed primarily its wholesale crop nutrients and crop protection assets to us and Land O’Lakes, Inc. (Land O’Lakes), respectively, and continues to operate primarily its retail distribution business until further repositioning of that business occurs. During the ninethree months ended May 31, 2008,November 30, 2007, we made a $13.0 million net cash payment to Land O’Lakes in order to maintain equal capital accounts in Agriliance, as previously discussed, and during the third quarter of fiscal 2008, Land O’Lakes paid us $8.3 million for additional assets distributed by Agriliance related to joint venture ownership interests.Agriliance. During the same nine-monththree-month period, our net contributionwe contributed $230.0 million to Agriliance was $255.0 million
34
which supported their working capital requirements, with Land O’Lakes making equal contributions, to Agriliance, primarily for crop nutrient and crop protection product trade payables that were not assumed by us or Land O’Lakes upon the distribution of the crop nutrients and crop protection assets, as well as for Agriliance’s ongoing retail operations. Also
Cash acquisitions of businesses, net of cash received, totaled $40.2 million and $3.9 million during the ninethree months ended MayNovember 30, 2008 and 2007, respectively. As previously discussed, through August 31, 2008, we invested $30.3held a 49% ownership interest in Cofina Financial and accounted for our investment using the equity method of accounting. On September 1, 2008, we purchased the remaining 51% ownership interest for $53.3 million. The purchase price included cash of $48.5 million inand the assumption of certain liabilities of $4.8 million. During the three months ended November 30, 2007, we paid for a joint venture (37.5% ownership)distillers dried grain business included in our Ag Business segment, that acquired production farmlandsegment.
Various cash acquisitions of intangibles were $1.3 million and related operations in Brazil, intended to strengthen$0.9 million for the three months ended November 30, 2008 and 2007, respectively.
Partially offsetting our ability to serve customers around the world. These operations include production of soybeans, corn, cotton and sugarcane, as well as cotton processing at four locations. Another investment was the $6.5 million purchase of additional shares of common stock in US BioEnergy, included in our Processing segment,cash outlays for investing activities during the ninethree months ended May 31,November 30, 2008, compared to $35.3 million during the nine months ended May 31, 2007. An additional investment during the nine months ended May 31, 2007, included $22.2 million for an equity position in a Brazil-based grain handling and merchandising company, Multigrain S.A., an agricultural commodities business headquartered in Sao Paulo, Brazil, in which we have a current ownership interest of 37.5% and is included in our Ag Business segment. This venture, which includes grain storage and export facilities, builds on our South American soybean origination, and helps meet customer needs year-round. We also invested $15.6 million in Horizon Milling G.P. (24% CHS ownership) during the nine months ended May 31, 2007, a joint venture included in our Processing segment, that acquired the Canadian grain-based foodservice and industrial businesses of Smucker Foods of Canada, which includes three flour milling operations and two dry baking mixing facilities in Canada.
During the nine months ended May 31, 2008 and 2007,were changes in notes receivable that resulted in decreasesan increase in cash flows of $62.5$96.3 million. Of this change, $58.8 million of the increase is from Cofina Financial notes receivable and $54.2the balance of $37.5 million respectively. The notes wereis primarily from related party notes receivable at NCRA from its minority owners, Growmark, Inc. and MFA Oil Company. During the ninethree months ended May 31, 2008, $29.8 million of theNovember 30, 2007, changes in notes receivable resulted in a decrease in cash flows resultedof $18.9 million, primarily from a noterelated party notes receivable at NCRA from our finance company joint venture, Cofina Financial. During the nine months ended May 31, 2007, $8.0 million of the decrease in cash flows resulted from a note receivable related to our investment in Multigrain S.A.its minority owners.
Various cash acquisitions of intangibles were $2.5 million and $8.1 million for the nine months ended May 31, 2008 and 2007, respectively.
Business acquisitions of $45.9 million during the nine months ended May 31, 2008, include $24.1 million from the purchase of an energy and convenience store business included in our Energy segment, $15.6 million from a soy-based food products business included in our Processing segment and $6.2 million from a distillers dried grain business included in our Ag Business segment.
PartiallyAlso partially offsetting our cash outlays for investing activities for the ninethree months ended May 31,November 30, 2008 and 2007, were proceeds from the sale of investments of $120.8$16.1 million and $10.9$114.2 million, respectively, which were previously discussed in “Results of Operations”, and primarily include proceeds from the sale of all of our shares ofNYMEX Holdings common stock during fiscal 2009, and our CF common stock. Also partially offsetting cash usagesstock during fiscal 2008. In addition, for the ninethree months ended May 31,November 30, 2008 and 2007, werewe received redemptions of investments
28
totaling $2.2 million and $0.1 million, respectively, and received proceeds from the disposition of property, plant and equipment of $8.1$0.9 million and $9.3 million, respectively, and investments redeemed totaling $35.5 million and $4.4$2.7 million, respectively.
