CHS Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended May 31, 2012; unaudited. CHS is a farmer-owned cooperative operating in energy, agriculture, and related businesses. Comparisons are with the periods ended May 31, 2011 unless noted.
Financial highlights
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $11.02 billion, up 5% | $29.60 billion, up 13% |
| Gross profit / margin | $616.3 million / 5.6%; prior year $439.5 million / 4.2% | $1.49 billion / 5.0%; prior year $1.04 billion / 4.0% |
| Operating earnings / margin | $487.0 million / 4.4%; prior year $335.9 million / 3.2% | $1.12 billion / 3.8%; prior year $737.1 million / 2.8% |
| Income before taxes | $440.7 million, down 5% | $1.06 billion, up 16% |
| Net income attributable to CHS | $405.1 million, up 13% | $899.7 million, up 19% |
| Operating cash flow | Not reported for the quarter alone | $995.3 million provided; prior year $383.9 million used |
Quarterly net income attributable to CHS rose even as pretax income declined. Nine-month net income growth reflected stronger operating results, particularly in Energy. The prior-year comparison included a $119.7 million gain on the Multigrain investment sale.
Liquidity, debt, and capital
- At May 31, 2012, cash was $689.3 million; working capital was $2.85 billion and the current ratio was 1.6, compared with $2.78 billion and 1.5 at August 31, 2011.
- Reported short-term notes payable were $621.9 million; current long-term debt was $89.2 million and long-term debt was $1.39 billion. Together, these debt balances were approximately $2.10 billion. The company also reported $332.7 million of mandatorily redeemable NCRA noncontrolling-interest obligations.
- Two committed revolving facilities totaled $2.5 billion and had no amounts outstanding at May 31. CHS reported compliance with debt covenants.
- Year-to-date investing cash use was $450.3 million, including $315.6 million of property, plant and equipment purchases and $159.4 million for business acquisitions. Financing cash use was $784.0 million, including patronage distributions, equity retirements, and debt repayments.
Performance changes and management commentary
- Energy: Pretax earnings rose to $294.7 million for the quarter from $231.4 million, and to $734.1 million year to date from $395.9 million. Management cited improved refined-fuel margins at both refineries; propane and transportation also improved. Renewable fuels marketing performed less well over the year-to-date period.
- Ag Business: Quarterly pretax earnings declined to $131.9 million from $209.8 million; year-to-date earnings fell to $289.5 million from $451.4 million. Crop nutrients improved, but grain marketing faced lower export volumes and lacked the prior-year Multigrain sale gain. Solbar-related expenses also affected results.
- Corporate and Other: Pretax earnings declined to $14.1 million for the quarter and $37.8 million year to date. Management cited weaker joint-venture earnings and Agriliance’s wind-down.
- CHS changed estimated useful lives for certain Energy assets beginning September 1, 2011; the change was expected to reduce fiscal 2012 depreciation expense by approximately $27 million.
Outlook, risks, contingencies, and unusual items
- Management expected fiscal 2012 property, plant and equipment spending plus major repairs of approximately $500 million. This included $60 million for a refinery coker project with an estimated total cost of $555 million and completion expected in fiscal 2015. Significant future cash contributions to TEMCO were expected beginning in fiscal 2013.
- Results are seasonal and exposed to commodity prices, weather, crop conditions, supply and transportation availability, regulation, and global economic and political conditions. Management warned a Cushing-area crude pipeline reversal, not yet operating at full capacity, could negatively affect future refined-fuel margins; the impact was not estimable.
- CHS acquired Solbar for $128.7 million net of cash acquired and purchased a Creston, Iowa oilseed facility for $32.3 million. It agreed to acquire the remaining approximately 25.6% of NCRA through staged closings in 2012–2015, with base consideration and contingent crack-spread payments. The related recorded obligations included $332.7 million for future purchase payments and a $98.4 million contingent-payment liability.
- A new commitment to route minimum grain volumes through a planned Brazilian port extends through 2037; discounted minimum payments were estimated at $84.5 million using May 31 exchange rates.
- NCRA’s EPA settlement required approximately $0.7 million of community environmental projects and approximately $0.7 million plus interest in civil penalties; management said it would not be material. A separate investigation related to a 2009 facility fire remained unresolved; CHS was exploring a possible settlement and expected any penalty not to be material.
- Management reported no material changes in market-risk disclosures or risk factors. It cited commodity-price volatility, competition, regulatory and environmental costs, operational interruptions, cooperative capital constraints, and limited control over certain joint ventures among the risks.
Important facts for investors to verify
- Whether Energy’s improved refinery margins are sustainable, including the eventual effect of the Cushing pipeline reversal.
- Whether lower Ag Business grain volumes and reduced joint-venture earnings persist, and how Solbar contributes after acquisition-related costs.
- The cash-flow and debt effects of NCRA’s staged buyout, contingent crack-spread payments, patronage distributions, and planned capital spending.
- Progress, funding obligations, and grain-volume requirements for the Brazilian port commitment and TEMCO expansion.
- Developments in the unresolved fire-related investigation and any resulting settlement or penalty.