Add
CHSCP to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| CHSCP > SEC Filings for CHSCP > Form 10-Q on 10-Jul-2008 | All Recent SEC Filings |
10-Jul-2008
Quarterly Report
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 Form 10-Q, as well as our consolidated financial statements and notes thereto for the year ended August 31, 2007, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission. This discussion contains forward-looking statements based on current expectations, assumptions, estimates and projections of management. Actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, as more fully described in the cautionary statement and elsewhere in this Form 10-Q.
CHS Inc. (CHS, we or us) is a diversified company, which provides grain, foods and energy resources to businesses and consumers on a global basis. As a cooperative, we are owned by farmers, ranchers and their member cooperatives from the Great Lakes to the Pacific Northwest and from the Canadian border to Texas. We also have preferred stockholders that own shares of our 8% Cumulative Redeemable Preferred Stock.
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 United States. These grains and oilseeds are either sold to domestic and international customers, or further processed into a variety of grain-based food products.
The consolidated financial statements include the accounts of CHS and all of our wholly-owned and majority-owned subsidiaries and limited liability companies, including National Cooperative Refinery Association (NCRA) in our Energy segment. The effects of all significant intercompany transactions have been eliminated.
We operate three business segments: Energy, Ag Business and Processing. Together, our three business segments create vertical integration to link producers with consumers. Corporate and Other primarily represents our business solutions operations, which consists of commodities hedging, insurance and financial services related to crop production. Our Energy segment produces and provides for the wholesale distribution of petroleum products and transports those products. Our Ag Business segment purchases and resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties, and also serves as wholesaler and retailer of crop inputs. Our Processing segment converts grains and oilseeds into value-added products.
Corporate administrative expenses are allocated to all three business segments, 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 retail agronomy, crop nutrients 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.
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. These investments
principally include our 50% ownership in each of the following companies:
Agriliance LLC (Agriliance), TEMCO, LLC (TEMCO) and United Harvest, LLC (United
Harvest), and our 37.5% ownership in Multigrain S.A. included in our Ag Business
segment; our 50% ownership in Ventura Foods, LLC (Ventura Foods), our 24%
ownership in Horizon Milling, LLC (Horizon Milling) and Horizon Milling G.P.,
and US BioEnergy Corporation (US BioEnergy) prior to the decrease in equity
ownership on April 1, 2008, included in our Processing segment; and our 49%
ownership in Cofina Financial, LLC (Cofina Financial) included in Corporate and
Other.
Agriliance is owned and governed by United Country Brands, LLC (50%) and Land O'Lakes, Inc. (Land O'Lakes) (50%). United Country Brands, LLC is a 100% owned subsidiary of CHS. We account for our share of the Agriliance investment using the equity method of accounting. In June 2007, we announced that two business segments of Agriliance were being repositioned. In September 2007, Agriliance distributed the assets of the crop nutrients business to us, and the assets of the crop protection business to Land O'Lakes. Agriliance continues to exist as a 50-50 joint venture and primarily operates an agronomy retail distribution business. We currently are exploring, with Land O'Lakes, the repositioning options for the remaining portions of the Agriliance retail distribution business. During the nine months ended May 31, 2008, we contributed $255.0 million, net to Agriliance to support their working capital requirements, with Land O'Lakes making equal contributions to Agriliance, primarily for crop nutrient and crop protection product net trade payables that were not assumed by us or Land O'Lakes upon the distribution of the crop nutrients and crop protection assets, as well as Agriliance's ongoing retail operations.
Due to our 50% ownership interest in Agriliance and the 50% ownership interest of Land O'Lakes, we were each entitled to receive 50% of the distributions from Agriliance. Given the different preliminary values assigned to the assets of the crop nutrients and the crop protection businesses of Agriliance, at the closing of the distribution transactions Land O'Lakes owed us $133.5 million. Land O'Lakes paid us $32.6 million in cash, and in order to maintain equal capital accounts in Agriliance, they also paid down certain portions of Agriliance debt on our behalf in the amount of $100.9 million. Values of the distributed assets were determined after the closing and in October 2007, we made a true-up payment to Land O'Lakes in the amount of $45.7 million, plus interest. The final true-up is expected to occur during our current fiscal year.
