UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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| | | |
þ | | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended November 30, 2017.2019. |
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 number: 001-36079
CHS Inc.
(Exact name of registrantRegistrant as specified in its charter)
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| | |
Minnesota (State or other jurisdiction of incorporation or organization) | | 41-0251095 (I.R.S. Employer Identification Number) |
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5500 Cenex Drive Inver Grove Heights, Minnesota 55077 (Address of principal executive offices, including zip code) | | (651) 355-6000 (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
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| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
8% Cumulative Redeemable Preferred Stock | CHSCP | The Nasdaq Stock Market LLC |
Class B Cumulative Redeemable Preferred Stock, Series 1 | CHSCO | The Nasdaq Stock Market LLC |
Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2 | CHSCN | The Nasdaq Stock Market LLC |
Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3 | CHSCM | The Nasdaq Stock Market LLC |
Class B Cumulative Redeemable Preferred Stock, Series 4 | CHSCL | The Nasdaq Stock Market LLC |
Indicate 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 registrantRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
YES þ NO o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated" "accelerated filer,” “smaller" "smaller reporting company,”" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | Emerging growth company o |
| | (Do not check if a smaller reporting company) | | |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
Indicate the number of shares outstanding of each of the Registrant’sRegistrant's classes of common stock, as of the latest practicable date:
The Registrant has no common stock outstanding.
INDEX
Unless the context otherwise requires, for purposes of this Quarterly Report on Form 10-Q, the words “we,” “us,” “our,” the “Company” and “CHS”"CHS," "we," "us" or "our" refer to CHS Inc., a Minnesota cooperative corporation, and its subsidiaries as of November 30, 2017.2019.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains and our other publicly available documents may contain, and our officers, directors and other representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our businesses, financial condition and results of operations, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue reliance on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements are discussed or identified in our public filings made with the U.S. Securities and Exchange Commission, ("SEC"), including in the "Risk Factors" discussion in Item 1A of our Annual Report on Form 10-K for the year ended August 31, 2017.2019. Any forward-looking statements made by us in this Quarterly Report on Form 10-Q are based only on information currently available to us and speak only as of the date on which the statement is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise, except as required by applicable law.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | November 30, 2017 | | August 31, 2017 | November 30, 2019 | | August 31, 2019 |
| (Dollars in thousands) | (Dollars in thousands) |
ASSETS | | | | | | |
Current assets: | |
| |
|
| |
| |
|
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Cash and cash equivalents | $ | 252,129 |
| | $ | 181,379 |
| $ | 192,761 |
| | $ | 211,179 |
|
Receivables | 2,059,623 |
| | 1,869,632 |
| 2,631,374 |
| | 2,731,209 |
|
Inventories | 3,046,101 |
| | 2,576,585 |
| 3,368,868 |
| | 2,854,288 |
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Derivative assets | 283,256 |
| | 232,017 |
| |
Margin deposits | 206,955 |
| | 206,062 |
| |
Supplier advance payments | 542,139 |
| | 249,234 |
| |
Other current assets | 289,250 |
| | 299,618 |
| 980,904 |
| | 865,919 |
|
Total current assets | 6,679,453 |
| | 5,614,527 |
| 7,173,907 |
| | 6,662,595 |
|
Investments | 3,777,000 |
| | 3,750,993 |
| 3,713,201 |
| | 3,683,996 |
|
Property, plant and equipment | 5,266,408 |
| | 5,356,434 |
| 5,086,628 |
| | 5,088,708 |
|
Other assets | 1,061,562 |
| | 1,251,802 |
| 1,240,555 |
| | 1,012,195 |
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Total assets | $ | 16,784,423 |
| | $ | 15,973,756 |
| $ | 17,214,291 |
| | $ | 16,447,494 |
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LIABILITIES AND EQUITIES | | | | | | |
Current liabilities: | |
| | |
| |
| | |
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Notes payable | $ | 2,480,264 |
| | $ | 1,988,215 |
| $ | 2,170,924 |
| | $ | 2,156,108 |
|
Current portion of long-term debt | 71,022 |
| | 156,345 |
| 28,231 |
| | 39,210 |
|
Customer margin deposits and credit balances | 139,868 |
| | 157,914 |
| |
Customer advance payments | 414,441 |
| | 413,163 |
| |
Accounts payable | 2,380,998 |
| | 1,951,292 |
| 2,447,610 |
| | 1,931,415 |
|
Derivative liabilities | 226,279 |
| | 316,018 |
| |
Accrued expenses | 409,522 |
| | 437,527 |
| 467,765 |
| | 555,323 |
|
Dividends and equities payable | 121,209 |
| | 12,121 |
| |
Other current liabilities | | 1,066,902 |
| | 901,651 |
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Total current liabilities | 6,243,603 |
| | 5,432,595 |
| 6,181,432 |
| | 5,583,707 |
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Long-term debt | 1,936,744 |
| | 2,023,448 |
| 1,725,837 |
| | 1,749,901 |
|
Long-term deferred tax liabilities | 350,841 |
| | 333,221 |
| |
Other liabilities | 315,460 |
| | 278,667 |
| 684,106 |
| | 496,356 |
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Commitments and contingencies (Note 12) |
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| |
|
| |
Commitments and contingencies (Note 13) | |
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| |
|
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Equities: | |
| | |
| |
| | |
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Preferred stock | 2,264,038 |
| | 2,264,038 |
| 2,264,038 |
| | 2,264,038 |
|
Equity certificates | 4,319,840 |
| | 4,341,649 |
| 4,897,197 |
| | 4,988,877 |
|
Accumulated other comprehensive loss | (178,445 | ) | | (183,670 | ) | (228,571 | ) | | (226,933 | ) |
Capital reserves | 1,520,218 |
| | 1,471,217 |
| 1,681,597 |
| | 1,584,158 |
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Total CHS Inc. equities | 7,925,651 |
| | 7,893,234 |
| 8,614,261 |
| | 8,610,140 |
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Noncontrolling interests | 12,124 |
| | 12,591 |
| 8,655 |
| | 7,390 |
|
Total equities | 7,937,775 |
| | 7,905,825 |
| 8,622,916 |
| | 8,617,530 |
|
Total liabilities and equities | $ | 16,784,423 |
| | $ | 15,973,756 |
| $ | 17,214,291 |
| | $ | 16,447,494 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited).
CHS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
| | | | | | | |
| Three Months Ended November 30, |
| 2019 | | 2018 |
| (Dollars in thousands) |
Revenues | $ | 7,621,485 |
| | $ | 8,484,289 |
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Cost of goods sold | 7,295,942 |
| | 8,013,648 |
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Gross profit | 325,543 |
| | 470,641 |
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Marketing, general and administrative expenses | 168,331 |
| | 156,143 |
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Operating earnings | 157,212 |
| | 314,498 |
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Interest expense | 34,971 |
| | 38,908 |
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Other income | (13,498 | ) | | (25,134 | ) |
Equity income from investments | (49,662 | ) | | (66,508 | ) |
Income before income taxes | 185,401 |
| | 367,232 |
|
Income tax expense | 6,664 |
| | 20,117 |
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Net income | 178,737 |
| | 347,115 |
|
Net income (loss) attributable to noncontrolling interests | 855 |
| | (389 | ) |
Net income attributable to CHS Inc. | $ | 177,882 |
| | $ | 347,504 |
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|
| | | | | | | |
| For the Three Months Ended November 30, |
| 2017 | | 2016 |
| (Dollars in thousands) |
Revenues | $ | 8,048,889 |
| | $ | 8,048,250 |
|
Cost of goods sold | 7,735,627 |
| | 7,695,553 |
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Gross profit | 313,262 |
| | 352,697 |
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Marketing, general and administrative | 140,168 |
| | 147,849 |
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Reserve and impairment charges (recoveries), net | (3,787 | ) | | 18,357 |
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Operating earnings (loss) | 176,881 |
| | 186,491 |
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(Gain) loss on investments | (2,819 | ) | | 7,401 |
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Interest expense | 40,702 |
| | 38,265 |
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Other (income) loss | (22,195 | ) | | (44,401 | ) |
Equity (income) loss from investments | (38,362 | ) | | (40,328 | ) |
Income (loss) before income taxes | 199,555 |
| | 225,554 |
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Income tax expense (benefit) | 19,936 |
| | 16,612 |
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Net income (loss) | 179,619 |
| | 208,942 |
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Net income (loss) attributable to noncontrolling interests | (464 | ) | | (208 | ) |
Net income (loss) attributable to CHS Inc. | $ | 180,083 |
| | $ | 209,150 |
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The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited).
CHS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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| | | | | | | |
| For the Three Months Ended November 30, |
| 2017 | | 2016 |
| (Dollars in thousands) |
Net income (loss) | $ | 179,619 |
| | $ | 208,942 |
|
Other comprehensive income (loss), net of tax: | | | |
Postretirement benefit plan activity, net of tax expense (benefit) of $2,620 and $2,011, respectively | 4,196 |
| | 3,239 |
|
Unrealized net gain (loss) on available for sale investments, net of tax expense (benefit) of $404 and $482, respectively | 3,640 |
| | 777 |
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Cash flow hedges, net of tax expense (benefit) of $(2) and $406, respectively | (4 | ) | | 654 |
|
Foreign currency translation adjustment, net of tax expense (benefit) of $(443) and $(209), respectively | (2,607 | ) | | (19,164 | ) |
Other comprehensive income (loss), net of tax | 5,225 |
| | (14,494 | ) |
Comprehensive income (loss) | 184,844 |
| | 194,448 |
|
Less: comprehensive income (loss) attributable to noncontrolling interests | (464 | ) | | (208 | ) |
Comprehensive income (loss) attributable to CHS Inc. | $ | 185,308 |
| | $ | 194,656 |
|
|
| | | | | | | |
| Three Months Ended November 30, |
| 2019 | | 2018 |
| (Dollars in thousands) |
Net income | $ | 178,737 |
| | $ | 347,115 |
|
Other comprehensive (loss) income, net of tax: | | | |
Pension and other postretirement benefits | 5,073 |
| | 2,101 |
|
Cash flow hedges | (5,872 | ) | | (1,307 | ) |
Foreign currency translation adjustment | (839 | ) | | (405 | ) |
Other comprehensive (loss) income, net of tax | (1,638 | ) | | 389 |
|
Comprehensive income | 177,099 |
| | 347,504 |
|
Comprehensive income (loss) attributable to noncontrolling interests | 855 |
| | (389 | ) |
Comprehensive income attributable to CHS Inc. | $ | 176,244 |
| | $ | 347,893 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited).
CHS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | | | | |
| For the Three Months Ended November 30, |
| 2017 | | 2016 |
| (Dollars in thousands) |
Cash flows from operating activities: | |
| | |
|
Net income (loss) | $ | 179,619 |
| | $ | 208,942 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |
| | |
|
Depreciation and amortization | 120,148 |
| | 121,372 |
|
Amortization of deferred major repair costs | 16,418 |
| | 18,302 |
|
Equity (income) loss from investments | (38,362 | ) | | (40,328 | ) |
Distributions from equity investments | 12,514 |
| | 16,393 |
|
Provision for doubtful accounts | (3,601 | ) | | 27,812 |
|
Deferred taxes | 15,044 |
| | 6,199 |
|
Other, net | 2,976 |
| | 6,093 |
|
Changes in operating assets and liabilities, net of acquisitions: | |
| | |
|
Receivables | (80,637 | ) | | (16,555 | ) |
Inventories | (472,180 | ) | | (754,253 | ) |
Derivative assets | 67,365 |
| | 110,306 |
|
Margin deposits | (893 | ) | | (2,623 | ) |
Supplier advance payments | (292,905 | ) | | (133,109 | ) |
Other current assets and other assets | 2,689 |
| | 12,082 |
|
Customer margin deposits and credit balances | (18,045 | ) | | (28,141 | ) |
Customer advance payments | 1,278 |
| | 131,444 |
|
Accounts payable and accrued expenses | 441,071 |
| | 743,427 |
|
Derivative liabilities | (97,329 | ) | | (195,545 | ) |
Other liabilities | 4,376 |
| | 6,599 |
|
Net cash provided by (used in) operating activities | (140,454 | ) | | 238,417 |
|
Cash flows from investing activities: | |
| | |
|
Acquisition of property, plant and equipment | (85,824 | ) | | (116,986 | ) |
Proceeds from disposition of property, plant and equipment | 56,079 |
| | 2,574 |
|
Proceeds from sale of business | 29,457 |
| | — |
|
Expenditures for major repairs | (1,039 | ) | | (239 | ) |
Investments redeemed | 5,195 |
| | — |
|
Changes in CHS Capital notes receivable, net | (69,227 | ) | | (218,296 | ) |
Financing extended to customers | (15,778 | ) | | (14,353 | ) |
Payments from customer financing | 16,520 |
| | 21,523 |
|
Other investing activities, net | 1,847 |
| | (1,245 | ) |
Net cash provided by (used in) investing activities | (62,770 | ) | | (327,022 | ) |
Cash flows from financing activities: | |
| | |
|
Proceeds from lines of credit and long-term borrowings | 8,006,980 |
| | 10,300,476 |
|
Payments on lines of credit, long term-debt and capital lease obligations | (7,657,713 | ) | | (9,936,369 | ) |
Changes in checks and drafts outstanding | (31,417 | ) | | 14,334 |
|
Preferred stock dividends paid | (42,167 | ) | | (41,825 | ) |
Retirements of equities | (3,682 | ) | | (9,528 | ) |
Other financing activities, net | (263 | ) | | 384 |
|
Net cash provided by (used in) financing activities | 271,738 |
| | 327,472 |
|
Effect of exchange rate changes on cash and cash equivalents | 2,236 |
| | (2,696 | ) |
Net increase (decrease) in cash and cash equivalents | 70,750 |
| | 236,171 |
|
Cash and cash equivalents at beginning of period | 181,379 |
| | 279,313 |
|
Cash and cash equivalents at end of period | $ | 252,129 |
| | $ | 515,484 |
|
|
| | | | | | | |
| Three Months Ended November 30, |
| 2019 | | 2018 |
| (Dollars in thousands) |
Cash flows from operating activities: | |
| | |
|
Net income | $ | 178,737 |
| | $ | 347,115 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |
| | |
|
Depreciation and amortization, including amortization of deferred major maintenance | 136,643 |
| | 137,779 |
|
Equity income from investments, net of distributions received | (30,468 | ) | | (47,621 | ) |
Provision for doubtful accounts | 1,775 |
| | 5,009 |
|
Deferred taxes | (3,579 | ) | | 26,555 |
|
Other, net | 8,341 |
| | (3,162 | ) |
Changes in operating assets and liabilities, net of acquisitions: | |
| | |
|
Receivables | 108,495 |
| | (182,767 | ) |
Inventories | (514,580 | ) | | (416,196 | ) |
Accounts payable and accrued expenses | 386,021 |
| | 299,741 |
|
Other, net | (110,684 | ) | | (261,251 | ) |
Net cash provided by (used in) operating activities | 160,701 |
| | (94,798 | ) |
Cash flows from investing activities: | |
| | |
|
Acquisition of property, plant and equipment | (131,808 | ) | | (104,750 | ) |
Proceeds from disposition of property, plant and equipment | 3,015 |
| | 5,752 |
|
Expenditures for major maintenance | (7,691 | ) | | (3,441 | ) |
Changes in CHS Capital notes receivable, net | 15,195 |
| | (126,865 | ) |
Financing extended to customers | (915 | ) | | (3,928 | ) |
Payments from customer financing | 4,209 |
| | 71,137 |
|
Other investing activities, net | 3,046 |
| | 7,319 |
|
Net cash used in investing activities | (114,949 | ) | | (154,776 | ) |
Cash flows from financing activities: | |
| | |
|
Proceeds from notes payable and long-term debt | 5,414,395 |
| | 4,429,276 |
|
Payments on notes payable, long-term debt and capital lease obligations | (5,445,420 | ) | | (4,317,479 | ) |
Preferred stock dividends paid | (42,167 | ) | | (42,167 | ) |
Redemptions of equities | (5,447 | ) | | (24,072 | ) |
Other financing activities, net | 6,757 |
| | 3,503 |
|
Net cash (used in) provided by financing activities | (71,882 | ) | | 49,061 |
|
Effect of exchange rate changes on cash and cash equivalents | (1,153 | ) | | (1,535 | ) |
Decrease in cash and cash equivalents and restricted cash | (27,283 | ) | | (202,048 | ) |
Cash and cash equivalents and restricted cash at beginning of period | 299,675 |
| | 543,940 |
|
Cash and cash equivalents and restricted cash at end of period | $ | 272,392 |
| | $ | 341,892 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited).
CHS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 Organization, Basis of Presentation and Significant Accounting Policies
Basis of Presentation
TheThese unaudited Consolidated Balance Sheet as of November 30, 2017, the Consolidated Statements of Operations for the three months ended November 30, 2017, and 2016, the Consolidated Statements of Comprehensive Income for the three months ended November 30, 2017, and 2016, and the Consolidated Statements of Cash Flows for the three months ended November 30, 2017, and 2016,condensed consolidated financial statements reflect, in the opinion of our management, all normal recurring adjustments necessary for a fair statement of theour financial position, 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.businesses, among other things. Our Consolidated Balance Sheet data as of August 31, 2017, has been derived from our auditedunaudited condensed consolidated financial statements but does not include all disclosures requiredand notes are presented as permitted by accounting principles generally accepted in the United States of America ("U.S. GAAP").
Over the course of fiscal year 2017, we incurred charges relating to a trading partner of ours in Brazil, which entered into bankruptcy-like proceedings under Brazilian law, intangiblerequirements for Quarterly Reports on Form 10-Q and fixed asset impairment charges associated with certain assets meeting the criteria to be classified as held for sale, fixed asset impairment charges due to the cancellation of a capital project at one of our refineries and bad debt and loan loss reserve charges relating to a single large producer borrower. Charges and impairments of this nature, as well as any recoveries related to amounts previously reserved, are included in the Consolidated Statements of Operations in the line item, "Reserve and impairment charges (recoveries), net" for the three months ended November 30, 2017, and 2016. The timing and amounts of these charges and impairments, and any recoveries were determined utilizing facts and circumstances that were present in the respective quarters in which the charge, impairments or recoveries were recorded. Prior year information has been revised to conform to the current year presentation.
The notes to our consolidated financial statements reference our Energy, Ag, Nitrogen Production and Foods reportable segments, as well as our Corporate and Other category, which represents an aggregation of individually immaterial operating segments. The Nitrogen Production reportable segment resulted from our investment in CF Industries Nitrogen, LLC ("CF Nitrogen") in February 2016. The Foods segment resulted from our investment in Ventura Foods, LLC ("Ventura Foods") becoming a significant operating segment in fiscal 2016. See Note 9, Segment Reporting for more information.
Our consolidated financial statements include the accounts of CHS and all of our wholly owned and majority owned subsidiaries. The effects of all significant intercompany transactions have been eliminated.
These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended August 31, 2017,2019, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the "SEC"("SEC").
Certain captions within the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows have been combined within other captions as allowed by SEC financial statement reporting requirements under Regulation S-X. Prior year information has been revised to conform with the current presentation.
Significant Accounting Policies
The following significant accounting policy was updated or changed since our Annual Report on Form 10-K for the year ended August 31, 2019.
Leases
As described in the "Recent Accounting Pronouncements" section, we adopted Accounting Standards Update ("ASU") No. 2016-02, Leases, as amended (collectively "Accounting Standards Codification ("ASC") Topic 842"), on September 1, 2019, using the modified retrospective approach. Our accounting policies and additional disclosures with respect to ASC Topic 842 are included in Note 14, Leases.
Recent Accounting Pronouncements
Except for the recent accounting pronouncements described below, other recent accounting pronouncements are not expected to have a material impact on our condensed consolidated financial statements.
Adopted
In October 2016,We adopted ASC Topic 842 as of September 1, 2019, using the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory (Topic 740). This ASU is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory by requiring an entity to recognize the income tax consequences when a transfer occurs, instead of when an asset is sold to an outside party. This ASU is effective for periods beginning after December 15, 2017; however, early adoption of this ASU is permitted during the first interim period if an entity issues interim financial statements and the amendments in this ASU should be applied on a modified retrospective basis throughapproach. In addition, we used the additional optional transition method and package of practical expedients in the period of adoption without retrospective adjustment to previous periods presented, although we elected not to apply the hindsight practical expedient available under the standard. As a result of using the modified retrospective method, prior periods have not been restated, and a $33.7 million cumulative-effect adjustment directlywas recorded to retained earningsincrease the opening balance of capital reserves as of the beginningadoption date related to recognition of previously deferred gains associated with the periodsale-leaseback of adoption. We elected to early adopt ASU No. 2016-16 duringour primary corporate office building located in Inver Grove Heights, Minnesota. Additionally, adoption of ASC Topic 842 resulted in the first quarterrecognition of fiscal 2018. The adoptionoperating lease right of use assets and associated lease liabilities of $268.4 million and $267.0 million, respectively, as of September 1, 2019. Adoption of ASC Topic 842 did not have a material impact on our consolidatedCondensed Consolidated Statements of Operations or Condensed Consolidated Statements of Cash Flows. Additional information and further disclosures related to our leases and lease-related financial statements.statement amounts is included within Note 14,
Leases.
Not Yet Adopted
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU is intended to improve the financial reporting of hedging relationships to better represent the economic results of an entity’s risk management activities in its financial statements and make certain improvements to simplify the application of the hedge accounting guidance. The amendments in this ASU will make more financial and nonfinancial hedging strategies eligible for hedge accounting, amend the presentation and disclosure requirements and change how entities assess effectiveness. Entities are required to apply this ASU's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This ASU is effective for us beginning September 1, 2019, for our fiscal year 2020 and for interim periods within that fiscal year. We are currently evaluating the impact the adoption will have on our consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Costs and Net Postretirement Benefit Cost. This ASU changes the presentation of net periodic pension cost and net periodic postretirement benefit cost in the income statement. This ASU requires that the service cost component should be included in the same income statement line item as other compensation costs arising from services rendered by the employees during the period. The other components of net periodic benefit cost should be presented in the income statement separately outside of operating income if that subtotal is presented. Additionally, only service cost may be capitalized in assets. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. The guidance on the presentation of the components of net periodic benefit cost in the income statement should be applied retrospectively and the guidance regarding the capitalization of the service cost component in assets should be applied prospectively. The adoption of this amended guidance is not expected to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments within this ASU narrow the existing definition of a business and provide a more robust framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The definition of a business impacts various areas of accounting, including acquisitions, disposals and goodwill. Under the new guidance, fewer acquisitions are expected to be considered businesses. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. Early adoption is permitted and the guidance should be applied prospectively to transactions following the adoption date. The adoption of this amended guidance is not expected to have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. Early adoption is permitted, including in an interim period. The amendments in this ASU should be applied retrospectively to all periods presented. The adoption of this amended guidance is not expected to have a material impact on our consolidated statement of cash flows.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU is intended to reduce existing diversity in practice in how certain cash receipts and payments are presented and classified in the statement of cash flows. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. The adoption of this amended guidance is not expected to have a material impact on our consolidated statement of cash flows.
