CHS INC.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") is intended to provide a reader of our financial
statements with a narrative from the perspective of our management regarding our
financial condition and results of operations, liquidity and certain other
factors that may affect our future results. Our MD&A is presented in the
following sections:
•Overview
•Business Strategy •Fiscal 2022 First Quarter Highlights •Fiscal 2022 Trends Update •Operating Metrics •Results of Operations •Liquidity and Capital Resources •Critical Accounting Policies •Recent Accounting Pronouncements Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the year endedAugust 31, 2021 (including the information presented therein under Risk Factors), as well as the condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q. OverviewCHS Inc. is a diversified company that provides grain, food, agronomy and energy resources to businesses and consumers on a global scale. As a cooperative, we are owned by farmers, ranchers and member cooperatives acrossthe United States . We also have preferred shareholders who own our five series of preferred stock, all of which are listed and traded on the Global Select Market ofThe Nasdaq Stock Market LLC . We operate in the following three reportable segments: •Energy. Produces and provides primarily for the wholesale distribution and transportation of petroleum products. •Ag. Purchases and further processes or resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties; it also serves as a wholesaler and retailer of agronomy products. •Nitrogen Production. Produces and distributes nitrogen fertilizer. It consists of our equity method investment inCF Industries Nitrogen, LLC ("CF Nitrogen"), and allocated expenses.
In addition, our financing and hedging businesses, along with our nonconsolidated food production and distribution and wheat milling joint ventures, have been aggregated within Corporate and Other.
The condensed consolidated financial statements include the accounts of CHS
and all subsidiaries and limited liability companies in which we have a
controlling interest. The effects of all significant intercompany transactions
have been eliminated.
Corporate administrative expenses and interest are allocated to each reporting
segment and Corporate and Other, based on direct use of services, such as
information technology and legal, and other factors or considerations relevant
to the costs incurred.
Management's Focus. When evaluating our operating performance, management
focuses on gross profit and income before income taxes ("IBIT"). As a company
that operates heavily in global commodities, there is significant
unpredictability and volatility in pricing, costs and global trade volumes.
Consequently, we focus on managing the margin we can earn and the resulting
IBIT. Management also focuses on ensuring balance sheet strength through
appropriate management of financial liquidity, leverage, capital allocation and
cash flow optimization.
Seasonality. Many of our business activities are highly seasonal and our
operating results vary throughout the year. Our revenues generally trend lower
during the second and fourth fiscal quarters and higher during the first and
third fiscal quarters; however, our IBIT does not necessarily follow the same
trend due to weather and other events that can impact profitability. For
example, in our Ag segment, our country operations business generally
experiences higher volumes and revenues during the fall harvest and spring
planting seasons, which generally correspond to our first and third fiscal
quarters, respectively. Additionally, our agronomy business generally
experiences higher volumes and revenues during the spring planting season. Our
global grain and processing operations are subject to fluctuations in volume and
revenues based on
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producer harvests, world grain prices, demand and international trade
relationships. Our Energy segment generally experiences higher volumes and
revenues in certain operating areas, such as refined products, in the spring,
summer and early fall when gasoline and diesel fuel use by agricultural
producers is highest and is subject to global supply and demand forces. Other
energy products, such as propane, generally experience higher volumes and
revenues during the winter heating and fall crop-drying seasons. The graphs
below depict the seasonality inherent in our businesses:
[[Image Removed: chscp-20211130_g1.jpg]]
[[Image Removed: chscp-20211130_g2.jpg]]*The COVID-19 pandemic started during the second quarter of fiscal 2020.
Pricing and Volumes. Our revenues, assets and cash flows can be significantly affected by global market prices and sales volumes of commodities such as petroleum products, natural gas, grains, oilseed products and agronomy products. Changes in market prices for commodities we purchase without a corresponding change in the selling prices of those products can affect revenues and operating earnings. Similarly, increased or decreased sales volumes without a corresponding change in the purchase and selling prices of those products can affect revenues and operating earnings. Commodity prices and sales volumes are affected by a wide range of factors beyond our control, including weather, crop damage due to plant disease or insects, drought, availability/adequacy of supply of a commodity, availability of reliable rail and river transportation networks, outbreaks of disease, government regulations and policies, global trade disputes and general political and/or economic conditions.
