CHS INC – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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General
The following discussions of financial condition and results of operations should be read in conjunction with the unaudited interim financial statements and notes to such statements and the cautionary statement regarding forward-looking statements found at the beginning of Part I, Item 1, of this Quarterly Report on Form 10-Q, as well as our consolidated financial statements and notes thereto for the year ended
We provide a full range of production agricultural inputs such as refined fuels, propane, farm supplies, animal nutrition and agronomy products, as well as services, which include hedging, financing and insurance services. We own and operate petroleum refineries and pipelines, and market and distribute refined fuels and other energy products, under the Cenex® brand, through a network of member cooperatives and independents. We purchase grains and oilseeds directly and indirectly from agricultural producers primarily in the midwestern and western
Our consolidated financial statements include the accounts of CHS and all of our wholly-owned and majority-owned subsidiaries and limited liability companies, including NCRA in our Energy segment. The effects of all significant intercompany transactions have been eliminated.
We have aligned our segments based on an assessment of how our businesses operate and the products and services they sell. Our Energy segment produces and provides primarily for the wholesale distribution of petroleum products and transportation of those products. Our Ag Business segment purchases and further processes or resells grains and oilseeds originated by our members or third parties, and also serves as wholesaler and retailer of crop inputs. Corporate and Other primarily represents our non-consolidated wheat milling and packaged food joint ventures, as well as our business solutions operations, which consist of commodities hedging, insurance and financial services related to crop production.
Corporate administrative expenses are allocated to each business segment, and Corporate and Other, based on direct usage for services that can be tracked, such as information technology and legal, and other factors or considerations relevant to the costs incurred.
Many of our business activities are highly seasonal and operating results will vary throughout the year. Overall, our income is generally lowest during the second fiscal quarter and highest during the third fiscal quarter. Our business segments are subject to varying seasonal fluctuations. For example, in our Ag Business segment, our agronomy and country operations businesses generally experience higher volumes and income during the spring planting season and in the fall, which corresponds to harvest. Also in our Ag Business segment, our grain marketing operations are subject to fluctuations in volume and earnings based on producer harvests, world grain prices and demand. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products, in the summer and early fall when gasoline and diesel fuel usage is highest and is subject to global supply and demand forces. Other energy products, such as propane, may experience higher volumes and profitability during the winter heating and crop drying seasons.
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Our revenues, assets and cash flows can be significantly affected by global market prices for commodities such as petroleum products, natural gas, grains, oilseeds, crop nutrients and flour. Changes in market prices for commodities that we purchase without a corresponding change in the selling prices of those products can affect revenues and operating earnings. Commodity prices are affected by a wide range of factors beyond our control, including the weather, crop damage due to disease or insects, drought, the availability and adequacy of supply, government regulations and policies, world events, and general political and economic conditions.
While our revenues and operating results are derived from businesses and operations which are wholly-owned and majority-owned, a portion of our business operations are conducted through companies in which we hold ownership interests of 50% or less and do not control the operations. We account for these investments primarily using the equity method of accounting, wherein we record our proportionate share of income or loss reported by the entity as equity income from investments, without consolidating the revenues and expenses of the entity in our Consolidated Statements of Operations. In our Ag Business segment, this principally includes our 50% ownership in TEMCO. In Corporate and Other, these investments principally include our 50% ownership in
Results of Operations
Comparison of the three months ended
General. We recorded income before income taxes of
Our Energy segment generated income before income taxes of
Our Ag Business segment generated income before income taxes of
Corporate and Other generated income before income taxes of
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ended
Net Income attributable to
Revenues. Consolidated revenues were
Our Energy segment revenues of
Our Ag Business segment revenues of
Grain revenues in our Ag Business segment totaled
Our oilseed processing revenues in our Ag Business segment of
Wholesale crop nutrient revenues in our Ag Business segment totaled
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previous fiscal year. Of the wholesale crop nutrient revenues increase,
Our Ag Business segment other product revenues, primarily feed and farm supplies, of
Total revenues include other revenues generated primarily within our Ag Business segment and Corporate and Other. Our Ag Business segment's country operations elevators and agri-service centers derive other revenues from activities related to production agriculture, which include grain storage, grain cleaning, fertilizer spreading, crop protection spraying and other services of this nature, and our grain marketing operations receive other revenues at our export terminals from activities related to loading vessels. Corporate and Other derives revenues primarily from our financing, hedging and insurance operations.
