CHS Inc. — Fiscal 2021 First-Quarter 10-Q
Reporting period: Three months ended November 30, 2020; comparative period is the three months ended November 30, 2019. CHS is a diversified farmer-owned cooperative with Energy, Ag and Nitrogen Production segments. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $8,715.6 | $7,621.5 | +14.4% |
| Gross profit | $178.1 | $325.5 | -45.3% |
| Gross margin | 2.0% | 4.3% | -2.3 percentage points |
| Operating earnings | $7.4 | $157.2 | Down $149.8 |
| Income before taxes | $45.0 | $185.4 | Down $140.4 |
| Net income | $69.4 | $178.7 | Down $109.4 |
| Net income attributable to CHS | $69.7 | $177.9 | Down $108.2 |
| Interest expense | $25.1 | $35.0 | -28.4% |
The quarter’s $24.3 million income tax benefit (effective tax rate of -54.0%, versus a 3.6% expense rate) reflected projected earnings mix, patronage deduction assumptions and an anticipated intercompany asset transfer. This tax benefit helped moderate the decline in net income.
Cash flow: Operating activities used $673.5 million, versus providing $160.7 million a year earlier. CHS attributed the deterioration primarily to working-capital increases, including receivables and inventories, as well as lower net income. Investing activities used $114.3 million, broadly similar to the prior-year $114.9 million. Financing activities provided $808.9 million, including proceeds from debt facilities and the $375 million note funding. Cash, cash equivalents and restricted cash ended at $240.4 million; balance-sheet cash and cash equivalents were $143.5 million.
Balance sheet and liquidity: At November 30, 2020, working capital was $1.7 billion and the current ratio was 1.3. Notes payable were $2.04 billion; long-term debt including current maturities was $2.14 billion. Total equities were $8.79 billion. The $2.75 billion committed revolving facility had $527 million outstanding; the $456 million available securitization capacity was fully utilized, and a $150 million repurchase facility was also fully drawn. CHS reported compliance with debt covenants.
Material changes and segment performance
- Energy: Income before taxes swung to a loss of $67.2 million from income of $162.2 million. Revenue fell 33.6% to $1.26 billion. Management cited COVID-19-related demand weakness, exceptionally low crack spreads, lower refined-fuel volumes and prices, higher RIN prices, and reduced propane demand following warmer, drier weather.
- Ag: Income before taxes improved to $83.0 million from a loss of $13.9 million; revenue rose 30.3% to $7.45 billion. Favorable harvest weather and improved U.S. trade relations supported higher grain and oilseed volumes and margins. Grain and oilseed throughput rose to 746.6 million bushels from 619.5 million.
- Nitrogen Production: Income before taxes declined to $4.5 million from $16.5 million, mainly reflecting lower urea and urea ammonium nitrate selling prices at CF Nitrogen.
- Corporate and Other: Income before taxes increased to $24.7 million from $20.7 million, primarily due to improved hedging-business earnings on higher trading volumes.
- Consolidated revenue growth did not translate into higher profit: cost of goods sold increased to 98.0% of revenue from 95.7%, compressing gross margin. Non-designated derivatives recorded a net pretax loss of $176.5 million, versus a $35.8 million gain in the prior-year quarter.
Outlook, risks and other notable items
- Management expects uncertainty and volatility in energy markets, including COVID-19-related demand effects, to continue weighing on Energy profitability through the remainder of fiscal 2021.
- CHS expects Ag core-operation revenue, margins and cash flows to stabilize through the remainder of fiscal 2021, while noting that global market conditions and unpredictable weather could adversely affect results and asset values.
- Management said it is reducing budgeted costs, reprioritizing capital spending and pursuing cash-flow improvements. Fiscal 2021 capital expenditures were projected at approximately $501.4 million. The filing does not provide a consolidated earnings or revenue forecast.
- CHS said existing cash, operating cash flow and borrowing capacity should support operations for the foreseeable future. Expected fiscal 2021 cash uses include approximately $168.7 million of preferred dividends, $189.3 million of long-term debt and finance-lease repayments, and $38 million of authorized equity redemptions.
- Commodity prices, spreads, volumes, weather, transportation, trade conditions and regulation are significant business risks. Derivatives are used to manage commodity, foreign-exchange and interest-rate exposures, but may create earnings volatility.
- Routine litigation and environmental matters were not expected by management to have a material effect. Guarantees for related companies totaled $140.4 million; CHS reported no material off-balance-sheet debt. No material risk-factor changes were reported. CHS adopted the expected-credit-loss accounting standard in the quarter, with no material financial-statement impact.
Important facts for investors to verify
- Whether Energy margins and demand recover as COVID-19 effects and market conditions evolve, and how that affects full-year profitability.
- Whether Ag segment strength and management’s expected stabilization persist despite commodity, trade and weather volatility.
- How working-capital needs—particularly receivables and inventory—affect operating cash flow and reliance on borrowing.
- Debt levels, facility utilization, covenant compliance and the timing and cost of refinancing or repayment needs.
- The sustainability of reported earnings excluding the unusual tax benefit and the effects of derivative gains and losses.