The distribution of assets we received from Agriliance for the crop nutrients business had a book value of $248.2 million. We recorded 50% of the value of the net assets received at book value due to our ownership interest in those assets when they were held by Agriliance, and 50% of the value of the net assets at fair value using the purchase method of accounting. Preliminary values assigned to the net assets acquired totaled $268.7 million.
Certain reclassifications have been made to prior period's amounts to conform to current period classifications. These reclassifications had no effect on previously reported net income, equities or total cash flows.
During the first quarter of fiscal 2008, we changed our accounting method for the costs of turnarounds from the accrual method to the deferral method. Turnarounds are the scheduled and required shutdowns of refinery processing units for significant overhaul and refurbishment. Under the deferral accounting method, the
costs of turnarounds are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until the next turnaround occurs. The new method of accounting for turnarounds was adopted in order to adhere to FASB Staff Position ("FSP") No. AUG AIR-1 "Accounting for Planned Major Maintenance Activities" which prohibits the accrual method of accounting for planned major maintenance activities. The affect of this change in accounting principle to our Consolidated Statements of Operations for the three and nine months ended May 31, 2007, was to increase net income by $1.8 million and $3.3 million, respectively. In addition, equity was increased by $42.5 million and $39.4 million as of August 31, 2007 and May 31, 2007, respectively.
Effective September 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48). This interpretation clarifies the criteria for recognizing income tax benefits under FASB Statement 109, "Accounting for Income Taxes", and requires additional disclosures about uncertain tax positions. FIN 48 requires a taxpayer to determine whether a tax position is more likely than not (greater than 50 percent) to be sustained based solely on the technical merits of the position. If this threshold is met, the tax benefit is measured and recognized at the largest amount that is greater than 50 percent likely of being realized. The total amount of unrecognized tax benefits as of September 1, 2007 and May 31, 2008, were $7.5 million and $6.1 million, respectively. There was no impact to our equity as a result of adoption of FIN 48. Recognition of all or a portion of the unrecognized tax benefits would affect our effective income tax rate in the respective period of change. Any applicable interest and penalties on uncertain tax positions were included as a component of income tax expense prior to the adoption of FIN 48, and we have continued this classification subsequent to the adoption. The liability for uncertain income taxes as of September 1, 2007 and May 31, 2008, includes estimated interest and penalties of $0.3 million. We file income tax returns in the U.S. federal jurisdiction and various U.S. state and foreign jurisdictions. The U.S. income tax returns for periods ended after August 31, 2004, remain subject to examination. With limited exceptions, we are not subject to state and local income tax examinations for years before August 31, 2001. We do not expect that the amount of unrecognized tax benefits will significantly change within the next twelve months.
Recent Events
On June 11, 2008 we entered into a Purchase Agreement with Cenex Finance Association (CFA) to purchase their 51% interest in Cofina Financial. The sale was subject to approval by the members of CFA, and on July 7, 2008, the members approved the sale. The final purchase price for CFA's interest in Cofina Financial has not been determined, but the amount should range between approximately $48.0 million and $50.0 million, with an anticipated closing date of September 1, 2008. We will be the sole owner of Cofina Financial as of the closing date.
Results of Operations
Comparison of the three months ended May 31, 2008 and 2007
General. We recorded income before income taxes of $212.3 million during the three months ended May 31, 2008 compared to $262.7 million during the three months ended May 31, 2007, a decrease of $50.4 million (19%). These results reflected lower pretax earnings in our Energy segment and were partially offset by increased pretax earnings in our Ag Business and Processing segments and Corporate and Other.
