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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
-----------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28,
2002.
[ ] 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 333-17865
-----------------
CENEX HARVEST STATES COOPERATIVES
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0251095
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5500 CENEX DRIVE, (651) 451-5151
INVER GROVE HEIGHTS, MN 55077 (Registrant's telephone number
(Address of principal executive offices including area code)
and zip code)
-----------------
Include by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES _X_ NO ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
(Number of shares outstanding at
(Class) February 28, 2002)
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NONE NONE
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INDEX
PAGE
NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of February 28, 2002 (unaudited), August 31,
2001 and February 28, 2001 (unaudited) .................................... 2
Consolidated Statements of Operations for the three months and six months
ended February 28, 2002 and 2001 (unaudited) .............................. 3
Consolidated Statements of Cash Flows for the three months and six months
ended February 28, 2002 and 2001 (unaudited) .............................. 4
Notes to Consolidated Financial Statements (unaudited) .................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........ 19
PART II. OTHER INFORMATION
Items 1 through 5 have been omitted since all items are inapplicable or
answers are negative
Item 6. Exhibits and Reports on Form 8-K .................................. 20
SIGNATURE PAGE ............................................................. 21
i
PART I. FINANCIAL INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q may contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in the
forward-looking statements. These factors include those set forth in Exhibit 99,
under the caption "Cautionary Statement" to this Quarterly Report on Form 10-Q
for the quarter ended February 28, 2002.
1
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
FEBRUARY 28, AUGUST 31, FEBRUARY 28,
2002 2001 2001
------------ ------------ ------------
(DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 86,498 $ 113,458 $ 47,348
Receivables ............................................ 586,232 686,140 732,010
Inventories ............................................ 601,650 510,443 622,210
Other current assets ................................... 105,096 60,995 130,027
------------ ------------ ------------
Total current assets .................................. 1,379,476 1,371,036 1,531,595
INVESTMENTS ............................................. 461,058 467,953 440,996
PROPERTY, PLANT AND EQUIPMENT ........................... 1,029,214 1,023,872 1,028,775
OTHER ASSETS ............................................ 217,027 194,458 201,146
------------ ------------ ------------
Total assets .......................................... $ 3,086,775 $ 3,057,319 $ 3,202,512
============ ============ ============
LIABILITIES AND EQUITIES
CURRENT LIABILITIES:
Notes payable .......................................... $ 298,244 $ 97,195 $ 385,918
Current portion of long-term debt ...................... 14,658 17,754 28,270
Customer credit balances ............................... 63,244 38,486 65,848
Customer advance payments .............................. 83,154 109,135 142,799
Checks and drafts outstanding .......................... 69,535 87,808 44,572
Accounts payable ....................................... 325,422 495,198 456,740
Accrued expenses ....................................... 153,509 148,026 121,890
Patronage dividends and equity retirements payable ..... 32,198 72,154 35,362
------------ ------------ ------------
Total current liabilities ............................. 1,039,964 1,065,756 1,281,399
LONG-TERM DEBT .......................................... 565,250 542,243 530,213
OTHER LIABILITIES ....................................... 105,720 99,906 89,768
MINORITY INTERESTS IN SUBSIDIARIES ...................... 90,678 88,261 74,242
COMMITMENTS AND CONTINGENCIES
EQUITIES ................................................ 1,285,163 1,261,153 1,226,890
------------ ------------ ------------
Total liabilities and equities ........................ $ 3,086,775 $ 3,057,319 $ 3,202,512
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements (unaudited).
2
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES:
Net sales .............................. $ 1,859,811 $ 1,868,697 $ 3,731,763 $ 4,058,186
Patronage dividends .................... 1,188 823 1,909 1,248
Other revenues ......................... 23,648 38,478 55,724 64,484
------------ ------------ ------------ ------------
1,884,647 1,907,998 3,789,396 4,123,918
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of goods sold ..................... 1,822,402 1,803,763 3,626,766 3,937,292
Marketing, general and administrative .. 46,377 42,465 89,275 80,875
Interest ............................... 10,249 17,500 21,064 33,072
Equity loss (income) from
investments ........................... 2,176 15,853 (1,766) 13,493
Minority interests ..................... 2,674 8,473 5,710 12,206
------------ ------------ ------------ ------------
1,883,878 1,888,054 3,741,049 4,076,938
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES .............. 769 19,944 48,347 46,980
INCOME TAXES ............................ (1,602) (6,528) 4,621 (39,014)
------------ ------------ ------------ ------------
NET INCOME .............................. $ 2,371 $ 26,472 $ 43,726 $ 85,994
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements (unaudited).
3
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................. $ 2,371 $ 26,472 $ 43,726 $ 85,994
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ............................ 26,845 24,872 51,544 49,627
Noncash net loss (income) from equity investments ........ 2,176 15,853 (1,766) 13,493
Minority interests ....................................... 2,674 8,473 5,710 12,206
Adjustment of inventories to market value ................ (8,444) 6,441
Noncash portion of patronage dividends received .......... (970) (724) (1,736) (875)
Gain on sale of property, plant and equipment ............ (395) (13,790) (2,743) (14,416)
Deferred tax benefit ..................................... (34,247)
Other, net ............................................... 181 (1,938) 121 (1,938)
Changes in operating assets and liabilities:
Receivables ............................................. 51,663 107,697 97,716 102,679
Inventories ............................................. (55,246) 9,699 (107,637) (74,224)
Other current assets and other assets ................... (15,732) (80,559) (41,622) (100,985)
Customer credit balances ................................ 654 (8,015) 24,758 29,069
Customer advance payments ............................... (19,693) 13,722 (25,981) 10,864
Accounts payable and accrued expenses ................... (125,337) (203,027) (169,596) (193,852)
Other liabilities ....................................... 348 (4,424) 5,814 2,912
---------- ---------- ---------- ----------
Net cash used in operating activities ................. (138,905) (105,689) (115,251) (113,693)
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ............... (30,097) (24,124) (51,905) (48,536)
Proceeds from disposition of property, plant and
equipment ................................................. 2,530 26,206 8,646 27,721
Investments ................................................ (51) (4,123) (6,176) (11,604)
Equity investments redeemed ................................ 7,282 638 21,374 8,204
Investments redeemed ....................................... 700 468 2,028 635
Changes in notes receivable ................................ 4,571 (360) 2,408 (392)
Acquisition of intangibles ................................. (62) (7,038) (27,531) (7,038)
Distribution to minority owners ............................ (366) (8,537) (4,351) (12,525)
Other investing activities, net ............................ (29) 4,533 1,061 5,609
---------- ---------- ---------- ----------
Net cash used in investing activities ................. (15,522) (12,337) (54,446) (37,926)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in notes payable ................................... 187,429 77,863 201,049 167,992
Long-term debt borrowings .................................. 61,244 30,000 61,809
Principal payments on long-term debt ....................... (4,348) (4,718) (10,128) (13,826)
Changes in checks and drafts outstanding ................... 9,472 (28,202) (18,273) (39,514)
Proceeds from sale of preferred stock, net of expenses ..... 2,858 2,858
Preferred stock dividends paid ............................. (10) (10)
Retirements of equities .................................... (21,357) (2,374) (23,187) (7,911)
Cash patronage dividends paid .............................. (39,572) (25,976) (39,572) (25,976)
---------- ---------- ---------- ----------
Net cash provided by financing activities ............. 134,472 77,837 142,737 142,574
---------- ---------- ---------- ----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS ................................................ (19,955) (40,189) (26,960) (9,045)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD .................................................. 106,453 87,537 113,458 56,393
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD .................................................. $ 86,498 $ 47,348 $ 86,498 $ 47,348
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements (unaudited).