In June 2016, the FASBFinancial Accounting Standards Board issued ASU No. 2016-13, Financial Instruments - Credit Losses( (ASC Topic 326): : Measurement of Credit Losses on Financial Instruments. The amendments in this ASU introduce a new approach, based on expected losses, to estimate credit losses on certain types of financial instruments. This ASU is intended to provide financial statementusers with more decision-useful information about the expected credit losses associated with most financial assets measured at amortized cost and certain other instruments, including trade and other receivables,
loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. Entities are required to apply the provisions of this ASU’s provisionsASU as a cumulative-effect adjustment to retained earningscapital reserves as of the beginning of the first reporting period in which the guidance is adopted. This ASU is effective for us beginning September1, 2020, for our fiscal year 2021 and for interim periods within that fiscal year. We are currently evaluating the impact the adoption will have on our condensed consolidated financial statements.
Note 2 Revenues
In February 2016,The following table presents revenues recognized under ASC Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"), disaggregated by reportable segment, as well as the FASB issued ASU No. 2016-02, Leases (Topic 842)amount of revenues recognized under ASC Topic 815, Derivatives and Hedging ("ASC Topic 815"), which replacesand other applicable accounting guidance for the existingthree months ended November 30, 2019 and 2018. Other applicable accounting guidance in Accounting Standards Codification ("ASC") 840 -primarily includes revenues recognized under ASC Topic 842, Leases. The amendments, and ASC Topic 470, Debt, that fall outside the scope of ASC Topic 606.
|
| | | | | | | | | | | | | | | | |
| | ASC Topic 606 | | ASC Topic 815 | | Other Guidance | | Total Revenues |
Three Months Ended November 30, 2019: | | (Dollars in thousands) |
Energy | | $ | 1,693,848 |
| | $ | 201,575 |
| | $ | — |
| | $ | 1,895,423 |
|
Ag | | 1,358,626 |
| | 4,316,087 |
| | 37,142 |
| | 5,711,855 |
|
Corporate and Other | | 5,541 |
| | — |
| | 8,666 |
| | 14,207 |
|
Total revenues | | $ | 3,058,015 |
| | $ | 4,517,662 |
| | $ | 45,808 |
| | $ | 7,621,485 |
|
| | | | | | | | |
Three Months Ended November 30, 2018: | | | | | | | | |
Energy | | $ | 1,940,190 |
| | $ | 221,098 |
| | $ | — |
| | $ | 2,161,288 |
|
Ag | | 1,355,826 |
| | 4,913,428 |
| | 36,143 |
| | 6,305,397 |
|
Corporate and Other | | 5,234 |
| | — |
| | 12,370 |
| | 17,604 |
|
Total revenues | | $ | 3,301,250 |
| | $ | 5,134,526 |
| | $ | 48,513 |
| | $ | 8,484,289 |
|
Less than 1% of revenues accounted for under ASC Topic 606 included within this ASU introducethe table above are recorded over time; these revenues are primarily related to service contracts.
Contract Assets and Contract Liabilities
Contract assets relate to unbilled amounts arising from goods that have already been transferred to the customer where the right to payment is not conditional upon the passage of time. This results in recognition of an asset, as the amount of revenue recognized at a lessee model requiringcertain point-in-time exceeds the amount billed to the customer. Contract assets are recorded in receivables within our Condensed Consolidated Balance Sheets and were not material as of November 30, 2019, and August 31, 2019.
Contract liabilities relate to advance payments from customers for goods and services that we have yet to provide. Contract liabilities of $205.0 million and $207.5 million as of November 30, 2019, and August 31, 2019, respectively, are recorded within other current liabilities on our Condensed Consolidated Balance Sheets. For the three months ended November 30, 2019 and 2018, we recognized revenues of $92.0 million and $95.2 million, respectively, which were included in the other current liabilities balance at the beginning of the period.
Note 3 Receivables
|
| | | | | | | |
| November 30, 2019 | | August 31, 2019 |
| (Dollars in thousands) |
Trade accounts receivable | $ | 1,706,564 |
| | $ | 1,803,284 |
|
CHS Capital short-term notes receivable | 606,605 |
| | 592,909 |
|
Other | 497,880 |
| | 511,821 |
|
Gross receivables | 2,811,049 |
| | 2,908,014 |
|
Less: allowances and reserves | 179,675 |
| | 176,805 |
|
Total receivables | $ | 2,631,374 |
| | $ | 2,731,209 |
|
entities to recognize assets and liabilities for most leases, but continue recognizing the associated expenses in a manner similar to existing accounting guidance. This ASU does not make fundamental changes to existing lessor accounting; however, it does modify what constitutes a sales-type or direct financing lease and the related accounting, and aligns a numberReceivables are comprised of the underlying principles with those of the new revenue standard, ASU No. 2014-09. The guidance also eliminates existing real estate-specific provisions and requires expanded qualitative and quantitative disclosures. This ASU is effective for us beginning September 1, 2019, for our fiscal year 2020 and for interim periods within that fiscal year, and the ASU’s provisions are required to be applied using a modified retrospective approach. We have initiated a preliminary assessment of the new lease standard, including the implementation of a new lease software that will improve the collection, maintenance, and aggregation of lease data necessary for the reporting and disclosure requirements under the new lease standard. One of the more significant changes arising from the new lease standard relates to a number of operating lease agreements not currently recognized on our Consolidated Balance Sheets. The new lease guidance will require these lease agreements to be recognized on the Consolidated Balance Sheets as a right-of-use asset along with a corresponding lease liability. As a result, our preliminary assessment indicates the provisions of ASU No. 2016-02 are expected to have a material impact on our Consolidated Balance Sheets. Although we expect the new lease guidance to have a material impact on our Consolidated Balance Sheets, we are continuing to evaluate the extent of potential impact the new lease guidance will have on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The amendments within this ASU, as well as within additional clarifying ASUs issued by the FASB, provide a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new revenue recognition guidance includes a five-step model for the recognition of revenue, including (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue when (or as) an entity satisfies a performance obligation. The new revenue recognition guidance also specifies the accounting for certain costs to obtain or fulfill a contract with a customer and requires expanded disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We have completed an initial assessment of our revenue streams and do not believe that the new revenue recognition guidance will have a material impact on our consolidated financial statements. Certain revenue streams are expected to fall within the scope of the new revenue recognition guidance; however, a substantial portion of our revenue falls outside the scope of the new revenue recognition guidance and will continue to follow existing guidance, primarily ASC 815, Derivatives and Hedging. We are continuing to evaluate the impact of the new revenue recognition guidance, including potential changes to business practices and/or contractual terms for in scope revenue streams, as well as the scope of expanded disclosures related to revenue. We expect to complete our final evaluation and implementation of the new revenue recognition guidance throughout fiscal 2018, which will allow us to adopt ASU No. 2014-09 and the related ASUs on September 1, 2018, in the first quarter of fiscal 2019, using the modified retrospective method.
Note 2 Receivables
|
| | | | | | | |
| November 30, 2017 | | August 31, 2017 |
| (Dollars in thousands) |
Trade accounts receivable | $ | 1,329,887 |
| | $ | 1,234,500 |
|
CHS Capital notes receivable | 184,301 |
| | 164,807 |
|
Deferred purchase price receivable | 216,996 |
| | 202,947 |
|
Other | 556,275 |
| | 493,104 |
|
| 2,287,459 |
| | 2,095,358 |
|
Less allowances and reserves | 227,836 |
| | 225,726 |
|
Total receivables | $ | 2,059,623 |
| | $ | 1,869,632 |
|
Trade Accounts
Trade accounts receivable are initially recorded at a selling price, which approximates fair value, upon the sale of goods or services to customers. Subsequently, trade accounts receivable, are carried at net realizable value, which includes an allowance for estimated uncollectible amounts. We calculate this allowance based onshort-term notes receivable in our history of write-offs, level of past due accounts, and our relationships with, and the economic status of, our customers.
CHS Capital
Notes Receivable
wholly-owned subsidiary, CHS Capital, LLC ("CHS Capital"), our wholly-owned subsidiary, has short-term notes receivable from commercial and producer borrowers. The short-term notes receivable have maturity terms of 12 months orother receivables, less and are reported at their outstanding unpaid principal balances, adjustedan allowance for the allowance of loan losses, as CHS Capital has the intent and ability to hold the applicable loans for the foreseeable future or until maturity or pay-off. The carrying value of CHS Capital short-term notes receivable approximates fair value, given the notes' short duration and the use of market pricing adjusted for risk.doubtful accounts.
The notesNotes receivable from commercial borrowers are collateralized by various combinations of mortgages, personal property, accounts and notes receivable, inventories and assignments of capital stock from certain regional cooperative’s capital stock.cooperatives. These loans are primarily originated in various states, primarily in the statesUpper Midwest region of the United States, the most significant of which include Minnesota, WisconsinNorth Dakota and NorthSouth Dakota. CHS Capital also has loans receivable from producer borrowers whichthat are collateralized by various combinations of growing crops, livestock, inventories, accounts receivable, personal property and supplemental mortgages and are originated in the same states as the commercial notes with the addition of Michigan.notes.
In addition to the short-term balances included in the table above, CHS Capital had long-term notes receivable, with durations of generally not more than 10 years, totaling $14.8$164.3 million and $17.0$180.0 million at November 30, 2017,2019, and August 31, 2017,2019, respectively. The long-term notes receivable are included in Otherother assets on our Condensed Consolidated Balance Sheets. As of November 30, 2017,2019, and August 31, 2017,2019, the commercial notes represented 32%45% and 17%41%, respectively, and the producer notes represented 68%55% and 83%59%, respectively, of the total CHS Capital notes receivable. As of November 30, 2017, and August 31, 2017, CHS Capital had no third-party borrowers that accounted for more than 10% of the total CHS Capital notes receivable outstanding.
CHS Capital has commitments to extend credit to customers if there are no violations of any contractually established conditions. As of November 30, 2017,2019, CHS Capital's customers havehad additional available credit of $529.4$538.8 million.
Allowance No significant troubled debt restructuring activity occurred and no third-party customer or borrower accounted for Loan Losses and Impairments
CHS Capital maintains an allowance for loan losses which is the estimate of potential incurred losses inherent in the loans receivable portfolio. In accordance with FASB ASC 450-20, Accounting for Loss Contingencies, and ASC 310-10, Accounting by Creditors for Impairment of a Loan, the allowance for loan losses consists of general and specific components. The general component is based on historical loss experience and qualitative factors addressing operational risks and industry trends. The specific component relates to loans receivable that are classified as impaired. Additions to the allowance for loan losses are reflected within reserve and impairment charges (recoveries), net in the Consolidated Statements of Operations. The portion of loans receivable deemed uncollectible is charged off against the allowance. Recoveries of previously charged off amounts increase the allowance for loan losses. The amount of CHS Capital notes that were past due was not significant at any reporting date presented.
Interest Income
Interest income is recognized on the accrual basis using a method that computes simple interest daily. The accrual of interest on commercial loans receivable is discontinued at the time the commercial loan receivable is 90 days past due unless the credit is well-collateralized and in process of collection. Past due status is based on contractual termsmore than 10% of the loan. Producer loans receivable are placed in non-accrual status based on estimates and analysis due to the annual debt service terms inherent to CHS Capital’s producer loans. In all cases, loans are placed in nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful.
Sale of Receivables
Receivables Securitization Facility
On July 18, 2017, we amended an existingtotal receivables and loans securitization facility (“Securitization Facility”) with certain unaffiliated financial institutions (the "Purchasers"). Under the Securitization Facility, we and certain of our subsidiaries sell trade accounts and notes receivable (the “Receivables”) to Cofina Funding, LLC (“Cofina”), a wholly-owned bankruptcy-remote indirect subsidiary of CHS. Cofina in turn sells the purchased Receivables in their entirety to the Purchasers. Prior to amending the Securitization Facility in July 2017, the transfer of Receivables was accounted for as a secured borrowing. Under the terms of the amended Securitization Facility CHS accounts for Receivables sold under the Facility as a sale of financial
assets pursuant to ASC 860, Transfers and Servicing and derecognizes the sold Receivables from its Consolidated Balance Sheets.
Sales of Receivables by Cofina occur continuously and are settled with the Purchasers on a monthly basis. The proceeds from the sale of these Receivables comprise a combination of cash and a deferred purchase price (“DPP”) receivable. The DPP receivable is ultimately realized by CHS following the collection of the underlying Receivables sold to the Purchasers. The amount available under the Securitization Facility fluctuates over time based on the total amount of eligible Receivables generated during the normal course of business, with maximum availability of $700.0 million. As of November 30, 2017, the total availability under the Securitization Facility was $700.0 million, of which all has been utilized. The Securitization Facility terminates on July 17, 2018, but may be extended. We use the proceeds from the sale of Receivables under the Securitization Facility for general corporate purposes.
We have no retained interests in the transferred Receivables, other than our right to the DPP receivable and collection and administrative services. The DPP receivable is recorded at fair value within the Consolidated Balance Sheets, including a current portion within receivables and a long-term portion within other assets. Subsequent cash receipts related to the DPP receivable have been reflected as investing activities and additional sales of Receivables under the Securitization Facility are reflected in operating or investing activities, based on the underlying Receivable, in our Consolidated Statements of Cash Flows. Losses incurred on the sale of Receivables are recorded in interest expense and fees received related to the servicing of the Receivables are recorded in other income (loss) in the Consolidated Statements of Operations. We consider the fees received adequate compensation for services rendered, and accordingly have recorded no servicing asset or liability.
The fair value of the DPP receivable is determined by discounting the expected cash flows to be received based on unobservable inputs consisting of the face amount of the Receivables adjusted for anticipated credit losses. The DPP receivable is being measured like an investment in debt securities classified as available for sale, with changes to the fair value being recorded in other comprehensive income in accordance with ASC 320 - Investments - debt and equity securities. Our risk of loss following the transfer of Receivables under the Securitization Facility is limited to the DPP receivable outstanding and any short-falls in collections for specified non-credit related reasons after sale. Payment of the DPP receivable is not subject to significant risks other than delinquencies and credit losses on accounts receivable sold under the Securitization Facility.
The following table is a reconciliation of the beginning and ending balances of the DPP receivable for the quarter ended November 30, 2017:
|
| | | | |
| | (Dollars in thousands) |
Balance - as of August 31, 2017 | | $ | 548,602 |
|
Monthly settlements, net | | (27,100 | ) |
Balance - as of November 30, 2017 | | $ | 521,502 |
|
There was no DPP receivablebalance as of November 30, 2016, and therefore, no comparative period is included in the table above.2019, or August 31, 2019.
Other Receivables
Other receivables are comprised of certain other amounts recorded in the normal course of business, including receivables related to valued added taxes and pre-crop financing, primarily to Brazilian farmers, to finance a portion of supplier production costs. We do not bear any of the costs or operational risks associated with the related growing crops. The financing is largely collateralized by future crops and physical assets of the suppliers, carries a local market interest rate and settles when the farmer’s crop is harvested and sold.
| | | November 30, 2017 | | August 31, 2017 | November 30, 2019 | | August 31, 2019 |
| (Dollars in thousands) | (Dollars in thousands) |
Grain and oilseed | $ | 1,545,313 |
| | $ | 1,145,285 |
| $ | 1,451,865 |
| | $ | 1,024,645 |
|
Energy | 720,938 |
| | 755,886 |
| 721,887 |
| | 717,378 |
|
Crop nutrients | 222,053 |
| | 248,699 |
| |
Feed and farm supplies | 483,805 |
| | 353,130 |
| |
Agronomy | | 1,051,970 |
| | 954,037 |
|
Processed grain and oilseed | 54,916 |
| | 49,723 |
| 102,483 |
| | 109,900 |
|
Other | 19,076 |
| | 23,862 |
| 40,663 |
| | 48,328 |
|
Total inventories | $ | 3,046,101 |
| | $ | 2,576,585 |
| $ | 3,368,868 |
| | $ | 2,854,288 |
|
As of November 30, 2017,2019, we valued approximately 15%14% of inventories, primarily related tocrude oil and refined fuels within our Energy segment, using the lower of cost, determined on the LIFO method, or net realizable value (19%(16% as of August 31, 2017)2019). If the FIFO method of accounting had been used, inventories would have been higher than the reported amount by $99.0$247.2 million and $186.2$215.0 million as of November 30, 2017,2019, and August 31, 2017,2019, respectively. An actualActual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management's estimates of expected year-end inventory levels and are subject to the final year-end LIFO inventory valuation.
Note 45 Investments
| | | November 30, 2017 | | August 31, 2017 | November 30, 2019 | | August 31, 2019 |
| (Dollars in thousands) | (Dollars in thousands) |
Equity method investments: | | | | | | |
CF Industries Nitrogen, LLC | $ | 2,776,412 |
| | $ | 2,756,076 |
| $ | 2,743,776 |
| | $ | 2,708,942 |
|
Ventura Foods, LLC | 350,602 |
| | 347,016 |
| 378,463 |
| | 374,516 |
|
Ardent Mills, LLC | 209,926 |
| | 206,529 |
| 209,956 |
| | 209,027 |
|
TEMCO, LLC | 39,235 |
| | 41,323 |
| |
Other equity method investments | 265,621 |
| | 268,444 |
| 256,042 |
| | 267,247 |
|
Cost method investments | 135,204 |
| | 131,605 |
| |
Other investments | | 124,964 |
| | 124,264 |
|
Total investments | $ | 3,777,000 |
| | $ | 3,750,993 |
| $ | 3,713,201 |
| | $ | 3,683,996 |
|
Equity Method Investments
Joint ventures and other investments, in which we have significant ownership and influence, but not control, are accounted for in our condensed consolidated financial statements using the equity method of accounting. Our primary equity method investments are described below. In addition to recognition of our share of income from our equity method investments, our equity method investments are evaluated for indicators of other-than-temporary impairment on an ongoing basis in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). Other investments consist primarily of investments in cooperatives without readily determinable fair values and are generally measured at cost, unless an impairment or other observable market price change occurs requiring an adjustment.
On February 1, 2016, we invested $2.8CF Nitrogen
We have a $2.7 billion investment in CF Industries Nitrogen, commencing ourLLC ("CF Nitrogen"), a strategic venture with CF Industries Holdings, Inc. ("CF Industries"). The investment consists of an 11.4%approximate 10% membership interest (based on product tons) in CF Nitrogen. We account for this investment using the hypothetical liquidation at book value method, recognizing our share of the earnings and losses of CF Nitrogen based upon our contractual claims on the entity's net assets pursuant to the liquidation provisions of the CF Nitrogen's limited liability company agreement,Nitrogen Limited Liability Company Agreement, adjusted for the semi-annual cash distributions we receive as a result of our membership interest in CF Nitrogen. For the three months ended November 30, 2017,2019 and 2016, this amount was $20.32018, equity earnings were $34.8 million and $14.7$40.9 million, respectively. These amountsrespectively, and are included as equity income from investments in our Nitrogen Production segment.
Ventura Foods and Ardent Mills
We have a 50% interest in Ventura Foods, LLC ("Ventura Foods"), which is a joint venture whichwith Wilsey Foods, Inc., a majority-owned subsidiary of MK USA Holdings, Inc., that produces and distributes primarily vegetable oil-based products, and which constitutes our Foods segment. We account for Ventura Foods as an equity method investment, and as of November 30, 2017, our carrying value of Ventura Foods exceeded our share of its equity by $12.9 million, which represents equity method goodwill. The earnings are reported as equity income from investments in our Foods segment.
Weproducts. Additionally, we have a 12% interest in Ardent Mills, LLC ("Ardent Mills"), which is a joint venture with Cargill Incorporated ("Cargill") and ConAgra Foods, Inc., whichand combines the North American flour milling operations of the three parent companies. We account for Ventura Foods and Ardent Mills as an equity method investmentinvestments, and our share of the results of these equity methods investments are included in Corporate and Other.
TEMCO, LLC ("TEMCO") is owned and governed by Cargill (50%) and CHS (50%). Both owners have committed to sell all of their feedgrains, wheat, oilseeds and by-product origination that are tributary to the Pacific Northwest, United States ("Pacific Northwest") to TEMCO and to use TEMCO as their exclusive export-marketing vehicleThe following table provides aggregate summarized unaudited financial information for such grains exported through the Pacific Northwest through January 2037. We account for TEMCO as anour equity method investment includedinvestments in our Ag segment.
Note 5 GoodwillCF Nitrogen, Ventura Foods and Other Intangible Assets
Goodwill of $153.7 million and $154.1 million as of November 30, 2017, and August 31, 2017, respectively, is included in other assets on our Consolidated Balance Sheets. Changes in the net carrying amount of goodwillArdent Mills for the three months ended November 30, 2017, by segment, are as follows:2019 and 2018:
|
| | | | | | | | | | | | | | | |
| Energy | | Ag | | Corporate and Other | | Total |
| (Dollars in thousands) |
Balances, August 31, 2017 | $ | 552 |
| | $ | 142,929 |
| | $ | 10,574 |
| | $ | 154,055 |
|
Effect of foreign currency translation adjustments | — |
| | (389 | ) | | — |
| | (389 | ) |
Balances, November 30, 2017 | $ | 552 |
| | $ | 142,540 |
| | $ | 10,574 |
| | $ | 153,666 |
|
|
| | | | | | | |
| Three Months Ended November 30, |
| 2019 | | 2018 |
| (Dollars in thousands) |
Net sales | $ | 2,098,284 |
| | $ | 2,241,539 |
|
Gross profit | 346,027 |
| | 339,937 |
|
Net earnings | 214,004 |
| | 272,736 |
|
Earnings attributable to CHS Inc. | 53,462 |
| | 67,668 |
|
Our investments in other equity method investees are not significant in relation to our condensed consolidated financial statements, either individually or in the aggregate.
No goodwill has been allocated to our Nitrogen Production or Foods segments, which consist of investments accounted for under the equity method.
