CHS Inc. — Q3 FY2020 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2020. CHS is a diversified farmer-owned cooperative operating in Energy, Ag, and Nitrogen Production, with financing and hedging activities in Corporate and Other. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Key financial results
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Revenue | $7.241B | $8.498B | $21.461B | $23.466B |
| Gross profit | $218.4M | $223.8M | $859.0M | $1.122B |
| Gross margin | 3.0% | 2.6% | 4.0% | 4.8% |
| Operating earnings | $37.9M | $6.2M | $310.6M | $570.4M |
| Income before taxes | $70.4M | $61.6M | $383.7M | $690.7M |
| Net income attributable to CHS | $97.6M | $54.6M | $401.0M | $650.9M |
| Interest expense | $26.7M | $42.8M | $95.0M | $123.0M |
- Q3 revenue declined 14.8% year over year; nine-month revenue declined 8.5%. Nine-month CHS-attributable net income fell 38.4%, while Q3 increased 78.8%.
- Q3 operating earnings improved despite lower revenue, reflecting lower marketing, general and administrative expenses and stronger Ag results. Q3 net income also benefited from a $27.1M income tax benefit, compared with $6.9M tax expense a year earlier.
- Operating cash flow for the nine months was $525.8M, versus $129.9M in the prior-year period. Investing activities used $48.5M, compared with $592.5M used; financing activities used $292.2M, versus $174.3M provided. Cash and restricted cash ended at $484.0M; balance-sheet cash and cash equivalents were $408.1M.
Financial position and liquidity
- At May 31, 2020, total assets were $16.827B and total equities were $8.780B. Working capital was approximately $1.4B and the current ratio was 1.3, up from $1.1B and 1.2 at August 31, 2019.
- Notes payable were $2.216B; long-term debt, including current maturities, was approximately $1.793B. Cash less these borrowings implies net debt of roughly $3.6B. The company reported compliance with debt covenants.
- The committed revolving credit facility was $2.75B, with $800M outstanding. The securitization facility was fully utilized at $383M of availability as of May 31. A June 26 amendment reduced its maximum availability from $700M to $500M and extended its termination to September 24, 2020, subject to possible further extension.
- Management said it expected liquidity from operating cash flow and borrowing capacity to be adequate for the foreseeable future. It planned to seek up to $300M of debt in Q4 FY2020, with funding anticipated in the first half of FY2021 to refinance maturities and add liquidity.
Material changes and segment performance
- Energy: Q3 revenue fell 48.7% to $890.9M, and the segment recorded a $54.8M pretax loss versus $1.3M of income. COVID-19-related transportation demand weakness, lower refined-fuel prices and crack spreads drove results; improved heavy-crude differentials and propane hedging gains partly offset the impact. Nine-month segment pretax income fell 54.4% to $246.3M.
- Ag: Q3 pretax income rose to $95.4M from $21.1M, supported by improved spring planting weather, higher volumes and margins, and better—but not normalized—trade relations. COVID-related demand weakness hurt renewable fuels, processing and food ingredients. Nine-month pretax income increased 55.4% to $60.7M; prior-year comparison is affected by the March 2019 acquisition of the remaining interest in West Central Distribution.
- Nitrogen Production: Q3 pretax income increased 16.5% to $23.5M, while nine-month pretax income declined 16.3% to $45.7M, reflecting lower urea and UAN prices and lower CF Nitrogen equity income.
- Corporate and Other: Q3 pretax income declined 66.7% to $6.3M, primarily due to lower Ventura Foods equity earnings amid food-service demand disruption. Nine-month pretax income declined 45.4% to $31.0M.
- Lower interest rates and reduced average debt lowered interest expense. The prior-year periods included nonrecurring gains, including a $19.1M gain on remeasurement of the previously held WCD interest and an $80.8M federal excise tax-credit benefit in Energy.
Outlook, risks and unusual items
- Management expected uncertain, volatile energy markets to continue through Q4 FY2020. It also expected Ag revenue, margins and operating cash flows to remain under pressure through the rest of FY2020, citing trade uncertainty, commodity conditions and potential regional weather effects. No quantified earnings guidance was provided.
- CHS recorded a $42.0M noncash charge in Q3 to reduce refined-fuel inventory to market value. Management said the charge could increase or decrease by fiscal year-end; further energy-price declines could prompt additional, potentially significant, noncash adjustments.
- Goodwill and long-lived-asset impairment assessments were performed for an Ag renewable-fuels reporting unit after deteriorating conditions. No impairment was recorded; estimated reporting-unit fair value exceeded carrying value by approximately 18%. Management said it would continue monitoring results and projected cash flows.
- COVID-19 affected refined fuels, renewable fuels, food-service-related businesses and Ventura Foods. CHS reported that its operations were deemed essential and that pandemic response costs were not expected to be material, while acknowledging substantial uncertainty about the duration and effects of the outbreak.
- Disclosure controls and procedures were not effective as of May 31, 2020, because of previously reported material weaknesses in internal control over financial reporting. CHS continued remediation efforts and identified two remaining weaknesses, including controls monitoring and IT general controls.
- The DOJ closed its FCPA inquiry in February 2020 without action against CHS; the SEC’s evaluation remained ongoing, and CHS could not predict its timing or outcome. The company also reported ordinary-course litigation and $163.8M of guarantees outstanding; management did not expect these matters to have a material financial-statement effect.
- Fiscal 2020 capital expenditures were expected to be approximately $457M. Management also estimated preferred-stock dividends of $168.7M, cash patronage of $90M and equity redemptions of approximately $100M for the fiscal year.
Important facts for investors to verify
- Whether weak energy demand, crack spreads and inventory values led to further charges or materially changed Energy results after May 31.
- Whether Ag margins and cash flows remained under pressure, and how much year-over-year comparisons reflect the WCD acquisition.
- Execution and timing of the planned debt financing, upcoming maturities, and renewal or extension of the securitization and uncommitted credit facilities.
- Progress in remediating the two remaining internal-control material weaknesses and any effect on future reporting reliability.
- Outcome of the SEC’s FCPA review and any developments in tax audits, contingencies or guarantee exposure.