MKC 2017 Annual Report

2017 annual report

THIS IS YOUR

Cooperative

MKC exists for you, our member-owners.

Offering a complete line of supplies and services specializing in grain, agronomy, energy, feed and risk management.

We’re proud to be your cooperative.

A trusted partner with hard-working employees, state-of-the-art facilities and forward-thinking leadership - grounded by more than 50 years of unwavering commitment to farmers, family and community.

More than 4,526 active producer memberowners, 2,679 equity holders, 324 full-time and part-time employees, 73 seasonal employees and 12 interns are a part of this cooperative.

MKC is governed by a 12-member board of active producers. Your cooperative is locally owned and farmer-governed since 1965.

leadership letter DEAR STAKEHOLDERS, Balance, it truly is a challenge today in about every aspect of life. Without a doubt, the speed of change today, the adoption, expectation of new ways of doing things or just the pace we run at today has a tremendous impact on the balance in our lives.

At MKC, being a company over a half a century old, we are steeped in history that has developed a culture that is both comforting and recognizable. At the same time, we find ourselves operating in a world that has companies like Amazon and Uber setting the bar for customer expectations.

No company has the luxury of getting comfortable anymore.

Today, more than ever, we are challenged with balancing the needs of the future farmers with those in the twilight of their farming or ranching career. Especially the one-third of farmers or ranchers who have no succession plan.

That group, who will make the decision in the next five years or so on what they will do next have little expectation of change. In fact, that group would prefer things to stay just the way they are, or were.

At the other end of the scale is a younger, progressive group of growers, whose expectations when it comes to technology, convenience, choice, speed is beyond the scope of imagination. This dynamic, faced by organizations with history, creates one more challenge to strike a balance if we remain tethered to the past.

Like any organization or farm, which has no retirement date, your company has ongoing decisions to make. What to keep, what to let go of, where to allocate our time, energy and money. These are choices that have long lasting implications.

Our focus continues to be future-facing and making investments that will provide us both the capabilities to keep up with the farmer of the future and have the market access that will be required to capture the best value of the crops you raise.

Maintaining balance also means appreciating the past and recognizing all that has brought us to where we are. We must have a relentless focus on what farmers of the future and our ultimate customer, the consumer, will need to be successful. And honestly, we probably can’t think big enough.

We’re learning to think different, not necessarily just work harder.

We should all try to peer around corners and take bold actions that inspire results with

the understanding we may be misunderstood in the short-term but continue to have a long-term focus. The good thing about our business is the core customer values haven’t changed through the years. Customers always want better, faster service, a great customer experience and lower prices. These are all things MKC focuses on daily.

Balancing is what we do every day. We can and are flexible in how we go about the attainment of our goals. The market changes rapidly. However, we must remain diligent on the achievement of our vision, mission and strategic intent. Our intention of providing a cooperative to you that is relevant in the marketplace and valuable to your operation is why we do the balancing act we do today.

Fortunately, your cooperative had another successful year and will continue to invest for your future. Thank you for your support.

Sincerely,

CJ Blew Chairman Board of Directors

Dave Christiansen President and Chief Executive Officer

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OFFICERS AND

DAVID MILLS Secretary

JASON GAEDDERT

AT-LARGE

KEITH BECKER

DISTRICT 3

DISTRICT 1

DISTRICT 2

Directors

C.J. BLEW

DUANE JOHNSON

Chairman

MYRON VOTH

Vice Chairman

HAL MAYER

ALLAN WEGNER

DAVE CHRISTIANSEN

RANDY ELLWOOD

Cooperative leadership changes through the years, but a strong board of directors needs to understand our cooperative has no retirement date so it is critical we govern this organization into perpetuity.�

President & CEO

ASSOCIATE

-C.J. Blew

MKC Board of Director Chairman , and farmer and rancher in Reno and Barber County

KENNY CARLTON

BEN SCHRAG

SARAH HASTY

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

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2017 MKC ANNUAL REPORT

FISCAL YEAR 2017

NEW MEMBERS

MKC has added 1,294 new members over the past five years. This growth in members is in addition to new members added through mergers and acquisitions.

