NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 Organization, Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The unaudited Consolidated Balance Sheet as of
November 30, 2017
, the Consolidated Statements of Operations for
the three months ended
November 30, 2017
, and
2016
, the Consolidated Statements of Comprehensive Income for
the three months ended
November 30, 2017
, and
2016
, and the Consolidated Statements of Cash Flows for
the three months ended
November 30, 2017
, and
2016
, reflect in the opinion of our management, all normal recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. The results of operations and cash flows for interim periods are not necessarily indicative of results for a full fiscal year because of, among other things, the seasonal nature of our businesses. Our Consolidated Balance Sheet data as of
August 31, 2017
, has been derived from our audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America ("U.S. GAAP").
Over the course of fiscal year 2017, we incurred charges relating to a trading partner of ours in Brazil, which entered into bankruptcy-like proceedings under Brazilian law, intangible and fixed asset impairment charges associated with certain assets meeting the criteria to be classified as held for sale, fixed asset impairment charges due to the cancellation of a capital project at one of our refineries and bad debt and loan loss reserve charges relating to a single large producer borrower. Charges and impairments of this nature, as well as any recoveries related to amounts previously reserved, are included in the Consolidated Statements of Operations in the line item, "Reserve and impairment charges (recoveries), net" for
the three months ended
November 30, 2017
, and
2016
. The timing and amounts of these charges and impairments, and any recoveries were determined utilizing facts and circumstances that were present in the respective quarters in which the charge, impairments or recoveries were recorded. Prior year information has been revised to conform to the current year presentation.
The notes to our consolidated financial statements reference our Energy, Ag, Nitrogen Production and Foods reportable segments, as well as our Corporate and Other category, which represents an aggregation of individually immaterial operating segments. The Nitrogen Production reportable segment resulted from our investment in CF Industries Nitrogen, LLC ("CF Nitrogen") in February 2016. The Foods segment resulted from our investment in Ventura Foods, LLC ("Ventura Foods") becoming a significant operating segment in fiscal 2016. See Note 9,
Segment Reporting
for more information.
Our consolidated financial statements include the accounts of CHS and all of our wholly owned and majority owned subsidiaries. The effects of all significant intercompany transactions have been eliminated.
These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended
August 31, 2017
, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the "SEC").
Recent Accounting Pronouncements
Adopted
In October 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-16,
Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory
(Topic 740). This ASU is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory by requiring an entity to recognize the income tax consequences when a transfer occurs, instead of when an asset is sold to an outside party. This ASU is effective for periods beginning after December 15, 2017; however, early adoption of this ASU is permitted during the first interim period if an entity issues interim financial statements and the amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We elected to early adopt ASU No. 2016-16 during the first quarter of fiscal 2018. The adoption did not have a material impact on our consolidated financial statements.
Not Yet Adopted
In August 2017, the FASB issued ASU No. 2017-12
, Derivatives and Hedging
(Topic 815):
Targeted Improvements to Accounting for Hedging Activities
. This ASU is intended to improve the financial reporting of hedging relationships to better represent the economic results of an entity’s risk management activities in its financial statements and make certain improvements to simplify the application of the hedge accounting guidance. The amendments in this ASU will make more financial and nonfinancial hedging strategies eligible for hedge accounting, amend the presentation and disclosure requirements and change how entities assess effectiveness. Entities are required to apply this ASU's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This ASU is effective for us beginning September 1, 2019, for our fiscal year 2020 and for interim periods within that fiscal year. We are currently evaluating the impact the adoption will have on our consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07,
Compensation - Retirement Benefits
(Topic 715):
Improving the Presentation of Net Periodic Pension Costs and Net Postretirement Benefit Cost.
This ASU changes the presentation of net periodic pension cost and net periodic postretirement benefit cost in the income statement. This ASU requires that the service cost component should be included in the same income statement line item as other compensation costs arising from services rendered by the employees during the period. The other components of net periodic benefit cost should be presented in the income statement separately outside of operating income if that subtotal is presented. Additionally, only service cost may be capitalized in assets. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. The guidance on the presentation of the components of net periodic benefit cost in the income statement should be applied retrospectively and the guidance regarding the capitalization of the service cost component in assets should be applied prospectively. The adoption of this amended guidance is not expected to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations
(Topic 805)
: Clarifying the Definition of a Business
. The amendments within this ASU narrow the existing definition of a business and provide a more robust framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The definition of a business impacts various areas of accounting, including acquisitions, disposals and goodwill. Under the new guidance, fewer acquisitions are expected to be considered businesses. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. Early adoption is permitted and the guidance should be applied prospectively to transactions following the adoption date. The adoption of this amended guidance is not expected to have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows
(Topic 230):
Restricted Cash
. This ASU is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. Early adoption is permitted, including in an interim period. The amendments in this ASU should be applied retrospectively to all periods presented. The adoption of this amended guidance is not expected to have a material impact on our consolidated statement of cash flows.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows
(Topic 230):
Classification of Certain Cash Receipts and Cash Payments.
This ASU is intended to reduce existing diversity in practice in how certain cash receipts and payments are presented and classified in the statement of cash flows. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. The adoption of this amended guidance is not expected to have a material impact on our consolidated statement of cash flows.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses
(Topic 326)
: Measurement of Credit Losses on Financial Instruments
. The amendments in this ASU introduce a new approach, based on expected losses, to estimate credit losses on certain types of financial instruments. This ASU is intended to provide financial statement
users with more decision-useful information about the expected credit losses associated with most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases, and off-balance-sheet credit exposures. Entities are required to apply this ASU’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This ASU is effective for us beginning September
1, 2020, for our fiscal year 2021 and for interim periods within that fiscal year. We are currently evaluating the impact the adoption will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which replaces the existing guidance in Accounting Standards Codification ("ASC") 840 -
Leases
. The amendments within this ASU introduce a lessee model requiring
entities to recognize assets and liabilities for most leases, but continue recognizing the associated expenses in a manner similar to existing accounting guidance. This ASU does not make fundamental changes to existing lessor accounting; however, it does modify what constitutes a sales-type or direct financing lease and the related accounting, and aligns a number of the underlying principles with those of the new revenue standard, ASU No. 2014-09. The guidance also eliminates existing real estate-specific provisions and requires expanded qualitative and quantitative disclosures. This ASU is effective for us beginning September 1, 2019, for our fiscal year 2020 and for interim periods within that fiscal year, and the ASU’s provisions are required to be applied using a modified retrospective approach. We have initiated a preliminary assessment of the new lease standard, including the implementation of a new lease software that will improve the collection, maintenance, and aggregation of lease data necessary for the reporting and disclosure requirements under the new lease standard. One of the more significant changes arising from the new lease standard relates to a number of operating lease agreements not currently recognized on our Consolidated Balance Sheets. The new lease guidance will require these lease agreements to be recognized on the Consolidated Balance Sheets as a right-of-use asset along with a corresponding lease liability. As a result, our preliminary assessment indicates the provisions of ASU No. 2016-02 are expected to have a material impact on our Consolidated Balance Sheets. Although we expect the new lease guidance to have a material impact on our Consolidated Balance Sheets, we are continuing to evaluate the extent of potential impact the new lease guidance will have on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
. The amendments within this ASU, as well as within additional clarifying ASUs issued by the FASB, provide a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new revenue recognition guidance includes a five-step model for the recognition of revenue, including (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue when (or as) an entity satisfies a performance obligation. The new revenue recognition guidance also specifies the accounting for certain costs to obtain or fulfill a contract with a customer and requires expanded disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We have completed an initial assessment of our revenue streams and do not believe that the new revenue recognition guidance will have a material impact on our consolidated financial statements. Certain revenue streams are expected to fall within the scope of the new revenue recognition guidance; however, a substantial portion of our revenue falls outside the scope of the new revenue recognition guidance and will continue to follow existing guidance, primarily ASC 815,
Derivatives and Hedging
. We are continuing to evaluate the impact of the new revenue recognition guidance, including potential changes to business practices and/or contractual terms for in scope revenue streams, as well as the scope of expanded disclosures related to revenue. We expect to complete our final evaluation and implementation of the new revenue recognition guidance throughout fiscal 2018, which will allow us to adopt ASU No. 2014-09 and the related ASUs on September 1, 2018, in the first quarter of fiscal 2019, using the modified retrospective method.
