CHS Inc. — Fiscal 2021 Second-Quarter Form 10-Q
Business context and period: CHS is a farmer- and cooperative-owned agricultural, food and energy enterprise. This unaudited report covers the three and six months ended February 28, 2021, compared with the corresponding periods ended February 29, 2020. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended Feb. 28, 2021 | Three months ended Feb. 29, 2020 | Six months ended Feb. 28, 2021 | Six months ended Feb. 29, 2020 |
|---|---|---|---|---|
| Revenue | $8,320m | $6,598m | $17,036m | $14,220m |
| Gross profit / margin | $102m / 1.2% | $315m / 4.8% | $280m / 1.6% | $641m / 4.5% |
| Operating earnings (loss) | $(60)m | $115m | $(52)m | $273m |
| Net income (loss) attributable to CHS Inc. | $(38)m | $125m | $31m | $303m |
| Equity income from investments | $64m | $34m | $114m | $84m |
| Interest expense | $29m | $33m | $54m | $68m |
- Cash flow: Six-month operating cash flow was $(1,135)m, versus $302m provided a year earlier, chiefly reflecting working-capital investment, especially a $1,496m inventory increase. Investing cash use was $70m. Financing provided $1,320m; cash and restricted cash increased $117m to $334m. Balance-sheet cash and cash equivalents were $218m.
- Liquidity and debt: At February 28, 2021, working capital was $1.4bn and the current ratio was 1.2. Notes payable were $2.95bn; long-term debt including current maturities was $1.77bn. The $2.75bn revolving facility had $1.265bn drawn. The $538m securitization availability and $150m repurchase facility were fully utilized. CHS reported compliance with debt covenants.
- Balance sheet: Total assets were $18.57bn, total equities $8.72bn, and inventories $4.25bn, up from $2.74bn at August 31, 2020.
Material changes versus prior year
- Second-quarter revenue rose 26%, but gross profit fell 68%; CHS reported a quarterly operating loss and a $38m net loss attributable to CHS, versus $125m attributable net income a year earlier. Year-to-date attributable net income fell to $31m from $303m.
- Ag revenue increased 35% in the quarter and 33% year to date, supported by stronger grain and oilseed volumes and prices, improved trade relations and favorable weather. Ag pretax income improved to $14m for the quarter and $97m year to date.
- Energy remained under pressure: quarterly revenue declined 6%, and the segment recorded a $55m pretax loss versus $139m income. Year-to-date Energy pretax loss was $122m versus $301m income. COVID-related demand effects, weaker crack spreads and crude differentials, and higher renewable fuel credit costs weighed on results.
- Quarterly equity income rose 86%, chiefly due to stronger TEMCO results and higher CF Nitrogen and Ardent Mills income. Year-to-date equity income increased 36%.
- Marketing, general and administrative expenses declined 19% in the quarter and 10% year to date, reflecting cost reductions, lower employee-related costs and lower bad-debt expense. Interest expense also decreased.
Outlook, risks and unusual items
- Management expected uncertain, volatile Energy conditions to weigh on profitability through the remainder of fiscal 2021, citing pandemic-related demand weakness and sharply higher renewable identification number (RIN) costs. RIN prices increased substantially year over year; CHS estimated a negative Energy margin impact of about $40m in the quarter and $63m year to date.
- Management expected Ag core-operation revenue, margins and cash flows to stabilize through the rest of fiscal 2021, while noting risks from global supply and demand, commodity prices and weather. Some grain and oilseed mark-to-market losses were expected to reverse over time.
- Fiscal 2021 expected cash requirements included approximately $467.5m of capital expenditures, $555.3m of long-term debt and finance-lease repayments, $73.7m of interest payments, and $168.7m of preferred dividends. The Board authorized approximately $30m of fiscal 2020 patronage payments and $38m of equity redemptions for fiscal 2021.
- CHS said liquidity, including cash, operating and investing cash flows and available borrowing capacity, should support operations for the foreseeable future. It was reducing spending and reprioritizing capital expenditures while managing COVID-19 impacts. These are management expectations, not guarantees.
- Twenty-one putative class actions filed between January 8 and March 16, 2021, alleged antitrust and related violations involving crop-input pricing and sales platforms. The company said it was too early to assess outcome or potential loss. It also reported ordinary-course litigation and environmental matters, which management did not expect to be material.
- Other notable items: CHS adopted the expected-credit-loss accounting standard with no material financial-statement impact; a tax-planning intercompany asset transfer affected tax expense. The quarter’s tax expense was $31.7m despite a pretax loss, producing a reported effective tax rate of (473.4)%.
Important facts for investors to verify
- Whether Energy margins and RIN costs improve or continue to pressure earnings through fiscal year-end.
- Whether Ag volumes, commodity margins and the expected reversal of mark-to-market losses support management’s stabilization outlook.
- How working-capital needs, particularly inventory levels, affect operating cash flow and borrowing requirements.
- Available liquidity and refinancing needs, given elevated notes payable and fully utilized securitization and repurchase facilities.
- Developments in the crop-input class actions, including any subsequent estimate of potential exposure.
- Actual fiscal 2021 capital spending, debt payments, preferred dividends, patronage and equity redemptions versus planned amounts.