Business context and reporting period
CHS Inc. is a farmer-owned cooperative operating in agriculture, energy and related businesses. This unaudited Form 10-Q covers the three and six months ended February 28, 2015, the second quarter and first half of fiscal 2015. Results are seasonal; management says income is generally lowest in the second fiscal quarter and highest in the third.
Key financial metrics
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Three months ended Feb. 28, 2015 | Prior-year quarter | Six months ended Feb. 28, 2015 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $8,355.7 | $9,680.3 | $17,855.2 | $20,706.4 |
| Gross profit / margin | $244.4 / 2.9% | $441.4 / 4.6% | $835.1 / 4.7% | $842.4 / 4.1% |
| Operating earnings / margin | $73.6 / 0.9% | $285.7 / 3.0% | $502.3 / 2.8% | $553.4 / 2.7% |
| Net income attributable to CHS Inc. | $92.8 | $260.1 | $471.5 | $502.3 |
| Net cash from (used in) operations | Not presented by quarter | $(558.3) | $(31.2) |
For the six months, operating cash use reflected a $1.3 billion net outflow from changes in operating assets and liabilities, particularly higher inventories and lower customer margin deposits. Investing cash use was $870.2 million, including $512.5 million of property and equipment purchases and $315.0 million invested in short-term deposits. Financing provided $554.9 million, including preferred stock proceeds. Cash and equivalents fell to $1.262 billion from $2.133 billion at August 31, 2014.
At February 28, 2015, working capital was $3.7 billion and the current ratio was 1.6. Notes payable were $1.362 billion; current and long-term debt totaled $1.318 billion, for approximately $2.680 billion of these reported borrowings. The $2.5 billion committed revolving facility had no borrowings; CHS reported compliance with debt covenants.
Material changes versus prior comparable periods
- Quarterly revenue fell 13.7% and CHS-attributable net income fell 64.3%. Pretax income dropped to $90.5 million from $290.3 million, mainly because Energy earnings fell 94% to $14.1 million as refining margins weakened.
- First-half revenue declined 13.8% and CHS-attributable net income declined 6.1%. Energy pretax earnings fell 18% to $291.3 million; Ag pretax earnings rose 27% to $200.4 million, partly offsetting the Energy decline.
- Lower commodity prices reduced reported revenues across major businesses. First-half Ag earnings benefited from stronger crop nutrient margins; quarterly Ag earnings also improved in processing and food ingredients.
- First-half marketing, general and administrative expense increased 15% to $332.7 million, attributed to staffing and expansion, a higher bad-debt provision related to an international customer, and higher IT and marketing costs.
- CHS issued $1.010 billion of Series 3 and Series 4 preferred stock proceeds net of issuance costs during the first half. The Series 4 issuance generated approximately $501.1 million net and was intended to help fund the proposed fertilizer plant.
Outlook, risks, contingencies and unusual items
- CHS plans a nitrogen fertilizer plant in Spiritwood, North Dakota, estimated to cost more than $3.0 billion and anticipated to begin operating in calendar 2018. Funding is expected from preferred stock and long-term debt. Risks include financing, cost overruns, delays and operating issues.
- Management estimated fiscal 2015 property, plant and equipment and refinery turnaround spending at approximately $690 million. The NCRA refinery coker replacement is expected to cost approximately $555 million; a separate refinery expansion is expected to cost approximately $330 million.
- The EPA deferred the 2014 Renewable Fuel Standard percentage requirements pending final action; compliance may be retroactive. CHS buys renewable identification numbers (RINs) to meet refinery obligations and warns that a significant RIN price increase could materially affect results.
- CHS reported a $121.1 million fair-value liability for contingent crack-spread payments connected with acquiring remaining NCRA interests. The estimate uses significant unobservable inputs.
- Undiscounted long-term unconditional purchase obligations were $1.051 billion. Guarantees of related-party obligations outstanding were $117.6 million; management did not expect payment. An EPA information request concerning flares at the Laurel refinery could lead to enforcement action; potential liability was not yet determinable and no liability was recorded.
- Management said existing cash and committed credit capacity were adequate for likely working-capital needs and expected maintenance spending. The filing provides no quantified earnings guidance. Management cautions that seasonal patterns may not continue.
- CHS is implementing a worldwide ERP system in phases expected to begin in fiscal 2016; implementation may affect internal financial-control processes. The filing reported disclosure controls as effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether refinancing margins and RIN costs stabilize, and how EPA action changes the timing or cost of renewable-fuel compliance.
- How seasonal inventory and working-capital movements affect operating cash flow and liquidity in subsequent quarters.
- Funding plans, capital needs, construction costs and schedule for the Spiritwood fertilizer plant and refinery projects.
- Whether the increase in operating expenses and the international-customer bad-debt provision persists.
- Developments in the Laurel refinery EPA inquiry, NCRA contingent payments and other purchase obligations or guarantees.