CHS Inc. 10-Q Filing Summary
Business Context and Reporting Period
Company: CHS Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2009 (Third Quarter of Fiscal 2009)
Business Overview: CHS is a diversified cooperative providing grain, foods, and energy resources. Operations are organized into three segments: Energy (petroleum products), Ag Business (grains, oilseeds, crop inputs), and Processing (value-added grain products). The company also operates Corporate and Other functions including financial services and hedging.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended May 31, 2009 | Nine Months Ended May 31, 2009 |
|---|---|---|
| Revenues | $6,163,119 | $19,074,107 |
| Net Income | $64,569 | $284,100 |
| Operating Earnings | $67,851 | $416,621 |
| Gross Profit | $158,268 | $693,752 |
| Net Cash Provided by Operating Activities | N/A | $678,240 |
| Cash and Cash Equivalents (End of Period) | $166,480 | $166,480 |
| Total Assets | $8,370,429 | $8,370,429 |
| Total Liabilities | $5,206,734 | $5,206,734 |
| Long-Term Debt | $1,026,402 | $1,026,402 |
| Working Capital | $1,716,272 | $1,716,272 |
Material Changes vs. Prior Comparable Period
- Revenue Decline: Revenues decreased 34% ($3.1 billion) for the quarter and 16% ($3.7 billion) for the nine months compared to the prior year. This was primarily driven by significant declines in commodity prices for refined fuels, grains, and crop nutrients.
- Profitability Drop: Net income fell 66% ($124.1 million) for the quarter and 57% ($373.5 million) for the nine months. Income before taxes dropped 63% for the quarter and 56% for the nine months.
- Segment Performance:
- Energy: Pretax earnings increased 211% for the quarter and 80% for the nine months, driven by higher margins on refined fuels at refineries in Laurel, Montana, and McPherson, Kansas.
- Ag Business: Pretax earnings decreased 87% for the quarter and 89% for the nine months. This was due to lower crop nutrient margins, reduced grain marketing earnings, and a $83 million lower-of-cost-or-market inventory adjustment on crop nutrients.
- Processing: Pretax earnings decreased 17% for the quarter. For the nine months, the segment reported a net loss of $29.3 million, largely due to a $74.3 million loss on the VeraSun investment.
- Investment Losses: The company recorded a $74.3 million loss on its investment in VeraSun Energy Corporation (ethanol manufacturer) during the nine months ended May 31, 2009, following VeraSun's bankruptcy. A final write-off of $3.6 million occurred in the third quarter.
- Cash Flow: Net cash provided by operating activities increased to $678.2 million for the nine months (vs. $512.1 million prior year), primarily due to a decrease in net operating assets and liabilities resulting from lower commodity prices reducing working capital needs.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates continued price volatility in grain and crude oil markets but within a narrower band. Crude oil prices are expected to remain lower than June 2008 peaks.
- Capital Expenditures: The company expects to spend approximately $503.9 million on property, plant, and equipment for the fiscal year ending August 31, 2009. This includes approximately $134 million for benzene removal at refineries to comply with EPA regulations effective January 1, 2011.
- Unusual Items:
- VeraSun Write-off: A significant non-cash loss of $74.3 million related to the VeraSun investment.
- Inventory Adjustments: Approximately $83 million in lower-of-cost-or-market adjustments recorded in the Ag Business segment due to falling fertilizer prices.
- Investment Gains: A $15.7 million gain on the sale of NYMEX Holdings stock and a $25.5 million gain on the sale of a Canadian agronomy investment partially offset losses.
- Risks: Key risks include exposure to commodity price fluctuations, weather impacts on crop production and application, counterparty nonperformance, and regulatory compliance costs (environmental). The cooperative structure limits access to equity capital.
- Liquidity: The company maintains a current ratio of 1.5 to 1.0. Committed lines of credit total $1.6 billion ($1.3 billion five-year revolver and $300 million 364-day revolver), with $272 million outstanding as of May 31, 2009.
Investor Verification Checklist
- Commodity Price Exposure: Verify current market prices for grain, oilseed, and fertilizer against the company's inventory valuation and hedging positions.
- VeraSun Investment Status: Confirm the finality of the VeraSun write-off and any remaining contingent liabilities.
- Inventory Valuation: Review the remaining $24.2 million lower-of-cost-or-market adjustments in inventory and the potential for further write-downs if prices continue to fall.
- Capital Expenditure Commitments: Assess the funding requirements for the $134 million EPA benzene removal project and other refinery upgrades.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly regarding working capital levels, given the volatility in operating assets.
- Patronage Distributions: Monitor the cash portion of patronage distributions ($227.6 million paid in the nine months) and its impact on cash flow.