UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: February 28, 2011
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 AND 15(d) OF THE
SECURITES EXCHANGE ACT OF 1934
Commission file: No. 33-94644
MINN-DAK FARMERS COOPERATIVE
(Exact named of Registrant as specified in its charter)
North Dakota | 23-7222188 |
(State or other jurisdiction of | (I.R.S. Employer |
7525 Red River Road | 58075 |
(Address of principal executive offices) | (Zip Code) |
(701) 642-8411
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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, and (2) has been subject to such filing requirements for the past 90 days.
YES ☒ |
| NO ☐ |
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.
YES ☐ |
| NO ☐ |
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer☐ Accelerated Filer☐ Non-Accelerated Filer☒ Smaller Reporting Co☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐ |
| NO ☒ |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class of Common Stock |
| Outstanding at |
$250 Par Value |
| 478 |
Minn-Dak Farmers Cooperative (“The Company” or the “Registrant”) has previously registered securities for offer and sale pursuant to the Securities Act of 1933, as amended (the “Securities Act”). As a result of that previous registration under the Securities Act, under Sections 15(d) and 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is obligated to file quarterly reports on form 10-Q, annual reports on Form 10-K and supplemental reports on Form 8-K. However, the Company has not registered any of its securities under Section 12(g) of the Exchange Act. The Company is exempt from any obligation to register its securities under the Exchange Act due to the provisions of Section 12(g)(2)(E), which exempts from Exchange Act registration any security of an issuer, such as the Company, which is a “cooperative association” as defined in the Agricultural Marketing Act of 1929. As a result, those provisions of the Exchange Act, which are applicable only to securities registered under Section 12 of that act, do not apply to shares issued by the Company. The provisions, which do not apply to the Company’s shares, include the regulation of proxies under Section 14 of the Exchange Act and the reporting and other obligations of directors, officers and principal stockholders under Section 16 of the Exchange Act.
This report contains forward-looking statements and information based upon assumptions by the Company’s management, including assumptions about risks and uncertainties faced by the Company. Any statements regarding future market prices, anticipated costs, agricultural results, operating results and other statements that are not historical facts contained in this annual report are considered forward-looking statements. The words “expect”, “project”, “estimate”, “believe”, “anticipate”, “plan”, “intend”, “could”, “may”, “predict”, and similar expressions are also intended to be identified as forward-looking terminology. Such statements involve risks, uncertainties and assumptions, including, without limitation, market factors, the effect of weather and economic conditions, farm and trade policy, the available supply of sugar, available quantity and quality of sugarbeets and other factors detailed elsewhere in this and other Company filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MINN-DAK FARMERS COOPERATIVE
CONSOLIDATED BALANCE SHEETS
ASSETS
(In Thousands)
ASSETS | Feb 28, 2011 |
| Aug 31, 2010 |
| |||
|
| ||||||
CURRENT ASSETS |
|
| |||||
Cash | $ | 254 |
| $ | 129 |
| |
|
| ||||||
Current bond trust | ― |
| 4,731 |
| |||
|
| ||||||
Receivables |
|
| |||||
Trade accounts | 23,687 |
| 12,731 |
| |||
Growers | ― |
| 13,763 |
| |||
Receivable from affiliates | 97 |
| ― |
| |||
Income tax | 210 |
| ― |
| |||
Other receivables | 3 |
| 3 |
| |||
Total Receivables | 23,997 |
| 26,496 |
| |||
|
| ||||||
Inventories |
|
| |||||
Refined sugar, in-process sugar, pulp and molasses to be sold on a pooled basis | 90,402 |
| 29,770 |
| |||
Non-member refined sugar | 7 |
| 1,717 |
| |||
Sugarbeet inventory | 46,034 |
| 3,121 |
| |||
Yeast | 231 |
| 237 |
| |||
Materials and supplies | 14,293 |
| 13,403 |
| |||
Total Inventories | 150,967 |
| 48,249 |
| |||
|
| ||||||
Deferred charges | 595 |
| ― |
| |||
Prepaid expenses | 1,936 |
| 2,039 |
| |||
Prepaid beet seed | 7,492 |
| 8 |
| |||
|
| ||||||
Total Current Assets | 185,251 |
| 81,653 |
| |||
|
| ||||||
PROPERTY, PLANT AND EQUIPMENT |
|
| |||||
Land and land improvements | 28,164 |
| 28,164 |
| |||
Buildings | 37,883 |
| 37,883 |
| |||
Factory/Agricultural equipment | 153,199 |
| 152,493 |
| |||
Other equipment | 5,294 |
| 5,301 |
| |||
Capitalized leases | 3,353 |
| 3,353 |
| |||
Construction in progress | 10,808 |
| 5,214 |
| |||
Total Property, Plant and Equipment | 238,701 |
| 232,408 |
| |||
Less accumulated depreciation | (139,955 | ) | (135,638 | ) | |||
Net Property, Plant and Equipment | 98,746 |
| 96,769 |
| |||
|
| ||||||
OTHER ASSETS |
|
| |||||
Investment in other cooperatives, unconsolidated marketing subsidiaries and other corporations | 10,932 |
| 11,116 |
| |||
Bond trust and financing costs | 9,527 |
| 2,493 |
| |||
Other long-term assets | 3,543 |
| 5,035 |
| |||
Total Other Assets | 24,002 |
| 18,643 |
| |||
|
| ||||||
TOTAL ASSETS | $ | 307,999 |
| $ | 197,065 |
|
See Notes to Consolidated Financial Statements.