Business Strategy
Our business strategies focus on an enterprisewide effort to create an
experience that empowers customers to make CHS their first choice, expand market
access to add value for our owners and transform and evolve our core businesses
by capitalizing on changing market dynamics. To execute these strategies, we are
focused on implementing agile, efficient and sustainable new technology
platforms; building robust and efficient supply chains; hiring, developing and
retaining high-
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performing, diverse and passionate teams; achieving operational excellence and continuous improvement; and maintaining a strong balance sheet.
Fiscal 2022 First Quarter Highlights
•Robust global demand drove commodity prices higher and provided favorable
market conditions for improved margins across our Ag segment. As a result, our
global grain and processing and wholesale agronomy businesses experienced
significantly improved earnings compared to the same period of the prior year.
•Refining margins were higher in our Energy segment as a result of improved
crack spreads and more favorable pricing for Canadian crude oil, which is
processed by our refineries.
•Equity earnings from our CF Nitrogen investment improved as a result of
increased urea and urea ammonium nitrate ("UAN") pricing due to strong global
demand and global supply disruptions.
Fiscal 2022 Trends Update
Our Energy and Ag segments operate in cyclical environments in which unforeseen market conditions can have significant positive or negative impacts. For example, we have experienced and anticipate continued effects of inflation on costs such as labor, freight and materials. Additionally, we expect there to be continued uncertainty during fiscal 2022 that could have significant impacts on our results as we continue to navigate the lingering effects of the COVID-19 pandemic. Most of our operations are considered to be essential; however, periods of depressed demand and margins could result in decreased profitability and the need to assess for potential impairments. Easing of measures taken to mitigate the spread of COVID-19, the effectiveness of vaccines and other efforts to respond to the pandemic inthe United States and globally could also impact the profitability of our businesses. Refer to Item 1A of our Annual Report on Form 10-K for the year endedAugust 31, 2021 , for additional considerations of risks the COVID-19 pandemic may continue to have on our business, liquidity, capital resources and financial results. The energy industry continued to experience improved margins and maintain higher volumes compared to the lows experienced during the early stages of the COVID-19 pandemic; however, the volumes and margins remain lower than historical levels. These lower volumes and margins are primarily the result of the COVID-19 pandemic, which began in our second quarter of fiscal 2020 and significantly reduced our profitability. In addition, the cost of renewable energy credits remains significantly higher than historical levels, which continued to negatively impact our profitability during the first quarter of fiscal 2022. We are unable to predict how long the current environment will last or the severity of the financial and operational impacts; however, we expect uncertainty and volatility to continue in the energy industry during fiscal 2022, which could significantly impact our earnings. Although challenges remain, theU.S. agricultural industry has experienced continued strong demand for grain and oilseed commodities following the Phase One trade agreement withChina , which has resulted in improved commodity prices. In addition, due to decreased global supply and strong global demand for fertilizer and related products, the current improved profitability will likely continue in our Ag and Nitrogen Production segments until supply becomes more balanced with the current strong demand. However, unforeseen global market conditions can positively or negatively impact agricultural commodity prices and volumes sold. We are unable to predict these conditions or the severity of the impact such conditions could have on our pricing and volumes. In addition to global supply and demand impacts, regional factors such as unpredictable weather conditions, including those due to climate change, could impact our operations. For example, unfavorable weather events and conditions experienced in fiscal 2021, including the effects of Hurricane Ida on our grain export terminal inMyrtle Grove, Louisiana , and drought conditions experienced in portions of our trade territory, have negatively impacted our revenues, margins and cash flows from core operations during fiscal 2022. As with others in our industry, we are seeing significantly higher freight costs that are the result of inflation and logistical challenges in the shipping industry, and we expect these challenges to continue during fiscal 2022. Additionally, unforeseen global market conditions with negative impacts remain a risk that could put pressure on asset valuations in our Ag segment. In addition to market conditions that impact our businesses, we will continue to take actions to protect our financial health during fiscal 2022, while continuing to deliver on our enterprise resource planning system implementation and advancing our operating model. 23