Note 2 Receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2017
|
|
August 31, 2017
|
|
|
(Dollars in thousands)
|
|
Trade accounts receivable
|
$
|
1,329,887
|
|
|
$
|
1,234,500
|
|
|
CHS Capital notes receivable
|
184,301
|
|
|
164,807
|
|
|
Deferred purchase price receivable
|
216,996
|
|
|
202,947
|
|
|
Other
|
556,275
|
|
|
493,104
|
|
|
|
2,287,459
|
|
|
2,095,358
|
|
|
Less allowances and reserves
|
227,836
|
|
|
225,726
|
|
|
Total receivables
|
$
|
2,059,623
|
|
|
$
|
1,869,632
|
|
Trade Accounts
Trade accounts receivable are initially recorded at a selling price, which approximates fair value, upon the sale of goods or services to customers. Subsequently, trade accounts receivable are carried at net realizable value, which includes an allowance for estimated uncollectible amounts. We calculate this allowance based on our history of write-offs, level of past due accounts, and our relationships with, and the economic status of, our customers.
CHS Capital
Notes Receivable
CHS Capital, LLC ("CHS Capital"), our wholly-owned subsidiary, has short-term notes receivable from commercial and producer borrowers. The short-term notes receivable have maturity terms of
12
months or less and are reported at their outstanding unpaid principal balances, adjusted for the allowance of loan losses, as CHS Capital has the intent and ability to hold the applicable loans for the foreseeable future or until maturity or pay-off. The carrying value of CHS Capital short-term notes receivable approximates fair value, given the notes' short duration and the use of market pricing adjusted for risk.
The notes receivable from commercial borrowers are collateralized by various combinations of mortgages, personal property, accounts and notes receivable, inventories and assignments of certain regional cooperative’s capital stock. These loans are primarily originated in the states of Minnesota, Wisconsin and North Dakota. CHS Capital also has loans receivable from producer borrowers which are collateralized by various combinations of growing crops, livestock, inventories, accounts receivable, personal property and supplemental mortgages and are originated in the same states as the commercial notes with the addition of Michigan.
In addition to the short-term balances included in the table above, CHS Capital had long-term notes receivable, with durations of generally not more than
10 years
, totaling
$14.8 million
and
$17.0 million
at
November 30, 2017
, and
August 31, 2017
, respectively. The long-term notes receivable are included in Other assets on our Consolidated Balance Sheets. As of
November 30, 2017
, and
August 31, 2017
, the commercial notes represented
32%
and
17%
, respectively, and the producer notes represented
68%
and
83%
, respectively, of the total CHS Capital notes receivable. As of
November 30, 2017
, and
August 31, 2017
, CHS Capital had no third-party borrowers that accounted for more than
10%
of the total CHS Capital notes receivable outstanding.
CHS Capital has commitments to extend credit to customers if there are no violations of any contractually established conditions. As of
November 30, 2017
, CHS Capital's customers have additional available credit of
$529.4 million
.
Allowance for Loan Losses and Impairments
CHS Capital maintains an allowance for loan losses which is the estimate of potential incurred losses inherent in the loans receivable portfolio. In accordance with FASB ASC 450-20,
Accounting for Loss Contingencies,
and ASC 310-10,
Accounting by Creditors for Impairment of a Loan
, the allowance for loan losses consists of general and specific components. The general component is based on historical loss experience and qualitative factors addressing operational risks and industry trends. The specific component relates to loans receivable that are classified as impaired. Additions to the allowance for loan losses are reflected within reserve and impairment charges (recoveries), net in the Consolidated Statements of Operations. The portion of loans receivable deemed uncollectible is charged off against the allowance. Recoveries of previously charged off amounts increase the allowance for loan losses. The amount of CHS Capital notes that were past due was not significant at any reporting date presented.
Interest Income
Interest income is recognized on the accrual basis using a method that computes simple interest daily. The accrual of interest on commercial loans receivable is discontinued at the time the commercial loan receivable is
90
days past due unless the credit is well-collateralized and in process of collection. Past due status is based on contractual terms of the loan. Producer loans receivable are placed in non-accrual status based on estimates and analysis due to the annual debt service terms inherent to CHS Capital’s producer loans. In all cases, loans are placed in nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful.
Sale of Receivables
Receivables Securitization Facility
On July 18, 2017, we amended an existing receivables and loans securitization facility (“Securitization Facility”) with certain unaffiliated financial institutions (the "Purchasers"). Under the Securitization Facility, we and certain of our subsidiaries sell trade accounts and notes receivable (the “Receivables”) to Cofina Funding, LLC (“Cofina”), a wholly-owned bankruptcy-remote indirect subsidiary of CHS. Cofina in turn sells the purchased Receivables in their entirety to the Purchasers. Prior to amending the Securitization Facility in July 2017, the transfer of Receivables was accounted for as a secured borrowing. Under the terms of the amended Securitization Facility CHS accounts for Receivables sold under the Facility as a sale of financial
assets pursuant to ASC 860,
Transfers and Servicing
and derecognizes the sold Receivables from its Consolidated Balance Sheets.
Sales of Receivables by Cofina occur continuously and are settled with the Purchasers on a monthly basis. The proceeds from the sale of these Receivables comprise a combination of cash and a deferred purchase price (“DPP”) receivable. The DPP receivable is ultimately realized by CHS following the collection of the underlying Receivables sold to the Purchasers. The amount available under the Securitization Facility fluctuates over time based on the total amount of eligible Receivables generated during the normal course of business, with maximum availability of
$700.0 million
. As of
November 30, 2017
, the total availability under the Securitization Facility was
$700.0 million
, of which all has been utilized. The Securitization Facility terminates on July 17, 2018, but may be extended. We use the proceeds from the sale of Receivables under the Securitization Facility for general corporate purposes.