4
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1. ACCOUNTING POLICIES
The unaudited consolidated balance sheets as of February 28, 2002 and 2001,
and the statements of operations and cash flows for the three months and six
months ended February 28, 2002 and 2001 reflect, in the opinion of management of
Cenex Harvest States Cooperatives (the Company), all normal recurring
adjustments necessary for a fair statement of the financial position and results
of operations and cash flows for the interim periods presented. The results of
operations and cash flows for interim periods are not necessarily indicative of
results for a full year due in part to the seasonal nature of some of the
Company's businesses. The consolidated balance sheet data as of August 31, 2001
has been derived from audited consolidated financial statements but does not
include all disclosures required by accounting principles generally accepted in
the United States of America.
The consolidated financial statements include the accounts of the Company
and all of its wholly-owned and majority-owned subsidiaries and limited
liability companies. The effects of all significant intercompany accounts and
transactions have been eliminated.
Certain reclassifications have been made to the prior period's financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported net income or equities.
These statements should be read in conjunction with the consolidated
financial statements and footnotes for the year ended August 31, 2001, included
in the Company's Annual Report on Form 10-K previously filed with the Securities
and Exchange Commission on November 19, 2001.
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective September 1, 2001 the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". This statement discontinued the amortization of goodwill and
indefinite-lived intangible assets, subject to periodic impairment testing.
Goodwill (net of accumulated amortization) at August 31, 2001 was $29.2 million
and was included as a component of other assets. The effect of adopting the new
standard will reduce goodwill amortization expense by approximately $2.0 million
annually. The Company has completed its transitional impairment testing and no
material changes to the carrying value of goodwill and other intangible assets
were made as a result of the adoption of SFAS No. 142. Subsequent impairment
testing will take place annually as well as when there is a triggering event
indicating an impairment may have occurred. In addition, the classification of
the intangible assets was reviewed, along with the remaining useful lives of
intangibles being amortized, and no material changes were made.
Intangible assets subject to amortization at August 31, 2001 and February
28, 2002 were $10.1 million ($14.9 million net of accumulated amortization of
$4.8 million) and $36.0 million ($42.4 million net of accumulated amortization
of $6.4 million), respectively. The intangible assets subject to amortization
include primarily tradenames, customer lists and non-compete agreements and are
amortized on a straight-line basis over the number of years that approximate
their respective useful lives (ranging from 5 to 15 years). Total amortization
expense for these intangible assets during the six-month period ended February
28, 2002 was approximately $1.6 million. For the next five fiscal years, the
future estimated annual amortization expense related to intangible assets being
amortized will approximate $4.0 million each year.
BUSINESS COMBINATIONS
Effective July 2001 the Company also adopted the provisions of SFAS No.
141, "Business Combinations".
During the six months ended February 28, 2002 and 2001 the Company made
various acquisitions using the purchase method of accounting. Accordingly, the
purchase prices were allocated to assets acquired and liabilities assumed based
on their estimated fair values at the dates of acquisition. These
5
acquisitions individually and in the aggregate are not material to the Company's
operations. Operations of the acquired companies have been included in the
operations of the Company since the date of the respective acquisitions.
Through Country Energy, LLC, a joint venture formerly with Farmland
Industries, Inc. (Farmland), the Company marketed refined petroleum products
including gasoline, diesel fuel, propane and lubricants under the Cenex brand.
On November 30, 2001 the Company purchased the wholesale energy business of
Farmland, as well as all interest in Country Energy, LLC. The purchase price of
the acquisition was $39.0 million. Based on estimated fair values, the majority
of the purchase price was allocated to intangible assets of $26.4 million,
primarily trademarks, tradenames and non-compete agreements. The intangible
assets have a weighted average life of approximately 12 years. The balance of
the purchase price was allocated to inventory, real and personal property and
other assets and liabilities. The Company also entered into a supply agreement
related to the purchase of Farmland's refined fuel production from their
Coffeyville, Kansas refinery at prevailing market values.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) recently issued SFAS No.
143, "Accounting for Asset Retirement Obligations" which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The Company is currently analyzing the effects of adoption
of this pronouncement.
The FASB also recently issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS No. 144
retains and expands upon the fundamental provisions of existing guidance related
to the recognition and measurement of the impairment of long-lived assets to be
held and used and the measurement of long-lived asset to be disposed of by sale.
Generally, the provisions of SFAS No. 144 are effective for financial statements
issued for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. The Company is currently analyzing the effects of
adoption of this pronouncement.
NOTE 2. RECEIVABLES
FEBRUARY 28, AUGUST 31, FEBRUARY 28,
2002 2001 2001
------------ ----------- ------------
Trade ....................................... $ 584,512 $ 682,593 $ 725,411
Other ....................................... 27,540 28,864 30,404
---------- ---------- ----------
612,052 711,457 755,815
Less allowances for doubtful accounts ....... 25,820 25,317 23,805
---------- ---------- ----------
$ 586,232 $ 686,140 $ 732,010
========== ========== ==========
NOTE 3. INVENTORIES
FEBRUARY 28, AUGUST 31, FEBRUARY 28,
2002 2001 2001
------------ ----------- ------------
Energy ...................................... $ 256,503 $ 163,710 $ 229,714
Grain and oilseed ........................... 213,954 237,498 251,209
Feed and farm supplies ...................... 112,247 76,570 104,583
Processed grain and oilseed ................. 15,933 28,648 32,755
Other ....................................... 3,013 4,017 3,949
---------- ---------- ----------
$ 601,650 $ 510,443 $ 622,210
========== ========== ==========
As of February 28, 2002 reserves amounting to $6.4 million have been
established to reduce energy inventories to estimated market value. During the
quarter ended February 28, 2002 the Company reduced such reserves by $8.4
million. During the quarter ended February 28, 2002 the Company received cash of
$13.1 million for inventories and related contracts sold to a newly formed wheat
flour milling limited liability company (LLC).
6
NOTE 4. INVESTMENTS
The following provides summarized unaudited financial information for
Ventura Foods, LLC and Agriliance, LLC, of which the Company has a 50% and 25%
equity ownership, respectively, for the three-month and six-month periods as
indicated below.