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Table of Contents Operating Metrics Energy
Our Energy segment operations primarily include our refineries in
Three Months Ended November 30,
2021 2020
Refinery throughput volumes (Barrels per day)
Heavy, high-sulfur crude oil 102,340 92,594
All other crude oil 70,327 60,082
Other feedstocks and blendstocks 18,338 15,815
Total refinery throughput volumes 191,005
168,491
Refined fuel yields
Gasolines 92,886 84,263
Distillates 78,924 65,853
We are subject to the Renewable Fuel Standard, which requires refiners to
blend renewable fuels (e.g., ethanol, biodiesel) into their finished
transportation fuels or purchase renewable energy credits, known as Renewable
Identification Numbers ("RINs"), in lieu of blending. The U.S. Environmental
Protection Agency ("EPA ") generally establishes new annual renewable fuel
percentage standards for each compliance year in the preceding year. In December
2021 , the EPA issued a proposal for the renewable volume obligation ("RVO") for
calendar years 2020 through 2022. As proposed, the RVO for calendar year 2020 is
lower than previously issued, and calendar year 2021 is lower than anticipated
as a result of lower demand for refined fuels due to the COVID-19 pandemic. We
generate RINs through our blending activities, but we cannot generate enough
RINs to meet the needs of our refining capacity, and RINs must be purchased on
the open market. The price of RINs can be volatile, with prices for D6 ethanol
RINs and D4 ethanol RINs rising by 114% and 81%, respectively, during the first
quarter of fiscal 2022 compared to the same period of the prior year, which
negatively impacted our profitability during the first quarter of fiscal 2022.
Estimates of our RIN expense are based on past practice and are calculated using
an average RIN price each month.
In addition to our internal operational reliability, the profitability of our
Energy segment is largely driven by crack spreads (i.e., the price differential
between refined products and inputs such as crude oil) and Western Canadian
Select ("WCS") crude oil differentials (i.e., the price differential between
West Texas Intermediate ("WTI") crude oil and WCS crude oil), which are driven
by the supply and demand of refined product. Crack spreads and WCS crude oil
differentials both increased during the three months ended November 30, 2021 ,
compared to the same period during the prior year, contributing to improved IBIT
for the Energy segment. The table below provides information about average
market reference prices and differentials that impact our Energy segment:
Three Months Ended November 30,
2021 2020
Market indicators
WTI crude oil (dollars per barrel) $ 77.14 $ 40.18
WTI - WCS crude oil differential (dollars per barrel) $ 12.95 $ 9.79
Group 3 2:1:1 crack spread (dollars per barrel)* $ 18.04 $ 7.65
Group 3 5:3:2 crack spread (dollars per barrel)* $ 17.56 $ 7.38
D6 ethanol RIN (dollars per RIN) $ 1.1760 $ 0.5485
D4 ethanol RIN (dollars per RIN) $
1.4648
*Group 3 refers to the oil refining and distribution system serving Midwest
markets from the
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Ag
Our Ag segment operations work together to facilitate production, purchase, sale and eventual use of grain and other agricultural commodities withinthe United States and internationally. Profitability in our Ag segment is largely driven by throughput and production volumes, as well as commodity price spreads; however, revenues and cost of goods sold ("COGS") are largely affected by market-driven commodity prices that are outside our control. The table below provides information about average market prices for agricultural commodities and our sales/throughput volumes that impacted our Ag segment for the three months endedNovember 30, 2021 and 2020: Three Months Ended November 30, Market Source* 2021 2020 Commodity prices Corn (dollars per bushel) Chicago Board of Trade$ 5.57 $ 4.20 Soybeans (dollars per bushel) Chicago Board of Trade$ 12.36 $ 11.69 Wheat (dollars per bushel) Chicago Board of Trade$ 7.57 $ 5.80 Urea (dollars per ton) Green Markets NOLA$ 676.00 $ 225.00 Urea ammonium nitrate (dollars per ton) Green Markets NOLA$ 456.64 $ 119.32 Ethanol (dollars per gallon) Chicago Platts$ 2.81 $ 1.33
Volumes
Grain and oilseed (thousands of bushels) 564,112 746,584
North American grain and oilseed port throughput (thousands of bushels)
172,987 219,707
Wholesale crop nutrients (thousands of tons) 1,823 1,875
Ethanol (thousands of gallons) 224,246 220,771
*Market source information represents the average month-end price during the period.
