CHS Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended August 31, 2016. The filing also provides fourth-quarter results for the three months ended August 31, 2016. CHS is a farmer- and rancher-owned cooperative operating across agriculture, energy and food businesses; it has preferred stock but no common stock.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $30.35 billion | $34.58 billion | Down 12% |
| Gross profit | $959.3 million | $1.49 billion | Down 36% |
| Operating earnings | $310.2 million | $715.4 million | Down 57% |
| Income before taxes | $419.9 million | $768.2 million | Down 45% |
| Net income attributable to CHS | $424.2 million | $781.0 million | Down 46% |
| Cash from operations | $1.26 billion | $570.0 million | Up from prior year |
Gross margin was approximately 3.2%, versus 4.3% in FY2015; operating margin was approximately 1.0%, versus 2.1%. Net income attributable to CHS exceeded income before taxes largely because of cooperative tax treatment and a tax benefit.
Fourth-quarter revenue was $8.18 billion, income before taxes was $12.0 million, and net loss attributable to CHS was $1.6 million.
- Segments: Energy pretax income was $275.4 million, down 49%, mainly on significantly lower refining margins. Ag pretax income was $30.9 million, down 79%, reflecting weaker grain, crop nutrient and processing margins and asset/customer-related charges. Nitrogen Production contributed $34.1 million after the February 2016 investment in CF Nitrogen; Foods contributed $64.8 million.
- Cash and investment: Operating cash flow was $1.26 billion. Investing activities used $3.75 billion, including the $2.8 billion CF Nitrogen investment. Capital expenditures were $692.8 million, compared with $1.19 billion in FY2015.
- Liquidity and debt: Cash was $279.3 million; working capital was $414.4 million, down from $2.75 billion, and the current ratio fell to 1.1 from 1.5. Notes payable were $2.73 billion and long-term debt, including current maturities, was $2.30 billion. Total equities were $7.87 billion. CHS reported compliance with debt covenants.
Material changes and unusual items
- Consolidated revenue fell as lower commodity selling prices reduced Energy and Ag sales. Energy revenue declined 34%; Ag revenue declined 6%.
- CHS invested $2.8 billion for an 11.4% interest in CF Nitrogen and entered an 80-year supply agreement for up to 1.1 million tons of granular urea and 580,000 tons of UAN annually. The investment is accounted for under the equity method.
- FY2016 included $27.3 million of non-cash asset disposal and impairment charges in Ag processing, and a $60.9 million gain from remeasurement of a contingent crack-spread liability. An IRS settlement produced a $25.6 million deferred tax benefit. FY2015 included a $116.5 million charge for abandoning the Spiritwood fertilizer plant project.
- Preferred stock dividends paid were $163.3 million, up from $133.7 million. The Board expected approximately $279 million of FY2016 patronage refunds to be distributed in FY2017, including about $111.6 million in cash.
Outlook, risks and contingencies
- Management described agriculture, energy and nitrogen fertilizer markets as being in a down cycle, with continued pressure on revenue, margins and cash flow and no clear estimate of the cycle’s duration. It cited cost discipline, flat overhead and reduced investment as responses.
- FY2017 capital expenditures were forecast at approximately $632 million, including $262 million for refinery equipment and major repairs. Management stated operating cash flow and available revolving credit were expected to support operations for the next 12 months.
- Key exposures include commodity-price and refining-margin volatility, weather and seasonality, member patronage choices, counterparty credit, international and currency risks, regulation (including renewable fuel credits and environmental rules), and reliance on joint ventures. CHS warned that RIN prices are volatile and may affect refining margins.
- At the Laurel refinery, the EPA initially requested $886,905 in stipulated penalties for reported flaring incidents. CHS paid $34,965 for four incidents and disputed penalties for 11 others; the EPA agreed to reduce requested penalties for eight of those incidents. The final amount remained unresolved in the filing. A separate EPA information request concerning refinery flares had no recorded liability because the potential action and costs were uncertain.
- CHS reported $133.8 million of guarantees outstanding for non-consolidated related entities and approximately $304.8 million of future operating lease payments. It said ordinary-course litigation and environmental matters were not expected to materially affect its financial position, results or cash flows.
Important facts for investors to verify
- Whether Energy refining margins and Ag segment margins stabilize or continue to decline, and how that affects operating cash flow.
- Whether liquidity remains adequate after the sharp reduction in working capital and increase in short-term borrowing; review available revolver capacity and debt maturities.
- Returns, distributions and fertilizer-supply benefits from the CF Nitrogen investment, including the terms and economics of the long-term supply agreement.
- Final resolution and potential cost of the Laurel EPA matters, plus exposure to RIN prices and other environmental compliance obligations.
- Execution and cost of planned refinery capital projects and the ERP implementation; verify that planned spending and management’s liquidity expectations remain achievable.