CHS INC.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide a reader of our financial statements
with a narrative from the perspective of our management on our financial
condition and results of operations, liquidity and certain other factors that
may affect our future results. Our MD&A is presented in the following sections:
• Overview
• Business Strategy
• Fiscal 2020 Second Quarter Highlights
• Fiscal 2020 Trends Update
• Operating Metrics • Results of Operations
• Liquidity and Capital Resources
• Off-Balance Sheet Financing Arrangements
• Contractual Obligations
• Critical Accounting Policies
• Effect of Inflation and Foreign Currency Transactions
• Recent Accounting Pronouncements
Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the year endedAugust 31, 2019 (including the information presented therein under Risk Factors), as well as the condensed consolidated financial statements and the related notes included in Item 1 of Part I, and the risk factor included in Item 1A of Part II of this Quarterly Report on Form 10-Q.
Overview
CHS Inc. is a diversified company that provides grain, food, agronomy and energy resources to businesses and consumers on a global scale. As a cooperative, we are owned by farmers, ranchers and member cooperatives acrossthe United States . We also have preferred shareholders that own our five series of preferred stock, all of which are listed and traded on the Nasdaq Global Select Market. We operate in the following three reportable segments:
• Energy. Produces and provides primarily for the wholesale distribution and
transportation of petroleum products.
• Ag. Purchases and further processes or resells grains and oilseedsoriginated by our country operations business, by our member cooperatives
and by third parties; also serves as a wholesaler and retailer of agronomy
products.
• Nitrogen Production. Consists solely of our equity method investment in CF
Nitrogen and produces and distributes nitrogen fertilizer.
In addition, our financing and hedging businesses, along with our non-consolidated wheat milling and food production and distribution joint ventures, have been aggregated within Corporate and Other.
The condensed consolidated financial statements include the accounts of CHS and
all subsidiaries and limited liability companies in which we have a controlling
interest. The effects of all significant intercompany transactions have been
eliminated.
Corporate administrative expenses and interest are allocated to each reporting
segment, along with Corporate and Other, based on direct use of services, such
as information technology and legal, and other factors or considerations
relevant to the costs incurred.
Management's Focus. When evaluating our operating performance, management
focuses on gross profit and income before income taxes ("IBIT"). As a company
that operates heavily in global commodities, there is significant
unpredictability and volatility in pricing, costs and global trade volumes.
Consequently, we focus on managing the margin we can earn and the resulting
IBIT. Management also focuses on ensuring balance sheet strength through
appropriate management of financial liquidity, leverage, capital allocation and
cash flow optimization.
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Seasonality. Many of our business activities are highly seasonal and our
operating results vary throughout the year. Our revenues and income generally
trend lower during the second and fourth fiscal quarters and higher during the
first and third fiscal quarters; however, weather or other events may impact
this trend, particularly for IBIT. For example, in our Ag segment, our country
operations business generally experiences higher volumes and income during the
fall harvest and spring planting seasons, which generally correspond to our
first and third fiscal quarters, respectively. Additionally, our agronomy
business generally experiences higher volumes and income during the spring
planting season. Our global grain marketing operations are subject to
fluctuations in volume and income based on producer harvests, world grain
prices, demand and global trade volumes. Our Energy segment generally
experiences higher volumes and profitability in certain operating areas, such as
refined products, in the spring, summer and early fall when gasoline and diesel
fuel use by agricultural producers is highest and is subject to global supply
and demand forces. Other energy products, such as propane, generally experience
higher volumes and profitability during the winter heating and fall crop-drying
seasons. The graphs below depict the seasonality inherent in our businesses.
[[Image Removed: chart-858ab48ee59a59ef896a01.jpg]]
[[Image Removed: chart-4b53e239bee55851ae4a01.jpg]]
* Income (loss) before income taxes experienced deviations from historical
trends during fiscal 2019 and fiscal 2018 as a result of gains on sales of
noncore assets, recoveries of previously recorded losses and a combination of
other factors, including poor weather conditions that negatively impacted our Ag
segment operations.
Pricing and Volumes. Our revenues, assets and cash flows can be significantly
affected by global market prices and sales volumes of commodities such as
petroleum products, natural gas, grains, oilseed products and agronomy products.
Changes in market prices for commodities we purchase without a corresponding
change in the selling prices of those products can affect revenues and operating
earnings. Similarly, increased or decreased sales volumes without a
corresponding change in the purchase and selling prices of those products can
affect revenues and operating earnings. Commodity prices and sales volumes are
affected by a wide range of factors beyond our control, including weather, crop
damage due to plant disease or
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insects, drought, availability/adequacy of supply of a commodity, availability of reliable rail and river transportation network, outbreaks of disease, government regulations/policies, global trade disputes and general political/economic conditions.
Foreign Corrupt Practices Act Update. As previously reported in our Annual Report on Form 10-K for the year endedAugust 31, 2019 , in the fourth quarter of fiscal 2018, we contacted theU.S. Department of Justice ("DOJ") and theU.S. Securities and Exchange Commission ("SEC") to voluntarily self-disclose potential violations of the Foreign Corrupt Practices Act of 1977 ("FCPA") in connection with a small number of reimbursements made to Mexican customs agents in the 2014-2015 time period for payments customs agents made to Mexican customs officials in connection with inspections of grain crossing theU.S. -Mexican border by railcar. In connection with its review of this matter, we have cooperated with the DOJ's andSEC's evaluation of other areas of potential interest relating to the FCPA. OnFebruary 25, 2020 , we received a letter from the DOJ stating that it had closed its inquiry into each of these matters without taking any action against us and acknowledging its appreciation of our cooperation. We are still fully cooperating with theSEC's ongoing evaluation of these FCPA-related matters. At this time, theSEC has not taken a position on these FCPA-related matters and we are unable to predict when theSEC's review of these matters will be completed or what regulatory or other outcomes may result.
Business Strategy
Our business strategies focus on an enterprise-wide effort to create an experience that empowers customers to make CHS their first choice, expands market access to add value for our owners, and transforms and evolves our core businesses by capitalizing on changing market dynamics. To execute on these strategies, we are focused on implementing agile, efficient and sustainable new technology platforms; building robust and efficient supply chains; hiring, developing and retaining high-performing, diverse and passionate teams; achieving operational excellence and continuous improvement; and maintaining a strong balance sheet.
