CHS Inc. Form 10-Q Summary
Business context and reporting period
CHS Inc. is a farmer-owned agricultural cooperative with Energy, Ag and Nitrogen Production segments, plus financing, hedging and other activities. This unaudited report covers the fiscal third quarter and nine months ended May 31, 2024; comparisons are with the periods ended May 31, 2023. Results are seasonal and interim performance may not indicate full-year results.
Key financial metrics
| Metric | Three months ended May 31 | Nine months ended May 31 |
|---|---|---|
| Revenue | $9.61 billion, down 20.1% | $30.09 billion, down 16.7% |
| Gross profit / gross margin | $467.8 million / 4.9%, versus $674.3 million / 5.6% | $1.48 billion / 4.9%, versus $1.94 billion / 5.4% |
| Operating earnings | $151.4 million, versus $401.1 million | $611.9 million, versus $1.19 billion |
| Net income attributable to CHS Inc. | $297.3 million, versus $547.5 million | $990.5 million, versus $1.62 billion |
| Operating cash flow | Not separately presented for the quarter | $159.7 million, versus $1.97 billion |
For the nine months, investing cash outflow was $519.5 million and financing cash outflow was $1.10 billion. Cash and cash equivalents were $310.1 million at May 31, 2024, compared with $1.77 billion at August 31, 2023. Working capital was $3.25 billion, up $21.6 million from fiscal year-end, and the current ratio was 1.6.
Notes payable were $337.5 million and long-term debt, including current maturities, was $1.83 billion. Total equity was $10.91 billion, including $2.26 billion of preferred stock. CHS reported compliance with all debt covenants. It had no borrowings under its $2.8 billion revolving credit facility or its securitization facility at May 31; securitization availability was $1.0 billion.
Material changes versus prior periods
- Lower commodity prices contributed to substantial declines in reported revenue, particularly in Ag; lower selling prices also reduced Energy revenue. Gross and operating margins narrowed.
- Third-quarter income before taxes fell to $309.9 million from $558.1 million. Energy segment income before taxes declined 50.8% and Ag declined 53.5% year over year.
- Energy’s nine-month income before taxes fell 51.6%, principally due to narrower refining crack spreads and reduced Western Canadian Select crude discounts. Lower renewable identification number (RIN) costs partly offset the pressure.
- Ag’s nine-month income before taxes declined 23.7%, reflecting weaker oilseed-processing and grain margins, partly offset by improved agronomy margins and higher grain and oilseed volumes.
- Equity income from investments decreased 28.7% for the nine months, primarily reflecting lower CF Nitrogen earnings amid lower urea and UAN prices and lower income from Ventura Foods.
- Nine-month operating cash flow fell by $1.81 billion year over year, reflecting lower net income and higher receivables and inventories. Capital spending increased: property, plant and equipment acquisitions were $541.4 million versus $374.2 million.
Outlook, commentary and risks
Management expects moderated margins in energy and agricultural commodities to persist through the remainder of fiscal 2024 and into fiscal 2025, potentially reducing profitability. The company says it cannot predict the duration or severity of current conditions. Its fiscal 2024 capital expenditure outlook is approximately $825 million; major maintenance is expected to be approximately $22 million.
Management cited refining capacity utilization and added fuel supply as pressures on Energy margins, and shifting global trade flows away from the United States and weaker grain and oilseed demand as pressures on Ag. Other disclosed uncertainties include commodity prices, weather and climate conditions, global trade, geopolitical conflicts, higher interest rates, inflation, labor and freight costs, and volatile renewable fuel credit prices. The company also notes significant seasonality and exposure to supply-chain, regulatory, counterparty and environmental risks.
On April 18, 2024, CHS agreed to issue $700 million of notes at interest rates of 5.84% to 6.13%, with maturities of eight to 15 years; funding was scheduled for July 16, 2024, for general corporate purposes, including capital expenditures and investments. Management believes operating and investing cash flows and available borrowing capacity will support operations. It reported no material changes to risk factors, market-risk disclosures or internal controls; disclosure controls were effective as of May 31. Environmental matters and ordinary-course litigation were not expected by management to have a material effect. The report also discloses $97 million of guarantees for related nonconsolidated companies.
Important facts for investors to verify
- Whether weaker Energy and Ag margins persist as management expects, and how commodity prices, trade flows, weather and refining conditions develop.
- Whether operating cash flow recovers from the steep year-over-year decline as working-capital needs change.
- Execution and funding of the $700 million note issuance, planned capital spending, and continued covenant compliance.
- Performance of CF Nitrogen and other equity-method investments, which materially contribute to earnings.
- Final full-year results, including the effects of seasonality, estimated inventory LIFO valuation, and patronage and equity-redemption payments.