CHS Inc. Form 10-Q Summary
Reporting period: Third quarter and nine months ended May 31, 2018. CHS is a farmer-owned cooperative with Energy, Ag and Nitrogen Production segments. Its common stock is not outstanding; preferred shares are publicly traded.
Financial performance
| Metric | Three months ended May 31, 2018 | Nine months ended May 31, 2018 |
|---|---|---|
| Revenue | $9.03 billion; up 4.8% year over year | $23.93 billion; down 0.2% |
| Gross profit | $298.6 million; 3.3% of revenue | $754.4 million; 3.2% of revenue |
| Operating earnings | $140.8 million, versus a $230.3 million loss | $284.8 million, versus a $33.3 million loss |
| Net income attributable to CHS | $229.3 million, versus a $45.2 million loss | $576.1 million, versus $178.5 million |
| Operating cash flow | Not separately provided for the quarter | Use of $147.5 million, versus $204.8 million provided |
- Quarterly improvement reflects stronger Ag and Energy margins and the absence of substantial prior-year reserve and impairment charges. The comparison also benefited from $124.1 million in disposal gains.
- For the quarter, Ag income before taxes was $111.4 million and Energy was $95.4 million. Year to date, Ag income before taxes was $155.1 million and Energy was $217.5 million.
- Interest expense rose 25.9% in the quarter and 10.9% year to date, primarily due to higher interest rates.
- Nine-month net income included a $133.6 million provisional deferred-tax benefit from revaluing U.S. deferred tax liabilities after the Tax Act. CHS recorded $100.9 million of income tax benefit for the nine months; the quarter had $60.3 million of tax expense.
Balance sheet, debt and liquidity
- At May 31, cash was $533.9 million, working capital was $654.1 million and the current ratio was 1.1.
- Notes payable were $2.82 billion and long-term debt, including its current portion, was approximately $1.96 billion. The company reported total equities of $8.16 billion and stated it was in compliance with debt covenants.
- Cash increased $352.5 million over the nine-month period, but operating activities used $147.5 million. Financing provided $570.8 million, while investing used $71.8 million.
- Management attributed weaker operating cash flow mainly to higher receivables amid delayed spring planting and the timing of sales and collections. The $3.0 billion committed revolving facility had $1.09 billion outstanding; other credit facilities were also in use.
Material changes, outlook and risks
- Energy revenue increased as commodity prices rose; improved refining crack spreads supported margins. A Laurel refinery turnaround increased costs, partly offset by a $19.1 million benefit from a small-refinery exemption. The exemption is granted annually and may not recur.
- Ag revenue declined 5.0% year to date, chiefly reflecting lower grain and oilseed sales amid reduced U.S. exports, global competition and strained trade relations, particularly with China. The late spring also compressed planting activity. Management said core Ag and Energy revenues, margins and cash flows would remain under pressure and did not expect significant changes to the core Ag environment for the remainder of fiscal 2018.
- CHS sold certain Energy and other assets, including 34 Zip Trip stores, a pipeline and terminal, and CHS Insurance. The sales generated $124.1 million in reported gains; proceeds from asset and business sales were $260.3 million over the nine months. A separate corporate-office sale-leaseback generated $54.7 million. No numeric earnings guidance was provided.
- Operating risks include commodity-price and margin volatility, seasonality, weather, global trade and customer credit. Brazilian tax legislation restricted use of certain tax credits, resulting in a $15.5 million impairment; CHS also recorded tax expense related to asset sales and Brazilian guarantees.
- On June 28, 2018, after quarter-end, CHS amended its receivables securitization facility so transfers would be accounted for as secured borrowings, with receivables and corresponding debt remaining on the balance sheet. Maximum availability remains $700 million.
- CHS reported ordinary-course litigation and environmental matters as not expected to have a material overall financial effect. It paid a $177,950 penalty to Montana’s environmental department, which closed the matter. A potential energy-related excise tax credit gain contingency, if recognized, could be material.
Important facts for investors to verify
- How much of earnings growth reflects recurring segment performance versus prior-year reserve reversals and disposal gains.
- Whether operating cash flow improves as seasonal working-capital needs and receivables unwind, and how short-term borrowing evolves.
- The sustainability of Ag and Energy margins, including export demand, trade developments, refining spreads and renewal of the small-refinery exemption.
- Final tax accounting under the Tax Act, including the provisional deferred-tax benefit and the Brazilian tax-credit impairment.
- The liquidity and balance-sheet effects of the amended securitization facility, as well as the outcome of the potential excise-tax-credit contingency.