Fiscal 2020 Second Quarter Highlights
• We experienced lower margins in our Energy segment due to less
advantageous market conditions in our refined fuels business, which were
driven by lower crack spreads and decreased Western Canadian Select
("WCS") crude oil differentials experienced on heavy Canadian crude oil
compared to the same period of the prior year.
• While Ag margins have improved from the prior year, we continued to
experience pressure on grain volumes and associated margins due to slow
movement of grain, which primarily reflected uncertainty in the grain
markets related to trade issues between
partners.
• We continued to devote considerable resources toward the design,development and implementation of our new enterprise resource planning
("ERP") platform, which will provide an improved platform to execute upon
our business strategies.
• As more fully described in Item 4 of Part I of this Quarterly Report on
Form 10-Q, we continued dedicating significant internal and external
resources, as well as executive and board focus, to improving our control
environment.
Fiscal 2020 Trends Update
As with virtually all other companies in the United States , we are dealing with
the recent outbreak and pandemic of the novel coronavirus known as COVID-19. As
more fully described in Item 1A of Part II of this Quarterly Report on Form
10-Q, at the time of this filing it is not possible to predict the overall
impact of COVID-19 on our business, liquidity, capital resources and financial
results. However, we have mobilized our resources (operational, people and
financial) to be in a position to best serve our customers, owners and other
stakeholders as the social, economic and financial impacts of COVID-19 unfold.
Our Energy and Ag segments operate in cyclical environments. The favorable
market conditions experienced by our Energy segment during the first half of
fiscal 2019, most notably heavy Canadian crude oil price differentials, returned
to lower, more normalized levels during the second half of fiscal 2019 and the
first half of fiscal 2020. Unforeseen market conditions can also positively or
negatively impact the energy industry, including the significant price decreases
that occurred during March 2020 subsequent to the second quarter ended February
29, 2020 . We are unable to predict how long the current environment will last or
the severity of the financial and operational impacts; however, we expect the
uncertain and volatile market conditions in the energy industry to remain
through the second half of fiscal 2020.
The agricultural industry continues to operate in a challenging environment that
has been characterized by generally lower margins, reduced liquidity and
increased leverage that have resulted from a period of reduced commodity prices.
In addition, trade relations between the United States and foreign trade
partners, particularly those that purchase large quantities of agricultural
commodities, while improving, are still not normalized as of the end of our
second quarter ended February 29 ,
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2020, resulting in unpredictable impacts to agricultural commodity prices and volumes sold. We are unable to predict how long the current environment will last or how severe the effects will ultimately be on our pricing and volumes. In addition to global supply and demand impacts, regional factors such as unpredictable weather conditions, could continue to impact our operations. As a result, we expect revenues, margins and cash flows from our core operations in our Ag segment to remain under pressure through the remainder of fiscal 2020, which will continue to put pressure on associated asset valuations.
Operating Metrics
Energy
Our Energy segment operations primarily include our
Three Months Ended Six Months Ended
February 29, 2020 February 28, 2019 February 29, 2020 February 28, 2019
Refinery throughput volumes (Barrels per day)
Heavy, high-sulfur crude oil 97,863 94,198 91,410 97,136
All other crude oil 75,156 70,078 76,988 66,990
Other feedstocks and blendstocks 12,671 10,356 14,978 14,158
Total refinery throughput volumes 185,690 174,632 183,376 178,284
Refined fuel yields
Gasolines 89,160 78,403 90,721 83,880
Distillates 77,714 77,179 75,321 74,802
We are subject to the Renewable Fuels Standard, which requires refiners to blend
renewable fuels (e.g., ethanol, biodiesel) into their finished transportation
fuels or purchase renewable energy credits, known as Renewable Identification
Numbers ("RINs"), in lieu of blending. The U.S. Environmental Protection Agency
generally establishes new annual renewable fuel percentage standards for each
compliance year in the preceding year. We generate RINs through our blending
activities, but we cannot generate enough RINs to meet the needs of our refining
capacity and RINs must be purchased on the open market. The price of RINs can be
volatile and can impact profitability.
In addition to our internal operational reliability, the profitability of our
Energy segment is largely driven by crack spreads (e.g., the price differential
between refined products and inputs such as crude oil) and WCS crude oil
differentials (e.g., the price differential between West Texas Intermediate
("WTI") crude oil and WCS crude oil), which are driven by the supply and demand
of refined product markets. Crack spreads and WCS crude oil differentials each
decreased during the three and six months ended February 29, 2020 , compared to
the three and six months ended February 28, 2019 , contributing to a significant
decline in IBIT for the Energy segment. The table below provides information
about average market reference prices and differentials that impact our Energy
segment.
Three Months Ended Six Months Ended
February 29, 2020 February
28, 2019
55.96 $ 51.80 $ 56.03 $ 58.83
WTI - WCS crude oil differential
(dollars per barrel) $ 21.56 $ 23.76 $ 17.27 $ 29.36
Group 3 2:1:1 crack spread (dollars
per barrel)* $ 13.21 $ 14.90 $ 15.84 $ 17.50
Group 3 5:3:2 crack spread (dollars
per barrel)* $ 12.37 $ 13.08 $ 14.90 $ 15.85
D6 ethanol RIN (dollars per RIN) $ 0.1945 $ 0.2079 $ 0.1806 $ 0.1686
D4 ethanol RIN (dollars per RIN) $ 0.4616 $ 0.5256 $ 0.5102 $ 0.4482
*Group 3 refers to the oil refining and distribution system serving the Midwest
markets from the
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Table of Contents Ag Our Ag segment operations work together to facilitate the production, purchase, sale and eventual use of grain and other agricultural commodities withinthe United States , as well as internationally. Profitability in our Ag segment is largely driven by throughput and production volumes, as well as commodity price spreads; however, revenues and cost of goods sold ("COGS") are largely affected by market-driven commodity prices that are outside our control. The table below provides information about average market prices for agricultural commodities and our sales/throughput volumes that impacted our Ag segment for the three and six months endedFebruary 29, 2020 , andFebruary 28, 2019 . Three Months Ended Six Months Ended Market Source* February 29, 2020 February 28, 2019 February 29, 2020 February 28, 2019 Commodity prices Corn (dollars per Chicago Board of bushel) Trade $ 3.79 $ 3.71 $ 3.81 $ 3.67 Soybeans (dollars Chicago Board of per bushel) Trade $ 9.00 $ 8.98 $ 9.00 $ 8.79 Wheat (dollars per Chicago Board of bushel) Trade $ 5.47 $ 4.91 $ 5.32 $ 5.00 Urea (dollars per Green Markets ton) NOLA $ 221.00 $ 255.00 $ 223.00 $ 275.00 UAN (dollars per Green Markets ton) NOLA $ 130.00 $ 200.00 $ 141.00 $ 206.00 Ethanol (dollars per gallon) Chicago Platts $ 1.35 $ 1.27 $ 1.42 $ 1.28
Volumes
Grain and oilseed (thousands of bushels) 583,749 616,668 1,203,288 1,315,598 North American grain and oilseed port throughput (thousands of bushels) 127,093 136,999 263,949 314,405 Crop nutrients (thousands of tons) 1,476 1,288 3,327 2,949 Ethanol (thousands of gallons) 225,524 225,992 447,800 472,082
*Market source information represents the average month-end price during the period.
