CHS Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2021. CHS is a diversified agricultural cooperative operating in Energy, Ag and Nitrogen Production; its results are seasonal and exposed to commodity prices and volumes. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $10,930 | $7,241 | $27,966 | $21,461 |
| Gross profit / margin | $315 / 2.9% | $218 / 3.0% | $594 / 2.1% | $859 / 4.0% |
| Operating earnings / margin | $128 / 1.2% | $38 / 0.5% | $76 / 0.3% | $311 / 1.4% |
| Income before tax | $256 | $70 | $295 | $384 |
| Net income attributable to CHS | $274 | $98 | $305 | $401 |
| Interest expense | $29 | $27 | $83 | $95 |
- Third-quarter improvement reflected stronger Ag results, recovery in refined-fuel margins, and higher equity income from investments ($147 million versus $51 million). Ag pretax income rose to $140 million from $95 million; Energy moved to $5 million pretax income from a $55 million loss.
- For the nine months, revenue increased 30%, but net income attributable to CHS declined 24%. Ag pretax income improved to $237 million from $61 million, while Energy swung to a $117 million pretax loss from $246 million of income. Equity income from investments rose to $261 million from $135 million.
- Revenue growth largely reflected higher commodity prices and volumes, especially in Ag. The nine-month gross margin contracted, reflecting business mix and weaker Energy performance, among other factors.
- Cash from operations was a use of $632 million for the nine months, versus generation of $526 million a year earlier. CHS attributed the deterioration to lower net income and working-capital increases, particularly receivables and inventories. Investing cash use was $178 million; financing provided $1,012 million.
Balance sheet, debt and liquidity
- At May 31, 2021, cash and cash equivalents were $301 million; current assets were $8,903 million and current liabilities $7,394 million. Working capital was $1.5 billion and the current ratio was 1.2, compared with $1.3 billion and 1.3 at August 31, 2020.
- Notes payable were $2.777 billion; long-term debt including current maturities was $1.770 billion. The $2.75 billion revolving credit facility had $1.2 billion drawn and expires July 2024. The $600 million receivables securitization facility was fully utilized; the $150 million repurchase facility was also fully drawn.
- CHS reported compliance with debt covenants and expected continued compliance. Management said cash, operating cash flow and borrowing capacity should support operations for the foreseeable future, while noting active liquidity management and spending restraint.
- Fiscal 2021 expected uses included approximately $415 million in capital expenditures, $555 million of long-term debt and finance-lease repayments, and $169 million of preferred dividends.
Outlook, risks and unusual items
- Management expected energy-industry uncertainty and volatility, including COVID-19-related demand effects and elevated renewable identification number (RIN) costs, to weigh on Energy profitability through the remainder of fiscal 2021. Higher RIN prices reduced Energy margins by approximately $145 million over nine months and $82 million in Q3.
- Ag benefited from improved trade relations, stronger demand and favorable planting-season weather. Management warned that drought across much of its trade territory could reduce fourth-quarter Ag volumes and margins if it persisted; timely rainfall could limit the impact.
- CHS reported $915 million of pretax losses on derivatives not designated as hedges for the nine months, primarily commodity derivatives. These fair-value changes are recorded in earnings and should be considered alongside related physical commodity exposures.
- Management said certain Ag processing and food-ingredient mark-to-market losses were expected to reverse over time. A planned TEMCO business-model change reduced reported revenue and cost of goods sold on certain transactions.
- Twenty-seven putative class actions alleged antitrust and related violations involving crop-input pricing and sales platforms; the cases were consolidated in June 2021. CHS said it was too early to assess outcome or potential loss. It stated routine litigation and environmental matters were not expected to have a material financial effect.
- CHS disclosed a credible cybersecurity threat; its investigation found no breach, data loss or significant operational interruption. The filing also highlights continuing ERP implementation, legacy-system, cybersecurity and remote-work risks. No material changes to other reported risk factors were identified.
- The income-tax benefit for the nine months included benefits related to an intercompany asset transfer for tax planning. The filing reports no material impact from adopting the expected-credit-loss accounting standard.
Important facts for investors to verify
- Whether operating cash flow recovers as seasonal working-capital needs unwind, and whether liquidity facilities remain available as they approach renewal or termination dates.
- How much of the earnings improvement depends on equity-method investees and volatile commodity prices, versus recurring operating margins.
- Whether elevated RIN costs, energy demand and drought conditions affect fourth-quarter results as management described.
- How derivative fair-value volatility relates to underlying physical positions and how much of reported losses may reverse or be offset.
- Developments and any potential financial exposure from the crop-input litigation, and progress, cost and control implications of the ERP and cybersecurity programs.