MKC 2018 Annual Report

2018 MKC ANNUAL REPORT

SHARED GROWTH. SHARED SUCCESS.

LEADERSHIP LETTER

DEAR MEMBER-OWNERS, CUSTOMERS, VENDORS, EMPLOYEES AND COMMUNITIES.

W

hen we initially adopted the tagline ”Shared growth. Shared success.” we had little understanding as to what that mantra would lead us to accomplish over time. We had little insight of what it would do for the success of your cooperative and the commitment of the employees making an effort every day to help our owners achieve personal success.

The shared success we intentionally created this year was for our member-owners, employees, rural communities and strategic partners. This year was one of those classic years where the cooperative business model, and your participation in it, paid significant dividends. All of the projects we have continued to work on and the plans we have executed over the past number of years beared fruit for your cooperative in a year we could benefit memberowners through the sharing of patronage dividends. In a time that has seen some less than stellar net farm income driven mostly by low commodity prices, your co-op built the facilities and balance sheet to capture what the market was offering. Thanks to your continued support and advocacy, we have continued to experience growth in virtually every area of our business year after year. We also continued to grow in membership and again added 220 members this year.

Our Board of Director’s dedication to the success and sustainability of your cooperative means we continually evaluate the entirety of our business and make changes when and where necessary. Just like on the farm, the business environment continues to evolve

making changes mandatory if we are intent on sharing success. You simply don’t farm and ranch as you used to in years gone by. We are convinced we can no longer make excuses for lazy money or money not working for us. We are committed to taking those lazy dollars, and when possible, reinvesting them into facilities, personnel or services that will be contributors to farmers success in the future.

Like any organization or farm, your company has ongoing decisions to make. What to keep, what to let go of, where to allocate our time, energy and money. We clearly understand these are choices that have long-lasting implications. Our focus continues to be futurefacing and making investments that will provide us with both the capabilities to keep up with the farmer of the future and having the market access required to capture the best value of the crops you raise.

Living our tagline is what we do every day. It defines our culture. We can and are flexible in how we go about the attainment of our goals.

The market changes rapidly, however, we must remain stubborn on the achievement of our strategic intent. Our intention is to provide a cooperative that is relevant in the marketplace and valuable to your operation, today and going forward.

Sincerely,

Allan Wegner Chairman Board of Directors

Dave Christiansen President and Chief Executive Officer

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DISTRICT 3

DISTRICT 1

DISTRICT 2 DAVID MILLS Secretary

JASON GAEDDERT

AT-LARGE

KEITH BECKER

C.J. BLEW

DUANE JOHNSON

ALLAN WEGNER Chairman

MYRON VOTH Vice Chairman

HAL MAYER

RANDY ELLWOOD

KENNY CARLTON

BEN SCHRAG

SARA HASTY

ASSOCIATE

OFFICERS AND DIRECTORS

Elected by their peers, the Board of Directors are member-owners themselves. These individuals collectively leverage their expertise to provide important direction, and ensure the safety and soundness of the finances of the cooperative. Board members are farmers and ranchers themselves and have a deep understanding of the challenges their fellow customer-owners face each day.

The Board of Directors consists of 12 members. Three directors represent a district, six directors are at-large, and three directors are appointed.

Detailed biographical information on the MKC Board of Directors is available at www.mkcoop.com.

DAVE CHRISTIANSEN President & CEO

FINANCIAL REVIEW

We are pleased to report to our memberowners our financial performance for our 2018 fiscal year was very strong.

We can summarize our strong financial performance in three measures; net earnings, net fixed assets and working capital.

Net earnings measure the level of success or profitability achieved, net fixed assets measure MKC’s commitment to growing and upgrading the infrastructure of the cooperative for future generations, DANNY POSCH and working capital measures the strength Executive Vice President and stability of the cooperatives’ balance & Chief Financial Officer sheet and overall financial position.