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Table of Contents Results of Operations
Three Months Ended
Three Months Ended
February 29, 2020 % of
Revenues
(Dollars in thousands)
Revenues $ 6,598,226 100.0 % $ 6,483,539 100.0 %
Cost of goods sold 6,283,171 95.2 6,056,126 93.4
Gross profit 315,055 4.8 427,413 6.6
Marketing, general and administrative
expenses 199,570 3.0 177,768 2.7
Operating earnings 115,485 1.8 249,645 3.9
Interest expense 33,411 0.5 41,269 0.6
Other income (11,352 ) (0.2 ) (11,763 ) (0.2 )
Equity income from investments (34,398 ) (0.5 ) (41,716 ) (0.6 )
Income before income taxes 127,824 1.9 261,855 4.0
Income tax expense 2,130 - 13,551 0.2
Net income 125,694 1.9 248,304 3.8
Net income (loss) attributable to
noncontrolling interests 247 - (462 ) -
Net income attributable to CHS Inc. $ 125,447 1.9 % $ 248,766 3.8 %
The charts below detail revenues, net of intersegment revenues, and IBIT by
reportable segment for the three months ended
[[Image Removed: chart-cc6ad9083f695f31a82.jpg]]
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Income Before Income Taxes by Segment
Energy
Three Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Income before income taxes $ 138,921 $ 306,585 $ (167,664 ) (54.7 )%
The following waterfall analysis and commentary presents the changes in our
Energy segment IBIT for the three months ended
[[Image Removed: chart-c51b6e783a32589fa9ca01.jpg]]+See commentary related to these changes in the marketing, general and administrative expenses, interest expense, other income and equity income from investments sections of this Results of Operations.
The
fuels business compared to the same period of the prior year, driven by a
combination of decreased crack spreads and decreased WCS crude oil
differentials experienced on heavy Canadian crude oil, which is processed
by our refineries.
• Recognition of an
excise tax credits during the second quarter of fiscal 2019 that did not
reoccur during the current year.
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Ag
Three Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Income (loss) before income taxes $ (20,845 ) $ (62,398 )
The following waterfall analysis and commentary presents the changes in our Ag segment IBIT for the three months endedFebruary 29, 2020 , compared to the same period during the prior year. [[Image Removed: chart-586d2a08a1ce52ac824a01.jpg]]
+See commentary related to these changes in the marketing, general and administrative expenses, interest expense, other income and equity income from investments sections of this Results of Operations.
The
conditions experienced during fiscal 2019 in the agricultural region of
States and foreign trading partners, a strong wheat crop and improved
weather conditions through
margins and drove the increase.
• The improved margins were partially offset by a net decrease in volumes.
Decreased volumes across much of the Ag segment were mostly offset by
higher volumes associated with certain agronomy products, driven by our
acquisition of the remaining 75% ownership interest in West Centralincluded in the comparable period of the prior year.
All Other Segments
Three Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Nitrogen Production IBIT* $ 5,741 $ 10,712 $ (4,971 ) (46.4 )%
Corporate and Other IBIT $ 4,007 $ 6,956 $ (2,949 ) (42.4 )%
*See Note 5, Investments, of the notes to the condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q for additional information.
Our Nitrogen Production segment IBIT decreased as a result of lower equity method income from our investment in CF Nitrogen during the three months endedFebruary 29, 2020 , attributable to decreased market pricing of urea and UAN, which are produced and sold by CF Nitrogen. Corporate and Other IBIT decreased primarily as a result of non-operating gains recognized during the three months endedFebruary 28, 2019 , that did not reoccur during the current year, as well as decreased interest income from our financing and hedging businesses due to lower interest rates and lower commissions, respectively. 35
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Revenues by Segment
Energy
Three Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Revenues $ 1,461,050 $ 1,474,777 $ (13,727 ) (0.9 )%
The following waterfall analysis and commentary presents the changes in our
Energy segment revenues for the three months ended
[[Image Removed: chart-13171294bcd5cca1f95.jpg]]
The
and product mix contributed to a
• Increased selling prices for refined fuels were driven by global market
conditions and product mix and contributed to a partially offsetting
increase in revenues.
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Ag
Three Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)Revenues $ 5,124,202 $ 4,994,545$ 129,657 2.6 % The following waterfall analysis and commentary presents the changes in our Ag segment revenues for the three months endedFebruary 29, 2020 , compared to the same period during the prior year. [[Image Removed: chart-abdb1a6935097873a10.jpg]]
The
global market conditions and product mix, and contributed to
million and
price increases were partially offset by market-driven price decreases of
• Volume decreases were primarily driven by lower grain and oilseed and feed
and farm supply volumes that contributed to
million decreases of revenues, respectively. The decreased volumes
resulted from a combination of less grain available to trade due to lower
yields from the 2019 crop year and continued trade tensions between the
partially offset by increased volumes associated with agronomy products,
including a
due to heightened spring demand and a
that resulted from the
ownership interest in WCD that we did not previously own, the results of
which were not included in the comparable period of the prior year.
All Other Segments
Three Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Corporate and Other revenues* $ 12,974 $
14,217
*Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses, but not revenues.
