CHS Inc. — Fiscal 2021 Form 10-K
Reporting period: Fiscal year ended August 31, 2021. This is an annual report, not a standalone fourth-quarter report; the filing does not provide a clear standalone Q4 income statement.
Business context and financial results
CHS is a farmer- and rancher-owned agricultural cooperative with Energy, Ag, Nitrogen Production and Foods segments. Energy and Ag generate most consolidated revenue; Nitrogen Production and Foods are equity-method investments, so their sales are not consolidated. CHS has publicly traded preferred shares but no common stock.
| Metric | Fiscal 2021 | Fiscal 2020 |
|---|---|---|
| Revenue | $38.45 billion | $28.41 billion |
| Gross profit / gross margin | $951.4 million / 2.5% | $981.8 million / 3.5% |
| Operating earnings / operating margin | $205.8 million / 0.5% | $277.3 million / 1.0% |
| Income before income taxes | $515.3 million | $386.9 million |
| Net income attributable to CHS | $554.0 million | $422.4 million |
| Net cash from operating activities | $757.8 million | $1.09 billion |
Reported gross profit and operating earnings declined despite substantially higher revenue. Net income attributable to CHS increased, supported in part by higher equity income from investments ($354.5 million, up 89.9%) and a larger income tax benefit. The tax benefit was $38.2 million; the effective tax rate was negative 7.4%, reflecting cooperative patronage and other tax items.
Segments, liquidity and debt
- Ag: Revenue was $32.04 billion, up 39.7%; income before tax rose to $298.1 million from $53.7 million. Stronger grain and oilseed prices and volumes, improved trade flows and favorable harvest and planting conditions contributed.
- Energy: Revenue was $6.38 billion, up 17.4%, but the segment recorded a $10.6 million pretax loss versus $225.3 million pretax income. Higher renewable fuel credit costs and less favorable Western Canadian crude differentials offset improved crack spreads.
- Equity-method segments: Nitrogen Production pretax income was $121.0 million, up from $51.8 million; Foods was $67.9 million, up from $24.2 million. Higher fertilizer prices helped CF Nitrogen; improved edible-oil conditions and recovering sales supported Ventura Foods.
- Cash and working capital: Cash and cash equivalents were $413.2 million, compared with $140.9 million; working capital was $1.67 billion, up from $1.35 billion. The current ratio was 1.3 in both years. Management attributed lower operating cash flow mainly to working-capital growth and greater earnings from equity-method investments, whose income is not cash until distributed.
- Debt: Notes payable were $1.74 billion and long-term debt, including current maturities, was $1.62 billion, for about $3.36 billion combined, broadly comparable to 2020. CHS reported compliance with debt covenants. Its $2.75 billion revolving credit facility had no borrowings at year-end; the receivables securitization facility had $600 million utilized.
- Cash uses and planned spending: Fiscal 2021 capital expenditures were $317.8 million. For fiscal 2022, CHS expected about $414 million of capital expenditures, plus approximately $53.7 million for major Laurel refinery maintenance; it also anticipated $168.7 million of preferred dividends, $50 million of cash patronage and $100 million of equity redemptions.
Changes, outlook and risks
- Revenue increased 35.4%, largely due to higher grain and oilseed prices and volumes and a recovery in refined-fuel prices and demand from pandemic lows. Ag earnings improved sharply, while Energy earnings weakened.
- Operating cash flow fell $329.4 million year over year, principally from increased receivables and inventory and a higher proportion of income from equity-method investments. Investing cash outflow narrowed to $101.7 million, and financing cash outflow narrowed to $326.6 million.
- Fiscal 2022 outlook is qualitative, not a numeric earnings forecast. Management cited continuing energy-market uncertainty and expected elevated renewable fuel credit costs; higher freight costs and logistical challenges; and potential adverse effects from drought, weather and Hurricane Ida-related disruption. The Myrtle Grove, Louisiana, grain export terminal was damaged by Ida and was out of service for about four weeks.
- Key risks include commodity-price and margin volatility, seasonality, weather and climate impacts, member business shifting to other suppliers, counterparty and borrower credit risk, regulation and environmental liabilities, and COVID-19 effects on demand and supply chains. CHS also highlighted the potential effect of LIBOR transition on some borrowings and preferred dividends.
- Unusual financial item: Non-hedge-accounted commodity derivatives recorded a $971.6 million loss in cost of goods sold in fiscal 2021, compared with an $89.2 million gain in 2020. CHS states it uses derivatives to manage commodity exposure; the filing explains that derivative accounting volatility may not by itself reflect the economics of associated physical positions. Investors should review the related notes and reconciliation.
- Contingencies and control matters: CHS continued cooperating with an SEC Division of Enforcement review concerning previously identified rail-freight contract valuation misstatements and intentional misconduct by a former employee; the outcome and potential sanctions were not predictable. The SEC also continued evaluating previously self-disclosed potential FCPA-related matters; the DOJ closed its inquiry without action in 2020. CHS reported no data loss, system breach or significant operational interruption from a credible cybersecurity threat identified in June 2021. Management concluded internal control over financial reporting was effective; the auditor did not provide an attestation on internal controls.
- Management said cash from operations and available borrowing capacity should be sufficient for the foreseeable future and expected continued covenant compliance, while noting that market conditions could materially affect results.
Most important facts for investors to verify
- How much of fiscal 2021’s higher net income and equity income translates into recurring cash distributions, especially from CF Nitrogen, Ventura Foods and TEMCO.
- The composition, timing and potential reversal of the large commodity-derivative losses, and the sensitivity of physical margins to RIN prices, crude differentials and crack spreads.
- Whether forecast fiscal 2022 capital spending, refinery maintenance, preferred dividends, patronage and equity redemptions are supported by operating cash generation and available facilities.
- Developments in the SEC rail-freight review and the SEC’s FCPA evaluation, including any financial, legal or reputational consequences.
- Actual operating and financial effects of Ida damage, drought, freight constraints, COVID-19 and other market conditions relative to management’s qualitative outlook.