Item 1. BUSINESS
GENERAL
The Company is a Minnesota 308A agricultural cooperative corporation owned by approximately 2,800 sugarbeet growers in the Minnesota and North Dakota portions of the Red River Valley. The Red River Valley forms a band approximately 35 miles wide on either side of the North Dakota and Minnesota border and extending approximately 200 miles south from the border of the United States and Canada. The Company was organized in 1973 by sugarbeet growers to acquire the business and assets of the American Crystal Sugar Company, then a publicly held New Jersey corporation in operation since 1899. By owning and operating five sugarbeet processing facilities in the Red River Valley, the Company provides its shareholders (members) with the ability to process their sugarbeets into sugar and agri-products such as: molasses; sugarbeet pulp; and by-products of the molasses desugarization process, betaine and concentrated separated by-product (CSB). The Company’s Board of Directors establishes sugarbeet acreage planting requirements in the Red River Valley (Red River Valley crop) each year based on factory processing capacity, expected crop quality, government regulations and other factors. The total authorized acres to be planted are allocated ratably to each preferred share held by the members. The Company processed sugarbeets from approximately 443,000 acres for the 2011 Red River Valley crop (fiscal year 2012) and expects to process sugarbeets from approximately 419,000 acres for the 2012 Red River Valley crop (fiscal year 2013).
The Company, through its wholly-owned subsidiary, Sidney Sugars Incorporated (Sidney Sugars), owns two additional sugarbeet processing facilities. At the Sidney, Montana, facility, the Company processed non-member sugarbeets from approximately 29,000 acres for the 2011 crop (fiscal year 2012) and expects to process from approximately 33,000 acres for the 2012 crop (fiscal year 2013). The Torrington, Wyoming, facility has been leased on a long-term basis to another sugar producer.
The Company, through its wholly-owned subsidiary, Crab Creek Sugar Company (Crab Creek), controls the long-term production of sugar at a sugarbeet processing facility at Moses Lake, Washington. Neither Crab Creek nor the Company currently operates or intends to operate the Moses Lake facility.
The Company is the controlling member of ProGold Limited Liability Company (ProGold) holding a 51 percent ownership interest. ProGold owns a corn wet-milling plant in Wahpeton, North Dakota, that is currently being leased to Cargill, Incorporated (Cargill) pursuant to a 10 year lease between ProGold and Cargill that runs through December 31, 2017. The lease provides that Cargill pay ProGold average annual rental payments equal to $21.9 million.
The Company’s sugar marketing agent, United Sugars Corporation (United), is a cooperative owned by the Company, Minn-Dak Farmers Cooperative and United States Sugar Corporation. The Company’s agri-products are marketed through a marketing agent, Midwest Agri-Commodities Company (Midwest). Midwest is a cooperative owned by the Company, Minn-Dak Farmers Cooperative, Southern Minnesota Beet Sugar Cooperative and Michigan Sugar Company.
Operating Segments
The Company has identified two reportable operating segments: Sugar and Leasing. The Sugar segment is engaged primarily in the production and marketing of sugar from sugarbeets. It also sells agri-products and sugarbeet seed. The Leasing segment is engaged in the leasing of a corn wet milling plant used in the production of high-fructose corn syrup. For financial information by segment see Note 13 of “Notes to the Consolidated Financial Statements.”
Principal Products Produced
The Company is engaged primarily in the production and marketing of sugar from sugarbeets. Total sugar sales accounted for 88.1 percent, 89.9 percent and 88.1 percent of the Company’s consolidated total revenues for the years ended August 31, 2012, 2011 and 2010, respectively. United Sugars Corporation, the Company’s sugar marketing agent, sells sugar primarily to industrial users such as confectioners, breakfast cereal manufacturers and bakeries. For the fiscal year ended August 31, 2012, 90.4 percent (by weight) of the sugar was sold to industrial users. The remaining portion is marketed by United Sugars Corporation to wholesalers and retailers under the “Crystal Sugar” and various private labels for household consumption. With regard to brand name sales, the Company licenses the use of the “Crystal Sugar” trademark to United Sugars Corporation.
The majority of United Sugars Corporation’s sugar sales are contracted one or more quarters in advance.
The Company also sells agri-products such as: molasses; sugarbeet pulp; betaine and concentrated separated by-product (CSB), by-products of the molasses desugarization process; and sugarbeet seed. Substantially all of the Company’s agri-products are marketed through Midwest Agri-Commodities Company, a common marketing agency. Sugarbeet pulp is marketed to livestock feed mixers and livestock feeders in the United States and foreign markets. A large proportion of the Company’s pulp production is exported to Japan and Europe. The market for sugarbeet pulp is affected by the availability and quality of competitive feedstuffs and foreign exchange rates. Sugarbeet molasses is marketed primarily to yeast manufacturers, livestock feed mixers and livestock feeders. Total agri-product sales accounted for 9.0 percent of the Company’s consolidated total revenues during fiscal 2012, of which export agri-product sales accounted for 3.9 percent of total revenues. Agri-products sales accounted for 7.6 percent and 8.7 percent of the Company’s consolidated total revenues in fiscal 2011 and fiscal 2010, respectively, while agri-product export sales accounted for 3.4 percent and 3.8 percent of the Company’s total revenues in fiscal 2011 and fiscal 2010, respectively.
There is no single customer of United or Midwest attributable to the Company that accounts for 10 percent or more of the revenues of the Company.
The Company’s total annual sugar and agri-product production is influenced by the amount and the quality of sugarbeets grown by its members and non-members, the processing capacity of the Company’s plants, by its ability to store harvested sugarbeets and by government programs and regulations.
Raw Materials
The Company purchases all of its Red River Valley sugarbeets from members under contract with the Company. All members are party to a five year contract for the 2008 through 2012 crop years which the Company terminated at the end of the current term. A new five year contract becomes effective for the crop years 2013 through 2017 and will automatically renew for additional five-year terms unless terminated by one of the parties at the end of the current term. In addition, each member has an annual contract with the Company specifying the number of acres the member is obligated to grow during that year. Each member is required to have a five-year contract and an annual contract with the Company. Each share of Preferred Stock held by a member requires that member to grow sugarbeets, subject to the planting tolerance, for delivery to the Company. The Company’s Board of Directors has the discretion to adjust the acreage that is required to be planted for each share of Preferred Stock held by the members. The Company’s Board of Directors set the planting tolerance for the 2012 crop year at .83 to .88 acres per share of Preferred Stock. Based on current market conditions and processing capacity, the Company estimates planting tolerances for the 2013 crop year and beyond will be in the range of .80 to .85 acres per share of Preferred Stock. The Board of Directors and management regularly review and determine the relationship between the ownership of Preferred Stock and acreage planting.
The gross beet payment is the value of recovered sugar from the sugarbeets a member delivers plus the member’s share of agri-product revenues, minus the member’s share of member business operating costs. The following allowances, costs and deductions, if applicable, are used to adjust the gross beet payment to arrive at the net payment to the members: hauling program allowance and costs, pre-pile premium and costs, tare incentive premium/penalty program and unit retains. The costs of these programs are shared among members on the basis of the net tonnage of sugarbeets delivered by each member.
Under the grower contracts, payments to members for sugarbeets delivered must be made in at least three installments: (i) on or about November 15, the Company pays its members an amount equal to 65 percent of the Company’s estimate of the member’s net beet payment for the then current fiscal year’s crop; (ii) on or about March 31, the Company pays an amount, which combined with the November payment, equals 90 percent of the member’s estimated net beet payment for the then current fiscal year’s crop; (iii) and not more than 15 days after completion and acceptance by the Board of Directors of the audit of the Company’s annual consolidated financial statements for the then completed fiscal year, the Company pays the remainder of the member’s net beet payment for the immediately prior completed fiscal year. Except for unit retains, the Company must pay to its members for their sugarbeets all proceeds from the sale of the members’ sugar and agri-products in excess of related member business operating costs, as described above.
All of the sugarbeets processed at the Sidney, Montana, factory are purchased from non-member growers under contract with Sidney Sugars. Each non-member grower has an annual contract with Sidney Sugars specifying the number of acres the non-member grower is obligated to grow during each year.
The price per ton of sugarbeets paid to the growers who deliver to Sidney Sugars (Scale Payment) is determined according to the sugarbeet payment scale contained in the grower contract and is calculated based on Sidney Sugars’ average net return for sugar from that year’s crop, the adjusted average sugar content of each grower’s sugarbeets and sugarbeet storage results.
Under grower contracts between Sidney Sugars and its growers, payments to these growers for sugarbeets must be made in three installments following delivery of the crop: (i) in November, Sidney Sugars pays the growers an amount equal to 65 percent of the estimated Scale Payment for that year’s crop; (ii) in April, Sidney Sugars pays an amount, which combined with the November payment, equals
90 percent of the estimated Scale Payment for that year’s crop; (iii) and in October, Sidney Sugars pays the remainder of the actual Scale Payment.
Seasonality
The period during which the Company’s plants are in operation to process sugarbeets into sugar and agri-products is referred to as the “campaign.” During the campaign, the Company’s factories operate twenty-four hours per day, seven days per week. In the Red River Valley, the campaign typically begins in September and continues until the available supply of sugarbeets has been depleted, which generally occurs in May of the following year. Based on current processing capacity, an average campaign lasts approximately 260 days, assuming normal crop yields. At the Sidney, Montana factory, the campaign begins in late September or early October and generally concludes in February.
While the timing of the Company’s processing activities are connected to the start of the harvest and the available supply of sugarbeets, the sales of sugar and agri-products occur ratably throughout the year.
Sales Backlog
The backlog of any unfilled sales orders at August 31, 2012 and 2011 was not material to the Company.
Market and Competition
Current United States government statistics estimate total United States refined sugar deliveries at approximately 213 million hundredweight for the year beginning October 1, 2011 and ending September 30, 2012. For the same period ending September 2011, total deliveries were approximately 214 million hundredweight.
The United States refined sugar market has grown at about 1.3 percent per year over the last ten years. Corn sweeteners and non-nutritive sweeteners also constitute a large portion of the overall sweetener market. The Company believes that the United States annual market growth for sugar in the near future will be approximately 1.0 percent.
Approximately 65 percent of the United States sugar market share is concentrated in the top three sellers. The Company’s sugar production and sales represent approximately 13 percent of the total domestic market for refined sugar in 2011/2012. The Company had the right to market, or to have marketed on its behalf, approximately 34 million hundredweight of sugar from the 2011 crop. Sugar sales by United Sugars Corporation, the Company’s marketing agent, represent approximately 25 percent of the United States sugar market.
United is currently the second largest marketer of sugar in the United States. Main competitors in the domestic market are: The Amalgamated Sugar Company LLC; Cargill, Incorporated; Domino Foods Incorporated; Louis Dreyfus Commodities LLC: Michigan Sugar Company; and The Western Sugar Cooperative. Because sugar is a fungible commodity, competition in the United States sugar industry is primarily based upon price, customer service and reliability as a supplier.
Government Programs and Regulations
Food, Conservation and Energy Act of 2008
The Food, Conservation and Energy Act of 2008 (Farm Bill) enacted in May, 2008, contains several provisions related to the domestic sugar industry aimed at achieving balance and stability in the
U.S. sugar market while minimizing the cost to the Federal government. The Farm Bill applies to the 2008 through 2012 crop years. Generally, the Farm Bill:
· maintains a non-recourse loan program,
· sets a minimum overall allotment quantity for U.S. producers at no less than 85% of domestic consumption,
· maintains a system of marketing allocations for sugarbeet and sugar cane producers,
· restricts imports of foreign sugar and
· provides a new market balancing mechanism to divert any oversupply of sugar from sugar producers to ethanol producers.
Under the Farm Bill, sugar processors can borrow funds on a non-recourse basis from the Commodity Credit Corporation (CCC), with repayment of such funds secured by sugar. If the price of sugar drops below the forfeiture price, the processors can forfeit the sugar securing the loans to the CCC in lieu of repayment. Processors may also obtain CCC loans for “in-process” sugar or syrups at 80 percent of the loan rate.
The Farm Bill incorporated gradual loan rate increases for raw and refined sugar. For raw sugar, the loan rate increased three-quarters of a cent per pound, raw value, phased-in in quarter-cent increments over crop years 2009-2011. Raw cane loan rates were at 18.25 cents/lb. for the 2009 crop and gradually rose to 18.75 cents for the 2011 crop, and they remained at 18.75 cents/lb. for the 2012 crop year. Refined beet sugar loan rates were set at a rate equal to 128.5 percent of the loan rate per pound for raw cane sugar for each of the 2009 through 2012 crop years.
The U.S. Department of Agriculture (USDA) has historically maintained raw and refined sugar prices above the forfeiture price without cost to the U.S. Treasury by regulating the supply of sugar in the U.S. market through management of a tariff rate quota system. Currently, forty exporting countries retain guaranteed preferential access to the U.S. market under World Trade Organization (WTO) and Free Trade Agreement (FTA) rules. Mexico’s access has been unlimited since January 1, 2008 as a result of the North American Free Trade Agreement. The Farm Bill sets a minimum overall allotment quantity for U.S. producers at no less than 85% of domestic human consumption and provides a market balancing mechanism if there is an oversupply in the domestic sugar market. If the Secretary of Agriculture determines there is an oversupply of sugar, the new market balancing mechanism requires the Secretary to divert the excess sugar from sugar producers to ethanol producers while minimizing the cost to the U.S Treasury. No sugar has been diverted under this market balancing mechanism.
The marketing allotments and allocations set forth under the Farm Bill affect the sugar produced from the 2008 crop through the 2012 crop. On an annual basis, the marketing allotments and the corresponding allocation to the Company will dictate the amount of sugar the Company can sell into the domestic market. The Company’s marketing allocation for the 2011 crop was initially set at approximately 35 million hundredweight. The Company’s marketing allocation for the 2012 crop is currently set at approximately 36 million hundredweight. The Company’s allocation may decrease or increase the amount of sugar the Company can market for a given year, thus affecting the number of acres of sugarbeets required for processing to produce that amount of sugar.
Currently Congress is considering language that will either extend or revise the current Farm Bill. The Company has no way to predict the outcome, but the impact could be material and significant.
North American Free Trade Agreement
The North American Free Trade Agreement (NAFTA) governs sweetener trade between the United States and Mexico. Under the NAFTA, tariffs on over-quota imports of sugar from and exports of sugar to Mexico expired on January 1, 2008. Imports of Mexican sugar could cause material harm to the United States sugar market. During the years ended September 30, 2012, 2011 and 2010, Mexico exported approximately 19 million, 32 million and 15 million hundredweight of sugar into the United States, respectively. The Company has no way to predict the extent to which Mexico will take advantage of its export opportunities.
Regional and Bilateral Free Trade Agreements
The United States government may continue to pursue international trade agreements. The Company monitors the U.S. government’s international trade policy because it may lead to additional commitments to import sugar into the U.S. market. Some of the countries who have either participated in trade agreements or are contemplated for new negotiations are major producers of sugar. The primary agreement affecting sugar that is being negotiated, to the Company’s knowledge, is the Trans-Pacific Partnership Agreement. The Trans-Pacific Partnership Agreement includes Chile, Singapore, Brunei, New Zealand, Australia, Peru, Malaysia, Vietnam and the United States. Additional countries may join the Trans-Pacific Partnership Agreement, including Canada and Mexico. If added without proper rules, these countries could undermine management of the tariff-rate quota system and the Federal sugar program. The Company believes this agreement, if passed into law, could negatively impact the Company’s profitability. If increases in guaranteed access or reductions in sugar tariffs are included in this agreement, excess sugar from these regions could enter the U.S. market and reduce domestic sugar prices.
The Doha Round negotiations of the WTO may be pursued by the U.S. Administration and some of its international counterparts. It is unclear at this time whether negotiations will be completed. If the negotiations are completed, the outcome of any negotiated arrangement could have significant adverse consequences for the Company.
The U.S. sugar industry and the Company, as an influential member of such industry, recognize the potential negative impact that could result if these agreements are entered into by the United States and are taking steps to attempt to positively influence the outcome. The Company and the sugar industry intend to continue to focus significant attention on trade issues in the future.
The impact of the various trade agreements on the Company cannot be assessed at this time due to the uncertainty concerning the terms of the agreements and whether they will ultimately be implemented. It is possible, however, that the passage of various trade agreements could have a material adverse effect on the Company through a reduction in sugar selling prices, and a corresponding reduction in the beet payment to its shareholders.
Employees
Substantially all of the hourly employees at the Company’s factories, including full-time and seasonal employees, are represented by the Bakery, Confectionery, Tobacco Workers and Grain Millers (BCTGM) AFL-CIO. The collective bargaining agreement for the Red River Valley factory employees expired on July 31, 2011. On July 31, 2011, the Red River Valley employees represented by the BCTGM rejected the Company’s new contract offer. On August 1, 2011, the Company locked out the Red River Valley union employees. The collective bargaining agreement for the Sidney, Montana,
factory employees will expire on April 30, 2015. Office, clerical and management employees are not unionized, except for certain office employees at the Moorhead and Crookston, Minnesota, and Hillsboro, North Dakota, factories who are covered by the collective bargaining agreement with the BCTGM.
On August 1, 2011, the Company commenced operating its Red River Valley factories with contract replacement workers in order to meet its obligations to its customers and shareholders. As of the date of this report, a new collective bargaining agreement has not been reached with the BCTGM and the Red River Valley union employees remain locked out. The Company is continuing to recruit and hire limited duration non-union employees to replace the contract workers. The Company cannot predict the time-frame for the resolution of this matter.
The Company generally employs approximately 1,365 full-time employees, of which approximately 1,090 are hourly and 275 are salaried. In addition, the Company generally employs approximately 850 hourly seasonal workers, approximately 370 during the sugarbeet harvest and approximately 480 during the remainder of the sugarbeet processing campaign. During the sugarbeet harvest, the Company also contracts with third party agencies for approximately another 1,300 additional workers.
Environmental Matters
The Company is subject to extensive federal and state environmental laws and regulations with respect to water and air quality, solid waste disposal and odor and noise control. The Company conducts an ongoing compliance program designed to meet these environmental laws and regulations. The Company believes that it is in substantial compliance with applicable environmental laws and regulations. From time to time, however, the Company may be involved in investigations or determinations regarding matters that may arise in the ordinary course of business. The Company works closely with all affected government agencies to resolve environmental issues that have arisen and believes such issues will be resolved without any material adverse effect on the Company.