3
MINN-DAK FARMERS COOPERATIVE
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND MEMBERS’ INVESTMENT
(In Thousands)
Feb 28, 2011 |
| Aug 31, 2010 | |||||
LIABILITIES AND MEMBERS’ INVESTMENT |
|
| |||||
| |||||||
CURRENT LIABILITIES |
| ||||||
Short-term notes payable | $ | 79,775 |
| $ | 27,558 | ||
| |||||||
Current portion of long-term debt, capital leases and bonds payable | 3,002 |
| 2,977 | ||||
| |||||||
Accounts payable: |
| ||||||
Trade | 7,277 |
| 10,144 | ||||
Checks outstanding | 1,986 |
| 1,008 | ||||
Deferred liabilities | ― |
| 8,825 | ||||
Growers | 49,952 |
| 13,874 | ||||
Total Accounts Payable | 59,215 |
| 33,851 | ||||
| |||||||
Income tax | ― |
| 195 | ||||
|
| ||||||
Payable to affiliates | ― |
| 283 | ||||
| |||||||
Accrued liabilities | 5,834 |
| 3,101 | ||||
| |||||||
Total Current Liabilities |
| 147,826 |
| 67,965 | |||
| |||||||
LONG-TERM DEBT, CAPITAL LEASES, AND BONDS PAYABLE, NET OF CURRENT PORTION | 44,819 |
| 37,930 | ||||
| |||||||
LONG-TERM DEFERRED INCOME TAX LIABILITY | 222 |
| 266 | ||||
| |||||||
LONG-TERM PENSION LIABILITY | 20,952 |
| 19,630 | ||||
| |||||||
COMMITMENTS AND CONTINGENCIES |
| ||||||
| |||||||
Total Liabilities | 213,819 |
| 125,791 | ||||
| |||||||
MEMBERS’ INVESTMENT |
| ||||||
Preferred stock: |
| ||||||
Class A - 100,000 shares authorized, $105 par value; | 7,581 |
| 7,581 | ||||
Class B - 100,000 shares authorized, $75 par value; | 5,415 |
| 5,415 | ||||
Class C - 100,000 shares authorized, $76 par value; | 5,487 |
| 5,487 | ||||
Total Preferred stock | 18,483 |
| 18,483 | ||||
Common stock, 600 shares authorized, $250 par value; | 120 |
| 119 | ||||
Paid in capital in excess of par value | 32,094 |
| 32,094 | ||||
Unit retention capital | 3,108 |
| ― | ||||
Nonqualified allocated patronage | 48,098 |
| 28,299 | ||||
Accumulated other comprehensive loss | (18,882 | ) | (18,837 | ) | |||
Retained earnings | 11,159 |
| 11,116 | ||||
Total Members’ Investment | 94,180 |
| 71,274 | ||||
| |||||||
TOTAL LIABILITIES AND MEMBERS’ INVESTMENT | $ | 307,999 |
| $ | 197,065 |
See Notes to Consolidated Financial Statements.
4
MINN-DAK FARMERS COOPERATIVE
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
|
| Three-Months Ended |
| Six-Months Ended |
| ||||||||
|
| Feb 28, |
| Feb 28,, |
| Feb 28, |
| Feb 28, |
| ||||
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of sugar, co-products and yeast, net of discounts |
| $ | 82,988 |
| $ | 55,970 |
| $ | 157,367 |
| $ | 112,468 |
|
Changes in finished goods inventory and in-process sugar at NRV |
|
| 19,346 |
|
| 9,759 |
|
| 69,863 |
|
| 25,922 |
|
Total Revenue |
|
| 102,334 |
|
| 65,729 |
|
| 227,230 |
|
| 138,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Production costs of sugar, in-process sugar, co-products and yeast sold |
|
| 23,875 |
|
| 19,655 |
|
| 53,379 |
|
| 42,433 |
|
Sales and distribution costs |
|
| 13,234 |
|
| 10,210 |
|
| 28,323 |
|
| 21,906 |
|
General and administrative |
|
| 2,069 |
|
| 1,893 |
|
| 4,093 |
|
| 3,415 |
|
Interest |
|
| 759 |
|
| 609 |
|
| 1,340 |
|
| 1,016 |
|
(Gain) on disposition of property and equipment |
|
| — |
|
| — |
|
| (1 | ) |
| (122 | ) |
Total Expenses |
|
| 39,937 |
|
| 32,367 |
|
| 87,134 |
|
| 68,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOLLING & OTHER REVENUE |
|
| 119 |
|
| 7,056 |
|
| 190 |
|
| 7,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET PROCEEDS RESULTING FROM MEMBER AND NON-MEMBER BUSINESS BEFORE INCOME TAXES |
|
| 62,516 |
|
| 40,418 |
|
| 140,286 |
|
| 76,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX BENEFIT (EXPENSE) |
|
| 17 |
|
| (150 | ) |
| 39 |
|
| (128 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET PROCEEDS RESULTING FROM MEMBER AND NON-MEMBER BUSINESS |
| $ | 62,533 |
| $ | 40,268 |
| $ | 140,325 |
| $ | 76,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISTRIBUTION OF NET PROCEEDS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Credited to members' investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from non-member business |
| $ | 21 |
| $ | 222 |
| $ | 44 |
| $ | 244 |
|
Patronage income |
|
| 10,100 |
|
| 11,286 |
|
| 19,810 |
|
| 16,546 |
|
Net income credited to members' investment |
|
| 10,121 |
|
| 11,508 |
|
| 19,854 |
|
| 16,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated costs of sugarbeets paid or payable to growers for production to date |
| $ | 52,412 |
| $ | 28,760 |
| $ | 120,471 |
| $ | 59,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET PROCEEDS RESULTING FROM MEMBER AND NON-MEMBER BUSINESS |
| $ | 62,533 |
| $ | 40,268 |
| $ | 140,325 |
| $ | 76,701 |
|
See Notes to Consolidated Financial Statements.
5
MINN-DAK FARMERS COOPERATIVE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
| Six-Months Ended |
| ||||
|
| Feb 28, |
| Feb 28, |
| ||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
Net income credited to members' investment |
| $ | 19,854 |
| $ | 16,790 |
|
Add (deduct) noncash items: |
|
|
|
|
|
|
|
Depreciation |
|
| 4,341 |
|
| 4,426 |
|
Amortization |
|
| 246 |
|
| 138 |
|
(Gain) on property and equipment disposals |
|
| (1 | ) |
| (122 | ) |
Loss allocated from unconsolidated marketing subsidiaries |
|
| 1 |
|
| — |
|
Noncash portion of patronage capital credits |
|
| (194 | ) |
| (183 | ) |
Deferred income taxes |
|
| (55 | ) |
| (141 | ) |
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
Accounts receivable and advances |
|
| 2,500 |
|
| 6,722 |
|
Inventory and prepaid expenses |
|
| (110,098 | ) |
| (58,345 | ) |
Deferred charges and other assets |
|
| 765 |
|
| 1,805 |
|
Accounts payable, accrued liabilities and other liabilities |
|
| 35,015 |
|
| 11,464 |
|
Net cash (used in)/provided by operating activities |
|
| (47,626 | ) |
| (17,446 | ) |
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
Proceeds from disposition of property, plant and equipment |
|
| 1 |
|
| 123 |
|
Change in other assets |
|
| — |
|
| (4,400 | ) |
Tax exempt bond draw |
|
| 6,782 |
|
| — |
|
Capital expenditures |
|
| (6,318 | ) |
| (1,922 | ) |
Patronage received from other coops |
|
| 412 |
|
| 1,135 |
|
Net cash (used in)/provided by investing activities |
|
| 877 |
|
| (5,064 | ) |
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Net proceeds from issuance of short-term debt |
|
| 52,217 |
|
| 29,930 |
|
Checks outstanding |
|
| 978 |
|
| 298 |
|
Payment of long-term debt and capital leases |
|
| (1,901 | ) |
| (3,135 | ) |
Payment of financing fees |
|
| (390 | ) |
| (743 | ) |
Equity payment to estate |
|
| (10 | ) |
| — |
|
Payment of allocated patronage |
|
| (4,020 | ) |
| (3,626 | ) |
Net cash (used in)/provided by financing activities |
|
| 46,874 |
|
| 22,724 |
|
|
|
|
|
|
|
|
|
NET INCREASE/(DECREASE) IN CASH |
|
| 125 |
|
| 214 |
|
|
|
|
|
|
|
|
|
CASH, BEGINNING OF YEAR |
|
| 129 |
|
| 94 |
|
|
|
|
|
|
|
|
|
CASH, END OF PERIOD |
| $ | 254 |
| $ | 308 |
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
Cash payments for (Receipts from) |
|
|
|
|
|
|
|
Interest |
| $ | 975 |
| $ | 880 |
|
|
|
|
|
|
|
|
|
Income taxes, net of refunds |
| $ | 574 |
| $ | 12 |
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit retain deductions from grower payable |
| $ | 3,108 |
|
| — |
|
|
|
|
|
|
|
|
|
Proceeds for bond issuance transferred to restricted investment |
| $ | 8,815 |
|
| 7,000 |
|
|
|
|
|
|
|
|
|
Equipment purchased by issuance of capital lease |
| $ | — |
| $ | 392 |
|
See Notes to Consolidated Financial Statements.
