CHS Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended February 29, 2020; filed April 8, 2020. CHS is a farmer-owned agricultural and energy cooperative with Energy, Ag and Nitrogen Production segments. Results are seasonal and can be volatile with commodity prices and volumes.
Financial performance
Amounts below are in U.S. dollars; comparisons are with the prior-year comparable period.
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $6.598 billion, up 1.8% | $14.220 billion, down 5.0% |
| Gross profit / margin | $315.1 million / 4.8% (prior: $427.4 million / 6.6%) | $640.6 million / 4.5% (prior: $898.1 million / 6.0%) |
| Operating earnings / margin | $115.5 million / 1.8% (prior: $249.6 million / 3.9%) | $272.7 million / 1.9% (prior: $564.1 million / 3.8%) |
| Net income attributable to CHS | $125.4 million (prior: $248.8 million) | $303.3 million (prior: $596.3 million) |
| Operating cash flow | Not separately presented | $301.6 million (prior: $(125.3) million) |
| Investing / financing cash flow | Not separately presented | $(0.2) million / $(279.5) million (prior: $(98.3) million / $139.0 million) |
At February 29, cash and cash equivalents were $239.8 million; cash and restricted cash totaled $315.9 million. Working capital was approximately $1.1 billion and the current ratio was 1.2. Notes payable were $2.10 billion; long-term debt including current maturities was $1.76 billion. The company reported covenant compliance. Total equities were $8.62 billion.
Material changes and business drivers
- Quarterly earnings were pressured by lower Energy margins: less favorable refined-fuel crack spreads and WTI–WCS crude differentials. Energy pretax income fell 54.7% to $138.9 million. The prior-year quarter included an $80.8 million federal excise tax credit benefit that did not recur.
- Ag pretax loss narrowed to $20.8 million in the quarter, from $62.4 million, with improved margins and weather, partly offset by lower volumes. For the six months, Ag moved to a $34.7 million pretax loss from $17.9 million income, reflecting difficult agricultural conditions and trade tensions.
- Six-month Energy pretax income fell 44.1% to $301.1 million. Nitrogen Production pretax income declined to $22.2 million from $34.4 million, mainly due to lower urea and UAN prices and CF Nitrogen equity earnings.
- Six-month equity income from investments decreased 22.3% to $84.1 million. SG&A rose 10.2% to $367.9 million, including ERP implementation, IT maintenance and WCD-related payroll. WCD results are included after CHS acquired the remaining 75% interest on March 1, 2019, limiting comparability.
- Cash from operations improved substantially year over year, primarily reflecting working-capital changes, including lower receivables; net income was lower. Investing cash outflow was nearly flat as CHS Capital note collections largely offset higher capital spending.
Outlook, risks and notable items
- Management said COVID-19’s overall effect on business, liquidity and results could not be predicted. Subsequent to quarter-end, the pandemic and sharp decline in refined-fuel demand caused significant market volatility; CHS said it was increasing cash, prioritizing capital expenditures and monitoring counterparty risk.
- Management expected uncertain, volatile Energy markets to continue through the second half of fiscal 2020. Ag revenues, margins and cash flows were expected to remain under pressure for the remainder of the fiscal year.
- After February 29, energy inventory values fell significantly. If management determines the decline will not recover by August 31, 2020, CHS may record a material inventory valuation charge.
- Fiscal 2020 planned cash needs included approximately $503.8 million of capital expenditures, $168.7 million of preferred dividends, and approximately $90 million each for patronage payments and equity redemptions. Management believed available cash, operating and investing cash flows, and borrowing capacity would support operations and expected continued covenant compliance.
- The $485 million available under the receivables securitization facility was fully utilized at quarter-end; the facility was scheduled to terminate June 26, 2020, subject to possible extension. The company also had a $2.75 billion committed revolving facility, with $300 million outstanding.
- Disclosure controls were deemed ineffective due to previously identified material weaknesses in internal control over financial reporting. Remediation continued, including work on monitoring controls and IT general controls.
- The DOJ closed its FCPA inquiry without action on February 25, 2020; the SEC review remained ongoing, and its outcome was uncertain. CHS reported ordinary-course litigation and environmental matters, which management did not expect to have a material effect. Guarantees outstanding for related companies totaled $207 million.
- CHS adopted lease accounting guidance on September 1, 2019, recognizing operating lease right-of-use assets of $268.4 million and liabilities of $267.0 million, with a $33.7 million cumulative adjustment to capital reserves. The filing states adoption did not materially affect operations or cash flows.
Important facts for investors to verify
- Whether COVID-19, refined-fuel market conditions and subsequent energy price declines led to material inventory charges or liquidity changes after quarter-end.
- Renewal or replacement of the fully utilized securitization facility before its scheduled June 2020 termination, and available borrowing capacity under other facilities.
- Progress in remediating the disclosed material weaknesses and any subsequent change in the effectiveness of disclosure controls.
- Whether the SEC’s FCPA review resulted in regulatory action or other consequences.
- Actual fiscal 2020 capital spending, preferred dividends, patronage and equity redemptions compared with management’s estimates.
- Subsequent operating trends in Energy and Ag, including crack spreads, WCS differentials, crop conditions, grain volumes and fertilizer prices.