CHS Inc. 10-Q Summary
Reporting period: Quarter ended February 29, 2012; comparisons are with the quarter and six months ended February 28, 2011. CHS is a farmer-owned cooperative operating in energy, agriculture, and related businesses. Financial figures below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
- Quarter: Revenue rose 14.8% to $8,843.8, but gross profit fell to $231.6 from $292.9 and operating earnings fell to $105.0 from $190.5. Net income attributable to CHS declined 59.7% to $78.5 from $194.6. Gross margin was approximately 2.6% versus 3.8%; operating margin was 1.2% versus 2.5%.
- Six months: Revenue increased 17.3% to $18,578.0. Gross profit increased to $871.6 from $602.0, operating earnings to $632.5 from $401.2, and net income attributable to CHS to $494.7 from $396.3. Gross margin was approximately 4.7% versus 3.8%; operating margin was 3.4% versus 2.5%.
- Cash flow, six months: Operating activities provided $605.8, versus $957.2 used in the prior-year period. Investing activities used $342.6 versus $750.9; financing activities used $687.8 versus providing $1,497.2. Cash ended at $508.1, down from $937.7 at August 31, 2011.
- Balance sheet and funding: At February 29, working capital was $2,696.1 and the current ratio was 1.5. Notes payable were $636.1; current and long-term debt totaled $1,489.5, for approximately $2,125.6 of these borrowings. CHS had $2.5 billion of committed revolving credit facilities with no borrowings outstanding under those primary facilities. The company reported covenant compliance.
Material changes and business drivers
- Quarterly pretax income fell 58% to $89.9. Energy pretax income declined to $42.1 from $107.2, primarily because of lower refined-fuel margins at both refineries. Ag Business pretax income declined to $36.2 from $86.9, reflecting weaker crop-nutrient, country operations, and grain-marketing earnings. Corporate and Other pretax income declined to $11.6 from $20.0, including lower joint-venture earnings.
- For the six-month period, Energy pretax income increased to $439.4 from $164.5, mainly on improved refined-fuel margins. Ag Business pretax income fell to $157.5 from $241.6, and Corporate and Other fell to $23.8 from $39.3.
- Commodity and freight derivative losses were $188.3 in the quarter and $274.9 for six months, versus gains of $101.4 and $311.8 in the respective prior-year periods. Management attributed a $46.7 year-over-year increase in quarterly Energy cost of goods sold to derivative fair-value changes; for the six months, such changes reduced cost of goods sold by $66.3 year over year.
- Net interest expense increased to $34.6 for the quarter and $55.4 for six months, partly due to the NCRA transaction and a $500.0 million long-term debt private placement in June 2011. Equity income from investments decreased 52% for the quarter and 45% for six months.
Outlook, risks, and unusual items
- Management expects lower grain volumes in fiscal 2012, citing large crops in the Black Sea region, South America, and Australia, as well as short U.S. crops. It said a crude-oil pipeline reversal near Cushing, Oklahoma, could adversely affect future refined-fuel margins, but the impact could not be estimated.
- Management expects approximately $500 million of fiscal 2012 spending on property, plant and equipment and major repairs, including $60 million for a refinery coker project expected to cost $555 million in total and finish in fiscal 2015. Results are seasonal; historically income is lowest in the second fiscal quarter and highest in the third.
- CHS completed its $127.8 million net acquisition of Solbar in February 2012 and acquired an Iowa oilseed-crushing facility for $32.3 million. Solbar added $51.0 million of preliminary goodwill and $20.3 million of intangible assets; management said the acquisition was not expected to materially affect consolidated results.
- CHS agreed to acquire the remaining approximately 25.6% of NCRA through four closings from 2012 to 2015, with aggregate base consideration of about $351 million plus possible crack-spread-based payments. The balance sheet included $330.7 million for the present value of future redemption payments and a $101.0 million contingent crack-spread liability. Beginning in the second quarter, NCRA earnings were no longer attributed to noncontrolling interests; patronage earned by those interests was recorded in interest expense.
- Effective September 1, 2011, CHS extended the estimated useful lives of certain refining and asphalt assets from 16 to 20 years, expecting to reduce fiscal 2012 depreciation by approximately $27 million. CHS also disclosed correction of a prior-period classification error that had understated February 2011 receivables and notes payable by $269.3 million; the correction did not affect net income or equity.
- Guarantees for related companies totaled $31.9 million against a permitted maximum of $500 million; management did not expect a payment. NCRA agreed to an environmental settlement requiring approximately $0.7 million in community projects and $0.7 million plus interest in penalties; CHS said it would not have a material adverse effect. Management identified commodity-price volatility, weather, regulation, competition, environmental liabilities, and seasonal operating conditions among key risks.
Important facts for investors to verify
- Whether Energy margins recover, particularly given the pipeline-reversal risk and volatility in derivative results.
- Whether projected lower grain volumes and weaker Ag Business margins materialize, and how they affect full-year earnings.
- Cash requirements for the NCRA purchase, contingent consideration, capital projects, patronage distributions, and equity retirements.
- Whether working-capital swings, commodity prices, and seasonal cash needs remain manageable within available liquidity and debt covenants.
- The final purchase-price allocation and operating contribution from Solbar, and the effects of the useful-life estimate change on reported earnings.