There were no significant changes to revenues in Corporate and Other during the three months endedFebruary 29, 2020 , compared to the same period during the prior year. The overall decrease resulted primarily from lower revenues in our financing business due to market-driven interest rate reductions. 37
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Cost of Goods Sold by Segment
Energy
Three Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Cost of goods sold $ 1,270,092 $ 1,122,626 $ 147,466 13.1 %
The following waterfall analysis and commentary presents the changes in our
Energy segment COGS for the three months ended
[[Image Removed: chart-96942c138c855995a8ea01.jpg]]
The
product mix contributed to a
• Increased COGS due to the recognition of an
with certain federal excise tax credits as a reduction of COGS during the
second quarter of fiscal 2019 that did not reoccur during the current
year.
• Decreased pricing for propane was driven by global market conditions and
product mix, and contributed to an offsetting $77.3 million decrease of
COGS.
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Ag
Three Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Cost of goods sold $ 5,012,580 $ 4,933,484 $ 79,096 1.6 %
The following waterfall analysis and commentary presents the changes in our Ag
segment COGS for the three months ended February 29, 2020 , compared to the same
period during the prior year.
[[Image Removed: chart-acd99d1a0c0c55078a2a01.jpg]]
The
by global market conditions and product mix, and contributed to
million and
segment businesses also generally experienced price increases; however,
the price increases were offset by market-driven pricing decreases for
certain agronomy products that contributed to a
COGS.
• Volume decreases were primarily driven by lower grain and oilseed and feed
and farm supply volumes that contributed to
million decreases of COGS, respectively. The decreased volumes resulted
from a combination of challenges experienced in the agricultural commodity
market, including poor weather conditions during fiscal 2019 in the
agricultural region of the United States that contributed to lower crop
yields and fewer acres planted/harvested, and the continued impact of
global trade tensions between the United States and foreign trading
partners. These volume decreases were partially offset by increased
volumes associated with agronomy products, including a
increase of COGS for crop nutrient products due to heightened spring
demand and an increase of COGS that resulted from the
acquisition of the remaining 75% ownership interest in WCD that we did not
previously own, the results of which were not included in the comparable
period of the prior year.
All Other Segments
Three Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Nitrogen Production COGS $ 996 $ 2,534 $ (1,538 ) NM*
Corporate and Other COGS $ (498 ) $ (2,518 ) $ 2,020 NM*
*NM - not meaningful
There were no significant changes to COGS in our Nitrogen Production segment or
Corporate and Other during the three months ended February 29, 2020 , compared to
the same period during the prior year.
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Marketing, General and Administrative Expenses
Three Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Marketing, general and administrative
expenses $ 199,570 $ 177,768 $ 21,802 12.3 %
Increased marketing, general and administrative expenses during the three months
ended February 29, 2020 , were primarily due to increased expenses associated
with the implementation of our new ERP software, increased maintenance expenses
associated with our information technology platforms and higher payroll expenses
for employees that joined CHS following our acquisition of the remaining 75%
ownership interest in WCD, which were not included in the comparable period of
the prior year.
Interest Expense
Three Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)Interest expense $ 33,411 $ 41,269$ (7,858 ) (19.0 )% Interest expense decreased during the three months endedFebruary 29, 2020 , as a result of lower interest rates during the three months endedFebruary 29, 2020 , and decreased average outstanding debt balances compared to the same period of the prior year. Other Income Three Months Ended Change February 29, 2020 February 28, 2019 Dollars Percent (Dollars in thousands) Other income $ 11,352 $ 11,763$ (411 ) (3.5 )%
Other income includes interest income and other non-operating income, which did
not change significantly during the three months ended
Equity Income from Investments
Three Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Equity income from investments* $ 34,398 $
41,716
*See Note 5, Investments, of the notes to the condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q for additional information.
We record equity income or loss for investments in which we have an ownership interest of 50% or less and have significant influence, but not control, for our proportionate share of income or loss reported by the entity, without consolidating the revenues and expenses of the entity in our Condensed Consolidated Statements of Operations. Equity income from investments decreased during the three months endedFebruary 29, 2020 , compared to the same period during the prior year, primarily due to lower equity income associated with our equity method investment in CF Nitrogen, which decreased by a total of$7.6 million , which was driven by reduced urea and UAN pricing for CF Nitrogen. 40
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Income Tax Expense
Three Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Income tax expense $ 2,130 $ 13,551 $ (11,421 ) (84.3 )%
Decreased income tax expense during the three months ended February 29, 2020 ,
was primarily the result of decreased taxable income during the three months
ended February 29, 2020 , as well as the equity management assumptions used in
fiscal 2020. Effective tax rates for the three months ended February 29, 2020 ,
and February 28, 2019 , were 1.7% and 5.2%, respectively. Federal and state
statutory rates applied to nonpatronage business activity were 24.7% and 24.6%
for the three months ended February 29, 2020 , and February 28, 2019 ,
respectively. Income taxes and effective tax rate vary each year based on
profitability and nonpatronage business activity during each of the comparable
years.
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Six Months Ended
Six Months Ended
February 29, 2020 % of
Revenues
(Dollars in thousands)
Revenues $ 14,219,711 100.0 % $ 14,967,828 100.0 %
Cost of goods sold 13,579,113 95.5 14,069,774 94.0
Gross profit 640,598 4.5 898,054 6.0
Marketing, general and administrative
expenses 367,901 2.6 333,911 2.2
Operating earnings 272,697 1.9 564,143 3.8
Interest expense 68,382 0.5 80,177 0.5
Other income (24,850 ) (0.2 ) (36,897 ) (0.2 )
Equity income from investments (84,060 ) (0.6 ) (108,224 ) (0.7 )
Income before income taxes 313,225 2.2 629,087 4.2
Income tax expense 8,794 0.1 33,668 0.2
Net income 304,431 2.1 595,419 4.0
Net income (loss) attributable to
noncontrolling interests 1,102 - (851 ) -
Net income attributable to CHS Inc. $ 303,329 2.1 % $ 596,270 4.0 %
The charts below detail revenues, net of intersegment revenues, and IBIT by
reportable segment for the six months ended
[[Image Removed: chart-beea484cb613538437ba01.jpg]]
[[Image Removed: chart-746227a8da32178a7f8a01.jpg]]
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Income Before Income Taxes by Segment
Energy
Six Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Income before income taxes $ 301,074 $ 539,046 $ (237,972 ) (44.1 )%
The following waterfall analysis and commentary presents the changes in our
Energy segment IBIT for the six months ended
[[Image Removed: chart-8bac439b05bfd48e222a01.jpg]]+See commentary related to these changes in the marketing, general and administrative expenses, interest expense, other income and equity income from investments sections of this Results of Operations.
