CHS Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2014. Financial statements are unaudited. CHS is a farmer-owned diversified cooperative operating in agriculture and energy.
Key financial results
| Metric | Three months 2014 | Three months 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $11,967.4 million | $11,936.6 million | $32,673.8 million | $33,528.9 million |
| Gross profit | $506.6 million | $456.9 million | $1,349.0 million | $1,473.1 million |
| Operating earnings | $347.8 million | $318.1 million | $901.2 million | $1,075.1 million |
| Income before taxes | $439.6 million | $279.5 million | $999.6 million | $960.8 million |
| Net income attributable to CHS | $379.5 million | $250.8 million | $881.7 million | $869.6 million |
| Operating cash flow | Not presented separately for the quarter | $472.3 million | $1,446.3 million |
Gross margin was 4.2% in the quarter (versus 3.8%) and 4.1% for nine months (versus 4.4%). Operating margin was 2.9% in the quarter (versus 2.7%) and 2.8% for nine months (versus 3.2%). Net margin attributable to CHS was 3.2% in the quarter (versus 2.1%) and 2.7% for nine months (versus 2.6%).
Financial position and liquidity
- At May 31, 2014, cash was $1,549.5 million; current assets were $9,647.8 million and current liabilities $6,146.8 million. Working capital was $3,501.0 million and the current ratio was 1.6:1.
- Notes payable totaled $1,129.8 million; current and long-term debt totaled $1,467.4 million. Total notes payable and debt were approximately $2,597.2 million. The $2.5 billion committed revolving facility had no borrowings, and CHS reported compliance with its covenants.
- Nine-month operating cash flow fell to $472.3 million from $1,446.3 million, primarily due to a $611.6 million increase in net operating assets and liabilities, including higher fertilizer prices and inventory quantities. Investing used $1,025.6 million, including $656.3 million of property, plant and equipment purchases; financing provided $295.1 million.
Changes and management commentary
- Quarterly pretax income increased $160.1 million, led by Ag and Corporate and Other. Ag pretax income rose to $109.0 million from $40.0 million; Energy declined to $205.8 million from $220.4 million.
- Nine-month revenue declined 3%, while CHS-attributable net income rose 1%. Energy pretax income fell 20% to $567.3 million, primarily reflecting reduced refining margins; Ag pretax income rose 28% to $260.3 million.
- Quarterly results included a $108.8 million gain from contributing Horizon Milling assets to Ardent Mills, in which CHS retained a 12% interest. The transaction also generated $123.5 million in cash proceeds. The gain materially contributed to Corporate and Other earnings and pretax income.
- CHS issued Series 1 and Series 2 preferred stock during the period, raising net proceeds of $679.6 million combined. The shares carry stated dividend rates of 7.875% and 7.10%, respectively, with Series 2 resetting after March 2024 subject to a cap. A June 2014 shelf registration permits up to $2.0 billion of additional preferred stock offerings.
- Management was evaluating a potential nitrogen fertilizer plant in North Dakota costing more than $2 billion; the engineering study was completed, but the project remained under evaluation. Fiscal 2014 capital expenditures and refinery repairs were expected to total approximately $500 million. Major refinery projects include a $555 million coker replacement and a $327 million expansion at NCRA’s McPherson refinery.
Risks, contingencies, and unusual items
- Results are seasonal and exposed to commodity prices, weather, crop conditions, transportation availability, global supply and demand, and regulatory changes. CHS highlighted volatile renewable fuel credit (RIN) prices and uncertainty over the EPA’s 2014 renewable-fuels mandate.
- Operating cash flow is sensitive to working-capital movements. Capital spending and acquisitions were significant, and the company’s business includes commodity derivatives and associated margin requirements.
- A voluntary recall of soy protein products produced in Israel had an estimated loss range of $13.4–$21.1 million; CHS recorded $18.0 million. $9.6 million of claims had been settled, and no insurance recovery had been recorded by May 31, 2014.
- An EPA information request concerning refinery flares at the Laurel, Montana facility could potentially lead to enforcement action. CHS had not recorded a liability because the potential costs could not yet be determined.
- CHS disclosed $503.96 million of long-term unconditional purchase obligations and $79.6 million of guarantees outstanding. Ordinary-course litigation was not expected by management to have a material effect. No material change in reported market-risk exposures or risk factors was disclosed.
Important facts for investors to verify
- How much of reported earnings growth is sustainable apart from the $108.8 million Ardent Mills gain and the $13.5 million interest-rate-swap gain recognized during the nine-month period.
- Whether Energy refining margins and RIN costs improve, and how the EPA’s eventual renewable-fuel standards affect results.
- Whether Ag margins, commodity prices, inventory levels, and seasonal working-capital needs support stronger cash conversion in subsequent periods.
- Actual cost, financing, timing, and approval decisions for the nitrogen plant and the McPherson refinery projects.
- Any developments in the product-recall claims or EPA refinery inquiry, and the resulting liabilities, insurance recoveries, or cash costs.