CHS Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2023. CHS is a farmer-owned agricultural cooperative with Energy, Ag and Nitrogen Production segments. Financial statements are unaudited; results are seasonal and may not indicate full-year performance.
Financial performance
- Third quarter: Revenue was $12.03 billion, down 8.5% year over year; gross profit was $674.3 million, up 4.7%; operating earnings were $401.1 million, essentially unchanged. Net income attributable to CHS was $547.5 million, down 5.0% from $576.6 million. Gross margin improved to 5.6% from 4.9%; operating margin was 3.3% versus 3.1%.
- Nine months: Revenue was $36.10 billion, up 5.1%; gross profit was $1.94 billion, up 35.2%; operating earnings were $1.19 billion, up 60.3%. Net income attributable to CHS was $1.62 billion, up 30.1%. Gross margin rose to 5.4% from 4.2%, and operating margin to 3.3% from 2.2%.
- Segment results, third quarter income before income taxes: Energy was $199.0 million versus $163.2 million; Ag was $233.5 million versus $273.7 million; Nitrogen Production was $56.3 million versus $178.2 million; Corporate and Other was $69.3 million versus $23.6 million.
- Cash flow, nine months: Operating activities provided $1.97 billion, compared with $7.1 million used in the prior-year period. Investing activities used $651.1 million and financing activities used $1.15 billion. Cash and cash equivalents were $997.3 million at May 31; cash and restricted cash together increased $171.5 million during the period.
- Liquidity and debt: Working capital was $2.77 billion, up $339.4 million from August 31, 2022; the current ratio was 1.4 versus 1.3. Notes payable were $606.0 million and long-term debt, including current maturities, was $1.95 billion. The $2.8 billion revolving credit facility and $1.0 billion securitization facility had no borrowings outstanding. CHS reported compliance with debt covenants.
Changes and key drivers
- Third-quarter revenue declined mainly because lower commodity prices reduced reported Energy and Ag sales. Energy earnings nevertheless increased, helped by hedging-related gains and wider Western Canadian Select crude discounts; lower crack spreads and reduced refinery output partly offset those gains.
- Planned major maintenance at the Laurel refinery in April and May reduced throughput and higher-margin refined-fuel production. Nine-month Energy earnings rose substantially as stronger crack spreads and crude discounts more than offset maintenance-related production losses and higher costs, including RIN and repair expenses.
- Ag earnings declined in both the quarter and nine-month period, primarily because lower urea and UAN prices compressed agronomy margins. Strong meal and oil demand supported oilseed-processing margins; drought-related lower grain volumes and weaker ethanol prices were additional factors.
- Nitrogen Production earnings fell as lower urea and UAN selling prices reduced CF Nitrogen equity income. Total equity income from investments declined 38.1% in the quarter and 18.8% over nine months. Ventura Foods income improved and partly offset the CF Nitrogen decline.
- Interest expense increased 15.1% for the quarter and 31.5% over nine months, primarily reflecting higher interest rates. Higher interest income and a larger interest-earning cash balance increased other income.
Outlook, risks and unusual items
- Management provided no specific earnings or revenue forecast. It expects uncertainty to persist through the remainder of fiscal 2023, citing the Russia-Ukraine war, interest rates, bank failures, inflation, commodity markets, renewable-fuel credit costs and unpredictable weather. Management expects the imbalance between global agricultural supply and strong demand to continue moderating, but cannot predict its duration or financial impact.
- Fiscal 2023 expected cash requirements include approximately $730.2 million of capital expenditures and $238.3 million of major maintenance. Nine-month spending was $374.2 million on property, plant and equipment and $184.4 million on major maintenance. CHS said operating and investing cash flows plus available borrowing capacity should support its operations.
- Commodity-price, volume, weather, supply-chain, geopolitical, regulatory, interest-rate and counterparty risks may affect results. CHS also cited seasonality and volatility in agricultural and energy markets. Market-risk exposures were not materially changed from the prior annual report.
- Environmental matters and ordinary-course litigation were not expected by management to materially affect financial position, results or cash flows. Guarantees for related nonconsolidated entities totaled $74.3 million; CHS had not recorded a liability and said the underlying loans were current. Unrecognized tax benefits were $115.7 million, and the amount could change significantly within 12 months.
- Inventory valuation is subject to year-end LIFO estimates: FIFO inventory would have been $477.8 million higher at May 31. In July 2023, after quarter-end, CHS amended its securitization arrangements and added a repurchase facility with up to $200 million of financing capacity.
Important facts for investors to verify
- Whether CF Nitrogen earnings remain under pressure as fertilizer prices and supply-demand conditions change, and how much Ventura Foods offsets that pressure.
- Whether Laurel refinery operations and margins normalize after the planned turnaround, including the effects of crack spreads, crude discounts and RIN prices.
- Whether Ag margins recover as agronomy prices adjust, and how drought, grain volumes and global demand affect results.
- Whether the forecast capital spending, maintenance, debt service, preferred dividends, patronage and equity redemptions remain supportable from cash flows and available facilities.
- How year-end LIFO inventory valuation, seasonal working-capital movements and commodity hedging affect reported earnings and cash flow.