VENTURA FOODS, LLC
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales ............ $ 238,219 $ 229,427 $ 496,619 $ 459,435
Gross profit ......... 36,997 31,655 78,098 65,532
Net income ........... 10,584 10,950 25,828 22,414
AGRILIANCE, LLC
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales ............. $ 562,811 $ 668,397 $ 1,239,858 $ 1,329,278
Gross profit .......... 39,427 52,363 85,331 109,361
Net loss .............. (31,956) (26,130) (53,108) (48,767)
NOTE 5. EQUITIES
The Board of Directors has authorized the sale and issuance of up to
50,000,000 shares of 8% Preferred Stock at a price of $1.00 per share. The
Company filed a registration statement on Form S-2 with the Securities and
Exchange Commission registering the Preferred Stock. The registration statement
was declared effective on October 31, 2001 and sales of the Preferred Stock were
$4.2 million through February 28, 2002. Expenses related to the issuance of the
Preferred Stock were $1.3 million through the same period.
NOTE 6. COMPREHENSIVE INCOME
Comprehensive income for the Company is primarily related to net income and
changes in fair value of marketable securities. During the three months ended
February 28, 2002 and 2001, total comprehensive income amounted to $1.6 million
and $27.4 million, respectively. For the six months ended February 28, 2002 and
2001, total comprehensive income amounted to $44.0 million and $88.4 million,
respectively. Accumulated other comprehensive loss on February 28, 2002, August
31, 2001 and February 28, 2001 was $1.7 million, $1.9 million and $0.1 million,
respectively.
NOTE 7. NON-CASH FINANCING ACTIVITIES
During the six months ended February 28, 2002 and 2001 the Company accrued
patronage dividends and equity retirements payable of $21.9 million and $25.8
million, respectively.
NOTE 8. SEGMENT REPORTING
Segments, which are based on products and services, include Agronomy,
Energy, Grain Marketing, Country Operations and Processed Grains and Foods.
Reconciling Amounts represent the elimination of intracompany sales between
segments. Due to cost allocations and intersegment activity, management does not
represent that these segments, if operated independently, would report the
income before income taxes and other financial information as presented.
7
Segment information for the three months and six months ended February 28,
2002 and 2001 is as follows:
PROCESSED
GRAIN COUNTRY GRAINS AND RECONCILING
AGRONOMY ENERGY MARKETING OPERATIONS FOODS OTHER AMOUNTS TOTAL
---------- ---------- ---------- ---------- ---------- --------- ----------- ----------
FOR THE THREE MONTHS ENDED
FEBRUARY 28, 2002
Net sales ...................... $ 588,564 $1,006,680 $ 312,089 $ 126,143 $(173,665) $1,859,811
Patronage dividends ............ 25 173 947 $ 43 1,188
Other revenues ................. 820 5,838 15,793 538 659 23,648
---------- ---------- --------- ---------- --------- --------- ----------
589,409 1,012,691 328,829 126,681 702 (173,665) 1,884,647
Cost of goods sold ............. 563,148 1,003,681 309,590 119,648 (173,665) 1,822,402
Marketing, general and
administrative ................ $ 1,637 15,667 5,590 11,953 10,394 1,136 46,377
Interest ....................... (306) 4,218 1,398 2,661 2,393 (115) 10,249
Equity loss (income) from
investments ................... 8,304 157 (976) 219 (5,528) 2,176
Minority interests ............. 2,462 212 2,674
---------- ---------- ---------- --------- ---------- --------- --------- ----------
(Loss) income before income
taxes ......................... $ (9,635) $ 3,757 $ 2,998 $ 4,194 $ (226) $ (319) $ -- $ 769
========== ========== ========== ========= ========== ========= ========= ==========
Capital expenditures ........... $ -- $ 15,970 $ 2,713 $ 4,790 $ 6,306 $ 318 $ 30,097
========== ========== ========== ========= ========== ========= ==========
Depreciation and amortization .. $ 311 $ 15,814 $ 1,347 $ 5,170 $ 3,408 $ 795 $ 26,845
========== ========== ========== ========= ========== ========= ==========
FOR THE THREE MONTHS ENDED
FEBRUARY 28, 2001
Net sales ...................... $ 696,740 $ 879,112 $ 325,270 $ 155,070 $(187,495) $1,868,697
Patronage dividends ............ 31 444 313 $ 35 823
Other revenues ................. 671 5,979 26,414 (15) 5,429 38,478
---------- ---------- --------- ---------- --------- --------- ----------
697,442 885,535 351,997 155,055 5,464 (187,495) 1,907,998
Cost of goods sold ............. 640,075 879,781 324,742 146,660 (187,495) 1,803,763
Marketing, general and
administrative ................ $ 1,926 11,504 5,564 13,936 8,236 1,299 42,465
Interest ....................... (1,411) 6,822 2,160 4,011 3,464 2,454 17,500
Equity loss (income) from
investments ................... 13,100 (189) (707) 158 (5,632) 9,123 15,853
Minority interests ............. 8,356 117 8,473
---------- ---------- ---------- --------- ---------- --------- --------- ----------
(Loss) income before income
taxes ......................... $ (13,615) $ 30,874 $ (1,263) $ 9,033 $ 2,327 $ (7,412) $ -- $ 19,944
========== ========== ========== ========= ========== ========= ========= ==========
Capital expenditures ........... $ -- $ 8,178 $ 857 $ 6,588 $ 7,845 $ 656 $ 24,124
========== ========== ========== ========= ========== ========= ==========
Depreciation and amortization .. $ 311 $ 13,678 $ 987 $ 5,460 $ 3,508 $ 928 $ 24,872
========== ========== ========== ========= ========== ========= ==========
8
PROCESSED
GRAIN COUNTRY GRAINS AND RECONCILING
AGRONOMY ENERGY MARKETING OPERATIONS FOODS OTHER AMOUNTS TOTAL
---------- ---------- ---------- ---------- ---------- --------- ----------- ----------
FOR THE SIX MONTHS ENDED
FEBRUARY 28, 2002
Net sales ...................... $1,142,806 $1,988,577 $ 686,755 $ 289,192 $(375,567) $3,731,763
Patronage dividends ............ 448 352 1,008 $ 101 1,909
Other revenues ................. 3,439 14,290 36,282 563 1,150 55,724
---------- ---------- --------- ---------- --------- --------- ----------
1,146,693 2,003,219 724,045 289,755 1,251 (375,567) 3,789,396
Cost of goods sold ............. 1,061,123 1,985,678 683,807 271,725 (375,567) 3,626,766
Marketing, general and
administrative ................ $ 2,804 30,667 11,067 24,405 17,973 2,359 89,275
Interest ....................... (733) 8,300 3,027 5,804 4,989 (323) 21,064
Equity loss (income) from
investments ................... 11,606 1,533 (1,965) 213 (13,153) (1,766)
Minority interests ............. 5,357 353 5,710
---------- ---------- ---------- --------- ---------- --------- --------- ----------
(Loss) income before income
taxes ......................... $ (13,677) $ 39,713 $ 5,412 $ 9,463 $ 8,221 $ (785) $ -- $ 48,347
========== ========== ========== ========= ========== ========= ========= ==========
Capital expenditures ........... $ -- $ 25,650 $ 3,728 $ 10,538 $ 11,485 $ 504 $ 51,905
========== ========== ========== ========= ========== ========= ==========
Depreciation and amortization .. $ 623 $ 29,674 $ 2,691 $ 10,543 $ 6,429 $ 1,584 $ 51,544
