Business Context and Reporting Period
Company: Cenex Harvest States Cooperatives (CHS Inc)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended May 31, 1999.
Context: This report covers the first nine months and third quarter of the Company's new fiscal year ending August 31, following the June 1, 1998 merger of Cenex, Inc. and Harvest States Cooperatives (accounted for as a pooling of interests). The Company is currently in discussions regarding a potential merger with Farmland Industries, Inc. and recently contributed $55 million to a joint venture (Cenex/Land O'Lakes Agronomy Company) to acquire 310 retail agronomy facilities.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended May 31, 1999 | 9 Months Ended May 31, 1999 |
|---|---|---|
| Net Sales | $1,516,545 | $4,839,774 |
| Total Revenues | $1,549,830 | $4,929,949 |
| Net Income | $38,635 | $55,580 |
| Operating Cash Flow | $54,317 | ($155,914) |
| Cash and Equivalents (End of Period) | $44,760 | $44,760 |
| Total Debt (Short-term + Long-term) | $636,281 | $636,281 |
| Working Capital | $289,256 | $289,256 |
Note: Total Debt calculated as Notes Payable ($170,000) + Current Portion of Long-term Debt ($19,627) + Long-term Debt ($466,281) as of May 31, 1999.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated net sales decreased 18% ($338 million) for the quarter and 23% ($1.4 billion) for the nine months compared to the prior year. This was driven by lower grain prices (down $0.83/bushel quarterly, $1.12/bushel nine-month) and reduced volumes in energy and agronomy sectors due to the Asian monetary crisis and wet weather.
- Profitability Drop: Net income fell 26% ($13.6 million) for the quarter and 51% ($58.8 million) for the nine months. Key drivers included the absence of a $32.9 million agronomy patronage refund received in the prior year, depressed gross margins in food processing and energy, and a $3.1 million impairment on the St. Paul Bank for Cooperatives investment.
- Cash Flow Shift: Operating cash flow turned negative for the nine-month period ($155.9 million used) compared to positive $100.4 million in the prior year, primarily due to a $239.1 million increase in working capital requirements (receivables and inventories).
- Segment Performance:
- Oilseed Processing: Net income dropped 45% (quarter) and 59% (nine months) due to lower soymeal margins.
- Wheat Milling: Reported a net loss of $3.6 million (quarter) and $6.9 million (nine months) versus income in the prior year, caused by volume reductions at the Huron mill during conversion to bakery flour and $1.1 million in bad debt expenses.
Guidance, Outlook, Risks, and Unusual Items
- Merger Discussions: The Company announced intentions to merge with Farmland Industries, Inc., subject to due diligence and member votes.
- Capital Expenditures: Projected total capital expenditures for the fiscal year ending August 31, 1999, are approximately $196 million. This includes a new soybean processing plant in Fairmont, MN (construction tentatively scheduled for 2001) and the completion of the Mount Pocono, PA mill.
- Year 2000 Compliance: Management estimates total remediation costs will not exceed $2 million ($1.3 million expended to date). Risks remain regarding the readiness of third-party suppliers and customers.
- Market Risks: Significant exposure to supply/demand forces, commodity price volatility, and the Asian monetary crisis impacting U.S. agricultural exports. Competition in oilseed processing is intensifying due to new capacity.
- Unusual Items:
- Received a $1.0 million harbor maintenance tax refund due to a Supreme Court ruling.
- Recognized $1.1 million in bad debt expense from two Wheat Milling customers filing for bankruptcy.
- Recorded a $3.1 million impairment on the St. Paul Bank for Cooperatives investment.
Investor Verification Checklist
- Merger Status: Verify the progress of the potential merger with Farmland Industries, Inc. and the likelihood of member approval.
- Working Capital Trends: Monitor the $239 million increase in working capital usage and its impact on future liquidity and debt covenants.
- Wheat Milling Turnaround: Assess the success of the Huron mill conversion to bakery flour and the recovery of the $1.1 million bad debt write-off.
- Year 2000 Readiness: Confirm the completion of remediation for mission-critical systems and the status of supplier certifications.
- Commodity Pricing: Evaluate the sustainability of current grain and oilseed price levels and their effect on future gross margins.