CHS Inc. — Form 10-Q Summary
Business context and period: CHS is a diversified farmer-owned cooperative operating in energy, agriculture and related businesses. This unaudited report covers the first quarter of fiscal 2016, the three months ended November 30, 2015, compared with the three months ended November 30, 2014. Results are seasonal and interim performance may not indicate full-year results.
Key financial results
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $7.729 billion | $9.499 billion |
| Gross profit | $411.8 million | $592.0 million |
| Operating earnings | $259.8 million | $430.1 million |
| Income before taxes | $289.9 million | $435.7 million |
| Net income attributable to CHS | $266.5 million | $378.7 million |
| Operating cash flow | $416.1 million | $26.5 million |
| Investing cash flow | $(400.5) million | $(830.8) million |
| Financing cash flow | $285.9 million | $348.0 million |
- Gross margin was approximately 5.3%, down from 6.2%; operating margin was approximately 3.4%, down from 4.5%.
- At November 30, 2015, cash was $1.257 billion, working capital was approximately $2.7 billion, and the current ratio was 1.4.
- Notes payable were $1.694 billion; long-term debt, including its current portion, was approximately $1.412 billion. Total equities were $7.799 billion. CHS reported compliance with debt covenants.
- Capital expenditures were $251.7 million. Operating cash flow benefited from working-capital movements, including higher payables and customer advances, partly offset by inventory purchases and supplier advances.
Material changes versus prior period
- Revenue declined 19%, while gross profit fell 30%; CHS-attributable net income decreased 30%.
- Energy pretax income fell 31% to $192.9 million, primarily due to lower refined-fuel margins; lower prices also reduced refined-fuels and propane revenue.
- Ag pretax income fell 50% to $69.3 million. Management cited lower country-elevator grain volumes and margins, weaker grain-marketing performance and lower crop-nutrient margins. Improved soybean-crushing margins partly offset declines.
- Corporate and Other pretax income increased to $27.7 million from $17.2 million, primarily reflecting stronger Ventura Foods investment results.
- Net interest expense declined to $7.0 million from $21.9 million, largely because the prior-year period included $14.1 million associated with patronage due to CHS McPherson noncontrolling-interest holders.
- Notes payable increased from $1.165 billion at August 31, 2015 to $1.694 billion at November 30, 2015; cash increased from $953.8 million to $1.257 billion.
Outlook, risks and notable items
- Management described continuing pressure from a downturn in agriculture and energy markets, with low or potentially declining commodity prices and margins. The duration of the downturn is uncertain.
- Fiscal 2016 capital expenditures were expected to be approximately $1.2 billion, including refinery projects. CHS anticipated completing its McPherson coker replacement and refinery expansion in fiscal 2016.
- CHS expected to pay $2.8 billion on February 1, 2016 for an 11.4% interest in CF Nitrogen, alongside an 80-year nitrogen-product purchase agreement. Management planned to fund the investment with additional long-term debt, credit facilities and available cash, and expected significant short-term borrowing needs during the second quarter. It stated available liquidity should cover likely working-capital needs.
- CHS amended its unsecured revolving credit facility to $3.0 billion, expiring in September 2020; $450 million was drawn at quarter-end. A separate $600 million term-loan facility was undrawn. In December 2015, CHS entered into additional uncommitted facilities totaling $1.3 billion and borrowed $150 million under them.
- The effective tax rate was 8.2%, versus 13.2%. Management said an IRS settlement in fiscal Q2 would have a significant favorable effect on the tax rate and net income; the filing does not provide a clear dollar estimate.
- RIN prices can be volatile; CHS said the EPA’s final renewable-fuel mandates caused a substantial price increase, with no significant impact on reported results to date. Further commodity-price declines could also trigger potentially significant noncash inventory write-downs.
- CHS increased its ownership of CHS McPherson to 100% in September 2015. The remaining crack-spread contingent consideration liability was $43.7 million at quarter-end.
- Prior-period disclosures were revised for immaterial lease-accounting and cash-flow presentation errors; management concluded the corrections were not material to prior periods. The new ERP system began implementation on December 1, 2015 and is expected to take several years; management reported disclosure controls were effective and no material control change during the quarter.
Important facts for investors to verify
- Progress, financing costs and liquidity impact of the $2.8 billion CF Nitrogen investment, including the post-quarter borrowing and planned long-term debt.
- Whether Energy and Ag margins stabilize or deteriorate further, and the effects of commodity prices, seasonal working capital, RIN costs and potential inventory write-downs.
- Actual fiscal 2016 capital spending and completion costs for the McPherson refinery projects.
- The realized effect of the IRS settlement on subsequent-quarter taxes and earnings.
- ERP implementation costs and any related changes in internal controls; also monitor debt covenant compliance and the crack-spread contingent liability.