We have no retained interests in the transferred Receivables, other than our right to the DPP receivable and collection and administrative services. The DPP receivable is recorded at fair value within the Consolidated Balance Sheets, including a current portion within receivables and a long-term portion within other assets. Subsequent cash receipts related to the DPP receivable have been reflected as investing activities and additional sales of Receivables under the Securitization Facility are reflected in operating or investing activities, based on the underlying Receivable, in our Consolidated Statements of Cash Flows. Losses incurred on the sale of Receivables are recorded in interest expense and fees received related to the servicing of the Receivables are recorded in other income (loss) in the Consolidated Statements of Operations. We consider the fees received adequate compensation for services rendered, and accordingly have recorded no servicing asset or liability.
The fair value of the DPP receivable is determined by discounting the expected cash flows to be received based on unobservable inputs consisting of the face amount of the Receivables adjusted for anticipated credit losses. The DPP receivable is being measured like an investment in debt securities classified as available for sale, with changes to the fair value being recorded in other comprehensive income in accordance with
ASC 320 - Investments - debt and equity securities
. Our risk of loss following the transfer of Receivables under the Securitization Facility is limited to the DPP receivable outstanding and any short-falls in collections for specified non-credit related reasons after sale. Payment of the DPP receivable is not subject to significant risks other than delinquencies and credit losses on accounts receivable sold under the Securitization Facility.
The following table is a reconciliation of the beginning and ending balances of the DPP receivable for the quarter ended
November 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Balance - as of August 31, 2017
|
|
$
|
548,602
|
|
|
Monthly settlements, net
|
|
(27,100
|
)
|
|
Balance - as of November 30, 2017
|
|
$
|
521,502
|
|
There was
no
DPP receivable as of November 30, 2016, and therefore, no comparative period is included in the table above.
Other Receivables
Other receivables are comprised of certain other amounts recorded in the normal course of business, including receivables related to valued added taxes and pre-crop financing, primarily to Brazilian farmers, to finance a portion of supplier production costs. We do not bear any of the costs or operational risks associated with the related growing crops. The financing is largely collateralized by future crops and physical assets of the suppliers, carries a local market interest rate and settles when the farmer’s crop is harvested and sold.
Note 3 Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2017
|
|
August 31, 2017
|
|
|
(Dollars in thousands)
|
|
Grain and oilseed
|
$
|
1,545,313
|
|
|
$
|
1,145,285
|
|
|
Energy
|
720,938
|
|
|
755,886
|
|
|
Crop nutrients
|
222,053
|
|
|
248,699
|
|
|
Feed and farm supplies
|
483,805
|
|
|
353,130
|
|
|
Processed grain and oilseed
|
54,916
|
|
|
49,723
|
|
|
Other
|
19,076
|
|
|
23,862
|
|
|
Total inventories
|
$
|
3,046,101
|
|
|
$
|
2,576,585
|
|
As of
November 30, 2017
, we valued approximately
15%
of inventories, primarily related to our Energy segment, using the lower of cost, determined on the LIFO method, or net realizable value (
19%
as of
August 31, 2017
). If the FIFO method of accounting had been used, inventories would have been higher than the reported amount by
$99.0 million
and $
186.2 million
as of
November 30, 2017
, and
August 31, 2017
, respectively. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management's estimates of expected year-end inventory levels, and are subject to the final year-end LIFO inventory valuation.
Note 4 Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2017
|
|
August 31, 2017
|
|
|
(Dollars in thousands)
|
|
Equity method investments:
|
|
|
|
|
CF Industries Nitrogen, LLC
|
$
|
2,776,412
|
|
|
$
|
2,756,076
|
|
|
Ventura Foods, LLC
|
350,602
|
|
|
347,016
|
|
|
Ardent Mills, LLC
|
209,926
|
|
|
206,529
|
|
|
TEMCO, LLC
|
39,235
|
|
|
41,323
|
|
|
Other equity method investments
|
265,621
|
|
|
268,444
|
|
|
Cost method investments
|
135,204
|
|
|
131,605
|
|
|
Total investments
|
$
|
3,777,000
|
|
|
$
|
3,750,993
|
|
Equity Method Investments
Joint ventures and other investments, in which we have significant ownership and influence, but not control, are accounted for in our consolidated financial statements using the equity method of accounting. Our primary equity method investments are described below.
On February 1, 2016, we invested
$2.8 billion
in CF Nitrogen, commencing our strategic venture with CF Industries Holdings, Inc. ("CF Industries"). The investment consists of an
11.4%
membership interest (based on product tons) in CF Nitrogen. We account for this investment using the hypothetical liquidation at book value method, recognizing our share of the earnings and losses of CF Nitrogen based upon our contractual claims on the entity's net assets pursuant to the liquidation provisions of CF Nitrogen's limited liability company agreement, adjusted for the semi-annual cash distributions we receive as a result of our membership interest in CF Nitrogen. For the three months ended
November 30, 2017
, and
2016
, this amount was
$20.3 million
and
$14.7 million
, respectively. These amounts are included as equity income from investments in our Nitrogen Production segment.
We have a
50%
interest in Ventura Foods, a joint venture which produces and distributes primarily vegetable oil-based products, and which constitutes our Foods segment. We account for Ventura Foods as an equity method investment, and as of
November 30, 2017
, our carrying value of Ventura Foods exceeded our share of its equity by
$12.9 million
, which represents equity method goodwill. The earnings are reported as equity income from investments in our Foods segment.
We have a
12%
interest in Ardent Mills, LLC ("Ardent Mills"), a joint venture with Cargill Incorporated ("Cargill") and ConAgra Foods, Inc., which combines the North American flour milling operations of the
three
parent companies. We account for Ardent Mills as an equity method investment included in Corporate and Other.
TEMCO, LLC ("TEMCO") is owned and governed by Cargill (
50%
) and CHS (
50%
). Both owners have committed to sell all of their feedgrains, wheat, oilseeds and by-product origination that are tributary to the Pacific Northwest, United States ("Pacific Northwest") to TEMCO and to use TEMCO as their exclusive export-marketing vehicle for such grains exported through the Pacific Northwest through January 2037. We account for TEMCO as an equity method investment included in our Ag segment.
Note 5 Goodwill and Other Intangible Assets
Goodwill of
$153.7 million
and
$154.1 million
as of
November 30, 2017
, and
August 31, 2017
, respectively, is included in other assets on our Consolidated Balance Sheets. Changes in the net carrying amount of goodwill for
the three months ended
November 30, 2017
, by segment, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
Ag
|
|
Corporate
and Other
|
|
Total
|
|
|
(Dollars in thousands)
|
|
Balances, August 31, 2017
|
$
|
552
|
|
|
$
|
142,929
|
|
|
$
|
10,574
|
|
|
$
|
154,055
|
|
|
Effect of foreign currency translation adjustments
|
—
|
|
|
(389
|
)
|
|
—
|
|
|
(389
|
)
|
|
Balances, November 30, 2017
|
$
|
552
|
|
|
$
|
142,540
|
|
|
$
|
10,574
|
|
|
$
|
153,666
|
|
No
goodwill has been allocated to our Nitrogen Production or Foods segments, which consist of investments accounted for under the equity method.
