CHS Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended November 30, 2016 (CHS fiscal 2017 first quarter), compared with the three months ended November 30, 2015. CHS is a farmer-owned cooperative with Energy, Ag, Nitrogen Production and Foods segments, plus Corporate and Other. The company emphasizes that results are seasonal and interim results are not necessarily indicative of the full year.
Key financial metrics
Unless otherwise stated, amounts are in millions of dollars.
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $8,048.3 | $7,728.8 |
| Gross profit | $352.7 | $411.8 |
| Operating earnings | $186.5 | $259.8 |
| Income before income taxes | $225.6 | $289.9 |
| Net income attributable to CHS Inc. | $209.2 | $266.5 |
| Net cash from operating activities | $238.4 | $416.1 |
Gross margin was approximately 4.4% of revenue, compared with 5.3% a year earlier; operating margin was approximately 2.3%, compared with 3.4%. These percentages are calculated from reported figures.
At November 30, 2016, cash was $515.5; total assets were $18,430.5; total equities were $7,931.3; notes payable were $3,227.6; and long-term debt, including its current portion, was $2,165.8. Working capital was $378.6 and the current ratio was 1.0, versus $414.4 and 1.1 at August 31, 2016. CHS reported compliance with debt covenants. It had $916.0 outstanding under its $3.0 billion primary revolving facility and $550.0 under bilateral facilities.
Investing activities used $327.0 of cash, including $117.0 of property, plant and equipment purchases and a $211.1 net cash outflow from notes receivable. Financing activities provided $327.5. Cash increased by $236.2 during the quarter.
Material changes versus the prior comparable period
- Revenue increased 4%, but gross profit declined $59.1 and CHS-attributable net income fell $57.3, or 22%.
- Energy pretax income fell $122.9, or 64%, mainly due to significantly reduced refining margins in the sector downturn.
- Ag pretax income rose $39.9, or 58%, supported by improved grain, renewable fuels and crop nutrient margins.
- New Nitrogen Production operations contributed $27.0 of pretax income; there is no comparable prior-year segment result because the CF Nitrogen investment was made in February 2016. Foods pretax income declined $7.7, or 42%.
- Interest expense increased $29.2 to $38.3, largely from higher debt balances and lower capitalized interest. Marketing, general and administrative expense rose $14.2, including a $29.5 increase in the allowance for doubtful accounts, partly offset by lower other expenses.
- Operating cash flow declined $177.7, primarily because of greater working-capital cash needs, particularly inventory purchases and supplier advances. Cash was $515.5 at quarter-end versus $1,257.3 at November 30, 2015.
Outlook, management commentary, risks and unusual items
- Management described a prolonged downturn across Ag and Energy, with pressure on revenues, margins and cash flows and uncertain duration and severity. CHS said it was holding overhead costs flat, reducing capital investments through fiscal 2017 and into fiscal 2018, and focusing on returns from assets.
- Fiscal 2017 capital expenditures were forecast at approximately $632.0, including $262.0 for refinery property, plant and equipment and major repairs. The McPherson refinery expansion was completed and operational in Q1 FY2017.
- Management expected second-quarter working-capital needs and short-term borrowing needs to increase seasonally, but said available cash and committed credit capacity should be adequate. It believed operating cash flow and available revolving capacity would support operations for the next 12 months. No specific earnings guidance was provided.
- Results included a $29.1 gain from remeasuring an embedded derivative connected to the CF Nitrogen agreement, as well as a $5.0 contractual payment following a CF Industries credit-rating reduction. The embedded derivative asset was valued at $24.1 at quarter-end. These items contributed materially to other income and Nitrogen Production results.
- CHS cited commodity-price, weather, crop, supply, regulatory and geopolitical risks. The Renewable Fuels Standard and volatile Renewable Identification Number prices were identified as relevant to refining; the 2017 mandate-related price increase had not materially affected results as of the filing.
- CHS Capital’s loan-loss reserves increased to $71.9 from $45.8, nearly all due to one producer borrower. That borrower represented 19% of total CHS Capital short- and long-term notes receivable; management warned that changes in collateral values or assumptions could require material reserve adjustments. Past-due notes were approximately 3.0% of CHS Capital notes outstanding.
- Guarantees of related companies’ lines of credit and performance obligations totaled $137.2 outstanding under a $1.0 billion permitted maximum; CHS had not recorded a liability and said underlying loans were current. Disclosure controls were assessed as effective. ERP implementation was ongoing and expected to take several years.
Important facts for investors to verify
- Whether operating performance improves or remains constrained by the Energy downturn, commodity prices and thin margins, especially given Energy’s sharp earnings decline.
- Whether the $71.9 loan-loss reserve adequately reflects exposure to the concentrated producer borrower and the value of its collateral.
- How much of reported earnings depends on the CF Nitrogen embedded-derivative gain and contractual credit-rating payment, and how future distributions and investment earnings develop.
- Whether seasonal working-capital requirements, the current ratio of 1.0 and increased short-term borrowing remain manageable under the company’s liquidity and covenant facilities.
- Whether the $632.0 fiscal 2017 capital expenditure plan and the completed McPherson expansion deliver expected returns while management reduces investment spending.