6
MINN-DAK FARMERS COOPERATIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
FEBRUARY 28, 2011 and 2010
(Unaudited)
1. | The consolidated financial statements of the Company and that of its wholly owned subsidiary companies Minn-Dak Yeast Company (“Minn-Dak Yeast”) and Link Acquisition Company LLC (“Link”) for the three-month and six-month periods ended February 28, 2011 and 2010 are unaudited and reflect all adjustments consisting of normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim period. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2010. The results of operations for the three-month and six-month periods ended February 28, 2011 are not necessarily indicative of the results for the entire fiscal year ending August 31, 2011. |
2. | Inventories of refined sugar, in-process sugar, pulp and molasses to be sold on a pooled basis are valued at net realizable value, while third-party purchased refined sugar to be sold on a pooled basis is valued at the lower of cost or market. Third-party refined sugar costs include product, delivery, poll adjustment, and refining fee costs. Inventory of yeast is valued at the lower of average cost or market. Materials and supplies are valued at most recent purchase price that approximates cost. During the periods when sugarbeets are purchased from shareholder/growers and/or non-members, but not yet converted into refined sugar or in-process sugar, that sugarbeet inventory is valued at grower and/or non-members payment cost. In valuing inventories at Net Realizable Value (“NRV”), the Company, in effect sells the remaining inventory to the subsequent period’s sugar and co-product pool. Pooled product inventories will normally increase to a peak valuation at the end of the processing campaign and decrease to a low point of valuation at or near fiscal year end. |
3. | In September 2010, and effective as of August 31, 2010, the Company declared a revolvement of the remaining 66 percent of the allocated patronage for the 2003-crop totaling $2.9 million and 31 percent of the allocated patronage for the 2004-crop totaling $1.1 million. These amounts were accrued as of August 31, 2010 and paid to the shareholders on September 17, 2010. |
4. | In November 2010, the Company allocated to shareholders $4.0 million of patronage from the 2009-crop in the form of non-qualified allocated patronage credits. |
5. | The Company’s Board of Directors has authorized a $3.1 million per unit retain deduction from the 2010-crop. As of February 28, 2011, this has been deducted and allocated to shareholders’ equity accounts. |
6. | Short term credit utilized as of February 28, 2011 consisted of $79.8 million, $50.6 million from CoBank (the “Bank”) and $29.2 million from the USDA Commodity Credit Corporation “CCC”, leaving a remaining short-term credit capacity of $42.6 million. The increase in seasonal debt from August 31, 2010 to February 28, 2011 is due to normal seasonal operations for a 3.1 million ton crop. |
| Source |
| Capacity |
| Utilized |
| Unused Capacity |
| |||
|
|
|
|
|
|
|
|
| |||
| Co-Bank |
| $ | 85.0 |
| $ | 50.6 |
| $ | 34.4 |
|
| CCC |
| $ | 37.4 |
| $ | 29.2 |
| $ | 8.2 |
|
| Total |
| $ | 122.4 |
| $ | 79.8 |
| $ | 42.6 |
|
7. | On November 15, 2010 the Company renewed the Revolving Credit Supplement with the Bank through December 31, 2011. The Revolving Credit Supplement was renewed at $85.0 million for the time period from November 15, 2010 to May 31, 2011; then it will be reduced to $45.0 million through December 31, 2011. |
8. | On December 7, 2009, the Company applied for and received approval from Richland County to re-finance its tax-exempt long-term bonds. All variable rate bonds outstanding as of January 15, 2010 were called and new variable rate bonds (currently at 0.40 percent interest rate) were issued with a single maturity date of February 1, 2023 with no associated gains or losses. In addition, $7.0 million in new tax-exempt bonds, which are also exempt from alternative minimum taxes, were approved by Richland County to finance future capital expenditures. These variable rate bonds (currently at 0.26 percent interest rate) were issued on February 18, 2010 with a single maturity date of February 1, 2025. The letters of credit from the Bank associated with these bonds were also renewed as of the date of the issuance of the bonds. The new tax-exempt bonds are held as a restricted investment in a bond trust until qualified expenditures related to the bonds have been expended by the Company. |
7
9. | On November 30, 2010, the Company applied for and received approval from Richland County to sell $8.8 million of new tax-exempt bonds, which are also exempt from alternative minimum taxes, to finance future capital expenditures. These variable rate bonds (currently at 0.26 percent interest rate) were issued on November 30, 2010 with a single maturity date of November 1, 2025. The letters of credit from the Bank associated with all of the bonds were also renewed as of the date of the issuance of the November 30, 2010 bonds, with the letters of credit increasing $9.1 million, representing the $8.8 million in principal plus interest. These newly issued tax-exempt bonds are held as a restricted investment in a bond trust until qualified expenditures related to the bonds have been expended by the Company. |
10. | Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. |
| The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value: |
Level 1: Quoted prices in active markets for identical assets or liabilities
Level 2: Includes the following inputs:
• | Quoted prices in active markets for similar assets or liabilities |
• | Quoted prices for identical or similar assets or liabilities in markets that are not active |
• | Or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.
