CHS Inc. — FY2017 Form 10-K
Business context and reporting period. CHS is a farmer- and rancher-owned integrated agricultural cooperative with Energy, Ag, Nitrogen Production and Foods segments. The fiscal year ended August 31, 2017; the filing also reports quarterly results. CHS has no common stock outstanding; its preferred shares trade on Nasdaq.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $31.93 billion | $30.35 billion |
| Gross profit | $949.2 million | $959.3 million |
| Gross margin | 3.0% | 3.2% |
| Operating earnings (loss) | $(111.8) million | $310.2 million |
| Income (loss) before tax | $(54.9) million | $419.9 million |
| Net income attributable to CHS | $127.9 million | $424.2 million |
| Cash from operating activities | $933.0 million | $1.26 billion |
- FY2017 revenue rose 5.2%, but gross profit edged down and operating results turned to a loss. The $182.1 million income tax benefit—large relative to the pretax loss—allowed positive net income despite the operating loss.
- Cash and cash equivalents were $181.4 million; working capital was $181.9 million, down from $414.4 million, and the current ratio was 1.0 versus 1.1.
- At year-end, notes payable were $1.99 billion and long-term debt, including current maturities, was $2.18 billion. Total equity was $7.91 billion. Interest expense increased to $171.2 million from $113.7 million.
- Investing cash outflow was $405.0 million; capital expenditures were $444.4 million. Cash declined by $97.9 million to $181.4 million.
- Energy generated $76.9 million of pretax income, while Ag recorded a $230.9 million pretax loss. Nitrogen Production, Foods and Corporate and Other reported pretax income of $29.7 million, $26.0 million and $43.4 million, respectively.
Material changes and unusual items
- Reserve and impairment charges surged to $456.7 million from $47.8 million. Major items included $229.4 million related to a Brazilian trading partner’s bankruptcy-like proceedings, an $81.0 million increase in reserves for a single producer borrower, $110.6 million of Ag long-lived asset and goodwill impairments, and a $32.7 million Energy project impairment.
- CHS recorded a $130.7 million reserve against supplier advances associated with the Brazilian trading partner, in addition to the receivables reserve. Recovery efforts were underway, but no recovery was recorded.
- Energy pretax income fell 72%, primarily on weaker refined-fuel margins, partly offset by higher volumes. Ag moved from pretax income of $30.9 million to a $230.9 million loss, reflecting the Brazil-related charges, producer-loan reserves and impairments, partly offset by stronger crop nutrient and renewable-fuels results.
- The Brazilian producer loan situation also involved approximately $170 million of loan guarantees CHS expected to fund during the first nine months of FY2018. A separate producer loan workout involved CHS taking title to about 14,000 acres; the filing says a later sale of related rights generated a small gain in FY2018.
- Quarterly results were volatile: the quarter ended May 31, 2017 had a $209.2 million pretax loss; the quarter ended August 31, 2017 had a $94.8 million pretax loss and a $50.7 million loss attributable to CHS.
Outlook, risks and contingencies
- Management expected the weak Ag and Energy environment—lower commodity prices, compressed margins, reduced liquidity and higher leverage—to persist in FY2018, with revenue, margins and cash flows remaining under pressure. It did not foresee significant changes in that environment during FY2018.
- FY2018 priorities included restoring financial flexibility, controlling expenses, improving working-capital and asset efficiency, reducing funded debt, strengthening risk management and continuing the multi-year ERP implementation.
- Management forecast FY2018 capital expenditures of approximately $602 million, including about $221 million for refinery equipment and major repairs and a planned $92 million Laurel refinery turnaround. It expected $149.1 million of long-term debt repayments, $87.8 million of interest payments and $168.7 million of preferred dividends.
- CHS stated that operating cash flows and available borrowing capacity should support operations and that it expected to remain within debt covenants. It was in compliance with covenants at year-end. The receivables securitization facility had $618 million of availability, all utilized, and was scheduled to terminate July 17, 2018, unless extended.
- Key risks include commodity-price and margin volatility, seasonal and weather-related changes, counterparty and borrower defaults, member business shifting to competitors, international and currency exposure, environmental and regulatory obligations, RIN price volatility, operational interruptions, and ERP/cybersecurity risks. CHS also relies on joint ventures it does not control.
- CHS disclosed ordinary-course litigation that management did not expect to be material. Separately, Montana regulators proposed a $184,550 penalty over alleged air-emissions permit violations at the Laurel refinery; CHS disputed aspects and was awaiting a response.
Investor verification priorities
- Review the collectability and recovery prospects for the Brazilian receivables and supplier advances, including the expected timing and funding of the approximately $170 million in guarantees.
- Assess the producer-loan exposure, collateral and reserve adequacy, and verify the effects of the land transfer and subsequent sale described in the filing.
- Reconcile reported net income with the operating loss and unusually large tax benefit; assess the sustainability of tax credits, deductions and deferred tax assets.
- Check liquidity and refinancing needs, including short-term borrowings, the fully utilized securitization facility, and the facility’s renewal or replacement before its stated expiry.
- Track whether management’s FY2018 cash-flow, capital-spending and debt-reduction plans are achieved while margins remain under pressure.