The Company’s sugar manufacturing process is energy intensive and generates carbon dioxide and other “Greenhouse Gases” (GHGs). Several bills have been passed or introduced in the United States Senate and House of Representatives that would regulate GHG emissions to reduce the impact of global climate change. The Company believes that industries generating GHGs, including the Company, could be subject to either federal or state regulation relating to climate change policies in the relatively near future. These policies, if adopted, will increase the Company’s energy and other operating costs. Depending on how these policies address imports, the domestic sugar market may have a competitive disadvantage compared with imported sugar. These policies could have a significant negative impact on the Company’s beet payment to shareholders if the Company is not able to pass the increased costs on to its customers.
On August 12, 2011, the Company received a Finding of Violation and Notice of Violation from the United States Environmental Protection Agency (EPA) for alleged violations of the Clean Air Act concerning certain air emissions at the Company’s three Minnesota factories. The Company has had some preliminary discussions with the EPA concerning the alleged violations. The Company, at this time, cannot predict the outcome of these discussions or the financial impact, if any, resulting from the resolution of this matter.
The Company has identified capital expenditures for environmental related projects over the next three years at the Company’s factory locations of approximately $5.8 million.
Available Information
The Company’s corporate headquarters are located at 101 North Third Street, Moorhead, Minnesota 56560, telephone number (218) 236-4400. The Company’s fiscal year ends August 31. The Company’s website is www.crystalsugar.com. The Company files annual, quarterly and periodic reports with the United States Securities and Exchange Commission (SEC). These reports can be accessed by selecting “SEC Filings” on the Company’s website or electronic or paper copies can be obtained free of charge upon request. In addition, the Company’s reports may be read or copied at the SEC Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at http://www.sec.gov that contains reports and other information filed electronically about the Company.
Item 1A.
Item 1A. RISK FACTORS
The risks described below together with all of the other information included in this Annual Report on Form 10-K should be considered carefully. The risks and uncertainties described below and elsewhere in this Annual Report on Form 10-K are not the only ones we face. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the beet payments made to our members may decrease, the value of our Preferred Stock could fall, and a member could lose all or part of their investment.
Rising operating expenses might inhibit our ability to compete effectively in our industry.
Our Company operates in a commodity market environment. Our strategy involves, to a substantial degree, maximizing profitability by continuing to control operating expenses. In furtherance of this strategy, we have engaged in ongoing, company-wide efficiency activities intended to increase productivity and reduce costs. We cannot assure that our efforts will result in our continued profitability.
An oversupply of sugar could reduce the price of sugar and our profitability.
Many factors can lead to an oversupply of sugar. Excess supply may result in a decline in domestic sugar prices. Lower sugar prices directly impact profitability of selling refined sugar in the United States. If the selling price of sugar decreases, our revenues will decrease which will result in a direct negative impact on our profitability.
Under the current terms of the NAFTA sugar imported from Mexico may freely enter the U.S. market. These imports could oversupply the U.S. market and reduce the price of sugar.
The United States government has been engaged in regional and bilateral trade negotiations with countries that produce sugar. If the United States government enters into trade agreements with sugar producing countries, the amount of sugar in the domestic sugar market could increase. An increase in the supply of sugar could reduce the price of sugar, which would reduce our profitability.
The success or failure of our business is linked to certain government programs, regulations and legislation that may change in the future.
The nature and scope of future legislation and regulation affecting the sugar market and industry cannot be predicted. The current price supports and market protections in place for sugar may not continue in their present forms. If the price support programs were eliminated in their entirety, or if certain protections the federal government provides from foreign competitors were materially reduced, the amount of sugar we can sell, the amount of sugarbeets we can process and the price for which we
can sell our sugar may be impacted, which could reduce the profitability of our business. If legislation or government programs change, we may not be able to adopt strategies that would allow us to compete effectively in a greatly changed domestic market for sugar and the adverse effects could negatively impact the desirability of growing sugarbeets for delivery to us for processing, our financial results, and our continued viability.
The Food, Conservation and Energy Act of 2008 (Farm Bill) enacted in May, 2008, contains several provisions related to the domestic sugar industry aimed at achieving balance and stability in the U.S. sugar market while minimizing the cost to the Federal government. The Farm Bill applies to the 2008 through 2012 crop years. Legislative discussions have begun on a new Farm Bill. Any changes in the Farm Bill may impact our business. We cannot predict the changes to the Farm Bill or the impact such changes will have at this time.
The availability of alternative sweeteners in the sweetener market may reduce the demand for sugar and our operating results may suffer.
Sugar is a fungible commodity with competition for sales volume based primarily upon price, customer service and reliability. The overall sweetener market, in addition to sugar, includes corn-based sweeteners, such as regular and high fructose corn syrups, and non-nutritive, high-intensity sweeteners such as aspartame, sucralose and stevia. Differences in functional properties and prices have tended to define the use of these various sweeteners. Although the various sweeteners are not interchangeable in all applications, the substitution of other sweeteners for sugar has occurred in certain products, such as soft drinks. We cannot predict the availability, development or potential use of these and other alternative sweeteners and their possible impact on us or our members. We believe that we possess the ability to compete successfully with other producers of sugar in the United States. In spite of this competitive advantage, substitute products could reduce the demand for sugar which could lower the price of sugar, resulting in reduced profitability in the future.
Our operations are highly dependent on the availability of short-term financing.
Because sugar is sold throughout the year, while sugarbeets are processed primarily in the fall, winter and spring, and due to the timing of the payments to growers during the year, we are highly dependent on the availability of short-term financing to fund our operations. Even though we currently have access to several sources of short-term financing, disruptions in the access to these sources or alternative sources could have a significant adverse impact on our operations.
Funding obligations under our pension plans may increase.
Substantially all employees who meet eligibility requirements of age, date of hire and length of service are covered by Company-sponsored defined benefit pension plans, which impose on us certain funding obligations. In determining our future payment obligations under the plans, we assume certain rates of return on the plan assets and growth rates of certain costs. Significant adverse changes in credit or capital markets could result in actual rates of return being materially lower than projected. Our cost growth rates may also be materially higher than projected. These factors could significantly increase our payment obligations under the plans, require us to take a significant charge on our balance sheet and, as a result, adversely affect our business, results of operations and financial condition.
Our operations are sensitive to energy prices.
The prices we pay for energy related products, such as natural gas, coal, coke and diesel fuel, have been volatile and may continue to be volatile. We use substantial amounts of these products in our manufacturing process. Higher energy prices may also increase the costs of many goods and services we acquire. These higher prices may materially increase our cost of production, thus reducing our profitability.
Quantity and quality of sugarbeets is sensitive to weather and other factors such as seed varieties.
The sugarbeet, as with most other crops, is affected by many factors, including seed varieties and weather conditions during the growing season. Additionally, the quantity of sugarbeets to be processed and weather conditions during the processing season affect our ability to store sugarbeets held for processing. Growing and storage conditions different from what we predict or expect may change the quantity and quality of sugarbeets available for processing and therefore may affect the quantity of the sugar we produce.
A significant decrease in the quantity or quality of sugarbeets harvested due to poor weather conditions would result in higher unit operating costs and lower earnings.
A significant increase in the quantity or quality of sugarbeets harvested due to good weather conditions or improved seed varieties could result in an unpredictably large quantity of sugarbeets to be processed. If we are required to process a larger than anticipated quantity of sugarbeets we may experience increased per unit of sugar processing cost which in turn would have an adverse financial consequence to us and our members.
In order to manage the quantity and quality of sugarbeets that are harvested or available for processing, our Grower Contract allows for us to establish the number of acres to be planted at the beginning of a crop year or harvested at the end of a crop year.
Adequate sugarbeet storage conditions during a processing campaign are critical to ensure that the quantity and quality of sugarbeets available for processing are maintained. If we are not able to obtain or maintain adequate storage conditions, the sugarbeets stored for processing at a later date may deteriorate, resulting in increased production costs, and decreased production which in turn would have an adverse financial consequence to us and our members.
Based on results of recent yield trials and crop results, we expect that new sugarbeet varieties may continue to result in increases in the average sugarbeet crop yields over the next five years. As a result, we anticipate that there may be a need to reduce the number of acres of sugarbeets that can be planted by each shareholder in order to match the sugarbeet crop volume to our processing and marketing capacity. This reduction, if necessary, would be accomplished by reducing the per share planting tolerance by an amount that may be material. Assuming there are no changes in other variables, the increased yield per acre expected to result from the continued use of the new sugarbeet varieties would allow shareholders to deliver substantially the same number of tons of sugarbeets to us from fewer acres. Individual shareholder profitability will continue to depend on the circumstances unique to each shareholder.
Since September of 2009, the U.S. Department of Agriculture’s (USDA) deregulation of Roundup Ready® sugarbeets has been in controversy. As a result of this ongoing controversy, the Company has taken various actions related to the planting of Roundup Ready® sugarbeets, including
participating in the litigation process and entering into a compliance agreement with USDA to allow the Company’s shareholders to choose between conventional sugarbeet seed and Roundup Ready® sugarbeet seed during this time frame.
On July 19, 2012, the USDA announced its decision resulting in the nonregulated status of Roundup Ready® sugarbeet seed. This final action potentially concludes the controversy over Roundup Ready® sugarbeet seed and allows the Company’s shareholders to plant Roundup Ready® sugarbeet seed in the future. Notwithstanding this USDA action, there can be no assurances that groups opposed to Roundup Ready® sugarbeet seed or similar seed products will not institute additional proceedings related to the use of Roundup Ready® sugarbeet seed in the future.
Increased profitability of alternative crops could adversely affect the desirability of growing sugarbeets.
The prices growers receive from crops other than sugarbeets could impact their decisions as to which crop to plant and how much to plant. Higher prices and increased profitability for alternative crops could negatively impact the desirability of growing sugarbeets for delivery to us for processing, our financial results, and our continued viability.
Federal, state and local environmental laws and regulations may impact our operations.
We are subject to extensive federal and state environmental laws and regulations with respect to water and air quality and solid waste disposal. We conduct on-going programs designed to meet these environmental laws and regulations. Changes in environmental laws or regulations or complying with existing environmental laws and regulations or enforcement action brought under such environmental laws and regulations might increase the cost of operating our facilities or result in significant capital investment. Any such changes or compliance costs could reduce our profitability.
Our sugar manufacturing process is energy intensive and generates carbon dioxide and other “Greenhouse Gases” (GHGs). Several bills have been introduced in the United States Senate and House of Representatives that would regulate GHG emissions to reduce the impact of global climate change. We believe that industries generating GHGs, including us, could be subject to either federal or state regulation under climate change policies in the relatively near future. These policies, if adopted, will increase our energy and other operating costs. Depending on how these policies address imports, the domestic sugar market may have a competitive disadvantage with imported sugar. These policies could have a significant negative impact on the beet payment to our shareholders if we are not able to pass the increased costs on to our customers.
Labor-related disruptions may adversely affect our operations.
Substantially all of the hourly employees at our factories, including full-time and seasonal employees, are represented by the Bakery, Confectionery, Tobacco Workers and Grain Millers (BCTGM) AFL-CIO. The collective bargaining agreement for the Red River Valley factory employees expired on July 31, 2011. On July 31, 2011, the Red River Valley employees represented by the BCTGM rejected our new contract offer. On August 1, 2011, we locked out the Red River Valley union employees. The collective bargaining agreement for the Sidney, Montana, factory employees will expire on April 30, 2015. Office, clerical and management employees are not unionized, except for certain office employees at the Moorhead and Crookston, Minnesota, and Hillsboro, North Dakota, factories who are covered by the collective bargaining agreement with the BCTGM.
On August 1, 2011, we commenced operating our Red River Valley factories with contract replacement workers in order to meet our obligations to our customers and shareholders. As of the date of this report, no agreement has been reached with the BCTGM and the Red River Valley union employees remain locked out. If we are unable to reach agreement with the BCTGM, the lockout may continue indefinitely. We have implemented a strategy to reduce the financial impact of operating during a protracted lockout. We are currently continuing to recruit and hire limited duration non-union employees to replace the contract workers. We expect the current rate of spending associated with the lockout to decline. However, if our strategy is not successful, the continued lockout or an unfavorable collective bargaining agreement may negatively impact our current and future financial performance and payments to our shareholders.
Healthcare Legislation may impact our operations.
In March 2010, the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act which amends certain provisions of the PPACA were signed into law. We believe healthcare costs could increase significantly as a result of the legislative provisions effective in future years, negatively affecting our profitability.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
Item 2. PROPERTIES
The Company operates five sugarbeet processing factories in the Red River Valley and one in Sidney, Montana. The Company owns all of its factories and the land on which they are located. The factories range in size from 150,000 to 400,000 square feet. These properties are used in the Company’s sugar segment. The location and processing capacity of the Company’s factories are:
Each of the processing factories includes the physical facilities and equipment necessary to process sugarbeets into sugar. Each factory has space for sugarbeet storage, including ventilated storage sites. The Red River Valley factories also have cold storage facilities. Each of the factories is currently operating at or near its capacity. The Company owns molasses desugarization (MDS) plants at its East Grand Forks and Hillsboro facilities. The MDS plants process molasses to extract additional sugar. The Company has sugar packaging facilities located at the Moorhead, Hillsboro, Crookston, East Grand Forks and Sidney factories.
The Company also owns a sugarbeet processing plant in Torrington, Wyoming. The Torrington, Wyoming, facility is leased on a long-term basis to another sugar company.
ProGold owns a corn wet-milling plant in Wahpeton, North Dakota, which is currently being leased to Cargill. The corn wet-milling plant is capable of processing corn to produce high fructose corn syrup and various agri-products. This property is used in the Company’s leasing segment. The 10 year lease between ProGold and Cargill runs through December 31, 2017 and provides that Cargill pay ProGold average annual rental payments equal to $21.9 million.
The Company’s corporate office is located in a 30,000 square foot, two-story office building in Moorhead, Minnesota. The Company also has a 100,000 square foot Technical Services Center situated on approximately 200 acres in Moorhead, Minnesota. The Company owns both facilities. The Company also owns numerous sites as sugarbeet receiving and storage stations located within proximity of their factories. Substantially all non-current assets are mortgaged or pledged as collateral for its indebtedness to various financial institutions.
Item 3.
Item 3. LEGAL PROCEEDINGS
From time to time and in the ordinary course of its business, the Company is named as a defendant in legal proceedings related to various issues, including worker’s compensation claims, tort claims and contractual disputes. The Company is currently involved in certain legal proceedings which have arisen in the ordinary course of the Company’s business. The Company is also aware of certain other potential claims which could result in the commencement of legal proceedings. The Company carries insurance which provides protection against certain types of claims. With respect to current litigation and potential claims of which the Company is aware, the Company’s management believes that (i) the Company has insurance protection to cover all or a portion of any judgments which may be rendered against the Company with respect to certain claims or actions and (ii) any judgments which may be entered against the Company and which may exceed such insurance coverage or which may arise in actions involving potential liabilities not covered by insurance policies are not likely to have a material adverse effect upon the Company, or its assets or operations.
Since September of 2009, the U.S. Department of Agriculture’s (USDA) deregulation of Roundup Ready® sugarbeets has been in controversy. As a result of this ongoing controversy, the Company has taken various actions related to the planting of Roundup Ready® sugarbeets, including participating in the litigation process and entering into a compliance agreement with USDA to allow the Company’s shareholders to choose between conventional sugarbeet seed and Roundup Ready® sugarbeet seed during this time frame.
On July 19, 2012, the USDA announced its decision resulting in the nonregulated status of Roundup Ready® sugarbeet seed. This final action potentially concludes the controversy over Roundup Ready® sugarbeet seed and allows the Company’s shareholders to plant Roundup Ready® sugarbeet seed in the future. Notwithstanding this USDA action, there can be no assurances that groups opposed to Roundup Ready® sugarbeet seed or similar seed products will not institute additional proceedings related to the use of Roundup Ready® sugarbeet seed in the future.
Item 4.
Item 4. MINE SAFETY DISCLOSURES
None.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of August 31, 2012, the Company had 2,764 shares of the Common Stock and 498,570 shares of the Preferred Stock issued and outstanding. There is no established public market for the Company’s Common Stock or Preferred Stock, as such shares may be held only by farmer-producers who are eligible for membership in the Company. The Company’s shares are not listed for trading on any exchange or quotation system. Although transfers of the Company’s shares may occur only with the consent of the Board of the Directors, the Company does not obtain information regarding the transfer price in connection with such transfers. As a result, the Company is not able to provide information regarding the prices at which the Company’s shares have been transferred.
Because the number of acres of sugarbeets a member may grow for delivery to the Company is directly related to the number of shares of Preferred Stock owned, a limited, private market for Preferred Stock exists. It is not anticipated that a general public market for the Company’s shares of Common Stock or Preferred Stock will develop due to the limitations on transfer and the various membership requirements which must be satisfied in order to acquire such shares.
A member desiring to sell his or her Common Stock or Preferred Stock must first offer them to the Company for purchase at par value. If the Company declines to purchase such shares, either class may be sold to a new member (i.e., another farm operator not already a member) and Preferred Stock may be sold to one or more existing members or farm operators approved for membership, in each case subject to approval by the Board of Directors. To date, the Company’s Board of Directors has not exercised the Company’s right of first refusal to purchase preferred shares offered for sale by its members. Because the Company does not require parties seeking approval for transfers to provide information regarding the transfer price, the Company does not possess verifiable information regarding the transfer price involved in recent transfers of the Company’s Preferred Stock.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The selected financial data of the Company should be read in conjunction with the consolidated financial statements and related notes included in Appendix A of this report.
(1) Consolidated Net Proceeds are the Company’s gross revenues, including lease revenue, less the costs and expenses of producing and marketing sugar, agri-products and sugarbeet seed, but before payments to members for sugarbeets. (For a more complete description of the calculation of the payment to members for sugarbeets, see “Item 1. Business - Raw Materials.”)
(2) Calculated by dividing the Company’s long term debt, exclusive of the current maturities of such debt, by total members’ investments.
(3) Information for a fiscal year relates to the crop planted and harvested in the preceding calendar year (i.e., information for the fiscal year ended August 31, 2012 relates to the crop of 2011). Crop data reflect the combined data of the Red River Valley crop and the Sidney crop.
Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial conditions and results of operations of the Company should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in Appendix A of this report.
