CHS Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended August 31, 2020. The filing also reports the quarter ended August 31, 2020 (fiscal Q4). CHS is a farmer- and cooperative-owned agricultural cooperative with Energy, Ag, Nitrogen Production, and Corporate and Other operations; its preferred shares trade on Nasdaq.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $28.406 billion | $31.900 billion | -11.0% |
| Gross profit | $981.8 million | $1.384 billion | -29.1% |
| Operating earnings | $277.3 million | $659.6 million | -58.0% |
| Income before taxes | $386.9 million | $815.6 million | -52.6% |
| Net income attributable to CHS | $422.4 million | $829.9 million | -49.1% |
| Operating cash flow | $1.087 billion | $1.140 billion | -4.6% |
Gross margin fell to approximately 3.5% from 4.3%; operating margin fell to 1.0% from 2.1%. Net margin was approximately 1.5%, versus 2.6%. FY2020 net income exceeded pretax income because CHS recorded a $36.7 million income tax benefit.
- Energy: Revenue was $5.431 billion, down 23.7%; income before taxes was $225.3 million, down 63.6%. COVID-related demand weakness and lower refining spreads reduced refined-fuels margins and volumes.
- Ag: Revenue was $22.926 billion, down 7.3%; income before taxes rose 24.9% to $53.7 million. Improved margins in several businesses and stronger spring planting conditions helped, despite lower volumes and commodity pricing.
- Nitrogen Production: Income before taxes was $51.8 million, down 28.9%, principally reflecting lower urea and UAN prices. CHS’s CF Nitrogen investment was $2.663 billion.
- Corporate and Other: Income before taxes was $56.0 million, down 31.3%, primarily due to weaker Ventura Foods earnings and lower financing income.
Fiscal Q4: Revenue was $6.946 billion versus $8.435 billion a year earlier. Income before taxes was $3.2 million versus $124.9 million, and net income attributable to CHS was $21.5 million versus $179.0 million.
Liquidity, debt, and capital
- At August 31, 2020, cash and cash equivalents were $140.9 million; working capital was $1.347 billion, up from $1.079 billion; and the current ratio was 1.3 versus 1.2.
- Long-term debt, including current maturities, was $1.791 billion, while notes payable were $1.575 billion. Total equities were $8.819 billion, including $2.264 billion of preferred stock. Interest expense declined to $117.0 million from $167.1 million.
- Operating cash flow was $1.087 billion; investing cash outflow was $243.7 million and financing cash outflow was $931.1 million. Capital expenditures were $418.4 million. Cash and restricted cash together ended the year at $217.0 million.
- CHS had a $2.75 billion committed revolving credit facility, with $345 million outstanding. Its receivables securitization facility was fully utilized at $423 million availability at year-end. The company reported compliance with debt covenants.
- CHS expected FY2021 capital expenditures of approximately $486.8 million, excluding about $56 million of Laurel refinery major maintenance; debt repayments and finance lease obligations of $189.3 million; interest payments of $74.6 million; and preferred dividends of $168.7 million.
Material changes, outlook, and risks
- FY2020 results were materially affected by the COVID-19 demand shock, particularly in refined fuels, renewable fuels, processing and food ingredients, and Ventura Foods. Energy market indicators weakened: the WTI–WCS differential averaged $14.31 per barrel versus $20.23, and the Group 3 2:1:1 crack spread averaged $12.36 versus $18.74.
- Management expected volatile energy markets and pressure on energy profitability to continue into FY2021. It expected improved revenue, margins, and cash flow from core Ag operations, but highlighted uncertainty from trade relations, commodity markets, and weather. No quantified earnings guidance was provided.
- Management said it was curtailing certain spending and reprioritizing capital expenditures to protect liquidity, while continuing a multiyear ERP implementation expected to require significant investment. The Board authorized $30 million of FY2020 patronage earnings for cash distribution in FY2021, with $212 million in equity distributions, and $33 million of equity redemptions.
- Unusual items included a $42 million noncash energy-inventory write-down recorded at May 31, partly reversed as prices recovered; the remaining reserve reduction was approximately $34 million by year-end. A federal tax audit settlement generated additional tax credit carryovers and contributed to the tax benefit.
- Important exposures include commodity and basis risk, counterparty and borrower credit risk, seasonal and weather effects, trade restrictions, environmental regulation, cybersecurity and ERP implementation risks, and possible future asset impairments. CHS reported no significant FY2020 impairment; its interim renewable-fuels goodwill test showed estimated fair value about 18% above carrying value.
- The SEC Division of Enforcement’s review of rail-freight contract valuation and related accounting issues remained unresolved; CHS said potential sanctions or costs could be material but could not estimate an outcome. The DOJ closed its FCPA inquiry without action in February 2020; the SEC’s related review remained ongoing.
- Management concluded internal control over financial reporting was effective as of August 31, 2020, and said previously identified material weaknesses had been remediated. The auditor gave an unqualified opinion on the financial statements; the filing did not include an auditor attestation on internal controls.
Most important facts for investors to verify
- Whether reduced energy demand, refining spreads, and product margins persist, and how these affect FY2021 earnings and asset valuations.
- Whether Ag’s expected recovery in volumes and margins is supported by harvest results, weather, trade flows, and commodity prices.
- Liquidity and refinancing capacity, including utilization and renewal of the securitization and repurchase facilities, the November 2020 funding of $375 million in notes, and upcoming debt maturities.
- Cash demands from preferred dividends, patronage distributions, equity redemptions, capital spending, and ERP implementation.
- Developments in the SEC reviews concerning rail-freight accounting and FCPA matters, including any resulting penalties, remediation costs, or disclosures.
- Credit quality of agricultural borrowers and counterparties, and any changes in loan-loss reserves, guarantees, or collateral values.