Our Energy segment generated income before income taxes of $12.5 million for the three months ended May 31, 2008 compared to $178.0 million in the three months ended May 31, 2007. This decrease in earnings of $165.5 million (93%) is primarily from a net reduction to margins on refined fuels, which resulted mainly from lower margins at both our Laurel, Montana refinery and at our NCRA refinery in McPherson, Kansas. Earnings in our propane, lubricants and renewable fuels marketing businesses increased, while transportation operations earnings slightly decreased during the three months ended May 31, 2008 when compared to the same three-month period of the previous year.
Our Ag Business segment generated income before income taxes of $179.9 million for the three months ended May 31, 2008 compared to $77.1 million in the three months ended May 31, 2007, an increase in
earnings of $102.8 million (133%). As previously discussed, during the first quarter of fiscal 2008, the crop nutrients business of Agriliance was distributed to us and generated $54.9 million in earnings for the three months ended May 31, 2008. Prior to the distribution, we reflected 50% of these earnings through our equity income from our investment in Agriliance. We are not recording wholesale earnings of crop protection products, which along with other reduced Agriliance margins, decreased our net earnings in Agriliance by $43.5 million. Strong demand and increased volumes for grain and oilseed products, much of it driven by increased U.S. ethanol production, contributed to improved performances by both our grain marketing and country operations businesses. Our grain marketing operations improved earnings by $65.5 million during the three months ended May 31, 2008 compared with the same three-month period in fiscal 2007, primarily from increased grain volumes, greater margins on those grains, and strong earning performances from our joint ventures. Our country operations earnings increased $25.9 million, primarily as a result of overall improved product margins, including historically high volumes and margins on grain, and improved margins on agronomy, feed and energy transactions. Continued market expansion into Colorado, Oklahoma and Kansas also increased country operations volumes. Volatility in the grain markets creates opportunities for increased grain margins, and additionally during fiscal 2007 and 2008, increased interest in renewable fuels, and changes in transportation costs, shifted marketing patterns and dynamics for our grain marketing business.
Our Processing segment generated income before income taxes of $17.1 million for the three months ended May 31, 2008 compared to $5.2 million in the three months ended May 31, 2007, an increase in earnings of $11.9 million (233%). Oilseed processing earnings increased $13.4 million during the three months ended May 31, 2008 compared to the same period in the prior year, primarily due to improved margins in our crushing operations, partially offset by slightly decreased margins in our refining operations. Our share of earnings, net of allocated internal expenses, related to US BioEnergy, an ethanol manufacturing company in which we held a minority ownership interest, decreased $0.6 million for the three months ended May 31, 2008 compared to the same period in the prior year. Effective April 1, 2008, US BioEnergy and VeraSun completed a merger, and as a result of our change in ownership interest we no longer have significant influence, and account for VeraSun, the surviving entity, as an available for sale investment. Our share of earnings from our wheat milling joint ventures, net of allocated internal expenses, generated improved net earnings of $6.0 million for the three months ended May 31, 2008 compared to the same period in the prior year. Our share of earnings from Ventura Foods, our packaged foods joint venture, net of allocated internal expenses, decreased $6.5 million during the three months ended May 31, 2008, compared to the same period in the prior year, primarily as a result of increased commodity prices, reducing margins on the products sold.
Corporate and Other generated income before income taxes of $2.8 million for the three months ended May 31, 2008 compared to $2.5 million in the three months ended May 31, 2007, an increase in earnings of $0.3 million (13%). This improvement in earnings is primarily attributable to our business solutions' financial services, partially offset by our hedging and insurance services.
Net Income. Consolidated net income for the three months ended May 31, 2008 was $188.7 million compared to $239.6 million for the three months ended May 31, 2007, which represents a $50.9 million (21%) decrease.
Revenues. Consolidated revenues were $9.3 billion for the three months ended May 31, 2008 compared to $4.7 billion for the three months ended May 31, 2007, which represents a $4.6 billion (97%) increase.