Intangible assets subject to amortization primarily include customer lists, trademarks and non-compete agreements, and are amortized over their respective useful lives (ranging from
2
to
30
years). Information regarding intangible assets that are included in other assets on our Consolidated Balance Sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30,
2017
|
|
August 31,
2017
|
|
|
Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
|
(Dollars in thousands)
|
|
Customer lists
|
$
|
42,391
|
|
|
$
|
(11,695
|
)
|
|
$
|
30,696
|
|
|
$
|
46,180
|
|
|
$
|
(14,695
|
)
|
|
$
|
31,485
|
|
|
Trademarks and other intangible assets
|
6,536
|
|
|
(4,752
|
)
|
|
1,784
|
|
|
23,623
|
|
|
(21,778
|
)
|
|
1,845
|
|
|
Total intangible assets
|
$
|
48,927
|
|
|
$
|
(16,447
|
)
|
|
$
|
32,480
|
|
|
$
|
69,803
|
|
|
$
|
(36,473
|
)
|
|
$
|
33,330
|
|
Total amortization expense for intangible assets during
the three months ended
November 30, 2017
, and 2016, was
$0.9 million
and
$1.3 million
, respectively. The estimated annual amortization expense related to intangible assets subject to amortization for the next five years is as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Year 1
|
$
|
3,395
|
|
|
Year 2
|
3,373
|
|
|
Year 3
|
3,095
|
|
|
Year 4
|
3,037
|
|
|
Year 5
|
2,755
|
|
Note 6 Notes Payable and Long-Term Debt
Our notes payable and long-term debt are subject to various restrictive requirements for maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with our debt covenants as of
November 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2017
|
|
August 31, 2017
|
|
|
(Dollars in thousands)
|
|
Notes payable
|
$
|
2,182,243
|
|
|
$
|
1,695,423
|
|
|
CHS Capital notes payable
|
298,021
|
|
|
292,792
|
|
|
Total notes payable
|
$
|
2,480,264
|
|
|
$
|
1,988,215
|
|
On
November 30, 2017
, our primary line of credit was a
five
-year, unsecured revolving credit facility with a committed amount of
$3.0 billion
which expires in September 2020. The outstanding balance on this facility was
$1.1 billion
and
$480.0 million
as of
November 30, 2017
, and
August 31, 2017
, respectively.
Interest expense for the three months ended
November 30, 2017
, and 2016, was
$40.7 million
and
$38.3 million
, respectively, net of capitalized interest of
$1.8 million
and
$1.6 million
, respectively.
Note 7 Equities
Changes in Equities
Changes in equities for
the three months ended
November 30, 2017
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Certificates
|
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
|
|
|
|
|
|
Capital
Equity
Certificates
|
|
Nonpatronage
Equity
Certificates
|
|
Nonqualified Equity Certificates
|
|
Preferred
Stock
|
|
|
Capital
Reserves
|
|
Noncontrolling
Interests
|
|
Total
Equities
|
|
|
(Dollars in thousands)
|
|
Balance, August 31, 2017
|
$
|
3,906,426
|
|
|
$
|
29,836
|
|
|
$
|
405,387
|
|
|
$
|
2,264,038
|
|
|
$
|
(183,670
|
)
|
|
$
|
1,471,217
|
|
|
$
|
12,591
|
|
|
$
|
7,905,825
|
|
|
Reversal of prior year redemption estimates
|
1,561
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,561
|
|
|
Redemptions of equities
|
(1,449
|
)
|
|
(53
|
)
|
|
(59
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,561
|
)
|
|
Preferred stock dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(84,334
|
)
|
|
—
|
|
|
(84,334
|
)
|
|
Other, net
|
(1,498
|
)
|
|
(66
|
)
|
|
(344
|
)
|
|
—
|
|
|
—
|
|
|
3,954
|
|
|
(3
|
)
|
|
2,043
|
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
180,083
|
|
|
(464
|
)
|
|
179,619
|
|
|
Other comprehensive income (loss), net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,225
|
|
|
—
|
|
|
—
|
|
|
5,225
|
|
|
Estimated 2018 cash patronage refunds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(50,702
|
)
|
|
—
|
|
|
(50,702
|
)
|
|
Estimated 2018 equity redemptions
|
(19,901
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19,901
|
)
|
|
Balance, November 30, 2017
|
$
|
3,885,139
|
|
|
$
|
29,717
|
|
|
$
|
404,984
|
|
|
$
|
2,264,038
|
|
|
$
|
(178,445
|
)
|
|
$
|
1,520,218
|
|
|
$
|
12,124
|
|
|
$
|
7,937,775
|
|
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive income (loss) by component, net of tax, are as follows for
the three months ended
November 30, 2017
, and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Other Postretirement Benefits
|
|
Unrealized Net Gain on Available for Sale Investments
|
|
Cash Flow Hedges
|
|
Foreign Currency Translation Adjustment
|
|
Total
|
|
|
(Dollars in thousands)
|
|
Balance as of August 31, 2017, net of tax
|
$
|
(135,046
|
)
|
|
$
|
10,041
|
|
|
$
|
(6,954
|
)
|
|
$
|
(51,711
|
)
|
|
$
|
(183,670
|
)
|
|
Other comprehensive income (loss), before tax:
|
|
|
|
|
|
|
|
|
|
|
Amounts before reclassifications
|
—
|
|
|
4,044
|
|
|
(435
|
)
|
|
(1,008
|
)
|
|
2,601
|
|
|
Amounts reclassified out
|
6,816
|
|
|
—
|
|
|
429
|
|
|
(2,042
|
)
|
|
5,203
|
|
|
Total other comprehensive income (loss), before tax
|
6,816
|
|
|
4,044
|
|
|
(6
|
)
|
|
(3,050
|
)
|
|
7,804
|
|
|
Tax effect
|
(2,620
|
)
|
|
(404
|
)
|
|
2
|
|
|
443
|
|
|
(2,579
|
)
|
|
Other comprehensive income (loss), net of tax
|
4,196
|
|
|
3,640
|
|
|
(4
|
)
|
|
(2,607
|
)
|
|
5,225
|
|
|
Balance as of November 30, 2017, net of tax
|
$
|
(130,850
|
)
|
|
$
|
13,681
|
|
|
$
|
(6,958
|
)
|
|
$
|
(54,318
|
)
|
|
$
|
(178,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Other Postretirement Benefits
|
|
Unrealized Net Gain on Available for Sale Investments
|
|
Cash Flow Hedges
|
|
Foreign Currency Translation Adjustment
|
|
Total
|
|
|
(Dollars in thousands)
|
|
Balance as of August 31, 2016, net of tax
|
$
|
(165,146
|
)
|
|
$
|
5,656
|
|
|
$
|
(9,196
|
)
|
|
$
|
(43,040
|
)
|
|
$
|
(211,726
|
)
|
|
Other comprehensive income (loss), before tax:
|
|
|
|
|
|
|
|
|
|
|
Amounts before reclassifications
|
—
|
|
|
1,259
|
|
|
620
|
|
|
(18,940
|
)
|
|
(17,061
|
)
|
|
Amounts reclassified out
|
5,250
|
|
|
—
|
|
|
440
|
|
|
(15
|
)
|
|
5,675
|
|
|
Total other comprehensive income (loss), before tax
|
5,250
|
|
|
1,259
|
|
|
1,060
|
|
|
(18,955
|
)
|
|
(11,386
|
)
|
|
Tax effect
|
(2,011
|
)
|
|
(482
|
)
|
|
(406
|
)
|
|
(209
|
)
|
|
(3,108
|
)
|
|
Other comprehensive income (loss), net of tax
|
3,239
|
|
|
777
|
|
|
654
|
|
|
(19,164
|
)
|
|
(14,494
|
)
|
|
Balance as of November 30, 2016, net of tax
|
$
|
(161,907
|
)
|
|
$
|
6,433
|
|
|
$
|
(8,542
|
)
|
|
$
|
(62,204
|
)
|
|
$
|
(226,220
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) were primarily related to pension and other post-retirement benefits. Pension and other post-retirement reclassifications include amortization of net actuarial loss, prior service credit and transition amounts and are recorded as marketing, general and administrative expenses (see Note 8,
Benefit Plans
for further information).
