CHS Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended May 31, 2015. CHS is a farmer- and cooperative-owned agribusiness with Energy and Ag segments; interim results are seasonal. Figures below are in U.S. dollars.
Financial results
| Metric | Three months ended May 31, 2015 | Prior-year quarter | Nine months ended May 31, 2015 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $8.74 billion | $11.97 billion | $26.60 billion | $32.67 billion |
| Gross profit | $310.7 million | $506.6 million | $1.15 billion | $1.35 billion |
| Operating earnings | $145.3 million | $347.8 million | $647.7 million | $901.2 million |
| Net income attributable to CHS | $178.1 million | $379.5 million | $649.6 million | $881.7 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(71.3) million | $472.3 million |
Gross margin was approximately 3.6% for the quarter versus 4.2% a year earlier, and 4.3% year to date versus 4.1%. Operating margin was approximately 1.7% versus 2.9% for the quarter and 2.4% versus 2.8% year to date.
- Liquidity: At May 31, cash and cash equivalents were $1.10 billion; working capital was $3.3 billion and the current ratio was 1.6. Cash was $2.13 billion at August 31, 2014.
- Debt: Notes payable, current long-term debt and long-term debt totaled approximately $2.59 billion at May 31, versus approximately $2.62 billion at August 31, 2014. The $2.5 billion revolving facility had no borrowings; CHS reported covenant compliance.
- Cash investment and funding: Investing activities used $1.30 billion, including $827.2 million for property, plant and equipment and $145.6 million for refinery turnarounds. Financing activities provided $344.9 million, including net proceeds from $1.01 billion of preferred stock issuance. Cash declined by $1.03 billion over the nine-month period.
Material changes and management commentary
- Quarterly revenue fell 28% and CHS-attributable net income fell 53%; nine-month revenue fell 19% and attributable net income fell 26% year over year. Lower commodity prices were a major factor in the revenue declines.
- Quarterly Energy pretax income fell 58%, mainly due to reduced refining margins during the McPherson refinery turnaround. Nine-month Energy pretax income fell 32%.
- Quarterly Ag pretax income fell 47%, reflecting weaker crop-nutrient and grain-marketing earnings and lower retail agronomy margins; stronger processing and food-ingredients earnings partly offset the declines. Nine-month Ag pretax income was down 5%.
- Corporate and Other results declined substantially because the prior-year period included a $108.8 million gain related to the contribution of Horizon Milling assets to Ardent Mills.
- Operating cash flow shifted from positive $472.3 million to negative $71.3 million year to date. Management attributed the change to working-capital needs, including higher grain and oilseed inventories and supplier advances, lower accounts payable and accrued expenses, and lower net income.
- A $30.7 million deferred tax benefit was recorded in the third quarter after the board changed its treatment of certain non-qualified equity certificates. Management also expected a favorable IRS settlement on a tax item in the fourth quarter, which it said could significantly benefit the tax rate and net income; no amount was provided.
Outlook, risks and contingencies
- CHS gave no specific earnings guidance. It estimated fiscal 2015 property, plant and equipment and refinery major-repair expenditures of approximately $690 million.
- The proposed Spiritwood, North Dakota nitrogen fertilizer plant is estimated to cost more than $3.0 billion and, if built, was expected to be operational in calendar 2018. CHS said it was still evaluating the project, including the suitability of a construction contract and securing a reliable, long-term water supply. Potential financing would include preferred stock and long-term debt.
- Commodity prices, weather, supply and demand, seasonality, agricultural conditions, and regulation can materially affect results. CHS highlighted uncertainty and volatility in renewable identification number (RIN) prices under the Renewable Fuels Standard.
- CHS reported $912.2 million of long-term unconditional purchase obligations. It guaranteed $94.6 million of related-company obligations under a permitted maximum of $1.0 billion; management did not expect these guarantees to require payment.
- An EPA Clean Air Act information request concerning flares at the Laurel refinery could potentially lead to enforcement action. The potential liability was not clear, and no liability had been recorded. CHS said ordinary-course lawsuits were not expected to have a material effect.
- CHS disclosed that it corrected certain prior derivative gain/loss and notional-volume disclosures; it said the revisions did not materially affect the financial statements. It also planned a phased worldwide ERP implementation beginning in fiscal 2016, which will require internal-control testing.
Important facts for investors to verify
- Whether refining margins recover after the McPherson turnaround and how subsequent refinery maintenance affects output and costs.
- Whether working capital converts to cash in the seasonally stronger fourth fiscal quarter, and the extent of continuing inventory and capital-spending needs.
- The final feasibility, contract terms, water supply, financing plan, cost and schedule for the Spiritwood fertilizer project.
- The outcome and financial effect of the expected IRS settlement, and the basis and potential variability of the reported tax benefit.
- Developments in RIN pricing, commodity markets, the Laurel refinery EPA matter, and other environmental or regulatory obligations.