Intangible assets subject to amortization primarily include customer lists, trademarks and non-compete agreements, and are amortized over their respective useful lives (ranging from 2 to 30 years). Information regarding intangible assets that are included in other assets on our Consolidated Balance Sheets is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| November 30, 2017 | | August 31, 2017 |
| Carrying Amount | | Accumulated Amortization | | Net | | Carrying Amount | | Accumulated Amortization | | Net |
| (Dollars in thousands) |
Customer lists | $ | 42,391 |
| | $ | (11,695 | ) | | $ | 30,696 |
| | $ | 46,180 |
| | $ | (14,695 | ) | | $ | 31,485 |
|
Trademarks and other intangible assets | 6,536 |
| | (4,752 | ) | | 1,784 |
| | 23,623 |
| | (21,778 | ) | | 1,845 |
|
Total intangible assets | $ | 48,927 |
| | $ | (16,447 | ) | | $ | 32,480 |
| | $ | 69,803 |
| | $ | (36,473 | ) | | $ | 33,330 |
|
Total amortization expense for intangible assets during the three months ended November 30, 2017, and 2016, was $0.9 million and $1.3 million, respectively. The estimated annual amortization expense related to intangible assets subject to amortization for the next five years is as follows:
|
| | | |
| (Dollars in thousands) |
Year 1 | $ | 3,395 |
|
Year 2 | 3,373 |
|
Year 3 | 3,095 |
|
Year 4 | 3,037 |
|
Year 5 | 2,755 |
|
Note 6 Notes Payable and Long-Term Debt
Our notes payable and long-term debt are subject to various restrictive requirements for maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with our debt covenants as of November 30, 2017.2019. The table below summarizes our notes payable as of November 30, 2019, and August 31, 2019.
| |
| November 30, 2017 |
| August 31, 2017 | November 30, 2019 |
| August 31, 2019 |
| (Dollars in thousands) | (Dollars in thousands) |
Notes payable | $ | 2,182,243 |
|
| $ | 1,695,423 |
| $ | 1,357,062 |
|
| $ | 1,330,550 |
|
CHS Capital notes payable | 298,021 |
|
| 292,792 |
| 813,862 |
|
| 825,558 |
|
Total notes payable | $ | 2,480,264 |
|
| $ | 1,988,215 |
| $ | 2,170,924 |
|
| $ | 2,156,108 |
|
As of November 30, 2017,2019, our primary line of credit was a five-year unsecured revolving credit facility with a syndicate of domestic and international banks. The credit facility provides a committed amount of $3.0$2.75 billion whichthat expires in September 2020. Theon July 16, 2024. As of November 30, 2019, and August 31, 2019, the outstanding balance on this facility was $1.1 billion$245.0 million and $480.0$335.0 million, respectively. Additionally, on September 30, 2019, CHS Capital entered into a credit agreement with a revolving note. Under this agreement, CHS Capital has available capacity of $150.0 million of which no amount was outstanding as of November 30, 2017,2019.
We have a receivables and loans securitization facility ("Securitization Facility") with certain unaffiliated financial institutions ("Purchasers"). Under the Securitization Facility, we and certain of our subsidiaries ("Originators") sell trade accounts and notes receivable ("Receivables") to Cofina Funding, LLC ("Cofina"), a wholly-owned bankruptcy-remote indirect subsidiary of CHS. Cofina in turn transfers the Receivables to the Purchasers, and this arrangement is accounted for as a secured borrowing. We use the proceeds from the sale of Receivables under the Securitization Facility for general corporate purposes and settlements are made on a monthly basis. The Securitization Facility terminates on June 26, 2020, but may be extended.
On September 6, 2019, we renewed our repurchase facility ("Repurchase Facility") related to the Securitization Facility. Under the Repurchase Facility, we can borrow up to $150.0 million, collateralized by a subordinated note issued by Cofina in favor of the Originators and representing a portion of the outstanding balance of the Receivables sold by the Originators to Cofina under the Securitization Facility. As of November 30, 2019, and August 31, 2017, respectively.2019, the outstanding balance under the Repurchase Facility was $150.0 million.
Interest expense for the three months ended November 30, 2017,2019 and 2016,2018, was $40.7$35.0 million and $38.3$38.9 million, respectively, net of capitalized interest of $1.8$2.8 million and $1.6$2.1 million, respectively.
Note 7 Equities
Changes in Equities
Changes in equities for the three months ended November 30, 2017,2019 and 2018, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity Certificates | | | | Accumulated Other Comprehensive Loss | | | | | | |
| Capital Equity Certificates | | Nonpatronage Equity Certificates | | Nonqualified Equity Certificates | | Preferred Stock | | | Capital Reserves | | Noncontrolling Interests | | Total Equities |
| (Dollars in thousands) |
Balance, August 31, 2017 | $ | 3,906,426 |
| | $ | 29,836 |
| | $ | 405,387 |
| | $ | 2,264,038 |
| | $ | (183,670 | ) | | $ | 1,471,217 |
| | $ | 12,591 |
| | $ | 7,905,825 |
|
Reversal of prior year redemption estimates | 1,561 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,561 |
|
Redemptions of equities | (1,449 | ) | | (53 | ) | | (59 | ) | | — |
| | — |
| | — |
| | — |
| | (1,561 | ) |
Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (84,334 | ) | | — |
| | (84,334 | ) |
Other, net | (1,498 | ) | | (66 | ) | | (344 | ) | | — |
| | — |
| | 3,954 |
| | (3 | ) | | 2,043 |
|
Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 180,083 |
| | (464 | ) | | 179,619 |
|
Other comprehensive income (loss), net of tax | — |
| | — |
| | — |
| | — |
| | 5,225 |
| | — |
| | — |
| | 5,225 |
|
Estimated 2018 cash patronage refunds | — |
| | — |
| | — |
| | — |
| | — |
| | (50,702 | ) | | — |
| | (50,702 | ) |
Estimated 2018 equity redemptions | (19,901 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (19,901 | ) |
Balance, November 30, 2017 | $ | 3,885,139 |
| | $ | 29,717 |
| | $ | 404,984 |
| | $ | 2,264,038 |
| | $ | (178,445 | ) | | $ | 1,520,218 |
| | $ | 12,124 |
| | $ | 7,937,775 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity Certificates | | | | Accumulated Other Comprehensive Loss | | | | | | |
| Capital Equity Certificates | | Nonpatronage Equity Certificates | | Nonqualified Equity Certificates | | Preferred Stock | | | Capital Reserves | | Noncontrolling Interests | | Total Equities |
| (Dollars in thousands) |
Balance as of August 31, 2019 | $ | 3,753,493 |
| | $ | 29,074 |
| | $ | 1,206,310 |
| | $ | 2,264,038 |
| | $ | (226,933 | ) | | $ | 1,584,158 |
| | $ | 7,390 |
| | $ | 8,617,530 |
|
Reversal of prior year redemption estimates | 5,447 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,447 |
|
Redemptions of equities | (4,721 | ) | | (54 | ) | | (672 | ) | | — |
| | — |
| | — |
| | — |
| | (5,447 | ) |
Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (84,334 | ) | | — |
| | (84,334 | ) |
ASC Topic 842 cumulative-effect adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | 33,707 |
| | — |
| | 33,707 |
|
Other, net | (8 | ) | | — |
| | (39 | ) | | — |
| | — |
| | (1,312 | ) | | 410 |
| | (949 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 177,882 |
| | 855 |
| | 178,737 |
|
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (1,638 | ) | | — |
| | — |
| | (1,638 | ) |
Estimated 2020 cash patronage refunds | — |
| | — |
| | — |
| | — |
| | — |
| | (28,504 | ) | | — |
| | (28,504 | ) |
Estimated 2020 equity redemptions | (91,633 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (91,633 | ) |
Balance as of November 30, 2019 | $ | 3,662,578 |
| | $ | 29,020 |
| | $ | 1,205,599 |
| | $ | 2,264,038 |
| | $ | (228,571 | ) | | $ | 1,681,597 |
| | $ | 8,655 |
| | $ | 8,622,916 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity Certificates | | | | Accumulated Other Comprehensive Loss | | | | | | |
| Capital Equity Certificates | | Nonpatronage Equity Certificates | | Nonqualified Equity Certificates | | Preferred Stock | | | Capital Reserves | | Noncontrolling Interests | | Total Equities |
| (Dollars in thousands) |
Balance as of August 31, 2018 | $ | 3,837,580 |
| | $ | 29,498 |
| | $ | 742,378 |
| | $ | 2,264,038 |
| | $ | (199,915 | ) | | $ | 1,482,003 |
| | $ | 9,446 |
| | $ | 8,165,028 |
|
Reversal of prior year redemption estimates | 24,072 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 24,072 |
|
Redemptions of equities | (22,004 | ) | | (183 | ) | | (1,885 | ) | | — |
| | — |
| | — |
| | — |
| | (24,072 | ) |
Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (84,334 | ) | | — |
| | (84,334 | ) |
Reclassification of unrealized (gain) loss on investments | — |
| | — |
| | — |
| | — |
| | (4,706 | ) | | 4,706 |
| | — |
| | — |
|
Other, net | (409 | ) | | — |
| | (26 | ) | | — |
| | — |
| | 3,436 |
| | 318 |
| | 3,319 |
|
Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 347,504 |
| | (389 | ) | | 347,115 |
|
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | 389 |
| | — |
| | — |
| | 389 |
|
Estimated 2019 cash patronage refunds | — |
| | — |
| | — |
| | — |
| | — |
| | (89,344 | ) | | — |
| | (89,344 | ) |
Estimated 2019 equity redemptions | (50,081 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (50,081 | ) |
Balance as of November 30, 2018 | $ | 3,789,158 |
| | $ | 29,315 |
| | $ | 740,467 |
| | $ | 2,264,038 |
| | $ | (204,232 | ) | | $ | 1,663,971 |
| | $ | 9,375 |
| | $ | 8,292,092 |
|
Preferred Stock Dividends
The following is a summary of dividends per share by class of preferred stock for the three months ended November 30, 2019 and 2018. Due to the timing of dividend declarations during the first quarter of each fiscal year, the per share amount of dividends is comprised of two quarterly dividend declarations for those periods.
|
| | | | | | | |
| | | Three Months Ended November 30, |
| Nasdaq symbol | | 2019 | | 2018 |
Class of preferred stock: | | | (Dollars per share) |
8% Cumulative Redeemable | CHSCP | | 1.00 |
| | 1.00 |
|
Class B Cumulative Redeemable, Series 1 | CHSCO | | 0.98 |
| | 0.98 |
|
Class B Reset Rate Cumulative Redeemable, Series 2 | CHSCN | | 0.88 |
| | 0.88 |
|
Class B Reset Rate Cumulative Redeemable, Series 3 | CHSCM | | 0.84 |
| | 0.84 |
|
Class B Cumulative Redeemable, Series 4 | CHSCL | | 0.94 |
| | 0.94 |
|
Accumulated Other Comprehensive LossIncome (Loss)
Changes in accumulated other comprehensive income (loss) by component, net of tax, are as follows for the three months ended November 30, 2017,2019 and 2016:2018:
| | | Pension and Other Postretirement Benefits | | Unrealized Net Gain on Available for Sale Investments | | Cash Flow Hedges | | Foreign Currency Translation Adjustment | | Total | Pension and Other Postretirement Benefits | | Cash Flow Hedges | | Foreign Currency Translation Adjustment | | Total |
| (Dollars in thousands) | (Dollars in thousands) |
Balance as of August 31, 2017, net of tax | $ | (135,046 | ) | | $ | 10,041 |
| | $ | (6,954 | ) | | $ | (51,711 | ) | | $ | (183,670 | ) | |
Balance as of August 31, 2019, net of tax | | $ | (172,478 | ) | | $ | 15,297 |
| | $ | (69,752 | ) | | $ | (226,933 | ) |
Other comprehensive income (loss), before tax: | | | | | | | | | | | | | | | | |
Amounts before reclassifications | — |
| | 4,044 |
| | (435 | ) | | (1,008 | ) | | 2,601 |
| (85 | ) | | (3,331 | ) | | (2,411 | ) | | (5,827 | ) |
Amounts reclassified out | 6,816 |
| | — |
| | 429 |
| | (2,042 | ) | | 5,203 |
| 4,977 |
| | (4,473 | ) | | — |
| | 504 |
|
Total other comprehensive income (loss), before tax | 6,816 |
| | 4,044 |
| | (6 | ) | | (3,050 | ) | | 7,804 |
| 4,892 |
| | (7,804 | ) | | (2,411 | ) | | (5,323 | ) |
Tax effect | (2,620 | ) | | (404 | ) | | 2 |
| | 443 |
| | (2,579 | ) | 181 |
| | 1,932 |
| | 1,572 |
| | 3,685 |
|
Other comprehensive income (loss), net of tax | 4,196 |
| | 3,640 |
| | (4 | ) | | (2,607 | ) | | 5,225 |
| 5,073 |
| | (5,872 | ) | | (839 | ) | | (1,638 | ) |
Balance as of November 30, 2017, net of tax | $ | (130,850 | ) | | $ | 13,681 |
| | $ | (6,958 | ) | | $ | (54,318 | ) | | $ | (178,445 | ) | |
Balance as of November 30, 2019, net of tax | | $ | (167,405 | ) | | $ | 9,425 |
| | $ | (70,591 | ) | | $ | (228,571 | ) |
| | | Pension and Other Postretirement Benefits | | Unrealized Net Gain on Available for Sale Investments | | Cash Flow Hedges | | Foreign Currency Translation Adjustment | | Total | Pension and Other Postretirement Benefits | | Unrealized Net Gain on Available for Sale Investments | | Cash Flow Hedges | | Foreign Currency Translation Adjustment | | Total |
| (Dollars in thousands) | (Dollars in thousands) |
Balance as of August 31, 2016, net of tax | $ | (165,146 | ) | | $ | 5,656 |
| | $ | (9,196 | ) | | $ | (43,040 | ) | | $ | (211,726 | ) | |
Balance as of August 31, 2018, net of tax | | $ | (140,335 | ) | | $ | 8,861 |
| | $ | (5,882 | ) | | $ | (62,559 | ) | | $ | (199,915 | ) |
Other comprehensive income (loss), before tax: | | | | | | | | | | | | | | | | | | |
Amounts before reclassifications | — |
| | 1,259 |
| | 620 |
| | (18,940 | ) | | (17,061 | ) | 175 |
| | — |
| | (317 | ) | | (25 | ) | | (167 | ) |
Amounts reclassified out | 5,250 |
| | — |
| | 440 |
| | (15 | ) | | 5,675 |
| 2,565 |
| | — |
| | (1,475 | ) | | — |
| | 1,090 |
|
Total other comprehensive income (loss), before tax | 5,250 |
| | 1,259 |
| | 1,060 |
| | (18,955 | ) | | (11,386 | ) | 2,740 |
| | — |
| | (1,792 | ) | | (25 | ) | | 923 |
|
Tax effect | (2,011 | ) | | (482 | ) | | (406 | ) | | (209 | ) | | (3,108 | ) | (639 | ) | | — |
| | 485 |
| | (380 | ) | | (534 | ) |
Other comprehensive income (loss), net of tax | 3,239 |
| | 777 |
| | 654 |
| | (19,164 | ) | | (14,494 | ) | 2,101 |
| | — |
| | (1,307 | ) | | (405 | ) | | 389 |
|
Balance as of November 30, 2016, net of tax | $ | (161,907 | ) | | $ | 6,433 |
| | $ | (8,542 | ) | | $ | (62,204 | ) | | $ | (226,220 | ) | |
Reclassifications | | 416 |
| | (8,861 | ) | | 983 |
| | 2,756 |
| | (4,706 | ) |
Balance as of November 30, 2018, net of tax | | $ | (137,818 | ) | | $ | — |
| | $ | (6,206 | ) | | $ | (60,208 | ) | | $ | (204,232 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) were primarily related to pension and other post-retirement benefits.postretirement benefits, cash flow hedges, available-for-sale investments and foreign currency translation adjustments. Pension and other post-retirementpostretirement reclassifications include amortization of net actuarial loss, prior service credit and transition amounts and are recorded as cost of goods sold, marketing, general and administrative expenses and other income (see Note 8, Benefit Plans, for further information). Gains or losses associated with cash flow hedges are recorded as cost of goods sold (see Note 11, Derivative Financial Instruments and Hedging Activities, for further information). Gains or losses on the sale of available-for-sale investments and foreign currency translation reclassifications related to sales of businesses are recorded as other income.
Note 8 Benefit Plans
We have various pension and other defined benefit and defined contribution plans, in which substantially all employees may participate. We also have non-qualifiednonqualified supplemental executive and Board retirement plans.
Components of net periodic benefit costs for the three months endedNovember 30, 2017,2019 and 2016,2018, are as follows:
| | | Qualified Pension Benefits | | Non-Qualified Pension Benefits | | Other Benefits | Three Months Ended November 30, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | Qualified Pension Benefits | | Nonqualified Pension Benefits | | Other Benefits |
Components of net periodic benefit costs for the three months ended November 30 are as follows: | (Dollars in thousands) | |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
Components of net periodic benefit costs: | | (Dollars in thousands) |
Service cost | $ | 9,919 |
| | $ | 9,383 |
| | $ | 137 |
| | $ | 259 |
| | $ | 236 |
| | $ | 353 |
| $ | 10,538 |
| | $ | 9,648 |
| | $ | 101 |
| | $ | 78 |
| | $ | 262 |
| | $ | 263 |
|
Interest cost | 6,002 |
| | 7,692 |
| | 178 |
| | 352 |
| | 227 |
| | 427 |
| 5,431 |
| | 7,099 |
| | 107 |
| | 187 |
| | 187 |
| | 274 |
|
Expected return on assets | (12,040 | ) | | (12,014 | ) | | — |
| | — |
| | — |
| | — |
| (11,671 | ) | | (11,242 | ) | | — |
| | — |
| | — |
| | — |
|
Prior service cost (credit) amortization | 359 |
| | 402 |
| | 8 |
| | 57 |
| | (141 | ) | | (30 | ) | 45 |
| | 42 |
| | (28 | ) | | (19 | ) | | (111 | ) | | (139 | ) |
Actuarial (gain) loss amortization | 6,888 |
| | 4,765 |
| | 15 |
| | 173 |
| | (306 | ) | | (116 | ) | |
Actuarial loss (gain) amortization | | 5,396 |
| | 3,087 |
| | 25 |
| | — |
| | (348 | ) | | (407 | ) |
Net periodic benefit cost | $ | 11,128 |
| | $ | 10,228 |
| | $ | 338 |
| | $ | 841 |
| | $ | 16 |
| | $ | 634 |
| $ | 9,739 |
| | $ | 8,634 |
| | $ | 205 |
| | $ | 246 |
| | $ | (10 | ) | | $ | (9 | ) |
The service cost component of defined benefit net periodic benefit cost is recorded in cost of goods sold and marketing, general and administrative expenses. The other components of net periodic benefit cost are recorded in other income.
Employer Contributions
TotalAny contributions to be made during fiscal 20182020 will depend primarily on market returns on the pension plan assets and minimum funding level requirements. DuringNo contributions were made to the pension plans during the three months ended November 30, 2017, we made no contributions to the pension plans. At this time,2019, and we do not currently anticipate being required to make a contribution for our benefit plans in fiscal 2018.2020.
Note 9 Income Taxes
Our effective tax rate for the three months ended November 30, 2019, was 3.6%, compared to 5.5% for the three months ended November 30, 2018. The decreased effective tax rate reflects the equity management assumptions used in fiscal 2020.
It is reasonably possible that the amount of unrecognized tax benefits could significantly change within the next 12 months. We have ongoing federal, state and international income tax audits in various jurisdictions and are evaluating uncertain tax positions that may be challenged by local tax authorities and not fully sustained. These uncertain tax positions are reviewed on an ongoing basis and adjusted in light of facts and circumstances, including progression of tax audits, developments in case law and closing of statutes of limitation. The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of November 30, 2019, and August 31, 2019, are $98.7 million and $93.3 million, respectively.
Note 910 Segment Reporting
We are an integrated agricultural enterprise, providing grain, foods and energy resources to businesses and consumers on a global basis. We provide a wide variety of products and services, from initial agricultural inputs such as fuels, farm supplies, crop nutrient and crop protection products, to agricultural outputs that include grains and oilseeds, grain and oilseed processing and food products, and the production and marketing of ethanol. We define our operating segments in accordance with ASC Topic 280, Segment Reporting, to reflect the manner in which our chief operating decision maker, our Chief Executive Officer, evaluates performance and allocates resources in managing our business.businesses. We have aggregated those operating segments into fourthree reportable segments: Energy, Ag and Nitrogen Production and Foods.Production.
Our Energy segment produces and provides primarily for the wholesale distribution of petroleum products and transportation of those products. Our Ag segment purchases and further processes or resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties; serves as a wholesaler and retailer of crop inputs; and produces and markets ethanol. Our Nitrogen Production segment consists solely of our equity method investment in CF Nitrogen, which entitles us, pursuant to a supply agreement that we entered into with CF Nitrogen, to purchase up to a specified annual quantity of granular urea and urea ammonium nitrate ("UAN") annually from CF Nitrogen. Our Foods segment consists solely of our equity method investment in Ventura Foods. Corporate and Other primarily represents our non-consolidated wheat milling operations, as well as our financing and hedging businesses, which primarily consist of commodities hedging and insurance operations.financial services related to crop production. Our non-consolidated investments in Ventura Foods and Ardent Mills are also included in Corporate and Other.
Corporate administrative expenses and interest are allocated to each business segment 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 vary throughout the year. For example, in our Ag segment, our crop nutrients and country operations businessesbusiness generally experienceexperiences higher volumes and income during the spring planting season and induring the fall which corresponds to harvest.harvest season, and our agronomy business generally experiences higher volumes and income during the spring planting season. Our global grain marketing operations are also 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 fall crop dryingcrop-drying seasons.
Our revenues, assets and cash flows can be significantly affected by global market prices for commodities such as petroleum products, natural gas, ethanol, 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 plant 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 primarily from businesses and operations that are wholly-owned or subsidiaries and limited liability companies in which are wholly owned and majority owned,we have a controlling interest, a portion of our business operations are conducted through companies in which we hold ownership interests of 50% or less andor do not control the operations. See Note 4,5, Investments, for more information on these entities.