Note 8 Benefit Plans
We have various pension and other defined benefit and defined contribution plans, in which substantially all employees may participate. We also have non-qualified supplemental executive and Board retirement plans.
Components of net periodic benefit costs for
the three months ended
November 30, 2017
, and
2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
Pension Benefits
|
|
Non-Qualified
Pension Benefits
|
|
Other Benefits
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Components of net periodic benefit costs for the three months ended November 30 are as follows:
|
(Dollars in thousands)
|
|
Service cost
|
$
|
9,919
|
|
|
$
|
9,383
|
|
|
$
|
137
|
|
|
$
|
259
|
|
|
$
|
236
|
|
|
$
|
353
|
|
|
Interest cost
|
6,002
|
|
|
7,692
|
|
|
178
|
|
|
352
|
|
|
227
|
|
|
427
|
|
|
Expected return on assets
|
(12,040
|
)
|
|
(12,014
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Prior service cost (credit) amortization
|
359
|
|
|
402
|
|
|
8
|
|
|
57
|
|
|
(141
|
)
|
|
(30
|
)
|
|
Actuarial (gain) loss amortization
|
6,888
|
|
|
4,765
|
|
|
15
|
|
|
173
|
|
|
(306
|
)
|
|
(116
|
)
|
|
Net periodic benefit cost
|
$
|
11,128
|
|
|
$
|
10,228
|
|
|
$
|
338
|
|
|
$
|
841
|
|
|
$
|
16
|
|
|
$
|
634
|
|
Employer Contributions
Total contributions to be made during fiscal 2018 will depend primarily on market returns on the pension plan assets and minimum funding level requirements. During
the three months ended
November 30, 2017
, we made
no
contributions to the pension plans. At this time, we do not anticipate being required to make a contribution for our benefit plans in fiscal 2018.
Note 9 Segment Reporting
We define our operating segments in accordance with ASC Topic 280,
Segment Reporting
, to reflect the manner in which our chief operating decision maker, our Chief Executive Officer, evaluates performance and allocates resources in managing our business. We have aggregated those operating segments into four reportable segments: Energy, Ag, Nitrogen Production and Foods.
Our Energy segment produces and provides primarily for the wholesale distribution of petroleum products and transportation of those products. Our Ag segment purchases and further processes or resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties; serves as a wholesaler and retailer of crop inputs; and produces and markets ethanol. Our Nitrogen Production segment consists solely of our equity method investment in CF Nitrogen, which entitles us, pursuant to a supply agreement that we entered into with CF Nitrogen, to purchase up to a specified annual quantity of granular urea and urea ammonium nitrate annually from CF Nitrogen. Our Foods segment consists solely of our equity method investment in Ventura Foods. Corporate and Other primarily represents our non-consolidated wheat milling operations, as well as our financing, hedging and insurance operations.
Corporate administrative expenses and interest are allocated to each business segment, and Corporate and Other, based on direct usage for services, such as information technology and legal, and other factors or considerations relevant to the costs incurred.
Many of our business activities are highly seasonal and operating results vary throughout the year. For example, in our Ag segment, our crop nutrients and country operations businesses generally experience higher volumes and income during the spring planting season and in the fall, which corresponds to harvest. Our grain marketing operations are also subject to fluctuations in volume and earnings based on producer harvests, world grain prices and demand. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products, in the summer and early fall when gasoline and diesel fuel usage is highest and is subject to global supply and demand forces. Other energy products, such as propane, may experience higher volumes and profitability during the winter heating and fall crop drying seasons.
Our revenues, assets and cash flows can be significantly affected by global market prices for commodities such as petroleum products, natural gas, ethanol, grains, oilseeds, crop nutrients and flour. Changes in market prices for commodities that we purchase without a corresponding change in the selling prices of those products can affect revenues and operating earnings. Commodity prices are affected by a wide range of factors beyond our control, including the weather, crop damage
due to disease or insects, drought, the availability and adequacy of supply, government regulations and policies, world events, and general political and economic conditions.
While our revenues and operating results are derived from businesses and operations which are wholly owned and majority owned, a portion of our business operations are conducted through companies in which we hold ownership interests of 50% or less and do not control the operations. See Note 4,
Investments
for more information on these entities.
Reconciling Amounts represent the elimination of revenues and interest between segments. Such transactions are executed at market prices to more accurately evaluate the profitability of the individual business segments.
