CHS Inc. Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended February 29, 2016; comparisons are to the periods ended February 28, 2015. CHS is a diversified farmer-owned cooperative operating in energy, agriculture and related businesses. Results are seasonal, with the second fiscal quarter historically its weakest income period.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $6.64 billion, down 21% | $14.37 billion, down 20% |
| Gross profit | $89.0 million, versus $245.6 million | $500.8 million, versus $837.7 million |
| Gross margin | 1.3%, versus 2.9% | 3.5%, versus 4.7% |
| Operating earnings (loss) | $(91.8) million, versus $74.9 million | $168.0 million, down 67% |
| Net income attributable to CHS | $(31.0) million, versus $92.8 million | $235.5 million, down 50% |
| Operating cash flow | Not presented for quarter | $319.1 million, versus cash used of $502.2 million |
Quarterly operating results deteriorated sharply amid lower margins in Energy and Ag. Six-month revenue fell mainly with lower commodity selling prices; lower prices also reduced costs of goods sold, but not enough to preserve prior-year earnings. The six-month cash-flow improvement primarily reflected less cash used in working capital than in the prior-year period.
Liquidity, debt and investment
- At February 29, cash was $339.5 million; working capital was $890.8 million and the current ratio was 1.1, compared with $2.8 billion and 1.5 at August 31, 2015.
- Notes payable were $2.80 billion and long-term debt, including current portion, was approximately $2.64 billion. CHS reported compliance with debt covenants.
- CHS invested $2.8 billion in CF Nitrogen on February 1, funded with long-term debt, credit-facility borrowings and available cash. The investment gives CHS an 11.4% membership interest and, under an 80-year supply agreement, rights to purchase up to 1.1 million tons of granular urea and 580,000 tons of UAN annually.
- Cash declined by $614.3 million during the six months. Investing activities used $3.25 billion, chiefly reflecting the CF Nitrogen investment; financing activities provided $2.31 billion.
Material changes and unusual items
- Energy six-month pretax income fell 55% to $129.8 million, principally on significantly reduced refining margins. An $80.2 million noncash inventory lower-of-cost-or-market charge reduced results; the quarter included a $46.1 million charge.
- Ag six-month pretax income fell 81% to $38.1 million, with lower margins in crop nutrients, country operations and grain marketing among the causes.
- New Nitrogen Production segment results included $11.9 million of CF Nitrogen equity income for the quarter and six-month period; CHS reported $1.3 million pretax segment income.
- Six-month tax benefit was $22.6 million, versus tax expense of $54.9 million a year earlier. CHS attributed the benefit primarily to an IRS settlement and recognition of tax credits enacted in 2015.
- CHS completed its purchase of the remaining CHS McPherson refinery interests, increasing ownership to 100% in September 2015. The remaining crack-spread contingent liability was valued at $24.2 million at period end.
- Comparative prior-period figures were revised for immaterial lease-accounting and cash-flow presentation errors; CHS said the revisions did not materially affect prior periods.
Outlook, commentary and risks
- Management described Ag and Energy as being in a down cycle, with lower commodity prices and global margins pressuring revenue, margins and cash flows. CHS said the duration and severity were uncertain and it was managing costs and investments while pursuing opportunities.
- No specific earnings or revenue guidance was provided. CHS expected fiscal 2016 capital expenditures of approximately $912.1 million, including refinery work, and stated operating cash flow plus available revolving-credit capacity should support operations for the next 12 months.
- Risks highlighted include commodity-price and margin volatility, additional potential inventory valuation charges if energy prices fall, seasonal working-capital demands, and volatile Renewable Identification Number (RIN) prices under the Renewable Fuels Standard.
- CHS reported disclosure controls were effective. Implementation of a new enterprise resource planning system began in December 2015 and is expected to take several years.
- Subsequent events: in April 2016 CHS accepted a proposed $90,000 MDEQ penalty concerning sulfur dioxide emissions at its Laurel refinery. Also in April, CHS disclosed new CEO employment and change-in-control agreements effective September 1, 2016.
Important facts for investors to verify
- Whether Energy and Ag margins stabilize, and whether further inventory write-downs or RIN-cost changes affect results.
- CF Nitrogen investment economics, distributions and supply-agreement performance relative to the $2.8 billion commitment and financing burden.
- Available borrowing capacity, covenant headroom and working-capital needs given lower cash, higher short-term borrowings and seasonal inventory buildup.
- Whether management’s capital-spending plan and stated 12-month liquidity expectations remain achievable.
- The final fiscal-year inventory valuation, since interim LIFO estimates and commodity prices can change.