Reconciling Amountsamounts primarily represent the elimination of revenues and interest 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 months ended November 30, 2017,2019 and 2016,2018, is presented in the tables below. Fiscal 2020 results for our Ag segment include results associated with our acquisition of the remaining 75% ownership interest in West Central Distribution, LLC ("WCD") that we did not previously own on March 1, 2019, which are not included in our prior period results. Refer to further details related to our acquisition of the remaining 75% ownership interest in WCD that we did not previously own within Note 15, Acquisitions. | |
| Energy | | Ag | | Nitrogen Production | | Foods | | Corporate and Other | | Reconciling Amounts | | Total | Energy | | Ag | | Nitrogen Production | | Corporate and Other | | Reconciling Amounts | | Total |
For the Three Months Ended November 30, 2017: | (Dollars in thousands) | |
Revenues | $ | 2,087,703 |
|
| $ | 6,086,680 |
|
| $ | — |
| | $ | — |
| | $ | 18,775 |
|
| $ | (144,269 | ) |
| $ | 8,048,889 |
| |
Three Months Ended November 30, 2019: | | (Dollars in thousands) |
Revenues, including intersegment revenues | | $ | 2,027,895 |
|
| $ | 5,715,994 |
|
| $ | — |
| | $ | 15,950 |
|
| $ | (138,354 | ) |
| $ | 7,621,485 |
|
Operating earnings (loss) | 117,173 |
|
| 60,822 |
|
| (3,135 | ) | | (2,467 | ) | | 4,488 |
|
| — |
|
| 176,881 |
| 161,199 |
|
| (417 | ) |
| (7,823 | ) | | 4,253 |
|
| — |
|
| 157,212 |
|
(Gain) loss on investments | — |
|
| (2,819 | ) |
| — |
| | — |
| | — |
|
| — |
|
| (2,819 | ) | |
Interest expense | 5,635 |
|
| 17,604 |
|
| 13,272 |
| | — |
| | 4,581 |
|
| (390 | ) |
| 40,702 |
| 374 |
|
| 20,741 |
|
| 12,130 |
| | 3,838 |
|
| (2,112 | ) |
| 34,971 |
|
Other (income) loss | (393 | ) | | (20,228 | ) | | (1,738 | ) | | — |
| | (226 | ) | | 390 |
| | (22,195 | ) | |
Other income | | (964 | ) | | (11,453 | ) | | (1,569 | ) | | (1,624 | ) | | 2,112 |
| | (13,498 | ) |
Equity (income) loss from investments | (1,152 | ) |
| (8,254 | ) |
| (20,335 | ) | | (3,440 | ) | | (5,181 | ) |
| — |
|
| (38,362 | ) | (364 | ) |
| 4,157 |
|
| (34,834 | ) | | (18,621 | ) |
| — |
|
| (49,662 | ) |
Income (loss) before income taxes | $ | 113,083 |
|
| $ | 74,519 |
|
| $ | 5,666 |
| | $ | 973 |
| | $ | 5,314 |
|
| $ | — |
|
| $ | 199,555 |
| $ | 162,153 |
|
| $ | (13,862 | ) |
| $ | 16,450 |
| | $ | 20,660 |
|
| $ | — |
|
| $ | 185,401 |
|
Intersegment revenues | $ | (137,204 | ) |
| $ | (4,033 | ) |
| $ | — |
| | $ | — |
| | $ | (3,032 | ) |
| $ | 144,269 |
|
| $ | — |
| $ | (132,472 | ) |
| $ | (4,139 | ) |
| $ | — |
| | $ | (1,743 | ) |
| $ | 138,354 |
|
| $ | — |
|
Total assets as of November 30, 2019 | | $ | 4,449,652 |
| | $ | 7,108,507 |
| | $ | 2,761,709 |
| | $ | 2,894,423 |
| | $ | — |
| | $ | 17,214,291 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Energy | | Ag | | Nitrogen Production | | Foods | | Corporate and Other | | Reconciling Amounts | | Total | Energy | | Ag | | Nitrogen Production | | Corporate and Other | | Reconciling Amounts | | Total |
For the Three Months Ended November 30, 2016: | (Dollars in thousands) | |
Revenues | $ | 1,700,180 |
| | $ | 6,435,994 |
| | $ | — |
| | $ | — |
| | $ | 27,441 |
| | $ | (115,365 | ) | | $ | 8,048,250 |
| |
Three Months Ended November 30, 2018: | | (Dollars in thousands) |
Revenues, including intersegment revenues | | $ | 2,310,080 |
| | $ | 6,308,714 |
| | $ | — |
| | $ | 19,067 |
| | $ | (153,572 | ) | | $ | 8,484,289 |
|
Operating earnings (loss) | 72,780 |
| | 109,597 |
| | (4,029 | ) | | (2,797 | ) | | 10,940 |
| | — |
| | 186,491 |
| 235,639 |
| | 80,127 |
| | (5,128 | ) | | 3,860 |
| | — |
| | 314,498 |
|
(Gain) loss on investments | — |
| | 7,385 |
| | — |
| | — |
| | 16 |
| | — |
| | 7,401 |
| |
Interest expense | 4,268 |
| | 16,339 |
| | 12,736 |
| | — |
| | 7,974 |
| | (3,052 | ) | | 38,265 |
| 4,237 |
| | 21,000 |
| | 13,679 |
| | 763 |
| | (771 | ) | | 38,908 |
|
Other (income) loss | (309 | ) | | (17,923 | ) | | (29,106 | ) | | — |
| | (115 | ) | | 3,052 |
| | (44,401 | ) | |
Other income | | (986 | ) | | (22,400 | ) | | (1,571 | ) | | (948 | ) | | 771 |
| | (25,134 | ) |
Equity (income) loss from investments | (1,162 | ) | | (5,417 | ) | | (14,696 | ) | | (13,369 | ) | | (5,684 | ) | | — |
| | (40,328 | ) | (73 | ) | | 1,209 |
| | (40,915 | ) | | (26,729 | ) | | — |
| | (66,508 | ) |
Income (loss) before income taxes | $ | 69,983 |
| | $ | 109,213 |
| | $ | 27,037 |
| | $ | 10,572 |
| | $ | 8,749 |
| | $ | — |
| | $ | 225,554 |
| |
Income before income taxes | | $ | 232,461 |
| | $ | 80,318 |
| | $ | 23,679 |
| | $ | 30,774 |
| | $ | — |
| | $ | 367,232 |
|
Intersegment revenues | $ | (110,087 | ) | | $ | (3,765 | ) | | $ | — |
| | $ | — |
| | $ | (1,513 | ) | | $ | 115,365 |
| | $ | — |
| $ | (148,792 | ) | | $ | (3,317 | ) | | $ | — |
| | $ | (1,463 | ) | | $ | 153,572 |
| | $ | — |
|
| | | | | | | | | | | | | | |
Note 1011 Derivative Financial Instruments and Hedging Activities
Our derivative instruments primarily consist of commodity and freight futures and forward contracts and, to a lesserminor degree, may include foreign currency and interest rate swap contracts. These contracts are economic hedges of price risk, but we do not apply hedge accounting under ASC Topic 815, Derivatives and Hedging, except with respect to certain interest rate swap contracts whichaccounted for as fair value hedges and certain future crude oil purchases that are accounted for as cash flow or fair value hedges. Derivative instruments are primarily recorded within other current assets and other current liabilities on our Condensed Consolidated Balance Sheets at fair value as described in Note 11,12, Fair Value Measurements.
Derivatives Not Designated as Hedging Instruments
The following tables present the gross fair values of derivative assets, derivative liabilities and margin deposits (cash collateral) recorded on our Condensed Consolidated Balance Sheets, along with the related amounts permitted to be offset in accordance with U.S. GAAP. We have elected not to offset derivative assets and liabilities when we have the right of offset under ASC Topic 210-20, Balance Sheet - Offsetting,; or when the instruments are subject to master netting arrangements under ASC Topic 815-10-45, Derivatives and Hedging - Overall.
|
| | | | | | | | | | | | | | | |
| November 30, 2017 |
| | | Amounts Not Offset on the Consolidated Balance Sheet but Eligible for Offsetting | | |
| Gross Amounts Recognized | | Cash Collateral | | Derivative Instruments | | Net Amounts |
| (Dollars in thousands) |
Derivative Assets: | | | | | | | |
Commodity and freight derivatives | $ | 324,867 |
| | $ | — |
| | $ | 36,052 |
| | $ | 288,815 |
|
Foreign exchange derivatives | 4,297 |
| | — |
| | 2,741 |
| | 1,556 |
|
Interest rate derivatives - hedge | 3,596 |
| | — |
| | — |
| | 3,596 |
|
Embedded derivative asset | 22,271 |
| | — |
| | — |
| | 22,271 |
|
Total | $ | 355,031 |
| | $ | — |
| | $ | 38,793 |
| | $ | 316,238 |
|
Derivative Liabilities: | | | | | | | |
Commodity and freight derivatives | $ | 224,656 |
| | $ | 10,358 |
| | $ | 36,052 |
| | $ | 178,246 |
|
Foreign exchange derivatives | 7,556 |
| | — |
| | 2,741 |
| | 4,815 |
|
Interest rate derivatives - hedge | 2,641 |
| | — |
| | — |
| | 2,641 |
|
Total | $ | 234,853 |
| | $ | 10,358 |
| | $ | 38,793 |
| | $ | 185,702 |
|
|
| | | | | | | | | | | | | | | |
| November 30, 2019 |
| | | Amounts Not Offset on Condensed Consolidated Balance Sheet but Eligible for Offsetting | | |
| Gross Amount Recognized | | Cash Collateral | | Derivative Instruments | | Net Amount |
| (Dollars in thousands) |
Derivative Assets | | | | | | | |
Commodity derivatives | $ | 159,617 |
| | $ | — |
| | $ | 27,199 |
| | $ | 132,418 |
|
Foreign exchange derivatives | 5,518 |
| | — |
| | 3,632 |
| | 1,886 |
|
Embedded derivative asset | 17,933 |
| | — |
| | — |
| | 17,933 |
|
Total | $ | 183,068 |
| | $ | — |
| | $ | 30,831 |
| | $ | 152,237 |
|
Derivative Liabilities | | | | | | | |
Commodity derivatives | $ | 183,025 |
| | $ | 3,030 |
| | $ | 37,749 |
| | $ | 142,246 |
|
Foreign exchange derivatives | 19,297 |
| | — |
| | 3,632 |
| | 15,665 |
|
Total | $ | 202,322 |
| | $ | 3,030 |
| | $ | 41,381 |
| | $ | 157,911 |
|
|
| | | | | | | | | | | | | | | |
| August 31, 2017 |
| | | Amounts Not Offset on the Consolidated Balance Sheet but Eligible for Offsetting | | |
| Gross Amounts Recognized | | Cash Collateral | | Derivative Instruments | | Net Amounts |
| (Dollars in thousands) |
Derivative Assets: | | | | | | | |
Commodity and freight derivatives | $ | 384,648 |
| | $ | — |
| | $ | 35,080 |
| | $ | 349,568 |
|
Foreign exchange derivatives | 8,771 |
| | — |
| | 3,636 |
| | 5,135 |
|
Interest rate derivatives - hedge | 9,978 |
| | — |
| | — |
| | 9,978 |
|
Embedded derivative asset | 25,533 |
| | — |
| | — |
| | 25,533 |
|
Total | $ | 428,930 |
| | $ | — |
| | $ | 38,716 |
| | $ | 390,214 |
|
Derivative Liabilities: | | | | | | | |
Commodity and freight derivatives | $ | 309,762 |
| | $ | 3,898 |
| | $ | 35,080 |
| | $ | 270,784 |
|
Foreign exchange derivatives | 19,931 |
| | — |
| | 3,636 |
| | 16,295 |
|
Interest rate derivatives - hedge | 707 |
| | — |
| | — |
| | 707 |
|
Total | $ | 330,400 |
| | $ | 3,898 |
| | $ | 38,716 |
| | $ | 287,786 |
|
|
| | | | | | | | | | | | | | | |
| August 31, 2019 |
| | | Amounts Not Offset on Condensed Consolidated Balance Sheet but Eligible for Offsetting | | |
| Gross Amount Recognized | | Cash Collateral | | Derivative Instruments | | Net Amount |
| (Dollars in thousands) |
Derivative Assets | | | | | | | |
Commodity derivatives | $ | 215,030 |
| | $ | — |
| | $ | 58,726 |
| | $ | 156,304 |
|
Foreign exchange derivatives | 10,334 |
| | — |
| | 7,108 |
| | 3,226 |
|
Embedded derivative asset | 21,364 |
| | — |
| | — |
| | 21,364 |
|
Total | $ | 246,728 |
| | $ | — |
| | $ | 65,834 |
| | $ | 180,894 |
|
Derivative Liabilities | | | | | | | |
Commodity derivatives | $ | 223,410 |
| | $ | 4,191 |
| | $ | 41,647 |
| | $ | 177,572 |
|
Foreign exchange derivatives | 20,609 |
| | — |
| | 7,108 |
| | 13,501 |
|
Total | $ | 244,019 |
| | $ | 4,191 |
| | $ | 48,755 |
| | $ | 191,073 |
|
Derivative assets and liabilities with maturities of 12 months or less are recorded in other current assets and other current liabilities, respectively, on our Condensed Consolidated Balance Sheets. Derivative assets and liabilities with maturities greater than 12 months are recorded in other assets and other liabilities, respectively, on our Condensed Consolidated Balance Sheets. The amount of long-term derivative assets, and liabilitiesexcluding derivatives designated as cash flow or fair value hedges, recorded on theour Condensed Consolidated Balance SheetSheets at November 30, 2017, were $71.82019, and August 31, 2019, was $18.6 million and $8.6$26.6 million, respectively. The amount of long-term derivative assets and liabilities, recorded on the Consolidated Balance Sheet at August 31, 2017, were $196.9 million and $14.4 million, respectively.excluding derivatives designated as cash flow or fair value
Derivatives Not Designated as Hedging Instrumentshedges, recorded on our Condensed Consolidated Balance Sheets at November 30, 2019, and August 31, 2019, was $6.8 million and $7.4 million, respectively.
The majority of our derivative instruments have not been designated as hedging instruments for accounting purposes.instruments. The following table sets forth the pretax gains (losses) on derivatives not accounted for as hedging instruments that have been included in our Condensed Consolidated Statements of Operations for the three months endedNovember 30, 20172019, and 2016.2018.
| | | | For the Three Months Ended November 30, | | Three Months Ended November 30, |
| Location of Gain (Loss) | | 2017 | | 2016 | Location of Gain (Loss) | | 2019 | | 2018 |
| | (Dollars in thousands) | | (Dollars in thousands) |
Commodity and freight derivatives | Cost of goods sold | | $ | 27,752 |
| | $ | 18,410 |
| |
Commodity derivatives | | Cost of goods sold | | $ | 42,674 |
| | $ | (6,448 | ) |
Foreign exchange derivatives | Cost of goods sold | | 6,766 |
| | 6,024 |
| Cost of goods sold | | (10,161 | ) | | 16,056 |
|
Foreign exchange derivatives | Marketing, general and administrative | | (495 | ) | | 145 |
| Marketing, general and administrative expenses | | 1,743 |
| | (832 | ) |
Interest rate derivatives | Interest expense | | (1 | ) | | 2 |
| |
Embedded derivative | Other income | | 1,738 |
| | 29,106 |
| Other income | | 1,569 |
| | 1,571 |
|
Total | Total | | $ | 35,760 |
| | $ | 53,687 |
| Total | | $ | 35,825 |
| | $ | 10,347 |
|
Commodity and Freight Contracts
As of November 30, 2017,2019, and August 31, 2017,2019, we had outstanding commodity futures options and freightoptions contracts that were used as economic hedges, as well as fixed-price forward contracts related to physical purchases and sales of commodities. The table below presents the notional volumes for all outstanding commodity and freight contracts accounted for as derivative instruments.
|
| | | | | | | | | | | |
| November 30, 2017 | | August 31, 2017 |
| Long | | Short | | Long | | Short |
| (Units in thousands) |
Grain and oilseed - bushels | 588,263 |
| | 805,041 |
| | 570,673 |
| | 768,540 |
|
Energy products - barrels | 16,254 |
| | 19,300 |
| | 15,072 |
| | 18,252 |
|
Processed grain and oilseed - tons | 196 |
| | 1,700 |
| | 299 |
| | 2,347 |
|
Crop nutrients - tons | 25 |
| | 4 |
| | 9 |
| | 15 |
|
Ocean and barge freight - metric tons | 4,785 |
| | 3,144 |
| | 2,777 |
| | 1,766 |
|
Rail freight - rail cars | 151 |
| | 68 |
| | 176 |
| | 75 |
|
Natural gas - MMBtu | 1,500 |
| | — |
| | 500 |
| | — |
|
|
| | | | | | | | | | | |
| November 30, 2019 | | August 31, 2019 |
| Long | | Short | | Long | | Short |
| (Units in thousands) |
Grain and oilseed (bushels) | 546,758 |
| | 733,722 |
| | 547,096 |
| | 717,522 |
|
Energy products (barrels) | 9,705 |
| | 5,363 |
| | 13,895 |
| | 4,663 |
|
Processed grain and oilseed (tons) | 454 |
| | 2,753 |
| | 597 |
| | 2,454 |
|
Crop nutrients (tons) | 73 |
| | 29 |
| | 76 |
| | 23 |
|
Ocean freight (metric tons) | 200 |
| | 55 |
| | 295 |
| | 85 |
|
Natural gas (MMBtu) | 60 |
| | — |
| | 130 |
| | — |
|
Foreign Exchange Contracts
We conduct a substantial portion of our business in U.S. dollars, but we are exposed to risk regardingrisks relating to foreign currency fluctuations even though a substantial amountprimarily due to global grain marketing transactions in South America, the Asia Pacific region and Europe, and purchases of international sales are denominated in U.S. dollars. In addition to specific transactional exposure,products from Canada. We use foreign currency derivative instruments to mitigate the impact of exchange rate fluctuations. Although we have some risk exposure relating to foreign currency transactions, a larger impact with exchange rate fluctuations can impactis the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of U.S. agricultural products compared to the same products offered by alternative sources of world supply. From time to time, we enter into foreign currency hedge contracts to minimize the impact of currency fluctuations on our transactional exposures. The notional amounts of our foreign exchange derivative contracts were $646.3$972.2 million and $776.7$894.7 million as of November 30, 2017,2019, and August 31, 2017,2019, respectively.
Embedded Derivative Asset
Under the terms of our strategic investment in CF Nitrogen, if the CF Industries'Industries credit rating is reduced below certain levels by two of three specified credit ratings agencies, we are entitled to receive a non-refundablenonrefundable annual payment of $5.0 million from CF Industries in November of each yearIndustries. These payments will continue on an annual basis until the date that the CF Industries'Industries credit rating is upgraded to or above certain levels by two of the three specified credit ratings agencies or February 1, 2026, whichever is earlier.
During
Since the three months ended November 30, 2016, CF Industries'Industries credit rating was reduced below the specified levels andduring fiscal 2017, we have received aan annual payment of $5.0 million payment from CF Industries, which was recorded as a gainIndustries. Gains totaling $1.6 million were recognized in other income in our Condensed Consolidated Statement
of Operations. We also recorded an embedded derivative asset of $24.1 million on our Consolidated Balance Sheet and a corresponding gain in our Consolidated StatementStatements of Operations for the fair value of the embedded derivative asset during the three monthsperiods ended November 30, 2016. During the three months ended November 30, 2017, we received a second $5.0 million payment from CF Industries.2019 and 2018. The fair value of the embedded derivative asset recorded on our Condensed Consolidated Balance Sheet as of November 30, 2017,2019, was equal to $22.3$17.9 million. The current and long-term portions of the embedded derivative asset are included in derivativeother current assets and
other assets on our Condensed Consolidated Balance Sheets, respectively. See Note 11,12, Fair Value Measurements, for moreadditional information on theregarding valuation of the embedded derivative asset.
Derivatives Designated as Fair Value or Cash Flow Hedging Strategies
Fair Value Hedges
As of November 30, 2017,2019, and August 31, 2017,2019, we havehad outstanding interest rate swaps with an aggregate notional amount of $495.0$365.0 million designated as fair value hedges of portions of our fixed-rate debt.debt that is due between fiscal 2021 and fiscal 2025. Our objective in entering into these transactions is to offset changes in the fair value of the debt associated with the risk of variability in the three-month U.S. dollar LIBOR interest rate ("LIBOR"), in essence converting the fixed-rate debt to variable-rate debt. Under these interest rate swaps, we receive fixed-rate interest payments and make interest payments based on the three-month LIBOR. Offsetting changes in the fair values of both the swap instruments and the hedged debt are recorded contemporaneously each period and only create an impact to earnings to the extent that the hedge is ineffective. During
The following table presents the fair value of our derivative interest rate swap instruments designated as fair value hedges and the line item on our Condensed Consolidated Balance Sheets in which they are recorded.
|
| | | | | | | | |
Balance Sheet Location | | November 30, 2019 | | August 31, 2019 |
| | (Dollars in thousands) |
Other assets | | $ | 6,886 |
| | $ | 9,841 |
|
The following table sets forth the pretax gains (losses) on derivatives accounted for as hedging instruments that have been included in our Condensed Consolidated Statements of Operations for the three months ended November 30, 2017,2019 and 2016,2018.
|
| | | | | | | | | | |
| | | | Three Months Ended November 30, |
Gain (Loss) on Fair Value Hedging Relationships | | Location of Gain (Loss) | | 2019 | | 2018 |
| | | | (Dollars in thousands) |
Interest rate swaps | | Interest expense | | $ | (2,955 | ) | | $ | (955 | ) |
Hedged item | | Interest expense | | 2,955 |
| | 955 |
|
Total | | $ | — |
| | $ | — |
|
The following table provides the location and carrying amount of hedged liabilities in our Condensed Consolidated Balance Sheets as of November 30, 2019, and August 31, 2019.
|
| | | | | | | | | | | | | | | | |
| | November 30, 2019 | | August 31, 2019 |
Balance Sheet Location | | Carrying Amount of Hedged Liabilities | | Cumulative Amount of Fair Value Hedging Adjustments Included in Carrying Amount of Hedged Liabilities | | Carrying Amount of Hedged Liabilities | | Cumulative Amount of Fair Value Hedging Adjustments Included in Carrying Amount of Hedged Liabilities |
| | (Dollars in thousands) |
Long-term debt | | $ | 331,435 |
| | $ | 33,565 |
| | $ | 334,389 |
| | $ | 30,611 |
|
Cash Flow Hedges
In fiscal 2018, our Energy segment began designating certain pay-fixed, receive-variable, cash-settled swaps as cash flow hedges of future crude oil purchases. We also began designating certain pay-variable, receive-fixed, cash-settled swaps as cash flow hedges of future refined product sales. These hedging instruments and the related hedged items are exposed to significant market price risk and potential volatility. As part of our risk management strategy, we recorded offsetting fair value adjustmentslook to hedge a portion of $8.3our expected future crude oil needs and the resulting refined product output based on prevailing futures prices, management's expectations about future commodity price changes and our risk appetite. As of November 30, 2019, and August 31, 2019, the aggregate notional amount of cash flow hedges was 9.1 million and $13.37.7 million respectively, with no ineffectiveness recorded in earnings.barrels, respectively.
