CHS Inc. 10-Q Summary: Quarter Ended May 31, 2011
Business Context and Reporting Period
This is a Quarterly Report on Form 10-Q for CHS Inc., a diversified cooperative providing grain, foods, and energy resources. The report covers the three and nine-month periods ended May 31, 2011. CHS operates primarily through two segments: Energy (petroleum refining and distribution) and Ag Business (grain, oilseeds, and crop inputs), with a Corporate and Other segment. The company recently realigned its segments, moving oilseed processing into Ag Business and wheat milling into Corporate and Other.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended May 31, 2011 | 3 Months Ended May 31, 2010 | 9 Months Ended May 31, 2011 | 9 Months Ended May 31, 2010 |
|---|---|---|---|---|
| Revenues | $10,471,672 | $6,575,978 | $26,312,895 | $18,649,712 |
| Gross Profit | $439,488 | $251,978 | $1,041,487 | $621,364 |
| Operating Earnings | $335,892 | $155,954 | $737,105 | $352,779 |
| Net Income (Total) | $405,917 | $159,495 | $824,071 | $368,189 |
| Net Income Attributable to CHS Inc. | $358,484 | $145,449 | $754,807 | $348,067 |
| Cash and Equivalents (Balance Sheet) | $289,741 | $305,322 | $289,741 | $305,322 |
| Total Debt (Notes Payable + Long-Term) | $2,139,821 | $N/A | $2,139,821 | $N/A |
| Working Capital | $2,183,076 | $1,821,134 | $2,183,076 | $1,821,134 |
Note: Total Debt calculated as Notes Payable ($1,099,971) + Current Portion of Long-Term Debt ($90,768) + Long-Term Debt ($949,082) as of May 31, 2011.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 59% ($3.9 billion) for the quarter and 41% ($7.7 billion) for the nine months compared to the prior year. This was driven primarily by higher commodity prices for grains, oilseeds, and refined fuels, as well as increased volumes in grain marketing and crop nutrients.
- Profitability Surge: Net income attributable to CHS Inc. increased 146% for the quarter and 117% for the nine months. The Energy segment saw significant margin improvements in refined fuels. The Ag Business segment benefited from higher grain prices and a one-time gain.
- One-Time Gain: A pre-tax gain of $119.7 million was recognized from the sale of CHS's 45% ownership interest in Multigrain AG to Mitsui & Co., Ltd. for $225.0 million.
- Working Capital: Significant increases in receivables and inventories were recorded due to rising commodity prices. Cash used in operating activities was $383.9 million for the nine months ended May 31, 2011, compared to $18.9 million in the prior year, largely due to the buildup of inventory and receivables.
Guidance, Outlook, and Risks
- Capital Expenditures: CHS expects total expenditures for property, plant, and equipment, including major refinery repairs, to be approximately $526.0 million for the fiscal year ending August 31, 2011.
- Recent Debt Issuance: In June 2011, the company entered into a private placement for $500.0 million in long-term debt layered into four series with maturities ranging from 2019 to 2026.
- Operational Risks: Recent flooding in trade areas may adversely impact grain volumes and earnings in the first quarter of fiscal 2012. The dissolution of the United Harvest joint venture has temporarily reduced export capacity in Washington state.
- Market Risks: Results remain highly sensitive to global commodity prices (grains, oil, fertilizer) and weather conditions. The company utilizes extensive derivative instruments to hedge these risks.
Key Facts for Investor Verification
- Commodity Price Sensitivity: Verify the sustainability of margins given the significant reliance on high commodity prices for the reported revenue and profit growth.
- Non-Recurring Items: Confirm the impact of the $119.7 million Multigrain sale gain on the core operating performance of the Ag Business segment.
- Liquidity Position: Monitor the high level of short-term borrowings ($1.1 billion in notes payable) required to fund working capital needs amidst rising inventory costs.
- Refinery Turnarounds: Track the completion and cost implications of the major maintenance turnarounds at the Laurel, Montana and McPherson, Kansas refineries, which incurred $88.0 million in expenditures during the nine-month period.
- Segment Realignment: Review future reports to ensure consistent application of the new segment reporting structure (elimination of the Processing segment).