Segment information for
the three months ended
November 30, 2017
, and
2016
, is presented in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
Ag
|
|
Nitrogen Production
|
|
Foods
|
|
Corporate
and Other
|
|
Reconciling
Amounts
|
|
Total
|
|
For the Three Months Ended November 30, 2017:
|
(Dollars in thousands)
|
|
Revenues
|
$
|
2,087,703
|
|
|
$
|
6,086,680
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,775
|
|
|
$
|
(144,269
|
)
|
|
$
|
8,048,889
|
|
|
Operating earnings (loss)
|
117,173
|
|
|
60,822
|
|
|
(3,135
|
)
|
|
(2,467
|
)
|
|
4,488
|
|
|
—
|
|
|
176,881
|
|
|
(Gain) loss on investments
|
—
|
|
|
(2,819
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,819
|
)
|
|
Interest expense
|
5,635
|
|
|
17,604
|
|
|
13,272
|
|
|
—
|
|
|
4,581
|
|
|
(390
|
)
|
|
40,702
|
|
|
Other (income) loss
|
(393
|
)
|
|
(20,228
|
)
|
|
(1,738
|
)
|
|
—
|
|
|
(226
|
)
|
|
390
|
|
|
(22,195
|
)
|
|
Equity (income) loss from investments
|
(1,152
|
)
|
|
(8,254
|
)
|
|
(20,335
|
)
|
|
(3,440
|
)
|
|
(5,181
|
)
|
|
—
|
|
|
(38,362
|
)
|
|
Income (loss) before income taxes
|
$
|
113,083
|
|
|
$
|
74,519
|
|
|
$
|
5,666
|
|
|
$
|
973
|
|
|
$
|
5,314
|
|
|
$
|
—
|
|
|
$
|
199,555
|
|
|
Intersegment revenues
|
$
|
(137,204
|
)
|
|
$
|
(4,033
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3,032
|
)
|
|
$
|
144,269
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
Ag
|
|
Nitrogen Production
|
|
Foods
|
|
Corporate
and Other
|
|
Reconciling
Amounts
|
|
Total
|
|
For the Three Months Ended November 30, 2016:
|
(Dollars in thousands)
|
|
Revenues
|
$
|
1,700,180
|
|
|
$
|
6,435,994
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
27,441
|
|
|
$
|
(115,365
|
)
|
|
$
|
8,048,250
|
|
|
Operating earnings (loss)
|
72,780
|
|
|
109,597
|
|
|
(4,029
|
)
|
|
(2,797
|
)
|
|
10,940
|
|
|
—
|
|
|
186,491
|
|
|
(Gain) loss on investments
|
—
|
|
|
7,385
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
—
|
|
|
7,401
|
|
|
Interest expense
|
4,268
|
|
|
16,339
|
|
|
12,736
|
|
|
—
|
|
|
7,974
|
|
|
(3,052
|
)
|
|
38,265
|
|
|
Other (income) loss
|
(309
|
)
|
|
(17,923
|
)
|
|
(29,106
|
)
|
|
—
|
|
|
(115
|
)
|
|
3,052
|
|
|
(44,401
|
)
|
|
Equity (income) loss from investments
|
(1,162
|
)
|
|
(5,417
|
)
|
|
(14,696
|
)
|
|
(13,369
|
)
|
|
(5,684
|
)
|
|
—
|
|
|
(40,328
|
)
|
|
Income (loss) before income taxes
|
$
|
69,983
|
|
|
$
|
109,213
|
|
|
$
|
27,037
|
|
|
$
|
10,572
|
|
|
$
|
8,749
|
|
|
$
|
—
|
|
|
$
|
225,554
|
|
|
Intersegment revenues
|
$
|
(110,087
|
)
|
|
$
|
(3,765
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,513
|
)
|
|
$
|
115,365
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10 Derivative Financial Instruments and Hedging Activities
Our derivative instruments primarily consist of commodity and freight futures and forward contracts and, to a lesser degree, may include foreign currency and interest rate swap contracts. These contracts are economic hedges of price risk, but we do not apply hedge accounting under ASC Topic 815,
Derivatives and Hedging
, except with respect to certain interest rate swap contracts which are accounted for as cash flow or fair value hedges. Derivative instruments are recorded on our Consolidated Balance Sheets at fair value as described in Note 11,
Fair Value Measurements
.
The following tables present the gross fair values of derivative assets, derivative liabilities, and margin deposits (cash collateral) recorded on our Consolidated Balance Sheets along with the related amounts permitted to be offset in accordance with GAAP. We have elected not to offset derivative assets and liabilities when we have the right of offset under ASC Topic 210-20,
Balance Sheet - Offsetting
; or when the instruments are subject to master netting arrangements under ASC Topic 815-10-45,
Derivatives and Hedging - Overall
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2017
|
|
|
|
|
Amounts Not Offset on the Consolidated Balance Sheet but Eligible for Offsetting
|
|
|
|
|
Gross Amounts Recognized
|
|
Cash Collateral
|
|
Derivative Instruments
|
|
Net Amounts
|
|
|
(Dollars in thousands)
|
|
Derivative Assets:
|
|
|
|
|
|
|
|
|
Commodity and freight derivatives
|
$
|
324,867
|
|
|
$
|
—
|
|
|
$
|
36,052
|
|
|
$
|
288,815
|
|
|
Foreign exchange derivatives
|
4,297
|
|
|
—
|
|
|
2,741
|
|
|
1,556
|
|
|
Interest rate derivatives - hedge
|
3,596
|
|
|
—
|
|
|
—
|
|
|
3,596
|
|
|
Embedded derivative asset
|
22,271
|
|
|
—
|
|
|
—
|
|
|
22,271
|
|
|
Total
|
$
|
355,031
|
|
|
$
|
—
|
|
|
$
|
38,793
|
|
|
$
|
316,238
|
|
|
Derivative Liabilities:
|
|
|
|
|
|
|
|
|
Commodity and freight derivatives
|
$
|
224,656
|
|
|
$
|
10,358
|
|
|
$
|
36,052
|
|
|
$
|
178,246
|
|
|
Foreign exchange derivatives
|
7,556
|
|
|
—
|
|
|
2,741
|
|
|
4,815
|
|
|
Interest rate derivatives - hedge
|
2,641
|
|
|
—
|
|
|
—
|
|
|
2,641
|
|
|
Total
|
$
|
234,853
|
|
|
$
|
10,358
|
|
|
$
|
38,793
|
|
|
$
|
185,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
|
|
|
Amounts Not Offset on the Consolidated Balance Sheet but Eligible for Offsetting
|
|
|
|
|
Gross Amounts Recognized
|
|
Cash Collateral
|
|
Derivative Instruments
|
|
Net Amounts
|
|
|
(Dollars in thousands)
|
|
Derivative Assets:
|
|
|
|
|
|
|
|
|
Commodity and freight derivatives
|
$
|
384,648
|
|
|
$
|
—
|
|
|
$
|
35,080
|
|
|
$
|
349,568
|
|
|
Foreign exchange derivatives
|
8,771
|
|
|
—
|
|
|
3,636
|
|
|
5,135
|
|
|
Interest rate derivatives - hedge
|
9,978
|
|
|
—
|
|
|
—
|
|
|
9,978
|
|
|
Embedded derivative asset
|
25,533
|
|
|
—
|
|
|
—
|
|
|
25,533
|
|
|
Total
|
$
|
428,930
|
|
|
$
|
—
|
|
|
$
|
38,716
|
|
|
$
|
390,214
|
|
|
Derivative Liabilities:
|
|
|
|
|
|
|
|
|
Commodity and freight derivatives
|
$
|
309,762
|
|
|
$
|
3,898
|
|
|
$
|
35,080
|
|
|
$
|
270,784
|
|
|
Foreign exchange derivatives
|
19,931
|
|
|
—
|
|
|
3,636
|
|
|
16,295
|
|
|
Interest rate derivatives - hedge
|
707
|
|
|
—
|
|
|
—
|
|
|
707
|
|
|
Total
|
$
|
330,400
|
|
|
$
|
3,898
|
|
|
$
|
38,716
|
|
|
$
|
287,786
|
|
The amount of long-term derivative assets and liabilities recorded on the Consolidated Balance Sheet at
November 30, 2017
, were
$71.8 million
and
$8.6 million
, respectively. The amount of long-term derivative assets and liabilities recorded on the Consolidated Balance Sheet at August 31, 2017, were
$196.9 million
and
$14.4 million
, respectively.