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 hedging and insurance operations.
Our Energy segment revenues, after elimination of intersegment revenues, of $3.0 billion increased by $851.2 million (40%) during the three months ended May 31, 2008 compared to the three months ended May 31, 2007. During the three months ended May 31, 2008 and 2007, our Energy segment recorded revenues from our Ag Business segment of $75.6 million and $54.9 million, respectively. The net increase in revenues
of $851.2 million is comprised of a net increase of $715.1 million related to price appreciation on refined fuels and propane products and $136.1 million net increase is related to higher sales volume. Refined fuels revenues increased $669.4 million (45%), of which $648.1 million was related to a net average selling price increase and $21.3 million was attributable to increased volumes, compared to the same period in the previous year. The sales price of refined fuels increased $0.95 per gallon (43%) and volumes increased 1% when comparing the three months ended May 31, 2008 with the same period a year ago. Higher crude oil prices, strong global demand and limited refining capacity contributed to the increase in refined fuels selling prices. Renewable fuels marketing revenues increased $77.0 million (32%), mostly from a 22% increase in volumes along with an increase of $0.17 (8%) per gallon, when compared with the same three-month period in the previous year. Propane revenues increased by $39.8 million (44%), of which $34.8 million related to an increase in the net average selling price and $5.0 million related to an increase in volumes, when compared to the same period in the previous year. The average selling price of propane increased $0.43 per gallon (38%) and sales volume increased 4% in comparison to the same period of the prior year. Propane prices tend to follow the prices of crude oil and natural gas, both of which increased during the three months ended May 31, 2008 compared to the same period in 2007. Propane prices are also affected by changes in propane demand and domestic inventory levels. The decrease in propane volumes primarily reflects reduced demand caused by higher prices.
Our Ag Business segment revenues, after elimination of intersegment revenues, of $6.0 billion, increased $3.6 billion (150%) during the three months ended May 31, 2008 compared to the three months ended May 31, 2007. Grain revenues in our Ag Business segment totaled $4,288.0 million and $1,863.9 million during the three months ended May 31, 2008 and 2007, respectively. Of the grain revenues increase of $2,424.1 million (130%), $945.6 million is attributable to increased volumes and $1,478.5 million is due to increased average grain selling prices during the three months ended May 31, 2008 compared to the same period last fiscal year. The average sales price of all grain and oilseed commodities sold reflected an increase of $4.51 per bushel (79%), over the same three-month period in fiscal 2007. The 2007 fall harvest produced good yields throughout most of the United States, with the quality of most grains rated as excellent or good. Despite the good harvest, prices for nearly all grain commodity prices increased because of strong demand, particularly for corn, which is used as the feedstock for most ethanol plants as well as for livestock feed. The average month-end market price per bushel of spring wheat, soybeans and corn increased approximately $6.18, $5.22 and $2.15, respectively, when compared to the prices of those same grains for the three months ended May 31, 2007. Volumes increased 28% during the three months ended May 31, 2008 compared with the same period of a year ago. Corn, soybeans and barley reflected the largest volume increases compared to the three months ended May 31, 2007. Beginning in September 2007, we began recording revenues from our crop nutrients business reflecting $935.1 million for the three months ended May 31, 2008. Our Ag Business segment non-grain or non-wholesale crop nutrients product revenues of $729.3 million increased by $225.6 million (45%) during the three months ended May 31, 2008 compared to the three months ended May 31, 2007, primarily the result of increased revenues in our country operations business of retail crop nutrients, energy, feed, seed, crop protection and processed sunflower products. Other revenues within our Ag Business segment of $41.7 million during the three months ended May 31, 2008 increased $8.0 million (24%) compared to the three months ended May 31, 2007, primarily from grain handling and service revenues.