Our net earnings for the year were $18.2 million, our strongest performance in the history of the cooperative. Wheat carry opportunities in the market favorably impacted the financial performance of our grain business unit. Unfortunately, not all news was positive this past fiscal year. The narrowing or reduction of agronomy margins during this past fiscal year negatively impacted the financial performance of the agronomy business unit. Although our sales increased this past year, our overall agronomy business unit profits decreased because of very competitive markets. Our energy business unit was negatively impacted by the significant reduction in regional patronage dividends from CHS, our partner in energy. Our energy business unit relies heavily on regional patronage revenues received to achieve profitability.

MKC’s net fixed assets of the organization have grown from $24 million to $142 million in the past ten years. We are often reminded that the cooperative has no end date and that we must provide future generations with a company that can serve them as well as it has served previous generations. Our commitment to future generations is demonstrated in the growth of our net fixed assets.

At fiscal year-end, our cooperative has a very strong working capital position of nearly $50 million, up $36 million from 2009.

A strong working capital position is essential to our organization because it allows the cooperative to execute its’ strategic goals, strengthens relationships with creditors and lenders, and allows the cooperative to maintain adequate lines of credit.

As a member-owner, you have experienced the advantages of being a member of a cooperative. As a business, your cooperative must first be prudent to ensure our profitability and overall financial position. And as a cooperative, we share our successes and earnings with our member-owners. Our total patronage allocation this past fiscal year was $7,718,766 and includes an allocation of qualified patronage of $3,718,766 – 100% payable in cash, as well as an allocation of $4,000,000 in non-qualified patronage. In addition to the patronage allocation, we will also be passing through $3.16 million in the Section 199 deduction through to our member-owners.

We are pleased to share our success with our member-owners, as well as our commitment to be a financially sound company that adds value for our member-owners today, and for future generations to follow.

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CONSOLIDATED BALANCE SHEETS

Current Assets

2018

2017

$ 1,551,582

$ 1,425,393

4,171,346

3,967,215

Patrons and customers

8,643,241

10,269,102

Allowance for doubtful accounts

(300,000)

(325,000)

Grain shipments

2,456,834

5,804,029

Grain storage receivable

3,862,014

4,086,175

Commodity margin accounts

12,766,057

15,653,363

Other

11,367,500

14,092,566

Prepaid inventories

22,344,067

12,916,004

Inventories on hand

315,513,716

235,213,096

382,376,357

303,101,943

Equity in other cooperatives

37,883,221

35,465,612

Investments in affiliates

26,811,820

22,509,937

1,786,517

1,564,533

66,481,558

59,540,082

Cost

118,637,560

117,017,268

Accumulated depreciation

(48,330,161)

(44,914,056)

70,307,399

72,103,212

$ 519,165,314

$ 434,745,237

Cash and cash equivalents Marketable securities, available for sale Accounts and notes receivable - trade

Total Current Assets

Other Assets Other

Total Other Assets

Property, Plant and Equipment

Net Property, Plant and Equipment

Total Assets

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2018 MKC ANNUAL REPORT

February 28, 2018 and 2017

Current Liabilities Accounts payable and accrued expenses Customer prepaid sales contracts Revolving bank notes

2018

2017

$ 59,851,512

$ 51,815,394

11,765,496

11,227,640

246,574,483

193,077,368

Patron demand certificates

4,703,516

3,301,064

Current maturities of long-term debt

5,167,475

6,137,276

Patronage dividends payable

3,718,766

1,252,329

613,433

414,711

332,394,681

267,225,782

Income taxes payable

Total Current Liabilities

Long-term Liabilities, excluding current maturities Non-revolving bank notes

40,111,640

43,118,220

Patron certificates of indebtedness

6,775,662

5,581,702

Capital lease obligations

2,147,177

1,011,584

Deferred income taxes

68,183

1,335,331

2,516,013

2,683,838

51,618,675

53,730,675

11,989,850

11,839,250

2,726,800

2,731,650

Allocated Patronage

31,671,012

28,748,676

Contributed capital

9,385,612

9,387,567

Retained earnings

57,980,085

47,706,765

Non-controlling interests

21,271,928

13,439,917

126,671

(65,045)

135,151,958

113,788,780

$ 519,165,314

$ 434,745,237

Other

Total Long-term Liabilities

Member’s Equity Common stock Participating stock

Accumulated other comprehensive income (loss)

Total Members’ Equity Total Liabilities and Members’ Equity

Financial Statement Presentation The statements presented within do not contain all necessary disclosures to be considered in conformity with accounting principles generally accepted in the United States of America. A report containing the required disclosures is on file at the general office.