The following table presents the fair value of our commodity derivative instruments designated as cash flow hedges and the line items on our Condensed Consolidated Balance Sheets in which they are recorded. |
| | | | | | | | | | | | | | | | | | |
| | Derivative Assets | | | | Derivative Liabilities |
Balance Sheet Location | | November 30, 2019 | | August 31, 2019 | | Balance Sheet Location | | November 30, 2019 | | August 31, 2019 |
| | (Dollars in thousands) | | | | (Dollars in thousands) |
Other current assets | | $ | 26,112 |
| | $ | 33,179 |
| | Other current liabilities | | $ | 5,387 |
| | $ | 5,351 |
|
The following table presents the pretax losses recorded in other comprehensive income relating to cash flow hedges for the three months ended November 30, 2019 and 2018:
|
| | | | | | | | |
| | Three Months Ended November 30, |
| | 2019 | | 2018 |
| | (Dollars in thousands) |
Commodity derivatives | | $ | (7,103 | ) | | $ | (2,463 | ) |
The following table presents the pretax gains relating to cash flow hedges that were reclassified from accumulated other comprehensive loss into our Condensed Consolidated Statements of Operations for the three months ended November 30, 2019 and 2018:
|
| | | | | | | | | |
| | | Three Months Ended November 30, |
| Location of Gain | | 2019 | | 2018 |
| | | (Dollars in thousands) |
Commodity derivatives | Cost of goods sold | | $ | 4,852 |
| | $ | 1,900 |
|
Note 1112 Fair Value Measurements
ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value, 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 or market data that a market participant would obtain from independent sources to value the asset or liability. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability developed based uponon the best information available in the circumstances. The fair value hierarchy consists of three levels.levels: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include 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, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Recurring fair value measurements at November 30, 2017,2019, and August 31, 2017,2019, are as follows:
| | | November 30, 2017 | November 30, 2019 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| (Dollars in thousands) | (Dollars in thousands) |
Assets: | |
| | |
| | |
| | |
| |
Commodity and freight derivatives | $ | 29,637 |
| | $ | 295,230 |
| | $ | — |
| | $ | 324,867 |
| |
Foreign currency derivatives | — |
| | 4,297 |
| | — |
| | 4,297 |
| |
Assets | | |
| | |
| | |
| | |
|
Commodity derivatives | | $ | 26,343 |
| | $ | 159,387 |
| | $ | — |
| | $ | 185,730 |
|
Foreign exchange derivatives | | — |
| | 5,606 |
| | — |
| | 5,606 |
|
Interest rate swap derivatives | — |
| | 3,596 |
| | — |
| | 3,596 |
| — |
| | 6,886 |
| | — |
| | 6,886 |
|
Deferred compensation assets | 53,348 |
| | — |
| | — |
| | 53,348 |
| 46,754 |
| | — |
| | — |
| | 46,754 |
|
Deferred purchase price receivable | — |
| | — |
| | 521,502 |
| | 521,502 |
| |
Embedded derivative asset | — |
| | 22,271 |
| | — |
| | 22,271 |
| — |
| | 17,933 |
| | — |
| | 17,933 |
|
Segregated investments | | 91,080 |
| | — |
| | — |
| | 91,080 |
|
Other assets | 17,784 |
| | — |
| | — |
| | 17,784 |
| 6,082 |
| | — |
| | — |
| | 6,082 |
|
Total | $ | 100,769 |
| | $ | 325,394 |
| | $ | 521,502 |
| | $ | 947,665 |
| $ | 170,259 |
| | $ | 189,812 |
| | $ | — |
| | $ | 360,071 |
|
Liabilities: | |
| | |
| | | | |
| |
Commodity and freight derivatives | $ | 25,299 |
| | $ | 199,357 |
| | $ | — |
| | $ | 224,656 |
| |
Foreign currency derivatives | — |
| | 7,556 |
| | — |
| | 7,556 |
| |
Interest rate swap derivatives | — |
| | 2,641 |
| | — |
| | 2,641 |
| |
Liabilities | | |
| | |
| | | | |
|
Commodity derivatives | | $ | 36,032 |
| | $ | 152,380 |
| | $ | — |
| | $ | 188,412 |
|
Foreign exchange derivatives | | — |
| | 19,297 |
| | — |
| | 19,297 |
|
Total | $ | 25,299 |
| | $ | 209,554 |
| | $ | — |
| | $ | 234,853 |
| $ | 36,032 |
| | $ | 171,677 |
| | $ | — |
| | $ | 207,709 |
|
| | | August 31, 2017 | August 31, 2019 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| (Dollars in thousands) | (Dollars in thousands) |
Assets: | | | | | | | | |
Commodity and freight derivatives | $ | 48,491 |
| | $ | 336,157 |
| | $ | — |
| | $ | 384,648 |
| |
Foreign currency derivatives | — |
| | 8,771 |
| | — |
| | 8,771 |
| |
Assets | | | | | | | | |
Commodity derivatives | | $ | 67,817 |
| | $ | 180,392 |
| | $ | — |
| | $ | 248,209 |
|
Foreign exchange derivatives | | — |
| | 10,339 |
| | — |
| | 10,339 |
|
Interest rate swap derivatives | — |
| | 9,978 |
| | — |
| | 9,978 |
| — |
| | 9,841 |
| | — |
| | 9,841 |
|
Deferred compensation assets | 52,414 |
| | — |
| | — |
| | 52,414 |
| 40,368 |
| | — |
| | — |
| | 40,368 |
|
Deferred purchase price receivable | — |
| | — |
| | 548,602 |
| | 548,602 |
| |
Embedded derivative asset | — |
| | 25,533 |
| | — |
| | 25,533 |
| — |
| | 21,364 |
| | — |
| | 21,364 |
|
Segregated investments | | 77,777 |
| | — |
| | — |
| | 77,777 |
|
Other assets | 14,846 |
| | — |
| | — |
| | 14,846 |
| 6,519 |
| | — |
| | — |
| | 6,519 |
|
Total | $ | 115,751 |
| | $ | 380,439 |
| | $ | 548,602 |
| | $ | 1,044,792 |
| $ | 192,481 |
| | $ | 221,936 |
| | $ | — |
| | $ | 414,417 |
|
Liabilities: | | | | | | | | |
Commodity and freight derivatives | $ | 31,189 |
| | $ | 278,573 |
| | $ | — |
| | $ | 309,762 |
| |
Foreign currency derivatives | — |
| | 19,931 |
| | — |
| | 19,931 |
| |
Interest rate swap derivatives | — |
| | 707 |
| | — |
| | 707 |
| |
Liabilities | | | | | | | | |
Commodity derivatives | | $ | 40,305 |
| | $ | 188,455 |
| | $ | — |
| | $ | 228,760 |
|
Foreign exchange derivatives | | — |
| | 20,701 |
| | — |
| | 20,701 |
|
Total | $ | 31,189 |
| | $ | 299,211 |
| | $ | — |
| | $ | 330,400 |
| $ | 40,305 |
| | $ | 209,156 |
| | $ | — |
| | $ | 249,461 |
|
Commodity freight and foreign currencyexchange 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 with fixed-price components, select ocean freight contracts and other over-the-counter ("OTC") derivatives are determined using inputs that are generally based on exchange traded prices and/or recent market bids and offers, adjusted for location specific inputs, and are classified within Level 2. The location specificLocation-specific inputs are driven by local market supply and demand and are generally based on 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 Condensed Consolidated Statements of Operations as a component of cost of goods sold.
Interest rate swap derivatives —. Fair values of our interest rate swap derivatives are determined utilizingusing valuation models that are widely accepted in the market to value these OTC derivative contracts. The specific terms of the contracts, as well as
market observable inputs, such as interest rates and credit risk assumptions, are factored into the models. As all significant inputs are market observable, all interest rate swaps are classified within Level 2. Changes in the fair values of contracts not designated as hedging instruments for accounting purposes are recognized in our Condensed Consolidated Statements of Operations as a component of interest expense. See Note 10,11, Derivative Financial Instruments and Hedging Activities, for additional information about interest ratesrate swaps designated as fair value and cash flow hedges.
Deferred compensation and other assets —. Our deferred compensation investments Rabbi Trustconsist primarily of rabbi trust assets and available-for-sale investments in common stock of other companiesthat are valued based on unadjusted quoted prices on active exchanges and are classified within Level 1. Changes in the fair values of these other assets are primarily recognized in our Condensed Consolidated Statements of Operations as a component of marketing, general and administrative expenses.
Deferred purchase price receivable — The fair value of the DPP receivable included in receivables, net and other assets, is determined by discounting the expected cash flows to be received. The expected cash flows are primarily based on unobservable inputs consisting of the face amount of the Receivables adjusted for anticipated credit losses. Significant changes in the anticipated credit losses could result in a significantly higher (or lower) fair value measurement. Due to the use of significant unobservable inputs in the pricing model, including management's assumptions related to anticipated credit losses, the DPP receivable is classified as a Level 3 fair value measurement. The reconciliation of the DPP receivable for the period ended November 30, 2017, is included in Note 2, Receivables.
Embedded derivative asset —. The embedded derivative asset relates to contingent payments inherent into our investment in CF Nitrogen. The inputs intoused in the fair value measurement include the probability of future upgrades and downgrades of the CF Industries'Industries credit rating based on historical credit rating movements of other public companies and the discount rates to be applied to potential annual payments based on applicable historical and current yield coupon rates. Based on these observable inputs, our fair value measurement is classified within Level 2. See Note 10,11, Derivative Financial Instruments and Hedging Activities, for additional information.
Segregated investments. Our segregated investments are comprised of U.S. Treasury securities, which are valued using quoted market prices and classified within Level 1.
There were no material transfers between Level 1, Level 2 and Level 3 assets and liabilities during the three months ended November 30, 2017.2019.
Note 1213 Commitments and Contingencies
Environmental
We are required to comply with various environmental laws and regulations incidental to our normal business operations. In order toTo meet our compliance requirements, we establish reserves for the probable future costs of remediation of identified issues, which are included in cost of goods sold and marketing, general and administrative expenses in our Condensed Consolidated Statements of Operations. The resolution of any such matters may affect consolidated net income for any fiscal period; however, we believe any resulting liabilities, individually or in the aggregate, will not have a material effect on our condensed consolidated financial position, results of operations or cash flowsstatements during any fiscal year.
Other Litigation and Claims
We are involved as a defendant in various lawsuits, claims and disputes, which are in the normal course of our business. The resolution of any such matters may affect consolidated net income for any fiscal period; however, we believe any resulting liabilities, individually or in the aggregate, will not have a material effect on our condensed consolidated financial position, results of operations or cash flowsstatements during any fiscal year.
Guarantees
We are a guarantor for lines of credit and performance obligations of related, non-consolidated companies. As of November 30, 2017, ourOur bank covenants allowedallow maximum guarantees of $1.0 billion, of which $101.4$178.3 million were outstanding.outstanding on November 30, 2019. We have collateral for a portion of these contingent obligations. We have not recorded a liability related to the contingent obligations as we do not expect to pay out any cash related to them, and the fair values are considered immaterial. The underlying loans to the counterparties for which we provide these guarantees were current as of November 30, 2017.2019.
Note 14 Leases
On November 30, 2017,We adopted ASC Topic 842 on September 1, 2019, using the modified retrospective approach. In addition, we completedused the additional optional transition method and package of practical expedients in the period of adoption without retrospective adjustment to previous periods presented, although we elected not to apply the hindsight practical expedient. As a result of using the additional optional transition method and following a modified retrospective approach, prior periods have not been restated, and a $33.7 million cumulative-effect adjustment was recorded to increase the opening balance of capital reserves as of the adoption date related to recognition of previously deferred gains associated with the sale-leaseback transaction forof our primary corporate office building located in Inver Grove Heights, Minnesota. SimultaneousOur accounting for finance leases (previously referred to
as capital leases) remains substantially unchanged; however, adoption of ASC Topic 842 resulted in recognition of operating lease right of use assets and associated lease liabilities of $268.4 million and $267.0 million, respectively, as of September 1, 2019. Adoption of ASC Topic 842 did not have a material impact on our Condensed Consolidated Statements of Operations or Condensed Consolidated Statements of Cash Flows.
We assess arrangements at inception to determine whether they contain a lease. An arrangement is considered to contain a lease if it conveys the right to control the use of an asset for a period of time in exchange for consideration. The right to control the use of an asset must include both (a) the right to obtain substantially all economic benefits associated with an identified asset and (b) the right to direct how and for what purpose the identified asset is used. Certain arrangements provide us with the closingright to use an identified asset; however, most of these arrangements are not considered to represent a lease as we do not control how and for what purpose the identified asset is used. For example, our supply agreements, warehousing and distribution services agreements, and transportation services agreements generally do not contain leases.
We lease property, plant and equipment used in our operations primarily under operating lease agreements and, to a lesser extent, under finance lease agreements. Our operating leases are primarily for railcars, equipment, vehicles and office space, many of which contain renewal options and escalation clauses. Renewal options are included as part of the sale,right of use asset and liability when it is reasonably certain that we will exercise the Company enteredrenewal option; however, renewal options are generally not included as we are not reasonably certain to exercise such options.
Operating lease right of use assets and liabilities for operating leases are recognized at the lease commencement date for leases in excess of 12 months based on the present value of lease payments over the lease term. For measurement and classification of lease agreements, lease and non-lease components are grouped into a 20-year operatingsingle lease arrangement with base annual rentcomponent for all asset classes. Variable lease payments are excluded from measurement of approximately $3.4 million duringright of use assets and liabilities and generally include payments for non-lease components such as maintenance costs, payments for leased assets beyond their noncancelable lease term and payments for other non-lease components such as sales tax. The discount rate used to calculate present value is our collateralized incremental borrowing rate or, if available, the first year, followed by annual increases of 2% throughrate implicit in the remainder oflease. The incremental borrowing rate is determined for each lease based primarily on its lease term. Certain lease arrangements include rental payments adjusted annually based on changes in an inflation index. Our lease arrangements generally do not contain residual value guarantees or material restrictive covenants.
Lease expense is recognized on a straight-line basis over the lease period.term. The components of lease expense recognized in our Condensed Consolidated Statements of Operations are as follows:
|
| | | |
| Three Months Ended November 30, 2019 |
| (Dollars in thousands) |
Operating lease expense | $ | 16,480 |
|
Finance lease expense: | |
Amortization of assets | 2,189 |
|
Interest on lease liabilities | 224 |
|
Short-term lease expense | 3,343 |
|
Variable lease expense | 116 |
|
Total net lease expense* | $ | 22,352 |
|
*Income related to sub-lease activity is not material and has been excluded from the table above.
Supplemental balance sheet information related to operating and finance leases is as follows:
|
| | | | | |
| Balance Sheet Location | | November 30, 2019 |
| | | (Dollars in thousands) |
Operating leases | | | |
Assets | | | |
Operating lease right of use assets | Other assets | | $ | 259,028 |
|
Liabilities | | | |
Current operating lease liabilities | Accrued expenses | | 53,868 |
|
Long-term operating lease liabilities | Other liabilities | | 204,305 |
|
Total operating lease liabilities | | $ | 258,173 |
|
| | | |
Finance leases | | | |
Assets | | | |
Finance lease assets | Property, plant and equipment | | $ | 40,536 |
|
Liabilities | | | |
Current finance lease liabilities | Current portion of long-term debt | | 6,049 |
|
Long-term finance lease liabilities | Long-term debt | | 21,092 |
|
Total finance lease liabilities | | $ | 27,141 |
|
| | | |
Weighted average remaining lease term (in years) | | | |
Operating leases | | 8.4 |
|
Finance leases | | 6.3 |
|
| | | |
Weighted average discount rate | | | |
Operating leases | | 3.13 | % |
Finance leases | | 3.34 | % |
Supplemental cash flow and other information related to operating and finance leases is as follows: |
| | | |
| Three Months Ended November 30, 2019 |
| (Dollars in thousands) |
Cash paid for amounts included in measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 15,722 |
|
Operating cash flows from finance leases | 224 |
|
Financing cash flows from finance leases | 1,673 |
|
| |
Supplemental noncash information: | |
Right of use assets obtained in exchange for lease liabilities | 4,724 |
|
Maturities of lease liabilities as of November 30, 2019, were as follows:
|
| | | | | | | |
| November 30, 2019 |
| Finance Leases | | Operating Leases |
| (Dollars in thousands) |
Remainder of fiscal 2020 | $ | 4,790 |
| | $ | 45,821 |
|
Fiscal 2021 | 6,190 |
| | 53,054 |
|
Fiscal 2022 | 5,045 |
| | 40,159 |
|
Fiscal 2023 | 4,452 |
| | 31,851 |
|
Fiscal 2024 | 2,685 |
| | 24,958 |
|
After fiscal 2024 | 7,228 |
| | 105,730 |
|
Total maturities of lease liabilities | 30,390 |
| | 301,573 |
|
Less amounts representing interest | 3,249 |
| | 43,400 |
|
Present value of future minimum lease payments | 27,141 |
| | 258,173 |
|
Less current obligations | 6,049 |
| | 53,868 |
|
Long-term obligations | $ | 21,092 |
| | $ | 204,305 |
|
Disclosures Related to Periods Prior to Adoption of New Lease Standard
The following pertains to previously disclosed information from Note 6, Property, Plant and Equipment, and Note 15, Commitments and Contingencies, contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019, which incorporates information about leases now in the scope of ASC Topic 842 discussed above. Total rental expense for operating leases was $113.3 million, $88.5 million and $81.3 million for the years ended August 31, 2019, 2018 and 2017, respectively. Various leases under capital lease totaled $62.7 million and $50.0 million as of August 31, 2019 and 2018, respectively. Accumulated amortization on assets under capital leases was $20.6 million and $18.9 million as of August 31, 2019 and 2018, respectively. Minimum future lease payments required under noncancelable capital and operating leases as of August 31, 2019, were as follows:
|
| | | | | | | |
| August 31, 2019 |
| Capital Leases | | Operating Leases |
| (Dollars in thousands) |
Fiscal 2020 | $ | 6,761 |
| | $ | 87,168 |
|
Fiscal 2021 | 6,199 |
| | 57,381 |
|
Fiscal 2022 | 5,021 |
| | 43,665 |
|
Fiscal 2023 | 4,548 |
| | 34,328 |
|
Fiscal 2024 | 2,638 |
| | 26,793 |
|
Thereafter | 6,517 |
| | 92,653 |
|
Total minimum future lease payments | 31,684 |
| | $ | 341,988 |
|
Less amount representing interest | 3,445 |
| | |
Present value of net minimum lease payments | $ | 28,239 |
| | |
Note 13 Subsequent Events15 Acquisitions
On March 1, 2019, we completed our acquisition of the remaining 75% ownership interest in WCD, a full-service wholesale distributor of agronomy products that operates primarily in the United States. The purchase price was equal to $113.4 million, including $6.7 million that was previously paid and $106.7 million paid on March 1, 2019, of which the net cash flows were reduced by $8.0 million of cash acquired. Prior to completing this acquisition and through February 28, 2019, we had a 25% ownership interest in WCD, which was accounted for under the equity method of accounting whereby we shared in the economics of WCD earnings on a pro-rata basis. By acquiring the remaining ownership interest in WCD, we were able to expand our agronomy platform, position ourselves as a leading supply partner to cooperatives and retailers serving growers throughout the United States Tax Reformand add value for our owners. The WCD enterprise value was determined using a discounted cash flow model in which the fair value of the business was estimated based on the earning capacity of WCD. We estimated the fair value of the previously held equity interest to be equal to 25% of the total fair value of WCD, which was implied based on the price we paid for the remaining 75% interest. The acquisition-date fair value of the previous equity interest was $37.8 million
and is included in measurement of the Tax Cutsconsideration transferred. We recognized a gain of approximately $19.1 million as a result of remeasuring our prior equity interest in WCD held before acquisition of the remaining 75% interest. The gain was included in other income in our Condensed Consolidated Statements of Operations for the third quarter of fiscal 2019.
Preliminary allocation of the purchase price for this transaction resulted in goodwill of $61.4 million, which is nondeductible for tax purposes, and Jobs Act was signed into law.definite-lived intangible assets of $47.2 million. As this acquisition is not considered to have a material impact on our financial statements, pro forma results of operations are not presented. The law includes significant changesacquisition resulted in fair value measurements that are not on a recurring basis and did not have a material impact on our Condensed Consolidated Statements of Operations. Purchase accounting has not been finalized and preliminary fair values assigned to the U.S. corporate tax system, including a Federal corporate rate reduction from 35% to 21%, repeal of the Section 199 Domestic Production Activities Deduction and enactment of the Deductionnet assets acquired are as follows:
|
| | | |
| (Dollars in thousands) |
Cash | $ | 8,033 |
|
Current assets | 708,764 |
|
Property, plant and equipment | 44,064 |
|
Goodwill | 61,358 |
|
Intangible assets | 47,200 |
|
Other assets | 55 |
|
Liabilities | (718,262 | ) |
Total net assets acquired | $ | 151,212 |
|
Operating results for Qualified Business Income of Pass-Thru Entities. WeWCD are in the process of analyzing the legislation and determining an estimate of the financial impact. Currently, we expect to record a material tax benefit due to the revaluation of our net deferred tax liability position included in our Condensed Consolidated Balance Sheets.Statements of Operations from the day of the acquisition on March 1, 2019, including revenues and a loss before income taxes of $77.8 million and $0.3 million, respectively, for the three months ended November 30, 2019.
ITEM 2. MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition and results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections:
Overview
Business Strategy
Fiscal 20182020 First Quarter Highlights
Fiscal 2018 Priorities Update
Fiscal 20182020 Trends Update
Results of Operations
Liquidity and Capital Resources
Off BalanceOff-Balance Sheet Financing Arrangements
Contractual Obligations
Critical Accounting Policies
Effect of Inflation and Foreign Currency Transactions
Recent Accounting Pronouncements
Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended August 31, 20172019 (including the information presented therein under Risk Factors), as well as the condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Overview
CHS Inc. is a diversified company that provides grain, foodsfood, agronomy and energy resources to businesses and consumers on a global scale. As a cooperative, we are owned by farmers, ranchers and member cooperatives across the United States. We also have preferred shareholders that own our five series of preferred stock, all of which are listed and traded on the Nasdaq Global Select Market. We operate in the following fourthree reportable segments:
Energy Segment - produces. Produces and provides primarily for the wholesale distribution of petroleum products and transportation of thosepetroleum products.
Ag Segment - purchases. Purchases and further processes or resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties andparties; also serves as a wholesaler and retailer of crop inputs.agronomy products.
Nitrogen Production Segment - consists. Consists solely of our equity method investment in CF Industries Nitrogen LLC ("CF Nitrogen") and produces and distributes nitrogen fertilizer, a commodity chemical.
Foods Segment - consists solely of our equity method investment in Ventura Foods, LLC ("Ventura Foods") and is a processor and distributor of edible oils used in food preparation and a packager of food products.
In addition, other operating activities, primarilyour financing and hedging businesses, along with our non-consolidated wheat milling and food production and distribution joint venture, as well as our financing, hedging and insurance operations,ventures, have been aggregated within Corporate and Other.
The condensed consolidated financial statements include the accounts of CHS and all of our wholly-owned and majority-owned subsidiaries and limited liability companies.companies in which we have a controlling interest. The effects of all significant intercompany transactions have been eliminated.
Corporate administrative expenses and interest are allocated to each reporting segment, along with Corporate and Other, based on direct usage foruse of services, such as information technology and legal, and other factors or considerations relevant to the costs incurred.
Management's Focus. When evaluating our operating performance, management focuses on gross profit and income before income taxes.taxes ("IBIT"). As a company that operates heavily in global commodities, there is significant unpredictability and volatility in pricing, costs and costs. As such,global trade volumes. Consequently, we focus on managing the margin we can earn and the resulting income before income taxes.IBIT. Management also focuses on ensuring the strength of the balance sheet strength through the appropriate management of financial liquidity, workingleverage, capital capital deployment, capital resourcesallocation and overall leverage.cash flow optimization.
Seasonality. Many of our business activities are highly seasonal and our operating results vary throughout the year. Our revenues and income are generally lowesttrend lower during the second and fourth fiscal quarters and highesthigher during the first and third fiscal quarters.quarters; however, weather or other events may impact this trend, particularly for IBIT. For example, in our Ag segment, our crop nutrients and country operations businessesbusiness generally experienceexperiences higher volumes and income during the fall harvest and spring planting seasons, which generally correspond to our first and third fiscal quarters, respectively. Additionally, our agronomy
business generally experiences higher volumes and income during the spring planting season and in the fall, which corresponds to harvest.season. Our global grain marketing operations are also subject to fluctuations in volume and earningsincome based on producer harvests, world grain prices, demand and demand.global trade volumes. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products, in the spring, summer and early fall when gasoline and diesel fuel usageuse by our agricultural producers is highest and is subject to global supply and demand forces. Other energy products, such as propane, maygenerally experience higher volumes and profitability during the winter heating and crop dryingfall crop-drying seasons. The graphs below depict the seasonality inherent in our business.businesses, particularly revenue trends that are not impacted as significantly by other events.
