CHS Inc. — Form 10-Q Summary
Reporting period: Second fiscal quarter and six months ended February 28, 2014. Unaudited consolidated results. CHS is a farmer- and cooperative-owned diversified agribusiness with Energy, Ag, and Corporate and Other segments. Results are seasonal; management says earnings are historically lowest in the second fiscal quarter and highest in the third.
Financial performance
| Metric | Three months ended Feb. 28, 2014 | Three months ended Feb. 28, 2013 | Six months ended Feb. 28, 2014 | Six months ended Feb. 28, 2013 |
|---|---|---|---|---|
| Revenue | $9.680 billion | $9.882 billion | $20.706 billion | $21.592 billion |
| Gross profit | $441.4 million | $470.6 million | $842.4 million | $1.016 billion |
| Operating earnings | $285.7 million | $336.0 million | $553.4 million | $757.0 million |
| Net income attributable to CHS | $260.1 million | $275.1 million | $502.3 million | $618.8 million |
| Gross margin | 4.6% | 4.8% | 4.1% | 4.7% |
- Profitability: Second-quarter income before tax was $290.3 million, down $9.1 million (3%); CHS-attributable net income declined 5%. For the six months, pretax income fell 18% and attributable net income fell 19%.
- Cash flow: Operating activities used $31.2 million in the first half, compared with $1.030 billion provided a year earlier. Investing activities used $744.1 million, including $389.5 million of property and equipment purchases, $243.2 million of net increases in notes receivable, and $97.9 million for acquisitions. Financing activities used $120.0 million. Cash declined by $899.4 million to $909.2 million.
- Liquidity: Working capital was $3.090 billion and the current ratio was 1.5:1 at February 28, 2014. CHS had a $2.5 billion revolving credit facility with no borrowings outstanding and reported compliance with its financial covenants.
- Debt: At February 28, 2014, notes payable were $1.074 billion, current long-term debt $156.5 million, and long-term debt $1.316 billion. Management separately reports total long-term debt of $1.472 billion, including the current portion. Debt covenants were met.
Material changes and management commentary
- First-half Energy pretax earnings fell 26% to $361.4 million, primarily because of reduced refining margins. Higher propane demand and earnings in renewable fuels marketing, lubricants, and transportation partly offset the decline.
- First-half Ag pretax earnings declined 7% to $151.2 million. Grain marketing improved, but lower crop-nutrient margins and weaker soybean-crushing results weighed on performance. Management also cited rail transportation constraints affecting grain volumes.
- Corporate and Other first-half pretax earnings rose 51% to $47.3 million, mainly on stronger earnings from Ventura Foods and wheat-milling joint ventures.
- Revenue declined as lower grain and fertilizer prices outweighed higher Energy sales. First-half grain revenue fell 14% and wholesale crop-nutrient revenue fell 20%; Energy revenue increased 16%, supported by higher volumes, including propane.
- First-half operating cash flow was pressured by a $683.2 million increase in net operating assets and liabilities, which management attributed chiefly to higher fertilizer prices and inventory quantities versus August 31, 2013. The filing notes that seasonal working-capital needs are typically greatest in the second fiscal quarter.
Outlook, risks, contingencies, and unusual items
- Capital plans: CHS was evaluating a proposed nitrogen fertilizer plant in Spiritwood, North Dakota, with potential investment exceeding $2 billion; the feasibility study was completed in February, and the project remained under evaluation. Management expected approximately $500 million of fiscal 2014 property, plant, equipment, and refinery-repair expenditures, including $197.1 million for the NCRA coker replacement project. No formal earnings guidance was provided.
- Other projects and transactions: The NCRA coker replacement was expected to cost $555 million and be completed in fiscal 2015; a separate $327 million refinery expansion was expected to finish in fiscal 2016. CHS expected the Ardent Mills joint venture transaction to close in fiscal 2014, subject to financing and other customary conditions. In March 2014, after quarter-end, CHS issued Series 2 preferred stock with $420 million redemption value and $406.4 million net proceeds.
- Unusual earnings item: Termination of interest-rate swaps generated a $13.5 million pretax gain recorded in interest, net. The swaps were terminated because issuance of the underlying debt was no longer probable.
- Market and operating risks: Commodity prices, weather, crop conditions, supply and transportation availability, regulation, and seasonality can affect revenue, margins, working capital, and cash flow. RIN prices had been highly volatile; management noted that the EPA had suggested reducing the 2014 renewable-fuel mandate, contributing to lower RIN prices. The filing reported no material change in market-risk exposures.
- Contingencies: A voluntary recall of soy protein products following a reported positive salmonella test carried an estimated loss range of $13.5–$27.0 million; CHS had recorded a $25.0 million reserve in fiscal 2013 and no insurance recovery as of February 28, 2014. An EPA information request concerning refinery flares could lead to enforcement action; potential costs were not yet determinable and no liability was recorded.
- Commitments: Long-term unconditional purchase obligations totaled $512.6 million. Guarantees of related-party obligations outstanding were $81.4 million; management said the underlying loans were current and expected no payout.
Important facts for investors to verify
- Whether the seasonal third-quarter earnings pattern materializes, and whether refining margins and Ag-segment margins recover.
- Drivers and durability of the sharp year-over-year operating cash-flow decline, including inventory, fertilizer prices, and other working-capital movements.
- Progress, total funding needs, and expected returns for the Spiritwood fertilizer proposal and refinery capital projects.
- Effects of RIN-market and regulatory changes, rail capacity constraints, commodity-price movements, and colder-weather-driven propane demand.
- Final costs and any insurance recovery for the product recall, and developments in the EPA refinery-flare inquiry.
- Terms and financial effects of the post-quarter Series 2 preferred issuance and the anticipated Ardent Mills transaction.