========== ========== ========== ========= ========== ========= ==========
Total identifiable assets at
February 28, 2002 ............. $ 217,822 $1,202,734 $ 306,445 $ 784,546 $ 396,734 $ 178,494 $3,086,775
========== ========== ========== ========= ========== ========= ==========
FOR THE SIX MONTHS ENDED
FEBRUARY 28, 2001
Net sales ...................... $1,570,136 $1,856,901 $ 728,932 $ 315,240 $(413,023) $4,058,186
Patronage dividends ............ $ 268 40 501 346 $ 93 1,248
Other revenues ................. 1,418 11,420 45,197 10 6,439 64,484
---------- ---------- ---------- --------- ---------- --------- --------- ----------
268 1,571,594 1,868,822 774,475 315,250 6,532 (413,023) 4,123,918
Cost of goods sold ............. 1,474,087 1,855,382 725,733 295,113 (413,023) 3,937,292
Marketing, general and
administrative ................ 3,716 21,254 11,601 25,643 16,219 2,442 80,875
Interest ....................... (2,582) 13,902 4,325 7,748 7,172 2,507 33,072
Equity loss (income) from
investments ................... 18,329 (344) (2,526) 251 (11,340) 9,123 13,493
Minority interests ............. 12,086 120 12,206
---------- ---------- ---------- --------- ---------- --------- --------- ----------
(Loss) income before income
taxes ......................... $ (19,195) $ 50,609 $ 40 $ 14,980 $ 8,086 $ (7,540) $ -- $ 46,980
========== ========== ========== ========= ========== ========= ========= ==========
Capital expenditures ........... $ -- $ 17,915 $ 1,757 $ 17,305 $ 10,538 $ 1,021 $ 48,536
========== ========== ========== ========= ========== ========= ==========
Depreciation and amortization .. $ 626 $ 27,247 $ 2,031 $ 10,852 $ 6,992 $ 1,879 $ 49,627
========== ========== ========== ========= ========== ========= ==========
Total identifiable assets at
February 28, 2001 ............. $ 207,572 $1,212,305 $ 360,507 $ 790,555 $ 429,935 $ 201,638 $3,202,512
========== ========== ========== ========= ========== ========= ==========
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Through Country Energy, LLC, a joint venture formerly with Farmland
Industries, Inc. (Farmland), the Company marketed refined petroleum products
including gasoline, diesel fuel, propane and lubricants under the Cenex brand.
On November 30, 2001 the Company purchased the wholesale energy business of
Farmland, as well as all interest in Country Energy, LLC. The purchase price of
the acquisition was $39.0 million. Based on estimated fair values, the majority
of the purchase price was allocated to intangible assets of $26.4 million,
primarily trademarks, tradenames and non-compete agreements. The intangible
assets have a weighted average life of approximately 12 years. The balance of
the purchase price was allocated to inventory, real and personal property and
other assets and liabilities. The Company also entered into a supply agreement
related to the purchase of Farmland's refined fuel production from their
Coffeyville, Kansas refinery at prevailing market values.
In January 2002, the Company formed an LLC with Cargill, Incorporated to
engage in wheat flour milling in North America. The Company holds a 24% interest
in the entity, which is known as Horizon Milling, LLC (Horizon). During the
quarter ended February 28, 2002 the Company sold inventories and related
contracts to Horizon and received cash of $13.1 million. The Company is in the
process of finalizing agreements whereby it will lease to Horizon its wheat
milling facilities. These agreements are expected to be finalized in the third
quarter.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 2002 AND 2001
Consolidated net income for the three months ended February 28, 2002 was
$2.4 million compared to $26.5 million for the same three-month period in 2001,
which represents a $24.1 million (91%) decrease. This decrease in profitability
is primarily attributable to decreased earnings in the Company's Energy segment.
Consolidated net sales of $1.9 billion for the three months ended February
28, 2002 decreased $8.9 million compared to the same three months ended in 2001.
Company-wide grain and oilseed net sales of $1.1 billion increased $143.3
million (16%) during the three months ended February 28, 2002 compared to the
same three months ended in 2001. Sales for the three months ended February 28,
2002 were $1,006.7 million and $217.3 million from Grain Marketing and Country
Operations segments, respectively. Sales for the three months ended February 28,
2001 were $879.1 million and $213.4 million from Grain Marketing and Country
Operations segments, respectively. The Company eliminated all intracompany sales
from the Country Operations segment to the Grain Marketing segment, of $157.6
million and $169.4 million, for the three months ended February 28, 2002 and
2001, respectively. The net increase in sales was primarily due to an increase
of $0.67 per bushel in the average sales price of all grains and oilseed
marketed by the Company, which was partially offset by a decrease in grain
volume of 3% compared to the same three months ended in 2001.
Energy net sales of $572.5 million decreased $106.1 million (16%) during
the three months ended February 28, 2002 compared to the same period in 2001.
Sales for the three months ended February 28, 2002 and 2001 were $588.6 million
and $696.7 million, respectively. The Company eliminated all intracompany sales
from the Energy segment to the Country Operations segment of $16.1 million and
$18.1 million, respectively. The decrease is primarily attributable to a
decrease in the average sales price of refined fuels of $0.32 per gallon, which
was partially offset by a volume increase of 69% compared to the same three
months ended in 2001. In addition, the average sales price of propane decreased
by $0.26 per gallon, which was partially offset by a volume increase of 14%
compared to the same three months ended in 2001. Refined fuels and propane
volume increases were primarily a result of acquisitions.
Country Operations farm supply sales of $94.8 million decreased by $17.1
million (15%) during the three months ended February 28, 2002 compared to the
same three months ended in 2001. The decrease is primarily due to a reduction in
the average retail sales price of energy products compared to the same three
months ended in 2001.
10
Processed Grains and Foods sales of $126.1 million decreased $28.9 million
(19%) during the three months ended February 28, 2002 compared to the same three
months ended in 2001. The decrease is primarily due to Horizon, the newly formed
wheat milling LLC described earlier. As of January 2002, the Company no longer
recorded sales of processed wheat. The decrease was partially offset by
increased sales due to foods acquisitions compared to the same three months
ended in 2001.
Patronage dividends of $1.2 million increased $0.4 million (44%) during the
three months ended February 28, 2002 compared to the same three months ended in
2001. This increase is primarily due to an increased patronage dividend from a
processing cooperative.
