CHS Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended August 31, 2012. The filing is an annual report, not a standalone Q4 filing; it also provides unaudited results for the quarter ended August 31, 2012. CHS is a farmer- and rancher-owned agricultural cooperative with Energy, Ag, and Corporate and Other operations.
Key financial results
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $40.60 billion | $36.92 billion |
| Gross profit / margin | $2.01 billion / 5.0% | $1.40 billion / 3.8% |
| Operating earnings / margin | $1.51 billion / 3.7% | $964.3 million / 2.6% |
| Income before taxes | $1.42 billion | $1.15 billion |
| Net income attributable to CHS | $1.26 billion | $961.4 million |
| Operating cash flow | $718.6 million | $301.3 million |
| Working capital / current ratio | $2.85 billion / 1.4 | $2.78 billion / 1.5 |
| Long-term debt, including current maturities | $1.44 billion | $1.50 billion |
Cash and cash equivalents were $314.0 million at year-end, down from $937.7 million. Notes payable were $803.6 million; combined with long-term debt, reported borrowings were approximately $2.24 billion. CHS had $2.5 billion of committed revolving credit capacity with no borrowings outstanding on those facilities, and reported compliance with its debt covenants.
FY 2012 capital expenditures for property and equipment were $468.6 million; cash used in investing activities was $694.2 million and cash used in financing activities was $638.9 million. The 8% cumulative redeemable preferred stock had 12.27 million shares outstanding; preferred dividends paid were $24.5 million.
Q4 and changes versus prior year
For the quarter ended August 31, 2012, revenue was $11.00 billion, gross profit $523.3 million, pretax income $355.1 million, net income $360.9 million, and net income attributable to CHS $360.9 million. The filing’s quarterly table reports these figures; the relationship between quarterly pretax income and net income is not explained there. In Q4 2011, revenue was $10.60 billion, pretax income $236.5 million, and net income attributable to CHS $206.5 million.
Annual revenue rose 10% and net income attributable to CHS rose 31%. Energy pretax income increased 63% to $1.03 billion, chiefly on improved refining margins and higher refined-fuel volumes. Ag pretax income fell 25% to $327.4 million: grain marketing earnings declined, partly because FY 2011 included a $119.7 million gain on the sale of Multigrain and FY 2012 had lower export volumes. Corporate and Other pretax income declined 26% to $61.6 million.
Operating cash flow improved but remained below net income, as higher commodity prices and inventory volumes drove a $914.3 million use of cash from changes in operating assets and liabilities. Gross and operating margins increased year over year.
Outlook, risks and unusual items
- Investment plans: CHS expected approximately $750 million of FY 2013 property, equipment and refinery major-repair spending. This included $164 million expected for a refinery coker replacement project, with an estimated total project cost of $555 million and completion expected in FY 2015. A spring 2013 refinery turnaround was estimated at $50 million.
- Growth commitments: CHS expected significant future contributions toward TEMCO’s Kalama export-terminal expansion; total project capital expenditures were estimated at $200 million, with completion anticipated in FY 2014. These are management estimates, not earnings guidance; the filing provides no clear forecast for FY 2013 revenue or profit.
- NCRA purchase: CHS agreed to acquire the remaining NCRA interests in staged closings through 2015. The purchase accounting shifted future patronage to interest expense; $107.2 million was recorded as interest in FY 2012. A contingent crack-spread liability was valued at $127.5 million, including a $22.3 million FY 2012 charge to cost of goods sold.
- Seasonality and market exposure: Results vary with planting, harvest, weather, commodity prices, refining margins, transportation and global supply and demand. Management states that hedging reduces price exposure but does not eliminate counterparty risk; fertilizer and certain grains cannot be fully hedged with futures.
- Other risks and contingencies: The filing highlights regulatory and environmental costs, labor disruptions, customer and supplier concentration/consolidation, international expansion, and risks from joint ventures that CHS does not control. CHS reported ordinary-course litigation not expected to be material. Separately, an October 2012 plea agreement concerning a 2009 Montana fire required a $500,000 fine and a $50,000 contribution to the local fire department. An NCRA environmental settlement included approximately $0.7 million in civil penalties and $0.7 million for local environmental projects; CHS said it was not materially adverse.
- Accounting consideration: A change in estimated useful lives of certain Energy assets reduced FY 2012 depreciation expense by approximately $27 million.
Important facts for investors to verify
- Whether elevated FY 2012 refining margins and the associated Energy earnings are sustainable.
- The cash, earnings and financing effects of NCRA’s staged buyout, including future contingent crack-spread payments and interest charges.
- Whether working-capital needs and commodity-price movements continue to constrain cash generation despite higher reported earnings.
- Actual costs, timing and funding for refinery capital projects and the TEMCO terminal expansion.
- The Q4 tax and noncontrolling-interest details behind reported net income exceeding pretax income.