Business context and reporting period
CHS Inc. is a farmer-owned cooperative operating in agriculture, energy, food and related services. This unaudited Form 10-Q covers the third quarter and nine months ended May 31, 2017; comparisons are with the corresponding 2016 periods. Results are subject to seasonal and commodity-market fluctuations.
Key financial metrics
| Metric | Three months ended May 31, 2017 | Nine months ended May 31, 2017 |
|---|---|---|
| Revenue | $8.614 billion | $23.983 billion |
| Gross profit | $247.1 million | $840.5 million |
| Operating earnings (loss) | ($230.3 million) | ($33.3 million) |
| Net income (loss) attributable to CHS Inc. | ($45.2 million) | $178.5 million |
| Cash from operating activities | Not provided for quarter | $204.8 million |
Gross margin was approximately 2.9% for the quarter and 3.5% year to date, versus 4.1% and 3.7%, respectively, in 2016. Revenue rose 10% for the quarter and 8% year to date, while gross profit fell $70.4 million for the quarter and increased $22.2 million year to date.
At May 31, 2017, cash was $267.2 million; working capital was $311.1 million and the current ratio was 1.0. Notes payable were $3.322 billion and long-term debt, including its current portion, was approximately $2.239 billion. Total equities were $7.859 billion. Cash from operations declined from $262.4 million in the prior-year nine-month period. Capital expenditures were $298.0 million, compared with $557.7 million a year earlier.
Material changes versus the prior comparable period
- Quarterly net loss attributable to CHS replaced prior-year net income of $190.3 million; year-to-date net income attributable to CHS fell from $425.8 million to $178.5 million.
- Quarterly operating results were sharply affected by $323.9 million of reserve and impairment charges, including $229.4 million related to a Brazilian trading partner’s bankruptcy, a $32.7 million Energy project impairment, and $51.8 million of Ag asset and goodwill impairment.
- Energy and Ag segment results deteriorated. Quarterly pretax results shifted from income to losses in both segments; Ag’s nine-month pretax result shifted from $62.3 million of income to a $121.3 million loss.
- Interest expense rose to $117.4 million year to date from $71.6 million, reflecting higher debt and lower capitalized interest. Year-end-to-date notes payable increased from $2.731 billion at August 31, 2016 to $3.322 billion.
- Operating cash flow was lower year over year, while investing cash outflow improved substantially because the prior-year period included the $2.8 billion CF Nitrogen investment.
Outlook, management commentary, risks and unusual items
Management described a challenging Ag and Energy cycle, with pressure on revenue, margins and cash flow expected to continue. It cited expense control, working-capital management, debt reduction, constrained investment and review or sale of underperforming or nonstrategic assets as actions to restore financial flexibility. Management expects cash from operations and available borrowing capacity to support operations for the foreseeable future and expects covenant compliance.
Fiscal 2017 capital expenditures were projected at approximately $500 million, including about $227 million for refinery equipment and major repairs; management said the spending level remained under review. CHS expected to fund approximately $230 million of Brazilian loan guarantees within 12 months, using a combination of cash flow and liquidity actions. Recovery efforts relating to the Brazilian counterparty were at an early stage; no recoveries had been recorded.
Brazil-related deferred tax benefits were $75.0 million for equity redemptions and $84.4 million related to the tax treatment of losses funded through guarantees. These benefits contributed substantially to the quarterly tax benefit of $163.0 million and year-to-date tax benefit of $137.8 million. A separate $30.1 million gain year to date related to an embedded derivative in the CF Nitrogen agreement. Management noted volatile commodity prices, seasonal working-capital needs and potential volatility in Renewable Identification Number prices. The filing reported no material change in risk factors or market-risk exposures.
The company reported compliance with debt covenants. Its $3.0 billion revolving facility had $1.1 billion outstanding; a $750 million securitization facility had $618.0 million funded. Disclosure controls were considered effective. The filing also disclosed an EPA penalty payment of $198,775 relating to refinery flaring incidents.
Most important facts for investors to verify
- How much of the $230 million expected Brazilian guarantee funding has been paid, and what recovery prospects exist for the $229.4 million counterparty charges?
- Whether working capital, short-term borrowing and liquidity improve as seasonal inventory is sold and receivables collected.
- Whether the projected $500 million fiscal-year capital program is maintained, and how asset-sale plans affect proceeds and impairment risk.
- Whether refining margins, Ag segment credit losses, and equity income from CF Nitrogen and Ventura Foods recover or remain under pressure.
- How much earnings depended on the disclosed tax benefits and other unusual items, and whether future periods contain comparable benefits or charges.