Cost of Goods Sold. Consolidated cost of goods sold was
Our Energy segment cost of goods sold of
Our Ag Business segment cost of goods sold, of
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The cost of grains procured through our Ag Business segment of
Our oilseed processing cost of goods sold in our Ag Business segment of
Wholesale crop nutrients cost of goods sold in our Ag Business segment of
Our Ag Business segment other product cost of goods sold, primarily feed and farm supplies, increased
Marketing, General and Administrative. Marketing, general and administrative expenses of
Interest, net. Net interest of
Equity Income from Investments. Equity income from investments of
Our Ag Business segment equity investment earnings increased by
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Corporate and Other equity investment earnings decreased by
Income Taxes. Income tax expense was
Noncontrolling Interests. Income attributable to noncontrolling interests of
Comparison of the nine months ended
General. We recorded income before income taxes of
Our Energy segment generated income before income taxes of
Our Ag Business segment generated income before income taxes of
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Corporate and Other generated income before income taxes of
Net Income attributable to
Revenues. Consolidated revenues were
Our Energy segment revenues of
Our Ag Business segment revenues of
Grain revenues in our Ag Business segment totaled
Our oilseed processing revenues in our Ag Business segment of
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Wholesale crop nutrient revenues in our Ag Business segment totaled
Our Ag Business segment other product revenues, primarily feed and farm supplies, of
Total revenues include other revenues generated primarily within our Ag Business segment and Corporate and Other. Our Ag Business segment's country operations elevators and agri-service centers derive other revenues from activities related to production agriculture, which include grain storage, grain cleaning, fertilizer spreading, crop protection spraying and other services of this nature, and our grain marketing operations receive other revenues at our export terminals from activities related to loading vessels. Corporate and Other derives revenues primarily from our financing, hedging and insurance operations.
Cost of Goods Sold. Consolidated cost of goods sold was
Our Energy segment cost of goods sold of
Our Ag Business segment cost of goods sold, of
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The cost of grains procured through our Ag Business segment of
Our oilseed processing cost of goods sold in our Ag Business segment of
Wholesale crop nutrients cost of goods sold in our Ag Business segment of
Our Ag Business segment other product cost of goods sold, primarily feed and farm supplies, increased
Marketing, General and Administrative. Marketing, general and administrative expenses of
Interest, net. Net interest of
Equity Income from Investments. Equity income from investments of
Our Ag Business segment equity investment earnings decreased by
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Corporate and Other equity investment earnings decreased by
Income Taxes. Income tax expense was
Noncontrolling Interests. Income attributable to noncontrolling interests of
Liquidity and Capital Resources
On
On
On
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In addition, our wholly-owned subsidiary,
Cash Flows from Operations
Cash flows from operations are generally affected by commodity prices and the seasonality of our businesses. These commodity prices are affected by a wide range of factors beyond our control, including weather, crop conditions, drought, the availability and the adequacy of supply and transportation, government regulations and policies, world events, and general political and economic conditions. These factors are described in the cautionary statements and may affect net operating assets and liabilities, and liquidity.
Our cash flows provided by operating activities were
Our operating activities provided net cash of
Our operating activities used net cash of
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market prices on
Our cash usage in our operating activities has generally been the lowest during our fourth fiscal quarter. Historically by this time we have sold a large portion of our seasonal agronomy-related inventories in our Ag Business segment operations and continue to collect cash from the related receivables.
Cash Flows from Investing Activities
For the nine months ended
The acquisition of property, plant and equipment totaled
Expenditures for major repairs related to our refinery turnarounds during the nine months ended
For the year ending
Investments made during the nine months ended
Cash acquisitions of businesses, net of cash received, totaled
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Changes in notes receivable during the nine months ended
Partially offsetting our cash outlays for investing activities for the nine months ended
Cash Flows from Financing Activities
For the nine months ended
Working Capital Financing
We finance our working capital needs through short-term lines of credit with a syndication of domestic and international banks. On
We have two commercial paper programs, totaling up to
CHS Capital Financing
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purchase agreements. The notes payable issued by Cofina Funding bear interest at variable rates based on commercial paper with a weighted average rate of 1.21% as of
Long-term Debt Financing
We typically finance our long-term capital needs, primarily for the acquisition of property, plant and equipment, with long-term agreements with various insurance companies and banks.
