CHS Inc. — Fiscal 2018 First-Quarter 10-Q
Reporting period: Three months ended November 30, 2017, compared with the three months ended November 30, 2016. CHS is a diversified farmer-owned cooperative operating in Energy, Ag, Nitrogen Production and Foods; preferred shares are publicly traded, and the company has no common stock outstanding. Results are seasonal and may not indicate full-year performance.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $8,048.9 million | $8,048.3 million |
| Gross profit / margin | $313.3 million / 3.9% | $352.7 million / 4.4% |
| Operating earnings / margin | $176.9 million / 2.2% | $186.5 million / 2.3% |
| Income before taxes | $199.6 million | $225.6 million |
| Net income | $179.6 million | $208.9 million |
| Net income attributable to CHS | $180.1 million | $209.2 million |
| Operating cash flow | $(140.5) million | $238.4 million |
Revenue was essentially unchanged, but gross profit fell 11% and net income attributable to CHS declined about 14%. The effective tax rate increased to 10.0% from 7.4%. Interest expense rose to $40.7 million from $38.3 million, which management attributed primarily to higher interest rates.
Operating cash flow turned negative, mainly reflecting working-capital timing, including increased inventory and supplier advances, lower customer advances, and changes in payables and accrued expenses. Investing cash use was $62.8 million, versus $327.0 million in the prior-year quarter; financing provided $271.7 million. Cash increased $70.8 million during the quarter to $252.1 million.
At November 30, 2017, working capital was $435.9 million and the current ratio was 1.1. Notes payable were $2.48 billion and long-term debt, including current maturities, was approximately $2.01 billion. Long-term debt was reduced by $172.0 million during the quarter, while notes payable rose from $1.99 billion at August 31. Total equities were $7.94 billion. CHS reported compliance with debt covenants.
Material changes and segment performance
- Energy: Income before taxes increased $43.1 million to $113.1 million, mainly on improved refined-fuel margins following Gulf Coast supply disruptions during an active hurricane season; refined-fuel volumes fell 3%. Energy revenue rose 22.7%, largely reflecting higher selling prices.
- Ag: Income before taxes decreased $34.7 million to $74.5 million. Lower grain volumes and margins, reduced export activity and lower renewable-fuel margins weighed on results. Ag revenue fell 5.4%, primarily due to lower grain and oilseed volumes. Country operations gains, including asset-sale and loan-recovery items, partly offset weakness.
- Nitrogen Production: Income before taxes fell to $5.7 million from $27.0 million, principally because the prior-year period included a $29.1 million embedded-derivative gain; higher current-period CF Nitrogen equity income partly offset the decline.
- Foods: Income before taxes declined to $1.0 million from $10.6 million, reflecting weaker Ventura Foods margins, customer pricing pressure and acquisition-integration challenges.
- Other items: Reserve and impairment charges were a net recovery of $3.8 million, compared with $18.4 million of charges a year earlier. The current period included about $5.3 million recovered on a previously written-off loan. CHS also recorded a $7.1 million gain on the sale of an Ag location.
Outlook, risks and contingencies
- Management said it did not foresee significant change in the challenging Ag and Energy environment during the rest of fiscal 2018 and expected continued pressure on core revenues, margins and cash flows. It cited lower commodity prices, margins and liquidity, and increased leverage across the industries.
- Fiscal 2018 capital expenditures were expected to be approximately $602 million, including $221 million for refinery property and equipment. A Laurel refinery turnaround was expected to cost about $92 million.
- CHS expected to pay approximately $168.7 million in preferred dividends during fiscal 2018. It expected to fund approximately $170 million in guarantees to Brazilian operations in the first nine months of the year; $25 million had been funded in the quarter. The guarantees relate to losses after a Brazilian trading partner entered bankruptcy-like proceedings.
- The $700 million receivables securitization facility was fully utilized and scheduled to terminate July 17, 2018, unless extended. Management said available cash, operating cash flow and borrowing capacity should support operations and anticipated continued covenant compliance.
- On December 22, 2017, U.S. tax reform was enacted. CHS was evaluating the effects and expected a material tax benefit from revaluing net deferred tax liabilities; the amount was not yet clear in the filing.
- Other notable matters include a 20-year sale-leaseback of the corporate office building, with first-year base rent of approximately $3.4 million, and a pending Montana environmental matter involving alleged refinery permit violations and a proposed $184,550 administrative penalty. Management considered ordinary-course litigation and environmental liabilities not likely to be material.
- Key risks include commodity-price and seasonal volatility, weather and supply disruptions, credit and counterparty exposure, RIN price volatility, foreign operations and execution of asset disposals. Management reported no material change in market-risk disclosures or risk factors for the quarter.
Most important facts for investors to verify
- Whether Ag margins, export volumes and working-capital cash use improve, and whether management’s expectation of continued industry pressure changes.
- Availability and renewal of the fully utilized receivables securitization facility before its July 2018 termination date, as well as short-term borrowing needs and covenant headroom.
- The eventual tax-reform benefit and its timing, given that the filing’s estimate was preliminary and unquantified.
- Progress on the planned $602 million capital program, refinery turnaround, debt reduction and Brazilian guarantee funding.
- Whether the Montana refinery matter, Brazilian counterparty exposure or other contingent obligations result in costs beyond amounts currently disclosed.