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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
     
(Mark One)
    
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    for the quarterly period ended February 28, 2005.
 
o
   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    for the transition period from           to           .
Commission File Number 0-50150
CHS Inc.
(Exact name of registrant as specified in its charter)
     
Minnesota
   41-0251095
(State or other jurisdiction of
incorporation or organization)		   (I.R.S. Employer
Identification Number)
 
5500 Cenex Drive    
Inver Grove Heights, MN 55077
   (651) 355-6000
(Address of principal executive offices,
including zip code)		   (Registrant’s telephone number,
including area code)
      Include by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     YES þ          NO o
      Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     YES o          NO þ
      Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
    Number of Shares Outstanding
Class   at February 28, 2005
     
NONE
   NONE

INDEX
             
        Page No.
         
 PART I. FINANCIAL INFORMATION
   Financial Statements     3  
     Consolidated Balance Sheets as of February 28, 2005, August 31, 2004 and February 29, 2004 (unaudited)     3  
     Consolidated Statements of Operations for the three months and six months ended February 28, 2005 and February 29, 2004 (unaudited)     4  
     Consolidated Statements of Cash Flows for the three months and six months ended February 28, 2005 and February 29, 2004 (unaudited)     5  
     Notes to Consolidated Financial Statements (unaudited)     6  
 
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     16  
 
   Quantitative and Qualitative Disclosures about Market Risk     36  
 
   Controls and Procedures     36  
 
 PART II. OTHER INFORMATION
 
   Submission of Matters to a Vote of Security Holders     37  
 
   Exhibits and Reports on Form 8-K     37  
 
 SIGNATURE PAGE     38  
 Certification Pursuant to Section 302
 Certification Pursuant to Section 302
 Certification Pursuant to Section 906
 Certification Pursuant to Section 906

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PART I. FINANCIAL INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
      This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that may cause the Company’s actual results to differ materially from the results discussed in the forward-looking statements. These factors include those set forth in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the caption “Cautionary Statement Regarding Forward-Looking Statements” to this Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2005.

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Item 1.     Financial Statements
CHS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                             
    February 28,   August 31,   February 29,
    2005   2004   2004
             
    (dollars in thousands)
ASSETS
Current assets:
                        
 
Cash and cash equivalents
   $ 193,533     $ 136,491     $ 98,506  
 
Receivables
     740,389       834,965       762,892  
 
Inventories
     935,788       723,893       1,001,276  
 
Other current assets
     316,753       273,355       493,864  
                   
   
Total current assets
     2,186,463       1,968,704       2,356,538  
Investments
     516,785       575,816       522,340  
Property, plant and equipment
     1,310,581       1,249,655       1,156,256  
Other assets
     233,419       237,117       250,420  
                   
   
Total assets
   $ 4,247,248     $ 4,031,292     $ 4,285,554  
                   
 
LIABILITIES AND EQUITIES
Current liabilities:
                        
 
Notes payable
   $ 354,116     $ 116,115     $ 600,836  
 
Current portion of long-term debt
     34,704       35,117       18,606  
 
Customer credit balances
     115,045       88,686       126,653  
 
Customer advance payments
     79,319       64,042       111,317  
 
Checks and drafts outstanding
     67,918       64,584       102,304  
 
Accounts payable
     597,443       717,501       502,322  
 
Accrued expenses
     302,642       305,650       383,242  
 
Dividends and equities payable
     30,165       83,569       36,058  
                   
   
Total current liabilities
     1,581,352       1,475,264       1,881,338  
Long-term debt
     750,123       648,701       636,964  
Other liabilities
     139,703       148,526       123,273  
Minority interests in subsidiaries
     139,838       130,715       119,769  
Commitments and contingencies
                        
Equities
     1,636,232       1,628,086       1,524,210  
                   
   
Total liabilities and equities
   $ 4,247,248     $ 4,031,292     $ 4,285,554  
                   
The accompanying notes are an integral part of the consolidated financial statements (unaudited).