Liquidity and Capital Resources
Under the Company’s agreement with its shareholders, payments for member-delivered sugarbeets for each crop year are calculated based on the revenues from sugar and agri-products derived from the sugarbeet crop less all member business expenses. In addition, the beet payments made to member growers and non-member growers are paid in three payments over the course of a year, and the member payments are made net of any anticipated unit retain for the crop. These procedures have the effect of providing the Company with an additional source of short-term capital.
Because sugar is sold throughout the year (while sugarbeets are processed primarily in the fall, winter and spring) and because substantial amounts of equipment are required for its operations, the Company has utilized substantial outside financing on both a seasonal and long-term basis to fund its operations.
The Company had a seasonal line of credit through November 2, 2012, with a consortium of lenders led by CoBank, ACB of $350.0 million along with an additional $50.0 million which can be
utilized for either short-term or long-term borrowing purposes. On November 2, 2012, the Company entered into a Fourth Amendment to the Amended and Restated Credit Agreement between the Company and CoBank, ACB and received a Facility Increase Notice from CoBank, ACB increasing the Company’s seasonal line of credit from $350.0 million to $410.0 million through May 31, 2013 at which time the seasonal line of credit will revert back to $350.0 million through July 19, 2015. The availability of the additional $50.0 million which can be utilized for either short-term or long-term borrowing purposes remains unchanged during this time.
As of August 31, 2012, $3.5 million of the $50.0 million was utilized for long-term borrowing purposes. There was no outstanding balance with CoBank, ACB as of August 31, 2012. The Company also has a line of credit with Wells Fargo Bank for $1.0 million, against which there was no outstanding balance as of August 31, 2012. The Company’s commercial paper program provides short-term borrowings up to the amount of the CoBank, ACB seasonal line of credit of which approximately $110.6 million was outstanding as of August 31, 2012. The Company had $3.3 million in short-term letters of credit outstanding as of August 31, 2012. Any borrowings under the commercial paper program along with outstanding short-term letters of credit will act to reduce the available credit under the CoBank, ACB seasonal line of credit by a commensurate amount. The unused line of credit as of August 31, 2012 was $283.6 million which includes $46.5 million that can also be utilized for long-term borrowing purposes.
The Company can borrow funds on a non-recourse basis from the Commodity Credit Corporation (CCC), with repayment of such funds secured by sugar. The Company did not utilize the CCC during fiscal 2012. The limitations on such borrowings are based on the amount of the Company’s sugar inventory and certain loan covenant restrictions by CoBank, ACB. As of August 31, 2012, the Company had the capacity to obtain non-recourse loans from the CCC of approximately $57.7 million.
The Company has a long-term debt line of credit through July 30, 2015 with CoBank, ACB of $60.8 million along with an additional $50.0 million which can be utilized for either short-term or long-term borrowing purposes. As of August 31, 2012, there was no outstanding balance with CoBank, ACB but the Company had $64.3 million in long-term letters of credit outstanding. The unused long-term line of credit as of August 31, 2012 was $46.5 million which can also be utilized for short-term borrowing purposes. In addition, the Company had long-term debt outstanding, as of August 31, 2012, of $50 million from a private placement of Senior Notes that occurred in September of 1998 and $78.6 million from four separate issuances of Pollution Control and Industrial Development Revenue Bonds.
The Company had outstanding purchase commitments totaling $4.8 million as of August 31, 2012, for equipment and construction contracts related to various capital projects.
As of August 31, 2012, Midwest had outstanding short-term debt with CoBank, ACB of $6.1 million, of which $3.2 million was guaranteed by the Company.
The net cash provided by operations was $38.9 million for the year ended August 31, 2012, as compared to $55.8 million for the year ended August 31, 2011. This decrease in cash provided of $16.9 million was primarily the result of the following:
· Reflected in the change in the net cash provided by operating activities is a net cash decrease of $18.2 million from the prior year which was the result of decreased revenue of $63.6 million, increased costs of $197.2 million, decreased unit retains withheld of $16.1 million partially offset by a decrease in the member gross beet payment of $258.7 million.
· There was a net favorable change in assets and liabilities from the prior year of $1.3 million primarily comprised of the following:
· The increase in cash related to receivables of $33.2 million is primarily due to an increase in the selling price of sugar, pulp and molasses this year and the timing of the deliveries of products and collections.
· The increase in cash related to the change in inventories of $11.3 million was primarily due to a smaller increase in the per hundredweight net realizable value of sugar during fiscal 2012 as compared to that experienced during fiscal 2011 along with an increase in operating supplies inventory during fiscal 2011. These items were partially offset by the higher per ton net realizable values of the pulp and molasses inventories as of August 31, 2012 and the increased tons of pulp, molasses and unprocessed sugarbeet inventories resulting from early startup of the processing of the 2012 crop.
· The increases in cash related to changes in other liabilities of $8.0 million, advances to related parties of $15.0 million, and accounts payable of $19.3 million are all primarily due to the timing of payments.
· The decrease in cash related to changes in the Amount Due Growers of $85.3 million was due to a larger final payment for the previous year’s crop in fiscal 2012 as compared to the previous year and a decrease in the final grower payment for the current year’s crop which is payable in fiscal 2013.
The net cash used in investing activities was $48.5 million for the year ended August 31, 2012, as compared to $68.8 million for the year ended August 31, 2011. This decrease of $ 20.3 million was primarily due to the decreased purchases of property and equipment of $17.7 million.
The net cash provided by financing activities was $9.7 million for the year ended August 31, 2012, as compared $13.0 million for the year ended August 31, 2011. This decrease of $3.3 million was primarily due to decreased net proceeds from short- term debt of $16.7 million and decreased proceeds from a bond issuance of $15.0 million partially offset by decreased payments on long-term debt of $15.9 million, decreased distributions to noncontrolling interests of $1.8 million and a decrease in unit retains paid of $10.7 million.
The Company anticipates that the funds necessary for working capital requirements and future capital expenditures will be derived from operations and unit retains along with short-term and long-term borrowings.
The following table provides information regarding the Company’s contractual obligations as of August 31, 2012:
(1) Accrued Employee benefits of $2.7 million with corresponding offsetting assets and requiring no future payments have been excluded from the amounts presented. Other Long-Term Liabilities of $2.6 million, which relate to deferred revenue also requiring no future payments, have also been excluded from the table.
(2) The Company expects to make contributions of approximately $6.8 million to the defined benefit pension plans during the next fiscal year. Contributions for future years are not known at this time and therefore are not included in the above table. The Company expects to make contributions in the next fiscal year of approximately $99,000 related to Supplemental Executive Retirement Plans. This amount is reflected in Other Long-Term Obligations in the above table.
Critical Accounting Policies and Estimates
Preparation of the Company’s consolidated financial statements requires estimates and judgments to be made that affect the amounts of assets, liabilities, revenues and expenses reported. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. Management continually evaluates these estimates based on historical experience and other assumptions we believe to be reasonable under the circumstances.
The difficulty in applying these policies arises from the assumptions, estimates and judgments that have to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations as well as management intentions. As the difficulty increases, the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated.
Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. The Company’s critical accounting estimates include the following:
Inventory Valuation
Sugar, pulp, molasses and other agri-product inventories are valued at estimated net realizable value. The Company derives its estimates from sales contracts, recent sales and evaluations of market conditions and trends. Sugarbeets are valued at the projected gross per-ton beet payment related to that year’s crop. Changes in market conditions and the Company’s operations may cause management’s estimates to differ from actual results.
Property and Equipment, Property and Equipment Held for Lease, and Depreciation
Property and equipment, and property and equipment held for lease are depreciated for financial reporting purposes principally using straight-line methods with estimated useful lives ranging from 3 to 40 years. Economic circumstances or other factors may cause management’s estimates of expected useful lives to differ from actual.
The Company reviews its property and equipment, and property and equipment held for lease for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. An impairment loss is recorded when the sum of the future cash flows is less than the carrying amount of the asset. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. Considerable management judgment is necessary to estimate future cash flows and may differ from actual results.
Intangible Assets and Amortization
Intangible assets are amortized for financial reporting purposes principally using straight-line methods based on the expected useful lives of the assets. Economic circumstances or other factors may cause management’s estimates of expected useful lives to differ from actual.
Pension Plan and Other Post-Retirement Benefits
Accumulated plan benefits are those future periodic payments, including lump-sum distributions, which are attributable under the Company’s Pension Plan and Post-Retirement Plan to the service employees have rendered. Accumulated plan benefits include benefits expected to be paid to retired or vested terminated employees or their beneficiaries; beneficiaries of employees who have died; and present employees or their beneficiaries.
The actuarial present value of accumulated plan benefits is determined by an actuary and is the amount that results from applying actuarial assumptions to adjust the accumulated plan benefits to reflect the time value of money and the probability of payment.
The significant actuarial assumptions used in the determination of the actuarial present value of accumulated pension plan benefits for fiscal 2012 were as follows: Valuation Funding Method - Entry age normal, frozen initial liability; Life Expectancy - PPA separate static annuitant and non-annuitant mortality tables; Retirement Age - graded rates from 1 percent retiring at age 55 to 100 percent retired by age 70 ; Investment Return - 7.25 percent compounded annually for funding; Discount Rate- 3.71 percent compounded annually; Salary Scale - 3.5 percent compounded annually (Plan A only).
The significant actuarial assumptions used in the determination of the actuarial present value of accumulated post-retirement benefits for fiscal 2012 were as follows: Healthcare Cost Trend - an 8.0 percent annual rate of increase in the per capita cost of covered healthcare benefits for participants under age 65 was assumed for 2012. The rate is assumed to decline to 5.0 percent over the next five years. For participants age 65 and older, a 9.0 percent annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2012. The rate is assumed to decline to 6.0 percent over the next five years; Discount Rate- 3.71 percent compounded annually.
Actual events may differ from the assumptions used and may result in plan benefit payments differing significantly from these current estimates.
Self-Insurance
The Company is self-insured for a portion of the risks related to workers’ compensation claims and employees’ health insurance. The estimate of self-insurance liability is based upon known claims and an estimate of incurred but not reported (IBNR) claims. IBNR claims are estimated using historical claims lag information received by a third party claims administrator. Actual events may differ from the assumptions used and may result in claim payments differing from the current estimates.
Results of Operations
The Company’s operational results and the resulting beet payment to its members are substantially dependent on market factors, including domestic prices for refined sugar. These factors are continuously influenced by a wide variety of market forces, including domestic sugarbeet and cane production, weather conditions and United States’ farm and trade policy, which the Company is unable to predict.
In addition, highly variable weather conditions during the growing, harvesting and processing seasons, as well as diseases and insects, may materially affect the quality and quantity of sugarbeets available for purchase as well as the unit costs of raw materials and processing.
Comparison of the Years Ended August 31, 2012 and 2011
The harvest of the Red River Valley and Sidney sugarbeet crops grown during 2011 and processed during fiscal 2012 produced a total of 9.9 million tons of sugarbeets, or approximately 20.9 tons of sugarbeets per acre from approximately 473,000 acres. This represents a decrease in total tons harvested of approximately 15.7 percent compared to the 2010 crop. The sugar content of the 2011 crop was 18.0 percent, the same as the 2010 crop. The Company produced a total of approximately 28.1 million hundredweight of sugar from the 2011 crop, a decrease of approximately 21.3 percent compared to the 2010 crop.
Revenue for the year ended August 31, 2012, was $1.5 billion, a decrease of $63.7 million from the year ended August 31, 2011. The table below reflects the percentage changes in product revenues, prices and volumes for the year ended August 31, 2012, as compared to the year ended August 31, 2011.
The increases in selling prices for our products reflect strong markets due to supply and demand factors. The decreases in the volume of sugar and pulp reflect the impact of less product availability due to a smaller sugarbeet crop this year as compared to the previous year. The volume change for molasses primarily reflects increased molasses production resulting from decreased sugarbeet quality due to unfavorable storage conditions this year, as well as increased product availability due to a later start-up of the molasses desugarization facilities. The decreased volumes for CSB and Betaine reflect a change in the timing of sales between the two years and the impact of the later start-up of the molasses desugarization facilities this year.
Cost of sales for the year ended August 31, 2012, exclusive of payments to members for sugarbeets, increased $179.6 million as compared to the year ended August 31, 2011. This increase was primarily related to product inventories that are recorded at their net realizable value and increased operating costs, which include additional costs associated with the on-going union labor lockout. These increases were partially offset by lower costs associated with purchased sugar this year at United Sugars Corporation, the Company’s sugar marketing agent and the recognition of an expense in 2011 related to conventional sugarbeet seed chemicals. The change in the net realizable value of the product inventories from the beginning of the reporting period is recorded on the balance sheet as either an increase or decrease to inventories with a corresponding dollar for dollar adjustment to cost of sales on the statement of operations. The decrease in the net realizable value of product inventories for the year ended August 31, 2012 was $42.6 million as compared to an increase of $64.6 million for the year ended August 31, 2011 resulting in a $107.2 million unfavorable change in the cost of sales between the two years as shown in the table below:
Change in the Net Realizable Value of Product Inventories
(1) The change is primarily due to a 42.7 percent increase in the hundredweight of sugar inventory as of August 31, 2011, as compared to August 31, 2010 and a 14.8 percent increase in the per hundredweight net realizable value of sugar inventory as of August 31, 2011, as compared to August 31, 2010.
(2) The change is primarily due to a 28.0 percent decrease in the hundredweight of sugar inventory as of August 31, 2012, as compared to August 31, 2011, partially offset by a 2.4 percent increase in the per hundredweight net realizable value of sugar inventory as of August 31, 2012, as compared to August 31, 2011.
Selling, general and administrative expenses increased $9.4 million for the year ended August 31, 2012, as compared to the year ended August 31, 2011. Selling expenses increased $10.1 million primarily due to increased factory warehousing and packaging costs associated with sugar. This increase was partially offset by lower selling expenses due to the decreases in the volumes of products sold. General and administrative expenses decreased $ .7 million due to general cost reductions.
Interest expense decreased $1.5 million for the year ended August 31, 2012, as compared to the year ended August 31, 2011. This reflects a decrease in the average interest rate for short-term debt and a decrease in the average interest rate and average borrowing level for long-term debt partially offset by an increase in the average borrowing level of short-term debt.
Net proceeds attributable to American Crystal Sugar Company decreased $256.6 million for the year ended August 31, 2012, as compared to the year ended August 31, 2011. This decrease was primarily due to fewer tons of sugarbeets processed and increased operating costs partially offset by increased selling prices.
Comparison of the Years Ended August 31, 2011 and 2010
The harvest of the Red River Valley and Sidney sugarbeet crops grown during 2010 and processed during fiscal 2011 produced a total of 11.7 million tons of sugarbeets, or approximately 26.4 tons of sugarbeets per acre from approximately 445,000 acres. This represents an increase in total tons harvested of approximately 11.9 percent compared to the 2009 crop. The sugar content of the 2010 crop was 18.0 percent as compared to the 16.7 percent sugar content of the 2009 crop. The Company produced a total of approximately 35.6 million hundredweight of sugar from the 2010 crop, an increase of approximately 22.8 percent compared to the 2009 crop.
Revenue for the year ended August 31, 2011, was $1.5 billion, an increase of $338.9 million from the year ended August 31, 2010. The table below reflects the percentage changes in product revenues, prices and volumes for the year ended August 31, 2011, as compared to the year ended August 31, 2010.
The increases in selling prices for sugar, molasses and betaine reflect strong markets due to supply and demand factors. The decrease in the selling price of pulp is the result of lower prices for competing alternative products in the marketplace. The decreases in the volumes of sugar and molasses sold are primarily due to lower beginning inventories this year as compared to the previous year along with reduced sugar production this year. The increase in the volume of pulp sold reflects the impact of more product availability due to higher beginning inventories of pulp this year as compared to the previous year. The decreases in the volumes of CSB and betaine sold are primarily due to lower production this year.
Cost of sales for the year ended August 31, 2011, exclusive of payments to members for sugarbeets, increased $10.8 million as compared to the year ended August 31, 2010. This increase was primarily related to higher factory operating costs due to the increase in tons of sugarbeets processed, higher costs associated with purchased sugar at United Sugars Corporation, the Company’s sugar marketing agent, increased costs associated with the non-member sugarbeets and the expense recognized associated with conventional beet seed chemicals. These cost increases were partially offset by the change in product inventories that are recorded at their net realizable value. At the end of each reporting period, product inventories are recorded at their net realizable value. The change in the net realizable value of the product inventories from the beginning of the reporting period is recorded on the balance sheet as either an increase or decrease to inventories with a corresponding dollar-for-dollar adjustment to cost of sales on the statement of operations. The increase in the net realizable value of product inventories for the year ended August 31, 2011, was $64.6 million as compared to a decrease of $25.8 million for the previous year ended August 31, 2010, resulting in a $90.4 million favorable change in the cost of sales between the two years as shown in the table below:
Change in the Net Realizable Value of Product Inventories
(1) The change is primarily due to a 22.6 percent decrease in the hundredweight of sugar inventory as of August 31, 2010, as compared to August 31, 2009, partially offset by an 11.3 percent increase in the per hundredweight net realizable value of sugar inventory as of August 31, 2010, as compared to August 31, 2009; a 35.4 percent decrease in the tons of pulp inventory as of August 31, 2010, as compared to August 31, 2009; and a 47.3 percent decrease in the per ton net realizable value of pulp inventory as of August 31, 2010, as compared to August 31, 2009.
(2) The change is primarily due to a 42.7 percent increase in the hundredweight of sugar inventory as of August 31, 2011, as compared to August 31, 2010 and a 14.8 percent increase in the per hundredweight net realizable value of sugar inventory as of August 31, 2011, as compared to August 31, 2010.
Selling, general and administrative expenses increased $50.7 million for the year ended August 31, 2011, as compared to the year ended August 31, 2010. Selling expenses increased $47.5 million
primarily due to an increase in shipping and handling costs associated with increased volumes of sugar and agri-products sold. General and administrative expenses increased $3.2 million due to increased labor and benefit costs along with general cost increases.
Interest expense increased $ .7 million for the year ended August 31, 2011, as compared to the year ended August 31, 2010. This reflects an increase in the average borrowing level for short-term debt and an increase in the average interest rate for long-term debt partially offset by a decrease in the average interest rate for short-term debt and a decrease in the average borrowing level for long-term debt.