Our Processing segment revenues, after elimination of intersegment revenues, of $352.6 million increased $159.2 million (82%) during the three months ended May 31, 2008 compared to the three months ended May 31, 2007. Because our wheat milling and packaged foods operations are operated through non-consolidated joint ventures, revenues reported in our Processing segment are entirely from our oilseed processing operations. Higher average sales prices of processed oilseed increased revenues by $80.3 million, while processed soybean volumes increased 10%, accounting for an increase in revenues of $16.6 million. Oilseed refining revenues increased $56.9 million (60%), of which $76.7 million was due to higher average sales prices, partially offset by a $19.8 million (12%) net decrease in sales volume. The average selling price of processed oilseed increased $159 per ton (86%) and the average selling price of refined oilseed products increased $0.26 per pound (81%) compared to the same three-month period of fiscal 2007. The changes in the average selling price of products are primarily driven by the average higher price of soybeans.
Cost of Goods Sold. Consolidated cost of goods sold were $9.1 billion for the three months ended May 31, 2008 compared to $4.4 billion for the three months ended May 31, 2007, which represents a $4.7 billion (106%) increase.
Our Energy segment cost of goods sold, after elimination of intersegment costs, of $2.9 billion increased by $1,053.5 million (56%) during the three months ended May 31, 2008 compared to the same period of the prior year. The increase in cost of goods sold is primarily due to increased per unit costs for refined fuels and propane products. On a more product-specific basis, the average cost of refined fuels increased $1.07 (51%) per gallon and volumes increased 1% compared to the three months ended May 31, 2007. We process approximately 55,000 barrels of crude oil per day at our Laurel, Montana refinery and 80,000 barrels of crude oil per day at NCRA's McPherson, Kansas refinery. The average cost increase is primarily related to higher input costs at our two crude oil refineries and higher average prices on the refined products that we purchased for resale compared to the three months ended May 31, 2007. The average per unit cost of crude oil purchased for the two refineries increased 86% compared to the three months ended May 31, 2007. Renewable fuels marketing cost increased $77.0 million (32%), mostly from a 22% increase in volumes when compared with the same three-month period in the previous year. The average cost of propane increased $0.41 (37%) per gallon and volumes increased 4% compared to the three months ended May 31, 2007.
Our Ag Business segment cost of goods sold, after elimination of intersegment costs, of $5.8 billion increased $3.5 billion (148%) during the three months ended May 31, 2008 compared to the same period of the prior year. Grain cost of goods sold in our Ag Business segment totaled $4,234.9 million and $1,846.4 million during the three months ended May 31, 2008 and 2007, respectively. The cost of grains and oilseed procured through our Ag Business segment increased $2,388.5 million (129%) compared to the three months ended May 31, 2007. This is primarily the result of a 42% net increase in bushels sold and an increase of $3.45 (61%) in the average cost per bushel as compared to the prior year. Corn, soybeans and barley reflected the largest volume increases compared to the three months ended May 31, 2007. Commodity prices on spring wheat, soybeans and corn have increased compared to the prices that were prevalent during the same three-month period in 2007. Beginning in September 2007, we began recording cost of goods sold from our crop nutrients business reflecting $866.8 million for the three months ended May 31, 2008. Our Ag Business segment cost of goods sold, excluding the cost of grains procured through this segment, increased during the three months ended May 31, 2008 compared to the three months ended May 31, 2007, primarily due to higher volumes and price per unit costs for crop nutrients, seed, feed, energy, crop protection and processed sunflower products. The volume increases resulted primarily from acquisitions made and reflected in the reporting periods.
Our Processing segment cost of goods sold, after elimination of intersegment costs, of $331.3 million, increased $143.9 million (77%) compared to the three months ended May 31, 2007, which was primarily due to increased costs of soybeans in addition to volume increases in soybean crushing.
Marketing, General and Administrative. Marketing, general and administrative expenses of $86.6 million for the three months ended May 31, 2008 increased by $21.7 million (34%) compared to the three months ended May 31, 2007. The net . . .
|
|