2013 Annual Report

BU I L D I NG MO ME N TUM [ 2013 AN N U AL RE PORT ]

district 1

Officers & directors

Myron Voth

Cecil Wiebe

district 2

Vice chairman

Duane Johnson

David Mills

district 3

secretary

CJ Blew

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CHAIRMAN

Jason Gaeddert

OFFICERS AT LARGE

Keith Becker

Neal Beam

Randy Ellwood

Dave Christiansen CEO / President

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Chairman’s report

CJ Blew

Businesses and companies are always in motion and are either moving forward or backward. Simply standing still means the business is moving backward as everything changes around it.

A business that is moving forward builds momentum. It can be compared to a sports team that is on a roll in the middle of a game or season and the subsequent unstoppable power that the team has. With strategic initiatives developed by the board and the execution of those initiatives by management and staff, YOUR coop is “building momentum”.

The momentum that MKC’s culture and shared mission developed over the last several years has helped you, our farmer/owner succeed.

The wave of momentum can seem nice to ride, and it can even carry you through a couple years of drought. However, we can’t become complacent. We must continue to make new waves that will eventually be ridden and keep our heads above the water line.

Listening to our customers has told us we need to continue moving faster in order to keep up with the needs of producers. During the last four years, MKC’s board of directors has approved investments of approximately $50 million in infrastructure. We believe these types of efforts will help MKC continue its momentum and maintain a positive relationship with today’s customers as well as customers of the future.

New memberships are approved each month, not only within our traditional footprint, but from outside as well. These new members appreciate our efforts and are willing to demonstrate this by increasing the amount of business they do with MKC. Our job is to continue to build a business that will provide what they need to be successful today and in the future.

My hope is MKC has helped you succeed in some form or fashion this past year, helping you build a wave of momentum for the upcoming year. Thank you for your support.

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President’s report

Dave Christiansen When I think of building momentum in a company, I’m reminded of an incredibly heavy flywheel. I’ve always pictured one as approximately 40 feet in diameter, made from concrete and balancing on its side. Much like a grist wheel that some of you are familiar with.

When I first arrived at MKC we were fortunate to have a very solid base for our organization.

The greatest challenge seemed to be while our employees were intentional about providing great service, not everyone was pulling or pushing in the same direction. There were too many different interpretations of our objectives and too many different methods of operation. We found ourselves with a huge flywheel, that for the most part, was idle and clearly lacking any momentum.

It was clear the board of directors needed to establish a direction. Once the initial process was completed, efforts turned to getting everyone to grab on to this huge, heavy flywheel with both hands. Our vision became one that focused on helping our owners, customers, vendors and employees to be more successful. Once the vision was clearly explained, getting everyone to push in one direction became much easier.

Initially the process was tough. Getting the flywheel to move just an inch took everyone’s effort. After experiencing some success and the impact it was having on not just our customers, but employees and vendors alike, our pushing became more deliberate and with greater enthusiasm.

There are many who are pushing our flywheel today. This is what we believe “building momentum” in our company is all about. By consistently communicating our vision, plans and objectives we find it is much easier to get everyone behind our efforts.

Nothing has the potential to weigh heavier on momentum than achieving financial objectives.

We are constantly vigilant to something slowing down our progress. Droughts and freeze damaged wheat as experienced over the past few years are scary without a doubt. But to me those are not nearly as concerning as possibly losing the trust and support of our customers. Our efforts placed on customer meetings are done with the intent of constant learning, providing us with opportunity for needed improvement.

Building momentum is a continuous journey.

We have a long way to go before we can take a deep breath but I’ll settle every day for one more good push! Thank you for your efforts pushing this flywheel. Together we are helping MKC build momentum.

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PROJECT UPDATES:

MOMENTUM ON THE GROUND MKC continues to invest in facilities across its trade territory, all part of a plan to meet the needs of customers not only today, but as we move into the future.

Construction has resulted in increased grain handling speed and more than 3.8 million bushels of storage space since 2009 through additional bins and bunkers. These reinvestments in infrastructure are keeping pace with agricultural advances and the growing needs of our customers.

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1 | Four bulk seed bins installed in Walton doubled the location’s seed storage, meeting the need for a more efficient system for MKC customers.

2 | Bennington and Marquette constructed large bunkers capable of holding nearly 775,000 bushels of grain. The bunkers provide for additional storage as producers’ volumes grow.