300

276

275

251

250 217 200 161 150 114 100

50

0 2012

2013

324 employees living in

96 different

communities

2014

2015

2016

DETAILED FINANCIAL REPORTS FOR 2017 CAN BE FOUND ON PAGES 6-13.

By the Numbers

2017

OVER THE PAST FIVE YEARS, MKC HAS DONATED MORE THAN $500,000 TO OUR COMMUNITIES TO SUPPORT LEADERSHIP DEVELOPMENT, AG EDUCATION , COMMUNITY SAFETY, ALLEVIATING HUNGER AND MORE.

Revenue byUNIT Business Unit GROSS REVENUE Gross

BY BUSINESS

The business units of grain, agronomy, energy and feed generated $67,143,175 in gross revenues in FY17.

Agronomy, $17,776,240

Energy, $3,523,403

Feed, $1,886,550

Grain, $43,956,982

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CONSOLIDATED

Balance Sheets CURRENT ASSETS

2017

2016

$ 1,425,393

$ 3,477,482

3,967,215

2,834,554

10,269,102

10,306,281

Allowance for doubtful accounts

(325,000)

(100,000)

Grain shipments

5,804,029

3,459,949

Grain storage receivable

4,086,175

4,395,512

Commodity margin accounts

15,653,363

8,907,664

Other

14,092,566

13,238,873

Prepaid inventories

12,916,004

14,021,875

Inventories on hand

235,213,096

164,625,251

303,101,943

225,167,441

-

44,197

Equity in other cooperatives

35,465,612

35,219,620

Investments in affiliates

22,509,937

15,136,911

1,564,533

1,462,434

59,540,082

51,863,162

Cost

117,017,268

111,721,154

Accumulated depreciation

(44,914,056)

(41,531,806)

72,103,212

70,189,348

$ 434,745,237

$ 347,219,951

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

TOTAL CURRENT ASSETS OTHER ASSETS Notes receivable, net of current portion

Other

TOTAL OTHER ASSETS PROPERTY, PLANT AND EQUIPMENT NET PROPERTY, PLANT AND EQUIPMENT TOTAL ASSETS

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2017 MKC ANNUAL REPORT

For Years Ended February 28, 2017 and February 29, 2016

CURRENT LIABILITIES Accounts payable and accrued expenses Customer prepaid sales contracts Revolving bank notes

2017

2016

$ 51,815,394

$ 43,386,950

11,227,640

9,841,038

193,077,368

125,154,185

Patron demand certificates

3,301,064

3,531,096

Current maturities of long-term debt

6,137,276

5,172,651

Patronage dividends payable

1,252,329

2,342,642

414,711

721,153

267,225,782

190,149,715

43,118,220

38,514,048

Patron certificates of indebtedness

5,581,702

4,858,804

Capital lease obligations

1,011,584

1,292,360

Deferred income taxes

1,335,331

1,360,842

Other

2,683,838

2,557,645

53,730,675

48,583,699

11,839,250

5,321,600

2,731,650

1,669,900

28,748,676

34,978,318

Contributed capital

9,387,567

9,352,344

Retained earnings

47,706,765

45,441,179

Non-controlling interests

13,439,917

12,180,990

(65,045)

(457,794)

113,788,780

108,486,537

$ 434,745,237

$ 347,219,951

Income taxes payable

TOTAL CURRENT LIABILITIES LONG-TERM LIABILITIES, excluding current maturities Non-revolving bank notes

TOTAL LONG-TERM LIABILITIES MEMBERS’ EQUITY Common stock Participating stock Qualified patronage allocations

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 STATEMENT OF

Operations SALES

2017

2016

$ 315,451,202

$ 335,571,232

110,878,296

123,065,168

426,329,498

458,636,400

284,958,869

316,433,807

95,390,694

106,655,790

380,349,563

423,089,597

45,979,935

35,546,803

11,098,937

12,383,810

Limited liability companies

3,429,891

3,089,786

Agronomy services

Grain Farm supply

TOTAL SALES COST OF SALES Grain Farm supply

TOTAL COST OF SALES GROSS MARGINS OF SALES OTHER OPERATING INCOME Grain storage and handling services

