CHS Inc. 10-Q Summary
Business context and period: CHS is a farmer-owned cooperative operating in Energy, Ag and Nitrogen Production, with financing and other activities included in Corporate and Other. This filing covers the first quarter of fiscal 2019, the three months ended November 30, 2018. The November 2017 comparative figures are restated.
Financial results and liquidity
| Metric | Q1 FY2019 | Q1 FY2018, restated |
|---|---|---|
| Revenue | $8.484 billion | $8.032 billion |
| Gross profit | $470.6 million; 5.5% of revenue | $320.5 million; 4.0% of revenue |
| Operating earnings | $314.5 million; 3.7% of revenue | $183.9 million; 2.3% of revenue |
| Net income attributable to CHS | $347.5 million; 4.1% of revenue | $187.6 million; 2.3% of revenue |
| Operating cash flow | $(94.8) million | $(153.5) million |
| Investing cash flow | $(154.8) million | $(62.8) million |
- Revenue increased 5.6%; gross profit rose 46.8% and CHS-attributable net income rose 85.2% year over year.
- Equity income from investments increased 73.4% to $66.5 million, principally reflecting better results at CF Nitrogen and Ventura Foods.
- At November 30, cash and cash equivalents were $266.2 million; cash, cash equivalents and restricted cash totaled $341.9 million. Working capital was $933.8 million and the current ratio was 1.1.
- Notes payable were $2.402 billion and long-term debt, including current maturities, was $1.907 billion. Total equities were $8.292 billion. CHS reported compliance with debt covenants.
- Cash and restricted cash declined $202.0 million during the quarter. Seasonal working-capital needs contributed to negative operating cash flow; capital expenditures were $104.8 million.
Material changes and operating drivers
- Energy: Segment income before tax rose to $232.5 million from $120.4 million. Management cited improved refining economics, particularly favorable pricing for heavy Canadian crude oil processed at its refineries; refined-fuel volume also increased 2%.
- Ag: Segment income before tax increased modestly to $80.3 million from $75.1 million. Improved crop-nutrient and processing margins were partly offset by weaker investment income and higher interest expense. Management described the Ag environment as challenging.
- Nitrogen Production and Corporate and Other: Income before tax increased to $23.7 million and $30.8 million, respectively, supported by stronger CF Nitrogen, Ventura Foods and Ardent Mills results and higher financing income.
- Interest expense declined to $38.9 million from $40.7 million. SG&A increased 15.8% to $162.5 million, mainly due to incentive compensation and outside services.
Outlook, risks and unusual items
- Management expected favorable Energy market conditions to become less favorable as fiscal 2019 progressed. It expected Ag revenue, margins and cash flows to remain under pressure for the rest of the fiscal year, citing low commodity prices, reduced customer liquidity and leverage, and unpredictable effects from trade disputes.
- Planned fiscal 2019 capital expenditures were approximately $634 million, including $151 million for refinery property and equipment and $118 million for selective growth investments. A McPherson refinery turnaround was expected to cost approximately $177 million.
- After quarter-end, a tax-credit contingency was resolved. CHS said it would recognize an approximately $80.8 million gain, primarily as a reduction of cost of goods sold, in Q2 fiscal 2019.
- The 2017 comparative period was restated after an investigation found intentional manipulation of rail-freight derivative valuations and quantities by a former employee, as well as contracts that did not qualify for derivative accounting. Other historical misstatements were also corrected. The company reported that the former employee was terminated and additional personnel actions were taken.
- Management concluded disclosure controls were not effective at November 30, 2018, because of material weaknesses in internal control over financial reporting. Remediation was underway and had not yet been deemed complete. The ERP implementation is expected to take several years.
- Key exposures include commodity-price and margin volatility, seasonal working-capital demands, trade and weather uncertainty, volatile Renewable Identification Number prices, and environmental and ordinary-course litigation. Management did not expect environmental matters, litigation or guarantees to have a material financial effect; guarantees outstanding were $151.3 million.
Important facts for investors to verify
- Whether internal-control remediation is effective over time, particularly for grain marketing valuations, journal entries, intercompany transactions and ERP controls.
- Whether the expected $80.8 million Q2 gain is recognized as described and whether it is nonrecurring.
- How Energy margins and Ag performance develop against management’s outlook, especially amid trade disputes and commodity-price changes.
- Liquidity and refinancing capacity, including the receivables securitization facility’s June 17, 2019 termination date, which may be extended, and planned capital and turnaround spending.
- The effects of the restatement and the related accounting and governance improvements; the prior-year comparison is restated and should not be confused with figures originally reported.