CHS Inc. — Form 10-Q Summary
Business context and reporting period
CHS Inc. is a farmer- and cooperative-owned diversified business operating in energy, agriculture, and related services. This unaudited report covers the first quarter of fiscal 2012, the three months ended November 30, 2011; comparisons are with the three months ended November 30, 2010. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Revenue | $9.734 billion | $8.133 billion |
| Gross profit | $640.0 million; 6.6% margin | $306.8 million; 3.8% margin |
| Operating earnings | $527.5 million; 5.4% margin | $208.6 million; 2.6% margin |
| Income before tax | $530.8 million | $231.2 million |
| Net income attributable to CHS Inc. | $416.2 million | $201.7 million |
| Cash from operating activities | $1.157 billion | $(376.4) million |
Revenue increased 19.7%, while CHS-attributable net income rose 106.3%. The effective tax rate was 7.9%, versus 10.8%. Net income included $72.7 million attributable to noncontrolling interests, substantially related to NCRA.
Energy segment pretax income was $397.3 million, up from $57.3 million, mainly on improved refined-fuel margins at both refineries. Ag Business pretax income was $121.4 million, down from $154.7 million, reflecting lower grain marketing volumes and weaker country operations and oilseed processing margins. Corporate and Other pretax income declined to $12.2 million from $19.3 million, primarily due to lower joint-venture earnings.
Financial position, liquidity, and cash flow
- At November 30, 2011, cash and equivalents were $1.796 billion; working capital was $2.882 billion and the current ratio was 1.5:1. Total assets were $12.137 billion.
- Short-term notes payable were $645.5 million, including CHS Capital borrowings. Long-term debt, including its current portion, totaled approximately $1.476 billion. CHS reported compliance with debt covenants.
- CHS had $2.5 billion of committed revolving credit facilities, with no amounts outstanding on either primary facility. Management said available cash and credit capacity were adequate for expected working-capital needs and capital expenditures.
- Operating cash flow improved sharply year over year, principally because working capital released cash as commodity prices declined from August levels. The $810.1 million decrease in margin deposits was a major source of cash; inventory growth and lower customer margin deposits partly offset the benefit. Cash increased $857.9 million to $1.796 billion.
- Investing cash outflow was $116.6 million, including $98.9 million of property and equipment purchases and $32.3 million for the Creston, Iowa crushing facility. Financing cash outflow was $178.3 million.
Changes, outlook, and notable items
- Energy revenue rose with higher prices and volumes; refined-fuel sales prices increased 35% and volumes 11%. Ag Business revenue also increased, largely reflecting higher commodity prices despite lower grain and crop-nutrient volumes.
- Management expected net operating assets and liabilities to increase in Q2, with seasonal financing needs from crop-input inventories, supplier prepayments, and deferred grain payments. It expected sufficient liquidity to meet those needs.
- Management anticipated approximately $717.9 million of fiscal 2012 spending for property, plant and equipment and major repairs. Projects include a grain-export facility expansion and a refinery coker replacement.
- CHS changed estimated useful lives for certain Energy assets from 16 to 20 years effective September 1, 2011, estimating about $27 million lower depreciation expense in fiscal 2012.
- On November 29, CHS approved agreements to acquire the remaining approximately 25.6% of NCRA in staged closings from 2012 through 2015, for $351 million aggregate base consideration plus possible crack-spread-based contingent payments. The quarter-end balance sheet reflects $328.7 million for mandatorily redeemable interests and a separate $105.2 million estimated contingent-payment liability. From Q2 onward, NCRA earnings will no longer be attributed to noncontrolling interests.
- CHS signed an agreement to acquire Solbar Industries for an indicated equity value of approximately $133 million; the filing anticipated completion in Q2 FY2012, subject to conditions. The Creston facility acquisition was completed during the quarter.
- Commodity and freight derivative losses were $50.9 million in Q1 FY2012, compared with gains of $210.4 million in Q1 FY2011. These changes are recognized in cost of goods sold and are one factor in year-over-year comparisons.
- CHS warned that a crude-oil pipeline reversal near Cushing, Oklahoma could adversely affect future refined-fuel margins, but could not estimate the impact. It also expected lower grain volumes in fiscal 2012, citing large crops in several foreign markets and short U.S. crops. Commodity prices, weather, supply, regulation, competition, and seasonality remain significant risks; the filing notes income is historically lowest in Q2 and highest in Q3.
- The 2010 comparative balance sheet and cash flows were revised for an accounting error: receivables and notes payable, and investing and financing cash flows, were each understated by $140.6 million. The correction did not affect net income, equity, or credit-covenant compliance.
Important facts for investors to verify
- Whether the unusually strong Energy margins persist, particularly given the potential pipeline-related impact management identified.
- How seasonal Q2 working-capital requirements affect cash, borrowing, and liquidity after the Q1 cash release.
- Actual costs, timing, and contingent payments for the NCRA buyout, and completion and financing of the proposed Solbar acquisition.
- Whether projected fiscal 2012 capital spending and major projects remain on budget, and how the revised asset lives affect reported depreciation.
- The extent to which derivative valuation changes and commodity-price movements affect future segment earnings and cash flows.