7,631,560

7,687,359

Interest income

295,282

272,927

Gain on disposal of property, plant and equipment

630,820

1,421,568

2,123,429

1,943,963

TOTAL OTHER OPERATING INCOME

25,209,919

26,799,413

GROSS INCOME FROM LOCAL OPERATIONS

71,189,854

62,346,216

Personnel costs

24,556,014

23,417,977

Fixed expenses

13,226,671

11,541,586

Other operating expenses

21,467,211

19,680,501

TOTAL OPERATING EXPENSES

59,249,896

54,640,064

EARNINGS FROM LOCAL OPERATIONS

11,939,958

7,706,152

Miscellaneous

OPERATING EXPENSES

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2017 MKC ANNUAL REPORT

For Years Ended February 28, 2017 and February 29, 2016

OTHER EARNINGS

2017

2016

Patronage dividends

4,025,338

6,069,638

275,217

47,000

TOTAL OTHER EARNINGS

4,300,555

6,116,638

NET EARNINGS BEFORE INCOME TAXES

16,240,513

13,822,790

Current income taxes

(450,128)

(690,761)

Deferred income taxes

287,324

654,885

(162,804)

(35,876)

16,077,709

13,786,914

(10,620,480)

(5,669,914)

5,457,229

8,117,000

Unrealized holding gain (loss) of marketable securities

135,147

(69,509)

Unrealized loss on fair value of interest rate swap

257,602

(102,895)

392,749

(172,404)

$ 5,849,978

$ 7,944,596

$ 3,130,822

$ 5,856,606

2,326,407

2,260,394

392,749

(172,404)

$ 5,849,978

$ 7,944,596

Investment income

PROVISION FOR INCOME TAXES TOTAL PROVISION FOR INCOME TAXES NET EARNINGS BEFORE NON-CONTROLLING INTERESTS

NON-CONTROLLING INTERESTS NET EARNINGS ATTRIBUTABLE TO PARENT BEFORE OTHER COMPREHENSIVE INCOME

OTHER COMPREHENSIVE INCOME (LOSS) TOTAL OTHER COMPREHENSIVE INCOME (LOSS) TOTAL COMPREHENSIVE INCOME (LOSS) DISTRIBUTION OF COMPREHENSIVE INCOME Patronage dividends Retained earnings Other comprehensive loss

TOTAL

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There is no doubt there were far more challenges this past year than we have seen in the previous five years, but MKC continues to position itself and its balance sheet for the long haul. We are here to stay.�

HISTORICAL

Data

-Danny Posch MKC Senior Vice President and CFO

HISTORICAL TOTAL ASSETS

Historical total assets of the company have grown to $434,745,237, primarily because of the grain position (inventory) held by the company.

$500,000,000 $434,745,237

$450,000,000 $400,000,000 $350,000,000

$346,645,094

$347,219,951

2015

2016

$301,951,776

$300,000,000 $250,000,000

$222,184,457

$209,411,086

$227,504,568

$206,170,887

$200,000,000 $155,832,307

$150,000,000

$125,441,587

$100,000,000 $50,000,000 $0 2008

2009

2010

2011

HISTORICAL NET EARNINGS

2012

2013

2014

2017

Net earnings for FY17 were $5,849,978. 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.

$16,000,000 $14,073,776 $14,000,000

$13,342,854

$12,000,000

$10,837,662 $9,800,584

$10,000,000 $8,219,209

$9,111,101

$8,871,405

$7,944,596

$8,000,000

$5,849,978

$6,000,000 $4,000,000

$3,674,858

$2,000,000 $0

2008

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2017 MKC ANNUAL REPORT

2009

2010

2011

2012

2013

2014

2015

2016

2017

FINANCIAL PERFORMANCE AND

Community Investment WORKING CAPITAL

MKC has grown its working capital position to $38,876,161. Working capital is a good indicator of a company’s ability to meet upcoming debt obligation.