Other revenues of $23.6 million decreased $14.8 million (39%) during the
three months ended February 28, 2002 compared to the same three months ended in
2001. The most significant change was within the Country Operations segment.
Cost of goods sold of $1.8 billion increased $18.6 million (1%) during the
three months ended February 28, 2002, compared to the same three months ended in
2001. The increase is primarily due to an increase of $0.66 in the average cost
per bushel of all grains and oilseed procured by the Company through its Grain
Marketing and Country Operations segments, which was partially offset by a 3%
volume decrease compared to the same three months ended in 2001. Energy cost of
goods sold decreased primarily due to a decrease of $0.29 per gallon in the
average cost of refined fuels, which was partially offset by a 69% volume
increase compared to the same three months ended in 2001. The average cost of
propane decreased by $0.23 per gallon, which was partially offset by a 14%
volume increase compared to the same three months ended in 2001. Country
Operations farm supply cost of goods sold decreased by 19% primarily due to the
reduced cost of energy products compared to the same three months ended in 2001.
Processed Grains and Foods segment cost of goods sold decreased by 18% primarily
due to the formation of the new wheat milling LLC. As of January 2002, the
Company no longer recorded cost of goods sold of processed wheat. The decrease
was offset by increased cost of goods due to foods acquisitions compared to the
same three months ended in 2001.
Marketing, general and administrative expenses of $46.4 million for the
three months ended February 28, 2002 increased by $3.9 million (9%) compared to
the same three months ended in 2001. This increase is primarily due to
additional expenses resulting from an Energy segment acquisition.
Interest expense of $10.2 million for the three months ended February 28,
2002 decreased by $7.3 million (41%) compared to the same three months ended in
2001. The average level of short-term borrowings decreased by 39% and the
average short-term interest rate decreased by 4.4% during the three months ended
in 2002 compared to the same three months ended in 2001. These decreases in
interest expense were partially offset by increases due to an additional $80.0
million of long-term debt from a private placement, of which $25.0 million and
$55.0 million was issued in January 2001 and March 2001, respectively.
Equity loss from investments of $2.2 million for the three months ended
February 28, 2002 decreased by $13.7 million (86%) compared to the same three
months ended in 2001. The decrease was primarily attributable to decreased
losses from the Agronomy and Other segments investments of $4.8 million and $9.1
million, respectively, compared to the same three months ended in 2001.
Minority interests of $2.7 million for the three months ended February 28,
2002 decreased by $5.8 million (68%) compared to the same three months ended in
2001. This net change in minority interests during the three months ended
February 28, 2002 compared to the same three months ended in 2001 was primarily
a result of less profitable operations within the Company's majority-owned
subsidiaries and the dissolution of Cooperative Refining, LLC (CRLLC).
Substantially all minority interests relate to National Cooperative Refinery
Association (NCRA).
An income tax benefit of $1.6 million for the three months ended February
28, 2002 compares to a benefit of $6.5 million for the three months ended
February 28, 2001. The federal and state statutory rate applied to nonpatronage
business activity was 38.9% for the three months ended February 28, 2002 and
2001. Income taxes and effective tax rates vary each period based upon
profitability and nonpatronage business activity during each of the comparable
periods.
11
COMPARISON OF SIX MONTHS ENDED FEBRUARY 28, 2002 AND 2001
Consolidated net income for the six months ended February 28, 2002 was
$43.7 million compared to $86.0 million for the same six months ended in 2001,
which represents a $42.3 million (49%) decrease. This decrease in profitability
is primarily attributable to a tax benefit of $34.2 million in the prior year
and decreased earnings in the Company's Energy and Other segments compared to
the same six months ended in 2001.
Consolidated net sales of $3.7 billion for the six months ended February
28, 2002 decreased $326.4 million (8%) compared to the same six months ended in
2001.
Company-wide grain and oilseed net sales of $2.1 billion increased $148.8
million (8%) during the six months ended February 28, 2002 compared to the same
six months ended in 2001. Sales for the six months ended February 28, 2002 were
$1,988.6 million and $459.6 million from Grain Marketing and Country Operations
segments, respectively. Sales for the six months ended February 28, 2001 were
$1,856.9 million and $471.8 million from Grain Marketing and Country Operations
segments, respectively. The Company eliminated all intracompany sales from the
Country Operations segment to the Grain Marketing segment, of $345.6 million and
$374.9 million, for the six months ended February 28, 2002 and 2001,
respectively. The net increase in sales was primarily due to an increase of
$0.50 per bushel in the average sales price of all grains and oilseed marketed
by the Company which was partially offset by a decrease in grain volume of 6%,
compared to the same six months ended in 2001.
Energy net sales of $1.1 billion decreased $419.2 million (27%) during the
six months ended February 28, 2002 compared to the same period in 2001. Sales
for the six months ended February 28, 2002 and 2001 were $1,142.8 million and
$1,570.1 million, respectively. The Company eliminated all intracompany sales
from the Energy segment to the Country Operations segment of $30.0 million and
$38.1 million, respectively. The decrease is primarily attributable to a net
volume decrease compared to the same six months ended in 2001 due to the
dissolution of CRLLC effective December 31, 2000. The Company owned 58% of CRLLC
through its 75% ownership in NCRA and therefore consolidated CRLLC business
activity up to the time of dissolution. In addition, the average sales price of
refined fuels rack sales decreased by $0.30 per gallon, which was partially
offset by a volume increase of 39% compared to the same six months ended in
2001. The average sales price of propane decreased by $0.22 per gallon, which
was partially offset by a volume increase of 13% compared to the same six months
ended in 2001. Refined fuels and propane volume increases were primarily a
result of acquisitions.
Country Operations farm supply sales of $227.1 million decreased by $30.0
million (12%) during the six months ended February 28, 2002 compared to the same
six months ended in 2001. The decrease is primarily due to a reduction in the
average retail sales price of energy products compared to the same six months
ended in 2001.
Processed Grains and Foods sales of $289.2 million decreased $26.0 million
(8%) during the six months ended February 28, 2002 compared to the same six
months ended in 2001. This decrease in sales is primarily due to Horizon, the
newly formed wheat milling LLC described earlier. As of January 2002, the
company no longer recorded sales of processed wheat. In addition, sales of
oilseed processing and refining decreased primarily due to refined oil volume
and average selling price decreases compared to the same six months ended in
2001. These decreases were partially offset by increased sales due to foods
acquisitions compared to the same six months ended in 2001.
Patronage dividends of $1.9 million increased $0.7 million (53%) during the
six months ended February 28, 2002 compared to the same six months ended in
2001. This increase is primarily due to an increased patronage dividend from a
processing cooperative compared to the same six months ended in 2001.
Other revenues of $55.7 million decreased $8.8 million (14%) during the six
months ended February 28, 2002 compared to the same six months ended in 2001.
The most significant change was revenues within the County Operations segment.