Cash Flows from Financing Activities
Working Capital Financing
We finance our working capital needs through short-term lines of credit with a syndication of domestic and international banks. In May 2006, we renewed and expanded our committed lines of revolving credit to include a five-year revolver in the amount of $1.1 billion, with the ability to expand the facility an additional $200.0 million. In October 2007, we expanded that facility, receiving additional commitments in the amount of $200.0 million from certain lenders under the agreement. The additional commitments increased the total borrowing capacity to $1.3 billion on the facility. On May 31, 2008, interest rates for amountsfacility, with no outstanding balance on this credit facility ranged from 3.04% to 3.15%.November 30, 2008. In February 2008, we increased our short-term borrowing capacity by establishing a $500.0 million committed line of credit with a syndication of banks consisting of a364-day revolver, with no outstanding balance on November 30, 2008. We are currently in the process of renewing our364-day revolver with a planned committed amount outstanding on May 31, 2008.of $300.0 million. In addition to these lines of credit, we have a committed revolving credit facility dedicated to NCRA, with a syndication of banks in the amount of $15.0 million committed.million. In November 2007,December 2008, the line of credit dedicated to NCRA was renewed for an additional year. We
35
also have a committed revolving line of credit dedicated to Provista Renewable Fuels Marketing, LLC (Provista), which expires in November 2009, in the amount of $25.0 million. During the third quarter of fiscal 2008, ourOur wholly-owned subsidiary, CHS Europe S.A., entered into anhas uncommitted $75.0 million linelines of credit facility to finance its normal trade grain transactions, which are collateralized by $0.1$5.5 million of inventories and receivables as of May 31,at November 30, 2008. In June 2008, CHS Europe S.A. entered into an additional uncommitted $60.0 million line of credit facility. On May 31,November 30, 2008, August 31, 20072008 and May 31,November 30, 2007, we had total short-term indebtedness outstanding on these various facilities and other miscellaneous short-term notes payable totaling $405.9$6.5 million, $620.7$106.2 million and $484.5$432.5 million, respectively. Proceeds from our long-term borrowings totaling $600.0of $400.0 million during the ninethree months ended May 31, 2008,November 30, 2007, were used to pay down our five-year revolver and areis explained in further detail below.
During the first quarter of fiscal 2007, we instituted two commercial paper programs, totaling up to $125.0 million, with two banks participating in our five-year revolving credit facility. Terms of our five-year revolving credit facility allow a maximum usage of commercial paper of $200.0 million at any point in time. These commercial paper programs do not increase our committed borrowing capacity in that we are required to have at least an equal amount of undrawn capacity available on our five-year revolving facility as to the amount of commercial paper issued. On MayNovember 30, 2008 and August 31, 2008, we had no commercial paper outstanding, compared to $51.9 million and $44.1$10.9 million outstanding on August 31, 2007November 30, 2007.
Cofina Financial Financing
Cofina Funding, LLC (Cofina Funding), a wholly-owned subsidiary of Cofina Financial, has available credit totaling $403.0 million as of November 30, 2008, under note purchase agreements with various purchasers, through the issuance of notes payable with maturity dates of less than one year. Cofina Financial sells eligible commercial loans receivable it has originated to Cofina Funding, which are then pledged as collateral under the note purchase agreements. The notes payable issued by Cofina Funding bear interest at variable rates priced off of commercial paper rates, with a weighted average interest rate of 3.367% on November 30, 2008. Borrowings by Cofina Funding under the note purchase agreements totaled $256.8 million as of November 30, 2008, of which $119.8 million is shown net of the loans receivable on our Consolidated Balance Sheet, as the transfer of those loans receivable were accounted for as sales when they were surrendered in accordance with SFAS No. 140, “Accounting for Transfers and May 31, 2007, respectively.Servicing of Financial Assets and Extinguishments of Liabilities.”
Cofina Financial also sells loan commitments it has originated to ProPartners Financial (ProPartners) on a recourse basis. The total capacity for commitments under the ProPartners program is $120.0 million. The total outstanding commitments under the program totaled $81.7 million as of November 30, 2008, of which $56.6 million was borrowed under these commitments with interest rates ranging from 2.15% to 2.85%.
29
Cofina Financial also borrows funds under short-term notes issued as part of a surplus funds program. Borrowings under this program are unsecured and bear interest at variable rates (ranging from 2.00% to 2.50% on November 30, 2008) and are due upon demand. Borrowings under these notes totaled $156.8 million on November 30, 2008.