* It should be noted the third quarter of fiscal 2017 was impacted by material charges that caused incomeIncome (loss) before income taxes for that period to deviateexperienced deviations from historical trends.trends during fiscal 2019 and fiscal 2018 as a result of gains on sales of noncore assets, recoveries of previously recorded losses and a combination of other factors, including poor weather conditions that negatively impacted our Ag segment operations.
Pricing and Volumes. Our revenues, assets and cash flows can be significantly affected by global market prices forand sales volumes of commodities such as petroleum products, natural gas, grains, oilseed products and crop nutrients.agronomy products. 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. Similarly, increased or decreased sales volumes without a corresponding change in the purchase and selling prices of those products can affect revenues and operating earnings. Commodity prices and sales volumes are affected by a wide range of factors beyond our control, including the weather, crop damage due to plant disease or insects, drought, availability/adequacy of supply of the relateda commodity, availability of reliable rail and river transportation network, government regulations/policies, world eventsglobal trade disputes and general political/economic conditions.
Business Strategy
Our business strategy is to help our owners grow by maximizing returns and optimizing our various operations to ensure that our core businesses are strategically positioned today and for the future. We are focusing on improving efficiency and, when necessary, disposing of assets that that are not strategic and/or do not meet our internal measurement expectations. We are also focused on maintaining financial flexibility by optimizing debt levels and ensuring adequate financial liquidity so we can effectively operate throughout the agriculture and energy economic cycles.
Business Strategy
Our business strategies focus on an enterprise-wide effort to create an experience that empowers customers to make CHS their first choice, expands market access to add value for our owners, and transforms and evolves our core businesses by capitalizing on changing market dynamics. To execute on these strategies, we are focused on the implementing agile, efficient and sustainable new technology platforms; building robust and efficient supply chains; hiring, developing and retaining high-performing, diverse and passionate teams; achieving operational excellence and continuous improvement; and maintaining a strong balance sheet.
Fiscal 20182020 First Quarter Highlights
Margins were lowerLess advantageous market conditions in our Ag segment compared to prior year results; however, we did see improvementsrefined fuels business resulted in our Energy businessa significant decrease in IBIT compared to the same period during the prior year.year, primarily driven by decreased Western Canadian Select ("WCS") crude oil differentials experienced on heavy Canadian crude oil, which is processed by our refineries.
Long-term debt (includingStrong supply chain performance in our propane business was a significant positive contributor to our results. We were able to efficiently source propane for our customers during a period of significant propane demand for crop drying and home heating.
Poor weather conditions during fiscal 2019 continued to negatively impact our Ag segment's operations, including lower crop yields and poor grain quality following a late harvest, as well as lower crop nutrient sales that traditionally occur during the current portion)fall.
We continued to experience significant pressure on grain volumes and margins due to slow movement of grain, which was reduced by $172.0 million by monetizing certain assets and actively managing cash flow.
Continued our active management of the balance sheet which resultedassociated with uncertainty in the decision that no cash patronage would be issuedgrain markets related to unresolved trade issues between the United States and its trading partners.
We continued to devote considerable resources toward implementation of our new enterprise resource planning ("ERP") software, which will provide an improved platform to execute upon our business strategies.
As more fully described in fiscal 2018 for fiscal 2017 results,Item 4 of Part I of this Quarterly Report on Form 10-Q, we continued dedicating significant internal and equity retirements would be limitedexternal resources, as well as executive and board focus, to $10 million for estates.improving our control environment.
Fiscal 2018 Priorities Update
During the three months ended November 30, 2017, we continue to make improvements in our management of risk and the granting of credit through enhancements in the related policies, practices and operations. We finalized decisions to dispose of certain assets within our Ag segment that were determined to not be strategic and were not meeting our performance expectations. We also continued our focus on restoring financial flexibility by monetizing certain assets and paying down long-term debt.
Fiscal 20182020 Trends Update
Our business is cyclical and the Ag and Energy industries are currentlybusinesses operate in cyclical environments. The favorable market conditions experienced by the Energy business during the first half of fiscal 2019, most notably heavy Canadian crude oil price differentials, returned to lower, more normalized levels during the second half of fiscal 2019 and the first quarter of fiscal 2020. Although unforeseen market conditions could positively or negatively impact the energy industry, we expect the normalized market conditions experienced by our Energy segment during the first quarter of fiscal 2020 to remain throughout fiscal 2020. The agricultural industry continues to operate in a challenging environment characterized by reduced commodity prices, lower margins, reduced liquidity and increased leverage.leverage that have resulted from reduced commodity prices. In addition, trade relations between the United States and foreign trade partners, particularly those that purchase large quantities of agricultural commodities, are strained, resulting in unpredictable impacts to agricultural commodity prices and volumes sold. We are unable to predict how long thisthe current environment will last or how severe itthe effects will ultimately be; however, at this time, although there was an increase in Energy margins in the first quarter of fiscal 2018,be. In addition to global supply and demand impacts, regional factors such as unpredictable weather conditions, could continue to impact our operations. As a result, we do not foresee significant changes to the core economic environment during the remainder of fiscal 2018. During this period, we expect our revenues, margins and cash flows from our core operations in our Ag segment to remain under pressure throughout fiscal 2020, which will continue to be under pressure.put pressure on associated asset valuations.
Results of Operations
Condensed Consolidated Statements of Operations
|
| | | | | | | |
| For the Three Months Ended November 30 |
| 2017 | | 2016 |
| (Dollars in thousands)
|
Revenues | $ | 8,048,889 |
| | $ | 8,048,250 |
|
Cost of goods sold | 7,735,627 |
| | 7,695,553 |
|
Gross profit | 313,262 |
| | 352,697 |
|
Marketing, general and administrative | 140,168 |
| | 147,849 |
|
Reserve and impairment charges (recoveries), net | (3,787 | ) | | 18,357 |
|
Operating earnings (loss) | 176,881 |
| | 186,491 |
|
(Gain) loss on investments | (2,819 | ) | | 7,401 |
|
Interest expense | 40,702 |
| | 38,265 |
|
Other (income) loss | (22,195 | ) | | (44,401 | ) |
Equity (income) loss from investments | (38,362 | ) | | (40,328 | ) |
Income (loss) before income taxes | 199,555 |
| | 225,554 |
|
Income tax expense (benefit) | 19,936 |
| | 16,612 |
|
Net income (loss) | 179,619 |
| | 208,942 |
|
Net income (loss) attributable to noncontrolling interests | (464 | ) | | (208 | ) |
Net income (loss) attributable to CHS Inc. | $ | 180,083 |
| | $ | 209,150 |
|
|
| | | | | | | | | | | | | |
| Three Months Ended November 30, |
| 2019 | | % of Revenues | | 2018 | | % of Revenues |
| (Dollars in thousands) |
Revenues | $ | 7,621,485 |
| | 100.0 | % | | $ | 8,484,289 |
| | 100.0 | % |
Cost of goods sold | 7,295,942 |
| | 95.7 |
| | 8,013,648 |
| | 94.5 |
|
Gross profit | 325,543 |
| | 4.3 |
| | 470,641 |
| | 5.5 |
|
Marketing, general and administrative expenses | 168,331 |
| | 2.2 |
| | 156,143 |
| | 1.8 |
|
Operating earnings | 157,212 |
| | 2.1 |
| | 314,498 |
| | 3.7 |
|
Interest expense | 34,971 |
| | 0.5 |
| | 38,908 |
| | 0.5 |
|
Other income | (13,498 | ) | | (0.2 | ) | | (25,134 | ) | | (0.3 | ) |
Equity income from investments | (49,662 | ) | | (0.7 | ) | | (66,508 | ) | | (0.8 | ) |
Income before income taxes | 185,401 |
| | 2.4 |
| | 367,232 |
| | 4.3 |
|
Income tax expense | 6,664 |
| | 0.1 |
| | 20,117 |
| | 0.2 |
|
Net income | 178,737 |
| | 2.3 |
| | 347,115 |
| | 4.1 |
|
Net income (loss) attributable to noncontrolling interests | 855 |
| | — |
| | (389 | ) | | — |
|
Net income attributable to CHS Inc. | $ | 177,882 |
| | 2.3 | % | | $ | 347,504 |
| | 4.1 | % |
The charts below detail revenues and income (loss) before income taxes by reportable segment for the first quarter of fiscal 2018. Our Nitrogen Production and Foods reportable segments represent equity methods investments, and as such record earnings and allocated expenses but not revenue.
Income (Loss) Before Income TaxesThe charts below detail revenues, net of intersegment revenues, and IBIT by Segment
Energy
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Income (loss) before income taxes | $ | 113,083 |
| | $ | 69,983 |
| | $ | 43,100 |
| | 61.6 | % |
The following table and commentary present the primary reasons for the changes in income (loss) before income taxes ("IBIT") for the Energyreportable segment for the three months ended November 30, 2017, compared2019. Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses, but not revenues.
Operating Metrics
Energy
Our Energy segment operations primarily include our Laurel, Montana, and McPherson, Kansas, refineries, which process crude oil to the prior year:produce refined products, including gasolines, distillates and other products. The following table provides information about our consolidated refinery operations.
|
| | | | |
| | Change |
| | Three Months Ended November 30 |
| | (Dollars in millions) |
Volume | | $ | (1 | ) |
Price | | 37 |
|
Other* | | 2 |
|
Non-gross profit related activity+ | | 5 |
|
Total change in Energy IBIT | | $ | 43 |
|
* Other includes retail and non-commodity type activities.
+ See commentary related to these changes in the marketing, general and administrative expenses, (gain) loss on investments, interest expense, other income (loss) and equity (income) loss from investments sections of this Results of Operations. |
| | | | | |
| Three Months Ended November 30, |
| 2019 | | 2018 |
Refinery throughput volumes | (Barrels per day) |
Heavy, high-sulfur crude oil | 84,957 |
| | 101,096 |
|
All other crude oil | 78,819 |
| | 62,881 |
|
Other feedstocks and blendstocks | 17,285 |
| | 17,919 |
|
Total refinery throughput volumes | 181,061 |
| | 181,896 |
|
Refined fuel yields | | | |
Gasolines | 92,282 |
| | 89,297 |
|
Distillates | 72,929 |
| | 72,450 |
|
Comparison of Energy segment IBIT for the three months ended November 30, 2017, and 2016
The $43.1 million increase in the Energy segment IBIT reflects the following:
Primarily driven by improved margins within refined fuels, caused by lower market inventories in the energy industry due to an active hurricane season in the Gulf of Mexico which resulted in oil production and refining operations being temporarily suspended in major centers of production along a critical portion of the Gulf coast of the United States, driving prices higher.
This increase was partially offset by a 3% decrease in volumes in Refined Fuels.
We are subject to the Renewable Fuels Standard, program ("RFS"), which requires refiners to blend renewable fuels (e.g., ethanol, biodiesel) into their finished transportation fuels or purchase renewable energy credits, known as Renewable Identification Numbers ("RINs"), in lieu of blending. The U.S. Environmental Protection Agency ("EPA") generally establishes new annual renewable fuel percentage standards for each compliance year in the preceding year. We generate RINs under the RFS in our renewable fuels operations and through our blending activities, at our terminals. However, but
we cannot generate enough RINs to meet the needs of our refining capacity and RINs must be purchased on the open market. The price of RINs can be volatile. On November 30, 2017,volatile and can impact profitability.
In addition to our internal operational reliability, the EPA releasedprofitability of our Energy segment is largely driven by crack spreads (e.g., the final mandateprice differential between refined products and inputs such as crude oil) and WCS crude oil differentials (e.g., the price differential between West Texas Intermediate ("WTI") crude oil and WCS crude oil), which are driven by the supply and demand of refined product markets. Crack spreads and WCS crude oil differentials each decreased during the first quarter of fiscal 2020 compared to the first quarter of fiscal 2019, contributing to a significant decline in IBIT for year 2018.the Energy segment. The table below provides information about average market reference prices and differentials that impact our Energy segment.
|
| | | | | | | |
| Three Months Ended November 30, |
| 2019 | | 2018 |
Market indicators | | | |
WTI crude oil (dollars per barrel) | $ | 56.11 |
| | $ | 65.85 |
|
WTI - WCS crude oil differential (dollars per barrel) | $ | 12.98 |
| | $ | 34.97 |
|
Group 3 2:1:1 crack spread (dollars per barrel)* | $ | 18.47 |
| | $ | 20.10 |
|
Group 3 5:3:2 crack spread (dollars per barrel)* | $ | 17.43 |
| | $ | 18.57 |
|
D6 ethanol RIN (dollars per RIN) | $ | 0.1668 |
| | $ | 0.1292 |
|
D4 ethanol RIN (dollars per RIN) | $ | 0.5588 |
| | $ | 0.3708 |
|
*Group 3 refers to the oil refining and distribution system serving the Midwest markets from the Gulf Coast through the Plains States.
Ag
Our Ag segment operations work together to facilitate the production, purchase, sale and eventual use of grain and other agricultural commodities within the United States, as well as internationally. Profitability in our Ag segment is largely driven by throughput and production volumes, as well as commodity price spreads; however, revenues and cost of goods sold ("COGS") are largely affected by market-driven commodity prices that are outside our control. The table below provides information about average market prices for agricultural commodities and our sales/throughput volumes that impact our Ag segment for the three months ended November 30, 2019 and 2018.
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Income (loss) before income taxes | $ | 74,519 |
| | $ | 109,213 |
| | $ | (34,694 | ) | | (31.8 | )% |
|
| | | | | | | |
| | | Three Months Ended November 30, |
| Market Source* | | 2019 | | 2018 |
Commodity prices | | | | | |
Corn (dollars per bushel) | Chicago Board of Trade | | $3.83 | | $3.62 |
Soybeans (dollars per bushel) | Chicago Board of Trade | | $9.00 | | $8.60 |
Wheat (dollars per bushel) | Chicago Board of Trade | | $5.17 | | $5.08 |
Urea (dollars per ton) | Green Markets NOLA | | $225.00 | | $295.00 |
UAN (dollars per ton) | Green Markets NOLA | | $151.00 | | $212.00 |
Ethanol (dollars per gallon) | Chicago Platts | | $1.60 | | $1.24 |
| | | | | |
Volumes | | | | | |
Grain and oilseed (thousands of bushels) | | 619,539 |
| | 698,929 |
|
North American grain and oilseed port throughput (thousands of bushels) | | 136,856 |
| | 287,173 |
|
Crop nutrients (thousands of tons) | | 1,851 |
| | 1,661 |
|
Ethanol (thousands of gallons) | | 222,276 |
| | 287,173 |
|
*Market source information represents the average month-end price during the period.
Income Before Income Taxes by Segment
Energy
|
| | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Change |
| 2019 | | 2018 | | Dollars | | Percent |
| (Dollars in thousands) | | | | |
Income before income taxes | $ | 162,153 |
| | $ | 232,461 |
| | $ | (70,308 | ) | | (30.2 | )% |
The following tablewaterfall analysis and commentary present the primary reasons for the changes in our Energy segment IBIT for the Ag segment for the three months ended November 30, 2017,2019, compared to the same period during the prior year:year.
|
| | | | |
| | Change |
| | Three Months Ended November 30 |
| | (Dollars in millions) |
Volume | | $ | (7 | ) |
Price | | (41 | ) |
Other* | | (18 | ) |
Impairment+ | | 22 |
|
Non-gross profit related activity+ | | 9 |
|
Total change in Ag IBIT | | $ | (35 | ) |
* Other includes retail and non-commodity type activities.+See commentary related to these changes in the marketing, general and administrative expenses, reserve and impairment charges (recoveries), net, (gain) loss on investments, interest expense, other income (loss) and equity (income) lossincome from investments sections of this Results of Operations.
ComparisonThe $70.3 million decrease in Energy segment IBIT reflects the following:
Significantly less advantageous market conditions in our refined fuels business compared to the same period of the prior year, primarily driven by decreased WCS crude oil differentials experienced on heavy Canadian crude oil, which is processed by our refineries and, to a lesser extent, decreased crack spreads.
The decreased IBIT resulting from less advantageous market conditions for refined fuels was partially offset by hedging gains recognized for refined fuels and propane during the first quarter of fiscal 2020, as well as improved propane margins due to significant propane demand for crop drying and home heating.
Ag
|
| | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Change |
| 2019 | | 2018 | | Dollars | | Percent |
| (Dollars in thousands) | | | | |
Income (loss) before income taxes | $ | (13,862 | ) | | $ | 80,318 |
| | $ | (94,180 | ) | | (117.3 | )% |
The following waterfall analysis and commentary present the changes in our Ag segment IBIT for the three months ended November 30, 2017,2019, compared to the same period during the prior year.
+See commentary related to these changes in the marketing, general and 2016administrative expenses, interest expense, other income and equity income from investments sections of this Results of Operations.
The $34.7$94.2 million decrease in Ag segment IBIT reflects the following:
Grain marketing IBIT decreased primarily duePoor weather conditions experienced during fiscal 2019 in the agricultural region of the United States and continuing global trade tensions between the United States and foreign trading partners continued to lower grainnegatively impact volumes and associatedmargins within agricultural markets. In particular, decreased demand for feed and farm supplies and crop nutrient products during the late and smaller harvest in the fall of 2019 resulted in lower margins.
Country operations IBIT increased due to improvedLower margins along with a gain of approximately $7.1 million due to the sale of a non-strategic North American location, a gain on the sale of a domestic investment of $2.2 million, and recognition of approximately $5.3 million associated with the recovery of a loan that was written off in the prior fiscal year.
Processingour processing and food ingredients IBIT decreased primarily caused bybusiness due to a combination of increased competition and lower margins along with one-time severance charges and other costs associated with heldcrop yields, which made it more difficult to source soybeans for sale assets.
Crop nutrients IBIT increased, driven by higher associated margins.
Renewable fuels marketing and production operations IBIT decreased primarily resulting from lower margins.our processing facilities.
All Other Segments
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Nitrogen Production IBIT | $ | 5,666 |
| | $ | 27,037 |
| | $ | (21,371 | ) | | (79.0 | )% |
Foods IBIT | $ | 973 |
| | $ | 10,572 |
| | $ | (9,599 | ) | | (90.8 | )% |
Corporate and Other IBIT | $ | 5,314 |
| | $ | 8,749 |
| | $ | (3,435 | ) | | (39.3 | )% |
|
| | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Change |
| 2019 | | 2018 | | Dollars | | Percent |
| (Dollars in thousands) | | | | |
Nitrogen Production IBIT* | $ | 16,450 |
| | $ | 23,679 |
| | $ | (7,229 | ) | | (30.5 | )% |
Corporate and Other IBIT | $ | 20,660 |
| | $ | 30,774 |
| | $ | (10,114 | ) | | (32.9 | )% |
Comparison of All Other Segments IBIT for the three months ended November 30, 2017, and 2016
Our Nitrogen Production segment IBIT decreased due to a gain in the prior year of $29.1 million associated with an embedded derivative asset inherent in the agreement relating to our investment in CF Nitrogen for which there was no comparable gain in the current fiscal year. This was partially offset by higher equity method income in the current year driven by improved prices on urea and urea ammonium nitrate, which are produced and sold by CF Nitrogen. *See Note 4, 5, Investments,, of the notes to the condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q for additional information.
Our FoodsNitrogen Production segment IBIT decreased as a result of lower equity method income from our investment in CF Nitrogen during the first quarterthree months ended November 30, 2019, attributable to decreased market pricing of fiscal 2018 due to lower margins earnedurea and UAN, which are produced and sold by Ventura Foods, as its customers put significant pressure on pricing and it experienced acquisition integration challenges.CF Nitrogen. Corporate and Other IBIT decreased due toprimarily as a result of lower earnings from our wheat milling joint ventureinvestments in Ardent Mills and reducedVentura Foods, as well as decreased interest revenueincome from our financing group resulting from the sale of loans receivable.and hedging businesses due to lower interest rates and lower trading activity, respectively.
Revenues by Segment
Energy
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Revenue | $ | 1,950,499 |
| | $ | 1,590,093 |
| | $ | 360,406 |
| | 22.7 | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Change |
| 2019 | | 2018 | | Dollars | | Percent |
| (Dollars in thousands) | | | | |
Revenues | $ | 1,895,423 |
| | $ | 2,161,288 |
| | $ | (265,865 | ) | | (12.3 | )% |
The following tablewaterfall analysis and commentary present the primary reasons for the changes in revenue for theour Energy segment revenues for the three months ended November 30, 2017,2019, compared to the same period during the prior year:year. |
| | | | |
| | Change |
| | Three Months Ended November 30 |
| | (Dollars in millions) |
Volume | | $ | (36 | ) |
Price | | 377 |
|
Other* | | 19 |
|
Total change in Energy revenue | | $ | 360 |
|
* Other includes retail and non-commodity type activities.
Comparison of Energy segment revenue for the three months ended November 30, 2017, and 2016
The $360.4$265.9 million increasedecrease in Energy revenuesegment revenues reflects the following:
RefinedDecreased selling prices for refined fuels and propane were driven by global market conditions and product mix, and contributed to $207.5 million and $71.9 million decreases in revenues, rose $257.7respectively.
A 16% increase of propane volumes contributed to a $35.5 million (20%),increase of revenues, which approximately $298.0 million related to an increase in the net average selling price,was partially offset by $40.3 million related to lower sales volumes, compared to the prior year. The selling pricea 1% decrease of refined fuels products increased an averagevolumes that contributed to a $19.7 million decrease of $0.36 (24%) per gallon,revenues. Increased volumes of propane resulted from significant propane demand for crop drying and saleshome heating; decreased volumes decreased 3%, compared to the previous year.
Propane revenues increased $87.9 million (57%), of which $78.0 millionrefined fuels was attributable primarily to lower demand during the fall harvest as a riseresult of poor weather conditions that prevented planting of crops during fiscal 2019 across much of the agricultural region of the United States in the net average selling price and $9.9 million was attributable to higher volumes. Propane sales volume increased 6% and the average selling price of propane increased $0.31 (47%) per gallon, when compared to the previous year.which we operate.
Ag
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Revenue | $ | 6,082,647 |
| | $ | 6,432,229 |
| | $ | (349,582 | ) | | (5.4 | )% |
The following table and commentary present the primary reasons for the changes in revenue for the Ag segment for the three months ended November 30, 2017, compared to the prior year:
|
| | | | |
| | Change |
| | Three Months Ended November 30 |
| | (Dollars in millions) |
Volume | | $ | (360 | ) |
Price | | 4 |
|
Other* | | 6 |
|
Total change in Ag revenue | | $ | (350 | ) |
* Other includes retail and non-commodity type activities.
Comparison ofAg
|
| | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Change |
| 2019 | | 2018 | | Dollars | | Percent |
| (Dollars in thousands) | | | | |
Revenues | $ | 5,711,855 |
| | $ | 6,305,397 |
| | $ | (593,542 | ) | | (9.4 | )% |
The following waterfall analysis and commentary present the changes in our Ag segment revenuerevenues for the three months ended November 30, 2017 and 20162019, compared to the same period during the prior year.