• | Long-Term Debt, Inclusive of Current Maturities – Based upon discounted cash flows and current borrowing rates with similar maturities, the book value of the long-term debt as of February 28, 2011, was approximately $19.3 million of Bank debt in comparison to the fair value of $19.3 million. Also included in the Company’s long-term debt is $28.0 million in tax-exempt bonds, in comparison to the fair value of $28.0 million. |
• | Proceeds for Bond Issuance Transferred to Restricted Investment – included in the Company’s current and long-term Restricted Investments was $9.0 million in comparison to the fair value of $9.0 million. Current and long-term Restricted Investments are invested in short-term government backed securities. |
• | Investments in CoBank, Dakota Valley Electric, and Investments in Marketing Cooperatives – The Company believes it is not practical to estimate the fair value of these investments without incurring excessive costs because there is no established market for these securities and equity interests, and it is inappropriate to estimate future cash flows which are largely dependent on future earnings of these organizations. |
• | Foreign Currency Forward Contracts – There were no open foreign currency forward contracts as of February 28, 2011. |
• | Interest Rate Contracts– Based on the zero coupon method in which the term, notional amount, and repricing date of the interest rate swap match the term, repricing date, and principal amount of the interest-bearing liability on which the hedging interest payments are due, the fair value of the interest rate contracts as of February 28, 2011 was a liability of less than $0.1 million. Inputs used to measure the fair value of the interest rate swap contracts are quoted prices in active markets for similar assets or liabilities and therefore are contained within level 2 of the fair value hierarchy. See the tables below. |
| Interest Rate Swaps (In Millions) |
| Fair Value of Liabilities as of February 28, 2011 |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Fiscal Year |
| Notional Amt |
| Ave Interest Rate |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| 2011 |
| $ | 10.0 Million |
| 0.440% |
| $ | ― |
| $ | <0.1 |
| $ | ― |
| $ | <0.1 |
|
| 2012 |
| $ | 20.0 Million |
| 0.886% |
| $ | ― |
| $ | <0.1 |
| $ | ― |
| $ | <0.1 |
|
| 2013 |
| $ | 15.0 Million |
| 1.895% |
| $ | ― |
| $ | <0.1 |
| $ | ― |
| $ | <0.1 |
|
| 2014 |
| $ | 5.0 Million |
| 2.943% |
| $ | ― |
| $ | <0.1 |
| $ | ― |
| $ | <0.1 |
|
| Total |
|
|
|
|
|
| $ | ― |
| $ | <0.1 |
| $ | ― |
| $ | <0.1 |
|
8
11. | FASB ASC 815 (formerly SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities) requires the Company to recognize all derivatives, as defined, on the balance sheet at fair value. |
| The Company, as a result of its operating and financing activities, is exposed to changes in foreign currency exchange rates and interest rates which may adversely affect its results of operations and financial position. In seeking to minimize the risks and/or costs associated with such activities, the Company may enter into derivative contracts. |
| The Company manages its foreign currency related risks primarily through the use of foreign currency forward contracts. At February 28, 2011 and at August 31, 2010, the Company had no foreign currency derivative instruments. |
| The Company is exposed to interest risk primarily through its borrowing activities. The Company uses variable rate interest on substantially all of its debt obligations. To manage the interest rate risk on its debt, the Company uses interest rate swaps for the underlying interest rate of similar maturity debt instruments. These interest rate swaps are matched with future fiscal year periods. The Company has designated these interest rate swap contracts as a cash flow hedge. |
| The Company does not consider its interest rate swaps Level 1 inputs because they are not exchange traded. The Company considers its interest rate swaps to be Level 2 inputs because they are observable in the marketplace. |
| The Company reviews the hedging activity for effectiveness on a quarterly basis. The Company did not hold any hedging activity to review prior to the 2nd quarter of the current fiscal year. No ineffectiveness was recognized in earnings during the quarter ended February 28, 2011. |
| The current period loss as a result of reclassifying prior Interest Rate Liabilities to Interest Rate Expense was less than $0.1 million for the six-month period ended February 28, 2011. There was no activity for the six-month period ended February 28, 2010. |
| The Company has swap agreements in place by individual Fiscal Year with different interest rates for each Fiscal Year. |
| Interest Rate Swaps in effect February 28, 2011: |
| Interest Rate Swaps |
|
|
|
|
|
|
| |||||
| Fiscal Year |
| Notional Amount |
| Average Interest Rate |
| Mark to Market |
| Mark to Market |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| 2011 |
| $ | 10.0 Million |
| 0.440% |
| $ | (<0.1) Million |
| $ | 0.0 Million |
|
| 2012 |
| $ | 20.0 Million |
| 0.886% |
| $ | (<0.1) Million |
| $ | (<0.1) Million |
|
| 2013 |
| $ | 15.0 Million |
| 1.895% |
| $ | 0.0 Million |
| $ | <0.1 Million |
|
| 2014 |
| $ | 5.0 Million |
| 2.943% |
| $ | 0.0 Million |
| $ | <0.0 Million |
|
| Total |
|
|
|
|
|
| $ | (<0.1) Million |
| $ | (<0.0) Million |
|
Interest Rate Swaps in effect August 31, 2010:
Interest Rate Swaps - None
12. | The Company’s shareholder/growers harvested 3,108,004 tons of sugarbeets from the 2010-crop, which created a revised (in January 2011) estimated payment liability of $166.5 million, or a payment estimate of $53.57 per average ton. |
13. | The sugar beet industry and the Company have been or are currently involved in various litigations concerning the approval of Roundup Ready® sugarbeets for planting in 2011 and forward. The legal proceedings to date have resulted in the finding that, as of this filing, it is legal for the Company’s shareholder/growers to plant Roundup Ready® sugarbeet seed in 2011. However, the Company believes that there will continue to be legal challenges to the USDA’s partial deregulation of the Roundup Ready® sugarbeet seed. The ability of shareholder/growers to plant Roundup Ready® sugarbeets in subsequent years will be based upon actions by the USDA, which may be subject to further challenge by certain groups who oppose the partial deregulation. |
Environmental law restrictions on the use of Roundup Ready® sugarbeet seeds or other restriction relating to sugarbeet seeds or herbicides could have a significant, negative financial impact on the Company and its shareholder/growers. | |
The Company has incurred $3.6 million in costs related to the raising of conventional seed for the 2011-crop year. These costs are reflected as current assets and the method of allocating these costs back to the 2011-crop patrons has not been determined. |
9
14. | The following schedule provides the components of Net Periodic Benefit Cost for the Six-Months Ended, February 28, 2011 and 2010. |
(In 000’s) | Pension Plan | Other Than Pension Plan | ||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||
Service Cost | $ | 640 | $ | 502 | $ | ― | $ | ― | ||||||
Interest Cost | 996 | 922 | ― | ― | ||||||||||
| Expected return on plan assets |
|
| (833 | ) |
| (746 | ) |
| ― |
|
| ― |
|
| Amortization of prior service cost |
|
| 16 |
|
| 16 |
|
| ― |
|
| ― |
|
| Amortization of transition cost |
|
| ― |
|
| ― |
|
| ― |
|
| ― |
|
| Amortization of net (gain) loss |
|
| 542 |
|
| 304 |
|
| ― |
|
| ― |
|
| Net periodic benefit cost |
| $ | 1,361 |
| $ | 998 |
| $ | ― |
| $ | ― |
|
| Through the six-months ended February 28, 2011, the Company has made $0.4 million of contributions as compared to $0.4 million through the six-months ended February 28, 2010. The Company anticipates contributing $1.4 million in additional funds to its pension plan in Fiscal Year 2011, for a total of $1.8 million. Contributions in Fiscal Year 2010 totaled $1.5 million. |
15. | Recently Issued Accounting Pronouncements: |
| In December, 2010, the FASB issued authoritative guidance to improve goodwill impairment testing. Under this guidance, goodwill and other intangible assets testing is a two-step test. When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. This Update will be implemented for the quarter ending November 2011. The Company does not expect that this authoritative guidance on impairment testing will have a material effect on the Company’s financial statements. |
16. | Change in Accounting Standards: |
| In June and December 2009, the FASB issued authoritative guidance to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This guidance became effective for the Company in Fiscal Year 2011. The Company does not consider the adoption of this guidance to have a material effect on its financial statements. |
| In July 2010, the FASB issued authoritative guidance regarding disclosures about credit quality of financing receivables and the allowance for credit losses. This guidance is effective for the quarter ending February, 28, 2010. However, in January 2011, the FASB issued guidance regarding deferral of the effective date of disclosures about troubled debt restructurings in Update No. 2010-20. The deferral of the disclosures was effective upon issuance. The deferred portions of Update No. 2010-20 is anticipated to be effective for interim and annual reporting periods after June 15, 2011 |
17. | Subsequent Events: |
| The Company has considered subsequent events through the date the financial statements were issued. |
10
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Discussion should be read in conjunction with information contained in the Consolidated Financial Statements and Notes thereto and in the Company’s Annual Report on Form 10-K for fiscal year ended August 31, 2010.
