CHS Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended February 28, 2023. CHS is a farmer-owned agricultural cooperative with Energy, Ag and Nitrogen Production segments; results are seasonal and exposed to commodity markets.
Financial results
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $11.307B | $10.333B | $24.073B | $21.213B |
| Gross profit | $384.3M | $269.0M | $1.263B | $788.9M |
| Gross margin | 3.4% | 2.6% | 5.2% | 3.7% |
| Operating earnings | $142.3M | $24.7M | $786.8M | $339.6M |
| Income before taxes | $313.0M | $230.8M | $1.130B | $697.5M |
| Net income attributable to CHS | $292.3M | $219.0M | $1.075B | $671.0M |
| Interest expense | $36.0M | $25.2M | $69.2M | $48.6M |
Revenue increased year over year, but profit growth was uneven across businesses. In Q2, Energy pretax income rose to $264.8M from $10.8M, while Ag swung to an $81.6M pretax loss from $55.2M income. Nitrogen Production pretax income declined to $81.7M from $154.3M; Corporate and Other increased to $48.0M from $10.6M.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow: $16.6M provided, versus $1.304B used in the prior-year period. The filing attributes the improvement principally to lower inventory and receivables cash use and higher net income.
- Investing and financing: Investing used $433.5M, including $236.3M of property, plant and equipment purchases and $39.4M of major maintenance. Financing provided $103.5M. Cash and restricted cash decreased $313.6M during the six months.
- Cash and cash equivalents: $462.2M at February 28, 2023, versus $794.0M at August 31, 2022.
- Working capital/current ratio: $3.160B and 1.4 at February 28, compared with $2.426B and 1.3 at fiscal year-end. Management attributed working-capital movements largely to seasonal increases in inventories, supplier advances, customer advances and notes payable.
- Debt: Notes payable of $1.093B plus long-term debt, including current maturities, of $1.954B; combined, approximately $3.047B, versus approximately $2.566B at August 31. CHS reported compliance with debt covenants. Its $2.75B unsecured revolving facility had no borrowings outstanding; the securitization facility had $833.7M reported availability and $433.0M utilized.
- Equity and distributions: Total equity was $9.829B. CHS paid $381.9M in cash patronage during the six months and $84.3M in preferred dividends.
Material changes and management commentary
- Energy strength: Higher refining margins and wider Western Canadian Select crude discounts supported earnings. Q2 Energy pretax income benefited by $274.8M from improved refined-fuels conditions and $52.1M from propane margin and hedging effects. Unplanned refinery maintenance reduced production, while higher renewable identification number (RIN) costs weighed on results.
- Ag weakness: Lower agronomy and ethanol margins drove the Q2 loss. The quarter included a $57.2M noncash charge to reduce agronomy inventories to net realizable value. For the six months, the comparable charge was $68.2M; lower agronomy and renewable-fuels margins were partly offset by oilseed processing.
- Nitrogen and investments: Equity income from investments fell 22.4% in Q2 and 5.5% for the six months, primarily due to lower CF Nitrogen income as urea and UAN selling prices declined. CF Nitrogen remained the largest equity-income contributor.
- Other drivers: Higher interest rates increased interest expense, partly offset by higher interest income. Other income rose to $28.3M in Q2 and $52.6M for the six months, largely due to interest income.
Outlook, risks and contingencies
- Management expects continued volatility through the rest of fiscal 2023, citing the Russia-Ukraine war, inflation, rising interest rates, bank instability, weather and uncertain agricultural supply and demand. It said it cannot predict the duration or financial impact of current conditions. No specific earnings or revenue guidance was provided.
- Fiscal 2023 spending expectations: approximately $803.8M in capital expenditures and $262.4M in major maintenance, with planned refinery maintenance at Laurel and McPherson. Management expects to fund operations and obligations with operating and investing cash flows and available borrowing capacity.
- The filing identifies commodity-price and volume changes, supply-chain and weather disruptions, RIN costs, counterparty and financing risks, and seasonality as important exposures. Following the March 2023 failures of Silicon Valley Bank and Signature Bank, CHS disclosed uncertainty about potential broader banking-system effects; it reported no banking relationship with those two banks.
- Environmental matters and ordinary-course litigation are disclosed; management does not currently expect them, individually or in aggregate, to materially affect financial position, results or cash flows. CHS had $124.4M of guarantees outstanding for related nonconsolidated companies and said the underlying loans were current.
Important facts for investors to verify
- Whether elevated Energy margins persist and how planned and unplanned refinery maintenance affects production and margins.
- Whether Ag agronomy inventory write-downs, lower crop-input prices and weaker ethanol demand continue to pressure segment profitability.
- How CF Nitrogen earnings respond to fertilizer prices and global supply-demand conditions.
- Whether operating cash generation can support the announced capital expenditure, maintenance, debt-service and member-distribution plans while liquidity and covenant headroom remain adequate.
- The effects of commodity and derivative mark-to-market volatility, RIN prices, seasonal working-capital needs and banking-sector developments on subsequent results.