Long-term Debt Financing
We typically finance our long-term capital needs, primarily for the acquisition of property, plant and equipment, with long-term agreements with various insurance companies and banks. In June 1998, we established a long-term credit agreement through cooperative banks. This facility committed $200.0 million of long-term borrowing capacity to us, with repayments through fiscal 2009. The amount outstanding on this credit facility was $55.8$36.9 million, $75.4$49.2 million and $81.2$68.9 million on May 31,November 30, 2008, August 31, 20072008 and May 31,November 30, 2007, respectively. Interest rates on May 31,November 30, 2008 ranged from 3.52%4.05% to 7.13%. Repayments of $19.7$12.3 million and $17.2$6.6 million were made on this facility during the ninethree months ended May 31,November 30, 2008 and 2007, respectively.
Also in June 1998, we completed a private placement offering with several insurance companies for long-term debt in the amount of $225.0 million with an interest rate of 6.81%. Repayments are due in equal annual installments of $37.5 million each, in the years 2008 through 2013. During the three months ended November 30, 2008 and 2007, no repayments were due.
In January 2001, we entered into a note purchase and private shelf agreement with Prudential Insurance Company. The long-term note in the amount of $25.0 million has an interest rate of 7.9% and is due in equal annual installments of approximately $3.6 million in the years 2005 through 2011. A subsequent note for $55.0 million was issued in March 2001, related to the private shelf facility. The $55.0 million note has an interest rate of 7.43% and is due in equal annual installments of approximately $7.9 million in the years 2005 through 2011. Repayments of $11.4 million were made during each ofDuring the ninethree months ended May 31,November 30, 2008 and 2007.2007, no repayments were due on these notes.
In October 2002, we completed a private placement with several insurance companies for long-term debt in the amount of $175.0 million, which was layered into two series. The first series of $115.0 million has an interest rate of 4.96% and is due in equal semi-annual installments of approximately $8.8 million during the years 2007 through 2013. The second series of $60.0 million has an interest rate of 5.60% and is due in equal semi-annual installments of approximately $4.6 million during years 2012 through 2018. Repayments of $17.7$8.8 million were made on the first series notes during each of the ninethree months ended May 31,November 30, 2008 and 2007.
In March 2004, we entered into a note purchase and private shelf agreement with Prudential Capital Group, and in April 2004, we borrowed $30.0 million under this arrangement. One long-term note in the amount of $15.0 million has an interest rate of 4.08% and is due in full at the end of the nine-yearthree-year term in 2010. Another long-term note in the amount of $15.0 million has an interest rate of 4.39% and is due in full at the end of the seven-year term in 2011. In April 2007, we amended our Note Purchase and Private Shelf Agreement with Prudential Investment Management, Inc. and several other participating insurance companies to expand the uncommitted facility from $70.0 million to $150.0 million. We borrowed $50.0 million under
36
the shelf arrangement in February 2008, for which the aggregate long-term notes have an interest rate of 5.78% and are due in equal annual installments of $10.0 million during the years 2014 through 2018.
In September 2004, we entered into a private placement with several insurance companies for long-term debt in the amount of $125.0 million with an interest rate of 5.25%. Repayments are due in equal annual installments of $25.0 million during years 2011 through 2015.
In October 2007, we entered into a private placement with several insurance companies and banks for long-term debt in the amount of $400.0 million with an interest rate of 6.18%. Repayments are due in equal annual installments of $80.0 million during years 2013 through 2017.
In December 2007, we established a ten-year long-term credit agreement through a syndication of cooperative banks in the amount of $150.0 million, with an interest rate of 5.59%. Repayments are due in equal semi-annual installments of $15.0 million each, starting in June 2013 through December 2018.
30
Through NCRA, we had revolving term loans outstanding of $0.8$0.3 million, $3.0$0.5 million and $3.8$2.3 million on May 31,November 30, 2008, August 31, 20072008 and May 31,November 30, 2007, respectively. The interest rate on May 31,November 30, 2008 was 6.48%. Repayments of $2.3$0.3 million and $0.8 million were made during each of the ninethree months ended May 31,November 30, 2008 and 2007.2007, respectively.
On May 31,November 30, 2008, we had total long-term debt outstanding of $1,235.6$1,168.4 million, of which $206.5$187.2 million was bank financing, $1,003.9$957.5 million was private placement debt and $25.2$23.7 million was industrial development revenue bonds, and other notes and contracts payable. The aggregate amount of long-term debt payable presented in the Management’s Discussion and Analysis in our Annual Report onForm 10-K for the year ended August 31, 20072008, has not changed materially during the ninethree months ended May 31, 2008, other than for the $600.0 million of additional long-term borrowings discussed previously, of which repayments will start in fiscal 2013.November 30, 2008. On May 31,November 30, 2007, we had long-term debt outstanding of $690.9$1,071.5 million. Our long-term debt is unsecured except for other notes and contracts in the amount of $7.8$11.3 million; however, restrictive covenants under various agreements have requirements for maintenance of minimum working capital levels and other financial ratios. In addition, NCRA term loans of $0.8$0.3 million are collateralized by NCRA’s investment in CoBank, ACB. We were in compliance with all debt covenants and restrictions as of May 31,November 30, 2008.
