CHS Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended November 30, 2014; balance sheet compared with August 31, 2014. CHS is a farmer-owned agricultural and energy cooperative. Interim results are unaudited and affected by seasonal patterns.
Financial results
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $9.50 billion | $11.03 billion |
| Gross profit | $590.7 million | $400.9 million |
| Operating earnings | $428.8 million | $267.8 million |
| Income before taxes | $435.7 million | $269.7 million |
| Net income attributable to CHS Inc. | $378.7 million | $242.2 million |
| Net cash from (used in) operating activities | $(19.0) million | $518.5 million |
Gross margin rose to approximately 6.2% from 3.6%; operating margin was approximately 4.5% versus 2.4%. Revenue fell about 14%, while CHS-attributable net income rose about 56%. Lower commodity prices and some volume declines reduced reported sales, but improved refining margins and gains in several agricultural activities lifted earnings. Marketing, general and administrative expense increased 22% to $162.0 million; net interest expense declined to $20.6 million, primarily because more interest was capitalized.
Segment performance: Energy pretax income increased 123% to $282.2 million, mainly on improved refined-fuels margins, partly offset by lower propane earnings. Ag pretax income rose to $137.3 million from $119.1 million, with stronger country operations, grain marketing, crop nutrients and renewable fuels partly offset by weaker processing and food-ingredient margins. Corporate and Other pretax income declined to $16.2 million from $24.1 million.
Cash, liquidity and debt
- Cash and cash equivalents were $1.67 billion at November 30, down from $2.13 billion at August 31.
- Working capital was $3.4 billion and the current ratio was 1.5:1, broadly unchanged from fiscal year-end.
- Operating cash use was $19.0 million, versus $518.5 million provided a year earlier. The principal driver was seasonal inventory buildup, including an 82% increase in Ag grain and oilseed inventory quantities versus August 31.
- Investing activities used $795.1 million, including $267.3 million of property, plant and equipment purchases and $315.0 million placed in short-term investments. Financing activities provided $357.8 million.
- Notes payable were $1.29 billion; current and long-term debt totaled approximately $1.34 billion. The $2.5 billion revolving credit facility had no borrowings, and CHS reported compliance with debt covenants.
- CHS reported adequate liquidity for anticipated needs and did not expect to borrow in the second fiscal quarter, despite expected seasonal working-capital requirements.
Material changes, outlook and risks
- In September 2014, CHS issued $492.5 million of Series 3 preferred stock, receiving approximately $476.8 million net. The shares carry a 6.75% annual dividend through September 30, 2024, subject to the terms disclosed in the filing. Some proceeds were invested short term pending capital needs.
- CHS approved construction of a nitrogen fertilizer plant in Spiritwood, North Dakota, estimated to cost approximately $3.0 billion and expected to begin operations in calendar 2018. The company expects to fund the project with debt and preferred stock. It also forecast approximately $690 million of FY2015 property, plant and major-repair expenditures.
- Management cited highly seasonal operations and exposure to commodity prices, weather, supply and demand, regulation, and economic conditions. RIN prices remain a risk: the EPA deferred final 2014 Renewable Fuel Standard percentage standards, and a significant increase in RIN prices could materially affect results.
- A $28.4 million gain from remeasurement of the NCRA crack-spread contingent liability reduced cost of goods sold; the liability was $86.5 million at quarter-end. CHS had increased its NCRA ownership to 88.9% and made a $66.0 million payment toward the remaining-share purchase agreement.
- CHS disclosed an EPA information request concerning flares at its Laurel, Montana refinery. An enforcement action is possible, but the potential liability was not estimable and no liability was recorded. The filing says ordinary-course litigation is not expected to have a material effect.
- Other obligations include $875.9 million of undiscounted future minimum payments under long-term unconditional purchase agreements and $147.2 million of guarantees outstanding. Management reported no material change in market-risk disclosures and no material change in risk factors.
- CHS is evaluating the effect of the new revenue-recognition standard, effective for its fiscal years beginning after December 15, 2016; it had not selected a transition method.
Key facts for investors to verify
- Whether improved Energy refining margins and Ag segment performance persist as commodity prices, margins and seasonal volumes change.
- Whether the seasonal inventory and working-capital build converts to operating cash in subsequent quarters.
- Funding, construction costs, schedule and expected returns for the Spiritwood project and other major capital projects.
- Potential cost exposure from RIN compliance and the unresolved EPA refinery inquiry.
- Preferred-stock dividend commitments, NCRA purchase payments and the valuation of the contingent crack-spread liability.