OVERVIEW
The following discussion and analysis relates to the financial condition and results of operations of Minn-Dak Farmers Cooperative (the “Company” or the “Registrant”) for the three-month and six-month periods ended February 28, 2011 (the second quarter of the Company’s 2011 fiscal year). The Company’s fiscal year runs from September 1 to August 31.
Any statements regarding future market prices, anticipated costs, agricultural results, operating results and other statements that are not historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. The words “expect”, “project”, “estimate”, “believe”, “anticipate”, “plan”, “intend”, “could”, “may”, “predict” and similar expressions are also intended to identify forward-looking statements. Such statements involve risks, uncertainties and assumptions, including, without limitation, market factors, the effect of weather and economic conditions, farm and trade policy, the available supply of sugar, available quantity and quality of sugarbeets and other risks, including those set forth in the Company’s reports filed with the Securities and Exchange Commission, including Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended August 31, 2010. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. These forward-looking statements are made as of the date of this report and the Company assumes no obligation to update such forward-looking statements, or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.
Critical Accounting Policies and Estimates
The only material changes to the Company’s critical accounting policies and estimates since the filing of its Annual Report on form 10-K for the year ended August 31, 2010 has been the Derivative and Hedging Activities.
The Company’s critical accounting policies and estimate changes include the following:
Derivative and Hedging Activities
FASB ASC 815 (formerly SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities) requires the Company to recognize all derivatives, as defined, on the balance sheet at fair value.
The Company, as a result of its operating and financing activities, is exposed to changes in foreign currency exchange rates and interest rates which may adversely affect its results of operations and financial position. In seeking to minimize the risks and/or costs associated with such activities, the Company may enter into derivative contracts.
The Company manages its foreign currency related risks primarily through the use of foreign currency forward contracts. At February 28, 2011 and at August 31, 2010, the Company had no foreign currency derivative instruments.
The Company is exposed to interest risk primarily through its borrowing activities. The Company uses variable rate interest on substantially all of its debt obligations. To manage the interest rate risk on its debt, the Company uses interest rate swaps for the underlying interest rate of similar maturity debt instruments. These interest rate swaps are matched with future fiscal year periods. The Company has designated these interest rate swap contracts as a cash flow hedge.
The Company does not consider its interest rate swaps Level 1 inputs because they are not exchange traded.The Company considers its interest rate swaps to be Level 2 inputs because they are observable in the marketplace.
The Company reviews the hedging activity for effectiveness on a quarterly basis. The Company did not hold any hedging activity to review prior to the 2nd quarter of the current fiscal year. No ineffectiveness was recognized in earnings during the quarter ended February 28, 2011.
The current period loss as a result of reclassifying prior Interest Rate Liabilities to Interest Rate Expense was less than $0.1 million for the six-month period ended February 28, 2011. There was no activity for the six-month period ended February 28, 2010.
11
ESTIMATED FISCAL YEAR 2011/ CROP YEAR 2010 INFORMATION
This discussion contains a summary of the Company’s current estimates of the financial results to be obtained from the Company’s processing of the 2010 sugarbeet crop. Given the nature of the estimates required in connection with the payments to shareholder/growers for their sugarbeets, this discussion includes forward-looking statements regarding the quantity of sugar to be produced from the 2010 sugarbeet crop, the net selling price for the sugar and co-products produced by the Company and the Company’s operating costs. These forward-looking statements are based largely upon the Company’s expectations and estimates of future events; as a result, they are subject to a variety of risks and uncertainties. Some of those estimates, such as the selling price for the Company’s products, the quantity of sugar produced from the sugarbeet crop, changes in plant production efficiencies and sugarbeet storage conditions are beyond the Company’s control. The actual results experienced by the Company could differ materially from the forward-looking statements contained herein.
The Company’s shareholder/growers harvested 3.1 million tons of sugarbeets from the 2010-crop, approximately 42 percent more than the most recent 5-year average. Sugar content of the 2010-crop was 1 percent above the average of the five most recent years. Due to the higher harvested tons and sugar content, the Company’s initial production of sugar from the 2010-crop sugarbeets is expected to be 23 percent more than the average of the five most recent years of sugar production. Unfavorable storage temperatures in October, combined with excessively high storage heights of non-ventilated piles resulted in the disposal of an estimated 0.2 million tons of beets. The need to dispose of an estimated 0.2 million tons of beets resulted in approximately $3.0 million in beet disposal costs during the quarter ended February 28, 2011. The Board of Directors has authorized capital expenditures to add a sufficient quantity of forced air ventilation and extended pile grounds to significantly reduce the risk of having to discard beets in future years under the same size crop and weather circumstances.
The Company’s initial sugarbeet payment estimate totaled $56.86 per ton or $0.19369042 per harvested /bonus extractible pound of sugar. As a result of the loss of sugarbeets in storage (as discussed above) and deterioration of the remaining sugar beets, the payment estimate has been revised to $53.57 per ton or $0.182508248 per harvested/bonus extractible pound of sugar; with the final sugarbeet payment determined in October of 2011. This revised projected payment is 13 percent more than the final 2009-crop payment per ton and 1 percent less per pound of extractible sugar. The higher projected 2010-crop payment per ton results from more total tons of beets processed, higher sugar content in the sugarbeets, decreased operating and fixed costs per ton as well as improved sugar prices; offset to some degree by more beet discards, versus the prior year. The price per pound of extractible sugar was diluted by 6.5 percent due to bonus sugar for the 2010-crop vs. 2.3 percent for the 2009-crop. Bonus sugar is an incentive payment to shareholder/growers to deliver sugarbeets prior to main harvest. Harvest for the 2010-crop began on August 18, 2010 vs. the 2009-crop beginning on September 8, 2009.