The$238.0 million decrease in Energy segment IBIT reflects the following: • Significantly less advantageous market conditions in our refined fuels business compared to the same period of the prior year drove lower margins. These market conditions were primarily decreased WCS crude oil
differentials experienced on heavy Canadian crude oil, which is processed
by our refineries and, to a lesser extent, decreased crack spreads.
• Recognition of an
excise tax credits as a reduction of COGS during the second quarter of
fiscal 2019 that did not reoccur during the current year.
• The decreased IBIT was partially offset by increased volumes and improved
propane margins due to significant propane demand for crop drying and home
heating, particularly during the first quarter of fiscal 2020.
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Ag
Six Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Income (loss) before income taxes $ (34,707 ) $
17,920
The following waterfall analysis and commentary presents the changes in our Ag segment IBIT for the six months endedFebruary 29, 2020 , compared to the same period during the prior year. [[Image Removed: chart-44203d42754402fd52aa01.jpg]]
+See commentary related to these changes in the marketing, general and administrative expenses, interest expense, other income and equity income from investments sections of this Results of Operations.
The
the agricultural region of
tensions between
to negatively impact volumes and margins within agricultural markets. In
particular, decreased demand for feed and farm supplies and crop nutrient
products during the late and smaller harvest in the fall of 2019 resulted
in lower margins.
• Decreased volumes across much of the Ag segment were mostly offset byincreased volumes associated with agronomy products that were primarily
attributable to our acquisition of the remaining 75% ownership interest in
WCD on March 1, 2019 , the results of which were not included in the
comparable period of the prior year.
All Other Segments
Six Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Nitrogen Production IBIT* $ 22,191 $ 34,391 $ (12,200 ) (35.5 )%
Corporate and Other IBIT $ 24,667 $ 37,730 $ (13,063 ) (34.6 )%
*See Note 5, Investments, of the notes to the condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q for additional information.
Our Nitrogen Production segment IBIT decreased as a result of lower equity method income from our investment in CF Nitrogen during the six months endedFebruary 29, 2020 , attributable to decreased market pricing of urea and UAN, which are produced and sold by CF Nitrogen. Corporate and Other IBIT decreased primarily as a result of lower earnings from our investment in Ardent Mills, decreased interest income from our financing and hedging businesses due to lower interest rates and lower trading activity, respectively, and non-operating gains recognized during the six months endedFebruary 28, 2019 , that did not reoccur during the current year. 44
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Revenues by Segment
Energy
Six Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Revenues $ 3,356,473 $ 3,636,065 $ (279,592 ) (7.7 )%
The following waterfall analysis and commentary presents the changes in our
Energy segment revenues for the six months ended
[[Image Removed: chart-ec469105d34cf8658e1a01.jpg]]
The
global market conditions and product mix, which contributed to
million and
• An 11% increase of propane volumes contributed to a
of revenues, which was partially offset by a 2% decrease of refined fuels
volumes that contributed to a
Increased volumes of propane resulted from significant propane demand for
crop drying and home heating. Decreased volumes of refined fuels were
attributable primarily to lower demand during the fall harvest as a result
of poor weather conditions and a smaller crop to harvest in the fall of
2019 across much of the agricultural region of the United States in which
we operate.
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Ag
Six Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Revenues $ 10,836,057 $ 11,299,942 $ (463,885 ) (4.1 )%
The following waterfall analysis and commentary presents the changes in our Ag
segment revenues for the six months ended February 29, 2020 , compared to the
same period during the prior year.
[[Image Removed: chart-fee1ff6438b8c10512fa01.jpg]]
The
and farm supply volumes that contributed to
million decreases of revenues, respectively. The decreased volumes
resulted from a combination of challenges experienced in the agricultural
commodity market, including poor weather conditions during fiscal 2019 in
the agricultural region of
crop yields and fewer acres planted/harvested, and the continued impact of
global trade tensions between
partners. These volume decreases were partially offset by increased
volumes associated with agronomy products, including a
increase of revenues for crop nutrient products due to heightened spring
demand and a
that we did not previously own, the results of which were not included in
the comparable period of the prior year.
• Increased feed and farm supplies and grain and oilseed prices were driven
by global market conditions and product mix, and contributed to
million and
these price increases were mostly offset by market-driven price decreases
for other products, including certain agronomy products that lowered
revenues by $160.3 million .
All Other Segments
Six Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Corporate and Other revenues* $ 27,181 $
31,821
*Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses, but not revenues.
Corporate and Other revenues decreased during the six months endedFebruary 29, 2020 , compared to the same period during the prior year, primarily due to lower revenues in our financing business due to market-driven interest rate reductions. 46
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Cost of Goods Sold by Segment
Energy
Six Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Cost of goods sold $ 2,956,254 $ 2,999,297 $ (43,043 ) (1.4 )%
The following waterfall analysis and commentary presents the changes in our
Energy segment COGS for the six months ended
[[Image Removed: chart-818e83aca83ce36c7cba01.jpg]]
The
COGS and increased pricing of refined fuels contributed to a partially
offsetting COGS increase of
conditions and product mix.
• Recognition of an
excise tax credits as a reduction of COGS during the second quarter of
fiscal 2019 that did not reoccur during the current year.
• An 11% increase of propane volumes contributed to a
of COGS, which was partially offset by a 2% decrease of refined fuels
volumes that contributed to a
volumes of propane resulted from significant propane demand for crop
drying and home heating. Decreased volumes of refined fuels were
attributable primarily to lower demand during the fall harvest as a result
of the poor weather conditions that prevented planting of crops during
fiscal 2019 across the agricultural region of the United States in which
we operate.