The $349.6$593.5 million decrease in Ag segment revenuerevenues reflects the following:
Grain and oilseed revenues attributable to country operationsvolumes and grain marketing totaled $4.4 billion and $4.7 billion for the three months ended November 30, 2017, and 2016, respectively. The grain and oilseed revenue decrease of $338.1 million (7%) was attributable to a decline in volumes of $368.6 million, partially offset by $30.5 million in higher average grain selling prices. The average sales price of all grain and oilseed commodities sold increased $0.04 per bushel. Wheat, corn and soybean volumesprices decreased by approximately 8%10% and 3%, respectively, compared to the prior year. The decreaseAs the primary drivers of lower Ag segment revenues during the current fiscal year, lower grain and oilseed volumes and prices contributed to $473.6 million and $108.6 million decreases of revenues, respectively. Decreased volumes and prices resulted from a combination of product mix and challenges experienced in volumes wasthe agricultural commodity market, including poor weather conditions during fiscal 2019 in the agricultural region of the United States that contributed to lower crop yields and fewer acres planted/harvested, and continuing global trade tensions between the United States and foreign trading partners.
Our other Ag segment businesses generally experienced a decline in revenues due to lower export activity compared to the same periodsimilar volume and pricing decreases that resulted from continued challenges being experienced in the prior year causedagricultural commodity market. These decreases were partially offset by increased global competition.
Ourvolumes associated with certain agronomy products and processing and food ingredients, revenue decreased $26.8 million, primarily duemost of which was attributable to a $11.7$77.8 million decline resultingincrease of revenues that resulted from the prior-year saleMarch 1, 2019, acquisition of an international location, along with a declinethe remaining 75% ownership interest in volumesWest Central Distribution, LLC ("WCD") that we did not previously own, the results of $24.5 million (7%). These declineswhich were partially offset by an average sales price increasenot included in the comparable period of $0.39 (3%) per bushel or $9.4 million related to our oilseed commodities.
Wholesale crop nutrient revenues attributable to crop nutrients and grain marketing decreased $3.9 million due to lower average fertilizer selling prices of $21.2 million, partially offset by higher volumes of $17.3 million. Our wholesale crop nutrient volumes increased 4% and the average sales price of all fertilizers sold reflected a decrease of $12.72 (5%) per ton compared to the prior year. The increase in volumesdecrease was due to improved market conditions from the prior year as well as supply chain management improvements.
Our renewable fuels revenues from our marketing and production operations decreased $13.7 million primarily the result of a lower average sales price of $0.11 (7%) per gallon or $24.1 million,also partially offset by 3% higher volumes or $10.3 million. Market supply and demand forces decreased average sales prices.
The remaining Ag segment product revenues related primarily to feed and farm supplies increased $26.5 million mainly due to increases in diesel sold and a rise in propane sold16% pricing increase for home heating due to colder temperatures.renewable fuels driven by global market conditions.
All Other Segments
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Corporate and Other revenue | $ | 15,743 |
| | $ | 25,928 |
| | $ | (10,185 | ) | | (39.3 | )% |
|
| | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Change |
| 2019 | | 2018 | | Dollars | | Percent |
| (Dollars in thousands) | | | | |
Corporate and Other revenues* | $ | 14,207 |
| | $ | 17,604 |
| | $ | (3,397 | ) | | (19.3 | )% |
*Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses, but not revenues.
Comparison of All
There were no significant changes to revenues in Corporate and Other Segments revenue forduring the three months ended November 30, 2017,2019. The overall decrease resulted primarily from lower revenues in our financing and 2016hedging businesses due to market-driven interest rate reductions and lower trading activity, respectively.
Corporate and Other revenue decreased due to the sale34
Cost of Goods Sold by Segment
Energy
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Cost of goods sold | $ | 1,800,404 |
| | $ | 1,478,610 |
| | $ | 321,794 |
| | 21.8 | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Change |
| 2019 | | 2018 | | Dollars | | Percent |
| (Dollars in thousands) | | | | |
Cost of goods sold | $ | 1,686,162 |
| | $ | 1,876,671 |
| | $ | (190,509 | ) | | (10.2 | )% |
The following waterfall analysis and commentary present the changes in our Energy segment COGS for the three months ended November 30, 2019, compared to the same period during the prior year.
The $190.5 million decrease in Energy segment COGS reflects the following:
Decreased pricing for propane and refined fuels were driven by global market conditions and product mix, and contributed to $106.1 million and $100.7 million decreases of COGS, respectively.
A 16% increase of propane volumes contributed to a $34.0 million increase of COGS, which was partially offset by a 1% decrease of refined fuels volumes that contributed to a $16.9 million decrease of COGS. Increased volumes of propane resulted from significant propane demand for crop drying and home heating, and decreased volumes of refined fuels was attributable primarily to lower demand during the fall harvest as a result of the poor weather conditions that prevented planting of crops during fiscal 2019 across the agricultural region of the United States in which we operate.
|
| | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Change |
| 2019 | | 2018 | | Dollars | | Percent |
| (Dollars in thousands) | | | | |
Cost of goods sold | $ | 5,610,200 |
| | $ | 6,139,585 |
| | $ | (529,385 | ) | | (8.6 | )% |
The following tablewaterfall analysis and commentary present the primary reasons for the changes in cost of goods sold ("COGS") for the Energy segment for the three months ended November 30, 2017, compared to the prior year:
|
| | | | |
| | Change |
| | Three Months Ended November 30 |
| | (Dollars in millions) |
Volume | | $ | (35 | ) |
Price | | 340 |
|
Other* | | 17 |
|
Total change in Energy cost of goods sold | | $ | 322 |
|
* Other includes retail and non-commodity type activities.
Comparison of Energy segment COGS for the three months ended November 30, 2017, and 2016
The $321.8 million increase in Energy segment COGS reflects the following:
Refined fuels cost of goods sold increased $196.1 million (16%), which reflects a $0.28 (19%) per gallon or $234.6 million rise in the average cost of refined fuels, partially offset by a decrease of 3% in volume or $38.5 million.
The increase in propane cost of goods sold of $112.1 million was attributable to a 6% rise in volumes or $7.8 million and an increase in average cost of $0.32 (62%) per gallon or $79.7 million. In addition, there were certain manufacturing changes that reduced cost of goods sold by $24.6 million in fiscal 2017 that did not reoccur in fiscal 2018.
Ag
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Cost of goods sold | $ | 5,936,062 |
| | $ | 6,220,190 |
| | $ | (284,128 | ) | | (4.6 | )% |
The following table and commentary present the primary reasons for the changes in COGS for the Ag segment for the three months ended November 30, 2017, compared to the prior year:
|
| | | | |
| | Change |
| | Three Months Ended November 30 |
| | (Dollars in millions) |
Volume | | $ | (353 | ) |
Price | | 45 |
|
Other* | | 24 |
|
Total change in Ag cost of goods sold | | $ | (284 | ) |
* Other includes retail and non-commodity type activities.
Comparison ofour Ag segment COGS for the three months ended November 30, 2017, and 20162019, compared to the same period during the prior year.
The $284.1$529.4 million decrease in Ag segment COGS reflects the following:
Grain and oilseed costvolumes and pricing decreased by 10% and 3%, respectively, compared to the prior year and were the primary drivers of goods soldlower COGS in our Ag segment. Lower volumes and pricing contributed to decreased COGS of $467.4 million and $119.1 million, respectively. Decreased volumes and pricing resulted from a combination of product mix and challenges experienced in the agricultural commodity market, including poor weather conditions experienced during fiscal 2019 in the agricultural regions of the United States that contributed to lower crop yields and fewer acres planted/harvested, and continuing global trade tensions between the United States and foreign trading partners.
Our other Ag segment businesses generally experienced a decline in COGS due to similar volume and pricing decreases as a result of continued challenges being experienced in the agricultural commodity market. These decreases were partially offset by increased volumes associated with certain agronomy products and processing and food ingredients, most of which was attributable to country operationsan increase of COGS that resulted from the March 1, 2019, acquisition of the remaining 75% ownership interest in WCD that we did not previously own, the results of which were not included in the comparable period of the prior year. The decrease was also partially offset by a 14% pricing increase for renewable fuels inputs due to lower crop yields, which made it more difficult to source corn for our ethanol processing facilities.
All Other Segments
|
| | | | | | | | | | | | | |
| Three Months Ended November 30, | | Change |
| 2019 | | 2018 | | Dollars | | Percent |
| (Dollars in thousands) | | | | |
Nitrogen Production COGS | $ | 538 |
| | $ | (2,073 | ) | | $ | 2,611 |
| | NM* |
Corporate and Other COGS | $ | (957 | ) | | $ | (535 | ) | | $ | (422 | ) | | NM* |
*NM - not meaningful
There were no significant changes to COGS in our Nitrogen Production segment or Corporate and grain marketing totaled $4.3 billion and $4.6 billion forOther during the three months ended November 30, 2017, and 2016, respectively. The costs of grains and oilseed procured through our Ag segment decreased $299.2 million. The majority of the decline was driven by an 8% decrease in volumes of $360.9 million, partially offset by a higher average cost per bushel of $0.08 (1%) or $61.7 million. The decrease in volumes was due to lower export activity compared to the same period in the prior year.
Processing and food ingredients cost of goods sold increased $5.5 million (2%) and is comprised of $47.4 million from a higher average cost of oilseeds purchased for further processing, partially offset by $22.2 million in lower volumes, plus a $19.7 million decline due to the sale of an international location in the prior year. Changes in cost are typically driven by the market price of soybeans purchased.2019.
Wholesale crop nutrients cost of goods sold attributable to crop nutrients and grain marketing increased by $1.2 million (less than 1%), caused primarily by an increase of 4%, or $16.5 million, in tons sold. The increase was partially offset by a decline of 4%, or $15.3 million, in average cost per ton of product. The increase in volumes and decrease in the prices paid for goods were due to better market conditions compared to the prior year, as well as beneficial changes in supply chain management.
Renewable fuels cost of goods sold decreased $3.6 million (1%) resulting from a decrease in the average cost per gallon of $0.06 (4%) or $13.2 million, which was mostly offset by an increase in volume of 3% or $9.7 million.
The remaining Ag segment product cost of goods sold, primarily feed and farm supplies, decreased $11.7 million due to lower costs incurred related to crop protection services and sunflower processing.
Total Ag cost of goods sold include "Other" cost of goods sold, which are generated from our country operations elevators and agri-service centers that incur costs from activities related to production agriculture. These cost of goods sold activities include grain storage, grain cleaning, fertilizer spreading, crop protection spraying and other associated services of this nature. In addition, our grain marketing operations incur "Other" costs at our export terminals from activities related to loading vessels.
All Other Segments
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Nitrogen Production COGS | $ | 219 |
| | $ | (884 | ) | | $ | 1,103 |
| | 124.8 | % |
Corporate and Other COGS | $ | (1,058 | ) | | $ | (2,363 | ) | | $ | 1,305 |
| | 55.2 | % |
Comparison of All Other Segments COGS for the three months ended November 30, 2017, and 2016
The increase in COGS for our Nitrogen Production segment for fiscal 2018 was due to an unfavorable variance on our natural gas hedges. The increase in COGS for Corporate and Other for fiscal 2018 was due to increased commission expense as a result of higher volumes of transactions in our financing, hedging and insurance operations. Our Foods reportable segment represents an equity method investment, and as such records earnings and allocated expenses but not COGS.
Marketing, General and Administrative Expenses
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Marketing, general and administrative expenses | $ | 140,168 |
| | $ | 147,849 |
| | $ | (7,681 | ) | | (5.2 | )% |
|
| | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Change |
| 2019 | | 2018 | | Dollars | | Percent |
| (Dollars in thousands) | | | | |
Marketing, general and administrative expenses | $ | 168,331 |
| | $ | 156,143 |
| | $ | 12,188 |
| | 7.8 | % |
Comparison ofIncreased marketing, general and administrative expenses forduring the three months ended November 30, 2017, and 2016
The $7.7 million decrease in marketing, general and administrative expenses is2019, were primarily due to lower compensationincreased maintenance expenses and lower brokerage commissions.
Reserve and Impairment Charges (Recoveries), net
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Reserve and impairment charges (recoveries), net | $ | (3,787 | ) | | $ | 18,357 |
| | $ | (22,144 | ) | | (120.6 | )% |
Comparison of reserve and impairment charges (recoveries), net for the three months ended November 30, 2017, and 2016
The $22.1 million decrease in reserve and impairment charges (recoveries), net reflects the following:
During fiscal 2017, an allowance for doubtful accounts of $18.4 million was recorded, including loan loss reservesassociated with our information technology platforms, increased consulting expenses related to a single producer borrower.
In fiscal 2018, we recovered approximately $5.3 million associated with a loanour new ERP software and increased payroll expenses for employees that was previously written offjoined CHS following our acquisition of WCD, which were not included in the comparable period of the prior fiscal year, partially offset by increases in bad debt expense of approximately $1.5 million. As a result, the current fiscal year to date reflects a net recovery.
Gain (Loss) on Investments
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Gain (loss) on investments | $ | 2,819 |
| | $ | (7,401 | ) | | $ | 10,220 |
| | 138.1 | % |
Comparison of gain (loss) on investments for the three months ended November 30, 2017, and 2016year.
The increase in gain (loss) on investments is mainly attributable to a gain on the sale of a domestic investment of $2.2 million in fiscal 2018, compared to a $7.4 million loss on the sale of an international investment during fiscal 2017 which did not reoccur in fiscal 2018.
Interest Expense
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Interest expense | $ | 40,702 |
| | $ | 38,265 |
| | $ | 2,437 |
| | 6.4 | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Change |
| 2019 | | 2018 | | Dollars | | Percent |
| (Dollars in thousands) | | | | |
Interest expense | $ | 34,971 |
| | $ | 38,908 |
| | $ | (3,937 | ) | | (10.1 | )% |
ComparisonThere were no significant changes to the amount of interest expense forduring the three months ended November 30, 2017, and 2016
The $2.4 million increase in2019; however, the overall decrease resulted from lower interest expense for fiscal 2018 was primarily due to higher interest expense associated with higher interest rates.
Other Income (Loss)
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Other income (loss) | $ | 22,195 |
| | $ | 44,401 |
| | $ | (22,206 | ) | | (50.0 | )% |
Comparison of other income (loss) forrates during the three months ended November 30, 2017,2019, and 2016decreased average outstanding debt balances compared to the same period of the prior year.
The $22.2 million decrease in otherOther Income
|
| | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Change |
| 2019 | | 2018 | | Dollars | | Percent |
| (Dollars in thousands) | | | | |
Other income | $ | 13,498 |
| | $ | 25,134 |
| | $ | (11,636 | ) | | (46.3 | )% |
Other income (loss) reflectsdecreased primarily as a result of non-operating gains recognized during the following:
During fiscal 2017, we recorded a gain of $29.1 million associated with an embedded derivative within the contract relating to our strategic investment in CF Nitrogenthree months ended November 30, 2018, that did not reoccur during fiscal 2018. the three months ended November 30, 2019.
Equity Income from Investments
|
| | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Change |
| 2019 | | 2018 | | Dollars | | Percent |
| (Dollars in thousands) | | | | |
Equity income from investments* | $ | 49,662 |
| | $ | 66,508 |
| | $ | (16,846 | ) | | (25.3 | )% |
*See Note 10, Derivative Financial Instruments and Hedging Activities,5, Investments, of the notes to the condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q for additional information.
In fiscal year 2018, we sold a non-strategic North American location in our Ag segment that resulted in a gain of approximately $7.1 million.
Equity Income (Loss) from Investments
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Equity income (loss) from investments | $ | 38,362 |
| | $ | 40,328 |
| | $ | (1,966 | ) | | (4.9 | )% |
Comparison of equity income (loss) from investments for the three months ended November 30, 2017, and 2016
Equity income (loss) from investments primarily decreased due to lower equity income recognized from our equity method investments in Ventura Foods, TEMCO, LLC, and Ardent Mills, LLC caused by lower margins, which was partially offset by higher equity income recognized from our equity method investment in CF Nitrogen. See Note 4, Investments, of the notes to the consolidated financial statements that are included in this Quarterly Report on Form 10-Q for additional information. We record equity income or loss from thefor 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 Condensed Consolidated Statements of Operations.
Income Taxes
|
| | | | | | | | | | | | | | |
| For the Three Months Ended November 30
| | Change |
| 2017 | | 2016 | | Dollars | | Percent |
| (Dollars in thousands) |
Income taxes | $ | (19,936 | ) | | $ | (16,612 | ) | | $ | (3,324 | ) | | (20.0 | )% |
Comparison of Equity income taxes forfrom investments decreased during the three months ended November 30, 2017,2019, compared to the same period during the prior year, primarily due to lower equity income associated with our equity method investments in CF Nitrogen, Ardent Mills and 2016Ventura Foods, which decreased by a total of $14.2 million. The decreased equity method income for these investments was driven by reduced urea and UAN pricing for CF Nitrogen, lower product margins and volumes as a result of customer consolidation for Ardent Mills and increased marketing, general and administrative expenses for Ventura Foods.
Income Tax Expense
|
| | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Change |
| 2019 | | 2018 | | Dollars | | Percent |
| (Dollars in thousands) | | | | |
Income tax expense | $ | 6,664 |
| | $ | 20,117 |
| | $ | (13,453 | ) | | (66.9 | )% |
During the first quarter of fiscal 2018,three months ended November 30, 2019, we had an increaseexperienced a decrease in income tax expense when compared to the first quartersame period of the prior fiscal 2017, resultingyear, primarily as a result of decreased taxable income during the three months ended November 30, 2019, as well as the equity management assumptions used in effectivefiscal 2020. Effective tax rates of 10.0%for the three months ended November 30, 2019 and 7.4%2018, were 3.6% and 5.5%, respectively. The federalFederal and state statutory raterates applied to nonpatronage business activity was 38.4%were 24.7% and 38.3%24.6% for the periodsthree months ended November 30, 2017,2019 and 2016,2018, respectively. The incomeIncome taxes and effective tax rate vary each year based uponon profitability and nonpatronage business activity during each of the comparable years.
Liquidity and Capital Resources
Summary
In assessing our financial condition, we consider factors such as working capital and internal benchmarking related to our applicable covenants and other financial criteria. We fund our operations primarily through a combination of cash flows from operations andsupplemented with borrowings under our revolving credit facilities. We fund our capital expenditures and growth primarily through cash, operating cash flow and long-term debt financing.
On November 30, 2017,2019, we had working capital, defined as current assets less current liabilities, of $435.9$992.5 million, and a current ratio, defined as current assets divided by current liabilities, of 1.2 compared to working capital of $1.1 billion and a current ratio of 1.2 on August 31, 2019. On November 30, 2018, we had working capital of $933.8 million and a current ratio of 1.1 compared to working capital of $181.9 million and a current ratio of 1.0 on August 31, 2017. On November 30, 2016, we had working capital of $378.6 million and a current ratio of 1.0 compared to working capital of $414.4$759.0 million and a current ratio of 1.1 on August 31, 2016.2018.
As of November 30, 2017,2019, we had cash and cash equivalents of $252.1$192.8 million, total equities of $7.9$8.6 billion, long-term debt (including current maturities) of $2.0$1.8 billion and notes payable of $2.5$2.2 billion. Our capital allocation priorities include paying interest on debt and preferred stock dividends, returning cash to our member-owners in the form of cash patronage and equity redemptions, maintaining the safety and compliance of our operations, paying our dividends, reducing funded debt and taking advantage of strategic opportunities that benefit our owners. We expect the down cycle in the Ag industry to continue and while we maintain appropriate levels of liquidity, we will continue to consider opportunities to further diversify and enhance our sources and amounts of liquidity. These opportunities include reducing operating expenses, deploying and/or financing working capital more efficiently and identifying and disposing of nonstrategic or underperforming assets. We believe that cash generated by operating and investing activities, along with available borrowing capacity under our credit facilities, will be sufficient to support our operations for the foreseeable future and we expect to remain in compliance with our loan covenants.
Fiscal 2020 and 2019 Activity
Fiscal 2018During fiscal 2019, we completed the acquisition of the remaining 75% ownership interest in WCD that we did not previously own by paying $106.7 million, of which net cash flows were reduced by $8.0 million of cash acquired. WCD is now included in our Ag segment and 2017 Activitydeepens our presence in the agronomy products market. See Note 15, Acquisitions, of the notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
Also during fiscal 2019, we completed planned major maintenance activities, which contributed to cash outflows of $232.1 million for the year ended August 31, 2019.
On July 18, 2017,June 27, 2019, we amended anextended our existing receivables and loans securitization facility (“("Securitization Facility” or the "Facility"Facility") with certain unaffiliated financial institutions (the "Purchasers"("Purchasers"). Under the Securitization Facility, CHS Capitalwe and CHS bothcertain of our subsidiaries ("Originators") sell eligible trade accounts and notes receivable (“Receivables”("Receivables") they have originated to Cofina Funding, LLC (“Cofina Funding”("Cofina"), a wholly-owned bankruptcy-remote indirect subsidiary of CHS. Cofina Funding in turn sellstransfers the purchased Receivables in their entirety to the Purchasers. Prior to amending the Securitization Facility in July 2017, the transfer of Receivables wasPurchasers, which is accounted for as a secured borrowing. Under the terms of the amendedThe Securitization Facility CHS accounts for Receivables sold under the facility as a sale of financial assets and derecognizes the sold Receivables from its Consolidated Balance Sheets. is scheduled to terminate on June 26, 2020, but may be extended.
The amount available under the Securitization Facility fluctuates over time based on the total amount of eligible Receivables generated during the normal course of business, with maximum availability of $700.0 million. As of November 30, 2017, the2019, total availability under the Securitization Facility was $700.0$601.5 million, all of which $601.0 million had been utilized.
The Facility agreement contains certain customary representations and warranties and affirmative covenants, including as
On September 6, 2019, we renewed our repurchase facility ("Repurchase Facility") related to the eligibilitySecuritization Facility. Under the Repurchase Facility, we can borrow up to $150.0 million, collateralized by a subordinated note issued by Cofina in favor of the Originators and representing a portion of the outstanding balance of the Receivables being sold and contains customary program termination events and non-reinvestment events. We were in compliance with all covenants associated with ourby the Originators to Cofina under the Securitization Facility asFacility. As of November 30, 2017.2019, and August 31, 2019, the outstanding balance under the Repurchase Facility was $150.0 million.
