CHS Inc. Form 10-Q Summary
Reporting period: Fiscal first quarter ended November 30, 2023, compared with the three months ended November 30, 2022. CHS is a diversified agricultural cooperative with Energy, Ag and Nitrogen Production segments. Amounts below are in U.S. dollars; financial statement values are converted from thousands to millions.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $11,390.7 million | $12,765.8 million | Down 10.8% |
| Gross profit / gross margin | $645.0 million / 5.7% | $879.1 million / 6.9% | Margin down 1.2 percentage points |
| Operating earnings / operating margin | $392.9 million / 3.4% | $644.5 million / 5.0% | Down 39.0% |
| Net income attributable to CHS Inc. | $522.9 million | $782.6 million | Down 33.2% |
| Operating cash flow | $(147.6) million | $(180.2) million | Cash used decreased by $32.6 million |
Income before taxes was $516.8 million, compared with $817.5 million. The effective tax rate was (1.3)% versus 4.2%; the current-quarter tax benefit primarily reflected research and development tax credits. Interest expense declined to $29.6 million from $33.3 million. Equity income from investments fell to $109.1 million from $182.0 million, chiefly reflecting lower CF Nitrogen earnings as urea and UAN prices declined.
Segments and material year-over-year changes
- Energy: Revenue declined 12.9% to $2,717.9 million; segment income before taxes decreased 32.7% to $266.8 million. Lower crack spreads and narrower WCS crude oil discounts reduced income before taxes by $228.0 million. Lower RIN costs, higher propane margins and greater refined-fuel production partly offset the decline.
- Ag: Revenue declined 10.2% to $8,652.2 million; segment income before taxes decreased 40.9% to $169.7 million. Lower grain, oilseed and crop-nutrient prices reduced reported revenue, while weak U.S. export demand and derivative mark-to-market timing compressed margins. Higher grain and oilseed volumes provided a partial offset.
- Nitrogen Production: Income before taxes decreased 62.4% to $36.5 million, primarily due to lower fertilizer selling prices, partly offset by lower natural gas costs. CF Nitrogen’s reported net earnings were $263.3 million, versus $764.2 million.
- Corporate and Other: Income before taxes rose to $43.8 million from $36.7 million, primarily due to higher interest income.
Management said earnings remained strong across segments but were below the prior-year record. Revenue declines largely reflected lower commodity selling prices; Ag grain and oilseed volumes increased. Marketing, general and administrative expenses rose 7.4% to $252.1 million, including higher salary and consulting costs, partly related to enterprise resource planning and technology initiatives.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $1,349.8 million at November 30, 2023, down from $1,765.3 million at August 31, 2023. Cash, cash equivalents and restricted cash together decreased $425.7 million during the quarter to $1,418.9 million.
- Investing cash outflow was $99.6 million; financing cash outflow was $174.5 million. Property, plant and equipment purchases were $142.4 million.
- Working capital was $3,620.8 million, up $391.3 million from fiscal year-end; the current ratio was 1.5. Seasonal increases in receivables and inventories, largely associated with fall harvest, contributed to higher current assets and accounts payable.
- Notes payable were $421.6 million and long-term debt, including current maturities, was $1,825.6 million. Total debt on these measures was approximately $2,247.1 million. CHS reported compliance with all debt covenants.
- The $2.8 billion revolving credit facility, which expires April 21, 2028, had no borrowings outstanding. The securitization facility had $974.2 million of availability and no amount utilized; the $200 million repurchase facility also had no balance outstanding.
- Total assets were $20,432.9 million and total equities were $10,697.4 million at November 30, 2023.
Outlook, risks and contingencies
CHS provided no specific earnings or revenue guidance. Management expects global supply-and-demand imbalances in energy and agricultural commodities to continue moderating through the rest of fiscal 2024, but emphasized that the duration and severity of market conditions and their financial and operational effects cannot be predicted. It cited geopolitical conflicts, shifting trade flows, higher interest rates, inflation and labor, freight and materials costs, volatile renewable energy credit prices, and unpredictable weather as sources of uncertainty.
Fiscal 2024 planned cash uses include approximately $971.8 million of capital expenditures, $22.0 million of major maintenance, $88.3 million of interest payments on long-term debt, and $168.7 million of preferred dividends. The board authorized approximately $365 million of fiscal 2023 patronage-sourced earnings to be paid to member-owners in fiscal 2024, and equity redemptions of up to $365 million. Management believes operating and investing cash flows and available borrowing capacity will support operations and expects continued covenant compliance.
Commodity price, volume, foreign exchange and interest-rate exposures are managed in part through derivatives; market movements and hedge timing can affect earnings. Management said environmental matters and ordinary-course litigation are not expected to have a material effect, individually or in aggregate. Guarantees of related nonconsolidated companies’ credit lines and performance obligations totaled $158.6 million; underlying loans were current, and CHS did not expect to make payments under the guarantees. No material changes to the previously disclosed risk factors or market-risk exposures were reported.
As a seasonal business, CHS cautioned that interim results may not indicate full-year performance; revenues and income before taxes generally trend lower in the second fiscal quarter and rise in the third. After quarter-end, Series 2 and Series 3 preferred-stock dividend rates were fixed at 7.10% and 6.75%, respectively, for periods beginning after their March 31, 2024 and September 30, 2024 payment dates.
Important facts for investors to verify
- Whether Energy and Ag margins stabilize, given lower crack spreads, weak U.S. grain export demand and continued commodity-price volatility.
- Whether CF Nitrogen earnings and distributions recover or remain affected by fertilizer prices and natural gas costs.
- How seasonal working-capital requirements and planned capital spending affect cash balances, borrowing needs and liquidity through the year.
- Whether fiscal 2024 capital expenditure, patronage, equity redemption and preferred-dividend plans remain consistent with cash generation and covenant compliance.
- The effect of RIN prices, derivative mark-to-market timing, geopolitical events, weather and inflation on operating results.
- The amount and outcome of uncertain tax positions: CHS disclosed $130.4 million of unrecognized tax benefits that would benefit its effective tax rate if all relevant positions were sustained.