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CHS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                                   
    For the Three Months Ended   For the Six Months Ended
         
    February 28,   February 29,   February 28,   February 29,
    2005   2004   2005   2004
                 
    (dollars in thousands)
Revenues:
                                
 
Net sales
   $ 2,407,805     $ 2,654,596     $ 5,345,053     $ 5,143,940  
 
Other revenues
     34,759       34,410       79,283       67,443  
                         
      2,442,564       2,689,006       5,424,336       5,211,383  
Cost of goods sold
     2,354,277       2,630,264       5,227,010       5,046,977  
Marketing, general and administrative
     58,293       51,050       106,209       96,886  
                         
Operating earnings
     29,994       7,692       91,117       67,520  
Gain on sale of investment
     (3,448 )             (3,448 )        
Gain on legal settlements
             (405 )             (692 )
Interest
     13,042       13,482       24,636       25,022  
Equity loss (income) from investments
     154       (18,080 )     (16,529 )     (31,787 )
Loss on impairments of assets
     13,397               48,397          
Minority interests
     4,726       3,220       12,915       7,142  
                         
Income before income taxes
     2,123       9,475       25,146       67,835  
Income taxes
     (6,600 )     964       (1,573 )     8,585  
                         
Net income
   $ 8,723     $ 8,511     $ 26,719     $ 59,250  
                         
The accompanying notes are an integral part of the consolidated financial statements (unaudited).

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CHS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                                         
    For the Three Months Ended   For the Six Months Ended
         
    February 28,   February 29,   February 28,   February 29,
    2005   2004   2005   2004
                 
    (dollars in thousands)
Cash flows from operating activities:
                                
 
Net income
   $ 8,723     $ 8,511     $ 26,719     $ 59,250  
 
Adjustments to reconcile net income to net cash used in operating activities:
                                
   
Depreciation and amortization
     27,326       27,045       54,444       53,860  
   
Noncash loss (income) from equity investments
     154       (18,080 )     (16,529 )     (31,787 )
   
Noncash loss on impairments of assets
     13,397               48,397          
   
Minority interests
     4,726       3,220       12,915       7,142  
   
Noncash portion of patronage dividends received
     (216 )     (2,519 )     (437 )     (2,830 )
   
(Gain) loss on sale of property, plant and equipment
     (1,027 )     198       (2,236 )     141  
   
Gain on sale of investment
     (3,448 )             (3,448 )        
   
Other, net
     265       313       555       540  
   
Changes in operating assets and liabilities:
                                
     
Receivables
     99,852       56,820       84,614       11,798  
     
Inventories
     (94,307 )     25,773       (211,687 )     (189,113 )
     
Other current assets and other assets
     (56,532 )     (200,256 )     (46,866 )     (323,170 )
     
Customer credit balances
     21,950       52,768       26,359       65,606  
     
Customer advance payments
     (33,238 )     (57,054 )     15,277       (12,079 )
     
Accounts payable and accrued expenses
     (201,765 )     (106,537 )     (124,666 )     (16,263 )
     
Other liabilities
     (9,105 )     5,069       (8,248 )     11,718  
                         
       
Net cash used in operating activities
     (223,245 )     (204,729 )     (144,837 )     (365,187 )
                         
Cash flows from investing activities:
                                
 
Acquisition of property, plant and equipment
     (59,007 )     (49,989 )     (122,863 )     (102,222 )
 
Proceeds from disposition of property, plant and equipment
     2,082       8,078       7,953       29,742  
 
Investments
     (2,184 )     (1,012 )     (2,230 )     (1,022 )
 
Equity investments redeemed
     14,425       16,010       36,945       43,503  
 
Investments redeemed
     1,110       2,657       2,093       6,115  
 
Proceeds from sale of investment
     7,420               7,420          
 
Changes in notes receivable
     8,498       248       9,116       (5,896 )
 
Distribution to minority owners
     (1,906 )             (4,966 )     (1,338 )
 
Other investing activities, net
     177       696       1,371       3,203  
                         
       
Net cash used in investing activities
     (29,385 )     (23,312 )     (65,161 )     (27,915 )
                         
Cash flows from financing activities:
                                
 
Changes in notes payable
     353,033       223,990       238,001       349,705  
 
Long-term debt borrowings
             445       125,000       445  
 
Principal payments on long-term debt
     (17,647 )     (4,500 )     (24,195 )     (8,271 )
 
Changes in checks and drafts outstanding
     16,690       19,194       3,334       16,290  
 
Expenses incurred — capital equity certificates redeemed for preferred stock
     (78 )     (53 )     (78 )     (53 )
 
Preferred stock dividends paid
     (2,113 )     (1,874 )     (4,226 )     (3,748 )
 
Retirements of equities
     (19,058 )     (1,583 )     (19,285 )     (2,851 )
 
Cash patronage dividends paid
     (51,511 )     (28,158 )     (51,511 )     (28,158 )
                         
       
Net cash provided by financing activities
     279,316       207,461       267,040       323,359  
                         
Net increase (decrease) in cash and cash equivalents
     26,686       (20,580 )     57,042       (69,743 )
Cash and cash equivalents at beginning of period
     166,847       119,086       136,491       168,249  
                         
Cash and cash equivalents at end of period
   $ 193,533     $ 98,506     $ 193,533     $ 98,506  
                         
The accompanying notes are an integral part of the consolidated financial statements (unaudited).

