CHS Inc. 10-Q Summary
Business context and reporting period
CHS Inc. is a farmer-owned agricultural cooperative operating in Energy, Ag and Nitrogen Production, with financing, hedging and joint-venture activities reported in Corporate and Other. This unaudited report covers the first quarter of fiscal 2022, the three months ended November 30, 2021, and compares results with the three months ended November 30, 2020. Results are seasonal and interim performance may not indicate full-year results.
Financial performance and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $10.881 billion | $8.716 billion |
| Gross profit / gross margin | $519.9 million / 4.8% | $178.1 million / 2.0% |
| Operating earnings / operating margin | $315.0 million / 2.9% | $7.4 million / 0.1% |
| Income before taxes | $466.7 million | $45.0 million |
| Net income attributable to CHS | $452.0 million | $69.7 million |
| Equity income from investments | $151.3 million | $50.0 million |
| Operating cash flow | $(183.6) million | $(673.5) million |
Revenue rose about 25% year over year. The effective tax rate was 3.2%, compared with (54.0)% in the prior-year quarter. Interest expense declined to $23.4 million from $25.1 million. Cash used in investing was $52.2 million; financing provided $156.0 million. Cash and cash equivalents were $310.0 million at quarter-end; cash and cash equivalents plus restricted cash were $459.2 million.
At November 30, 2021, working capital was $1.891 billion and the current ratio was 1.2, versus $1.673 billion and 1.3 at August 31, 2021. Notes payable were $1.905 billion and long-term debt, including current maturities, was $1.615 billion. Total equities were $9.250 billion. CHS reported compliance with debt covenants.
Material changes and drivers
- Energy income before taxes improved to $69.2 million from a loss of $67.2 million. Higher crack spreads and wider Western Canadian Select crude differentials supported refining margins; higher renewable fuel credit costs and weaker propane margins partly offset improvement.
- Ag income before taxes increased to $286.4 million from $83.0 million, supported by improved margins in grain and oilseed, wholesale agronomy and oilseed processing. Grain and oilseed volumes declined, reflecting the prior-year comparison, drought-related lower yields and Hurricane Ida’s impact on the Myrtle Grove export terminal.
- Nitrogen Production income before taxes increased to $96.6 million from $4.5 million, primarily due to higher urea and UAN prices and stronger equity earnings from CF Nitrogen; higher natural gas costs partly offset gains.
- Corporate and Other income before taxes fell to $14.5 million from $24.7 million, mainly reflecting lower Ventura Foods equity income and increased incentive compensation.
- Equity income from investments more than tripled, led by CF Nitrogen. Other income also increased, partly due to a gain on sale of an Ag business.
Operating cash use narrowed year over year, principally because of higher earnings, but remained negative. Receivables and inventories increased with higher commodity prices; the filing attributes the quarter’s operating cash use in part to working-capital needs.
Outlook, risks and contingencies
- CHS expects fiscal 2022 capital expenditures of approximately $669.7 million, long-term debt and finance lease repayments of approximately $38.5 million, interest payments of approximately $70.7 million and preferred dividends of approximately $168.7 million. The Board authorized approximately $50 million of fiscal 2021 patronage-sourced earnings for payment in fiscal 2022 and $100 million of equity redemptions for distribution in fiscal 2022.
- Management believes operating and investing cash flows together with available borrowing capacity will support operations for the foreseeable future and expects continued covenant compliance. No specific earnings or revenue guidance is provided.
- Management expected uncertainty and volatility to continue in fiscal 2022. Risks include commodity-price and volume swings, seasonality, inflation in labor, freight and materials, supply-chain and transportation constraints, COVID-19 effects, drought and other weather events, and global trade and political conditions.
- Energy profitability remains exposed to refining margins and volatile Renewable Identification Number prices; management noted higher RIN prices weighed on results. Agricultural and nitrogen performance depends on strong demand and constrained fertilizer supply, conditions that may change.
- Environmental matters and ordinary-course litigation were not believed by management to have a material financial effect. CHS had $134.0 million of outstanding guarantees for related nonconsolidated companies’ credit lines and performance obligations, within a $1.0 billion covenant limit; underlying loans were current. Unrecognized tax benefits could change significantly within 12 months.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the earnings improvement is sustainable versus dependent on unusually favorable commodity prices, refining spreads and CF Nitrogen equity earnings.
- The timing and cash impact of planned capital spending, patronage payments, preferred dividends and equity redemptions, alongside seasonal working-capital demands.
- Whether drought, Hurricane Ida-related disruption, freight constraints and inflation continue to affect Ag volumes, costs and margins.
- Exposure to RIN-price volatility, commodity derivatives and mark-to-market reversals; the filing says derivative gains and losses can affect earnings in different periods.
- Potential changes in tax exposures, contingent guarantees and environmental or litigation matters, and continued covenant compliance.