In December 2006, NCRA entered into an agreement with the City of McPherson, Kansas related to certain of its ultra-low sulfur fuel assets, with a cost of approximately $325.0 million. The City of McPherson issued $325.0 million of Industrial Revenue Bonds (IRBs) which were transferred to NCRA, as consideration in a financing agreement between the City of McPherson and NCRA, related to the ultra-low sulfur fuel assets. The term of the financing obligation is ten years, at which time NCRA has the option of extending the financing obligation or purchasing the assets for a nominal amount. NCRA has the right at anytime to offset the financing obligation to the City of McPherson against the IRBs. No cash was exchanged in the transaction and none is anticipated to be exchanged in the future. Due to the structure of the agreement, the financing obligation and the IRBs are shown net in our consolidated financial statements. In March 2007, notification was sent to the bond trustees to pay the IRBs down by $324.0 million, at which time the financing obligation to the City of McPherson was offset against the IRBs. The balance of $1.0 million will remain outstanding until the final ten-year maturity.
During the nine months ended May 31, 2008, we borrowed on a long-term basis, $600.0 million, andWe did not have any new long-term borrowings during the ninethree months ended May 31, 2007.November 30, 2008. During the ninethree months ended May 31,November 30, 2007, we borrowed $400.0 million on a long-term basis. During the three months ended November 30, 2008 and 2007, we repaid long-term debt of $54.6$22.1 million and $54.2$18.7 million, respectively.
Other Financing Activities
Distributions to minority owners for the ninethree months ended May 31,November 30, 2008 and 2007, were $55.4$9.6 million and $32.7$38.4 million, respectively, and were primarily related to NCRA.
During the ninethree months ended May 31,November 30, 2008 and 2007, changes in checks and drafts outstanding resulted in a decrease in cash flows of $97.6 million and an increase in cash flows of $10.1 million and $32.3$26.9 million, respectively.
In accordance with the bylaws and by action of the Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each fiscal year. Patronage refunds are calculated based on amounts using financial statement earnings. The cash portion of the patronage
37
distribution is determined annually by the Board of Directors, with the balance issued in the form of capital equity certificates. The patronage earnings from the fiscal year ended August 31, 2007, were2008 are expected to be primarily distributed during the nine months ended May 31, 2008.second fiscal quarter of fiscal 2009. The cash portion of this distribution, deemed by the Board of Directors to be 35%, was $195.0 million. During the nine months ended Mayis expected to be approximately $228.2 million, and is classified as a current liability on our November 30, 2008 and August 31, 2007, we distributed cash patronage of $133.1 million.2008 Consolidated Balance Sheets in dividends and equities payable.
Redemptions of capital equity certificates, approved by the Board of Directors, are divided into two pools, one for non-individuals (primarily member cooperatives) who may participate in an annual pro-rata program for equities held by them, and another for individuals who are eligible for equity redemptions at age 70 or upon
31
death. The amount that each non-individual receives under the pro-rata program in any year is determined by multiplying the dollars available for pro-rata redemptions, if any that year, as determined by the Board of Directors, by a fraction, the numerator of which is the amount of patronage certificates eligible for redemption held by them, and the denominator of which is the sum of the patronage certificates eligible for redemption held by all eligible holders of patronage certificates that are not individuals. In addition to the annual pro-rata program, the Board of Directors approved additional equity redemptions to non-individuals in prior years targeting older capital equity certificates which were redeemed in cash in fiscal 2008 and 2007. In accordance with authorization from the Board of Directors, we expect total redemptions related to the year ended August 31, 2007,2008, that will be distributed in fiscal 2008,2009, to be approximately $136.2$93.8 million, of which $75.9$2.2 million was redeemed in cash during the ninethree months ended May 31,November 30, 2008 compared to $64.9$3.8 million during the ninethree months ended May 31,November 30, 2007. We also redeemed $46.4Included in our redemptions during our second quarter of fiscal 2009, we intend to redeem approximately $50.0 million of capital equity certificates during the nine months ended May 31, 2008, by issuing shares of our 8% Cumulative Redeemable Preferred Stock (Preferred Stock) pursuant to a registration statementRegistration Statement onForm S-1 filed with the Securities and Exchange Commission. During the nine months ended May 31, 2007, we redeemed $35.9 million of capital equity certificates by issuing shares of our Preferred Stock.Commission on December 17, 2008.