As of the date of this report, the Company has taken into consideration key indicators of actual results vs. projections used for the revised sugarbeet payment estimate. Consideration has been given to beet inventory storage conditions, projected net selling prices, factory operation costs, and sugar, pulp and molasses production. No change in the revised estimated beet payment, as announced in the 8-K filed January 25, 2011, has resulted from this review. It is the Company’s policy to update its estimate of yearly crop payments only when a material change is sufficiently certain and the amount of such change is reasonably calculable.
12
RESULTS OF OPERATIONS
Comparison of the three-months ended February 28, 2011 and 2010
In the Consolidated Statements of Operations, Distribution of Net Proceeds, allocated costs of sugarbeets paid or payable to shareholder/growers for production to date totaled $52.4 million, an increase of $23.7 million or 82.2 percent from the prior year period. As of February 28, 2011, Management has revised the estimated Fiscal 2011 payment to shareholder/growers for sugarbeets to $166.5 million, which is $71.4 million or 75.2 percent more than the prior year.
The increase in payments to shareholder/growers is based upon (i) an average delivered sugar content of 16.8 percent, an 8.7 percent increase from the 2009-crop, (ii) a total shareholder/grower sugarbeet crop to process of 3.1 million tons less an estimated 0.2 million tons discarded and (iii) the Company’s projected selling price for its sugar, pulp and yeast being higher; offset some by lower molasses prices when compared to the previous year.
Revenues for the three-month period ended February 28, 2011 were comprised of Sugar 87 percent, Pulp 5 percent, Yeast 3 percent and Molasses 5 percent.
Consolidated revenue for the three-month period ended February 28, 2011 from the sales of Sugar, Pulp, Molasses and Yeast, increased $27.0 million or 48.3 percent from the three-month period ended February 28, 2010. The table below reflects the percentage changes in product revenues, prices and volumes for the three-month period ended February 28, 2011.
Product |
| Revenue |
| Change |
| Revenue |
| Selling Price |
| Volume | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sugar |
| $ | 69. | 8 |
| $ | 27.0 |
|
| 63. | 2% |
| 16. | 2% |
| 47. | 0% |
Pulp |
| $ | 4. | 9 |
| $ | (0.2 | ) |
| (3. | 7%) |
| 8. | 0% |
| (11. | 7%) |
Molasses |
| $ | 5. | 1 |
| $ | 1.2 |
|
| 29. | 5% |
| (10. | 4%) |
| 39. | 9% |
Yeast |
| $ | 3. | 2 |
| $ | (1.0 | ) |
| (23. | 7%) |
| 0. | 1% |
| (23. | 8%) |
Total |
| $ | 83. | 0 |
| $ | 27.0 |
|
|
|
|
|
|
|
|
|
|
The increase in volume of sugar sold is attributable a larger 2010-crop, delivered by shareholder/growers coupled with a very high demand from customers. The net increase in volume of co-products sold is attributable to a larger 2010-crop causing an earlier start to manufacturing on a pool wide basis. Overall returns per ton for Pulp are projected to be higher and the overall returns per ton for Molasses are projected to be lower for the Fiscal Year ended August 31, 2011. Returns for Pulp and Molasses throughout the fiscal year will be impacted by prior period carry-over sales, inventory levels, product mix and timing of sales. Yeast sales volume decreased due to existing customers’ decreased demand for yeast.
The value of finished product inventories for the three-month period ended February 28, 2011 increased $19.3 million, $9.6 million more than the three-month period ended February 28, 2010, mostly the result of not tolling sugarbeets for another processor, as was the case during the three month period ended February 28, 2010. The change in Sugar and Juice inventories accounted for substantially all of the change vs. 2010.
Tolling and Other Income decreased by $6.9 million due to the Company not having a tolling agreement in place this period. The Company determined that it does not have excess capacity in the current year to process sugarbeets for other processors.
Expenses for the three-month period ended February 28, 2011 increased $7.6 million. $3.0 million increased due to disposal costs of deteriorated sugarbeets, $1.2 million increased due to other production costs, $3.0 million increased due to Sales and Distribution Costs associated with the larger crop and $0.4 million increased due to General, Administrative, and Interest costs.
13
Comparison of the six-months ended February 28, 2011 and 2010.
In the Consolidated Statements of Operations, Distribution of Net Proceeds, allocated costs of sugarbeets paid or payable to shareholder/growers for production to date totaled $120.5 million, an increase of $60.6 million or 101.1 percent from the prior year. As of February 28, 2011, Management has revised the estimated Fiscal 2011 payment to shareholder/growers for sugarbeets to $166.5 million, which is $71.4 million or 75.2 percent more than the prior year.
The increase in payments to shareholder/growers is based upon (i) an average delivered sugar content of 16.8 percent, an 8.7 percent increase from the 2009-crop, (ii) a total shareholder/grower sugarbeet crop to process of 3.1 million tons less an estimated 0.2 million tons discarded and (iii) the Company’s projected selling price for its sugar, pulp and yeast being higher; offset to some degree by lower molasses prices when compared to the previous year.
Revenues for the six-month period ended February 28, 2011 were comprised of Sugar 90 percent, Pulp 4 percent, Yeast 3 percent and Molasses 3 percent.
Consolidated revenue for the six-month period ended February 28, 2011, increased $88.8 million or 64.2 percent from the six-month period ended February 28, 2010. The table below reflects the percentage changes in product revenues, prices and volumes for the six-month period ended February 28, 2011.
Product |
| Revenue |
| Change |
| Revenue |
| Selling Price |
| Volume | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sugar |
| $ | 132. | 2 |
| $ | 42. | 6 |
| 47. | 6% |
| 15. | 7% |
| 31. | 9% |
Pulp |
| $ | 10. | 4 |
| $ | 1. | 7 |
| 19. | 4% |
| (17. | 9%) |
| 37. | 3% |
Molasses |
| $ | 8. | 3 |
| $ | 1. | 8 |
| 27. | 8% |
| (10. | 0%) |
| 37. | 8% |
Yeast |
| $ | 6. | 5 |
| $ | (1. | 2) |
| (15. | 9%) |
| 0. | 9% |
| (16. | 8%) |
Total |
| $ | 157. | 4 |
| $ | 44. | 9 |
|
|
|
|
|
|
|
|
|
The increase in volume of sugar sold is attributable a larger 2010 crop, delivered by shareholder/growers coupled with a very high demand from customers. The increase in volume of co-products sold is attributable to a larger 2010-crop causing an earlier start to manufacturing on a pool wide basis. Overall returns per ton for Pulp are projected to be higher and the overall returns per ton for Molasses are projected to be lower for the Fiscal Year ended August 31, 2011. Returns for Pulp and Molasses throughout the fiscal year will be impacted by prior period carry-over sales, inventory levels, product mix and timing of sales. Yeast sales volume decreased due to existing customers’ decreased demand for yeast. Selling prices for all products increased or decreased due to general market conditions.