Derivatives Not Designated as Hedging Instruments
The majority of our derivative instruments have not been designated as hedging instruments for accounting purposes. The following table sets forth the pretax gains (losses) on derivatives not accounted for as hedging instruments that have been included in our Consolidated Statements of Operations for
the three months ended
November 30, 2017
, and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended November 30,
|
|
|
Location of
Gain (Loss)
|
|
2017
|
|
2016
|
|
|
|
|
(Dollars in thousands)
|
|
Commodity and freight derivatives
|
Cost of goods sold
|
|
$
|
27,752
|
|
|
$
|
18,410
|
|
|
Foreign exchange derivatives
|
Cost of goods sold
|
|
6,766
|
|
|
6,024
|
|
|
Foreign exchange derivatives
|
Marketing, general and administrative
|
|
(495
|
)
|
|
145
|
|
|
Interest rate derivatives
|
Interest expense
|
|
(1
|
)
|
|
2
|
|
|
Embedded derivative
|
Other income
|
|
1,738
|
|
|
29,106
|
|
|
Total
|
|
$
|
35,760
|
|
|
$
|
53,687
|
|
Commodity and Freight Contracts
As of
November 30, 2017
, and
August 31, 2017
, we had outstanding commodity futures, options and freight contracts that were used as economic hedges, as well as fixed-price forward contracts related to physical purchases and sales of commodities. The table below presents the notional volumes for all outstanding commodity and freight contracts accounted for as derivative instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2017
|
|
August 31, 2017
|
|
|
Long
|
|
Short
|
|
Long
|
|
Short
|
|
|
(Units in thousands)
|
|
Grain and oilseed - bushels
|
588,263
|
|
|
805,041
|
|
|
570,673
|
|
|
768,540
|
|
|
Energy products - barrels
|
16,254
|
|
|
19,300
|
|
|
15,072
|
|
|
18,252
|
|
|
Processed grain and oilseed - tons
|
196
|
|
|
1,700
|
|
|
299
|
|
|
2,347
|
|
|
Crop nutrients - tons
|
25
|
|
|
4
|
|
|
9
|
|
|
15
|
|
|
Ocean and barge freight - metric tons
|
4,785
|
|
|
3,144
|
|
|
2,777
|
|
|
1,766
|
|
|
Rail freight - rail cars
|
151
|
|
|
68
|
|
|
176
|
|
|
75
|
|
|
Natural gas - MMBtu
|
1,500
|
|
|
—
|
|
|
500
|
|
|
—
|
|
Foreign Exchange Contracts
We are exposed to risk regarding foreign currency fluctuations even though a substantial amount of international sales are denominated in U.S. dollars. In addition to specific transactional exposure, foreign currency fluctuations can impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of U.S. agricultural products compared to the same products offered by alternative sources of world supply. From time to time, we enter into foreign currency hedge contracts to minimize the impact of currency fluctuations on our transactional exposures. The notional amounts of our foreign exchange derivative contracts were
$646.3 million
and
$776.7 million
as of
November 30, 2017
, and
August 31, 2017
, respectively.
Embedded Derivative Asset
Under the terms of our strategic investment in CF Nitrogen, if CF Industries' credit rating is reduced below certain levels by two of three specified credit ratings agencies, we are entitled to receive a non-refundable annual payment of
$5.0 million
from CF Industries in November of each year until the date that CF Industries' credit rating is upgraded to or above certain levels by two of the three specified credit ratings agencies or February 1, 2026, whichever is earlier.
During the three months ended November 30, 2016, CF Industries' credit rating was reduced below the specified levels and we received a
$5.0 million
payment from CF Industries, which was recorded as a gain in our Consolidated Statement
of Operations. We also recorded an embedded derivative asset of
$24.1 million
on our Consolidated Balance Sheet and a corresponding gain in our Consolidated Statement of Operations for the fair value of the embedded derivative asset during the three months ended November 30, 2016. During the three months ended November 30, 2017, we received a second
$5.0 million
payment from CF Industries. The fair value of the embedded derivative asset recorded on our Consolidated Balance Sheet as of November 30, 2017, was equal to
$22.3 million
. The current and long-term portions of the embedded derivative asset are included in derivative assets and other assets on our Consolidated Balance Sheets, respectively. See Note 11,
Fair Value Measurements
for more information on the valuation of the embedded derivative asset.
Derivatives Designated as Fair Value Hedging Strategies
As of
November 30, 2017
, and
August 31, 2017
, we have outstanding interest rate swaps with an aggregate notional amount of
$495.0 million
designated as fair value hedges of portions of our fixed-rate debt. Our objective in entering into these transactions is to offset changes in the fair value of the debt associated with the risk of variability in the three-month U.S. dollar LIBOR interest rate, in essence converting the fixed-rate debt to variable-rate debt. Offsetting changes in the fair values of both the swap instruments and the hedged debt are recorded contemporaneously each period and only create an impact to earnings to the extent that the hedge is ineffective. During
the three months ended
November 30, 2017
, and
2016
, we recorded offsetting fair value adjustments of
$8.3 million
and
$13.3 million
, respectively, with
no
ineffectiveness recorded in earnings.