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Ag
Six Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Cost of goods sold $ 10,622,780 $ 11,073,069 $ (450,289 ) (4.1 )%
The following waterfall analysis and commentary presents the changes in our Ag
segment COGS for the six months ended February 29, 2020 , compared to the same
period during the prior year.
[[Image Removed: chart-efccf87086d3fb9862da01.jpg]]
The
and farm supply volumes that contributed to
million decreases of COGS, respectively. The decreased volumes resulted
from a combination of challenges experienced in the agricultural commodity
market, including poor weather conditions during fiscal 2019 in the
agricultural region of the United States in which we operate that
contributed to lower crop yields and fewer acres planted/harvested, and
the continued impact of global trade tensions between
and foreign trading partners. These volume decreases were partially offset
by increased volumes associated with agronomy products, including a
million increase of COGS for crop nutrient products due to heightened
spring demand and an increase of COGS that resulted from the
2019, acquisition of the remaining 75% ownership interest in WCD that we
did not previously own, the results of which were not included in the
comparable period of the prior year.
• Increased feed and farm supplies, renewable fuels and grain and oilseed
prices were driven by global market conditions and product mix, and
contributed to
of COGS, respectively. However, the price increases were mostly offset by
market-driven price decreases, including for certain agronomy products,
that contributed to a
All Other Segments
Six Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Nitrogen Production COGS $ 1,534 $ 461 $ 1,073 NM*
Corporate and Other COGS $ (1,455 ) $ (3,053 ) $ 1,598 NM*
*NM - not meaningful
There were no significant changes to COGS in our Nitrogen Production segment or
Corporate and Other during the six months ended February 29, 2020 , compared to
the same period during the prior year.
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Marketing, General and Administrative Expenses
Six Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Marketing, general and administrative
expenses $ 367,901 $ 333,911 $ 33,990 10.2 %
Increased marketing, general and administrative expenses during the six months
ended February 29, 2020 , were primarily due to increased maintenance expenses
associated with our information technology platforms, increased expenses related
to the implementation of our new ERP software and elevated payroll expenses for
employees that joined CHS following our acquisition of the remaining 75%
ownership interest in WCD, which were not included in the comparable period of
the prior year.
Interest Expense
Six Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)Interest expense $ 68,382 $ 80,177$ (11,795 ) (14.7 )% Interest expense decreased during the six months endedFebruary 29, 2020 , as a result of lower interest rates during the six months endedFebruary 29, 2020 , and decreased average outstanding debt balances compared to the same period of the prior year. Other Income Six Months Ended Change February 29, 2020 February 28, 2019 Dollars Percent (Dollars in thousands) Other income $ 24,850 $ 36,897$ (12,047 ) (32.7 )% Other income decreased primarily as a result of non-operating gains recognized during the six months endedFebruary 28, 2019 , that did not reoccur during the six months endedFebruary 29, 2020 .
Equity Income from Investments
Six Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Equity income from investments* $ 84,060 $
108,224
*See Note 5, Investments, of the notes to the condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q for additional information.
Equity income from investments decreased during the six months endedFebruary 29, 2020 , compared to the same period during the prior year, primarily due to lower equity income associated with our equity method investments in CF Nitrogen and Ardent Mills, which together decreased by a total of$17.9 million . The decreased equity method income for these investments was driven by reduced urea and UAN pricing for CF Nitrogen and lower product margins and volumes as a result of customer consolidation for Ardent Mills. 49
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Income Tax Expense
Six Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)Income tax expense $ 8,794 $ 33,668$ (24,874 ) (73.9 )% Decreased income tax expense during the six months endedFebruary 29, 2020 , was primarily the result of decreased taxable income during the six months endedFebruary 29, 2020 , as well as the equity management assumptions used in fiscal 2020. Effective tax rates for the six months endedFebruary 29, 2020 , andFebruary 28, 2019 , were 2.8% and 5.4%, respectively. Federal and state statutory rates applied to nonpatronage business activity were 24.7% and 24.6% for the six months endedFebruary 29, 2020 , andFebruary 28, 2019 , respectively. Income taxes and effective tax rate vary each year based on profitability and nonpatronage business activity during each of the comparable years.
Liquidity and Capital Resources
Summary
In assessing our financial condition, we consider factors such as working capital and internal benchmarking related to our applicable covenants and other financial criteria. We fund our operations primarily through a combination of cash flows from operations supplemented with borrowings under our revolving credit facility. We fund our capital expenditures and growth primarily through cash, operating cash flow and long-term debt financing. OnFebruary 29, 2020 , we had working capital, defined as current assets less current liabilities, of$1.1 billion , and a current ratio, defined as current assets divided by current liabilities, of 1.2 compared to working capital of$1.1 billion and a current ratio of 1.2 onAugust 31, 2019 . OnFebruary 28, 2019 , we had working capital of$1.1 billion and a current ratio of 1.2 compared to working capital of$759.0 million and a current ratio of 1.1 onAugust 31, 2018 . As ofFebruary 29, 2020 , we had cash and cash equivalents of$239.8 million , total equities of$8.6 billion , long-term debt (including current maturities) of$1.8 billion and notes payable of$2.1 billion . Our capital allocation priorities include maintaining the safety and compliance of our operations, paying interest on debt and preferred stock dividends, returning cash to our member-owners in the form of cash patronage and equity redemptions, maintaining the safety and compliance of our operations, and taking advantage of strategic opportunities that benefit our owners. We will continue to consider opportunities to further diversify and enhance our sources and amounts of liquidity. We believe cash generated by operating and investing activities, along with available borrowing capacity under our credit facility, will be sufficient to support our operations for the foreseeable future and we expect to remain in compliance with our loan covenants. Subsequent toFebruary 29, 2020 , there has been substantial volatility in the equity, debt and energy markets related to COVID-19 and the global decrease in demand for refined fuels. We are actively reviewing our liquidity and capital structure. We have increased cash on our balance sheet, reviewed and prioritized capital expenditures and are actively monitoring and mitigating counterparty risk. Fiscal 2020 and 2019 Activity During fiscal 2019, we completed the acquisition of the remaining 75% ownership interest in WCD that we did not previously own by paying$106.7 million , of which net cash flows were reduced by$8.0 million of cash acquired. WCD is now included in our Ag segment and deepens our presence in the agronomy products market. See Note 15, Acquisitions, of the notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
Also during fiscal 2019, we completed planned major maintenance activities,
which contributed to cash outflows of
OnJune 27, 2019 , we extended our existing receivables and loans securitization facility ("Securitization Facility") with certain unaffiliated financial institutions ("Purchasers"). Under the Securitization Facility, we and certain of our subsidiaries ("Originators") sell trade accounts and notes receivable ("Receivables") toCofina Funding, LLC ("Cofina"), a wholly-owned bankruptcy-remote indirect subsidiary of CHS. Cofina in turn transfers the Receivables to the Purchasers, which is accounted for as a secured borrowing. The Securitization Facility is scheduled to terminate onJune 26, 2020 , but may be extended. 50
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The amount available under the Securitization Facility fluctuates over time based on the total amount of eligible Receivables generated during the normal course of business, with maximum availability of$700.0 million . As ofFebruary 29, 2020 , total availability under the Securitization Facility was$485.0 million , all of which had been utilized. OnSeptember 6, 2019 , we renewed our repurchase facility ("Repurchase Facility") related to the Securitization Facility. Under the Repurchase Facility, we can borrow up to$150.0 million , collateralized by a subordinated note issued by Cofina in favor of the Originators and representing a portion of the outstanding balance of the Receivables sold by the Originators to Cofina under the Securitization Facility. As ofFebruary 29, 2020 , andAugust 31, 2019 , the outstanding balance under the Repurchase Facility was$150.0 million .