On
We had no long-term borrowings during the nine months ended
Other Financing
During the nine months ended
Distributions to noncontrolling interests for the nine months ended
In accordance with the bylaws and by action of the Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each fiscal year. Patronage refunds are calculated based on amounts using financial statement earnings. The cash portion of the patronage distribution is determined annually by the Board of Directors, with the balance issued in the form of capital equity certificates. Consenting patrons have agreed to take both the cash and the capital equity certificate portion allocated to them from our previous fiscal year's income into their taxable income, and as a result, we are allowed a deduction
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from our taxable income for both the cash distribution and the allocated capital equity certificates as long as the cash distribution is at least 20% of the total patronage distribution. Distributable patronage earnings from the fiscal year ended
Redemptions of capital equity certificates, approved by the Board of Directors, are divided into two pools, one for non-individuals (primarily member cooperatives) who may participate in an annual retirement program for equities held by them and another for individuals who are eligible for equity redemptions at age 70 or upon death. In accordance with authorization from the Board of Directors,
Our 8% Cumulative Redeemable Preferred Stock (Preferred Stock) is listed on the NASDAQ Global Select Market under the symbol CHSCP. On
Off Balance Sheet Financing Arrangements
Lease Commitments:
Our lease commitments presented in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended
Guarantees:
We are a guarantor for lines of credit and performance obligations of related companies. As of
Debt:
There is no material off balance sheet debt.
Contractual Obligations
Our contractual obligations are presented in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended
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Legal Proceedings
We are involved as a defendant in various lawsuits, claims and disputes, which are in the normal course of our business. The resolution of any such matters may affect consolidated net income for any fiscal period; however, our management believes any resulting liabilities, individually or in the aggregate, will not have a material effect on our consolidated financial position, results of operations or cash flows during any fiscal year.
In
On
On
Critical Accounting Policies
Our critical accounting policies are presented in our Annual Report on Form 10-K for the year ended
Effect of Inflation and Foreign Currency Transactions
We believe that inflation and foreign currency fluctuations have not had a significant effect on our operations since we conduct a significant portion of our business in U.S. dollars.
Recent Accounting Pronouncements
In
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fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. Some of the key amendments to the fair value measurement guidance include the highest and best use and valuation premise for nonfinancial assets, application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk, premiums or discounts in fair value measurement and fair value of an instrument classified in a reporting entity's equity. Additional disclosures for fair value measurements categorized in Level 3 of the fair value hierarchy include a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation processes in place, a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs. ASU 2011-04 became effective for us during our third fiscal quarter, and the required disclosures are included in Note 11, Fair Value Measurements.
In
In
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CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE SECURITIES LITIGATION REFORM ACT
Any statements contained in this report regarding the outlook for our businesses and their respective markets, such as projections of future performance, statements of our plans and objectives, forecasts of market trends and other matters, are forward-looking statements based on our assumptions and beliefs. Such statements may be identified by such words or phrases as "will likely result," "are expected to," "will continue," "outlook," "will benefit," "is anticipated," "estimate," "project," "management believes" or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those discussed in such statements and no assurance can be given that the results in any forward-looking statement will be achieved. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Any forward-looking statement speaks only as of the date on which it is made, and we disclaim any obligation to subsequently revise any forward-looking statement to reflect events or circumstances after such date or to reflect the occurrence of anticipated or unanticipated events.
Certain factors could cause our future results to differ materially from those expressed or implied in any forward-looking statements contained in this report. These factors include the factors discussed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended
• Our revenues and operating results could be adversely affected by changes in commodity prices. • Our operating results could be adversely affected if our members were to do business with others rather than with us. • We participate in highly competitive business markets in which we may not be able to continue to compete successfully. • Changes in federal income tax laws or in our tax status could increase our tax liability and reduce our net income. • We incur significant costs in complying with applicable laws and regulations. Any failure to make the capital investments necessary to comply with these laws and regulations could expose us to financial liability. • Changing environmental and energy laws and regulation, including those related to climate change andGreen House Gas ("GHG") emissions, may result in increased operating costs and capital expenditures and may have an adverse effect on our business operations. • Government policies and regulation affecting the agricultural sector and related industries could adversely affect our operations and profitability. • Environmental liabilities could adversely affect our results and financial condition. • Actual or perceived quality, safety or health risks associated with our products could subject us to liability and damage our business and reputation. • Our operations are subject to business interruptions and casualty losses; we do not insure against all potential losses and could be seriously harmed by unexpected liabilities. • Our cooperative structure limits our ability to access equity capital. • Consolidation among the producers of products we purchase and customers for products we sell could adversely affect our revenues and operating results. • If our customers choose alternatives to our refined petroleum products our revenues and profits may decline. 39
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Table of Contents • Operating results from our agronomy business could be volatile and are dependent upon certain factors outside of our control. • Technological improvements in agriculture could decrease the demand for our agronomy and energy products. • We operate some of our business through joint ventures in which our rights to control business decisions are limited.
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