CHS Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2019. CHS is a farmer- and cooperative-owned agribusiness operating in Energy, Ag and Nitrogen Production; its common stock is not publicly outstanding. Comparative 2018 figures are restated.
Financial performance
| Metric | Three months 2019 | Three months 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $8,497.9m | $9,087.3m | $23,465.8m | $24,099.4m |
| Gross profit | $223.8m | $245.6m | $1,121.8m | $701.1m |
| Operating earnings | $6.2m | $87.0m | $570.4m | $229.7m |
| Income before taxes | $61.6m | $236.8m | $690.7m | $422.9m |
| Net income attributable to CHS | $54.6m | $181.8m | $650.9m | $535.5m |
| Interest expense | $42.8m | $49.3m | $123.0m | $130.2m |
Gross margin was approximately 2.6% in the quarter versus 2.7% a year earlier, and 4.8% year to date versus 2.9%. Operating margin was approximately 0.1% versus 1.0% in the quarter, and 2.4% versus 1.0% year to date.
- Cash flow: Nine-month operating cash flow was $129.9m, compared with cash use of $194.4m. Investing used $592.5m; financing provided $174.3m. Cash and restricted cash declined $288.6m to $255.3m.
- Liquidity: May 31 working capital was $828.4m and the current ratio was 1.1. Cash and cash equivalents were $155.3m.
- Debt: Notes payable were $2.763bn; long-term debt including current maturities was $1.918bn, for combined reported borrowings of approximately $4.681bn. Notes payable increased from $2.272bn at August 31, 2018. CHS reported compliance with debt covenants.
- Capital and investment: Total equity was $8.412bn. The company reported a $3.738bn investment portfolio, including its CF Nitrogen investment.
Changes and drivers
- Quarterly revenue fell 6.5% and CHS-attributable net income fell 70% year over year. Operating earnings fell sharply, particularly in Energy and Ag.
- Quarterly Energy pretax income fell to $1.3m from $94.1m, chiefly reflecting the McPherson refinery turnaround and less favorable crude-oil economics; prior-year asset-sale gains also did not recur. Nine-month Energy pretax income improved to $540.3m from $239.0m, supported by favorable heavy Canadian crude pricing and an $80.8m federal excise tax credit benefit.
- Quarterly Ag pretax income fell to $21.1m from $60.1m. Management cited poor spring weather, flooding and transport disruption, trade uncertainty, reduced grain movement and increased loan-loss reserves. Nine-month Ag pretax income was $39.0m versus $81.7m.
- Nitrogen Production pretax income rose to $54.6m for nine months from $29.0m, mainly on higher urea and UAN pricing. Equity income from investments increased to $173.4m from $137.1m.
- On March 1, CHS acquired the remaining 75% of West Central Distribution for a net $106.7m cash payment. The acquisition contributed $255.6m revenue and $10.5m pretax income in the quarter; remeasurement of CHS’s former interest generated a $19.1m gain.
Outlook, risks and unusual items
- Management expects continued pressure on Ag revenue, margins and cash flows amid trade disputes, weak agricultural-sector liquidity, delayed planting and flooding; it said duration and severity are uncertain. Ethanol margins remain pressured by industry oversupply. Energy conditions were expected to normalize after favorable first-half conditions.
- Fiscal 2019 capital expenditures were projected at approximately $628.3m. Management expected preferred dividends of approximately $168.7m and equity redemptions of approximately $85m for the year, and said operating and investing cash flow plus available borrowing capacity should support operations.
- CHS completed the McPherson refinery turnaround during April and May; start-up took longer than planned and throughput was lower. The company also made a discretionary $40m pension contribution during the nine months.
- The quarter included $33.8m of net reserve and impairment charges. CHS identified an out-of-period receivables error that increased bad-debt expense by $29.5m in the quarter and $25.5m year to date; management said the correction was not material to the reported periods or expected full-year results.
- Prior-period results were restated after an investigation found intentional manipulation of rail-freight contract valuations and quantities by a former employee, as well as contracts that did not qualify as derivatives. CHS also corrected intercompany and other misstatements. Restated 2018 CHS-attributable income was reduced by $47.5m for the quarter and $40.6m for the nine months.
- Disclosure controls and procedures were deemed ineffective at May 31 because of previously identified material weaknesses in internal control over financial reporting. CHS described remediation work as ongoing. The filing reported ordinary-course litigation and environmental matters, which management did not expect to have a material overall effect; outstanding guarantees were $244m.
Important facts for investors to verify
- Progress and testing of remediation for material control weaknesses, and whether controls become effective.
- Whether weather, trade disruptions, grain volumes and agricultural credit conditions continue to weigh on Ag results and receivable quality.
- Refinery turnaround recovery, operating reliability and the durability of Energy margins and tax-credit benefits.
- Liquidity and refinancing needs, including the $3bn revolving facility’s September 2020 maturity, short-term borrowings and covenant headroom.
- Final purchase accounting for WCD, year-end capital spending, and the realization of expected operating cash flows and investment distributions.