Net proceeds attributable to American Crystal Sugar Company increased $278.7 million for the year ended August 31, 2011, as compared to the year ended August 31, 2010. This increase was primarily due to more tons of sugarbeets processed, higher sugar content of the sugarbeets and increased sugar selling prices.
2012 Crop and Estimated Fiscal Year 2013 Information
This discussion contains the Company’s current estimate of the results to be obtained from the Company’s processing of the 2012 sugarbeet crop. This discussion includes forward-looking statements regarding the quantity of sugar to be produced from the 2012 sugarbeet crop. These forward-looking statements are based largely upon the Company’s expectations and estimates of future events; as a result, they are subject to a variety of risks and uncertainties. The actual results experienced by the Company could differ materially from the forward-looking statements contained herein.
The harvest of the Red River Valley and the Sidney sugarbeet crops grown during 2012 is estimated to produce a total of 12.2 million tons of sugarbeets, or approximately 27.0 tons of sugarbeets per acre from approximately 452,000 acres. This represents an increase in total tons harvested of approximately 23.1 percent compared to the 2011 crop. The sugar content of the 2012 crop is estimated to be 19.0 percent as compared to 18.0 percent for the 2011 crop. The Company expects to produce a total of approximately 35.7 million hundredweight of sugar from the 2012 crop, an increase of approximately 27.1 percent compared to the 2011 crop.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in the interest rates, exchange rates, commodity prices, equity prices and other market changes. Market risk is attributed to all market-risk sensitive financial instruments, including long term debt.
The Company does not believe that it is subject to any material market risk exposure with respect to interest rates, exchange rates, commodity prices, equity prices and other market changes that would require disclosure under this item.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company for the fiscal years ended August 31, 2012, 2011 and 2010 have been audited by Eide Bailly LLP, an independent registered public accounting firm. Such consolidated financial statements have been included herein in reliance upon the report of Eide Bailly LLP. The consolidated financial statements of the Company are included in Appendix A to this annual report.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of August 31, 2012. Based on that review and evaluation, which included inquiries made to certain other employees of the Company, the chief executive officer and chief financial officer have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, are effective in ensuring that information relating to the Company required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management, including the chief executive officer and the chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, because of changes in conditions, the effectiveness of internal control may vary over time.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of August 31, 2012, using criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework and concluded that the Company maintained effective internal control over financial reporting as of August 31, 2012 based on these criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that may have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. OTHER INFORMATION
None.
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Board of Directors
The Board of Directors of the Company consists of three directors from each of the five Red River Valley factory districts. Directors must hold common stock of the Company or must be representatives of such shareholders belonging to the district they represent and are elected by the members of that district. In the case of a holder of common stock who is other than a natural person, a duly appointed or elected representative of such shareholder may serve as a director. The Company does not have a nominating committee. Any holder of common stock can stand for election or be nominated from the floor at the factory district meeting where elections are held. Each person’s experience, qualifications, attributes or skills to serve as a director are determined by the members voting in the district meetings at which the election occurs and not reviewed or otherwise considered by the Company before any election. The directors were elected to serve three-year terms expiring in December of the years indicated in the table below. One director is elected each year from each Red River Valley factory district. A director cannot serve more than four consecutive three-year terms. Our board officers consist of a Chairman and a Vice-Chairman. These board offices are populated by members of the Board of Directors who are elected by and at the discretion of the Board of Directors. Each of these individual’s experience, qualifications, attributes or skills to serve in their capacity as a board officer is determined by the members of the Board of Directors who are voting to place these individuals in these offices.
The table below lists certain information concerning current directors of the Company.
Below is the biographical information on each Director.
Robert M. Green. Mr. Green has been a director since 2005 and has served as Chairman since 2011. Mr. Green has been a sugarbeet grower since 1976. Mr. Green serves on the Board of Directors of United Sugars Corporation, the Board of Directors of Midwest Agri-Commodities Company and as a director for the American Sugarbeet Growers Association. Mr. Green served 12 years as a director of the Red River Valley Sugarbeet Growers Association.
Steve Williams. Mr. Williams has been a director since 2006 and has served as Vice-Chairman since 2011. Mr. Williams has farmed near Fisher, Minnesota since 1987. Mr. Williams serves on the Board of Directors of United Sugars Corporation, the Board of Governors of ProGold Limited Liability Company and on the Board of Directors of the American Sugarbeet Growers Association, serving as its President from 2006 to 2008. Mr. Williams is also the President of the Board of Directors for the Halstad Cooperative Telephone Company. Mr. Williams served as a director of the Red River Valley Sugarbeet Growers Association from 1998 to 2007, and served as its Chairman from 2003 to 2007.
Donald S. Andringa. Mr. Andringa has been a director since 2008. Mr. Andringa began farming in 1974 near Crookston, Minnesota. Mr. Andringa currently serves on the Board of Governors of ProGold Limited Liability Company and the Advisory Board for the University of Minnesota-Crookston Northwest Research and Outreach Center. Mr. Andringa previously served on Board of Directors of the Crookston Factory District Grower Association, the Red River Valley Sugarbeet Growers Association’s Executive Committee, the Board of Directors of the Red River Valley Farmers Insurance Pool and the American Sugarbeet Growers Association Board of Directors.
William Baldwin. Mr. Baldwin has been a director since 2004. Mr. Baldwin has been farming in the Drayton Factory District since 1966 and is the President of Baldwin Farms Incorporated. Mr. Baldwin is the past President of the Red River Valley Sugarbeet Growers Association, served on the American Sugarbeet Growers Executive Committee and is currently serving on the Farm Service Agency, State Committee.
John Brainard. Mr. Brainard has been a director since 2005. Mr. Brainard has been a sugarbeet grower since 1998. Mr. Brainard currently serves as a director of the American Sugarbeet Growers Association. Mr. Brainard is a past director of the Minnesota Farm Bureau and has served on the executive committee of the Red River Valley Sugarbeet Growers Association.
Brian R. Erickson. Mr. Erickson has been a director since 2005. Mr. Erickson has been a sugarbeet grower for over 20 years. Mr. Erickson currently serves on the Board of Directors of Midwest Agri-Commodities Company. Mr. Erickson has served as a director and Chairman of the East Grand Forks Economic Development and Housing Authority.
Dale Fischer. Mr. Fischer has been raising sugarbeets in the Moorhead, Minnesota area since 1973. Mr. Fischer has served on the Red River Valley Sugarbeet Growers Association’s Board of Directors for the past 12 years, currently serving as chairperson of the Moorhead Factory District and on the Executive Committee. Mr. Fischer has been a director of the Farmers Union Oil Company of Moorhead for the past 24 years and is a past chairperson of the board
John F. Gudajtes. Mr. Gudajtes has been a director since 2003. Mr. Gudajtes has farmed in the Minto, North Dakota area since 1967 and is the President of Gudajtes Farms. Mr. Gudajtes is a past President of the Walsh County Historical Society.
Curtis E. Haugen. Mr. Haugen has been a director since 2001 and served as Vice-Chairman from 2009 to 2011. Mr. Haugen has been a farmer since 1981 and farms near Argyle, Minnesota. Mr. Haugen serves on the Board of Directors of United Sugars Corporation, as a director for the American Sugarbeet
Growers Association and as a director and President of the Farmer’s Union Oil Company, Oslo, Minnesota.
William A. Hejl. Mr. Hejl has been a director since 2007. Mr. Hejl has farmed near Amenia, North Dakota since 1987. Mr. Hejl currently serves as a director of the American Sugarbeet Growers Association and is a manager of the Rush River Water Resource District. Mr. Hejl also served as President of the Red River Valley Sugarbeet Growers Association and as President of the World Association of Beet and Cane Growers.
Curtis Knutson. Mr. Knutson has been a director since 2007. Mr. Knutson has farmed near Fisher, Minnesota for 36 years. Mr. Knutson currently serves on the Polk County Extension Board.
Jeff D. McInnes. Mr. McInnes has been a director since 2001. Mr. McInnes co-manages a 4,000 acre farming operation near Hillsboro, North Dakota. Mr. McInnes serves on the Board of Governors of ProGold Limited Liability Company and on the Board of the Hillsboro, North Dakota Medical Center.
David Mueller. Mr. Mueller was elected as a director in 2009. Mr. Mueller has been a sugarbeet farmer near Cummings, North Dakota since 1985. Mr. Mueller previously served on the Red River Valley Sugarbeet Growers Association Boards’ Executive Committee and as treasurer of its Research and Education Board.
Wayne Tang. Mr. Tang was elected as a director in 2009. Mr. Tang has been a farmer since 1972. Mr. Tang serves on the Board of Governors of ProGold Limited Liability Company and previously served on the American Sugarbeets Growers Association Board of Directors and as Vice Chairman of the Red River Valley Sugarbeet Growers Association’s Executive Committee.
Neil C. Widner. Mr. Widner has been a director since 2000 and served as Chairman from 2009 to 2011. Mr. Widner has farmed near Stephen, Minnesota, since 1973.
Audit Committee and Audit Committee Financial Expert
The Audit Committee assists the Board of Directors in fulfilling its oversight responsibilities relating to the Company’s financial reporting and controls, the annual independent audit of the Company’s consolidated financial statements and the legal compliance and ethics programs as established by management and the Board of Directors. The Audit Committee selects the independent public accountants and approves the fees, scope and procedural plans of the audits of the Company’s consolidated financial statements. The Audit Committee administers the Company’s employee complaint program and handles, on behalf of the full Board of Directors, any issues that arise under the Company’s Code of Ethics. The Audit Committee has a charter that is available from the Company upon request.
As of August 31, 2012, the Board of Directors of the Company has determined that there is no audit committee financial expert serving on the Audit Committee. The Company is a cooperative formed in accordance with the Minnesota cooperative law of the State of Minnesota. In accordance with the Minnesota cooperative law, the Amended and Restated Articles of Incorporation of the Company and the Amended and Restated Bylaws of the Company, the Board of Directors must be composed of members of the Company (the holders of common stock). Membership in the Company is limited to agricultural producers who are actively involved in the production of sugarbeets. Based on the state law requirements for both membership and board service, the Company is unable to recruit outside of its membership to elect to its Board of Directors and its audit committee an individual that possesses the attributes of an “audit committee financial expert” as defined by the SEC. To date, the Company has
been unable to recruit from its membership an individual to serve on the Board of Directors that possesses the attributes of an “audit committee financial expert.”
The Audit Committee has reviewed and discussed with management and Eide Bailly LLP the Company’s audited consolidated financial statements contained in this Annual Report on Form 10-K for the fiscal year ended August 31, 2012. The Audit Committee also discussed with Eide Bailly LLP the matters required to be discussed pursuant to SAS No. 61 (Codification of Statements of Auditing Standards, AU Section 380), which includes, among other items, matters related to the conduct of the audit of the Company’s consolidated financial statements.
The Audit Committee has received and reviewed the written disclosures and the letter from Eide Bailly LLP required by the applicable requirements of the Public Company Accounting Oversight Board regarding Eide Bailly LLP’s communications with the Audit Committee concerning its independence from the Company and has discussed with Eide Bailly LLP its independence from the Company. Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in this Annual Report on Form 10-K for the fiscal year ended August 31, 2012 for filing with the Commission.
On August 31, 2012, the members of the Audit Committee were John Brainard (Committee Chair), Donald S. Andringa, Brian R. Erickson, William A. Hejl, David Mueller, Wayne Tang and Neil Widner.
Company Officers
The table below lists the officers of the Company for the fiscal year covered by this report, none of whom owns any shares of Common Stock or Preferred Stock. Officers are elected annually by the Board of Directors.
David A. Berg. Mr. Berg was named the Company’s President in March 2007 and assumed the role as the Company’s Chief Executive Officer in October 2007. Mr. Berg served as the Company’s Vice President-Operations and Chief Operations Officer from January 2004 to March 2007. Mr. Berg was the Company’s Vice President-Agriculture during the period December 2000 to January 2004 and the Company’s Vice President-Administration during the period from October 1998 to December 2000. Mr. Berg currently serves on the Boards of Directors of United Sugars Corporation, Midwest Agri-Commodities Company and Sidney Sugars Incorporated.
Thomas S. Astrup. Mr. Astrup was named the Company’s Vice President-Finance and Chief Financial Officer in May 2007. Mr. Astrup was named the Chief Operating Officer and Chief Financial Officer of Sidney Sugars Incorporated in May 2007. Mr. Astrup served as the Company’s Vice President-Agriculture from 2004 to 2007. Mr. Astrup was the Company’s Vice President-Administration from 2000 to 2004 and the Company’s Corporate Controller, Assistant Treasurer and Assistant Secretary from 1999 to 2000. Mr. Astrup currently serves on the Board of Directors for Sidney Sugars Incorporated and on the ProGold Limited Liability Company Board of Governors.
Joseph J. Talley. Mr. Talley was named the Company’s Chief Operating Officer in May 2007. Mr. Talley was named as the Chairman of the Board and Chief Executive Officer of Sidney Sugars Incorporated in May 2007. Mr. Talley served as the Company’s Vice President-Finance and Chief Financial Officer from 2003 to 2007. Mr. Talley was the Company’s Vice President-Finance from 1998 to 2003. Mr. Talley also served as Chief Operating Officer of Sidney Sugars Incorporated from 2002 to 2007. He currently serves on the Board of Directors for Sidney Sugars Incorporated and on the ProGold Limited Liability Company Board of Governors.
Brian F. Ingulsrud. Mr. Ingulsrud was named the Company’s Vice President-Administration in February 2004. From 2000 to 2004, he served as the Company’s Corporate Controller, Assistant Secretary and Assistant Treasurer.
Teresa A. Warne. Ms. Warne was named the Company’s Corporate Controller, Chief Accounting Officer, Assistant Treasurer and Assistant Secretary in March 2008. Prior to joining the Company, Ms. Warne was the Director of Accounting with Caribou Coffee Company at its corporate headquarters in Brooklyn Center, Minnesota from 2006 to 2008. Ms. Warne previously was employed with Northwest Airlines where she held various financial positions from 1999 to 2006.
Daniel C. Mott. Mr. Mott became the Company’s Secretary in 1999. Previously, he had served as Assistant Secretary since 1995. Mr. Mott also serves as the Company’s General Counsel. He is a Shareholder in the law firm of Fredrikson & Byron, P.A. Mr. Mott is not an employee of the Company.
Samuel S. M. Wai. Mr. Wai was named the Company’s Treasurer and Assistant Secretary in 1999. Mr. Wai also serves as Treasurer of the American Crystal Sugar Political Action Committee and on the Board of Directors of the Institute of Cooperative Financial Officers.
Mark L. Lembke. Mr. Lembke was named the Company’s Assistant Secretary and Assistant Treasurer in 1996 and also currently serves as the Company’s Finance Administration Manager.
Ronald K. Peterson. Mr. Peterson was named the Company’s Assistant Secretary and Assistant Treasurer in 1993 and also currently serves as the Company’s Accounting and Systems Manager.
David L. Malmskog. Mr. Malmskog was named the Company’s Assistant Secretary and Assistant Treasurer in 1998 and also currently serves as the Company’s Director-Economic Analysis.
Lisa M. Maloy. Ms. Maloy was named the Company’s Assistant Secretary and Assistant Treasurer in 2011. Ms. Maloy also currently serves as the Company’s Treasury Operations Manager. Previously, she had served as assistant Secretary since 2002.
Code of Ethics
The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller as well as all employees and Directors of the Company. The Company will provide at no charge a copy of the code of ethics to any person who requests a copy by sending a written request to the Company’s headquarters, attention of the Chief Executive Officer of the Company.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview
This compensation discussion and analysis addresses the compensation paid to the individuals who served as our President and Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and Vice President of Administration for fiscal year 2012, all of whom are identified on the Summary Compensation Table immediately following this report (Named Executive Officers). Immediately following this compensation discussion and analysis is the Compensation Committee Report of the Board of Directors (the Committee Report) of the Compensation Committee.
Purpose and Philosophy
We believe that strong leadership is a key component of success. To be successful, we must be able to attract, retain and motivate leaders with the skills necessary to excel in an integrated cooperative environment and understand key business and technical matters related to the diverse business influences that result from growers and owners, marketing partnerships and activities, technical manufacturing processes, and government policy. Our goal is to provide a competitive compensation package to our Named Executive Officers combining total direct compensation, retirement income and other benefits.
Total direct compensation, which includes base salary, short-term cash incentive compensation and long-term incentive compensation, is measured against comparable companies in the market in which we compete.
We believe the market in which we compete for executive talent consists of companies with similar characteristics to the Company, for example, manufacturing companies with similar revenues. We further believe that the market also includes privately owned businesses in general and exclusively as it relates to long-term incentive compensation because of the structure and nature of our business. Therefore, we have compared our compensation versus compensation data points for these types of companies (our market).
Our management, on behalf of the Compensation Committee and Board of Directors, retained Towers Watson, an outside compensation consultant (Compensation Consultant), to prepare market-based compensation data comparing compensation information for our Named Executive Officers with that of executive officers in our market. This analysis uses market data from published national survey sources, including Towers Watson CDB manufacturing, North Central and private industry and the Towers Watson Data Services manufacturing surveys. In addition, pay data from the proxy materials from the following group of comparative companies is referenced:
· Actuant Corporation
· Ameron International Corp.
· Arctic Cat Inc.
· Barnes Group Inc.
· Brady Corporation
· Donaldson Company, Inc.
· Gardner Denver, Inc.
· Graco Inc.
· Herman Miller, Inc.
· IDEX Corporation
· Imperial Sugar Company
· Magellan Midstream Partners, L.P.
· Mine Safety Appliances Co
· Minn-Dak Farmers Cooperative
· MSC Industrial Direct Co. Inc.
· OMNOVA Solutions Inc.
· Packaging Corporation of America
· Rayonier Inc.
· Schweitzer-Mauduit International, Inc.
· The Toro Company
· Thomas & Betts Corporation
This group of companies, together with the survey sources, represents the market in which we believe we compete for executive talent.
This data was provided to the Compensation Committee in September, 2011, when the Compensation Committee made compensation determinations and was utilized to establish market based pay practices for each of the Named Executive Officer positions.
Our base salary midpoint for our President and Chief Executive Officer is projected to represent less than the median of the market and total direct compensation is projected to be near the lower quartile of the market. Currently, we generally target our other Named Executive Officers’ base salary midpoint near the median of the market and total direct compensation near the lower quartile of our market. After review and discussion of our compensation objectives and any risks associated with these objectives, the Compensation Committee determined that total direct compensation as established was appropriate and reflects the compensation principles outlined in this report.
