CHS Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended February 28, 2013. Financial statements are unaudited. CHS is a farmer- and cooperative-owned diversified agribusiness with Energy, Ag, and Corporate and Other segments. Results are seasonal; management says earnings are generally lowest in Q2 and highest in Q3.
Key financial metrics
Amounts below are in millions of dollars except percentages and ratios.
| Metric | Three months ended Feb. 28, 2013 | Prior-year quarter | Six months ended Feb. 28, 2013 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $9,882.4 | $8,843.8 | $21,592.3 | $18,578.0 |
| Gross profit | $470.6 | $231.6 | $1,016.2 | $871.6 |
| Operating earnings | $336.0 | $105.0 | $757.0 | $632.5 |
| Net income attributable to CHS Inc. | $275.1 | $78.5 | $618.8 | $494.7 |
| Gross margin | 4.8% | 2.6% | 4.7% | 4.7% |
| Operating margin | 3.4% | 1.2% | 3.5% | 3.4% |
- Cash flow: Six-month operating cash flow was $1,030.1, versus $605.8 a year earlier. Investing activities used $237.8, including $264.3 of property, plant and equipment spending; financing activities used $630.3. Cash increased $164.3 to $478.3.
- Liquidity: At February 28, 2013, working capital was $2,969.1 and the current ratio was 1.5:1. The company had $2.5 billion of committed revolving credit facilities with no borrowings outstanding under those facilities and reported compliance with covenants.
- Debt: Balance-sheet notes payable were $858.5; current and long-term debt totaled $1,389.6, making total reported borrowings approximately $2,248.1. Long-term debt was $1,296.2 on the balance sheet. In March 2013, after quarter-end, CHS issued $100 million of 4.71% notes due in fiscal 2033.
Material changes versus prior periods
- Quarterly revenue rose 12%, while net income attributable to CHS increased $196.6 million. The largest earnings improvement was in Energy: pretax income increased to $234.2 million from $42.1 million. Ag pretax income increased to $50.4 million from $36.2 million.
- For the six-month period, revenue increased 16% and CHS-attributable net income rose 25%. Pretax income increased 10% to $681.3 million. Energy and Ag pretax income increased to $487.2 million and $162.8 million, respectively.
- Growth in Ag revenue was substantially influenced by higher grain prices and increased crop nutrient volumes; higher commodity-linked revenue does not necessarily indicate equivalent margin growth. Energy revenue declined year over year for both the quarter and six-month period, while quarterly Energy earnings rose substantially.
- Six-month net interest expense increased to $120.6 million from $55.4 million, primarily reflecting higher patronage earned by NCRA noncontrolling interests, which is recorded as interest, and increased short-term borrowing activity. The prior-year six-month comparison also included $73.4 million of net income attributable to noncontrolling interests, compared with $2.6 million in 2013, following changes in NCRA ownership and accounting.
Outlook, commentary, risks and unusual items
- Capital spending: CHS expected fiscal 2013 spending of approximately $750 million for property, plant and equipment and refinery major repairs. Planned work included an estimated $50 million spring 2013 turnaround at the Laurel refinery and a coker replacement project with an expected total cost of $555 million and completion in fiscal 2015. A $327 million expansion at NCRA’s McPherson refinery was planned to begin in spring 2013, with completion anticipated in fiscal 2016.
- Potential fertilizer project: CHS was evaluating a proposed nitrogen fertilizer plant in Spiritwood, North Dakota, with potential project cost exceeding $1 billion. It planned to spend up to $25 million on an engineering design study, expected to be completed in fall 2013; the filing does not present a final investment decision.
- Business combination: CHS agreed in March 2013 with Cargill and ConAgra to form Ardent Mills, combining North American flour milling operations. CHS expected to hold a 12% interest, with closing anticipated in fiscal 2014.
- Regulatory and commodity exposure: RIN prices were described as highly volatile and increasing. CHS recorded RIN expense of $17.2 million for the quarter and $23.1 million for six months; management could not estimate the potential future effect on refined-fuel margins. Results also remain exposed to commodity prices, weather, crop conditions, supply and demand, regulation, and seasonal working-capital swings.
- Hedges and NCRA purchase: Energy recorded a $57.8 million six-month net loss on refinery-margin hedge mark-to-market, compared with a $66.3 million gain a year earlier. A Level 3 contingent crack-spread liability related to the NCRA noncontrolling-interest purchase was $141.0 million at quarter-end; its valuation uses significant unobservable inputs.
- Commitments and legal matters: Long-term unconditional purchase obligations totaled $600.7 million, with discounted aggregate minimum payments of $505.0 million. Guarantees outstanding for related companies were $73.8 million; management did not expect payment. CHS agreed to a $500,000 fine and $50,000 fire-department contribution under a plea agreement concerning a 2009 Malta, Montana fire and reporting failure. An EPA information request concerning refinery flares at Laurel could lead to enforcement; potential liability was not estimable and no liability was recorded.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the large quarterly Energy earnings improvement is sustainable, given hedge mark-to-market volatility, refinery economics, and RIN costs.
- How Ag earnings and cash needs respond to grain and fertilizer prices, seasonal volumes, and working-capital changes.
- Progress, final costs, financing, and expected returns for the refinery projects and the proposed Spiritwood fertilizer plant.
- Changes in the NCRA purchase-related contingent liability, noncontrolling-interest accounting, and related interest expense.
- Developments in RIN pricing and the EPA’s response to the Laurel refinery information request, along with any eventual environmental or legal costs.
- Liquidity and covenant headroom as capital spending, patronage distributions, equity retirements, and seasonal borrowing needs evolve.