CHS Inc. — Fiscal 2024 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended February 29, 2024; comparisons are with the corresponding periods ended February 28, 2023. CHS is a farmer- and cooperative-owned agricultural and energy company, with Energy, Ag and Nitrogen Production reportable segments. Results are unaudited. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Revenue | $9,087 | $11,307 | $20,478 | $24,073 |
| Gross profit | $366 | $384 | $1,011 | $1,263 |
| Operating earnings | $68 | $142 | $461 | $787 |
| Income before taxes | $186 | $313 | $703 | $1,130 |
| Net income attributable to CHS Inc. | $170 | $292 | $693 | $1,075 |
| Gross margin | 4.0% | 3.4% | 4.9% | 5.2% |
| Operating margin | 0.7% | 1.3% | 2.2% | 3.3% |
Q2 revenue fell 19.6% year over year and six-month revenue fell 14.9%, largely reflecting lower commodity selling prices. Q2 gross profit was lower despite the improvement in gross margin; higher marketing, general and administrative expenses and reduced equity income contributed to lower operating earnings and net income. Q2 equity income from investments was $112 million, down 37.1%; six-month equity income was $221 million, down 38.6%.
Cash flow, debt and liquidity
- For the six months, operating cash flow was negative $397 million, versus positive $17 million a year earlier. The filing attributes the deterioration principally to increased receivables and lower net income, partly offset by lower inventories.
- Investing cash outflow was $185 million, compared with $433 million; property, plant and equipment purchases were $346 million. Financing cash outflow was $550 million, compared with a $104 million inflow.
- Cash and cash equivalents were $633 million at February 29, down from $1,765 million at August 31, 2023. Cash, cash equivalents and restricted cash totaled $709 million at period-end, after a six-month decrease of $1,135 million.
- Notes payable were $413 million; long-term debt, including current maturities, was $1,829 million. No borrowings were outstanding on the $2.8 billion revolving credit facility; the receivables securitization facility had $782 million available and was unused. The company reported compliance with debt covenants.
- Working capital was $3,416 million, up $186 million from August 31; the current ratio was 1.6, versus 1.5. Management said available cash and borrowing capacity should be sufficient for short- and long-term operations.
Material changes and segment results
- Energy: Q2 income before taxes was $52 million, down from $265 million. Lower crack spreads and WCS crude discounts reduced Q2 earnings by $236 million; lower RIN costs partly offset this, reducing costs by $67 million. Warm winter weather also weighed on propane and refined-fuel volumes. For the six months, segment income before taxes was $318 million, down 51.9%.
- Ag: Q2 income before taxes was $57 million, compared with a loss of $82 million. Improved agronomy margins and favorable timing of grain-and-oilseed derivative mark-to-market adjustments contributed to the improvement. Six-month income before taxes was $227 million, up 10.1%.
- Nitrogen Production: Q2 income before taxes was $37 million, down 54.7%; six-month income before taxes was $73 million, down 58.9%. Lower urea and UAN selling prices reduced CF Nitrogen earnings, partly offset by lower natural gas costs.
- Corporate and Other: Q2 income before taxes was $40 million, down 16.3%, primarily reflecting lower Ventura Foods equity income. Six-month results were broadly flat at $84 million.
- Q2 marketing, general and administrative expense increased 23.3% to $298 million, mainly due to higher compensation and benefits and a prior-year receivables recovery. Six-month expense increased 15.5% to $550 million. Interest expense declined in both comparisons as notes payable balances were lower.
Outlook, risks and unusual items
- Management described Q2 performance as solid across segments but below the record prior-year quarter. It expects global supply-demand imbalances in energy and agricultural commodities to continue moderating through the rest of fiscal 2024, but said the duration and severity of market conditions and their financial and operational effects cannot be predicted. No earnings guidance was provided in the supplied filing text.
- Fiscal 2024 capital expenditures are expected to be approximately $953 million, versus $565 million in fiscal 2023. Major maintenance is expected to be approximately $20 million, versus $217 million in fiscal 2023, reflecting fewer refinery turnaround activities.
- Other stated fiscal 2024 cash requirements include approximately $88 million of long-term debt interest, $169 million of preferred dividends, and Board-authorized distributions of approximately $365 million in patronage and up to $365 million in equity redemptions. The filing reports $301 million of fiscal 2023 patronage paid in the first half; the remainder was expected in Q3.
- Key exposures include commodity prices and spreads, weather and seasonality, global trade and geopolitical developments, inflation and interest rates, renewable fuel credit prices, supply-chain and transportation conditions, and counterparty and regulatory risks. Management cited the Russia-Ukraine war, Middle East conflict, and volatile renewable energy credit costs among factors that could affect results.
- Environmental matters and ordinary-course litigation remain outstanding; management did not expect resulting liabilities, individually or collectively, to materially affect financial position, results or cash flows. CHS had $162 million of guarantees outstanding for related nonconsolidated companies and said underlying loans were current. It also disclosed $130 million of unrecognized tax benefits that would benefit the effective tax rate if all relevant positions were sustained; the amount could change significantly within 12 months.
- The six-month effective tax rate was 1.3%, versus 4.9%, primarily reflecting research and development tax credits and lower nonpatronage income. The quarter’s effective rate was 8.3%, versus 6.7%.
- Series 2 and Series 3 preferred stock rates were fixed at 7.10% and 6.75%, respectively, under the applicable terms; these rates apply after their specified dates until redemption. The filing reported no material change in risk factors or market-risk exposures and no material change in internal controls.
Investor verification points
- Assess whether lower Energy margins and the decline in CF Nitrogen earnings persist, and how much Ag’s improvement depends on market conditions and derivative timing.
- Monitor operating cash flow and working-capital requirements, particularly receivables, inventories, supplier advances and seasonal cash movements.
- Track delivery and funding of the approximately $953 million fiscal 2024 capital program alongside patronage, equity redemptions and preferred dividends.
- Review commodity-price and margin sensitivity, weather effects, RIN costs, geopolitical and trade conditions, and the seasonal pattern of earnings.
- Follow debt maturities, covenant headroom, available credit facilities, contingent guarantees and developments in tax positions, litigation or environmental matters.