Cash Flows
The following table presents summarized cash flow data for the six months ended
Six Months Ended Change
February 29, 2020 February 28, 2019 Dollars Percent
(Dollars in thousands)
Net cash provided by (used in) operating
activities $ 301,598 $ (125,251 ) $ 426,849 340.8 %
Net cash used in investing activities (165 ) (98,263 ) 98,098 99.8 %
Net cash (used in) provided by financing
activities (279,547 ) 138,987 (418,534 ) (301.1 )%
Effect of exchange rate changes on cash
and cash equivalents (5,613 ) (2,051 ) (3,562 ) (173.7 )%
Net increase (decrease) in cash and cash
equivalents and restricted cash $ 16,273 $
(86,578 )
Cash flows from operating activities can fluctuate significantly from period to period as a result of various factors, including seasonality and timing differences associated with purchases, sales, taxes and other business decisions. The$426.8 million increase of cash provided by operating activities reflects a combination of working capital decreases, primarily associated with decreased receivables, and increased accounts payable and accruals, which was partially offset by other changes, including decreased net income.
The
The$418.5 million decrease in cash provided by financing activities primarily reflects increased net cash outflows associated with our notes payable and long-term debt facilities and a$15.0 million increase in cash patronage paid, which was partially offset by decreased equity redemption payments of$22.0 million .
Future Uses of Cash
We expect to utilize cash and cash equivalents, along with cash generated by operating activities to fund capital expenditures, major repairs, debt and interest payments, preferred stock dividends, patronage, equity redemptions and business continuity efforts amid the COVID-19 outbreak and pandemic. The following is a summary of our primary cash requirements for fiscal 2020:
• Capital expenditures. We expect total capital expenditures for fiscal 2020
to be approximately $503.8 million , compared to capital expenditures of
$443.2 million in fiscal 2019. During the six months ended February 29,
2020 , we acquired property, plant and equipment of $225.0 million .
• Debt and interest. We expect to repay approximately $39.2 million oflong-term debt and finance lease obligations and incur interest payments
related to long-term debt of approximately
2020. During the six months ended
of scheduled long-term maturities.
• Preferred stock dividends. We had approximately
stock outstanding at
preferred stock of approximately $168.7 million during fiscal 2020.
• Patronage. Our Board of Directors authorized approximately
of our fiscal 2019 patronage sourced earnings to be paid to our member
owners during fiscal 2020.
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• Equity redemptions. Our Board of Directors authorized and we expect total
redemptions of approximately
2020 in the form of redemptions of qualified and nonqualified equity owned
by individual producer members and association members. During the six
months ended
Future Sources of Cash We fund our current operations primarily through a combination of cash flows from operations and committed and uncommitted revolving credit facility, including our Securitization Facility and Repurchase Facility. We believe these sources will provide adequate liquidity to meet our working capital needs. We fund certain of our long-term capital needs, primarily those related to acquisitions of property, plant and equipment, with cash flows from operations and by issuing privately placed long-term debt and term loans. In addition, our wholly-owned subsidiary,CHS Capital , makes loans to member cooperatives, businesses and individual producers of agricultural products included in our cash flows from investing activities, and has financing sources as detailed below in CHS Capital Financing.
Working Capital Financing
We finance our working capital needs through committed and uncommitted lines of
credit with domestic and international banks. We believe our current cash
balances and our available capacity on our committed lines of credit will
provide adequate liquidity to meet our working capital needs. The following
table summarizes our primary lines of credit as of
Borrowings
Facilities Maturities Total Capacity Outstanding Interest Rates
(Fiscal Year) (Dollars in thousands)
Committed five-year LIBOR or Base Rate +
unsecured facility 2024 $ 2,750,000 $ 300,000 0.00% to 1.45%
Uncommitted bilateral LIBOR or Base Rate +
facilities 2020 630,000 530,000 0.00% to 1.05%
Our primary line of credit is a five-year unsecured revolving credit facility
with a syndicate of domestic and international banks. The credit facility
provides a committed amount of
In addition to our uncommitted bilateral facilities above, our wholly-owned subsidiaries CHS Europe S.a.r.l. and CHS Agronegocio Industria e Comercio Ltda had uncommitted lines of credit with$389.7 million outstanding as ofFebruary 29, 2020 . In addition, our other international subsidiaries had lines of credit outstanding of$147.2 million as ofFebruary 29, 2020 , of which$38.0 million was collateralized. Long-term Debt Financing
The following table presents summarized long-term debt data (including current
maturities) as of
February 29, August 31,
2020 2019
(Dollars in thousands)
Private placement debt $ 1,362,649 $ 1,379,840
Bank financing 366,000 366,000
Finance lease obligations 28,344 28,239
Other notes and contract payable 5,514 18,601
Deferred financing costs (3,285 ) (3,569 )
$ 1,759,222 $ 1,789,111
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Table of Contents CHS Capital Financing
For a description of the Securitization Facility, see above in Fiscal 2020 and 2019 Activity.