While market based information is important in terms of setting pay practices, it is not the only factor considered by our Compensation Committee when making individual executive compensation decisions. Other factors considered when making individual executive compensation decisions include individual roles and responsibilities, performance, reporting structure, experience in the executives’ particular position and internal pay relationships.
Process
The Compensation Committee of the Board of Directors is responsible for annually reviewing and recommending to the Board of Directors the base salary and performance objectives for the incentive compensation (both short-term and long-term) of the President and Chief Executive Officer, as well as the performance objectives for long-term incentive compensation for all Named Executive Officers. Board action on recommendations of the Compensation Committee is taken by a vote of all of the directors, none of whom are members of management. Decisions on executive compensation made by the Compensation Committee, the Board of Directors or the President and Chief Executive Officer have been guided by our compensation philosophy discussed above.
Our President and Chief Executive Officer sets base salary and the annual performance objectives for the short-term incentive compensation for the other Named Executive Officers. The prospective base salary and annual performance objectives for the other Named Executive Officers are reviewed with the Compensation Committee prior to being finalized by the President and Chief Executive Officer.
Elements of Compensation
The elements of compensation paid to our Named Executive Officers for 2012 are as follows:
· Base salary
· Short-term cash incentive compensation
· Long-term incentive compensation
· Retirement and other benefits
· Perquisites
· Severance for our President and Chief Executive Officer
· Severance for our Chief Operating Officer, Mr. Joseph Talley, effective July 15, 2011 through the period ending August 31, 2013
Each of the above are more completely described below.
Base Salary
The objective of the level of base salary paid to our Named Executive Officers is to reflect individual roles and responsibilities, performance, reporting structure, experience in the executive’s particular position, and internal pay relationships with respect to market competitiveness. All established base salaries for fiscal year 2012 for our Named Executive Officers were in accordance with our compensation philosophy described earlier in this report.
The fiscal year 2012 base salary of our President and Chief Executive Officer, Mr. Berg, was set by the Board of Directors in September, 2011 based on the comparable market data provided by our Compensation Consultant and the base salaries for the remaining Named Executive Officers were set by Mr. Berg using the same comparable market data.
Short-Term Cash Incentive Compensation
Our short-term cash incentive compensation is designed to reward the Named Executive Officers for their individual performance and our financial performance for the most recently completed fiscal year. Short-term cash incentive compensation is paid in cash following the close of the fiscal year.
Short-term cash incentive compensation provides an annual cash incentive opportunity, expressed as a percent of base salary, for our Named Executive Officers who meet performance objectives. For fiscal year 2012, our President and Chief Executive Officer had an opportunity to receive an additional 45% of his base salary, and the other Named Executive Officers had an
opportunity to receive an additional 35% of their base salary, by meeting “target” performance levels. Actual awards are determined based on the different performance levels achieved by the Named Executive Officers. The potential for short-term cash incentive compensation for the President and Chief Executive Officer ranges from 0% for unsatisfactory performance to a maximum of 90% for outstanding performance. For our other Named Executive Officers, the potential for short-term cash incentive compensation ranges from 0% for unsatisfactory performance to a maximum of 70% for outstanding performance.
The President and Chief Executive Officer’s performance objectives were weighted with 50% of the potential award based on our overall financial performance and 50% of the potential award based on the President and Chief Executive Officer’s individual performance objectives as established by the Board of Directors at the beginning of the fiscal year. For the other Named Executive Officers, annual performance objectives were determined by the President and Chief Executive Officer with the input and consult of the Compensation Committee at the beginning of the fiscal year, with 40% based on our overall financial performance and 60% based on the achievement of individual performance objectives, including personal effectiveness. Our overall financial performance objectives are based on the final gross beet payment for the fiscal year and total on-farm profit. Total on-farm profit is equal to total gross beet payment minus the product of Total Harvested Acres multiplied by On-Farm Costs per Acre. On-Farm Cost per Acre is based on the Red River Valley Report from the Minnesota and North Dakota Farm Business Management Education Program. Both of the targets for these performance objectives are approved by the Compensation Committee. For fiscal year 2012, the performance level was unsatisfactory for both the final gross beet payment and total on-farm profit.
The individual performance objectives of our Named Executive Officers are based primarily on performance measures in the key areas of cost and revenue management, agronomy best practices, factory performance, sugar recovery, safety, product quality and financial management. Our Named Executive Officers’ performance objectives also include key elements of personal managerial effectiveness such as leadership, problem solving, risk taking and communication.
The Board of Directors rates the President and Chief Executive Officer at the end of the fiscal year with respect to his achievement of his performance objectives during that fiscal year, and his short-term cash incentive compensation for that fiscal year is based on this rating. The President and Chief Executive Officer rates the other Named Executive Officers with respect to their individual achievement of their performance objectives and each of them receives a short-term cash incentive compensation award based on that rating.
Long-Term Incentive Compensation
Long-term incentive compensation provides a financial incentive opportunity, expressed as a percent of base salary, for our Named Executive Officers as a group who meet performance objectives designed to encourage long-term commitment to our organization. Our 2005 Long-Term Incentive Plan, as amended (Plan), sets forth long-term incentive compensation available to our Named Executive Officers. For fiscal year 2012, our President and Chief Executive Officer had an opportunity to receive an additional 40% of his base salary and the other Named Executive Officers had an opportunity to receive an additional 20% of their base salary assuming target performance levels. Actual awards are determined based on the performance level achieved by the Named Executive Officers as a group. The potential for long-term incentive compensation ranges from 0% for unsatisfactory performance to a maximum of 80% for outstanding performance for the President and Chief Executive Officer. For our other Named Executive Officers, the potential for long-term incentive compensation ranges from 0% for unsatisfactory performance to a maximum of 40% for outstanding performance. Unlike our short-term
cash incentive compensation, long-term incentive compensation awards are based on the performance level of our Named Executive Officers as a group. Forty-five percent (45%) of the performance objectives were based on the fiscal year’s actual on-farm profit as compared to historical profit levels while the other 55% was based on an assessment made by the Board of Directors regarding achievement of specific long-term performance objectives as established by the Board of Directors in the areas of international trade and governmental policy, strategic planning, succession management and reputation management. For fiscal year 2012, the performance level for total on-farm profit was unsatisfactory.
According to the Plan, a long-term incentive award may be granted to a Named Executive Officer in the form of contract rights, cash, or in a combination of both cash and contract rights (incentive awards). The value of any contract rights granted is determined by our Board of Directors. To date, all incentive awards granted have been in the form of contract rights. Incentive awards vest over a three-year period, with the first vesting occurring one year after the grant. Vested incentive awards may be redeemed at the discretion of the Named Executive Officer and must be redeemed upon certain other events causing a termination of employment. Redemptions that are in the form of cash payments must be deferred by the Named Executive Officer while employed by the Company. Named Executive Officers receive a profit per acre payment for vested contract rights based on the average profit per acre paid to our shareholders. Profit per acre payments are made to the Named Executive Officers in the same manner as our shareholders receive their crop payments. Profit per acre payments can be taken in cash or deferred until a later date. The Board of Directors retains the discretion to determine the amount of any incentive awards to be made available to the Named Executive Officers with respect to a given fiscal year.
In the event the Company is required to amend its financial statements for a given year because of material noncompliance with financial reporting requirements, the value of the incentive awards for the current fiscal year and the three immediately preceding fiscal years will be adjusted to reflect the changes reflected in the amended financial statements if the amended year is within three (3) years of the current fiscal year.
On September 26, 2012, 12.93 contract rights were awarded with a grant date of August 31, 2012 to Named Executive Officers with respect to performance for the fiscal year ended August 31, 2012 at a value of $3,550 per contract right. Correspondingly, the redemption value of the outstanding contract rights previously granted to the Named Executive Officers was increased from $3,250 to $3,550 per contract right. Effective as of August 31, 2012, (and including the contract rights awarded on September 26, 2012), there were a total of 1,432.76 contract rights issued and outstanding to the Named Executive Officers, of which 1,217.22 were vested.
Compensation Policies and Practices and Risk Management
The Company’s short-and long-term success is a direct result of the value we as a company provide to our shareholder/growers. This “value” is specifically measured annually by the amount of the gross beet payment and total on-farm profits. The members of our Compensation Committee and the Board of Directors, all of whom are shareholders of the Company and none of whom are members of management, have examined and reviewed all of our compensation policies and practices in light of the risks that may exist related to using personal performance standards and the annual gross beet payment and total on-farm profits as the measurements used for determining compensation. Both the gross beet payment and total on-farm profits are amounts and values that are directly paid to or experienced by our shareholders on an annual basis, with each fiscal year’s results for such amounts generally independent from the results from prior or upcoming fiscal years. The value of the gross beet payment and total on-farm profits are independently verified numbers. The other measurements used to determine either
incentive compensation or increases in compensation for our employees are based on job specific performance standards, none of which are specifically measured by performance actions by employees that relate to or affect risk taking by our employees. The incentive awards held by our Named Executive Officers were designed to align the management’s incentive compensation with the success of the Company such that the financial benefits to the shareholders and management are balanced and management is not incentivized to take risks to artificially increase the value of such contract rights or incentive awards. Therefore, the Board of Directors and the Compensation Committee reasonably believe, based on the information provided to them, that any risks that arise from our compensation policies and practices are not reasonably likely to have a material adverse effect on our business operations.
Retirement and Other Benefits
Retirement benefits are an important tool in achieving overall compensation objectives because they provide a financial security component and promote retention. Our Named Executive Officers participate in our retirement plans like any other employee. In addition, we provide a Supplemental Executive Retirement Plan (SERP) for our Named Executive Officers, which is a non-qualified defined contribution and defined benefit plan designed to replace benefits executives would have received if not for limits imposed by Code Section 401(a)(17) and 402(g). The Named Executive Officers may elect to defer a portion of base salary by regular payroll deductions, and may also defer 100% of all short-term incentive compensation and long-term incentive compensation awards or payments related to any such awards. All long term incentive deferrals are held in a long term incentive plan trust, all other deferrals are held in a SERP trust. Both have nine investment options and are subject to the claims of our creditors. The pension component of the SERP is “unfunded” with all amounts to be paid from our general assets, to the extent available, when due.
Our Named Executive Officers participate in our fully insured long-term disability program for all nonunion employees to provide income protection in the event of permanent disability. The long-term disability plan is part of the core benefits we provide. The long-term disability plan provides a benefit equal to 60% of base pay with a maximum monthly benefit of $10,000. The Named Executive Officers pay tax on the value of the long-term disability premium, and as a result if they become disabled their benefit will not be taxable. Most other nonunion employees are not taxed on the value of their long-term disability premium; therefore if they become disabled their benefit will be taxable. For the Named Executive Officers, we impute the value of the premium to provide a tax-free benefit to partially offset the impact of receiving a disability benefit less than 60% of base pay because of the $10,000 monthly benefit limitation.
Perquisites
Our Compensation Committee and the Board of Directors believe perquisites should be modest, reasonable in terms of cost, aligned with business needs and comparative to other salaried employees. Named Executive Officers may receive some or all of the following perquisites while employed: car allowance, cell phone, minimum of 4 weeks annual vacation accrual, reimbursement for income tax preparation and executive physicals. Additionally, the President and Chief Executive Officer is provided with a country club membership. The above described perquisites cease upon retirement or separation of service with us.
Severance
If we terminate Mr. Berg’s employment without cause he is entitled to receive a post-termination severance payment equal to two years of his base salary in effect on the date of termination. Mr. Talley is entitled to receive a post-termination severance payment equal to one year of his base salary in effect on the date of termination in the event we terminate his employment on or before August 31, 2013.
There are no compensatory plans or arrangements providing for payments to any of the other Named Executive Officers in conjunction with any termination of employment with us, including without limitation resignation, severance, retirement or constructive termination of employment by the Company. Furthermore, there are no such plans or arrangements providing for payments to any of the Named Executive Officers in conjunction with a change of control or change in such Named Executive Officer’s responsibilities.
Employment Agreements
We entered into an employment agreement with Mr. Berg effective March 21, 2007. The agreement provides that Mr. Berg shall serve as an “at will” employee at the pleasure of the Board of Directors. The agreement also includes a two-year non-compete/non-solicitation agreement with Mr. Berg. The agreement grants the Board of Directors the authority to establish Mr. Berg’s base salary each year, and also provides that he may participate in other benefit plans offered to all employees.
We entered into an employment agreement (Original Agreement) with Mr. Talley effective July 15, 2011 and continuing through the period ending August 31, 2012. On September 13, 2012, we amended the Original Agreement by entering into a new agreement effective September 1, 2012 that is identical to the original agreement except that it terminates on August 31, 2013. The agreement provides that Mr. Talley shall serve as an “at will” employee at the pleasure of the President and Chief Executive Officer. The agreement also provides that Mr. Talley receive a severance payment, any accrued benefits and a prorated portion of incentive awards if the Company terminates Mr. Talley’s employment prior to August 31, 2013.
Compensation Committee Report
The Compensation Committee of the Company’s Board of Directors has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K. The Compensation Committee has a charter that is available from the Company upon request.
Members of the Compensation Committee as of the date of the report, all of whom are members of the Board of Directors and none of whom are members of management are:
Jeff McInnes, Chairman
William Baldwin
John Brainard
Brian R. Erickson
Dale Fischer
John F. Gudajtes
Summary Compensation Table
The following table summarizes the compensation of the Named Executive Officers for the fiscal years ended August 31, 2012, 2011 and 2010. The Named Executive Officers are the Company’s Chief Executive Officer, Chief Financial Officer and the two other most highly compensated executive officers of the Company.
2012 SUMMARY COMPENSATION TABLE
(1) Amounts shown are not reduced to reflect the Named Executive Officers’ elections, if any, to defer compensation into the 401(k) plan or the Supplemental Executive Retirement Plan (SERP).
(2) Represents the stated value of contract rights that were earned in the fiscal year, which was the year performance targets were achieved. Contract rights vest equally over a three year period. For further information regarding the Long-Term Incentive Plan, see “Compensation Discussion and Analysis” within this Form 10-K.
(3) Represents the change in value of the outstanding contract rights granted to the executives in prior years of $300 per contract right in 2012, $700 per contract right in 2011 and $350 per contract right in 2010. Contract rights vest equally over a three year period. For further information regarding the Long-Term Incentive Plan, see “Compensation Discussion and Analysis” within this Form 10-K.
(4) Represents the Profit-Per-Acre payments that were earned in the fiscal year on vested contract rights.
(5) Components of Change in Pension Value and NQDC Earnings. See table below for details:
Change in Pension Value and Nonqualified Deferred Compensation Earnings
(A) Represents the change in the present value of the accumulated benefits provided by the plan or agreement including the effect of the decrease in the discount rate from 5.12% to 3.71%.
(B) Interest is considered to be preferential if the rate paid to the executive exceeds 120% of the applicable long-term federal rate under the Internal Revenue Code. Amounts reported reflect only the interest that exceeds 120% of the applicable long-term federal rate.
(6) Includes the imputed value of Company provided life insurance and long-term disability insurance, car allowance, reimbursement of health club dues, costs of tax return preparation, costs of medical physicals, Company 401(k) matching contributions, Company matching SERP contributions, flexible spending taxable cash and flexible spending dollars into 401(k).
Realized Compensation
The SEC’s calculation of total compensation, as shown above in the 2012 Summary Compensation Table, includes several items that are driven by accounting and actuarial assumptions, which are not necessarily reflective of compensation actually realized by the named executives in a particular year. To supplement the SEC-required disclosure, we have included the additional table below, which shows Realized Compensation for each named executive, as would be reported on the named executive’s W-2 form for each of the years shown.
2012 Realized Compensation Table
(1) Amounts as would be reported on the named executive’s W-2 form. Amounts reported as realized compensation differ substantially from the amounts determined under SEC rules and reported as total compensation in the
2012 Summary Compensation table. Realized compensation is not a substitute for total compensation. For 2012, realized compensation represents: (a) total compensation, as determined under applicable SEC rules, minus (b) the value of the contracts rights granted to the executives in the current year, minus (c) the change in value of the outstanding contract rights granted to the executives in prior years, minus (d) the year-over-year change in pension value and nonqualified deferred compensation earnings (as reflected in the Change in Pension Value and Nonqualified Deferred Compensation Earnings column), minus (e) Deferred 2012 Profit-Per-Acre unit retains, plus (f) Profit-Per-Acre unit retains paid, minus (g) 401(k) and SERP employee and Company contributions.
(2) Amounts as reflected on the above 2012 Summary Compensation table.
Grants of Plan-Based Awards
The following table discloses the grants of plan-based awards to each of the Company’s Named Executive Officers for the current year related to the Long-Term Incentive Plan (LTIP). The amounts of these awards that were expensed are shown in the Summary Compensation Table. The table below also discloses the estimated future payouts related to contract rights under the LTIP, Short-Term Incentive Plan (STIP) and the Profit-Per-Acre (PPA) payment under the LTIP.
Grants of Plan-Based Awards Table
(1) The “Target” amounts represent contract rights at the 8/31/2012 stated value of $3,550 per contract right. These rights vest to the executive equally over three years. Theoretically, the minimum received for these contract rights could be $0 and there is no maximum.
(2) The amounts indicated represent future potential payments under the Short-Term Incentive Plan (STIP) based on the executives’ salary as of August 31, 2012.
(3) The “Target” amount represents future Profit-Per-Acre (PPA) annual payments that will be paid to executives upon vesting and assuming a similar beet payment and on-farm costs to that experienced in fiscal year 2012. PPA payments are only paid on vested contract rights. Theoretically, the minimum payment could be $0 and there is no maximum.
Pension Benefits
The table below reflects information for the Named Executive Officers pertaining to the Company’s Pension Plan and the Supplemental Executive Retirement Plan.
(1) Footnote (11), “Employee Benefit Plans”, of the Company’s Notes to the Consolidated Financial Statements discloses the significant assumptions used in calculating this benefit.
(2) Refer to the Compensation, Discussion and Analysis (CD&A) section within this Form 10-K for a description of this benefit plan.
Non-Qualified Deferred Compensation
The table below reflects information for the Named Executive Officers pertaining to non-qualified deferred compensation. All non-qualified deferred compensation listed below is subject to claims of the Company’s creditors.
