CHS Inc. — Fiscal 2022 Second-Quarter 10-Q
Reporting period: Three and six months ended February 28, 2022; comparisons are with the same periods of fiscal 2021. CHS is a farmer-owned agricultural cooperative with Energy, Ag and Nitrogen Production segments, plus financing, hedging and other activities.
Financial results and liquidity
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $10.33 billion | $8.32 billion | $21.21 billion | $17.04 billion |
| Gross profit / margin | $269.0 million / 2.6% | $101.7 million / 1.2% | $788.9 million / 3.7% | $279.8 million / 1.6% |
| Operating earnings (loss) | $24.7 million | $(59.8) million | $339.6 million | $(52.3) million |
| Net income attributable to CHS | $219.0 million | $(38.2) million | $671.0 million | $31.4 million |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $(1.304) billion | $(1.135) billion |
- Q2 revenue increased 24.2%; six-month revenue increased 24.5%. Net income attributable to CHS was 2.1% of revenue in Q2 and 3.2% for the half-year, compared with a Q2 loss and a 0.2% margin for the prior-year half.
- Equity income from investments rose to $229.9 million for Q2 and $381.3 million for the half-year, primarily reflecting stronger CF Nitrogen earnings. CF Nitrogen contributed $292.6 million of CHS-attributable earnings for the six-month period.
- Cash used in operations increased year over year, principally because of working-capital investment in inventory and receivables, despite much higher earnings. Investing activities used $156.1 million; financing activities provided $1.192 billion for the first half.
- At February 28, cash and cash equivalents were $211.9 million; working capital was $2.417 billion and the current ratio was 1.3. Total notes payable were $2.688 billion and long-term debt, including current maturities, was $1.965 billion. Combined borrowings were approximately $4.653 billion, up from $3.359 billion at August 31, 2021.
- The $2.75 billion revolving credit facility had $820 million outstanding. The receivables securitization facility had $873 million of availability, of which $700 million was used; the separate $150 million repurchase facility was fully drawn. CHS reported compliance with debt covenants.
Material changes and management commentary
- Energy results improved as stronger refining crack spreads, wider Western Canadian crude differentials and recovering fuel volumes supported margins. Higher renewable identification number (RIN) costs and propane hedging-related losses were offsets.
- Ag earnings improved on stronger margins in oilseed processing, feed and farm supplies, and wholesale agronomy. Revenue growth largely reflected higher commodity prices; lower grain and oilseed volumes, supply constraints, drought and Hurricane Ida’s impact on the Myrtle Grove export terminal weighed on volumes.
- Nitrogen Production benefited from higher urea and UAN prices amid strong demand and constrained supply; increased natural-gas costs partly offset gains. Management said current improved Ag and Nitrogen profitability could persist until supply better matches demand, but market conditions remain uncertain.
- Management cited inflation in labor, freight and materials, ongoing logistics constraints, weather and commodity-price volatility, and COVID-19 uncertainty. It expected continued uncertainty and volatility in energy markets for the remainder of fiscal 2022, with potential significant earnings effects. No numerical earnings or revenue guidance was provided.
- The Russia-Ukraine conflict disrupted CHS’s Ukrainian operations and increased uncertainty in global commodity markets. Ukrainian grain inventory was approximately $30 million at February 28; export restrictions limited access and could lead to impairment. CHS also warned of possible fertilizer supply, shipping, banking, foreign-exchange and cybersecurity impacts.
Outlook, commitments and unusual items
- Fiscal 2022 capital expenditures were expected to be approximately $561.4 million, versus $317.8 million in fiscal 2021; $130.9 million had been spent in the first half. Management believed operating and investing cash flows plus borrowing capacity would be sufficient for the foreseeable future.
- CHS expected approximately $168.7 million of preferred dividends and $38.5 million of long-term debt and finance-lease repayments during fiscal 2022. The Board authorized $50 million of fiscal 2021 patronage distributions and $100 million of equity redemptions for fiscal 2022.
- Quarterly earnings included substantial commodity-derivative mark-to-market volatility: pretax losses on derivatives not designated as hedges were $537.3 million for Q2 and $537.8 million for the first half. Such instruments are generally recorded through earnings, primarily cost of goods sold; the filing describes these as economic hedges of commodity-price exposures.
- CHS said it expected to provide an SEC settlement offer concerning alleged former-employee misconduct in rail-freight trading. The proposed settlement, which required SEC approval, would involve no civil penalty and no admission or denial of findings; the final disposition was not assured.
- Environmental matters and ordinary-course litigation were not expected by management to have a material effect. Guarantees for nonconsolidated entities totaled $272.6 million; CHS said the underlying loans were current and it did not expect a payout. The company reported effective disclosure controls and no material change in internal control during the quarter.
Investor verification points
- Assess how much of the earnings improvement is repeatable versus dependent on unusually strong fertilizer, commodity and refining markets, and on equity-method investee results.
- Track working-capital needs, inventory and receivables, operating cash conversion, short-term borrowing levels and available facility capacity as commodity prices and seasonal activity change.
- Monitor the Russia-Ukraine conflict’s effects on Ukrainian inventory access, fertilizer sourcing, export flows and related impairment or operational exposure.
- Review energy margins alongside RIN costs and hedge results; derivative fair-value movements can materially affect reported earnings.
- Confirm fiscal 2022 capital spending, patronage and redemption plans, covenant compliance, and the outcome of the proposed SEC settlement.