Our Preferred Stock is listed on the NASDAQ Global Select Market under the symbol CHSCP. On May 31,November 30, 2008, we had 9,047,780 shares of Preferred Stock outstanding with a total redemption value of approximately $226.2 million, excluding accumulated dividends. Our Preferred Stock accumulates dividends at a rate of 8% per year, which are payable quarterly, and is redeemable at our option after February 1, 2008.option. At this time, we have no current plan or intent to redeem any Preferred Stock. Dividends paid on our preferred stock during the ninethree months ended May 31,November 30, 2008 and 2007, were $11.8$4.5 million and $9.5$3.6 million, respectively.
Off Balance Sheet Financing Arrangements
Lease Commitments:
Our lease commitments presented in Management’s Discussion and Analysis in our Annual Report onForm 10-K for the year ended August 31, 2007,2008, have not materially changed during the ninethree months ended May 31,November 30, 2008.
Guarantees:
We are a guarantor for lines of credit for related companies. As of May 31,November 30, 2008, our bank covenants allowed maximum guarantees of $500.0 million, of which $43.0$15.5 million was outstanding. All outstanding loans with respective creditors are current as of May 31,November 30, 2008.
Debt:
There is no material off balance sheet debt.
Cofina Financial:
The transfer of loans receivable of $119.8 million were accounted for as sales when they were surrendered in accordance with SFAS No.140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”.
Contractual Obligations
Our contractual obligations are presented in Management’s Discussion and Analysis in our Annual Report onForm 10-K for the year ended August 31, 2007. The total obligations2008. Since August 31, 2008, notes payable increased from the consolidation of Cofina Financial. In addition, commodity prices have not materially changeddeclined significantly during the ninethree months ended MayNovember 30, 2008. As a result, grain purchase contracts have declined between 40% and 54% compared to the year ended August 31, 2008. Fertilizer supply contracts have decreased 45% from August 31, 2008, except forprimarily due to the balance sheet changes in payables and long-term debt,recent depreciation of fertilizer prices.
3832
and an approximate 85% increase in grain purchase contracts primarily related to recent appreciation in grain prices.
On September 1, 2007, Agriliance distributed the net assets of their crop nutrients business to us, as previously discussed. We now have additional purchase obligations as of that date related to the crop nutrients business that were previously obligations of Agriliance. On May 31, 2008, we had obligations to purchase approximately 3.4 million tons of fertilizer through 2010. The average price per ton estimated for these purchase obligations was approximately $595.
Critical Accounting Policies
Our Critical Accounting Policies are presented in our Annual Report onForm 10-K for the year ended August 31, 2007.2008. There have been no changes to these policies during the ninethree months ended May 31,November 30, 2008.
Effect of Inflation and Foreign Currency Transactions
InflationWe believe that inflation and foreign currency fluctuations have not had a significant effect on our operations. We have some grain marketing, wheat milling and energy operations that impactsince we conduct essentially all of our exposure to foreign currency fluctuations, but to date, there have been no material effects.business in U.S. dollars.
Recent Accounting Pronouncements
In September 2006,December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting StandardsStandard (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157) which defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial assets and liabilities for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (FSP)157-2, “Effective Date of FASB Statement No. 157.”FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities that are not remeasured at fair value on a recurring basis until fiscal years beginning after November 15, 2008. Any amounts recognized upon adoption of this rule as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. We are in the process of evaluating the effect that the adoption of SFAS No. 157 will have on our consolidated results of operations and financial condition.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value, with changes in fair value reported in earnings, and requires additional disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the effect that the adoption of SFAS No. 159 will have on our consolidated results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” SFAS No. 141R provides companies with principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree, as well as the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS No. 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008. Early adoption of SFAS No. 141R is not permitted. The impact on our consolidated financial statements of adopting SFAS No. 141R will depend on the nature, terms and size of business combinations completed after the effective date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of Accounting Research Bulletin (ARB) No. 51.” This statement amends ARB
39
No. 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon its adoption, noncontrolling interests will be classified as equity in our Consolidated Balance Sheets. Income and comprehensive income attributed to the noncontrolling interest will be included in our Consolidated Statements of Operations and our Consolidated Statements of Equities and Comprehensive Income. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The provisions of this standard must be applied retrospectively upon adoption. We are in the process of evaluating the impact theThe adoption of SFAS No. 160 will have oneffect the presentation of these items in our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of SFAS No. 133.” SFAS No. 161 requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted. We are currently evaluating the impact of the adoption ofAs SFAS No. 161 is only disclosure related, it will not have an impact on our consolidated financial statements.position or results of operations.
