CHS Inc. — Q1 FY2013 10-Q Summary
Business context and period: CHS is a farmer- and cooperative-owned diversified agribusiness operating in Energy, Ag, and Corporate and Other. This unaudited quarter ended November 30, 2012; comparisons are with the three months ended November 30, 2011. Results are seasonal and are not necessarily indicative of the full fiscal year.
Key financial metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $11.710 billion | $9.734 billion | +20% |
| Gross profit | $545.5 million | $640.0 million | -15% |
| Operating earnings | $421.0 million | $527.5 million | -20% |
| Income before taxes | $381.9 million | $530.8 million | -28% |
| Net income attributable to CHS Inc. | $343.7 million | $416.2 million | -17% |
| Operating cash flow | $1.086 billion | $1.157 billion | -6% |
Gross margin was approximately 4.7%, versus 6.6% a year earlier; operating margin was 3.6%, versus 5.4%. Revenue growth was driven largely by higher Ag grain prices and volumes, while profit declined, particularly in Energy. Interest, net rose to $67.2 million from $20.8 million, substantially reflecting NCRA noncontrolling-interest-related charges.
At November 30, 2012, cash was $1.160 billion; working capital was $2.961 billion and the current ratio was 1.4. Notes payable were $876.8 million and total long-term debt, including its current portion, was approximately $1.394 billion. CHS had $2.5 billion of committed revolving credit facilities with no amounts drawn, and reported compliance with debt covenants. Investing cash outflow was $230.8 million, including $138.1 million of property, plant and equipment purchases.
Material changes and segment results
- Energy: Pretax income fell 36% to $253.0 million. Refinery-margin hedge results swung from a $113.0 million gain in the prior-year quarter to a $42.3 million loss. Management said refined-fuel margins would have improved excluding that hedge effect.
- Ag: Pretax income declined 7% to $112.4 million. Grain marketing and wholesale crop nutrients earnings weakened, partly offset by stronger country operations and processing/food ingredients.
- Corporate and Other: Pretax income increased 36% to $16.5 million, supported by improved Ventura Foods results and financial-services earnings.
- Consolidated revenue increased by $2.0 billion, but cost of goods sold rose 23%, faster than revenue. Marketing, general and administrative expenses increased 11% to $124.5 million.
Outlook, risks and unusual items
- Management expected operating assets and liabilities to increase in Q2, historically CHS’s period of highest short-term borrowings, but said cash and available credit were adequate to meet expected needs.
- FY2013 planned property, plant and equipment and refinery major-repair expenditures were approximately $750 million. This included $164 million for a refinery coker replacement project, with an estimated total cost of $555 million and expected completion in FY2015. A Laurel refinery turnaround was scheduled for spring 2013, with estimated costs of about $50 million.
- A $43.1 million mark-to-market loss increased the contingent liability for crack-spread payments related to NCRA ownership purchases. CHS paid $66 million in the quarter for NCRA shares, increasing its ownership to 79.2%.
- In October 2012, CHS agreed to plead guilty to a CERCLA reporting violation related to a 2009 fire at a cooperative facility; the agreement included a $500,000 fine and a $50,000 contribution to the local fire department.
- Key disclosed risks include commodity-price volatility, seasonality, weather and crop conditions, competitive pressures, regulatory and environmental costs, and the cooperative structure’s limits on equity capital access. Management reported no material change in market-risk exposures or risk factors during the quarter.
Important facts for investors to verify
- Whether Energy margins and hedge results improve, and how refinery-margin exposures affect reported earnings.
- Whether forecast FY2013 capital spending, the coker project, and the Laurel turnaround remain on schedule and within estimates.
- Q2 seasonal working-capital needs, borrowing levels, and continued compliance with credit covenants.
- The future amount and timing of contingent NCRA crack-spread payments and remaining ownership-purchase obligations.
- Potential financial or operational effects of the CERCLA plea and other environmental or legal matters.