CHS Inc. Form 10-K Summary
Reporting period: Fiscal year ended August 31, 2019. CHS is a farmer- and cooperative-owned agricultural cooperative with Energy, Ag, and Nitrogen Production segments. Fiscal Q4 refers to the three months ended August 31, 2019; annual results are presented alongside Q4 data where available.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $31.90 billion | $32.68 billion |
| Gross profit | $1.384 billion | $1.092 billion |
| Operating earnings | $659.6 million | $452.4 million |
| Income before income taxes | $815.6 million | $671.2 million |
| Net income attributable to CHS | $829.9 million | $775.9 million |
| Operating cash flow | $1.140 billion | $1.074 billion |
| Cash used in investing activities | $661.3 million | $79.5 million |
Gross margin was approximately 4.3% of revenue, up from 3.3%; operating margin was approximately 2.1%, versus 1.4%. Revenue declined about 2.4%, while net income attributable to CHS increased about 7%. The filing reports a fiscal 2019 income tax benefit of $12.5 million, compared with a $104.1 million benefit in fiscal 2018.
In Q4, revenue was $8.435 billion versus $8.584 billion a year earlier; gross profit was $262.5 million versus $391.0 million; pretax income was $124.9 million versus $248.3 million; and net income attributable to CHS was $179.0 million versus $240.4 million.
At August 31, 2019, cash and cash equivalents were $211.2 million, working capital was $1.079 billion, and the current ratio was 1.2. Total assets were $16.45 billion and total equity was $8.62 billion. Notes payable were $2.156 billion and long-term debt, including current maturities, was $1.789 billion. Debt covenants were met. The $2.75 billion committed revolving facility had $335 million outstanding; the $632 million available securitization capacity was fully utilized, and the $150 million repurchase facility was also fully drawn.
Material changes and segment results
- Energy: Segment pretax income rose 36.7% to $618.2 million, led by favorable heavy Canadian crude pricing, hedging gains, lower renewable identification number costs, and an $80.8 million federal excise tax credit benefit. The McPherson refinery turnaround partly offset gains. Segment revenue declined 6.2% to $7.12 billion.
- Ag: Segment pretax income fell 42.1% to $43.0 million. Trade tensions, poor weather and flooding disrupted grain flows, planting and transportation, pressuring volumes and margins. Loan-loss and impairment charges also weighed on results. The acquisition of the remaining 75% of West Central Distribution (WCD) added $456.2 million of revenue and $12.9 million of pretax income from March 1 through year-end.
- Nitrogen Production: Pretax income increased 87.6% to $72.9 million, principally reflecting stronger urea and UAN pricing at CF Nitrogen.
- Corporate and Other: Pretax income declined to $81.5 million from $106.0 million, largely because the prior year included a $58.2 million gain on the sale of CHS Insurance.
Investing cash outflows increased substantially, reflecting $232.1 million of refinery major-maintenance expenditures, the WCD acquisition, and increased growth capital spending; fiscal 2018 had included significant asset-sale proceeds. Fiscal 2019 also included a $27.4 million Ag goodwill impairment and a $25.5 million out-of-period bad-debt adjustment, which management said was not material to the previously reported or current-year financial statements. Net reserve and impairment recoveries were $12.9 million, comprising approximately $109.4 million of recoveries offset by $96.5 million of new charges.
Outlook, risks and unusual items
For fiscal 2020, management expected normalized Energy market conditions similar to the second half of fiscal 2019. It expected Ag revenue, margins and cash flows to remain under pressure amid weak agricultural margins, trade uncertainty, reduced liquidity and leverage in the sector, and weather-related risks. Planned fiscal 2020 capital expenditures were approximately $524.8 million, including $105 million for refinery property and equipment. Management stated that operating and investing cash flows and available credit were expected to support operations for the foreseeable future and that it expected to remain in covenant compliance.
- Financial reporting controls: Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end because two material weaknesses remained: monitoring of controls and certain IT general controls, including ERP-related and user-access controls. Three previously identified weaknesses were remediated. The weaknesses had contributed to prior-period restatements and corrected misstatements; the auditor did not attest to internal control effectiveness.
- Investigation and compliance: CHS disclosed intentional prior-period misstatements by a former rail-freight trading employee involving derivative valuations and stated it was cooperating with SEC Enforcement staff review. The potential outcome and any penalties were not estimable. CHS also reported a voluntary self-disclosure to the DOJ and SEC concerning potential FCPA violations involving reimbursements to Mexican customs agents; outcome and timing were uncertain.
- Other key exposures: Commodity price and margin volatility, trade restrictions, weather and transportation disruptions, counterparty and borrower credit risk, environmental obligations, RIN price volatility, and reliance on joint ventures and financing markets. Management noted that the Laurel refinery received a 2018 RFS small-refinery exemption during fiscal 2019, but future exemptions were uncertain.
- Capital returns and funding: The board authorized an estimated $562.4 million fiscal 2019 patronage distribution, including $90 million in cash and $472.4 million in equity, plus approximately $90 million in equity redemptions expected in fiscal 2020. Preferred stock outstanding was $2.264 billion; fiscal 2019 preferred dividends were $168.7 million.
- Accounting and leadership: Adoption of the new revenue standard reduced both revenue and cost of goods sold by $52.1 million in fiscal 2019, with no material profit effect. The CFO was scheduled to retire at the end of 2019; an interim CFO was appointed effective November 7, 2019.
Investor verification priorities
- Review the remaining internal-control material weaknesses, remediation testing, and whether controls improved after year-end.
- Track SEC and DOJ reviews relating to rail-freight accounting and the FCPA disclosure, including any eventual financial or operational consequences.
- Assess whether Ag credit losses, asset valuations and cash flows worsen under continued trade, weather and commodity-market pressure.
- Separate recurring Energy performance from the $80.8 million tax-credit gain, crude-price benefits, hedging effects and refinery turnaround timing.
- Confirm WCD integration and returns, and monitor the valuation and earnings contribution of CF Nitrogen and other equity-method investments.
- Evaluate liquidity against debt and notes payable, fully drawn receivables-related facilities, planned capital spending, preferred dividends and patronage obligations.
- Consider the effect of the stated fiscal 2020 outlook and the timing and execution of the ERP and control-remediation plans.