Cash Flows
The following table presents summarized cash flow data for the three months ended November 30, 2017,2019 and 2016:2018:
| | | | | Change | Three Months Ended November 30, | | Change |
| 2017 | | 2016 | | Dollars | | Percent | 2019 | | 2018 | | Dollars | | Percent |
| (Dollars in thousands) | (Dollars in thousands) | | | | |
Net cash provided by (used in) operating activities | $ | (140,454 | ) | | $ | 238,417 |
| | $ | (378,871 | ) | | (158.9 | )% | $ | 160,701 |
| | $ | (94,798 | ) | | $ | 255,499 |
| | 269.5 | % |
Net cash provided by (used in) investing activities | (62,770 | ) | | (327,022 | ) | | 264,252 |
| | 80.8 | % | (114,949 | ) | | (154,776 | ) | | 39,827 |
| | 25.7 | % |
Net cash provided by (used in) financing activities | 271,738 |
| | 327,472 |
| | (55,734 | ) | | (17.0 | )% | (71,882 | ) | | 49,061 |
| | (120,943 | ) | | (246.5 | )% |
Effect of exchange rate changes on cash and cash equivalents | 2,236 |
| | (2,696 | ) | | 4,932 |
| | 182.9 | % | (1,153 | ) | | (1,535 | ) | | 382 |
| | 24.9 | % |
Net increase (decrease) in cash and cash equivalents | $ | 70,750 |
| | $ | 236,171 |
| | $ | (165,421 | ) | | (70.0 | )% | |
Net increase (decrease) in cash and cash equivalents and restricted cash | | $ | (27,283 | ) | | $ | (202,048 | ) | | $ | 174,765 |
| | 86.5 | % |
ComparisonCash flows from operating activities can fluctuate significantly from period to period as a result of various factors, including seasonality and timing differences associated with purchases, sales, taxes and other business decisions. The $255.5 million increase of cash flow for the three months ended November 30, 2017,generated by operating activities reflects a combination of working capital decreases, primarily associated with decreased receivables, and 2016increased accounts payable and accruals, which was partially offset by other changes, including decreased net income.
The $378.9$39.8 million decrease in cash from operating activities reflects the following:
Reduced seasonal purchases of inventory offset by decreased accounts payable and accrued expenses.
Increased supplier advances due to timing of payments madeused in the first quarter of fiscal 2018 compared to payments made in the second quarter of fiscal 2017.
Decreased customer advance payments in the Ag segment due to lower sales volumes and drought conditions in the upper midwest.
The $264.3 million increase in cash from investing activities primarily reflects the following:
Decreasedincreased collections of $142.1 million associated with CHS Capital notes receivable, activity of $149.1 million.
Proceeds of $54.7 million due to sale of our primary corporate office building in Inver Grove Heights, Minnesota which was subsequently leased back to us. The proceeds received were used to pay down long-term debt.
Reducedpartially offset by increased acquisitions of property, plant and equipment and other business acquisitions primarily relateddecreased collections associated with financing extended to our plan to reduce our capital investments to allow us to actively reduce our funded debt obligations.non-CHS Capital customers.
CashThe $120.9 million decrease in cash from financing activities primarily reflects increased net cash outflows associated with our notes payable and long-term debt facilities, which was partially offset by decreased $55.7 million, primarily due to changes in checks and drafts outstanding compared to the three months ended November 30, 2016.equity redemption payments of $18.6 million.
Future Uses of Cash
We expect to utilize cash and cash equivalents, along with cash generated by operating activities to fund capital expenditures, major repairs, debt and interest payments, for debt, interest,preferred stock dividends, patronage and guarantees.equity redemptions. The following is a summary of our primary cash requirements for fiscal 2018:2020:
Capital expenditures.We expect total capital expenditures for fiscal 20182020 to be approximately $602.0$532.0 million, compared to capital expenditures of $446.7$443.2 million in fiscal 2017. Included in that amount for fiscal 2018 is
approximately $221.0 million for the acquisition of property, plant and equipment at our Laurel, Montana and McPherson, Kansas refineries.2019. During the three months ended November 30, 2017,2019, we acquired property, plant property and equipment of $85.8 million.
Major repairs. Refineries have planned major maintenance to overhaul, repair, inspect and replace process materials and equipment (referred to as a "turnaround") which typically occur for a five- to six-week period every 2-5 years. Our Laurel, Montana refinery has planned maintenance scheduled for fiscal 2018 for approximately $92.0$131.8 million.
Debt and interest. We expect to repay the remaining $25.0approximately $39.2 million of current maturitieslong-term debt and finance lease obligations and incur interest payments related to long-term debt of long term debtapproximately $76.2 million during fiscal 2018. During the three months ended November 30, 2017, we repaid $160.0 million of long term debt consisting of scheduled debt maturities and optional prepayments.2020.
Preferred stock dividends. We had approximately $2.3 billion of preferred stock outstanding at November 30, 2017.2019. We expect to pay dividends on our preferred stock of approximately $168.7 million during fiscal 2018.2020.
GuaranteesPatronage. We intendOur Board of Directors authorized approximately $90.0 million of our fiscal 2019 patronage sourced earnings to fund abe paid to our member owners during fiscal 2020.
Equity redemptions. Our Board of Directors authorized and we expect total redemptions of approximately $170.0$90.0 million to be distributed in loan guarantees to our Brazilian operationsfiscal 2020 in the first nine monthsform of fiscal 2018 as a resultredemptions of losses in the prior fiscal year causedqualified and nonqualified equity owned by a trading partner of ours in Brazil entering into bankruptcy-like proceedings under Brazilian law. During the three months ended November 30, 2017, we funded $25.0 million in guarantees.individual producer members and association members.
Future Sources of Cash
We fund our current operations primarily through a combination of cash flows from operations and committed and uncommitted revolving credit facilities, including our Securitization Facility and Repurchase Facility. We believe these sources
will provide adequate liquidity to meet our working capital needs. We fund certain of our long-term capital needs, primarily those related to acquisitions of property, plant and equipment, with cash flows from operations and by issuing privately placed long-term debt and term loans. In addition, our wholly-owned subsidiary, CHS Capital, makes loans to member cooperatives, businesses and individual producers of agricultural products included in our cash flows from investing activities, and has financing sources as detailed below in CHS Capital Financing.
Working Capital Financing
We finance our working capital needs through committed and uncommitted lines of credit with domestic and international banks. We believe our current cash balances and our available capacity on our committed lines of credit will provide adequate liquidity to meet our working capital needs. The following table summarizes our primary lines of credit as of November 30, 2017:2019:
| | Revolving Credit Facilities | | Maturities | | Total Capacity | | Borrowings Outstanding | | Interest Rates | |
| | November 30, 2017 | | |
Primary Revolving Credit Facilities | | | Maturities | | Total Capacity | | Borrowings Outstanding | | Interest Rates |
| | (Dollars in thousands) | | | Fiscal Year | | (Dollars in thousands) | |
Committed Five-Year Unsecured Facility | | 2020 | | $ | 3,000,000 |
| | $ | 1,080,000 |
| | LIBOR+0.00% to 1.45% | | 2024 | | $ | 2,750,000 |
| | $ | 245,000 |
| | LIBOR or Base Rate + 0.00% to 1.45% |
Uncommitted Bilateral Facilities | | 2018 | | 250,000 |
| | 250,000 |
| | LIBOR+0.00% to 1.05% | | 2020 | | 630,000 |
| | 530,000 |
| | LIBOR or Base Rate + 0.00% to 1.05% |
Our primary line of credit is a five-year unsecured revolving credit facility with a syndicate of domestic and international banks. The credit facility provides a committed amount of $2.75 billion that expires on July 16, 2024.
In addition to our primary revolving lines of credit, as of November 30, 2019, we havehad a three-year $325.0$315.0 million committed revolving pre-export credit facility for CHS Agronegocio Industria e Comercio Ltda ("CHS Agronegocio"), our wholly-owned subsidiary, in Brazil. CHS Agronegocio uses the facility, which expires in April 2019, to financeprovide financing for its working capital needs related toarising from its purchases and sales of grains, fertilizers and other agricultural products. Asproducts that was scheduled to expire in April 2020. No amounts were outstanding under the facility as of November 30, 2017, the outstanding balance under the facility was $260.0 million.2019, and we exited this line of credit on December 31, 2019.
In addition to our uncommitted bilateral facilityfacilities above, as of November 30, 2017, our wholly-owned subsidiaries CHS Europe S.a.r.l and CHS Agronegocio had uncommitted lines of credit with $420.0$359.2 million outstanding.outstanding as of November 30, 2019. In addition, our other international subsidiaries had lines of credit with a totaloutstanding of $167.3$149.0 million outstanding as of November 30, 2017,2019, of which $38.7$49.8 million was collateralized.
On November 30, 2017, and August 31, 2017, we had total short-term indebtedness outstanding on these various primary and other facilities, as well as other miscellaneous short-term notes payable, in the amount of $2.2 billion and $1.7 billion, respectively.
Long-term Debt Financing
The following table presents summarized long-term debt data (including current maturities) as of November 30, 2017,2019, and August 31, 2017:2019:
| | | November 30, 2017 | | August 31, 2017 | November 30, 2019 | | August 31, 2019 |
| (Dollars in thousands) | (Dollars in thousands) |
Private placement debt | $ | 1,530,955 |
| | $ | 1,643,886 |
| $ | 1,356,886 |
| | $ | 1,379,840 |
|
Bank financing | 391,000 |
| | 445,000 |
| 366,000 |
| | 366,000 |
|
Capital lease obligations | 28,917 |
| | 33,075 |
| |
Finance lease obligations | | 27,141 |
| | 28,239 |
|
Other notes and contract payable | 61,542 |
| | 62,652 |
| 7,468 |
| | 18,601 |
|
Deferred financing costs | (4,648 | ) | | (4,820 | ) | (3,427 | ) | | (3,569 | ) |
| $ | 2,007,766 |
| | $ | 2,179,793 |
| $ | 1,754,068 |
| | $ | 1,789,111 |
|
CHS Capital Financing
For a description of the Securitization Facility, see above in Fiscal 20182020 and 20172019 Activity activity.
CHS Capital has available credit under master participation agreements with numerous counterparties. Prior to the fourth quarter of fiscal 2017, all borrowings under these agreements were accounted for as secured borrowings. During the fourth quarter of fiscal 2017, certain of these agreements were amended resulting in the Company accounting for the participations as the sale of financial assets. As of November 30, 2017, the remaining participations accounted for as secured borrowings bear interest at variable rates ranging from 2.94% to 4.45%. As of November 30, 2017, the total funding commitment under these agreements was $93.6 million, of which $58.5 million was borrowed.
CHS Capital sells loan commitments it has originated to ProPartners Financial ("ProPartners") on a recourse basis. The total capacity for commitments under the ProPartners program is $265.0 million. The totalTotal outstanding commitments under the program totaled $192.1were $122.5 million as of November 30, 2017,2019, of which $135.2$73.6 million was borrowed under these commitments with an interest rate of 2.42%2.98%.
CHS Capital 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 0.10%0.35% to 0.90%1.4% as of November 30, 2017,2019, and are due upon demand. Borrowings under these notes totaled $104.2$62.2 million as of November 30, 2017.2019.
On September 30, 2019, CHS Capital entered into a credit agreement with a revolving note. Under this agreement, CHS Capital has available capacity of $150.0 million of which no amount was outstanding as of November 30, 2019.
Covenants
Our long-term debt is mostly unsecured; however, restrictive covenants under various debt agreements have requirements forrequire maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with all debt covenants and restrictions as of November 30, 2017.2019. Based on our current 20182020 projections, we expect continued covenant compliance in the near term.compliance.
In September 2015, we amended all
All outstanding private placement notes to conform theto financial covenants applicable thereto to those of our amended and restated five-year unsecured revolving credit facility. The amended notes provide that if our ratio of consolidated funded debt to consolidated cash flowflows is greater than a ratio of 3.0 to 1.0, the interest rate on all outstanding notes will be increased by 0.25% until the ratio becomes 3.0 or less. During the three months ended November 30, 2017,2019 and 2016,2018, our ratio of funded debt to consolidated cash flowflows remained below 3.0 to 1.0.
Patronage and Equity Redemptions
In accordance with our bylaws and upon approval ofby our Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each fiscal year.year and are based on amounts using financial statement earnings. For the year ended August 31, 2017,2019, our Board of Directors authorized only non-qualified distributions of $562.4 million, with noqualified cash patronage. distributions of $90.0 million and nonqualified equity distributions of $472.4 million.
As authorized by
In accordance with authorization from our Board of Directors, in September 2017, we intendexpect total redemptions related to redeem individual member owned equitythe year ended August 31, 2019, that will be distributed in fiscal 2018,2020, to be approximately $90.0 million and to be in an amount not to exceed $10 million.the form of qualified and nonqualified equity owned by individual producer members and associations. During the three months ended November 30, 2017, $1.62019, $5.4 million of that amount was redeemed in cash, compared to $9.5$24.1 million redeemed in cash during the three months ended November 31, 2016. In addition, $2.1 million of equities related to the Board of Director authorized fiscal 2017 redemption were redeemed during the three months ended November 30, 2017, due to the administrative timing of the payments.
Preferred Stock
The following is a summary of our outstanding preferred stock as of November 30, 2017,2019, all shares of which are listed on the Global Select Market of Nasdaq:
| | | | Nasdaq symbol | | Issuance date | | Shares outstanding | | Redemption value | | Net proceeds (a) | | Dividend rate (b) (c) | | Dividend payment frequency | | Redeemable beginning (d) | | Nasdaq Symbol | | Issuance Date | | Shares Outstanding | | Redemption Value | | Net Proceeds (a) | | Dividend Rate (b) (c) | | Dividend Payment Frequency | | Redeemable Beginning (d) |
| | | | (Dollars in millions) | | | | | | | (Dollars in millions) | | | |
8% Cumulative Redeemable | | CHSCP | | (e) | | 12,272,003 |
| | $ | 306.8 |
| | $ | 311.2 |
| | 8.00 | % | | Quarterly | | 7/18/2023 | | CHSCP | | (e) | | 12,272,003 |
| | $ | 306.8 |
| | $ | 311.2 |
| | 8.00 | % | | Quarterly | | 7/18/2023 |
Class B Cumulative Redeemable, Series 1 | | CHSCO | | (f) | | 21,459,066 |
| | $ | 536.5 |
| | $ | 569.3 |
| | 7.875 | % | | Quarterly | | 9/26/2023 | | CHSCO | | (f) | | 21,459,066 |
| | $ | 536.5 |
| | $ | 569.3 |
| | 7.875 | % | | Quarterly | | 9/26/2023 |
Class B Reset Rate Cumulative Redeemable, Series 2 | | CHSCN | | 3/11/2014 | | 16,800,000 |
| | $ | 420.0 |
| | $ | 406.2 |
| | 7.10 | % | | Quarterly | | 3/31/2024 | | CHSCN | | 3/11/2014 | | 16,800,000 |
| | $ | 420.0 |
| | $ | 406.2 |
| | 7.10 | % | | Quarterly | | 3/31/2024 |
Class B Reset Rate Cumulative Redeemable, Series 3 | | CHSCM | | 9/15/2014 | | 19,700,000 |
| | $ | 492.5 |
| | $ | 476.7 |
| | 6.75 | % | | Quarterly | | 9/30/2024 | | CHSCM | | 9/15/2014 | | 19,700,000 |
| | $ | 492.5 |
| | $ | 476.7 |
| | 6.75 | % | | Quarterly | | 9/30/2024 |
Class B Cumulative Redeemable, Series 4 | | CHSCL | | 1/21/2015 | | 20,700,000 |
| | $ | 517.5 |
| | $ | 501.0 |
| | 7.50 | % | | Quarterly | | 1/21/2025 | | CHSCL | | 1/21/2015 | | 20,700,000 |
| | $ | 517.5 |
| | $ | 501.0 |
| | 7.50 | % | | Quarterly | | 1/21/2025 |
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(a) | Includes patrons' equities redeemed with preferred stock. |
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(b) | The Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2, accumulates dividends at a rate of 7.10% per year until March 31, 2024, and then at a rate equal to the three-month LIBOR plus 4.298%, not to exceed 8.00% per annum, subsequent to March 31, 2024. |
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(c) | The Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3, accumulates dividends at a rate of 6.75% per year until September 30, 2024, and then at a rate equal to the three-month LIBOR plus 4.155%, not to exceed 8.00% per annum, subsequent to September 30, 2024. |
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(d) | Preferred stock is redeemable for cash at our option, in whole or in part, at a per share price equal to the per share liquidation preference of $25.00 per share, plus all dividends accumulated and unpaid on that share to and including the date of redemption, beginning on the dates set forth in this column. |
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(e) | The 8% Cumulative Redeemable Preferred Stock was issued at various times from 2003 through 2010. |
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(f) | Shares of Class B Cumulative Redeemable Preferred Stock, Series 1, were issued on September 26, 2013,2013; August 25, 2014,2014; March 31, 2016,2016; and March 30, 2017. |
Dividends paid on our preferred stock during the three months ended November 30, 2017,2019 and 2016,2018, were $42.2 million and $41.8 million, respectively.million.
Off BalanceOff-Balance Sheet Financing Arrangements
Operating Leases
Minimum future lease payments required under noncancelable operating leases as of November 30, 2017, were $317.1 million.
Guarantees
We are a guarantor for lines of credit and performance obligations of related companies. As of November 30, 2017,2019, our bank covenants allowed maximum guarantees of $1.0 billion, of which $101.4$178.3 million were outstanding. We have collateral for a portion of these contingent obligations. We have not recorded a liability related to the contingent obligations as we do not expect to pay out any cash related to them, and the fair values are considered immaterial. The underlying loans to the counterparties for which we provide guarantees were current as of November 30, 2017.
Debt
We have no material off balanceoff-balance sheet debt.
Receivables Securitization Facility and Loan Participations
In fiscal 2017, weWe engaged in off-balance sheet arrangements through our Securitization Facility and certain loan participation agreements. Refer to further details about these arrangements in Note 2,3, Receivables, of the notes to the consolidated financial statements that are included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended August 31, 2017, for additional information.2019.
Contractual Obligations
Our contractual obligations presented in Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended August 31, 2017,2019, have not materially changed during the three months ended November 30, 2017.2019.
Critical Accounting Policies
OurOther than as described within the Significant Accounting Policies section of Note 1, Basis of Presentation and Significant Accounting Policies, to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, our critical accounting policies as presented in Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended August 31, 2017,2019, have not materially changed during the three months ended November 30, 2017.2019.
Effect of Inflation and Foreign Currency Transactions
We believe that inflation and foreign currency fluctuations have not had a material effect on our operations, since we conduct an insignificant portion of our business in foreign currencies.
Recent Accounting Pronouncements
See Note 1, Organization, Basis of Presentation and Significant Accounting Policies, to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of the recent accounting pronouncements that are applicableapply to us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We did not experience any material changes in market risk exposures for the period ended November 30, 2017,2019, that would affect the quantitative and qualitative disclosures presented in our Annual Report on Form 10-K for the year ended August 31, 2017.2019.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934 (the "Exchange Act")), as of November 30, 2017.2019. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that, as of that date, our disclosure controls and procedures were effective.
On December 1, 2015, we began implementation of a new enterprise resource planning (“ERP”) system. The new ERP system is expected to take several years to fully implement, and has and will continue to require significant capital and human resources to deploy. The implementationnot effective because of the new ERP system will affect the processes that constitutematerial weaknesses in our internal control over financial reporting (as defineddisclosed within Management's Annual Report on Internal Control Over Financial Reporting in Rule 13a-15(f) underItem 9A of our Annual Report on Form 10-K for the Exchange Act)year ended August 31, 2019.
Status of Remediation of Material Weaknesses in Internal Control Over Financial Reporting
Remediation Actions Taken During the Quarter Ended November 30, 2019
The following remediation efforts were taken during the quarter ended November 30, 2019:
Held bi-weekly steering committee meetings consisting of senior finance, legal, information technology ("IT"), operational and human resources leaders to oversee the design and implementation of remediation plans.
Continued developing, executing and monitoring of detailed remediation plans in response to each of the remaining previously identified material weaknesses.
Ongoing Remediation Efforts
We are continuing to enhance our management has taken stepsoverall financial control environment through the following:
Continued execution of our plans designed to remediate the two remaining previously identified material weaknesses, including (1) implementing and reinforcing an adequate process for monitoring proper functioning of internal controls to verify that our accounting policies and procedures are consistently and adequately being performed as relevant by a sufficient number of resources with appropriate knowledge and training and (2) designing and maintaining effective controls over certain IT general controls for information systems that are relevant to the preparation of our financial statements and testing the effectiveness of remediated controls.
Continued hiring for our teams in functional areas as necessary to ensure that appropriatethe size and skill set of those teams is adequate given the size, scale and complexity of our organization, industry and required internal controls are designed and implemented as each functional area of the new ERP system is enacted.over financial reporting.
Other than as described above, there wereChanges in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended November 30, 2017,2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved as a defendant in various lawsuits, claims and disputes, which are in the normal course of our business. The resolution of any such matters may affect consolidated net income for any fiscal period; however, our management believes any resulting liabilities, individually or in the aggregate, will not have a material effect on our condensed consolidated financial position, results of operations or cash flowsstatements during any fiscal year.
Laurel
On May 17, 2016, and October 12, 2016, the Montana Department of Environmental Quality (“MDEQ”) issued violation letters to us, alleging that certain specified air emissions at our Laurel, Montana refinery exceeded amounts allowable under the refinery’s permits and applicable law. On June 1, 2016, and November 3, 2016, we responded to MDEQ and described the actions that we had taken in connection with those allegations. On August 30, 2017, MDEQ sent us a letter requesting that we execute an administrative order on consent, and pay an administrative penalty of $184,550. On September 27, 2017, we sent MDEQ a letter providing additional information and requesting that MDEQ reconsider the alleged violations and reduce the proposed penalty with respect to four of the alleged violations described in the violation letters. We also requested changes to the administrative order on consent to remove references to the Administrative Rules of the State of Montana. We are currently awaiting MDEQ’s response to the September 2017 letter.
For information regarding our other reportable legal proceedings, see Item 3 of our Annual Report on Form 10-K for the year ended August 31, 2017.
ITEM 1A. RISK FACTORS
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 on Form 10-K for the year ended August 31, 2017.2019.
ITEM 6. EXHIBITS
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Exhibit | Description |
| Amendment No. 1 to Master Framework Agreement, dated as of September 4, 2018 (“Framework Agreement”), by and among MUFG Bank, Ltd. (f/k/a The Bank of Tokyo-Mitsubishi UFJ, Ltd.) and each other financial institution from time to time party thereto, as MFA Buyers, MUFG Bank, Ltd., as agent for the MFA Buyers, CHS Inc. and CHS Capital, LLC, as sellers, and CHS Inc., as agent for the sellers. |
| Amendment No. 2 to the Framework Agreement, dated as of September 4, 2018. |
| Amendment No. 3 to the CHS Inc. Deferred Compensation Plan (2015 Restatement). |
| Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 20022002. |
| Certification of the Interim Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 20022002. |
| Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 20022002. |
| Certification of the Interim Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 20022002. |
| The following financial information from the CHS Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended November 30, 2017,2019, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (ii)(iii) the Condensed Consolidated Statements of Comprehensive Income, (iii)(iv) the Consolidated Balance Sheets, (iv) theCondensed Consolidated Statements of Cash Flows, and (v) the Notes to the Condensed Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHS Inc.
(Registrant)
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Date: | January 10, 20188, 2020 | | By: | | /s/ Timothy SkidmoreAngela Olsonawski |
| | | | | Timothy SkidmoreAngela Olsonawski |
| | | | | ExecutiveSenior Vice President, andInterim Chief Financial Officer and Corporate Treasurer |