3 | Addition of outbound scales in Moundridge and Walton improved traffic flow during peak harvest times and reduced wait times.

4 | New grain facilities planned for Canton and Lyons, and upgrades in Benton and Talmage will add 8.2 million bushels of grain storage space.

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4

2

3

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Consolidated

Balance sheets CURRENT ASSETS

2013

2012

$ 2,275,645

$ 4,037,661

1,324,891

1,238,509

Patrons and customers

7,152,181

8,407,942

Allowance for doubtful accounts

(135,000)

(100,000)

Grain shipments

2,475,804

1,884,480

Grain storage receivable

2,126,284

1,761,905

Commodity margin deposits

6,416,330

6,289,778

Other

6,223,340

6,010,367

199,907

210,771

Prepaid inventories

20,012,430

14,388,342

Inventories on hand

117,300,487

110,539,810

165,372,299

154,669,565

281,781

-

Equity in other cooperatives

20,459,795

16,650,472

Limited liability companies

7,872,829

5,769,635

976,747

1,581,558

29,591,152

24,001,665

69,695,379

67,078,644

(37,154,262)

(36,338,788)

32,541,117

30,739,856

$ 227,504,568

$ 209,411,086

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

Deferred income taxes

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

Other

TOTAL OTHER ASSETS PROPERTY, PLANT & EQUIPMENT Cost Accumulated depreciation

NET PROPERTY, PLANT & EQUIPMENT TOTAL ASSETS

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Financial Statement Presentation The statements presented within do not contain all the 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.

February 28, 2013 and February 29, 2012

CURRENT LIABILITIES

2013

2012

$ 43,194,289

$ 35,321,247

8,581,907

8,722,368

72,314,923

75,161,074

Patron demand certificates

1,779,624

955,328

Current maturities of long-term debt

5,666,531

4,495,514

Patronage dividends payable

3,417,300

2,379,444

Income taxes payable

1,788,769

884,712

136,743,343

127,919,687

Accounts payable and accrued expenses Customer forward contracts Revolving bank notes

TOTAL CURRENT LIABILITIES

LONG-TERM LIABILITIES, excluding current maturities Nonrevolving bank notes

10,732,057

12,527,580

3,793,943

3,161,265

710,294

1,264,577

Deferred income taxes

1,223,631

1,380,021

Other

1,508,108

888,684

17,968,033

19,222,127

4,354,700

4,237,500

931,975

936,450

Qualified patronage allocations

24,793,559

20,365,635

Retained earnings

36,722,565

31,278,096

Noncontrolling interests

6,119,938

5,523,259

Accumulated other comprehensive income (loss)

(129,545)

(71,668)

72,793,192

62,269,272

$ 227,504,568

$ 209,411,086

Patron certificates of indebtedness Capital lease obligations

TOTAL LONG-TERM LIABILITIES MEMBERS’ EQUITY Common stock Participating stock

TOTAL MEMBERS’ EQUITY TOTAL LIABILITIES & MEMBERS’ EQUITY

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Consolidated

statements of Operations SALES

2013

2012

$ 315,516,174

$ 297,102,925

124,466,905

122,687,056

439,983,079

419,789,981

Grain

298,056,046

271,138,490

Farm supply

112,450,628

110,543,890

410,506,674

381,682,380

29,476,405

38,107,601

7,361,324

4,893,644

919,430

1,113,935

5,293,795

4,833,498

Interest income

275,726

291,550

Gain on disposal of property, plant and equipment

557,249

560,560

1,391,054

810,919

15,798,578

12,504,106

$ 45,274,983

$ 50,611,707

Grain Farm supply

TOTAL SALES COST OF SALES

TOTAL COST OF SALES GROSS MARGINS ON SALES OTHER OPERATING INCOME Grain storage and handling services Limited liability companies Agronomy services

Miscellaneous

TOTAL OTHER OPERATING INCOME GROSS INCOME FROM LOCAL OPERATIONS

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For Years Ended February 28, 2013 and February 29, 2012

OPERATING EXPENSES

2013

2012

Personnel costs

$ 15,695,798

$ 15,888,281

Fixed expenses

8,090,342

8,065,770

12,041,551

11,609,957

35,827,691

35,564,008

9,447,292

15,047,699

Patronage dividends

7,576,782

4,749,075

Investment income

2,976,900

1,519,595

TOTAL OTHER EARNINGS

10,553,682

6,268,670

NET EARNINGS BEFORE INCOME TAXES

20,000,974

21,316,369

(1,544,695)

