CHS Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2013; comparative periods ended May 31, 2012. CHS is a farmer-owned diversified cooperative operating in Energy, Agriculture and Corporate and Other. Financial statements are unaudited. Dollars below are in millions unless stated otherwise.
Key financial results
| Metric | Three months 2013 | Three months 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $11,936.6 | $11,023.0 | $33,528.9 | $29,600.9 |
| Gross profit | $456.9 | $616.3 | $1,473.1 | $1,487.8 |
| Gross margin | 3.8% | 5.6% | 4.4% | 5.0% |
| Operating earnings | $318.1 | $487.0 | $1,075.1 | $1,119.5 |
| Income before taxes | $279.5 | $440.7 | $960.8 | $1,061.4 |
| Net income attributable to CHS | $250.8 | $405.1 | $869.6 | $899.7 |
| Net interest expense | $66.4 | $71.1 | $187.0 | $126.6 |
- Third-quarter revenue increased 8%, but gross profit fell 26%, operating earnings fell 35%, and CHS-attributable net income fell 38% year over year. The quarter’s calculated operating margin was approximately 2.7%, versus 4.4%.
- For the nine months, revenue increased 13%, while gross profit declined 1% and CHS-attributable net income declined 3%. Calculated operating margin was approximately 3.2%, versus 3.8%.
- Effective tax rates were 9.7% for the quarter and 9.1% for the nine months, compared with 7.7% and 8.2%, respectively.
Segments and material changes
- Energy: Third-quarter pretax income was $220.4 million, down 25%; nine-month pretax income was $707.6 million, down 4%. The quarter benefited from a $51.7 million net refinery-margin hedge mark-to-market gain, compared with a $2.7 million loss a year earlier. For the nine months, hedge mark-to-market was a $6.0 million loss versus a $50.0 million gain in 2012. Refined-fuels margins were pressured by the Laurel refinery turnaround; propane, lubricants and transportation improved in the quarter.
- Ag: Third-quarter pretax income was $40.0 million, down 70%; nine-month pretax income was $202.7 million, down 30%. Management cited weaker margins in crop nutrients, country operations and grain marketing. Cold, wet weather delayed planting, reduced fertilizer use and may delay harvest. Management expected lower fourth-quarter grain volumes, citing a short prior U.S. crop and anticipated lower grain prices.
- Corporate and Other: Pretax income rose to $19.1 million in the quarter from $14.1 million, and to $50.4 million for nine months from $37.8 million, aided by improved joint-venture earnings, including Ventura Foods and wheat milling.
- Revenue growth was driven principally by Ag grain sales, reflecting higher nine-month grain prices and volumes. Higher revenue did not translate into higher consolidated profit, as costs rose faster and segment margins weakened.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $1,446.3 million, up from $995.3 million. Investing cash outflow was $468.0 million; financing cash outflow was $556.1 million. Cash increased $419.9 million to $734.0 million.
- Capital expenditures for property, plant and equipment were $427.1 million, compared with $315.6 million. Refinery turnaround expenditures were $53.8 million, versus $20.9 million.
- At May 31, 2013, working capital was $2,959.8 million and the current ratio was 1.5:1, compared with $2,848.5 million and 1.4:1 at August 31, 2012.
- Short-term notes payable were $872.1 million, including $439.2 million at CHS Capital. Long-term debt, including current maturities, totaled approximately $1,484.1 million. The filing reports compliance with debt covenants.
- CHS had $2.5 billion of committed revolving credit facilities with no borrowings outstanding on May 31. In June 2013, it replaced them with a new five-year $2.5 billion facility.
- Management expected fiscal 2013 property, plant and equipment and refinery major-repair expenditures of approximately $750 million. The filing reports no material off-balance-sheet debt.
Outlook, risks and unusual items
- A voluntary recall of certain soy protein products from the Ashdod, Israel facility followed a customer’s reported positive salmonella test. No related illnesses had been reported. CHS recorded a $15.5 million reserve, the low end of an estimated loss range of $15.5 million to $65.0 million, and separately incurred $8.9 million of downtime, inventory write-down and other costs. No insurance recovery was recorded; additional costs may arise.
- Higher and volatile renewable identification number (RIN) prices could reduce future refined-fuels margins; CHS said the impact could not then be estimated.
- CHS entered an agreement to form Ardent Mills with Cargill and ConAgra, combining North American flour-milling operations. CHS expects a 12% interest; closing was expected in fiscal 2014, subject to financing and other conditions. Anticipated third-party borrowing was at least $600 million, without owner credit support.
- CHS was evaluating a nitrogen fertilizer plant in Spiritwood, North Dakota, with an estimated project cost exceeding $1 billion; an engineering study of up to $25 million was planned, with completion expected in fall 2013. This was a feasibility effort, not a disclosed final investment commitment.
- Other key exposures include commodity-price and counterparty risk, seasonal and weather-sensitive agricultural operations, refinery disruptions and regulation, environmental obligations, food safety and product liability, and limited control of joint ventures.
- Contingencies include a $146.2 million fair-value liability for contingent NCRA crack-spread payments, based on significant unobservable inputs, and $600.7 million of undiscounted minimum long-term unconditional purchase obligations. Guarantees of related-party obligations totaled $35.7 million outstanding; management did not expect payment.
- Legal matters disclosed include a 2012 plea agreement and $0.5 million fine plus a $50,000 contribution related to a 2009 Montana fire reporting violation, and an EPA information request concerning flares at the Laurel refinery; potential liability on the latter was not estimable.
Important facts for investors to verify
- Whether Ag earnings and margins recover after delayed planting and what the expected fourth-quarter grain volumes and prices imply for results.
- The ultimate recall costs, extent of insurance coverage and any subsequent developments concerning the recalled soy protein products.
- Exposure to RIN prices and refinery-margin hedging, including the effect of the Laurel turnaround and the timing of refinery projects.
- Cash generation and liquidity after planned capital spending, patronage distributions, equity retirements and debt service.
- Progress, financing and closing conditions for Ardent Mills, and whether the Spiritwood fertilizer project advances beyond feasibility study.
- Updates on the EPA Laurel refinery inquiry, contingent NCRA payments, purchase obligations and other material contingencies.