Cost of goods sold of $3.6 billion decreased $310.5 million (8%) during the
six months ended February 28, 2002, compared to the same six months ended in
2001. The decrease is primarily due to an Energy segment decrease in volume as a
result of the dissolution of CRLLC, which was previously
12
discussed. In addition, the average cost of refined fuels rack purchases
decreased $0.27 per gallon, which was partially offset by a 39% volume increase
compared to the same six months ended in 2001. The average cost of propane
decreased by $0.20 per gallon, which was partially offset by a 13% volume
increase compared to the same six months ended in 2001. Country Operations farm
supply cost of goods sold decreased by 13% primarily due to the reduced cost of
energy products compared to the same six months ended in 2001. The cost of all
grains and oilseed procured by the Company through its Grain Marketing and
Country Operations segments increased 10% compared to the same six-month period
ended in 2001 primarily due to a $0.50 average cost per bushel increase, which
was partially offset by a 6% decrease in volume. Processed Grains and Foods
segment cost of goods sold decreased by 8% compared to the same six months ended
in 2001, primarily due to the formation of the new wheat milling LLC. As of
January 2002, the company no longer recorded cost of goods sold of processed
wheat. In addition, the cost of oilseed processing and refining decreased due to
a reduced average cost of raw materials compared to the same six months ended in
2001. These decreases were partially offset by increased cost of goods sold due
to foods acquisitions compared to the same six months ended in 2001.
Marketing, general and administrative expenses of $89.3 million for the six
months ended February 28, 2002 increased by $8.4 million (10%) compared to the
same six months ended in 2001. This increase is primarily due to additional
expenses resulting from an Energy segment acquisition.
Interest expense of $21.1 million for the six months ended February 28,
2002 decreased by $12.0 million (36%) compared to the same six months ended in
2001. The average level of short-term borrowings decreased by 44% and the
average short-term interest rate decreased by 4.3% during the six months ended
in 2002 compared to the same six months ended in 2001. These decreases in
interest expense were partially offset by an increase due to an additional $80.0
million of long-term debt from a private placement, of which $25.0 million and
$55.0 million was issued in January 2001 and March 2001, respectively.
Equity income from investments of $1.8 million for the six months ended
February 28, 2002 increased by $15.3 million (113%) compared to the same six
months ended in 2001. The increase was primarily attributable to decreased
losses from the Agronomy and Other segments investments of $6.7 million and $9.1
million, respectively, and increased earnings from Processed Grains and Foods
segment investments of $1.8 million compared to the same six months ended in
2001. These increases were partially offset by losses within the Energy segment
investments of $1.9 million compared to the same six months ended in 2001.
Minority interests of $5.7 million for the six months ended February 28,
2002 decreased by $6.5 million (53%) compared to the same six months ended in
2001. This net change in minority interests during the six months ended February
28, 2002 compared to the same six months ended in 2001 was primarily a result of
the dissolution of CRLLC. Substantially all minority interests relates to NCRA.
Income tax expense of $4.6 million for the six months ended February 28,
2002 compares to a tax benefit of $39.0 million for the six months ended
February 28, 2001. The federal and state statutory rate applied to nonpatronage
business activity was 38.9% for the six months ended February 28, 2002 and 2001.
An income tax benefit of $34.2 million for the six months ended February 28,
2001 resulted from a change in the tax rate applied to the Company's cumulative
temporary differences between income for financial statement purposes and income
used for tax reporting purposes. The Company's calculation of its patronage
distribution using earnings for financial statement purposes rather than tax
basis earnings prompted the rate change. The Company recorded income tax expense
of $4.6 million for the six months ended February 28, 2002, which compares to a
$4.8 million tax benefit for the six months ended February 2001, exclusive of
the $34.2 million benefit related to the change in patronage determination
described above. The income taxes and effective tax rate varies from period to
period based upon profitability and nonpatronage business activity during each
of the comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS
Operating activities of the Company used net cash of $138.9 million and
$105.7 million for the three months ended February 28, 2002 and 2001,
respectively. For the three-month period ended in 2002, net
13
income of $2.4 million and net non-cash expenses of $22.1 million were offset by
increased working capital requirements of $163.4 million. For the three-month
period ended in 2001, net income of $26.5 million and net non-cash expenses of
$32.7 million were offset by increased working capital requirements of $164.9
million.
Operating activities of the Company used net cash of $115.3 million and
$113.7 million for the six months ended February 28, 2002 and 2001,
respectively. For the six-month period ended in 2002, net income of $43.7
million and net non-cash expenses of $57.6 million were offset by increased
working capital requirements of $216.6 million. For the six-month period ended
in 2001, net income of $86.0 million and net non-cash expenses of $23.8 million
were offset by increased working capital requirements of $223.5 million.
CASH FLOWS FROM INVESTING
Investing activities of the Company used net cash of $15.5 million during
the three-month period ended February 28, 2002. Expenditures for the acquisition
of property, plant and equipment of $30.1 million and distributions to minority
owners of $0.4 million were the primary uses of cash for investing activities
and were partially offset by investments redeemed of $8.0 million, changes in
notes receivable of $4.6 million and proceeds from the disposition of property,
plant and equipment of $2.5 million. For the year ended August 31, 2002 the
Company expects to spend approximately $153.6 million for the acquisition of
property, plant and equipment, which includes $22.7 million of expenditures for
the construction of an oilseed processing facility in Fairmont, Minnesota. Total
expenditures related to the construction of the facility are projected to be
approximately $90.0 million. Capital expenditures at NCRA, primarily related to
the EPA low sulfur fuel regulations required by 2006, are expected to be
approximately $250.0 million over the next five years.
Investing activities of the Company used net cash of $12.3 million during
the three-month period ended February 28, 2001. Expenditures for the acquisition
of property, plant and equipment of $24.1 million, acquisitions of intangibles
of $7.0 million, distributions to minority owners of $8.5 million, investments
of $4.1 million and changes in notes receivable were partially offset by
proceeds from the disposition of property, plant and equipment of $26.2 million,
investments redeemed of $1.1 million and other investing activities. The
acquisition of intangibles is related to the asset purchase of Rodriguez Festive
Foods, Inc., a manufacturer of Mexican foods. The proceeds from the disposition
of property, plant and equipment were primarily from the sale of feed plants and
other assets in the Country Operations segment.
Investing activities of the Company used net cash of $54.4 million during
the six-month period ended February 28, 2002. Expenditures for the acquisition
of property, plant and equipment of $51.9 million, acquisitions of intangibles
of $27.5 million, investments of $6.2 million and distributions to minority
owners of $4.4 million were partially offset by investments redeemed of $23.4
million, proceeds from the disposition of property, plant and equipment of $8.6
million, changes in notes receivable of $2.4 million and other investing
activities. The acquisitions of intangibles is primarily related to the purchase
of Farmland's wholesale energy business, as previously discussed and represents
trademarks, tradenames and non-compete agreements.
Investing activities of the Company used net cash of $37.9 million during
the six-month period ended February 28, 2001. Expenditures for the acquisition
of property, plant and equipment of $48.5 million, investments of $11.6 million,
acquisitions of intangibles of $7.0 million, distributions to minority owners of
$12.5 million and changes in notes receivable were partially offset by proceeds
from the disposition of property, plant and equipment of $27.7 million,
investments redeemed of $8.8 million and other investing activities.
