CHS Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended February 28, 2018. CHS is a farmer-owned cooperative with Energy, Ag and Nitrogen Production segments. Amounts below are in U.S. dollars; financial statement figures are converted to millions.
Financial performance and position
| Metric | Three months ended Feb. 28, 2018 | Prior-year quarter | Six months ended Feb. 28, 2018 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $6,851.1 million | $7,320.4 million | $14,900.0 million | $15,368.7 million |
| Gross profit | $142.5 million | $240.7 million | $455.7 million | $593.4 million |
| Gross margin | 2.1% | 3.3% | 3.1% | 3.9% |
| Operating earnings (loss) | $(32.9) million | $10.5 million | $144.0 million | $197.0 million |
| Income (loss) before tax | $(14.6) million | $23.6 million | $185.0 million | $249.2 million |
| Net income attributable to CHS | $166.7 million | $14.6 million | $346.8 million | $223.7 million |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $(655.2) million | $(643.2) million |
- The reported net income increase was principally tax-driven, not a reflection of positive second-quarter pretax results. CHS recorded a $136.8 million provisional tax benefit from revaluing deferred taxes after U.S. tax reform and a $41.3 million deferred tax benefit from an intercompany asset transfer.
- At February 28, 2018, cash was $190.4 million; working capital was $523.6 million and the current ratio was 1.1. Total assets were $17.1 billion and total equity was $8.1 billion.
- Notes payable were $3.0 billion and long-term debt, including its current portion, was approximately $2.0 billion. The company reported compliance with debt covenants.
- Cash from operations was negative in the first half, largely reflecting seasonal working-capital use, including a $1.1 billion inventory increase and $409.6 million increase in supplier advances. Financing activities provided $763.8 million; cash increased by $9.0 million to $190.4 million.
Material changes versus prior periods
- Quarterly revenue declined 6.4%; first-half revenue declined 3.1%. Ag revenue fell 11.8% in the quarter and 8.5% year to date, reflecting lower grain and oilseed volumes and prices, weaker U.S. export activity and global competition.
- Ag pretax income fell to a $30.9 million quarterly loss from a $9.3 million loss and declined to $43.6 million for the first half from $99.9 million. Lower volumes and margins drove the deterioration. Comparisons were also affected by prior-year producer-loan reserve charges that did not recur and current-year asset and loan recoveries.
- Energy first-half pretax income increased to $122.1 million from $86.6 million, mainly on wider refining margins. In the quarter, however, Energy pretax income declined to $9.0 million from $16.6 million, as higher margins were offset by increased expenses.
- Nitrogen Production first-half pretax income fell to $10.2 million from $32.5 million, partly because the prior year included a $29.1 million embedded-derivative gain. Corporate and Other first-half pretax income also declined, including lower Ventura Foods earnings and financing revenue.
- First-half marketing, general and administrative expense increased 6.9% to $326.9 million, mainly due to higher estimated incentive compensation. Interest expense increased 3.4% to $80.9 million.
Outlook, management commentary and notable items
- Management described Ag and Energy markets as challenging, with reduced commodity prices, margins and liquidity, and increased leverage. It expects core operating revenue, margins and cash flows to remain under pressure through the rest of fiscal 2018 and does not foresee significant changes in those operating environments.
- CHS expects fiscal 2018 capital expenditures of approximately $521 million, including about $218 million for refinery projects, and planned approximately $92 million for a Laurel refinery turnaround. It reported no scheduled long-term debt payments for the remainder of fiscal 2018.
- Management said cash from operations and available credit should support operations for the foreseeable future and anticipated continued covenant compliance. It also cited expense reductions, working-capital efficiency and sales of nonstrategic assets as liquidity priorities.
- CHS sold its corporate office building in a sale-leaseback in November 2017 and entered a 20-year lease with first-year annual rent of approximately $3.4 million, increasing 2% annually. It also sold nonstrategic Ag assets; proceeds included $53.6 million from business sales and were used in part to reduce debt.
- On March 23, 2018, after quarter-end, CHS sold 33 Zip Trip stores for $70 million plus inventory value. The filing expected a gain in the third quarter.
- A potential excise-tax-credit gain related to Energy operations remained a contingency; if recognized, it could materially affect the financial statements. CHS also reported a proposed $177,950 administrative penalty concerning alleged refinery air-emissions violations in Laurel, Montana, which it was contesting.
- CHS had $144.2 million of guarantees outstanding for related companies, against a permitted maximum of $1.0 billion, and said underlying loans were current. The receivables securitization facility had $618 million of availability, all utilized, and was scheduled to terminate July 17, 2018, subject to possible extension.
- The tax reform accounting remained provisional. CHS said it had not recorded a transition-tax liability and had not yet determined the treatment or impact of GILTI. Management also expected the new lease accounting standard to materially affect the balance sheet.
Important facts for investors to verify
- How much of the reported earnings improvement is attributable to the one-time tax benefits, and whether the provisional tax estimates change.
- Whether Ag volumes and margins stabilize, and whether Energy refining-margin gains persist amid commodity and seasonal volatility.
- Liquidity and working-capital needs, including seasonal borrowing, use and extension of the fully utilized receivables facility, and progress in reducing funded debt.
- Execution and funding of planned capital spending, refinery turnaround costs, preferred dividends and Brazilian guarantee commitments.
- Resolution and financial effect, if any, of the potential Energy tax-credit gain, Laurel environmental matter, and Zip Trip sale gain.