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Results of Operations
Three months ended
Three Months Ended November 30,
2021 % of Revenues* 2020 % of Revenues*
(Dollars in thousands)Revenues$ 10,880,757 100.0 %$ 8,715,643 100.0 % Cost of goods sold 10,360,849 95.2 8,537,539 98.0 Gross profit 519,908 4.8 178,104 2.0 Marketing, general and administrative expenses 204,934 1.9 170,661 2.0 Operating earnings 314,974 2.9 7,443 0.1 Interest expense 23,432 0.2 25,050 0.3 Other income (23,776) (0.2) (12,624) (0.1) Equity income from investments (151,345) (1.4) (50,023) (0.6) Income before income taxes 466,663 4.3 45,040 0.5 Income tax expense (benefit) 14,720 0.1 (24,329) (0.3) Net income 451,943 4.2 69,369 0.8 Net loss attributable to noncontrolling interests (18) - (302) - Net income attributable to CHS Inc.$ 451,961 4.2 %$ 69,671 0.8 %
*Amounts less than 0.1% are shown as zero percent. Percentage totals may differ due to rounding.
The charts below detail revenues, net of intersegment revenues, and IBIT by reportable segment for the three months endedNovember 30, 2021 . Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses, but not revenues. [[Image Removed: chscp-20211130_g3.jpg]] [[Image Removed: chscp-20211130_g4.jpg]] 26
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Income (Loss) Before Income Taxes by Segment
Energy
Three Months Ended November 30, Change
2021 2020 Dollars Percent
(Dollars in thousands)
Income (loss) before income taxes $ 69,190 $ (67,176) $ 136,366 203.0 %
The following waterfall analysis and commentary presents the changes in our
Energy segment IBIT for the three months ended November 30, 2021 , compared to
the same period during the prior year:
[[Image Removed: chscp-20211130_g5.jpg]]*See commentary related to these changes in the marketing, general and administrative expenses, interest expense, other income and equity income from investments sections of this Results of Operations.
The change in Energy segment IBIT reflects the following: •Higher crack spreads and increased WCS crude oil differentials reflect improved market conditions in our refined fuels business and contributed to a$165.6 million increase of IBIT. •Improved margins in our refined fuels business were partially offset by higher RIN prices due to market conditions driven by the regulatory environment. •Lower propane margins resulting from global market conditions and the reversal of unrealized hedging gains during the first quarter of fiscal 2022 also partially offset the improved earnings in our refined fuels business. 27
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Ag
Three Months Ended November 30, Change
2021 2020 Dollars Percent
(Dollars in thousands)
Income before income taxes $ 286,425 $ 83,010 $ 203,415 245.0 %
The following waterfall analysis and commentary presents the changes in our Ag
segment IBIT for the three months ended November 30, 2021 , compared to the same
period during the prior year:
[[Image Removed: chscp-20211130_g6.jpg]]*See commentary related to these changes in the marketing, general and administrative expenses, interest expense, other income and equity income from investments sections of this Results of Operations.
The change in Ag segment IBIT reflects the following: •Increased margins across all our Ag segment businesses, including an$85.6 million increase for grain and oilseed that resulted primarily from mark-to-market changes associated with our commodity derivatives, including the reversal of unrealized losses and unrealized gains that we expect to reverse in future periods; a$78.0 million increase for wholesale agronomy products, which resulted from strong global market demand and global supply disruptions during the first quarter of fiscal 2022; and a$38.0 million increase for oilseed processing as a result of strong meal and oil demand. •Decreased volumes of grain and oilseed resulted from a combination of factors, including the comparable period of the prior year experiencing elevated volumes following the Phase One trade agreement withChina , which have since plateaued, the lower crop yields due to drought conditions experienced in portions of our trade territory and the impact of Hurricane Ida on our grain export terminal inMyrtle Grove, Louisiana , during the first quarter of fiscal 2022. All Other Segments Three Months Ended November 30, Change 2021 2020 Dollars Percent (Dollars in thousands) Nitrogen Production IBIT*$ 96,583 $ 4,468 $ 92,115 2,061.7 % Corporate and Other IBIT$ 14,465 $ 24,738 $ (10,273) (41.5) %
*For additional information, see Note 5, Investments, of the notes to the unaudited condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q.
