CHS Inc. — Q1 FY2014 Form 10-Q
Business context and period: CHS is a farmer-owned agricultural cooperative with Ag, Energy, and Corporate and Other businesses. This unaudited report covers the three months ended November 30, 2013, compared with the same quarter of 2012. Results are seasonal and interim performance may not indicate full-year results.
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $11.026 billion | $11.710 billion |
| Gross profit / gross margin | $400.9 million / 3.6% | $545.5 million / 4.7% |
| Operating earnings / operating margin | $267.8 million / 2.4% | $421.0 million / 3.6% |
| Income before taxes | $269.7 million | $381.9 million |
| Net income attributable to CHS | $242.2 million | $343.7 million |
| Net cash from operating activities | $518.5 million | $1.086 billion |
Margins are calculated from reported revenue and earnings. Net interest expense was $30.8 million, down from $67.2 million, primarily because lower NCRA noncontrolling-interest patronage reduced related interest expense. The effective tax rate was 9.9%, versus 9.4%.
At November 30, 2013, cash was $2.143 billion, working capital was $3.268 billion, and the current ratio was 1.5:1. Notes payable were $1.060 billion; long-term debt, including its current portion, totaled approximately $1.496 billion. CHS had no borrowings under its $2.5 billion committed revolving facility and reported compliance with its debt covenants. Capital expenditures on property, plant and equipment were $168.0 million.
Material changes and operating drivers
- Revenue fell 6% and CHS-attributable net income declined 30%. Pretax income decreased 29%, mainly from weaker Energy segment results.
- Energy pretax income fell 49% to $128.9 million, primarily due to reduced refining margins. Energy revenue increased 10%, reflecting higher volumes, including propane and renewable fuels marketing, but earnings declined.
- Ag pretax income rose 4% to $116.7 million. Improved country operations, grain marketing logistics, and processing earnings were partly offset by a $26.2 million decline in wholesale crop nutrients earnings, including lower margins and $8.2 million of nitrogen plant feasibility-study costs.
- Corporate and Other pretax income increased 46% to $24.1 million, mainly on improved joint-venture earnings.
- Revenue reductions reflected lower grain and fertilizer selling prices: Ag revenue decreased 12%, with grain revenue down 14% and wholesale crop nutrients revenue down 22%.
- Operating cash flow was substantially lower year over year, principally because working-capital movements generated less cash. Investing cash outflow was $398.7 million, including increased capital spending and a $209.8 million increase in notes receivable. Financing cash flow was an outflow of $213.7 million.
Outlook, risks and contingencies
- Management expects working-capital needs to rise during Q2, including crop-input inventories and supplier prepayments, and expects payments on deferred grain contracts. It did not anticipate borrowing in Q2 given current cash, and stated available cash and credit capacity should meet expected needs.
- FY2014 property, plant and equipment and refinery major-repair spending was forecast at approximately $650 million. Major projects include a $555 million NCRA coker replacement, expected to finish in FY2015, and a $327 million refinery expansion, expected to finish in FY2016.
- CHS was studying a proposed nitrogen fertilizer plant costing more than $1 billion; a feasibility study of up to $25 million was expected to conclude in Q2 FY2014. The filing does not establish that the plant will proceed.
- Management cited commodity-price volatility, weather and crop conditions, seasonality, competition, regulation and environmental costs as important risks. RIN prices had been highly volatile; EPA indications of a lower 2014 renewable-fuels mandate had recently contributed to price declines.
- A voluntary recall of certain soy protein products followed a reported positive salmonella test. The estimated loss range was $14.4 million–$39.7 million; CHS had recorded a $25.0 million reserve in FY2013 and had recorded no insurance recovery as of November 30, 2013.
- CHS disclosed an EPA information request concerning refinery flares at its Laurel, Montana facility. Potential enforcement costs could not yet be determined, and no liability was recorded. It also reported $530.6 million of undiscounted long-term unconditional purchase obligations and $97.4 million of outstanding guarantees; management did not expect guarantee payouts.
- In September 2013, CHS issued Class B preferred stock for $273.7 million net proceeds, with a 7.875% annual dividend. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Energy refining margins recover and how RIN costs and renewable-fuel regulation affect future earnings.
- Whether Ag margins, commodity prices, harvest volumes and seasonal working-capital requirements develop as management expects.
- Actual FY2014 capital spending, project costs and timing, including the coker replacement, refinery expansion and nitrogen-plant decision.
- Cash conversion and debt trends, including CHS Capital lending activity and the expected patronage distribution and equity redemptions.
- Final costs and insurance recoveries for the soy protein recall, and any outcome or costs from the EPA flare inquiry.