CASH FLOWS FROM FINANCING
The Company finances its working capital needs through short-term lines of
credit with a syndication of banks. In May 2001, the Company renewed and
expanded its 364-day credit facility to $550.0 million committed. In addition to
these lines of credit, the Company has a 364-day credit facility dedicated to
NCRA, with a syndication of banks in the amount of $30.0 million committed. On
February 28, 2002, August 31, 2001 and February 28, 2001, the Company had total
short-term
14
indebtedness outstanding on these various facilities and other short-term notes
payable totaling $298.2 million, $97.2 million and $385.9 million, respectively.
In June 1998, the Company established a five-year revolving credit facility
with a syndication of banks, with $200.0 million committed. On February 28,
2002, August 31, 2001 and February 28, 2001 the Company had outstanding balances
on this facility of $75.0 million, $45.0 million and $80.0 million,
respectively, categorized as long-term debt. The outstanding balance on February
28, 2002 includes $30.0 million, which was drawn during the first quarter of the
current fiscal year.
The Company has financed its long-term capital needs in the past, primarily
for the acquisition of property, plant and equipment, with long-term agreements
through the banks for cooperatives. In June 1998, the Company established a
long-term credit agreement through the banks for cooperatives. This facility
committed $200.0 million of long-term borrowing capacity to the Company, with
repayments through fiscal year 2009. The commitment expired on May 31, 1999. The
amount outstanding on this credit facility was $147.6 million, $150.9 million
and $154.2 million on February 28, 2002, August 31, 2001 and February 28, 2001,
respectively. Repayments of approximately $1.6 million and $3.3 million were
made on this facility during each of the three months and six months ended
February 28, 2002 and 2001, respectively.
Also in June 1998, the Company issued a private placement with several
insurance companies for long-term debt in the amount of $225.0 million.
Repayments will be made in equal annual installments of $37.5 million each in
the years 2008 through 2013.
In January 2001, the Company entered into a note purchase and private shelf
agreement with Prudential Insurance Company. The long-term note in the amount of
$25.0 million will be repaid in equal annual installments of approximately $3.6
million, in the years 2005 through 2011. A subsequent note for $55.0 million was
issued in March 2001, related to the private shelf facility. The $55.0 million
note will be repaid in equal annual installments of approximately $7.9 million,
in the years 2005 through 2011.
On February 28, 2002, the Company had total long-term debt outstanding of
$579.9 million, of which $263.0 million was bank financing, $305.0 million was
private placement debt and $11.9 million was industrial development revenue
bonds and other notes and contracts payable. Long-term debt of NCRA represented
$23.7 million of the total long-term debt outstanding on February 28, 2002. On
August 31, 2001 and February 28, 2001, the Company had long-term debt
outstanding of $560.0 million and $558.5 million, respectively. The aggregate
amount of long-term debt payable as of August 31, 2001 was as follows (dollars
in thousands):
2002 $ 17,754
2003 59,083
2004 15,119
2005 34,553
2006 34,984
Thereafter 398,504
--------
$559,997
========
During the three-month periods ended February 28, 2002 and 2001, the
Company repaid long-term debt of $4.3 million and $4.7 million, respectively,
and had additional long-term borrowings of $61.2 million during the three-month
period ended in 2001.
During the six-month periods ended February 28, 2002 and 2001, the Company
repaid long-term debt of $10.1 million and $13.8 million, respectively, and had
additional long-term borrowings of $30.0 million and $61.8 million,
respectively, for the same six-month periods.
In accordance with the by-laws and by action of the Board of Directors,
annual net earnings from patronage sources are distributed to consenting patrons
following the close of each fiscal year. Effective September 1, 2000, patronage
refunds are calculated based on earnings for financial statement purposes rather
than based on amounts reportable for federal income tax purposes as had been the
Company's practice prior to this date. This change was authorized through a
by-law amendment at the Company's
15
annual meeting on December 1, 2000. The patronage earnings from the fiscal year
ended August 31, 2001 were distributed during the second quarter of the current
fiscal year. The cash portion of this distribution, deemed by the Board of
Directors to be 100% for Equity Participation Units and 30% for other patronage
earnings, was $39.6 million. During the three month period ended February 28,
2001 the Company distributed cash patronage of $26.0 million from the patronage
earnings of the fiscal year ended August 31, 2000.
The current equity redemption policy, as authorized by the Board of
Directors, allows for the redemption of capital equity certificates held by
inactive direct members and patrons and active direct members and patrons at age
72 or death that were of age 61 or older on June 1, 1998. For active direct
members and patrons who were of age 60 or younger on June 1, 1998, and member
cooperatives, equities older than 10 years will be redeemed annually based on a
prorata formula where the numerator is dollars available for such purpose as
determined by the Board of Directors, and the denominator is the sum of the
patronage certificates older than 10 years held by such eligible members and
patrons. Total redemptions related to the year ended August 31, 2001, to be
distributed in the current fiscal year, are expected to be approximately $33.5
million, of which $23.2 million was redeemed during the six months ended
February 28, 2002. During the six months ended February 28, 2001 the Company
redeemed $7.9 million of equity. Redemptions of equity by the Company during the
three-month periods ended February 28, 2002 and 2001 were $21.4 million and $2.4
million, respectively.
The Board of Directors has authorized the sale and issuance of up to
50,000,000 shares of 8% Preferred Stock at a price of $1.00 per share. The
Company filed a registration statement on Form S-2 with the Securities and
Exchange Commission registering the Preferred Stock. The registration statement
was declared effective on October 31, 2001 and sales of the Preferred Stock were
$4.2 million through February 28, 2002. Expenses related to the issuance of the
Preferred Stock were $1.3 million through the same period.
OFF BALANCE SHEET FINANCING ARRANGEMENTS
Lease Commitments:
The Company has commitments under operating leases for various refinery,
manufacturing and transportation equipment, rail cars, vehicles and office
space. Some leases include purchase options at not less than fair market value
at the end of the leases.
Total rental expense for all operating leases, net of rail car mileage
credits received from the railroad and sublease income for the three and six
months ended February 28, 2002 was approximately $9.0 million and $18.0 million,
respectively. For the three and six months ended February 28, 2001, total rental
expense was approximately $8.5 million and $17.0 million, respectively.
Minimum future lease payments, required under noncancellable operating
leases as of August 31, 2001, were as follows:
(DOLLARS IN MILLIONS)
-----------------------
2002 $ 35.4
2003 26.3
2004 16.8
2005 7.5
2006 5.0
Thereafter 12.8
------
Total minimum future
lease payments $103.8
======
Guarantees:
The Company is a guarantor for lines of credit for related companies of
which approximately $28.0 million was outstanding as of February 28, 2002. The
Company's bank covenants allow maximum guarantees of $100.0 million. All
outstanding loans with respective creditors are current as of February 28, 2002.