In December 2008, the FASB issued FASB Staff Position (FSP)SFAS No. 140-4 and FASB Interpretation (FIN) 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” This FSP amends SFAS No. 140 and FIN 46(R) to require public companies to disclose additional information regarding transfers of financial assets and interests in variable interest entities. It is effective for all reporting periods that end after December 15, 2008. As FSPSFAS No. 140-4 and FIN 46(R)-8 is only disclosure-related, it will not have an impact on our financial position or results of operations.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE SECURITIES LITIGATION REFORM ACT
Any statements contained in this report regarding the outlook for our businesses and their respective markets, such as projections of future performance, statements of our plans and objectives, forecasts of market trends and other matters, are forward-looking statements based on our assumptions and beliefs. Such
33
statements may be identified by such words or phrases as “will likely result,” “are expected to,” “will continue,” “outlook,” “will benefit,” “is anticipated,” “estimate,” “project,” “management believes” or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those discussed in such statements and no assurance can be given that the results in any forward-looking statement will be achieved. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Any forward-looking statement speaks only as of the date on which it is made, and we disclaim any obligation to subsequently revise any forward-looking statement to reflect events or circumstances after such date or to reflect the occurrence of anticipated or unanticipated events.
Certain factors could cause our future results to differ materially from those expressed or implied in any forward-looking statements contained in this report. These factors include the factors discussed in Item 1A of our Annual Report onForm 10-K for the fiscal year ended August 31, 20072008 under the caption “Risk Factors,” the factors discussed below and any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statements. Since it is not possible to foresee all such factors, these factors should not be considered as complete or exhaustive.
| | |
| • | Our revenues and operating results could be adversely affected by changes in commodity prices. |
|
| • | Our operating results could be adversely affected if our members were to do business with others rather than with us. |
|
| • | We participate in highly competitive business markets in which we may not be able to continue to compete successfully. |
|
| • | Changes in federal income tax laws or in our tax status could increase our tax liability and reduce our net income. |
|
| • | We incur significant costs in complying with applicable laws and regulations. Any failure to make the capital investments necessary to comply with these laws and regulations could expose us to financial liability. |
|
| • | Environmental liabilities could adversely affect our results and financial condition. |
40
| | |
| • | Actual or perceived quality, safety or health risks associated with our products could subject us to liability and damage our business and reputation. |
|
| • | Our operations are subject to business interruptions and casualty losses; we do not insure against all potential losses and could be seriously harmed by unexpected liabilities. |
|
| • | Our cooperative structure limits our ability to access equity capital. |
|
| • | Consolidation among the producers of products we purchase and customers for products we sell could adversely affect our revenues and operating results. |
|
| • | If our customers choose alternatives to our refined petroleum products our revenues and profits may decline. |
|
| • | Operating results from our agronomy business could be volatile and are dependent upon certain factors outside of our control. |
|
| • | Technological improvements in agriculture could decrease the demand for our agronomy and energy products. |
|
| • | We operate some of our business through joint ventures in which our rights to control business decisions are limited. |
| |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We did not experience any material changes in market risk exposures for the period ended May 31,November 30, 2008, that affect the quantitative and qualitative disclosures presented in our Annual Report onForm 10-K for
34
the year ended August 31, 2007.2008. As discussed in our Annual Report onForm 10-K, the market prices of our products significantly decreased during the three months ended November 30, 2008, thereby increasing the risk of nonperformance by counterparties.
| |
Item 4T. | Controls and Procedures |
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined inRule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of May 31,November 30, 2008. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of that date, our disclosure controls and procedures were effective.
During the thirdfirst fiscal quarter ended May 31,November 30, 2008, there was no change in our internal control over financial reporting (as defined inRule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
4135
PART II. OTHER INFORMATION
| |
Item 1. | Legal Proceedings |
The Montana Department of Environmental Quality (MDEQ) issued a Notice of Violation to us dated September 4, 2007 alleging that our refinery in Laurel, Montana exceeded nitrogen oxides (NOx) limits under a refinery operating permit. Following receipt of the letter, we provided certain facts and explanations regarding the matter to the MDEQ. By letter dated June 27, 2008, the MDEQ has proposed a civil penalty of approximately $0.2 million with respect to the incident. We intend to enter into settlement discussions with the MDEQ in an attempt to alleviate the civil penalty. We believe we are currently in compliance with the NOx limits under the permit, and do not believe that the civil penalty will have a material adverse affect on us.