Our Nitrogen Production segment IBIT increased as a result of higher equity income attributed to increased sale prices of urea and UAN, which was partially offset by increased natural gas costs. Corporate and Other IBIT decreased primarily due to lower equity income from our investment inVentura Foods , which experienced less favorable market conditions for edible oil-based products, and higher performance-based incentive compensation expenses associated with improved results in comparison to the prior year. 28
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Revenues by Segment
Energy
Three Months Ended November 30, Change
2021 2020 Dollars Percent
(Dollars in thousands)
Revenues $ 2,303,987 $ 1,257,847 $ 1,046,140 83.2 %
The following waterfall analysis and commentary presents the changes in our Energy segment revenues for the three months endedNovember 30, 2021 , compared to the same period during the prior year: [[Image Removed: chscp-20211130_g7.jpg]] The change in Energy segment revenues reflects the following: •Increased selling prices and volumes for refined fuels contributed to$852.1 million and$38.0 million increases in revenues, respectively. Increased refined fuels selling prices resulted from global market conditions and increased volumes resulted from a continued improvement in demand following the initial demand shocks associated with the COVID-19 pandemic. •Increased selling prices for propane as a result of global market conditions during the first quarter of fiscal 2022 positively impacted revenue by$136.9 million . •Increased revenues were partially offset by lower volumes of propane driven by lower demand as a result of warm and dry weather conditions during most of the first quarter of fiscal 2022. 29
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Ag
Three Months Ended November 30, Change
2021 2020 Dollars Percent
(Dollars in thousands)
Revenues $ 8,569,259 $ 7,445,402 $ 1,123,857 15.1 %
The following waterfall analysis and commentary presents the changes in our Ag segment revenues for the three months endedNovember 30, 2021 , compared to the same period during the prior year: [[Image Removed: chscp-20211130_g8.jpg]] The change in Ag segment revenues reflects the following: •Higher pricing for grain and oilseed was driven by increased global demand and contributed to a$1.2 billion increase in revenues. The remaining price increase was attributed to a combination of market-driven price increases and product mix across our other Ag segment businesses, including wholesale agronomy, feed and farm supplies, renewable fuels and processing. •Decreased volumes of grain and oilseed contributed to a$1.4 billion decrease in revenues. The decreased volumes resulted from a combination of factors, including the comparable period of the prior year experiencing elevated volumes following the Phase One trade agreement withChina , which have since plateaued; a business model change at ourTEMCO, LLC ("TEMCO") equity method investment during the second quarter of fiscal 2021 that resulted in reduced revenues and COGS during the current period on certain transactions associated with TEMCO; the lower crop yields due to drought conditions experienced in portions of our trade territory and the impact of Hurricane Ida on our grain export terminal inMyrtle Grove, Louisiana , during the first quarter of fiscal 2022. •Decreased grain and oilseed volumes were partially offset by the net impact of volume increases and decreases across our other Ag segment businesses, including a$112.9 million increase in volumes for renewable fuels and a$95.0 million increase in volumes for oilseed processing as a result of strong demand in the ethanol and edible oil markets, respectively. All Other Segments Three Months Ended November 30, Change 2021 2020 Dollars Percent (Dollars in thousands) Corporate and Other revenues*$ 7,511 $ 12,394 $ (4,883) (39.4) %
*Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses, but not revenues.