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CONSOLIDATED STATEMENTS OF OPERATIONS Sales

2018

2017

$ 296,695,745

$ 315,451,202

112,253,981

110,878,296

408,949,726

426,329,498

234,322,178

284,958,869

96,990,102

95,390,694

331,312,280

380,349,563

77,637,446

45,979,935

Grain storage and handling services

9,126,506

11,098,937

Limited liability companies

6,273,572

3,429,891

Agronomy services

Grain Farm supply

Total Sales

Cost of Sales Grain Farm supply

Total Cost of Sales Gross Margins of Sales

Other Operating Income 8,347,592

7,631,560

Interest income

270,063

295,282

Gain on disposal of property, plant and equipment

768,999

630,820

2,321,834

2,123,429

27,108,566

25,209,919

104,746,012

71,189,854

Personnel costs

27,046,166

24,556,014

Fixed expenses

17,122,131

13,226,671

Other operating expenses

22,930,610

21,467,211

Total Operating Expenses

67,098,907

59,249,896

Earnings from Local Operations

37,647,105

11,939,958

Miscellaneous

Total Other Operating Income Gross Income from Local Operations

Operating Expenses

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2018 MKC ANNUAL REPORT

For Years Ended February 28, 2018 and 2017

Other Earnings

2018

2017

4,819,362

4,025,338

249,854

275,217

5,069,216

4,300,555

42,716,321

16,240,513

Current income taxes

(285,214)

(450,128)

Deferred income taxes

1,298,863

287,324

1,013,649

(162,804)

43,729,970

16,077,709

(25,709,323)

(10,620,480)

18,020,647

5,457,229

20,161

135,147

Unrealized gain on fair value of interest rate swaps

171,555

257,602

Total Other Comprehensive Income

191,716

392,749

$ 18,212,363

$ 5,849,978

Patronage dividends

$ 7,718,766

$ 3,130,822

Retained earnings

10,301,881

2,326,407

191,716

392,749

$ 18,212,363

$ 5,849,978

Patronage dividends Investment income

Total Other Earnings Net Earnings Before Income Taxes

Provision for Income Taxes

Total Provisions for Income Taxes Net Earnings Before Non-Controlling Interests

Non-Controlling Interests Net Earnings Attributable to Parent Before Other Comprehensive Income

Other Comprehensive Income Unrealized holding gain of marketable securities

Total Comprehensive Income

Distribution of Comprehensive Income Other comprehensive income

Total

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FINANCIAL PERFORMANCE

Total Assets

Net Earnings

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2018 MKC ANNUAL REPORT

Historical total assets of the company have grown to $519,165,314, primarily because of the grain position (inventory) held by the company.

Net earnings for FY18 were $18,212,363. Net earnings are important to the organization because it allows the company to attract talented employees, redeem past patronage, retire debt and reinvest in infrastructure.

FINANCIAL PERFORMANCE AND COMMUNITY INVESTMENT

Working Capital

Community Investment

MKC has grown its working capital position to $49,981,676.

Working capital is a good indicator of a company’s ability to meet upcoming debt obligation.

MKC provides benefits to 91 communities in the form of personnel costs, local taxes and other expenses. These payments have a significant impact on the communities and help support the businesses and services we utilize.