There were no material changes to our risk factors during the period covered by this report. See the discussion of risk factors in Item 1A of our Annual Report onForm 10-K for the fiscal year ended August 31, 2007.2008.
| | | | |
Exhibit | | Description |
|
| 10 | .1 | | Fourth Amendment to 2006 Amended and Restated Credit Agreement by and among CHS Inc., CoBank, ACB and the Syndication Parties dated May 1, 2008 |
| 10 | .2 | | First Amendment to Credit Agreement(364-day Revolving Loan) by and between CHS Inc., CoBank, ACB and the Syndication Parties dated as of May 1, 2008 |
| 10 | .3 | | First Amendment to $150 Million Term Loan Credit Agreement by and between CHS Inc., CoBank, ACB and the Syndication Parties dated as of December 12, 2007 |
| 10 | .4 | | $75 Million Uncommitted Demand Facility by and between CHS Europe S.A. and Fortis Bank (Nederland) N.V. dated April 18, 2008 |
| 10 | .5 | | Third Amendment to the CHS Inc. Deferred Compensation Plan |
| 10 | .6 | | $60 Million Uncommitted Trade Finance Facility by and between CHS Europe S.A. and Societe Generale dated June 6, 2008 |
| 31 | .1 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31 | .2 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32 | .1 | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32 | .2 | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | | |
Exhibit | | Description |
|
| 3 | .1 | | Amended and Restated Bylaws (Incorporated by reference to our Registration Statement onForm S-1, filed December 17, 2008) |
| 10 | .1 | | Sixth Amendment to 2003 Amended and Restated Credit Agreement between National Cooperative Refinery Association and the Syndication Parties (Incorporated by reference to our Registration Statement onForm S-1, filed December 17, 2008) |
| 10 | .2 | | Base Indenture dated August 10, 2005 between Cofina Funding, LLC as Issuer and U.S. Bank National Association as Trustee. |
| 10 | .3 | | Amendment No. 1 to Base Indenture dated as of November 18, 2005 by and among Cofina Funding, LLC (the “Issuer”), Cofina Financial, LLC (the “Servicer”), Bank Hapoalim B.M. (the “Funding Agent”) and U.S. Bank National Association, as Trustee. |
| 10 | .4 | | Lockbox Agreement dated August 10, 2005 between Cofina Financial, LLC and M&I Marshall & Isley Bank. |
| 10 | .5 | | Purchase and Sale Agreement dated as of August 10, 2005 between Cofina Funding, LLC, as Purchaser and Cofina Financial, LLC, as Seller.) |
| 10 | .6 | | Custodian Agreement dated August 10, 2005 between Cofina Funding, LLC, as Issuer; U.S. Bank National Association, as Trustee; and U.S. Bank National Association, as Custodian. |
| 10 | .7 | | Servicing Agreement dated as of August 10, 2005 among Cofina Funding, LLC, as Issuer; Cofina Financial, LLC, as Servicer; and U.S. Bank National Association, as Trustee. |
| 10 | .8 | | Omnibus Amendment and Agreement dated as of August 30, 2005 by and among Cofina Funding, LLC (the “Issuer”); Cofina Financial, LLC (the “Servicer”), Cenex Finance Association, Inc. (the “Guarantor”), Bank Hapoalim B.M. (the “Funding Agent”) and U.S. Bank National Association, as Trustee and as Custodian. |
| 10 | .9 | | Series 2005-A Supplement dated as of August 10, 2005 (to Base Indenture dated as of August 10, 2005) between Cofina Funding, LLC, as Issuer, and U.S. Bank National Association, as Trustee. |
| 10 | .10 | | Note Purchase Agreement dated as of August 10, 2005 among Cofina Funding, LLC, as Issuer; Bank Hapoalim B.M. as Funding Agent; and the Financial Institutions from time to time parties thereto. |
| 10 | .11 | | Series 2005-B Supplement dated as of November 18, 2005 (to Base Indenture dated as of August 10, 2005) between Cofina Funding, LLC, as Issuer, and U.S. Bank National Association, as Trustee. |
| 10 | .12 | | Note Purchase Agreement dated as of November 18, 2005 among Cofina Funding, LLC, as Issuer; Venus Funding Corporation, as the Conduit Purchaser; Bank Hapoalim, B.M., as Funding Agent for the Purchasers; and the Financial Institutions from time to time parties thereto. |
36
| | | | |
Exhibit | | Description |
|
| 10 | .13 | | First Amendment to Note Purchase Agreement dated as of November 6, 2008 among Cofina Funding, LLC (the “Issuer”); Venus Funding Corporation (the “Conduit Purchaser”); Bank Hapoalim, B.M., as Funding Agent and as a Committed Purchaser. |
| 10 | .14 | | Omnibus Amendment and Agreement dated as of May 11, 2007 among Cofina Funding, LLC (the “Issuer”); Cofina Financial, LLC (the “Servicer”), Bank Hapoalim B.M. (the “Funding Agent”); and U.S. Bank National Association as Trustee and as Custodian. |