(1) Executives may defer from 2% to 20% of eligible earnings above the limit for a qualified plan and up to 100% of incentive compensation (which includes short-term incentive comp, profit per acre payments and proceeds from the sale of contract rights). These amounts are included in the Summary Compensation Table.
(2) Represents Company 401k matching above the IRS limit for a qualified plan. These amounts are included in the “All Other Compensation” column of the Summary Compensation Table.
(3) Preferential interest is included here as well as in the NQDC column of the Summary Compensation Table. Preferential interest for fiscal year 2012 is as follows: Mr. Berg - $2: Mr. Astrup - $1: Mr. Talley - $9. Executives have the option of investing funds in an S&P 500 index fund or in a money market fund guaranteeing interest at prime as of January 2 of each calendar year. The 2012, 2011 and 2010 calendar year rates each were 3.25%.
(4) Distributions occur upon termination of employment and can be in a lump sum or in equal installments over a period not to exceed ten years.
Potential Payments upon Termination or Change-In-Control
On March 21, 2007, the Company and Mr. Berg entered into an agreement regarding Mr. Berg’s employment by the Company. The agreement provides that Mr. Berg shall serve as an “at will” employee at the pleasure of the Board of Directors. The agreement also contains the provision of a two-year non-compete/non-solicitation agreement with Mr. Berg, grants the Board of Directors the authority to establish Mr. Berg’s base compensation each year, and also provides that he may participate in other incentive compensation and benefit programs available to the Company’s executive officers.
If Mr. Berg’s employment is terminated without cause, he will be eligible for severance pay equal to two times his then current base salary. Mr. Berg has elected to receive a lump-sum payout of the benefits provided by the Supplemental Executive Retirement Plan (SERP) upon separation from the Company. The present value of Mr. Berg’s pension related SERP was approximately $1.3 million as of August 31, 2012.
If Mr. Talley’s employment is terminated prior to August 31, 2013, he will be eligible for severance pay equal to one times his then current base salary plus a prorated portion of any incentive awards that would otherwise have been paid and/or awarded him under the Company’s long-term and short-term incentive plans. Mr. Talley has elected to receive a lump-sum payout of the benefits
provided by the SERP upon separation from the Company. The present value of Mr. Talley’s pension related SERP was approximately $390,000 as of August 31, 2012.
Compensation of Directors
The Board of Directors meets monthly. For fiscal year 2012, the Company provided its directors with compensation consisting of (i) a payment of $675 per month, (ii) a per diem payment of $300 for each day spent on Company activities, including board meetings and other Company functions, and (iii) reimbursement of expenses associated with director responsibilities. The Chairman and Vice-Chairman of the Board of Directors received payments of $2,175 and $1,175, respectively, per month and a per diem in the amount of $300 for each day spent on Company activities. The monthly compensation paid to the Chairman, Vice-Chairman and directors increases by $25 per month each fiscal year.
Under the terms of the Board of Directors Deferred Compensation Plan, members of the Board of Directors can elect to defer receipt of their monthly and per diem compensation. This is an annual irrevocable election made prior to January 1 of each calendar year the fees are to be paid. The amounts are deferred until the earliest of the board member’s withdrawal from the Board of Directors, the board member’s death or attainment of age 65. Two payment options are available at the election of the participant. Payments can be received in a single lump sum or in equal installments over a period of up to ten years. The Board of Directors, at its discretion, can elect to distribute the remaining balance at any time. Interest is earned on the amounts deferred based on the Company’s weighted average cost of short-term and long-term borrowing. Currently, there is one former board member who has elected to participate in this plan. The amount deferred, as of August 31, 2012, was approximately $32,000.
The table below reflects director compensation for the year ended August 31, 2012.
(1) Consists of fees of $675 per month to Directors, $2,175 to the Chairman of the Board and $1,175 to the Vice Chairman of the Board. The Chairman, Vice Chairman and Directors also receive a per diem fee of $300 for each day spent on Company activities.
(2) Chairmanship began in December 2011.
(3) Vice-Chairmanship began in December 2011.
(4) Term began in April 2012.
(5) Vice-Chairmanship ended in December 2011.
(6) Deceased December 2011.
(7) Chairmanship ended in December 2011.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Under state law and the Company’s Bylaws, each member of the cooperative is entitled to one vote, regardless of the number of Preferred shares the member holds. The Common Stock of the Company is voting stock and each member of the Company holds one share of Common Stock. The Preferred Stock of the Company is non-voting stock. The Company’s stock can only be held by individuals who are sugarbeet growers. None of the officers or executives of the Company hold stock of the Company. As members of the cooperative, each director owns one share of Common Stock and is
entitled to one vote. As a group, the directors own approximately 2 to 3 percent of the outstanding Preferred Stock.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
In accordance with the Company’s Bylaws, only people who are members of the Company or representatives of members can serve on our Board of Directors. As members of the Company (or representatives of members), all Directors have a contractual patronage relationship with the Company that obligates them to deliver sugarbeets to the Company for processing. As a result of this patronage relationship, Directors, like all other members of the Company, receive beet payments from the Company.
The Company has developed its own definition of “Independent Director” that takes into account the patronage relationship that exists between the Company and the Director. Under the Company’s definition, the patronage relationship is not considered for purposes of determining “independence”. However, other relevant relationships between the Company and the Directors, and certain family members, are considered in assessing independence. Except with respect to the patronage relationship that exists, the Company’s definition is consistent with the definition of an independent director found in Section 303A.02 of the New York Stock Exchange Listed Company Manual.
The Company’s definition of Director Independence is provided below:
A director of the Company shall be considered an “Independent Director” unless:
(a)The director has a material financial relationship with the Company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company) other than the patronage relationship that exists between the Company and each of its members.
(b)The director is, or has been within the last 3 years, an employee of the Company; or immediate family member is, or has been within the last 3 years, an employee, of the Company.
(c)The director has received, or an immediate family member has received, during any 12-month period within the last 3 years, more than $120,000 in direct compensation from the Company, other than director or committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service).
(d)
(i)the director is a current partner or employee of a firm that is the Company’s internal or external auditor;
(ii)the director has an immediate family member who is a current partner of such firm;
(iii)the director has an immediate family member who is a current employee of such a firm and personally works on the Company’s audits; or
(iv)the director or an immediate family member was, within the last 3 years, a partner or employee of such a firm and personally worked on the Company’s audit within that timeframe.
(e)The Director or an immediate family member is, or has been within the last 3 years, employed as an executive officer of another company, and any of the Company’s present executive officers, at the same time serves or served on that Company’s compensation committee.
(f)The Director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the Company for property or services in an amount which, in any of the last 3 fiscal years, exceeds the greater of $1,000,000 or 2% of such company’s consolidated gross revenues, other than as a result of such person’s patronage relationship with the Company.
References to “company” include any parent or subsidiary in a consolidated group with such other company.
Based on the above definition, all of our Directors are independent of management and of the Company.
Item 14.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees for professional audit services rendered by Eide Bailly LLP for the audits of the Company’s and consolidated companies’ annual financial statements for the years ended August 31, 2012 and 2011 and fees for other services rendered by Eide Bailly LLP during those periods.
Audit Fees. The Audit Fees set forth above include the aggregate fees billed by Eide Bailly LLP to the Company for audit services related to the audit of the Company’s and consolidated companies’ annual financial statements and review of the statements included in the Company’s quarterly reports on Form 10-Q for fiscal 2012 and fiscal 2011.
Audit-Related Fees. The Audit-Related Fees set forth above include the aggregate fees billed by Eide Bailly LLP to the Company and consolidated companies for assurance and related services provided by Eide Bailly LLP related to the performance of the audit or review of the Company’s financial statements for fiscal 2012 and fiscal 2011. These services included benefit plan audits.
Tax Fees. The Tax Fees set forth above include the aggregate fees billed by Eide Bailly LLP to the Company and consolidated companies for professional services rendered by Eide Bailly for tax compliance and tax return preparation services for fiscal 2012 and fiscal 2011.
All Other Fees. All Other Fees set forth above include the aggregate fees billed by Eide Bailly LLP to the Company and consolidated companies for professional services provided by Eide Bailly LLP to the Company and consolidated companies for fiscal 2012 and fiscal 2011.
The Company’s Audit Committee pre-approves all professional services provided by Eide Bailly LLP to the Company. The Audit Committee approved all of the services and the fees billed for such services to the Company. The Audit Committee makes its decisions on the approval of services with due consideration given to maintaining the independence of the principal accountant. None of the hours expended on the audit of the 2012 financial statements were attributed to work performed by persons who were not employed full time on a permanent basis by Eide Bailly LLP.
PART III
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
Pursuant to the requirements of Section 13 or 15 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, on November 8, 2012.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ DAVID A. BERG
President and Chief Executive Officer
November 8, 2012
(Principal Executive Officer)
/s/ THOMAS S. ASTRUP
Vice President-Finance and Chief Financial
November 8, 2012
Officer (Principal Financial Officer)
/s/ TERESA A. WARNE
Corporate Controller
November 8, 2012
(Principal Accounting Officer)
/s/ ROBERT M. GREEN
Director (Chairman)
November 8, 2012
/s/ STEVE WILLIAMS
Director (Vice-Chairman)
November 8, 2012
/s/ DONALD S. ANDRINGA
Director
November 8, 2012
/s/ WILLIAM BALDWIN
Director
November 8, 2012
/s/ JOHN BRAINARD
Director
November 8, 2012
/s/ BRIAN R. ERICKSON
Director
November 8, 2012
/s/ DALE FISCHER
Director
November 8, 2012
/s/ JOHN F. GUDAJTES
Director
November 8, 2012
/s/ CURTIS E. HAUGEN
Director
November 8, 2012
/s/ WILLIAM A. HEJL
Director
November 8, 2012
/s/ CURTIS KNUTSON
Director
November 8, 2012
/s/ JEFF D. MCINNES
Director
November 8, 2012
/s/ DAVID MUELLER
Director
November 8, 2012
/s/ WAYNE TANG
Director
November 8, 2012
/s/ NEIL C. WIDNER
Director
November 8, 2012
APPENDIX A
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN CRYSTAL SUGAR COMPANY
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm
A-2
Consolidated Statements of Operations for the Years Ended August 31, 2012, 2011 and 2010
A-3
Consolidated Balance Sheets as of August 31, 2012 and 2011
A-4
Consolidated Statements of Changes in Members’ Investments and Comprehensive Income for the Years Ended August 31, 2012, 2011 and 2010
A-6
Consolidated Statements of Cash Flows for the Years Ended August 31, 2012, 2011 and 2010
A-7
Notes to the Consolidated Financial Statements
A-8
A-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of American Crystal Sugar Company
Moorhead, Minnesota
We have audited the accompanying consolidated balance sheets of American Crystal Sugar Company and Subsidiaries as of August 31, 2012 and 2011, and the related consolidated statements of operations, changes in members’ investments and comprehensive income, and cash flows for the years ended August 31, 2012, 2011, and 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such an opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Crystal Sugar Company and Subsidiaries as of August 31, 2012 and 2011, and the results of their operations and their cash flows for the years ended August 31, 2012, 2011, and 2010, in conformity with accounting principles generally accepted in the United States of America.
/s/ EIDE BAILLY LLP
Sioux Falls, South Dakota
November 8, 2012
A-2
American Crystal Sugar Company
Consolidated Statements of Operations
For the Years Ended August 31
(In Thousands)
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
A-3
American Crystal Sugar Company
Consolidated Balance Sheets
August 31
(In Thousands)
Assets
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
A-4
American Crystal Sugar Company
Consolidated Balance Sheets
August 31
(In Thousands)
Liabilities and Members’ Investments
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
A-5
American Crystal Sugar Company
Consolidated Statements of Changes in Members’ Investments and Comprehensive Income
For the Years Ended August 31
(In Thousands)
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
A-6
American Crystal Sugar Company
Consolidated Statements of Cash Flows
For the Years Ended August 31
(In Thousands)
Non-Cash Investing Activities: Purchases of Property and Equipment include the changes in accounts payable related to these purchases of $2,222,000; ($3,356,000) and $3,597,000 for the years ended August 31, 2012, 2011 and 2010, respectively.
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
A-7
American Crystal Sugar Company
Notes to the Consolidated Financial Statements
(1) PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES:
Organization
American Crystal Sugar Company (Company) is a Minnesota agricultural cooperative corporation which processes and markets sugar as well as sugarbeet pulp, molasses, concentrated separated by-product (CSB), betaine (collectively, agri-products) and sugarbeet seed. Business done with its shareholders (members) constitutes “patronage business” as defined by the Internal Revenue Code, and the net proceeds therefrom are credited to members’ investments in the form of unit retains or distributed to members in the form of payments for sugarbeets. Members are paid the net amounts realized from the current year’s production less member operating costs determined in conformity with accounting principles generally accepted in the United States of America.
Basis of Presentation
The Company’s consolidated financial statements are comprised of American Crystal Sugar Company, its wholly-owned subsidiaries Sidney Sugars Incorporated (Sidney Sugars) and Crab Creek Sugar Company (Crab Creek), and ProGold Limited Liability Company (ProGold), a limited liability company in which the Company holds a 51 percent ownership interest.
All material inter-company transactions have been eliminated.
Revenue Recognition
Revenue from the sale of sugar, agri-products and seed is recorded when the product is delivered to the customer. Operating lease revenue is recognized as earned ratably over the term of the lease.
Operating Lease
ProGold owns a corn wet milling facility which it leases under an operating lease. On November 6, 2007, ProGold entered into an amended operating lease agreement with Cargill, Incorporated that superseded and replaced the previous ten year lease agreement. Payments are to be received monthly under the lease, which runs through December 31, 2017. The operating lease revenue is recognized as earned ratably over the term of the lease and to the extent that amounts received exceed amounts earned, deferred revenue is recorded. Expenses (including depreciation and interest) are charged against such revenue as incurred. The lease does not contain a provision for the automatic renewal or extension of the lease terms. However, it does provide an option for Cargill, Incorporated to request exclusive negotiations with ProGold during a certain period of time prior to the expiration of the current lease. The lease also contains provisions for increased payments to be received during the lease period related to the plant’s capital additions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company places its temporary cash investments with high credit quality financial institutions. At times, such investments may be in excess of the applicable insurance limit.
A-8
Accounts Receivable and Credit Policies
The Company grants credit, individually and through its marketing cooperatives, to its customers, which are primarily companies in the food processing industry located throughout the United States.
Trade receivables are uncollateralized customer obligations due under normal trade terms requiring payment within 15 to 90 days from the invoice date. The receivables are non-interest bearing. Trade receivables are stated at the amount billed to the customer. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.
Ongoing credit evaluations of customers’ financial condition are performed and the Company maintains a reserve for potential credit losses. The carrying amount of trade receivables is reduced by a valuation allowance that reflects the Company’s best estimate of the amounts that will not be collected. The Company determines a receivable to be uncollectable and is written off against the reserve based on several criteria including such items as the credit evaluation of a customer’s financial condition, the aging of the receivable and previous unsuccessful collection efforts.
Inventories
Sugar, pulp, molasses and other agri-products inventories are valued at estimated net realizable value. Operating supplies, maintenance parts, and sugarbeet seed inventories are valued at the lower of average cost or market. Sugarbeets are valued at the projected gross per-ton beet payment related to that year’s crop.
Net Property and Equipment
Property and equipment are recorded at cost less impairment. Indirect costs and construction period interest are capitalized as a component of the cost of qualified assets. Property and equipment are depreciated for financial reporting purposes principally using straight-line methods with estimated useful lives ranging from 3 to 33 years.
Net Property and Equipment Held for Lease
Net property and equipment held for lease are stated at cost, net of accumulated depreciation. Depreciation on assets placed in service is provided using the straight-line method with estimated useful lives ranging from 5 to 40 years.
Impairment of Long Lived Assets
The Company reviews its long lived assets for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. An impairment loss is recorded when the sum of the future cash flows is less than the carrying amount of the asset. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. The fair value of assets is a significant estimate and it is at least reasonably possible that a change in the estimate could occur in the near term. No impairment was recognized in 2012, 2011 or 2010.
Related Parties
The following organizations are considered related parties for financial reporting purposes: United Sugars Corporation (United), Midwest Agri-Commodities Company (Midwest) and West Coast Beet Seed Company.
A-9
Investments
Investments in CoBank, ACB are stated at cost plus unredeemed patronage refunds received in the form of capital stock. Investments in Marketing Cooperatives include investments in United and Midwest, which are accounted for using the equity method. Investments in West Coast Beet Seed Company are stated at cost.
Members’ Investments
Preferred and Common Stock - The ownership of common and preferred stock is restricted to a “farm operator” as defined by the bylaws of the Company. Each shareholder may own only one share of common stock and is entitled to one vote in the affairs of the Company. Each shareholder is required to grow a specified number of acres of sugarbeets in proportion to the shares of preferred stock owned. The preferred shares are non-voting. All transfers of stock must be approved by the Company’s Board of Directors and any shareholder desiring to sell stock must first offer it to the Company for repurchase at its par value. The Company has never exercised this repurchase option for preferred stock. The Company’s articles of incorporation do not allow dividends to be paid on either the common or preferred stock.
Unit Retains - The bylaws authorize the Company’s Board of Directors to require additional direct capital investments by members in the form of a variable unit retain per ton of up to a maximum of 10 percent of the weighted average gross per ton beet payment. All refunds and retirements of unit retains must be approved by the Board of Directors.
Accumulated Other Comprehensive Income (Loss) - Accumulated Other Comprehensive Income (Loss) represents the cumulative net increase (decrease) in equity related to the recording of the over-funded or under-funded status of defined benefit postretirement plans, the Company’s portion of the other comprehensive income (loss) of equity method investees and the gain or loss related to foreign currency forward contracts and interest rate swap contracts. Consistent with the Company’s treatment of income taxes related to member-source income and expenses, accumulated other comprehensive income (loss) does not include any adjustment for income taxes.
Retained Earnings (Accumulated Deficit) - Retained earnings represents the cumulative net income (loss) resulting from non-member business, the 2009 pension measurement date adjustment and, for years prior to 1996, the difference between member income as determined for financial reporting purposes and for federal income tax reporting purposes.
Interest Expense, Net
The Company earns patronage dividends from CoBank, ACB based on the Company’s share of the net income earned by CoBank, ACB. These patronage dividends are applied against interest expense.