Corporate and Other revenues decreased during the three months endedNovember 30, 2021 , compared to the same period during the prior year primarily as a result of decreased revenues in our hedging business due to lower commissions from hedging activities. 30
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Cost of Goods Sold by Segment
Energy
Three Months Ended November 30, Change
2021 2020 Dollars Percent
(Dollars in thousands)
Cost of goods sold $ 2,179,625 $ 1,281,042 $ 898,583 70.1 %
The following waterfall analysis and commentary presents the changes in our
Energy segment COGS for the three months ended November 30, 2021 , compared to
the same period during the prior year:
[[Image Removed: chscp-20211130_g9.jpg]]
The change in Energy segment COGS reflects the following:
•Increased costs and volumes for refined fuels contributed to $686.2 million and
$39.5 million increases of COGS, respectively. Increased refined fuels costs
resulted from global market conditions and increased volumes resulted from a
continued improvement in demand following the initial demand shocks associated
with the COVID-19 pandemic.
•Increased costs for propane as a result of global market conditions and the
reversal of unrealized hedging gains resulted in a $154.0 million increase of
COGS.
•Increased COGS was partially offset by lower volumes of propane driven by lower
demand as a result of warm and dry weather conditions during most of the first
quarter of fiscal 2022.
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Ag
Three Months Ended November 30, Change
2021 2020 Dollars Percent
(Dollars in thousands)
Cost of goods sold $ 8,183,993 $ 7,260,342 $ 923,651 12.7 %
The following waterfall analysis and commentary presents the changes in our Ag
segment COGS for the three months ended November 30, 2021 , compared to the same
period during the prior year:
[[Image Removed: chscp-20211130_g10.jpg]]
The change in Ag segment COGS reflects the following:
•Higher costs of grain and oilseed were driven by increased global demand and
contributed to a $1.1 billion increase in COGS. The remaining cost increase was
attributed to a combination of price increases and product mix across our
remaining Ag segment businesses, including wholesale agronomy, feed and farm
supplies, renewable fuels and processing.
•Decreased volumes of grain and oilseed contributed to a $1.4 billion decrease
in COGS. The decreased volumes resulted from a combination of factors, including
the comparable period of the prior year experiencing elevated volumes following
the Phase One trade agreement with China which have since plateaued; a business
model change at our TEMCO equity method investment during the second quarter of
fiscal 2021 that resulted in reduced revenues and COGS during the current period
on certain transactions associated with TEMCO; the lower crop yields due to
drought conditions experienced in portions of our trade territory and COGS
during the current period on certain transactions associated with TEMCO and the
impact of Hurricane Ida on our grain export terminal in Myrtle Grove, Louisiana ,
during the first quarter of fiscal 2022.
•Decreased grain and oilseed volumes were partially offset by the net impact of
volume increases and decreases across our other Ag segment businesses, including
a $109.3 million increase for renewable fuels and a $91.6 million increase for
oilseed processing as a result of strong demand in the ethanol and edible oil
markets, respectively.
All Other Segments
Three Months Ended November 30, Change
2021 2020 Dollars Percent
(Dollars in thousands)
Nitrogen Production COGS $ 414 $ 421 $ (7) (1.7)%
Corporate and Other COGS $ (3,183) $ (4,266) $ 1,083 25.4%
There were no significant changes to COGS in our Nitrogen Production segment
or Corporate and Other during the three months ended November 30, 2021 , compared
to the same period during the prior year.
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Marketing, General and Administrative Expenses
Three Months Ended November 30, Change
2021 2020 Dollars Percent
(Dollars
in thousands)
Marketing, general and administrative expenses
20.1 %
Marketing, general and administrative expenses increased during the three
months ended November 30, 2021 , primarily due to higher performance-based
incentive compensation expenses driven by improved results in comparison to the
prior year.
Interest Expense
Three Months Ended November 30, Change
2021 2020 Dollars Percent
(Dollars in thousands)
Interest expense $ 23,432 $ 25,050 $ (1,618) (6.5) %
Interest expense decreased during the three months ended November 30, 2021 , as
a result of lower notes payable and long-term debt balances compared to the same
period of the prior year.
Other Income
Three Months Ended November 30, Change
2021 2020 Dollars Percent
(Dollars in thousands)
Other income $ 23,776 $ 12,624 $ 11,152 88.3 %
Other income increased during the three months ended
Equity Income from Investments
Three Months Ended November 30, Change
2021 2020 Dollars Percent
(Dollars in thousands)
Equity income from investments* $ 151,345 $ 50,023 $ 101,322 202.6 %
*For additional information, see Note 5, Investments, of the notes to the condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q.
