CHS Inc. — FY2013 Form 10-K Summary
Reporting period: Fiscal year ended August 31, 2013. The filing also provides fourth-quarter results for the three months ended August 31, 2013. CHS is a farmer- and cooperative-owned agricultural business spanning energy, grain, crop inputs, processing and food, and financial services. It has no common stock; its preferred shares are publicly traded.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $44.48 billion | $40.60 billion |
| Gross profit | $1.77 billion | $2.01 billion |
| Operating earnings | $1.22 billion | $1.51 billion |
| Income before taxes | $1.09 billion | $1.42 billion |
| Net income attributable to CHS | $992.4 million | $1.26 billion |
| Cash from operating activities | $2.48 billion | $718.6 million |
| Capital expenditures for property, plant and equipment | $659.4 million | $468.6 million |
| Long-term debt, including current maturities | $1.61 billion | $1.44 billion |
- Revenue grew 10%, while CHS-attributable net income declined 21%. Gross margin was approximately 4.0% of revenue, down from 5.0% in FY2012; operating margin was approximately 2.7%, versus 3.7%.
- Operating cash flow rose sharply, primarily due to a $1.1 billion reduction in net operating assets and liabilities as commodity prices and inventory quantities fell. The cash-flow increase therefore was not solely earnings-driven.
- At year-end, cash and equivalents were $1.81 billion, working capital was $3.13 billion, and the current ratio was 1.5, compared with 1.4 a year earlier. CHS had a $2.5 billion revolving facility with no borrowings outstanding and reported compliance with debt covenants.
- Notes payable were $889.3 million at year-end, including $521.9 million of short-term indebtedness outside CHS Capital and $367.4 million of CHS Capital borrowings. Total equities were $5.15 billion.
- FY2013 cash used in investing activities was $535.0 million; cash used in financing activities was $443.2 million. Cash patronage distributions were $380.9 million, and preferred-stock dividends paid were $24.5 million.
Material changes and segment results
- Energy: Segment pretax income fell 21% to $816.7 million. Management attributed the decrease principally to lower refined-fuel margins at the Laurel refinery during a major maintenance turnaround, lower propane earnings, and costs associated with renewable fuel credits. Segment revenue was approximately $13.0 billion.
- Ag: Segment pretax income declined 39% to $199.3 million despite revenue growth to $31.9 billion. Lower grain export margins, weaker crop-nutrient margins, lower country-operations grain margins, and soy-protein recall costs weighed on results.
- Corporate and Other: Pretax income increased 14% to $70.0 million, supported by improved earnings from Ventura Foods and wheat-milling joint ventures.
- Consolidated revenue growth was led by grain sales, up 16% to $23.8 billion, reflecting higher volumes and prices. Crop-nutrient revenue declined 3%, as lower prices more than offset higher volumes.
- Fourth-quarter revenue was $10.95 billion, versus $11.00 billion in the prior-year quarter. Income before taxes was $125.2 million and net income attributable to CHS was $122.8 million, compared with $355.1 million and $360.9 million, respectively, in Q4 FY2012.
Outlook, risks and unusual items
- Management expected FY2014 spending of approximately $650 million for property, plant and equipment and refinery major repairs. This includes $195.2 million for the NCRA coker replacement project, with total expected cost of $555 million and completion anticipated in FY2015. A separate $327 million McPherson refinery expansion was expected to be completed in FY2016.
- CHS was studying the feasibility of a nitrogen fertilizer plant in North Dakota costing more than $1 billion; it planned to spend up to $25 million on engineering design. The filing does not present a final construction commitment or definitive project economics.
- A voluntary recall of certain soy-protein products from the Ashdod, Israel facility began in May 2013 after a customer reported a positive salmonella test. No related illnesses had been reported. CHS recorded a $25 million reserve within an estimated loss range of $14.4 million to $39.7 million and incurred another $20.1 million for downtime, inventory write-downs and related costs. No insurance recovery had been recorded at year-end; further costs were possible.
- The CFTC requested documents concerning trading positions and said an order of investigation was in process; CHS reported cooperating and said the agency had not identified specific activities of concern. The CME also reviewed certain April–May 2013 futures positions. Outcomes and potential costs were not clear in the filing.
- The EPA had requested information about flares at the Laurel refinery under the Clean Air Act. CHS had supplied the requested information and was awaiting a response; potential liability could not yet be estimated, and no related liability was recorded.
- RIN prices were described as extremely volatile and had negatively affected refined-fuel margins. CHS said the future impact was not estimable. Refining profitability also depends on volatile crude-oil costs and product margins.
- Other material risks include commodity-price, weather and crop risks; seasonality; competition; environmental compliance and remediation; counterparty performance; international-market exposure; member patronage choices; and access to equity capital constrained by the cooperative structure.
- CHS reported an unqualified independent audit opinion and effective disclosure controls and internal control over financial reporting as of August 31, 2013. The 10-K also revised FY2012 balance-sheet derivative presentation to gross amounts, with no effect on cash flows; management said the revision was not material.
Key facts for investors to verify
- Whether the FY2013 operating-cash-flow surge is repeatable, given its reliance on working-capital reductions.
- How refinery margins, maintenance timing, and RIN costs affect Energy earnings and the outlook for FY2014.
- The final recall losses, any insurance recoveries, and whether additional soy-protein claims or costs arise.
- Any developments, costs, or remedies associated with the CFTC/CME reviews and the EPA flare inquiry.
- Funding, expected returns, and execution risks for the refinery projects and the proposed nitrogen plant.
- Debt and liquidity implications of patronage distributions, planned capital spending, and the September 2013 Class B preferred-stock issuance, which produced $273.9 million of net proceeds.