CHS Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2022; comparisons are with the corresponding 2021 periods unless otherwise noted. CHS is a farmer-owned agricultural cooperative with Energy, Ag and Nitrogen Production segments. Financial amounts below are in U.S. dollars.
Financial performance and position
- Third-quarter results: Revenue was $13.14 billion, up 20.2%; gross profit was $644.3 million (4.9% gross margin, versus 2.9%); operating earnings were $401.1 million; and net income attributable to CHS was $576.6 million, versus $273.6 million.
- Nine-month results: Revenue was $34.35 billion, up 22.8%; gross profit was $1.43 billion (4.2% gross margin, versus 2.1%); operating earnings were $740.8 million; and net income attributable to CHS was $1.25 billion, versus $305.0 million.
- Key earnings driver: Equity income from investments increased 79.5% in the quarter to $263.1 million and 147.2% for nine months to $644.3 million, primarily due to CF Nitrogen. Nine-month CHS-attributable earnings from CF Nitrogen were $497.3 million.
- Cash flow: Nine-month operating cash flow was a use of $7.1 million, improved from a use of $632.4 million. Investing cash outflow was $339.9 million; financing provided $355.9 million. Cash and cash equivalents were $369.3 million at May 31; cash and restricted cash together were $540.1 million.
- Liquidity and debt: Working capital was $2.42 billion, up $748.3 million from August 31, 2021; the current ratio was 1.3. Notes payable were $2.03 billion and long-term debt, including current maturities, was $1.96 billion. CHS reported compliance with debt covenants. Its $950 million securitization facility was fully utilized; no borrowings were outstanding on its $2.75 billion revolving credit facility.
- Other metrics: Total equity was $9.74 billion. Interest expense was $32.1 million for the quarter and $80.7 million for nine months. The nine-month effective tax rate was 6.7%, compared with a benefit in the prior-year period.
Material changes and operating trends
- Energy segment income before income taxes rose to $163.2 million in the quarter from $5.0 million, and to $243.3 million for nine months from a loss of $116.9 million. Management cited stronger refining margins and wider crude discounts, partly offset by hedging losses, higher renewable fuel credit and natural gas costs, and lower refined-fuel volumes in the quarter.
- Ag segment income before income taxes increased 95.3% in the quarter to $273.7 million and 159.4% for nine months to $615.3 million. Strong oilseed-processing and wholesale agronomy margins helped; lower grain and oilseed volumes, drought, unfavorable planting weather and supply constraints were offsets.
- Nitrogen Production segment income before income taxes rose to $178.2 million in the quarter and $429.1 million for nine months, reflecting higher urea and UAN prices, partly offset by higher natural gas costs. Corporate and Other earnings declined.
- Revenue growth reflected higher commodity prices as well as volume changes. The filing notes that commodity-price-driven revenue and cost increases do not necessarily translate into comparable changes in earnings.
Outlook, risks and unusual items
- CHS did not provide a specific earnings forecast. Management expected continued uncertainty and volatility in energy markets through the remainder of fiscal 2022, and said stronger agricultural and fertilizer profitability could continue until supply better matches demand. It also highlighted inflation, higher freight costs and unpredictable weather.
- Management estimated fiscal 2022 capital expenditures of approximately $494.6 million. It said operating and investing cash flows, together with available borrowing capacity, should support operations for the foreseeable future and expected continued covenant compliance.
- The Russia-Ukraine war disrupted CHS’s Ukrainian operations and restricted access to grain inventories. CHS reported an impairment of part of the inventory and approximately $22.5 million of Ukrainian inventory remaining at May 31. Sanctions, export restrictions, employee and infrastructure disruption, and cyber risks could further affect operations and markets.
- The filing describes a proposed SEC settlement concerning a former employee’s misconduct in rail freight trading. The proposal would involve no civil penalty and is contingent on SEC Commissioner approval; the outcome is not assured.
- Environmental matters and ordinary-course litigation were described as not expected to have a material effect. CHS had $213.0 million of guarantees outstanding for nonconsolidated related companies. Disclosure controls were reported effective.
Investor verification priorities
- Assess how much of the earnings improvement depends on unusually strong commodity markets and CF Nitrogen, and whether those conditions persist.
- Review working-capital needs, receivables and inventory growth, the fully utilized securitization facility, and available committed liquidity.
- Track the Ukraine inventory exposure, any further impairment, and the operational and market consequences of the war and related restrictions.
- Confirm SEC approval and final terms of the proposed rail freight investigation settlement.
- Monitor delivery of the fiscal 2022 capital spending plan, debt maturities, preferred dividends and member patronage and equity-redemption commitments.