| 10 | .15 | | Omnibus Amendment and Agreement No. 2 dated as of October 1, 2007 among Cofina Funding, LLC (the “Issuer”); Cofina Financial, LLC (the “Servicer”), Bank Hapoalim B.M. (the “Funding Agent”); and U.S. Bank National Association as Trustee and as Custodian. |
| 10 | .16 | | Omnibus Amendment and Agreement No. 3 dated as of May 16, 2008 among Cofina Funding, LLC (the “Issuer”); Cofina Financial, LLC (the “Servicer”), Bank Hapoalim B.M. (the “Funding Agent”); Venus Funding Corporation (the “Conduit Purchaser”) and U.S. Bank National Association as Trustee and as Custodian. |
| 10 | .17 | | Series 2006-A Supplement dated as of February 21, 2006 (to Base Indenture dated as of August 10, 2005) between Cofina Funding, LLC, as Issuer, and U.S. Bank National Association, as Trustee. |
| 10 | .18 | | Note Purchase Agreement dated as of February 21, 2006 among Cofina Funding, LLC, as Issuer; Venus Funding Corporation, as the Conduit Purchaser; Bank Hapoalim, B.M., as Funding Agent for the Purchasers; and the Financial Institutions from time to time parties thereto. |
| 10 | .19 | | First Amendment to Note Purchase Agreement dated as of February 20, 2007 among Cofina Funding, LLC (the “Issuer”); Venus Funding Corporation (the “Conduit Purchaser”); Bank Hapoalim, B.M. (the “Funding Agent”); and the Committed Purchasers party thereto. |
| 10 | .20 | | Second Amendment to Note Purchase Agreement dated as of February 19, 2008 among Cofina Funding, LLC (the “Issuer”); Venus Funding Corporation (the “Conduit Purchaser”); Bank Hapoalim, B.M. (the “Funding Agent”); and the Committed Purchasers party thereto. |
| 10 | .21 | | Series 2006-B Supplement dated as of May 16, 2006 (to Base Indenture dated as of August 10, 2005) between Cofina Funding, LLC, as Issuer, and U.S. Bank National Association, as Trustee. |
| 10 | .22 | | Note Purchase Agreement dated as of May 16, 2006 among Cofina Funding, LLC, as Issuer; Voyager Funding Corporation, as the Conduit Purchaser; Bank Hapoalim, B.M., as Funding Agent for the Purchasers; and the Financial Institutions from time to time parties thereto. |
| 10 | .23 | | First Amendment to Note Purchase Agreement dated as of May 15, 2007 among Cofina Funding, LLC (the “Issuer”); Voyager Funding Corporation (the “Conduit Purchaser”); Bank Hapoalim, B.M. (the “Funding Agent”); and the Committed Purchasers party thereto. |
| 10 | .24 | | Second Amendment to Note Purchase Agreement dated as of May 13, 2008 among Cofina Funding, LLC (the “Issuer”); Voyager Funding Corporation (the “Conduit Purchaser”); Bank Hapoalim, B.M. (the “Funding Agent”); and the Committed Purchasers party thereto. |
| 10 | .25 | | Series 2008-A Supplement dated as of November 21, 2008 (to Base Indenture dated as of August 10, 2005) between Cofina Funding, LLC, as Issuer, and U.S. Bank National Association, as Trustee. |
| 10 | .26 | | Note Purchase Agreement dated as of November 21, 2008 among Cofina Funding, LLC, as Issuer; Victory Receivables Corporation, as the Conduit Purchaser; The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as Funding Agent for the Purchasers; and the Financial Institutions from time to time parties thereto. |
| 10 | .27 | | Amended and Restated Loan Origination and Participation Agreement dated as of October 31, 2006 by and among AgStar Financial Services, PCA d/b/a ProPartners Financial; CHS Inc.; and Cofina Financial, LLC. |
| 10 | .28 | | Amendment dated December 11, 2006 to Amended and Restated Loan Origination and Participation Agreement by and among AgStar Financial Services, PCA d/b/a ProPartners Financial; CHS Inc.; and Cofina Financial, LLC. |
37
| | | | |
Exhibit | | Description |
|
| 10 | .29 | | Amendment dated January 5, 2007 to Amended and Restated Loan Origination and Participation Agreement by and among AgStar Financial Services, PCA d/b/a ProPartners Financial; CHS Inc.; and Cofina Financial, LLC. |
| 10 | .30 | | Amendment dated December 12, 2007 to Amended and Restated Loan Origination and Participation Agreement by and among AgStar Financial Services, PCA d/b/a ProPartners Financial; CHS Inc.; and Cofina Financial, LLC/ |
| 31 | .1 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31 | .2 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32 | .1 | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32 | .2 | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
4238
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.
CHS Inc.
(Registrant)
John Schmitz
Executive Vice President and
Chief Financial Officer
July 10, 2008January 13, 2009
4339