$40,000,000 $35,000,000

$35,102,439

$35,017,726

2015

2016

$35,876,161

$28,628,956

$30,000,000 $26,749,878 $25,000,000

$22,414,581

$25,430,215

$23,193,813

$20,000,000 $13,672,912

$15,000,000 $8,978,707

$10,000,000 $5,000,000 $0

2008

2009

2010

2011

COMMUNITY INVESTMENT

2012

2013

2014

2017

MKC provides benefits to more than 96 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.

$40,000,000

$37,635,917 $35,335,447

$35,000,000

$32,862,108

$30,000,000 $25,000,000

$25,279,674

$24,787,234

2012

2013

$23,131,627 $21,095,385

$21,222,587

2009

2010

$26,305,850

$20,000,000 $15,000,000

$14,403,177

$10,000,000 $5,000,000 $0 2008

2011

2014

2015

2016

2017

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PATRONAGE DISTRIBUTION AND

Equity Redemption 2017 PATRONAGE ALLOCATION

RATE

AMOUNT

Grain

4.00 cents/bushel

Agronomy - Seed - Crop Protection

2.12% or $9/ton on fertilizer

Petroleum - Lubricants

.64% or 1.5 cents/gallon on fuel

Feed - Merchandise

2.29%

$ 1,471,670 1,308,652 97,193 253,307

TOTAL PATRONAGE ALLOCATION

3,130,822

EQUITY REDEMPTIONS

548,319

TOTAL DISTRIBUTIONS

$ 3,679,141

CASH DISTRIBUTION TO MEMBERS

Cash distributions to members totaled $1,800,648 for the current fiscal year. Cash distributions include equity redemptions as well as the cash portion of the current year patronage allocation.

$6,000,000 $5,257,003

$5,000,000 $4,067,812

$4,000,000

$3,618,527 $3,387,286 $3,043,155

$3,503,264

$3,077,843

$3,000,000 $2,353,469 $1,800,648

$2,000,000 $1,369,008

$1,000,000

$0 2008

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2017 MKC ANNUAL REPORT

2009

2010

2011

2012

2013

2014

2015

2016

2017

GROWTH IN

Net 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.

$80,000,000 $72,103,212

$70,189,348

$70,000,000

$65,145,213

$60,000,000 $50,000,000 $41,111,757 $40,000,000 $30,739,856 $30,000,000 $20,000,000

$32,541,117

$25,306,856 $17,075,444

$18,397,606

2009

2010

$13,613,996

$10,000,000 $0 2008

2011

2012

2013

2014

GROWTH IN OVERALL NET FIXED ASSETS

2015

2016

2017

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.

$140,000,000

130,216,270

$120,000,000 104,334,618 $100,000,000

88,775,996

$80,000,000 $60,000,000

52,419,383

$40,000,000 21,730,263

24,348,732

2008

2009

25,265,099

31,745,818

2010

2011

37,015,160

38,945,105

2012

2013

$20,000,000 $0 2014

2015

2016

2017

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themes for our

success MKC continues to share with our member-owners and customers of our success themes, and we talk about them constantly.

It is our belief that a successful business, if nothing else, should always be predictable. Our customers, vendors and employees should know every day where we are heading and how we intend to get there.

Producer Ag, LLC

Tactics and individual strategies will change over time, but the areas we believe will make us successful become ingrained in our culture.

PREMIER TALENT INNOVATIVE LEADERSHIP OPERATIONAL & ORGANIZATIONAL EXCELLENCE CUSTOMER ALLIANCE BUSINESS GROWTH

At a time of consolidation in the food and agriculture industry, our growers and customers are becoming more and more sophisticated and more demanding.

Today’s times are a threat for most agribusiness firms, but an opportunity for our cooperative system and local cooperatives like MKC. Our local co-ops are brilliant at “customer intimacy” skills. They know the growers, the geography, the history and how to translate what needs to be done on the farm. MKC’s ability to focus on growth positions all of us to win together in this hyper-competitive business.”

