CHS Inc. — FY2014 Form 10-K Summary
Business and reporting period. CHS is a farmer- and cooperative-owned agricultural, energy and food business. This annual report covers the fiscal year ended August 31, 2014; the filing also presents unaudited fourth-quarter results. CHS has publicly traded preferred stock but no common stock.
Financial results and liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $42.66 billion | $44.48 billion | Down 4% |
| Gross profit | $1.65 billion | $1.77 billion | Down 7% |
| Operating earnings | $1.04 billion | $1.22 billion | Down 14% |
| Income before income taxes | $1.13 billion | $1.09 billion | Up 4% |
| Net income attributable to CHS | $1.08 billion | $992 million | Up 9% |
| Net cash from operating activities | $1.43 billion | $2.48 billion | Down 42% |
Gross margin was approximately 3.9% and operating margin approximately 2.4%, versus 4.0% and 2.7%, respectively, in FY2013. The effective tax rate fell to 4.3% from 8.3%; management cited renewable-fuel excise tax credit claims and the release of tax reserves.
At August 31, 2014, cash was $2.13 billion, working capital $3.21 billion and the current ratio 1.5. Long-term debt, including current maturities, was $1.46 billion; notes payable were $1.16 billion. CHS had no borrowings on its $2.5 billion revolving credit facility and reported compliance with debt covenants.
FY2014 cash used in investing was $1.34 billion, including $944 million of property and equipment purchases and $282 million for acquisitions. Financing provided $241 million, including $703 million of preferred-stock issuance proceeds before issuance costs. Cash patronage distributions were $287 million.
Performance changes and notable items
- Energy: Pretax income fell 10% to $736 million, mainly from lower refining margins. Higher propane and renewable-fuels sales benefited revenue, while propane demand reflected colder weather and increased crop-drying activity.
- Ag: Pretax income rose 5% to $209 million. Improved grain-marketing logistics, country operations and crop-nutrient results were partly offset by a $74.5 million noncash impairment of Israeli assets and lower processing and food-ingredients earnings.
- Corporate and Other: Pretax income increased to $186 million, principally due to a $109.2 million gain on contributing milling assets to Ardent Mills, in which CHS retained a 12% interest.
- Consolidated revenue declined despite higher Energy revenue, as lower average grain and fertilizer prices reduced Ag revenue. Grain sales prices declined 15% on average; fertilizer prices declined 19% while volumes increased 18%.
- Operating cash flow was lower than FY2013, largely because of smaller cash inflows from changes in operating assets and liabilities. Management attributed the year-end working-capital movements in part to lower commodity prices.
Outlook, risks and contingencies
- In September 2014, after fiscal year-end, the board approved a nitrogen fertilizer plant in Spiritwood, North Dakota, estimated to cost approximately $3.0 billion and targeted to begin operations in the first half of calendar 2018. CHS expected to spend $829 million on the project in FY2015 and planned to finance it with debt and preferred stock. A September 2014 preferred-stock offering generated about $477 million net.
- Separately, CHS estimated FY2015 capital spending and refinery major repairs of approximately $690 million. It also scheduled refinery maintenance turnarounds for FY2015.
- Key exposures include volatile commodity prices and refining margins, seasonal results, weather and crop conditions, transportation constraints, member purchasing choices, competition, counterparty performance and environmental regulation. Hedging mitigates some price exposure but does not eliminate it; certain fertilizer and grain risks cannot be directly hedged.
- CHS disclosed a CFTC request for trading records and a CME review of certain 2013 futures positions; it said it was cooperating. The potential outcome was not clear in the filing.
- An EPA information request concerning refinery flares at the Laurel facility could lead to enforcement action. CHS had not recorded a liability because potential costs could not yet be determined.
- A voluntary recall of soy-protein products produced in Israel followed a customer’s positive salmonella test. CHS reported no related illnesses, estimated recall claims losses at $18 million, and had settled $11.5 million by year-end; no insurance recovery had been recorded. The filing also describes the $74.5 million impairment of certain Israeli assets.
- CHS stated that ordinary-course litigation was not expected to have a material effect. It reported $105 million of guarantees outstanding and $5.92 billion of purchase obligations, most due within one year.
Fourth-quarter results and investor verification points
For the quarter ended August 31, 2014, revenue was $9.99 billion, gross profit $298 million, pretax income $132 million, net income $199 million and net income attributable to CHS $200 million. Revenue was down from $10.95 billion in the comparable quarter, while attributable net income was up from $123 million. The quarterly data show net income exceeding pretax income; the filing text provided here does not clearly explain the quarter-specific tax reconciliation.
- Verify the source and sustainability of FY2014 earnings growth, especially the Ardent Mills gain and unusually low effective tax rate.
- Review the Israeli asset impairment and remaining recall exposure, including whether insurance recoveries are subsequently recognized.
- Track the CFTC/CME inquiry and the EPA Laurel refinery matter for any financial or operational developments.
- Assess funding, execution, cost-overrun and construction risks for the Spiritwood project, alongside planned refinery and other capital spending.
- Monitor refinancing and liquidity needs, including $1.16 billion of notes payable, debt maturities, patronage obligations and the substantial near-term purchase commitments.