CHS Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended August 31, 2015. Although the request identifies 2015 Q4, this is an annual filing; selected fourth-quarter figures are included below. CHS is a farmer- and cooperative-owned agricultural company operating in Energy, Ag, and Corporate and Other. It reported consolidated results under U.S. GAAP.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $34.58 billion | $42.66 billion |
| Gross profit / gross margin | $1.49 billion / 4.3% | $1.65 billion / 3.9% |
| Operating earnings / operating margin | $715.4 million / 2.1% | $1.05 billion / 2.5% |
| Income before income taxes | $768.2 million | $1.13 billion |
| Net income attributable to CHS | $781.0 million | $1.08 billion |
| Net cash from operating activities | $570.0 million | $1.44 billion |
| Capital expenditures for property, plant and equipment | $1.19 billion | $919.1 million |
| Cash and cash equivalents at year-end | $953.8 million | $2.13 billion |
| Working capital / current ratio | $2.75 billion / 1.5 | $3.17 billion / 1.5 |
| Long-term debt, including current maturities | $1.43 billion | $1.61 billion |
| Notes payable | $1.17 billion | $1.16 billion |
FY2015 gross margin improved modestly, but operating and net earnings declined. Net interest expense fell to $60.3 million from $140.3 million, including capitalized interest and lower costs tied to the McPherson refinery ownership interests. The income tax benefit was $12.2 million, compared with $48.3 million of tax expense in FY2014; management cited tax benefits related to equity certificates and Kansas tax credits.
Fourth-quarter context: The quarter ended August 31, 2015 reported revenue of $7.99 billion, gross profit of $341.2 million, pretax income of $71.5 million, and net income attributable to CHS of $131.5 million.
Material changes versus FY2014
- Revenue fell 19%, principally reflecting lower commodity selling prices: refined fuels revenue declined 29%, grain revenue 17%, and ethanol revenue was also pressured by lower prices.
- Income before taxes declined 32% and net income attributable to CHS declined 28%. Energy pretax income fell 26%, reflecting reduced refining margins and refinery turnarounds; Ag pretax income fell 30%, including the Spiritwood project charge.
- Operating cash flow fell to $570.0 million from $1.44 billion, with a $660.5 million cash outflow from changes in operating assets and liabilities. Investing cash outflow increased to $1.91 billion, primarily due to higher capital spending, refinery repairs, and acquisitions.
- Year-end cash declined by approximately $1.18 billion. Long-term debt decreased, while notes payable were broadly stable.
- CHS reorganized its renewable fuels marketing business into Ag; prior-period segment results were revised for comparability. It also acquired Patriot Renewable Fuels and Northstar Agri Industries during FY2015.
Outlook, management commentary, risks and unusual items
- Major strategic commitment: CHS agreed to invest $2.8 billion for an 11.4% membership interest in CF Industries Nitrogen LLC and enter an 80-year nitrogen fertilizer supply agreement. Closing was anticipated for February 1, 2016. CHS expected to finance approximately $1.6 billion with new debt; completion and financing were not assured.
- Capital spending: Management expected FY2016 capital expenditures of approximately $1.1 billion, including about $392 million for refinery acquisitions, repairs and projects. The McPherson coker replacement and refinery expansion were expected to be completed in FY2016.
- Spiritwood exit: CHS discontinued its planned North Dakota nitrogen fertilizer plant and recorded $116.5 million of impairment and exit charges, including $94.3 million related to construction in progress, land and equipment.
- Prior-year comparison: FY2014 included a $109.2 million gain from forming Ardent Mills, which did not recur. FY2015 also included $103.7 million of long-lived asset impairment charges in the cash-flow reconciliation.
- Liquidity and patronage: The company said cash generated from operations and revolving credit capacity should support FY2016 needs. A $3.0 billion revolving facility replaced the $2.5 billion facility in September 2015. Estimated FY2015 patronage distributions of $625.4 million, including about $250.2 million in cash, were expected in FY2016.
- Key risks: Results are exposed to volatile commodity prices, refining margins, seasonality, crop and weather conditions, transportation constraints, member business levels, counterparty performance, international markets, environmental and product-safety regulation, and the cooperative’s limited access to common equity capital. RIN price volatility may affect refining margins.
- Contingencies and controls: CHS was cooperating with a CFTC inquiry into trading positions; the CME closed its related review in December 2014. EPA information requests concerning Laurel refinery flares remained unresolved, and a Montana environmental agency proposed a $183,425 penalty over alleged sulfur dioxide permit exceedances, which CHS disputed. Management reported effective disclosure controls and internal control over financial reporting.
- Reporting corrections: CHS revised prior-period lease accounting and cash-flow classifications, concluding the errors were immaterial to prior periods. It also disclosed a $16 million FY2015 income-tax benefit from out-of-period adjustments, which management said was not material to current or prior statements.
Important facts for investors to verify
- Whether the CF Nitrogen investment closed as planned, its final financing, and the effect of added borrowing on debt service and covenant headroom.
- Whether operating cash flow recovers after the FY2015 working-capital outflow and how planned capital spending, patronage payments, and preferred dividends affect cash.
- Refinery operating performance after FY2015 turnarounds, completion and cost of McPherson projects, and exposure to refining-margin and RIN-price movements.
- Resolution and potential financial impact of the CFTC inquiry, Laurel EPA matter, and MDEQ allegations.
- Effects of the disclosed accounting revisions and FY2015 tax benefits on comparisons with earlier periods; verify underlying financial statements and notes.