Note 11 Fair Value Measurements
ASC Topic 820,
Fair Value Measurements and Disclosures
defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs or market data that a market participant would obtain from independent sources to value the asset or liability. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The fair value hierarchy consists of three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Recurring fair value measurements at
November 30, 2017
, and
August 31, 2017
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2017
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity and freight derivatives
|
$
|
29,637
|
|
|
$
|
295,230
|
|
|
$
|
—
|
|
|
$
|
324,867
|
|
|
Foreign currency derivatives
|
—
|
|
|
4,297
|
|
|
—
|
|
|
4,297
|
|
|
Interest rate swap derivatives
|
—
|
|
|
3,596
|
|
|
—
|
|
|
3,596
|
|
|
Deferred compensation assets
|
53,348
|
|
|
—
|
|
|
—
|
|
|
53,348
|
|
|
Deferred purchase price receivable
|
—
|
|
|
—
|
|
|
521,502
|
|
|
521,502
|
|
|
Embedded derivative asset
|
—
|
|
|
22,271
|
|
|
—
|
|
|
22,271
|
|
|
Other assets
|
17,784
|
|
|
—
|
|
|
—
|
|
|
17,784
|
|
|
Total
|
$
|
100,769
|
|
|
$
|
325,394
|
|
|
$
|
521,502
|
|
|
$
|
947,665
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Commodity and freight derivatives
|
$
|
25,299
|
|
|
$
|
199,357
|
|
|
$
|
—
|
|
|
$
|
224,656
|
|
|
Foreign currency derivatives
|
—
|
|
|
7,556
|
|
|
—
|
|
|
7,556
|
|
|
Interest rate swap derivatives
|
—
|
|
|
2,641
|
|
|
—
|
|
|
2,641
|
|
|
Total
|
$
|
25,299
|
|
|
$
|
209,554
|
|
|
$
|
—
|
|
|
$
|
234,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Commodity and freight derivatives
|
$
|
48,491
|
|
|
$
|
336,157
|
|
|
$
|
—
|
|
|
$
|
384,648
|
|
|
Foreign currency derivatives
|
—
|
|
|
8,771
|
|
|
—
|
|
|
8,771
|
|
|
Interest rate swap derivatives
|
—
|
|
|
9,978
|
|
|
—
|
|
|
9,978
|
|
|
Deferred compensation assets
|
52,414
|
|
|
—
|
|
|
—
|
|
|
52,414
|
|
|
Deferred purchase price receivable
|
—
|
|
|
—
|
|
|
548,602
|
|
|
548,602
|
|
|
Embedded derivative asset
|
—
|
|
|
25,533
|
|
|
—
|
|
|
25,533
|
|
|
Other assets
|
14,846
|
|
|
—
|
|
|
—
|
|
|
14,846
|
|
|
Total
|
$
|
115,751
|
|
|
$
|
380,439
|
|
|
$
|
548,602
|
|
|
$
|
1,044,792
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Commodity and freight derivatives
|
$
|
31,189
|
|
|
$
|
278,573
|
|
|
$
|
—
|
|
|
$
|
309,762
|
|
|
Foreign currency derivatives
|
—
|
|
|
19,931
|
|
|
—
|
|
|
19,931
|
|
|
Interest rate swap derivatives
|
—
|
|
|
707
|
|
|
—
|
|
|
707
|
|
|
Total
|
$
|
31,189
|
|
|
$
|
299,211
|
|
|
$
|
—
|
|
|
$
|
330,400
|
|
Commodity, freight and foreign currency derivatives
— Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified within Level 1. Our forward commodity purchase and sales contracts with fixed-price components, ocean freight contracts and other over-the-counter ("OTC") derivatives are determined using inputs that are generally based on exchange traded prices and/or recent market bids and offers, adjusted for location specific inputs, and are classified within Level 2. The location specific inputs are generally broker or dealer quotations, or market transactions in either the listed or OTC markets. Changes in the fair values of these contracts are recognized in our Consolidated Statements of Operations as a component of cost of goods sold.
Interest rate swap derivatives
— Fair values of our interest rate swap derivatives are determined utilizing valuation models that are widely accepted in the market to value these OTC derivative contracts. The specific terms of the contracts, as well as market observable inputs, such as interest rates and credit risk assumptions, are factored into the models. As all significant inputs are market observable, all interest rate swaps are classified within Level 2. Changes in the fair values of contracts not designated as hedging instruments for accounting purposes are recognized in our Consolidated Statements of Operations as a component of interest expense. See Note 10,
Derivative Financial Instruments and Hedging Activities
for additional information about interest rates swaps designated as fair value and cash flow hedges.
Deferred compensation and
other assets
— Our deferred compensation investments, Rabbi Trust assets and available-for-sale investments in common stock of other companies are valued based on unadjusted quoted prices on active exchanges and are classified within Level 1. Changes in the fair values of these other assets are primarily recognized in our Consolidated Statements of Operations as a component of marketing, general and administrative expenses.
Deferred purchase price receivable
— The fair value of the DPP receivable included in receivables, net and other assets, is determined by discounting the expected cash flows to be received. The expected cash flows are primarily based on unobservable inputs consisting of the face amount of the Receivables adjusted for anticipated credit losses. Significant changes in the anticipated credit losses could result in a significantly higher (or lower) fair value measurement. Due to the use of significant unobservable inputs in the pricing model, including management's assumptions related to anticipated credit losses, the DPP receivable is classified as a Level 3 fair value measurement. The reconciliation of the DPP receivable for the period ended
November 30, 2017
, is included in Note 2,
Receivables
.
Embedded derivative asset
— The embedded derivative asset relates to contingent payments inherent in our investment in CF Nitrogen. The inputs into the fair value measurement include the probability of future upgrades and downgrades of CF Industries' credit rating based on historical credit rating movements of other public companies and the discount rates to be applied to potential annual payments based on applicable historical and current yield coupon rates. Based on these observable inputs, our fair value measurement is classified within Level 2. See Note 10,
Derivative Financial Instruments and Hedging Activities
for additional information.
There were no material transfers between Level 1, Level 2 and Level 3 assets and liabilities during the three months ended November 30, 2017.
Note 12 Commitments and Contingencies
Environmental
We are required to comply with various environmental laws and regulations incidental to our normal business operations. In order to meet our compliance requirements, we establish reserves for the probable future costs of remediation of identified issues, which are included in cost of goods sold and marketing, general and administrative in our Consolidated Statements of Operations. The resolution of any such matters may affect consolidated net income for any fiscal period; however, we believe any resulting liabilities, individually or in the aggregate, will not have a material effect on our consolidated financial position, results of operations or cash flows during any fiscal year.
Other Litigation and Claims
We are involved as a defendant in various lawsuits, claims and disputes, which are in the normal course of our business. The resolution of any such matters may affect consolidated net income for any fiscal period; however, we believe any resulting liabilities, individually or in the aggregate, will not have a material effect on our consolidated financial position, results of operations or cash flows during any fiscal year.
Guarantees
We are a guarantor for lines of credit and performance obligations of related, non-consolidated companies. As of
November 30, 2017
, our bank covenants allowed maximum guarantees of
$1.0 billion
, of which
$101.4 million
were outstanding. We have collateral for a portion of these contingent obligations. We have not recorded a liability related to the contingent obligations as we do not expect to pay out any cash related to them, and the fair values are considered immaterial. The underlying loans to the counterparties for which we provide these guarantees were current as of
November 30, 2017
.
Lease Commitments
On November 30, 2017, we completed a sale-leaseback transaction for our primary corporate office building located in Inver Grove Heights, Minnesota. Simultaneous with the closing of the sale, the Company entered into a
20
-year operating lease arrangement with base annual rent of approximately
$3.4 million
during the first year, followed by annual increases of
2%
through the remainder of the lease period.
Note 13 Subsequent Events
United States Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The law includes significant changes to the U.S. corporate tax system, including a Federal corporate rate reduction from
35%
to
21%
, repeal of the Section 199 Domestic Production Activities Deduction and enactment of the Deduction for Qualified Business Income of Pass-Thru Entities. We are in the process of analyzing the legislation and determining an estimate of the financial impact. Currently, we expect to record a material tax benefit due to the revaluation of our net deferred tax liability position included in our Consolidated Balance Sheets.