The value of finished product inventories for the six-month period ended February 28, 2011 increased $69.9 million, $43.9 million more than the increase for the six-month period ended February 28, 2010. A significant portion of the increase is a reflection of the tolling the Company did for another processor during the three-months ended February 28, 2010, and which did not take place in current year. In addition, the start of campaign on August 20, 2010 allowed the Company to be manufacturing at full capacity on September 1, 2010 the first day of the six-month period ended February 28, 2011. The change in Sugar and Juice inventories accounted for almost all of the change in inventory vs. 2010.
Tolling and Other Income decreased by $6.9 million due to the Company not having a tolling agreement in place. The Company determined that it does not have excess capacity in the current year to process sugarbeets for other processors.
Expenses for the six-month period ended February 28, 2011 increased $18.5 million; $11.0 million increased due to the production costs for a campaign that has incurred nineteen more operating days in 2011 vs. 2010. The production costs include $3.0 million in beet disposal costs; higher grower delivery and trucking costs, higher trucking re-haul costs, higher energy costs, and higher maintenance costs. Other than beet disposal costs, production costs were related to the larger crop and higher levels of operations. $6.4 million increased due to Sales and Distribution Costs associated with the larger crop and $1.1 million increased due to General, Administrative, and Interest costs.
14
LIQUIDITY AND CAPITAL RESOURCES
Because the Company operates as a cooperative, payment for shareholder/grower-delivered sugarbeets, the principal raw material used in producing the sugar and co-products it sells, are subordinated to all shareholder/grower business expenses. In addition, actual cash payments to shareholder/growers are spread over a period of approximately one year following delivery of sugarbeet crops to the Company and are net of per unit retains and patronage allocated to them, both of which remain available to meet the Company’s capital requirements. This shareholder financing arrangement may result in an additional source of liquidity and reduced outside financing requirements in comparison to a similar business operated on a non-cooperative basis. However, because sugar is sold throughout the year (while sugarbeets are processed primarily between September and April) and because substantial amounts of equipment are required for its operations, the Company has utilized substantial outside financing on both a seasonal and long-term basis to fund such operations. The short and long-term financing has been primarily provided by CoBank (the “Bank”). The Company also has the ability to borrow money on a short-term basis from the USDA Commodity Credit Corporation “CCC” using the Company’s sugar inventory as collateral.
February 28, 2011 Seasonal Debt Information (Millions $)
Source |
| Capacity |
| Utilized |
| Unused Capacity | |||
|
|
|
|
|
|
| |||
Co-Bank |
| $ | 85.0 |
| $ | 50.6 |
| $ | 34.4 |
CCC |
| $ | 37.4 |
| $ | 29.2 |
| $ | 8.2 |
Total |
| $ | 122.4 |
| $ | 79.8 |
| $ | 42.6 |
During the six-month period ended February 28, 2011 the Company was reimbursed from the bond trust for qualified capital expenditures in the amount of $6.8 million in accordance with the sale of $7.0 million in tax exempt bonds during fiscal 2010.
On November 30, 2010, the Company sold $8.8 millionof new tax exempt bonds resulting from the Federal Government’s economic stimulus legislation. The proceeds of these bonds are required to be placed in a trust account until the Company makes qualifying capital investments that allow for the use of the proceeds of these bonds. The Company intends to use all of the proceeds from the bond issuance on qualifying capital expenditures within the time period required in the bond indenture.
The loan agreements between the Bank and the Company obligate the Company to maintain, “In accordance with GAAP”, the following financial covenants:
• | Maintain a current ratio of no less than 1.10 for the first quarter of a fiscal year and 1.15 for all other quarter and fiscal year ends; |
• | Maintain a long-term debt and capitalized leases to equity ratio of not greater than .8:1; |
• | Maintain available cash flow to current long-term debt ratio as defined in the agreement of not less than 1.25:1, as measured at fiscal year end. |
As of February 28, 2011 the Company was in compliance with its loan agreement covenants with the Bank.
Net Cash used for operations totaled $47.6 million for the six-month period ended February 28, 2011, compared to $17.4 million used for the previous period. This increase of $30.2 million in net cash used vs. the period ended February 28, 2010 was primarily due to the differences in the sugarbeet projected payments recorded liability, actual payments to shareholder/growers , and the associated additional inventory needs for processing materials from the record 2010-crop. Beet disposal costs were $3.0 million. Also, $3.5 million was used to fund crop chemical needs for the 2011 crop, should conventional sugarbeet seed be determined to be the planting option for shareholder/growers.
The net cash provided by investing activities totaled $0.9 million for the six-month period ended February 28, 2011, compared to $5.1 million used the period ended February 28, 2010. The decrease of $6.0 million was primarily due to the prior period having $4.4 million used in a change in other assets. The conversion of $6.8 million in restricted bond assets to cash during the current period was offset by an increase of $4.4 million in capital expenditures vs. the period ended February 28, 2010.
The net cash provided by financing activities totaled $46.9 million for the six-month period ended February 28, 2011 compared to $22.7 million for the period ended February 28, 2010. This increase of $24.2 million was primarily due to a $22.3 million increase in short term debt obligations required for the payment of sugarbeets from the record 2010-crop. All other factors totaled ($1.9) million.
15
The Company retained $3.1 million as a non-cash item from the November and January beet payments in the form of a non-qualified per unit retains.
The Company anticipates that the funds necessary for working capital requirements and future capital expenditures will be derived from operations, short-term borrowings, depreciation, patronage and long-term borrowings.
Working capital increased $23.8 million for the for the six-month period ended February 28, 2011. The Company funds its capital expenditure and debt retirement needs primarily from operating activities. The Company anticipates using the majority of the remaining $9.0 million in economic stimulus bonds as a source of funding for the fiscal 2011 capital expenditures.
Cash increased $0.1 million for the for the six-month period ended February 28, 2011.
Capital expenditures for fiscal year 2011 have been approved at $22.3 million. The capital expenditures are for equipment to improve efficiency, improved beet storage, improved rail facilities, safety and replacement activities. Failure by the Company to make capital expenditures over a period of years could result in the Company being less competitive due to its failure to reduce costs, increase operating efficiencies or increase revenues.
The Bonds are secured by a letter of Credit from the Bank. The letter of credit is ultimately secured by the plant and property of the Company’s facility at Wahpeton, ND.
The Company is not aware of any known trends, demands, commitments, events or uncertainties that will likely result in the Company’s liquidity increasing or decreasing materially.
Other than those items described above, the Company is not aware of any known material trends, either favorable or unfavorable, that would cause the mix of equity to debt or the cost of debt to materially change.
OTHER
Estimated Fiscal Year 2012 Information
The Company’s Board of Directors has not changed the planting level for the 2011-crop vs. the 2010-crop level. The 2010-crop level was 150 percent of member preferred shares plus or minus a 10 percent measuring tolerance; resulting in a total maximum planting of 160 percent and a total minimum planting of 140 percent of member preferred shares.