Income Taxes
The Company is a non-exempt cooperative for federal income tax purposes. As such, the Company is subject to corporate income taxes on its net income from non-member sources. The provision for income taxes relates to the results of operations from non-member business, state income taxes and certain other permanent differences between financial and income tax reporting. The Company also has various temporary differences between financial and income tax reporting, most notable of which is depreciation.
Deferred tax assets, less any applicable valuation allowance, and deferred tax liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.
A-10
Accounting Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value Measurements
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Includes the following inputs:
· quoted prices in active markets for similar assets or liabilities,
· quoted prices for identical or similar assets or liabilities in markets that are not active,
· or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Derivative Instruments and Hedging Activities
The Company recognizes all derivatives in its Consolidated Balance Sheet at fair value. On the date the derivative instrument is entered into, the Company designates the derivative as either (1) a hedge of the fair value of a recognized asset or liability, or of an unrecognized firm commitment (“fair value hedge”) or (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”). The Company has entered into foreign currency forward contracts and an interest rate swap, each of which have been designated as a cash flow hedge. Changes in the fair value of a derivative designated as a cash flow hedge are recorded in accumulated other comprehensive income (loss) and are reclassified into earnings as the underlying hedged item affects earnings.
Business Risk
The financial results of the Company’s operations may be directly and materially affected by many factors, including prevailing prices of sugar and agri-products, the Company’s ability to market its sugar competitively, the weather, government programs and regulations, and operating costs.
A-11
Concentration and Sources of Labor
Substantially all of the hourly employees at the Company’s factories, including full-time and seasonal employees, are represented by the Bakery, Confectionery, Tobacco Workers and Grain Millers (BCTGM) AFL-CIO. The collective bargaining agreement for the Red River Valley factory employees expired on July 31, 2011. On July 31, 2011, the Red River Valley employees represented by the BCTGM rejected the Company’s new contract offer. On August 1, 2011, the Company locked out the Red River Valley union employees. The collective bargaining agreement for the Sidney, Montana, factory employees will expire on April 30, 2015. Office, clerical and management employees are not unionized, except for certain office employees at the Moorhead and Crookston, Minnesota, and Hillsboro, North Dakota, factories who are covered by the collective bargaining agreement with the BCTGM.
On August 1, 2011, the Company commenced operating its Red River Valley factories with contract replacement workers in order to meet its obligations to its customers and shareholders. The Company is continuing to recruit and hire limited duration non-union employees to replace the contract workers. The Company cannot predict the time-frame for the resolution of this matter.
Shipping and Handling Costs
The costs incurred for the shipping and handling of products sold are classified in the consolidated financial statements as a selling expense on the Consolidated Statements of Operations. Shipping and handling costs were $203.5 million, $196.2 million and $153.7 million for the years ended August 31, 2012, 2011 and 2010, respectively.
Deferred Costs and Product Values
All costs incurred prior to the end of the Company’s fiscal year that relate to receiving and processing the subsequent year’s sugarbeet crop are deferred. Similarly, the net realizable values of products produced prior to the end of the Company’s fiscal year that relate to the subsequent year’s sugarbeet crop are deferred. The net result of these deferred costs and product values are recorded in the Company’s consolidated balance sheet in “Other Current Liabilities.” Deferred costs and product values were $8.5 million and $0 as of August 31, 2012 and 2011, respectively.
Recently Issued Accounting Pronouncements
In May 2011, the FASB issued an update to the authoritative guidance which establishes common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The guidance provided by this update became effective and was adopted by the Company in the third quarter of fiscal 2012.
In June 2011, the FASB issued an update to the authoritative guidance which improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. The guidance provided by this update becomes effective for the Company in the first quarter of fiscal 2013. The Company does not expect that the adoption of this guidance will have a material effect on the Company’s financial statements.
In September 2011, the FASB issued an update to the authoritative guidance which reduces the complexity and cost by allowing for a qualitative evaluation about the likelihood of goodwill impairment to determine whether the calculation of the fair value of a reporting unit is required. The guidance provided by this update becomes effective for the Company in the first quarter of fiscal 2013.
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The Company does not expect that the adoption of this guidance will have a material effect on the Company’s financial statements.
In December 2011, the FASB issued an update to the authoritative guidance which requires disclosure information about offsetting and related arrangements for financial instruments and derivative instruments. The guidance provided by this update becomes effective for the Company in the first quarter of fiscal 2014. The Company does not expect that the adoption of this guidance will have a material effect on the Company’s financial statements.
In December 2011, the FASB issued an update to the authoritative guidance which defers the effective date of the presentation of reclassification adjustments out of accumulated other comprehensive income. The guidance provided by this update becomes effective for the Company in the first quarter of fiscal 2013. The Company does not expect that the adoption of this guidance will have a material effect on the Company’s financial statements.
(2) RECEIVABLES:
There was no single customer attributable to the Company that accounted for 10 percent or more of the Company’s total receivables as of August 31, 2012 or 2011 or that accounted for 10 percent or more of the revenues of the Company for the years ended August 31, 2012, 2011 or 2010.
(3) INVENTORIES:
The major components of inventories as of August 31, 2012 and 2011 are as follows:
The Company’s reserve for inventory obsolescence was $9.2 million and $8.3 million as of August 31, 2012 and 2011, respectively.
(4) NET PROPERTY AND EQUIPMENT:
Indirect costs capitalized were $ .5 million, $1.5 million and $1.4 million in 2012, 2011 and 2010, respectively. Construction period interest capitalized was $ .2 million, $ .6 million and $ .6 million in 2012, 2011 and 2010, respectively. Depreciation expense was $41.9 million, $45.4 million and $43.4 million in 2012, 2011 and 2010, respectively. The Company had outstanding commitments totaling $4.8 million as of August 31, 2012, for equipment and construction contracts related to various capital projects.
(5) NET PROPERTY AND EQUIPMENT HELD FOR LEASE:
ProGold owns a corn wet-milling facility that it leases under an operating lease which runs through December 31, 2017. Under the terms of the operating lease, the lessee manages all aspects of the operations of the ProGold corn wet-milling facility.
Net Property and Equipment Held for Lease are stated at cost, net of accumulated depreciation. Depreciation expense was $11.4 million, $11.4 million and $11.2 million in 2012, 2011 and 2010,
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respectively. The components of Net Property and Equipment Held for Lease as of August 31, 2012 and 2011 are shown below:
Future minimum payments to be received under the lease are as follows:
(6) INVESTMENTS IN MARKETING COOPERATIVES:
The Company has a 62 percent ownership interest and a 33 1/3 percent voting interest in United. The investment is accounted for using the equity method. As of August 31, 2012, the Company’s share of United’s losses exceeded the carrying amount of the investment in United by approximately $5.9 million primarily as a result of United’s recognition of Other Comprehensive Losses. Accordingly, the Company reduced the carrying amount of its investment in United to zero and established advances due United comprised of a current liability of $873,000 and a long-term liability of $5.0 million. Substantially all sugar products produced are sold by United as an agent for the Company. The amount of sales and related costs to be recognized by each owner of United is allocated based on its pro rata share of sugar production for the year. The owners provide United with cash advances on an ongoing basis for operating and marketing expenses incurred by United. The Company had outstanding advances to United of $34.1 million and $30.5 million as of August 31, 2012 and 2011, respectively. The Company provides administrative services for United and is reimbursed for costs incurred. The Company was reimbursed $1.0 million for services provided in each of the years 2012, 2011 and 2010.
The Company has a 55 percent ownership interest and a 25 percent voting interest in Midwest. The investment is accounted for using the equity method. As of August 31, 2012, the Company’s investment in Midwest was approximately $82,000. Substantially all sugarbeet pulp, molasses and other agri-products produced are sold by Midwest as an agent for the Company. The amount of sales and related costs to be recognized by each owner of Midwest is allocated based on its pro rata share of production for each product for the year. The owners provide Midwest with cash advances on an ongoing basis for operating and marketing expenses incurred by Midwest. The Company had outstanding advances due to Midwest of $4.4 million and $4.8 million as of August 31, 2012 and 2011, respectively. The Company provides administrative services for Midwest and is reimbursed for costs incurred. The Company was reimbursed $152,000, $129,000 and $122,000 for services provided during 2012, 2011 and 2010, respectively. The owners of Midwest are guarantors of the short-term line of
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credit Midwest has with CoBank, ACB. As of August 31, 2012, Midwest had outstanding short-term debt with CoBank, ACB of $6.1 million, of which $3.2 million was guaranteed by the Company.
The Company has performed a complete analysis and has determined that its investments in United and Midwest do not meet the criteria of Variable Interest Entities and therefore such entities are not consolidated in the Company’s Consolidated Financial Statements.
(7) INVESTMENTS IN WEST COAST BEET SEED COMPANY:
The Company has a 15 percent ownership interest in West Coast Beet Seed Company (WCBS). The investment is accounted for on a cost basis. As of August 31, 2012, the Company’s investment in WCBS was approximately $1,000 and is included in Other Assets on the Consolidated Balance Sheets. WCBS contracts with growers for the production of sugarbeet seed per the requirements of the owners of WCBS. The owners provide WCBS with cash advances on an ongoing basis for operating expenses incurred by WCBS. The Company had outstanding advances to WCBS of $ .6 million and $1.7 million as of August 31, 2012 and 2011, respectively.
(8) LONG-TERM AND SHORT-TERM DEBT:
The long-term debt outstanding as of August 31, 2012 and 2011 is summarized below:
Minimum annual principal payments for the next five years are as follows:
The Company has a long-term debt line of credit through July 30, 2015 with CoBank, ACB of $60.8 million along with an additional $50.0 million which can be utilized for either short-term or long-term borrowing purposes. As of August 31, 2012, there was no outstanding balance with CoBank, ACB but the Company had $64.3 million in long-term letters of credit outstanding. The unused long-term line of credit as of August 31, 2012 was $46.5 million which can also be utilized for short-term borrowing purposes.
The short-term debt outstanding as of August 31, 2012 and 2011 is summarized below:
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During the year ended August 31, 2012, the Company issued commercial paper to meet its short-term borrowing requirements. As of August 31, 2012, the Company had a seasonal line of credit through July 19, 2015, with a consortium of lenders led by CoBank, ACB of $350.0 million along with an additional $50.0 million which can be utilized for either short-term or long-term borrowing purposes. As of August 31, 2012, $3.5 million of the $50.0 million was utilized for long-term borrowing purposes. There was no outstanding balance with CoBank, ACB as of August 31, 2012. The Company also has a line of credit with Wells Fargo Bank for $1.0 million, against which there was no outstanding balance as of August 31, 2012. The Company’s commercial paper program provides short-term borrowings up to the amount of the CoBank, ACB seasonal line of credit of which approximately $110.6 million was outstanding as of August 31, 2012. The Company had $3.3 million in short-term letters of credit outstanding as of August 31, 2012. Any borrowings under the commercial paper program along with outstanding short-term letters of credit will act to reduce the available credit under the CoBank, ACB seasonal line of credit by a commensurate amount. The unused line of credit as of August 31, 2012 was $283.6 million which includes $46.5 million that can also be utilized for long-term borrowing purposes.
The Company can borrow funds on a non-recourse basis from the Commodity Credit Corporation (CCC), with repayment of such funds secured by sugar. The Company did not utilize the CCC during fiscal 2012. The limitations on such borrowings are based on the amount of the Company’s sugar inventory and certain loan covenant restrictions by CoBank, ACB. As of August 31, 2012, the Company had the capacity to obtain non-recourse loans from the CCC of approximately $57.7 million.
During the year ended August 31, 2011, the Company issued commercial paper to meet its short-term borrowing requirements. The Company had a seasonal line of credit through July 19, 2015, with a consortium of lenders led by CoBank, ACB of $350.0 million, against which there was no outstanding balance as of August 31, 2011, and a line of credit with Wells Fargo Bank for $1.0 million, against which there was no outstanding balance as of August 31, 2011. The Company’s commercial paper program provided short-term borrowings up to $350 million of which approximately $66.2 million was outstanding as of August 31, 2011. The Company had $3.3 million in short-term letters of credit outstanding as of August 31, 2011. Any borrowings under the commercial paper program along with outstanding short-term letters of credit will act to reduce the available credit under the CoBank, ACB seasonal line of credit by a commensurate amount. The unused short-term line of credit as of August 31, 2011, was $281.5 million.
Maximum borrowings, average borrowing levels and average interest rates for short-term debt for the years ended August 31, 2012 and 2011, follow:
The terms of the loan agreements contain prepayment penalties along with certain covenants related to, among other matters, the: level of working capital; ratio of term liabilities to members’ investments; current ratio; interest coverage ratio; and investment in CoBank, ACB stock in amounts prescribed by the bank. Substantially all non-current assets are pledged to the senior lenders to provide security to support the Company’s seasonal and long-term financing. As of August 31, 2012 and 2011, the Company was in compliance with the terms of the loan agreements.
Interest paid, net of amounts capitalized, was $8.2 million, $7.9 million and $9.1 million for the years ended August 31, 2012, 2011 and 2010, respectively.
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(9) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
The Company, as a result of its operating and financing activities, is exposed to changes in foreign currency exchange rates and interest rates which may adversely affect its results of operations and financial position. In seeking to minimize the risks and/or costs associated with such activities, the Company may enter into derivative contracts.
The Company manages its foreign currency related risks primarily through the use of foreign currency forward contracts. The contracts held by the Company are denominated in Euros. The Company has entered into foreign currency forward contracts that are designated as cash flow hedges of exchange rate risk related to foreign currency-denominated purchases of equipment. Inputs used to measure the fair value of the foreign currency forward contracts are contained within level 1 of the fair value hierarchy. At August 31, 2012, the Company had cash flow hedges for approximately 341,000 Euros with a maturity dates of September 14, 2012 to December 31, 2012. At August 31, 2012, the fair value of the open contracts reflected a loss of approximately $20,000 recorded in accumulated other comprehensive income (loss) in members’ equity. At August 31, 2011, the Company had cash flow hedges for approximately 140,000 Euros with a maturity date of November 15, 2011. At August 31, 2011, the fair value of the open contracts reflected a gain of approximately $4,000 recorded in accumulated other comprehensive income (loss) in members’ equity. Amounts deferred to accumulated other comprehensive income (loss) are reclassified into the cost of the equipment when the actual purchase takes place.
The Company is exposed to interest risk primarily through its borrowing activities. On December 24, 2009, the Company entered into an interest rate swap contract associated with a $27.3 million Industrial Development Revenue Bond issue that matures on September 1, 2019. The interest rate swap contract requires payment of a fixed interest rate of 2.827 % and the receipt of a variable rate of interest based on the Securities Industry and Financial Market Association (SIFMA) index of .158 % as of August 31, 2012, on $27.3 million of indebtedness. The Company has designated this interest rate swap contract as a cash flow hedge. Inputs used to measure the fair value of the interest rate swap contracts are contained within level 2 of the fair value hierarchy. As of August 31, 2012, the fair value of the cash flow hedge reflected a loss of approximately $2.8 million recorded in accumulated other comprehensive income (loss) and will be reclassified to interest expense over the life of the swap contract. No ineffectiveness was recognized in earnings during the quarter ended August 31, 2012, or during the years ended August 31, 2012 and 2011. The current period loss of $171,000 is classified as interest expense on the statements of operations. As of August 31, 2012, $707,000 of deferred net losses on the interest rate swap contract contained in accumulated other comprehensive income (loss) are expected to be reclassified to earnings during the next 12 months. As of August 31, 2011, the fair value of the cash flow hedge reflected a loss of approximately $2.3 million recorded in accumulated other comprehensive income (loss).
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Fair Value of Asset Derivatives as of August 31
Fair Value of Liability Derivatives as of August 31
(10) OPERATING LEASES:
The Company is party to operating leases for such items as rail cars, computer hardware and vehicles. Cargill, Incorporated has assumed responsibility for the payments on a rail car lease for the duration of that lease and accordingly, the lease payments are not included in the table below. Operating lease expense was $2.1 million, $2.0 million and $1.8 million for years ended August 31, 2012, 2011 and 2010, respectively. Future minimum payments under these obligations are as follows:
(11) EMPLOYEE BENEFIT PLANS:
Company-Sponsored Defined Benefit Pension and Other Post-Retirement Benefit Plans
Substantially all employees who meet eligibility requirements of age, date of hire and length of service are covered by a Company-sponsored retirement plan. As of August 31, 2012, the pension plans were funded as required by the funding standards set forth by the Employee Retirement Income Security Act (ERISA). The Company also has non-qualified supplemental executive retirement plans for certain employees.
Employees of the Company who are not members of a collective bargaining unit and who are newly hired, or re-hired, and employees who transfer from a union position to a nonunion position on or after September 1, 2007, are not eligible for participation in the defined benefit pension plan. These employees participate in a defined contribution plan as described later in this note.
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The Company’s Investment Committee has the responsibility of managing the Company’s retirement plans and trust. Investment allocation decisions are made by the Investment Committee, pursuant to an Investment Policy (Policy) that includes a target strategic asset allocation. The Investment Committee is committed to diversification to reduce the risk of large losses. The Policy allows some flexibility within the target asset allocation in recognition that market fluctuations may cause the allocation to a specific asset class to move up or down within a range. The Policy is reviewed periodically by the Investment Committee. The asset allocation targets within the Plan, include four areas; Domestic Equity, International Equity, Fixed Income and Cash & Other. Domestic and International Equity consists primarily of publicly traded U.S. and Non-U.S. equities, respectively. The Cash & Other allocation is allowed only as necessary for impending benefit payments, lump sum contributions made by the company, or as authorized by the Investment Committee. The Policy does not allow direct use of derivatives, however, the Plan invests entirely in commingled or mutual funds, which may allow investment in derivatives. The stated goal is for each component of the plan to earn a rate of return greater than its corresponding benchmark. Progress of the plan against its return objectives will be measured over a full market cycle.