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CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(dollars in thousands)
Note 1. Accounting Policies
      The unaudited consolidated balance sheets as of February 28, 2005 and February 29, 2004, and the statements of operations and cash flows for the three and six months ended February 28, 2005 and February 29, 2004 reflect, in the opinion of our management, all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods presented. The results of operations and cash flows for interim periods are not necessarily indicative of results for a full fiscal year because of, among other things, the seasonal nature of our businesses. The consolidated balance sheet data as of August 31, 2004 has been derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.
      The consolidated financial statements include our accounts and the accounts of all of our wholly-owned and majority-owned subsidiaries and limited liability companies. The effects of all significant intercompany accounts and transactions have been eliminated.
      These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended August 31, 2004, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission.
Goodwill and Other Intangible Assets
      Goodwill was $18.5 million, $26.9 million and $27.1 million on February 28, 2005, August 31, 2004 and February 29, 2004, respectively, and is included in other assets in the consolidated balance sheets. During the three months ended February 28, 2005, we impaired goodwill related to our frozen prepared Mexican foods operation in Fort Worth, Texas by a pretax amount of $8.4 million.
      Intangible assets subject to amortization primarily include trademarks, tradenames, customer lists and non-compete agreements, and are amortized on a straight-line basis over the number of years that approximate their respective useful lives (ranging from 1 to 15 years). The gross carrying amount of these intangible assets is $34.8 million with total accumulated amortization of $14.2 million as of February 28, 2005. Intangible assets of $10 thousand and $179 thousand (non-cash) were acquired during the six months ended February 28, 2005 and February 29, 2004, respectively. Total amortization expense for intangible assets during the three-month and six-month periods ended February 28, 2005 and February 29, 2004, was $0.8 million and $0.8 million, respectively, and $1.6 million and $1.2 million, respectively. The estimated amortization expense related to intangible assets subject to amortization for the next five years will range from $1.6 million to $2.9 million.
Recent Accounting Pronouncements
      In March 2004, the FASB Emerging Issues Task Force (EITF) reached a consensus on and the FASB ratified EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). EITF 03-1 provides guidance for evaluating whether an investment is other-than-temporarily impaired. On September 30, 2004, the FASB issued FSP EITF 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments,’ “which delayed the effective date of the application guidance on impairment of securities included within EITF 03-1. We do not believe the adoption of this standard will have a significant impact on our financial statements.
      On November 24, 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 requires those items to be recognized as

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CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
current-period charges regardless of whether they meet the “abnormal” criterion outlined in ARB 43. It also introduces the concept of “normal capacity” and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. Unallocated overheads must be recognized as an expense in the period in which they are incurred. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We have not yet determined what the effects of adopting this standard will have on us.
      On December 16, 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29”. SFAS No. 153 replaces the exception from fair value measurement in APB Opinion No. 29 for nonmonetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is to be applied prospectively, and is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We have not yet determined what the effects of adopting this standard will have on us.
      A pending pronouncement, Emerging Issues Task Force (EITF) 04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds” was discussed on September 29-30, 2004, and was ratified by the FASB on October 13, 2004. EITF 04-10 would provide guidance on the aggregation criteria found in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. Although the FASB ratified the consensus in EITF 04-10, the FASB staff is in the process of drafting a proposed FASB Staff Position (FSP) to provide guidance in determining whether two or more operating segments have similar economic characteristics and has delayed the effective date indefinitely pending the issuance of this FSP. We have not yet determined what effect this pronouncement will have on us.
Reclassifications
      Certain reclassifications have been made to prior year’s amounts to conform to current year classifications. These reclassifications had no effect on previously reported net income, equities and comprehensive income, or cash flows.
Note 2. Receivables
                         
    February 28,   August 31,   February 29,
    2005   2004   2004
             
Trade
   $ 754,251     $ 835,066     $ 743,714  
Other
     42,384       55,708       52,921  
                   
      796,635       890,774       796,635  
Less allowances for doubtful accounts
     56,246       55,809       33,743  
                   
    $ 740,389     $ 834,965     $ 762,892  
                   

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CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
Note 3. Inventories
                         
    February 28,   August 31,   February 29,
    2005   2004   2004
             
Grain and oilseed
   $ 416,141     $ 308,207     $ 543,781  
Energy
     302,643       277,801       245,909  
Feed and farm supplies
     183,606       110,885       166,191  
Processed grain and oilseed
     32,084