On February 4, 2011the USDA issued an Environmental Assessment (EA) to address an administrative action on its part to partially deregulate the use of Roundup Ready® sugarbeet seed for sugarbeet crops in the U.S. The partial deregulation of Roundup Ready® sugarbeet seed by the USDA has allowed the Company to secure Roundup Ready® sugarbeet seed for the 2011-crop. As of the date of this report the Company intends to allow its shareholder/growers to make the decision to plant either Roundup Ready® or conventional sugarbeet seed. See Part II, Item 1 of this report for additional information.
Environmental
The Company is subject to extensive federal and state environmental laws and regulations with respect to water and air quality, solid waste disposal and odor control. The Company conducts an ongoing compliance program designed to meet these environmental laws and regulations. The Company believes that it is in substantial compliance with applicable environmental laws and regulations. From time to time, however, the Company may be involved in investigations or determinations regarding matters that may arise in the ordinary course of business. The Company works closely with all affected government agencies to resolve environmental issues that have arisen and believes such issues will be resolved without any material adverse effect on the Company.
The Company’s sugar manufacturing process is energy intensive and generates carbon dioxide and other “Greenhouse Gases” (GHGs). Several bills have been passed or introduced in the United States Senate and House of Representatives that would regulate GHGs and carbon dioxide emissions to reduce the impact of global climate change. The Company believes it is likely that industries generating GHGs, including the Company, will at some future date be subject to either federal or state regulation relating to climate change policies. These policies, if adopted, will increase the Company’s energy and other operating costs. Depending on how these policies address imports, the domestic sugar market may have a competitive disadvantage compared with imported sugar. These policies could have a significant negative impact on the Company’s beet payment to shareholder/growers if the Company is not able to pass the increased costs on to the Company’s customers.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company’s Quantitative and Qualitative Disclosures About Market Risk since the filing of the Company’s 10-K for the Fiscal Year ended August 31, 2010.
ITEM 4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, the Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer (together the “Certifying Officers”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of February 28, 2011, the end of the period covered by this report. Based upon that evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures were effective.
Inherent Limitations on Effectiveness of Controls
Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of the management and the Board; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Company assets that could have a material effect on the financial statements.
Management personnel, including the Certifying Officers, recognize that the Company’s internal control over financial reporting cannot prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
There have been no material changes to the Company’s internal control over financial reporting since the filing of the Company’s Form 10-Q for the period ended November 30, 2011 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In March 2005, the U.S. Department of Agriculture (the “USDA”) made a determination that Roundup Ready® sugarbeets should be deregulated. On January 23, 2008, a coalition group including the Center for Food Safety, the Sierra Club and two organic seed groups filed a lawsuit challenging the USDA’s determination. On September 21, 2009, the U.S. District Court for the Northern District of California (the “District Court”) ruled that the USDA violated the National Environmental Policy Act by failing to prepare an Environmental Impact Statement (“EIS”) before deregulating Roundup Ready® sugarbeets. The District Court also ordered the USDA to complete an EIS. The USDA has said that it expects to complete the EIS by May of 2012.
On August 13, 2010, the District Court issued an order that vacated the USDA’s decision to deregulate Roundup Ready® sugarbeets. As a result, the planting of Roundup Ready® sugarbeet seed after August 13, 2010 was prohibited until further action was taken by the USDA, in accordance with applicable environmental laws, to allow planting of Roundup Ready® sugarbeet seed.
In September 2010, the USDA, under existing regulatory authority, issued permits to commercial sugarbeet seed companies to plant root crop seed, or stecklings, for the purpose of possible commercial seed availability for the 2012 crop and beyond. That move was immediately challenged in court by the Center for Food Safety along with other groups. On November 30, 2010 the District Court granted the Plaintiffs’ motion for a preliminary injunction and ordered that the stecklings planted pursuant to the permits issued by USDA are removed from the ground. The District Court’s ruling was immediately appealed by USDA and was granted a series of stays by the Court of Appeals for the Ninth District Court. On February 25th the Appeals court overturned the District Court’s November 30th decision.
On February 4, 2011the USDA issued an Environmental Assessment (EA) to address an administrative action on its part to partially deregulate the use of Roundup Ready® sugarbeet seed for sugarbeet crops in the U.S. Plaintiffs tried to stop seed and root plantings for the 2011 crop by asking the Ninth District Court for a Temporary Restraining Order and Temporary Injunction. That was denied. The final result of all of the legal proceedings to date means that as of this filing it is legal for the Company’s shareholder/growers to plant Roundup Ready® sugarbeet seed in 2011. However, the Company believes that the Plaintiffs will continue to challenge by legal means the USDA’s partial deregulation of the Roundup Ready® sugarbeet seed going forward. The ability of shareholder/growers to plant Roundup Ready® sugarbeets in subsequent years will be based upon actions by the USDA, which may be subject to further challenge in the future by the Plaintiffs or other groups also.
On February 4, 2011 the Company, along with the rest of the sugarbeet industry, filed suit in U.S. district court in the District of Columbia against the USDA, the Center for Food Safety and the Sierra Club challenging some of the more onerous requirements set forth in the conditions for partial deregulation of the Roundup Ready® sugarbeet seed and requesting that the judge render a declaratory judgment that the partial deregulation complies with the National Environmental Protection Act (NEPA) and the Plant Protection Act (PPA).
According to the USDA, Roundup Ready® varieties accounted for about 95 percent of the planted acres in the 2009/10 crop year. The Company’s Board of Directors authorized the planting of Roundup Ready® sugarbeets beginning with the 2008 crop. Of the sugarbeet crop processed by the Company in 2010, the Company estimates that nearly 100 percent was grown with Roundup Ready® seed. Environmental law restrictions on the use of Roundup Ready® sugarbeet seeds or other restriction relating to sugarbeet seeds or herbicides could have a significant, negative financial impact on the Company and its shareholder/growers.
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Item 1A. Risk Factors
There have been no material changes from risk factors as previously disclosed in the Company’s Form 10-K. For a detailed discussion of certain risk factors that could affect the Company’s operations, financial condition or results for future periods, see Item 1 A, Risk factors in the Company’s 2010 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Approximately 70% of the estimated 2011-crop sugar has been marketed at net prices exceeding the estimated 2010-crop sugar net selling prices.
Item 6. Exhibits
a) Exhibits
Item #31.1 Section 302 Certification of the President and Chief Executive Officer
Item #31.2 Section 302 Certification of the Executive Vice President and Chief Financial Officer
Item #31.3 Section 302 Certification of the Controller and Chief Accounting Officer
Item #32.1 Section 906 Certification of the President and Chief Executive Officer
Item #32.2 Section 906 Certification of the Executive Vice President and Chief Financial Officer
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| MINN-DAK FARMERS COOPERATIVE |
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Date: | APRIL 14, 2011 |
| /s/ DAVID H. ROCHE |
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| David H. Roche |
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Date: | APRIL 14, 2011 |
| /s/ STEVEN M. CASPERS |
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| M. Caspers |
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