16
Debt:
There is no material off balance sheet debt.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements of the Company are prepared in
conformity with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements requires the
use of estimates as well as management's judgements and assumptions regarding
matters that are subjective, uncertain or involve a high degree of complexity,
all of which affect the results of operations and financial condition for the
periods presented. The Company believes that of its significant accounting
policies, the following may involve a higher degree of estimates, judgements,
and complexity:
ALLOWANCES FOR DOUBTFUL ACCOUNTS
The allowances for doubtful accounts is maintained at a level considered
appropriate by management based on an analysis of credit quality for specific
accounts, historical trends of charge-offs and recoveries, and current and
projected economic and market conditions. Different assumptions, changes in
economic circumstances, or the deterioration of the financial condition of the
Company's customers could result in additional provisions to the allowances for
doubtful accounts and increased bad debt expense.
INVENTORY VALUATION AND RESERVES
Grain, processed grain, oilseed and processed oilseed are stated at net
realizable values which approximates market values. All other inventories are
stated at the lower of cost or market. The cost of certain energy inventories
(wholesale refined products, crude oil and asphalt) is determined on the
last-in, first-out (LIFO) method; all other energy inventories are valued on the
first-in, first-out (FIFO) and average cost methods. Estimates are used in
determining the net realizable value of grain and oilseed and processed grain
and oilseed inventories. These estimates include the measurement of grain in
bins and other storage facilities, which use formulas in addition to actual
measurements taken to arrive at quantity. Other determinations made by
management include quality of the inventory and estimates for freight. Grain
shrink reserves and other reserves that account for spoilage also affect
inventory valuation. If estimates regarding the valuation of inventory or the
adequacy of reserves are less favorable than management's assumptions, then
additional reserves or write-downs of inventory may be required.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into exchange-traded commodity futures and options
contracts to hedge its exposure to price fluctuations on energy, grain and
oilseed transactions to the extent considered practicable for minimizing risk.
The Company does not use derivatives for speculative purposes. Futures and
options contracts used for hedging are purchased and sold through regulated
commodity exchanges. Fluctuations in inventory valuations, however, may not be
completely hedged, due in part to the absence of satisfactory hedging facilities
for certain commodities and geographical areas and in part to the Company's
assessment of its exposure from expected price fluctuations. The Company also
manages its risks by entering into fixed price purchase contracts with
pre-approved producers and establishing appropriate limits for individual
suppliers. Fixed price sales contracts are entered into with customers of
acceptable creditworthiness, as internally evaluated. The Company is exposed to
loss in the event of nonperformance by the counterparties to the contracts.
However, the Company does not anticipate nonperformance by counterparties. The
fair value of futures and options contracts are determined primarily from quotes
listed on regulated commodity exchanges. Fixed price purchase and sales
contracts are with various counterparties, and the fair values of such contracts
are determined from the market price of the underlying product.
The Company adopted Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 133, as amended, a standard related
to the accounting for derivative transactions and hedging activities, effective
September 1, 2000. Such accounting is complex, evidenced by significant
interpretations of the primary accounting standard, which continues to evolve.
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PENSION AND POSTRETIREMENT BENEFITS
Pension and other postretirement benefits costs and obligations are
dependent on assumptions used in calculating such amounts. These assumptions
include discount rates, health care cost trend rates, benefits earned, interest
cost, expected return on plan assets, mortality rates, and other factors. In
accordance with accounting principles generally accepted in the United States of
America, actual results that differ from the assumptions are accumulated and
amortized over future periods and, therefore, generally affect recognized
expense and the recorded obligation in future periods. While management believes
that the assumptions used are appropriate, differences in actual experience or
changes in assumptions may affect the Company's pension and other postretirement
obligations and future expense.
DEFERRED TAX ASSETS
The Company records a valuation allowance to reduce its deferred tax assets
to the amount that it believes is more likely than not to be realized. While the
Company has considered future taxable income as well as other factors in
assessing the need for the valuation allowance, in the event that the Company
were to determine that it would not be able to realize all or part of its net
deferred tax assets in the future, an adjustment to the deferred tax assets
would be charged to income in the period such determination was made.
LONG-LIVED ASSETS
Depreciation and amortization of the Company's property, plant and
equipment is provided on the straight-line method by charges to operations at
rates based upon the expected useful lives of individual or groups of assets.
Economic circumstances or other factors may cause management's estimates of
expected useful lives to differ from actual.
Long-lived assets, including property, plant and equipment, investments in
unconsolidated affiliates and non-indefinitely lived intangible assets are
evaluated for impairment on the basis of undiscounted cash flows whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. An impaired asset is written down to its estimated fair
market value based on the best information available. Estimated fair market
value is generally measured by discounting estimated future cash flows.
Considerable management judgment is necessary to estimate discounted future cash
flows and may differ from actual.
Goodwill is tested for impairment at the reporting unit level at least
annually or if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount. A
two-step process is utilized to test goodwill for impairment. The first step of
the impairment test, used to identify potential impairment, compares the fair
value of a reporting unit with its carrying amount, including goodwill. If the
fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired. However, if the carrying amount of
reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss will be recognized in an amount equal to that excess. Management
judgment is required in calculating the fair value of the reporting unit and
changes in the estimates utilized in the fair value determination may ultimately
result in impairment of goodwill.
ENVIRONMENTAL LIABILITIES
Liabilities related to remediation of contaminated properties are
recognized when the related costs are considered probable and can be reasonably
estimated. Estimates of these costs are based on current available facts,
existing technology, undiscounted site-specific costs and currently enacted laws
and regulations. Recoveries, if any, are recorded in the period in which
recovery is considered probable. It is often difficult to estimate the cost of
environmental compliance, remediation and potential claims given the
uncertainties regarding the interpretation and enforcement of applicable
environmental laws and regulations, the extent of environmental contamination
and the existence of alternate cleanup methods. All liabilities are monitored
and adjusted as new facts or changes in law or technology occur and management
believes adequate provisions have been made for environmental liabilities.
Changes in facts and circumstances may have an adverse impact on the Company's
financial results.
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EFFECT OF INFLATION AND FOREIGN CURRENCY TRANSACTIONS
The Company's management believes that inflation and foreign currency
fluctuations have not had a significant effect on its operations.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company is currently
analyzing the effects of adoption of this pronouncement.
The FASB also recently issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS No. 144
retains and expands upon the fundamental provisions of existing guidance related
to the recognition and measurement of the impairment of long-lived assets to be
held and used and the measurement of long-lived asset to be disposed of by sale.
Generally, the provisions of SFAS No. 144 are effective for financial statements
issued for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. The Company is currently analyzing the effects of
adoption of this pronouncement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended February 28, 2002 the Company did not experience any
adverse changes in market risk exposures that materially affect the quantitative
and qualitative disclosures presented in the Company's Annual Report on Form
10-K for the year ended August 31, 2001.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
------- -----------
99 Cautionary Statement
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENEX HARVEST STATES COOPERATIVES
--------------------------------------------
(Registrant)
DATE SIGNATURE
---- ---------
April 5, 2002 /s/ JOHN SCHMITZ
----------------------- -----------------------------------
(Date) John Schmitz
Executive Vice President and
Chief Financial Officer
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