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-Chris Policinski

2017 MKC ANNUAL REPORT

Land O’ Lakes, Inc. President and CEO

success themes

premier talent We believe our biggest investment made on behalf of our customers has to be our employees and in their development. Many times our employee group is the single most beneficial and noticeable area that differentiates MKC from others.�

-Brett Myers

MKC Director of Human Resources and Development

Staying ahead of the competition in the ever-changing environment of the agriculture industry requires new ideas and strong talent. During the mile-a-minute planting and harvest seasons, MKC team members work long hours to meet the needs of all of our member-owners and customers. Our employees take pride in having an impact on those around them and those we are charged with helping every day. We have a whole host of services and specialists at MKC and TMA who on any given day can help you leverage your management time.

Our efforts in recruiting young adults through our Collegiate Career Development Program and summer internship experiences are giving us a needed edge when it comes to recruiting. Pair this with the continued development of our existing team, and we are well-positioned to meet the WWW.MKCOOP.COM challenges ahead.

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e v i t a v o n n i rship e d a le Leading the industry with the latest tools, technology, products and services is critical in our business and in our customers. MKC continues to find ways to leverage the most innovative and data backed solutions, and we are dedicated to bringing cutting-edge intelligence straight to your farm gate. Our trusted advisors are prepared to provide customers with intuitive understanding of how to apply state-of-the-art agricultural resources to any operation.

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2017 2017MKC MKCANNUAL ANNUALREPORT REPORT

For MKC, it isn’t just enough to possess the technology, products and services; anyone can do that.

For us, it is about being our customers first choice in helping them utilize these applications and assisting them to gain value from them.�

-Dave Spears MKC Senior Vice President and CMO

success themes

success themes

operational & organizational excellence Having well designed employee teams at all of our locations aligned with our strategy leads to achieving operational excellence.

Communicating with our customers defines for us what they believe excellence is and what the customer believes is most important.�

-Erik Lange

MKC Senior Vice President and COO Excellence starts with the drive to perform above industry standards and exceed customer expectations. MKC believes to be excellent you must align best operational practices with a relevant organizational structure. Having a balanced focus on both will inspire blended efficiencies. MKC strives to ensure products and services are delivered to customers in a timely, accurate and cost effective manner through proficient processes, executed through strategically placed employees and capital assets.

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Many businesses can do the big things right, but what differentiates the MKC brand from others is the culture they have developed of being attentive and responsive to the personalized needs of our operation. When you are talking about the customer experience, it is the little details that keep customers coming back. Being competitive on price and quality gets our attention, but MKC’s exceptional customer experience is what creates loyalty and extra value for producers.

-Neal Beam

MKC member-owner and farmer in McPherson County

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2017 2017MKC MKCANNUAL ANNUALREPORT REPORT

customer alliance At MKC, we take our tagline seriously. Every day we focus on delivering on our purpose of “Shared growth. Shared success.” MKC has been diligent in building a strong customer alliance by offering product selection and service that is customized, collaborative, consultative, valued and exceeds expectations. By developing personalized relationships with our customers, we are mutually invested in assuring our customers’ success.

success themes

Our focus on the future has helped deliver the scale and market relevance to bring assets and programs that benefit our growers every day. We have brought this idea to life through key partnerships and maintaining our focus on customer success.�

success themes

-Dave Christiansen MKC President and CEO

Over the years, MKC has invested in a number of cooperative-wide infrastructure and capacity improvements in grain, agronomy, energy, feed and risk management projects to benefit member-owners for years to come. We have focused our efforts on achieving the necessary size and scale to not only compete, but succeed, in the face of unprecedented market dynamics.

One of our key partnerships has been our relationship with CHS to form Producer Ag, LLC. Our state-ofthe-art facilities in Canton and Milan through our partnership and with TMA managing the logistics and marketing has translated into additional revenue for our growers. Another example is our Groveland warehouse with Winfield-United. This partnership has brought additional warehouse space and logistics for your cooperative.

business growth

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307 W. COLE ST. MOUNDRIDGE, KS 67107 WWW.MKCOOP.COM