CHS Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended February 28, 2017; comparisons are to the three and six months ended February 29, 2016. Amounts below are in millions unless stated otherwise. CHS is a farmer-owned cooperative with publicly traded preferred stock and no common stock outstanding.
Financial performance
| Metric | Three months ended Feb. 28, 2017 | Prior-year quarter | Six months ended Feb. 28, 2017 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $7,320 | $6,639 | $15,369 | $14,368 |
| Gross profit | $241 | $89 | $593 | $501 |
| Operating earnings (loss) | $11 | $(92) | $197 | $168 |
| Income (loss) before tax | $24 | $(76) | $249 | $213 |
| Net income attributable to CHS | $15 | $(31) | $224 | $235 |
| Operating cash flow | Not separately presented in the filing summary | $(643) | $319 |
Gross margin was approximately 3.3% for the quarter versus 1.3% a year earlier, and 3.9% for the six-month period versus 3.5%. Six-month operating margin was approximately 1.3% versus 1.2%. Six-month income attributable to CHS declined despite higher pretax income, partly reflecting the change from a prior-year tax benefit to current-year tax expense.
At February 28, 2017, cash was $250; current assets were $8,279 and current liabilities $7,756, yielding working capital of $523 and a 1.1 current ratio. Notes payable were $3,867, current long-term debt $205, and long-term debt $2,052. Total equity was $7,962. The company reported compliance with debt covenants. Cash decreased $30 during the six months.
Material changes and drivers
- Quarterly pretax results improved by $100 million year over year, with Energy moving from a loss to income and Ag’s pretax loss narrowing. Energy benefited from higher refining margins and the absence of the prior-year $46 million inventory valuation charge.
- For the six months, Ag pretax income rose to $100 million from $38 million, driven largely by grain marketing and crop nutrients. Energy pretax income fell to $87 million from $130 million, primarily due to weaker refining margins; the prior year included an $80 million inventory valuation charge that did not recur.
- Marketing, general and administrative expense increased $64 million for the six months, mainly because the doubtful-account allowance rose $101 million, partly offset by lower other expenses. Interest expense increased $44 million, reflecting higher debt and lower capitalized interest.
- Operating cash flow turned negative, primarily because working-capital changes used $1.3 billion. Inventory purchases and supplier advances were major uses, partly offset by higher customer advances. The company said its second fiscal quarter typically has peak short-term borrowing needs.
Outlook, risks and unusual items
- Management described Ag and Energy markets as challenging, with reduced commodity prices and lower margins, and said revenue, margins and cash flow could remain under pressure. It is managing overhead and reducing capital investment through fiscal 2017 and into fiscal 2018.
- Fiscal 2017 capital expenditures were expected to be approximately $604 million, including about $259 million for refinery property, equipment and major repairs. The McPherson refinery expansion was completed and operational in the first quarter.
- CHS recorded a $29.6 million gain in the six-month period on an embedded derivative tied to its CF Nitrogen investment after CF Industries’ credit rating fell below specified thresholds. A $5 million payment was received; the derivative’s reported fair value was $24.6 million at February 28.
- CHS Capital’s past-due notes rose to 12.1% of outstanding notes from 2.5% at August 31, 2016. A single producer borrower represented 20% of total CHS Capital notes; related loan-loss reserves increased to $133.5 million from $45.8 million. Management cautioned that future commodity, property and agricultural conditions could require material reserve adjustments.
- Commodity prices, weather, supply and demand, and regulation can materially affect results. Refinery operations face potentially volatile Renewable Identification Number costs under the Renewable Fuels Standard, though the filing says recent price movements did not materially affect results.
- Environmental matters and ordinary-course litigation were disclosed; management did not expect resulting liabilities to materially affect financial position, results or cash flows. Guarantees for related companies totaled $110.4 million outstanding, against a permitted maximum of $1.0 billion; underlying loans were current. No material changes to reported risk factors or market-risk exposures were identified.
Most important facts for investors to verify
- Whether the elevated producer-loan delinquency and $133.5 million reserve adequately reflect collateral values and concentration risk.
- How seasonal inventory funding, negative operating cash flow, and increased short-term borrowings develop in subsequent quarters.
- Whether refining margins, Ag margins, and commodity-market conditions support management’s outlook and capital-spending plans.
- The sustainability of earnings excluding the $29.6 million CF Nitrogen derivative gain and other nonrecurring or timing-related items.
- Preferred-stock dividend obligations, debt maturities and available borrowing capacity; the filing reports $1.4 billion drawn on the $3.0 billion main revolver and $597 million outstanding under the $750 million securitization facility.