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PATRONAGE ALLOCATION AND CASH DISTRIBUTION TO MEMBERS

2018 Patronage Allocation

Rate

Grain

20.00 cents/bushel

Agronomy - Seed - Crop Protection

1.34% or $5/ton on fertilizer

Petroleum - Lubricants

0.00%

-

Feed - Merchandise

6.86%

677,842

Total Patronage Allocation Qualified Patronage - 100% payable in cash Non-qualified Patronage

Total Patronage Allocation

Cash Distribution to Members

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2018 MKC ANNUAL REPORT

Amount $ 6,233,216 807,708

$ 7,718,766 $ 3,718,766 4,000,000

$ 7,718,766

Cash distributions to members totaled $4,688,995 for the current fiscal year. Cash distributions include equity redemptions as well as the cash portion of the current year patronage allocation.

GROWTH IN FIXED ASSETS

Growth in Local Net Fixed Assets

Local net fixed assets reflect the ending balances of investments in property, plant and equipment of the company.

Growth in Overall Net Fixed Assets

Net overall fixed assets reflect the ending balances of investments in property, plant and equipment of MKC and its affiliates – Producer Ag and Countryside Feed.

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SHARED G SHARED S “Shared growth. Shared success.� is more than just a tagline at MKC. Our value is based upon sharing success with our member-owners, employees, strategic partners and rural communities.

We believe, as the agricultural industry continues to change, the interconnectedness between our member-owners, employees, strategic partners and rural communities, is one thing that very few companies can replicate. There is beauty in the simplicity of our tagline and there is challenge in its execution.

The sharing of growth and success is the reason we have been able to weather storms and forge bold strategies in the past. It is the reason we are optimistic about the future. It is by definition, what a great cooperative should be.

Member-owners 14

2018 MKC ANNUAL REPORT

EMPLOYEES

GROWTH. SUCCESS.

RURAL COMMUNITIES

STRATEGIC PARTNERS WWW.MKCOOP.COM

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Member owners MKC exists for our member-owners.

We’re proud to be a cooperative collectively owned by nearly 8,300 member-owners.

+220 new

members

The network of MKC member-owners depicted below continues to grow year after year.

Network of MKC member-owners

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2018 MKC ANNUAL REPORT

EMPLOYEES LIVING IN 91 different communities

EMPLOYEES

325+

More than 325 employees are part of the shared growth and success of MKC. Our strategy continues to focus on hiring the best talent to build upon our high-performing culture.

We will continue to invest in our existing talent to deepen and extend their knowledge and professional development. From the continuing expansion of our student internship program, to providing specialists in all areas of our business, our team is vital to the success of the cooperative.

At MKC, we are committed to keeping our rural communities strong by giving back with time, talent and resources.

We’re proud to play a role in the following programs: • 4-H Leadership Development • Kansas FFA Foundation and Local FFA Chapters • Community Events and Festivals • Ag in the Classroom • City and County Emergency Services • Food Banks • Young Business Professional Programs • Angel Tree Program • Adopt-a-Highway Program • School Programs • American Red Cross Blood Drives • MKC Scholarship Program

INVESTED More than $500,000 over the past 5 years

CORE DONATION AREAS LEADERSHIP DEVELOPMENT COMMUNITY SAFETY ALLEVIATING HUNGER AG EDUCATION

Rural

COMMUNITIES 18

2018 MKC ANNUAL REPORT

STRATEGIC PARTNERS

Innovative programs and strategic partnerships are key to the cooperative’s success. We are always looking for new ways to create more value for our members, both in the way we do business and with the products we offer.

At MKC, we are actively looking for ways to offer innovative new programs and establish strategic partnerships to set our cooperative up for a successful future of growth and success.

Some of our most recent programs and projects we are most proud of: • Sumner County Rail Terminal and Canton Rail Terminal with Producer Ag, LLC. • Named the recipient of the Precision Impact Award by AgPro magazine at the 2017 Ag Retailers Association (ARA) Conference and Expo • Input Financing through Cooperative Finance Association • Emerging Producer Program Strategic partnerships play a key role in our vision. These partnerships include: • Team Marketing Alliance • Producer Ag • Countryside Feed • FarmKan • A+ Aviation

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307 W. Cole Street / Moundridge, KS 67107 www.mkcoop.com