CHS Inc. — Fiscal 2023 First-Quarter 10-Q
Reporting period: Three months ended November 30, 2022; comparisons are with the three months ended November 30, 2021 unless otherwise noted. CHS is a diversified agricultural cooperative operating in Energy, Ag and Nitrogen Production. Results are unaudited and subject to seasonality.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $12.766B | $10.881B | +17.3% |
| Gross profit | $879.1M | $519.9M | +69.1% |
| Gross margin | 6.9% | 4.8% | +2.1 percentage points |
| Operating earnings | $644.5M | $315.0M | +104.6% |
| Income before taxes | $817.5M | $466.7M | +75.2% |
| Net income attributable to CHS | $782.6M | $452.0M | +73.2% |
| Operating margin | 5.0% | 2.9% | +2.1 percentage points |
Revenue increased mainly on higher commodity prices. Energy revenue rose 35.4%; Ag revenue rose 12.4%. Energy income before taxes increased to $396.6M from $69.2M, principally on stronger refining margins and wider WCS crude discounts. Ag income before taxes was essentially flat at $287.3M. Nitrogen Production income before taxes was $96.9M, roughly unchanged; equity income from investments rose 20.2% to $182.0M, led by CF Nitrogen and Ventura Foods.
Cash flow, balance sheet and liquidity
- Cash from operating activities was a use of $180.2M, versus a use of $183.6M. Strong net income was offset by seasonal working-capital needs, including increases in receivables and inventories.
- Investing activities used $110.7M, versus $52.2M, reflecting higher property and maintenance spending and no prior-year business-sale proceeds. Financing activities provided $130.0M, versus $156.0M. Cash and restricted cash decreased $159.5M during the quarter.
- At November 30, cash was $636.3M; working capital was $2.976B and the current ratio was 1.4. Total assets were $21.073B and total equity was $9.729B.
- Notes payable were $773.4M and long-term debt, including current maturities, was $1.958B. The $2.75B revolving credit facility had no borrowings outstanding; $929.0M was available under the securitization facility, also with no amount utilized. CHS reported compliance with debt covenants.
- Interest expense increased 41.9% to $33.3M, mainly due to higher interest rates.
Outlook, risks and notable items
- Management expected market volatility and favorable agricultural commodity pricing to continue through the remainder of FY2023, but said it could not predict how long conditions would persist or their financial and operational effects. No earnings guidance was provided.
- FY2023 planned spending includes approximately $869.1M of capital expenditures and $249.5M of major maintenance, including work at the Laurel and McPherson refineries. Management said operating and investing cash flows plus borrowing capacity should support operations and planned needs.
- Management cited the Russia-Ukraine war, inflation, rising interest rates, labor, freight and material costs, elevated renewable fuel credit costs, and unpredictable weather as sources of uncertainty. Commodity prices, supply chains, regulation, seasonality and counterparty performance also pose risks.
- Energy earnings benefited from higher crack spreads, but refinery maintenance reduced production and increased expenses; higher RIN prices added costs. Drought-related lower crop yields contributed to lower Ag volumes. Non-hedge-accounted derivatives generated a $154.9M pretax loss, compared with a $0.5M loss in the prior-year quarter.
- CHS said routine environmental matters and litigation were not expected to have a material effect. Guarantees outstanding for related nonconsolidated entities were $116.0M; the underlying loans were current. No material changes to reported risk factors or market-risk exposures were disclosed.
Important facts for investors to verify
- Whether unusually strong Energy refining margins and CF Nitrogen earnings persist as commodity supply, demand and geopolitical conditions change.
- How derivative mark-to-market effects, RIN costs, refinery maintenance and lower Ag volumes affect subsequent-quarter margins and earnings.
- Whether seasonal working-capital demands, planned capital spending and major maintenance remain manageable while supporting liquidity and covenant compliance.
- The timing and cash impact of planned FY2023 patronage payments, equity redemptions, preferred dividends and debt repayments.
- Potential changes in tax exposure: CHS reported $115.3M of unrecognized tax benefits that could benefit its effective tax rate if resolved favorably.