The following schedule reflects the percentage of pension plan assets by asset class as of the latest measurement date, August 31, 2012:
Percentage of Pension Plan Assets by Asset Class as of August 31, 2012
There have been no changes in the valuation methodologies used at August 31, 2012 and 2011. The Plan’s investment in the common/collective trust consists of investments in the WF Equity Index G Trust Fund (Fund) managed by Wells Fargo Bank NA. The Fund is a medium for collective investment of certain qualified employee benefit plans in common stocks designed to approximate the performance of the S&P 500 Index. Substantially all of the Fund’s assets are in common stocks that make up the S&P 500 Index, however the fund may also invest in S&P 500 Index Futures, common funds or investment companies, cash or cash equivalents or other securities. The net asset value of the Fund is determined daily. All earnings, gains and losses of the Fund are reflected in the computation of the daily unit value and are realized by the plan upon withdrawal from the Fund. The fund has a daily redemption frequency and redemption notice period with no unfunded commitments. Registered investment companies are valued at the net asset value of shares held by the Plan at year end based on quoted market prices. The money market fund is valued at quoted market price, which is cost plus accrued interest.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as, the target asset allocation of the pension portfolio. This resulted in the selection of the 7.25% long-term rate of return on assets assumption.
The following schedules reflect the fair values of the pension plan assets by major category as of August 31, 2012 and 2011:
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The development of the discount rate was based on a bond matching model whereby a hypothetical portfolio of bonds with an “AA” or better rating by a nationally recognized debt rating agency was constructed to match the expected benefit payments under the Company’s pension plans through the year 2042. The reinvestment rate for benefit cash flow occurring after 2042 was discounted back to the year 2042 at a rate consistent with the yields on long-term zero-coupon bonds. The resulting present value was treated as additional benefit cash flow for the year 2042 and consistently applied as any other benefit cash flow during the bond matching process.
The Company has a medical plan and a Medicare supplement plan which are available to union retirees and certain non-union retirees. The costs of these plans are shared by the Company and plan participants. The Company’s post-retirement plan for certain non-union employees currently coordinates with Medicare’s medical coverage and provides tiered prescription drug coverage. The Company has determined that this plan is actuarially equivalent to Medicare Part D and therefore qualifies for the Federal subsidy provision in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. This provision allows the Company to receive a subsidy of 28 percent of the dollars spent providing prescription drug coverage. The Company also participates in the Federal Early Retiree Reinsurance Program which provides reimbursement of medical expenses for early and disability retirees between the ages of 55 and 65 who are not covered by Medicare.
Weighted Average Assumptions as of August 31,
The following schedule reflects the expected pension and post-retirement benefit payments during each of the next five years and the aggregate for the following five years:
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The Company expects to make contributions of approximately $6.8 million to the defined benefit pension plans, approximately $99,000 related to Supplemental Executive Retirement Plans and approximately $1.3 million to the post-retirement plans during the next fiscal year.
The following schedules provide the components of the Net Periodic Pension and Post-Retirement Costs for the years ended August 31, 2012, 2011 and 2010:
Prior service costs are amortized over the lesser of seven years or the length of the union contract that included the benefit change.
For measurement purposes, an 8.0 percent annual rate of increase in the per capita cost of covered healthcare benefits for participants under age 65 was assumed for 2012. The rate is assumed to decline to 5.0 percent over the next five years. For participants age 65 and older, a 9.0 percent annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2012. The rate is assumed to decline to 6.0 percent over the next five years.
Assumed healthcare trends can have a significant effect on the amounts reported for healthcare plans. A one percent change in the assumed healthcare trend rates would have the following effects:
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The following schedules set forth a reconciliation of the changes in the plans’ benefit obligation and fair value of assets for the years ending August 31, 2012 and 2011, and a statement of the funded status and amounts recognized in the Balance Sheets and Accumulated Other Comprehensive Income as of August 31, 2012 and 2011:
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The estimated amounts that will be amortized from Accumulated Other Comprehensive Income at August 31, 2012, into net periodic benefit cost in fiscal 2013 are as follows:
The accumulated pension benefit obligation was $229.1 million and $182.6 million as of August 31, 2012 and 2011, respectively.
Long-Term Incentive Plan
The Company’s Long-Term Incentive Plan provides deferred compensation to certain key executives of the Company. The plan creates financial incentives that are based upon contract rights which are available to the executive under the terms of the plan, the value of which is determined by the Board of Directors. During 2012, 18.12 vested contract rights were exercised. In 2012, 12.93 contract rights were granted at a stated value of $3,550 per contract right. At August 31, 2012, the Board of Directors increased the value of the 1,419.83 contract rights previously granted and outstanding from $3,250 to $3,550 per contract right. As of August 31, 2012, there were 1,432.76 contract rights issued and outstanding at a stated value of $3,550 per contract right, of which 1,217.22 were vested.
Defined Contribution Plan
The Company has a qualified 401(k) plan for all eligible employees. Participants may contribute a percentage of their gross earnings each pay period as provided in the participation agreement. The Company matches the non-union and eligible union year-round participants’ contributions up to 4 percent and 2 percent, respectively, of their gross earnings. The plan provides for immediate vesting of these benefits. The Company’s contributions for this element of the plan totaled $1.4 million, $1.9 million and $1.8 million for the years ended August 31, 2012, 2011 and 2010, respectively.
Employees of the Company who are not members of a collective bargaining unit and who are newly hired, or rehired, and employees who transfer from a union position to a nonunion position on or after September 1, 2007, are no longer eligible for participation in the defined benefit pension plan but receive a 4% non-elective Company Contribution to the 401(k) plan. These Company Contributions have a six year vesting schedule. The Company’s Contributions for this element of the plan totaled $246,000, $136,000 and $115,000 for the years ended August 31, 2012, 2011 and 2010, respectively.
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(12) MEMBERS’ INVESTMENTS:
The following schedule details the Preferred Stock and Common Stock as of August 31, 2012, 2011 and 2010:
The components of Accumulated Other Comprehensive Income (Loss) as reflected in Members’ Investments on the Consolidated Balance Sheets are as follows:
(13) SEGMENT REPORTING:
The Company has identified two reportable segments: Sugar and Leasing. The sugar segment is engaged primarily in the production and marketing of sugar from sugarbeets. It also sells agri-products and sugarbeet seed. The leasing segment is engaged in the leasing of a corn wet milling plant used in the production of high-fructose corn syrup. The segments are managed separately. There are no inter-segment sales. The leasing segment has a major customer that accounts for all of that segment’s revenue.
Summarized financial information concerning the Company’s reportable segments is shown below:
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(14) FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Quoted market prices are generally not available for the Company’s financial instruments. Fair values are based on judgments regarding anticipated cash flows, future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates involve uncertainties and matters of judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Long-Term Debt, Inclusive of Current Maturities - Based upon discounted cash flows and current borrowing rates with similar maturities, the fair value of the long-term debt as of August 31, 2012, was approximately $143.6 million in comparison to the carrying value of $128.6 million. The fair value of the long-term debt as of August 31, 2011, was approximately $143.0 million in comparison to the carrying value of $134.4 million.
Investments in CoBank, ACB and Investments in Marketing Cooperatives - The Company believes it is not practical to estimate the fair value of these investments without incurring excessive costs because there is no established market for these securities and equity interests, and it is inappropriate to estimate future cash flows which are largely dependent on future earnings of these organizations.
Foreign Currency Forward Contracts - Based on a variety of pricing factors, which include the market price of the foreign currency forward contract available in the dealer-market, the fair value of the open contracts as of August 31, 2012, was a liability of approximately $20,000. The fair value of the open contracts as of August 31, 2011, was an asset of approximately $4,000. Inputs used to measure the fair value of the foreign currency forward contracts are quoted prices in active markets for identical assets or liabilities and therefore are contained within level 1 of the fair value hierarchy. See the tables below.
Interest Rate Contracts - Based on the zero coupon method in which the term, notional amount, and repricing date of the interest rate swap match the term, repricing date, and principal amount of the interest-bearing liability on which the hedging interest payments are due, the fair value of the interest rate contract as of August 31, 2012, was a liability of approximately $2.8 million. The fair value of the interest rate contract as of August 31, 2011, was a liability of approximately $2.3 million. Inputs used to measure the fair value of the interest rate swap contracts are quoted prices in active markets for similar assets or liabilities and therefore are contained within level 2 of the fair value hierarchy. See the tables below.
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The tables below reflect the assets and liabilities measured at fair value on a recurring basis as of August 31, 2012 and 2011.
(15) INCOME TAXES:
As of August 31, 2012 and 2011, the Company had no unrecognized tax benefits. Any future accrued interest or penalties related to unrecognized tax benefits will be recognized in income tax expense if incurred. The Company is no longer subject to U.S. Federal income tax examinations by tax authorities for fiscal years 2008 and earlier. The Company is no longer subject to state income tax examinations by tax authorities for fiscal years 2008 and earlier.
Total income tax payments were $3.3 million, $3.2 million and $17,000 for the years ended August 31, 2012, 2011 and 2010, respectively.
The Company’s net deferred tax liability included in Other Liabilities on the Company’s Balance Sheets as of August 31, 2012 and 2011 is reflected below:
Income tax expense/(benefit) for the years ended August 31, 2012, 2011 and 2010 is as follows:
A reconciliation of the Company’s effective tax rates for the years ended August 31, 2012, 2011 and 2010 is shown below:
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(16) ENVIRONMENTAL MATTERS:
The Company is subject to extensive federal and state environmental laws and regulations with respect to water and air quality, solid waste disposal and odor and noise control. The Company conducts an ongoing compliance program designed to meet these environmental laws and regulations. The Company believes that it is in substantial compliance with applicable environmental laws and regulations. From time to time, however, the Company may be involved in investigations or determinations regarding matters that may arise in the ordinary course of business. The Company works closely with all affected government agencies to resolve environmental issues that have arisen and believes such issues will be resolved without any material adverse effect on the Company.
The Company’s sugar manufacturing process is energy intensive and generates carbon dioxide and other “Greenhouse Gases” (GHGs). Several bills have been passed or introduced in the United States Senate and House of Representatives that would regulate GHG emissions to reduce the impact of global climate change. The Company believes that industries generating GHGs, including the Company, could be subject to either federal or state regulation relating to climate change policies in the relatively near future. These policies, if adopted, will increase the Company’s energy and other operating costs. Depending on how these policies address imports, the domestic sugar market may have a competitive disadvantage compared with imported sugar. These policies could have a significant negative impact on the Company’s beet payment to shareholders if the Company is not able to pass the increased costs on to its customers.
On August 12, 2011, the Company received a Finding of Violation and Notice of Violation from the United States Environmental Protection Agency (EPA) for alleged violations of the Clean Air Act concerning certain air emissions at the Company’s three Minnesota factories. The Company has had some preliminary discussions with the EPA concerning the alleged violations. The Company, at this time, cannot predict the outcome of these discussions or the financial impact, if any, resulting from the resolution of this matter.
The Company has identified capital expenditures for environmental related projects over the next three years at the Company’s factory locations of approximately $5.8 million.
(17) LEGAL MATTERS:
Since September of 2009, the U.S. Department of Agriculture’s (USDA) deregulation of Roundup Ready® sugarbeets has been in controversy. As a result of this ongoing controversy, the Company has taken various actions related to the planting of Roundup Ready® sugarbeets, including participating in the litigation process and entering into a compliance agreement with USDA to allow the Company’s shareholders to choose between conventional sugarbeet seed and Roundup Ready® sugarbeet seed during this time frame.
On July 19, 2012, the USDA announced its decision resulting in the nonregulated status of Roundup Ready® sugarbeet seed. This final action potentially concludes the controversy over Roundup Ready® sugarbeet seed and allows the Company’s shareholders to plant Roundup Ready® sugarbeet
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seed in the future. Notwithstanding this USDA action, there can be no assurances that groups opposed to Roundup Ready® sugarbeet seed or similar seed products will not institute additional proceedings related to the use of Roundup Ready® sugarbeet seed in the future.
(18) SUBSEQUENT EVENTS:
The Company has evaluated events through the date that the financial statements were issued, for potential recognition or disclosure in the August 31, 2012, financial statements.
The Company had a seasonal line of credit through November 2, 2012, with a consortium of lenders led by CoBank, ACB of $350.0 million along with an additional $50.0 million which can be utilized for either short-term or long-term borrowing purposes. On November 2, 2012, the Company entered into a Fourth Amendment to the Amended and Restated Credit Agreement between the Company and CoBank, ACB and received a Facility Increase Notice from CoBank, ACB increasing the Company’s seasonal line of credit from $350.0 million to $410.0 million through May 31, 2013 at which time the seasonal line of credit will revert back to $350.0 million through July 19, 2015. The availability of the additional $50.0 million which can be utilized for either short-term or long-term borrowing purposes remains unchanged during this time.
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EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-K
FOR FISCAL YEAR ENDED AUGUST 31, 2012
Exhibit No.
Exhibit Description
3.1
Restated Articles of Incorporation of American Crystal Sugar Company is incorporated by reference to Exhibit 3(i) from the Company’s Registration Statement on Form S-1 (File No. 33-83868), declared effective November 23, 1994.
3.2
Restated By-laws of American Crystal Sugar Company is incorporated by reference to Exhibit 3(ii) from the Company’s Registration Statement on Form S-1 (File No. 333-11693), declared effective November 13, 1996.
4.1
Restated Articles of Incorporation of American Crystal Sugar Company is incorporated by reference to Exhibit 3(i) from the Company’s Registration Statement on Form S-1 (File No. 33-83868), declared effective November 23, 1994
4.2
Restated By-laws of American Crystal Sugar Company is incorporated by reference to Exhibit 3(ii) from the Company’s Registration Statement on Form S-1 (File No. 333-11693), declared effective November 13, 1996.
10.1
Form of Operating Agreement between Registrant and ProGold Limited Liability Company is incorporated by reference to Exhibit 10(u) from the Company’s Registration Statement on Form S-1 (File No. 33-83868), declared effective November 23, 1994
10.2
Registrant’s Senior Note Purchase Agreement is incorporated by reference to Exhibit 10.24 from the Company’s Annual Report on Form 10-K for the year ended August 31, 1999 (File/Film No. 99764763) filed on November 26, 1999.
10.3
Registrant’s Senior Note Inter-creditor and Collateral Agency Agreement is incorporated by reference to Exhibit 10.25 from the Company’s Annual Report on Form 10-K for the year ended August 31, 1999 (File/Film No. 99764763) filed on November 26, 1999.
10.4
Registrant’s Senior Note Restated Mortgage and Security Agreement is incorporated by reference to Exhibit 10.26 from the Company’s Annual Report on Form 10-K for the year ended August 31, 1999 (File/Film No. 99764763) filed on November 26, 1999.
*10.5
Long Term Incentive Plan, dated June 23, 1999 is incorporated by reference to Exhibit 10.31 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2000 (File/Film No. 775168) filed on November 22, 2000.
*10.6
Long Term Incentive Plan, dated August 24, 2005 is incorporated by reference to Exhibit 10.25 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2005 (File/Film No. 051224287) filed on November 23, 2005.
*10.7
Employment Agreement dated March 21, 2007 between the Registrant and David A. Berg is incorporated by reference to Exhibit 10.26 from the Company’s Form 10-Q for the quarter ended February 28, 2007 (File/Film No. 07767289) filed on April 16, 2007.
10.8
Growers’ Contract (5-year Agreement) for the crop years 2008 through 2012 is incorporated by reference to Exhibit 10.24 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2007 (File/Film No. 071273808) filed on November 29, 2007.
10.9
Amended and Restated Uniform Member Sugar Marketing Agreement between the Registrant and United Sugars Corporation dated September 20, 2007 is incorporated by
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reference to Exhibit 10.22 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2008 (File/Film No. 081215861) filed on November 26, 2008.
*10.10
Restated Supplemental Executive Retirement Plan, dated December 5, 2008 is incorporated by reference to Exhibit 10.20 from the Company’s Form 10-Q for the quarter ended November 30, 2008 (File/Film No. 09525944) filed on January 14, 2009.
*10.11
Restated Board of Directors Deferred Compensation Plan, dated December 8, 2008 is incorporated by reference to Exhibit 10.21 from the Company’s Form 10-Q for the quarter ended November 30, 2008 (File/Film No. 09525944) filed on January 14, 2009.
*10.12
First Amendment to 2005 Long-Term Incentive Plan, dated December 20, 2006 is incorporated by reference to Exhibit 10.22 from the Company’s Form 10-Q for the quarter ended February 28, 2009 (File/Film No. 09747626) filed on April 14, 2009.
*10.13
Second Amendment to 2005 Long-Term Incentive Plan, dated November 5, 2007 is incorporated by reference to Exhibit 10.23 from the Company’s Form 10-Q for the quarter ended February 28, 2009 (File/Film No. 09747626) filed on April 14, 2009.
*10.14
Third Amendment to 2005 Long-Term Incentive Plan, dated December 11, 2008 is incorporated by reference to Exhibit 10.24 from the Company’s Form 10-Q for the quarter ended February 28, 2009 (File/Film No. 09747626) filed on April 14, 2009.
10.15
Amended and Restated Credit Agreement between the Registrant and CoBank, ACB dated July 30, 2009 is Incorporated by reference to Exhibit 10.17 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2009 (File/Film No. 091156997) filed on November 4, 2009.
10.16
Amended and Restated Uniform Member Marketing Agreement between the Registrant and Midwest Agri-Commodities Company dated September 1, 2009 is incorporated by reference to Exhibit 10.18 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2009 (File/Film No. 091156997) filed on November 4, 2009.
10.17
Amended and Restated Member Control Agreement between Registrant and Golden Growers Cooperative dated September 1, 2009 is incorporated by reference to Exhibit 10.19 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2009 (File/Film No. 091156997) filed on November 4, 2009.
10.18
First Amendment to Amended and Restated Credit Agreement between the Registrant and CoBank, ACB dated July 30, 2010 is incorporated by reference to Exhibit 10.20 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2010 (File/Film No. 101161560) filed on November 3, 2010.
*10.19
Fourth Amendment to 2005 Long-Term Incentive Plan, dated August 1, 2010 is incorporated by reference to Exhibit 10.21 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2010 (File/Film No. 101161560) filed on November 3, 2010.
10.20
Second Amendment to Amended and Restated Credit Agreement between the Registrant and CoBank, ACB dated November 4, 2010 is incorporated by reference to Exhibit 10.23 from the Company’s Form 10-Q for the quarter ended November 30, 2010 (File/Film No. 11528964) filed on January 14, 2011.
10.21
Third Amendment to Amended and Restated Credit Agreement between the Registrant and CoBank, ACB dated July 19, 2011 is incorporated by reference to Exhibit 10.23 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2011.
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*A management contract or compensatory plan required to be filed with this report.
** Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act of the Exchange Act, except as shall be expressly set forth by specific reference to such filings.
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