(877,644)

268,806

(915,913)

TOTAL PROVISION FOR INCOME TAXES

(1,275,889)

(1,793,557)

NET EARNINGS BEFORE NONCONTROLLING INTERESTS

18,725,085

19,522,812

NONCONTROLLING INTERESTS

(4,651,309)

(6,179,958)

$ 14,073,776

$ 13,342,854

Other operating expenses

TOTAL OPERATING EXPENSES EARNINGS FROM LOCAL OPERATIONS OTHER EARNINGS

PROVISION FOR INCOME TAXES Current income taxes Deferred income taxes

NET EARNINGS

DISTRIBUTION OF NET EARNINGS Patronage dividends Retained earnings

TOTAL

$ 8,543,250

$ 5,948,610

5,530,526

7,394,244

$ 14,073,776

$ 13,342,854

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Patronage distribution and

Equity redemptions 2013 PATRONAGE ALLOCATION

RATE

AMOUNT

Grain

20.02 cents / bushel

$ 3,557,062

Agronomy - Seed - Crop Protection

7.34% (avg. $44) / ton on fertilizer

Petroleum - Lubricants

3.61% (avg. 13 cents) / gallon on fuel

729,579

Feed - Merchandise

1.60%

161,338

TOTAL PATRONAGE ALLOCATION

4,095,271

8,543,250

EQUITY REDEMPTIONS

650,512

TOTAL DISTRIBUTIONS

$ 9,193,762

Patronage Distribution & Equity Redemptions – $9,193,762 Patronage Distribution Equity Redemptions

92.92% 7.08%

CASH DISTRIBUTIONS TO MEMBERS - 10 YEAR HISTORY YEAR ENDED

EQUITY REDEPMPTIONS

CASH PATRONAGE

TOTAL

2013

$ 650,512

$ 3,417,300

$ 4,067,812

2012

698,399

2,379,444

3,077,843

2011

746,339

2,296,816

3,043,155

2010

649,765

1,703,704

2,353,469

2009

714,116

2,673,170

3,387,286

2008

563,574

805,434

1,369,008

2007

835,730

675,936

1,511,666

2006

558,727

1,263,906

1,822,633

2005

229,503

479,277

708,780

2004

523,156

0

523,156

$ 6,169,821

$ 15,694,987

$ 21,864,808

TOTALS

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Net earnings and

Local benefits 40

60

30

10

20

10

Millions

20

NET EARNINGS

30

40 Millions

GRAIN BUSHELS RECEIVED

50

0

0 2008

2009

2010

2011

2012

2013

Grain Receipts Net Earnings

2013 local benefits - $24,797,234 Personnel Costs Property Taxes Income Taxes Other Expenses

3% 5%

63%

29%

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Historical data HISTORICAL NET EARNINGS $15,000,000

$14,073,776 $13,342,854

$12,000,000 $10,837,662 $8,871,405

$9,000,000

$8,219,209

$6,000,000 $4,324,814 $3,674,858

$3,000,000

0

$3,191,862

$3,033,082

$229,384

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

HISTORICAL RETURN ON EQUITY 35% 30.20%

30% 25% 21.43%

20%

20.48%

19.33% 17.22%

18.57% 16.31%

15%

12.77%

13.80%

10% 5% 1.41%

0%

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2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

COMMUNITY

STEWARDSHIP MKC takes great pride in contributing to the quality of life in the communities throughout its territory. This commitment is reflected by our contributions and activities that focus primarily on alleviating hunger, leadership development, ag education and community safety. Over the past five years, MKC has donated more than $300,000 to communities throughout central Kansas.

• 4-H Leadership Development

• City and County Emergency Services

• Farm Safety Camps

• Women in Agriculture

• Kansas FFA Foundation and local FFA Chapters

• Young Business Professionals Programs

• Community Events and Festivals

• School Programs

• Ag in the Classroom

• Mennonite Relief

Top left: Programs supporting ag education benefited from over $5,000 in contributions in 2012.

Top right: A total of $11,200 was donated to 10 area 4-H Leadership Development Funds in 2012.

Nine community food banks located throughout central Kansas benefited from donations totaling $15,700. In addition, MKC employees hosted their first-ever food drive, collecting more than 2,600 pounds of food.

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mkcoop.com

MKC | 307 West Cole | P.O. Box D | Moundridge, KS 67107 | 620.345.6328 | fax 620.345.6330