CHS Capital sells loan commitments it has originated to ProPartners Financial on a recourse basis. Total outstanding commitments under the program were$150.0 million as ofFebruary 29, 2020 , of which$48.3 million was borrowed with an interest rate of 2.89%.CHS Capital borrows funds under short-term notes issued as part of a surplus funds program. Borrowings under this program are unsecured and bear interest at variable rates ranging from 0.10% to 1.4% as ofFebruary 29, 2020 , and are due upon demand. Borrowings under these notes totaled$50.0 million as ofFebruary 29, 2020 .
On
Covenants
Our long-term debt is mostly unsecured; however, restrictive covenants under various debt agreements require maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with all debt covenants and restrictions as ofFebruary 29, 2020 . Based on our current 2020 projections, we expect continued covenant compliance. All outstanding private placement notes conform to financial covenants applicable to those of our amended and restated five-year unsecured revolving credit facility. The notes provide that if our ratio of consolidated funded debt to consolidated cash flows is greater than 3.0 to 1.0, the interest rate on all outstanding notes will be increased by 0.25% until the ratio becomes 3.0 or less. During the three months endedFebruary 29, 2020 , andFebruary 28, 2019 , our ratio of funded debt to consolidated cash flows remained below 3.0 to 1.0.
Patronage and Equity Redemptions
In accordance with our bylaws and upon approval by our Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each fiscal year and are based on amounts using financial statement earnings. Patronage earnings for the year endedAugust 31, 2019 , were distributed during the six months endedFebruary 29, 2020 , including the$90.0 million cash portion of this distribution. During the six months endedFebruary 28, 2019 , we distributed cash patronage of$75.0 million . In accordance with authorization from our Board of Directors, we expect total cash redemptions related to the year endedAugust 31, 2019 , that will be distributed in fiscal 2020, to be approximately$90.0 million and to include redemptions of qualified and nonqualified equity owned by individual producer members and associations. During the six months endedFebruary 29, 2020 ,$8.8 million of that amount was redeemed in cash, compared to$30.8 million redeemed in cash during the six months endedFebruary 28, 2019 . 53
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Table of Contents Preferred Stock Dividends paid on our preferred stock during the six months endedFebruary 29, 2020 , andFebruary 28, 2019 , were$84.3 million . The following is a summary of our outstanding preferred stock as ofFebruary 29, 2020 , all shares of which are listed on the Global Select Market of Nasdaq: Dividend Redeemable Shares Net Proceeds Dividend Rate Payment Beginning Nasdaq Symbol Issuance Date Outstanding
Redemption Value (a) (b) (c) Frequency (d)
(Dollars in millions)
8% Cumulative
Redeemable CHSCP (e) 12,272,003 $ 306.8 $ 311.2 8.00 % Quarterly 7/18/2023
Class B
Cumulative
Redeemable,
Series 1 CHSCO (f) 21,459,066 $ 536.5 $ 569.3 7.875 % Quarterly 9/26/2023
Class B Reset
Rate Cumulative
Redeemable,
Series 2 CHSCN 3/11/2014 16,800,000 $ 420.0 $ 406.2 7.10 % Quarterly 3/31/2024
Class B Reset
Rate Cumulative
Redeemable,
Series 3 CHSCM 9/15/2014 19,700,000 $ 492.5 $ 476.7 6.75 % Quarterly 9/30/2024
Class B
Cumulative
Redeemable,
Series 4 CHSCL 1/21/2015 20,700,000 $ 517.5 $ 501.0 7.50 % Quarterly 1/21/2025
(a) Includes patron equities redeemed with preferred stock.
(b) Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2,
accumulates dividends at a rate of 7.10% per year until March 31, 2024 , and then
at a rate equal to the three-month LIBOR plus 4.298%, not to exceed 8.00% per
annum, subsequent to March 31, 2024 .
(c) Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3,
accumulates dividends at a rate of 6.75% per year until September 30, 2024 , and
then at a rate equal to the three-month LIBOR plus 4.155%, not to exceed 8.00%
per annum, subsequent to September 30, 2024 .
(d) Preferred stock is redeemable for cash at our option, in whole or in part,
at a per share price equal to the per share liquidation preference of $25.00 per
share, plus all dividends accumulated and unpaid on that share to and including
the date of redemption, beginning on the dates set forth in this column.
(e) The 8% Cumulative Redeemable Preferred Stock was issued at various times
from 2003 through 2010.
(f) Shares of Class B Cumulative Redeemable Preferred Stock, Series 1, were
issued on September 26, 2013 ; August 25, 2014 ; March 31, 2016 ; and March 30,
2017 .
Off-Balance Sheet Financing Arrangements
Guarantees
We are a guarantor for lines of credit and performance obligations of related companies. As ofFebruary 29, 2020 , our bank covenants allowed maximum guarantees of$1.0 billion , of which$207.0 million were outstanding. We have collateral for a portion of these contingent obligations. We have not recorded a liability related to the contingent obligations as we do not expect to pay out any cash related to them, and the fair values are considered immaterial. The underlying loans to the counterparties for which we provide guarantees were current as ofFebruary 29, 2020 .
Debt
We have no material off-balance sheet debt.
Loan Participations
We engaged in off-balance sheet arrangements through certain loan participation agreements. Refer to further details about these arrangements in Note 3, Receivables, of the notes to the consolidated financial statements in our Annual Report on Form 10-K for the year endedAugust 31, 2019 . 54
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Table of Contents Contractual Obligations Our contractual obligations presented in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedAugust 31, 2019 , have not materially changed during the six months endedFebruary 29, 2020 .
Critical Accounting Policies
Other than as described within the Significant Accounting Policies section of Note 1, Basis of Presentation and Significant Accounting Policies, to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, our critical accounting policies as presented in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedAugust 31, 2019 , have not materially changed during the six months endedFebruary 29, 2020 .
Effect of Inflation and Foreign Currency Transactions
We believe that inflation and foreign currency fluctuations have not had a material effect on our operations, since we conduct an insignificant portion of our business in foreign currencies.
Recent Accounting Pronouncements
See Note 1, Basis of Presentation and Significant Accounting Policies, to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements that apply to us.
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