Equity income from investments increased during the three months endedNovember 30, 2021 , compared to the same period during the prior year, primarily due to increased income associated with our equity method investment in CF Nitrogen. CF Nitrogen experienced increased sale prices of urea and UAN due to strong global demand and decreased global supply.
Income Tax Expense (Benefit)
Three Months Ended November 30, Change
2021 2020 Dollars Percent
(Dollars in thousands)
Income tax expense (benefit) $ 14,720 $ (24,329) $ 39,049 160.5 %
The increased income tax expense during the three months ended November 30,
2021 , primarily resulted from increased earnings during the first quarter of
fiscal 2022. Effective tax rates for the three months ended November 30, 2021
and 2020, were 3.2% and (54.0)%, respectively. Federal and state statutory rates
applied to nonpatronage business activity were 24.4% and 24.9% for the three
months ended November 30, 2021 and 2020, respectively. Income taxes and
effective tax rates vary each year based on profitability and nonpatronage
business activity.
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Liquidity and Capital Resources
In assessing our financial condition, we consider factors such as working
capital, internal benchmarking related to our applicable covenants and other
financial information. The following financial information is used when
assessing our liquidity and capital resources to meet our capital allocation
priorities, which include maintaining the safety and compliance of our
operations, paying interest on debt and preferred stock dividends, returning
cash to our member-owners in the form of cash patronage and equity redemptions
and taking advantage of strategic opportunities that benefit them:
November 30, 2021 August 31, 2021
(Dollars in thousands)
Cash and cash equivalents $ 310,002 $ 413,159
Notes payable 1,905,371 1,740,859
Long-term debt including current maturities 1,615,112 1,618,361
Total equities 9,249,926 9,017,326
Working capital 1,891,232 1,672,938
Current ratio* 1.2 1.3
*Current ratio is defined as current assets divided by current liabilities.
Summary of Our Major Sources of Cash and Cash Equivalents
We fund our current operations primarily through a combination of cash flows
from operations supplemented with short-term borrowings through our committed
and uncommitted revolving credit facilities, including our securitization
facility, with certain unaffiliated financial institutions ("Securitization
Facility") and our repurchase facility relating thereto ("Repurchase Facility").
We fund certain of our long-term capital needs, primarily those related to
acquisitions of property, plant and equipment, with cash flows from operations
and by issuing long-term debt. See Note 6, Notes Payable and Long-Term Debt, of
the notes to the unaudited condensed consolidated financial statements that are
included in this Quarterly Report on Form 10-Q for additional information on our
short-term borrowings and long-term debt. We will continue to consider
opportunities to further diversify and enhance our sources and amounts of
liquidity.
Summary of Our Major Uses of Cash and Cash Equivalents
The following is a summary of our primary cash requirements for fiscal 2022:
•Capital expenditures. We expect total capital expenditures for fiscal 2022 to be approximately$669.7 million , compared to capital expenditures of$317.8 million in fiscal 2021. During the three months endedNovember 30, 2021 , we acquired$74.9 million of property, plant and equipment. •Debt and interest. We expect to repay approximately$38.5 million of long-term debt and finance lease obligations and incur interest payments related to long-term debt of approximately$70.7 million during fiscal 2022. During the three months endedNovember 30, 2021 , we repaid$0.2 million of scheduled long-term debt maturities. •Preferred stock dividends. We had approximately$2.3 billion of preferred stock outstanding as ofNovember 30, 2021 . We expect to pay dividends on our preferred stock of approximately$168.7 million during fiscal 2022. Dividends paid on our preferred stock during the three months endedNovember 30, 2021 , were$42.2 million . •Patronage. Our Board of Directors authorized approximately$50.0 million of our fiscal 2021 patronage-sourced earnings to be paid to our member-owners during fiscal 2022. •Equity redemptions. Our Board of Directors has authorized equity redemptions of$100.0 million to be distributed in fiscal 2022 in the form of redemptions of qualified and nonqualified equity owned by individual producer-members and association members. During the three months endedNovember 30, 2021 , we redeemed$12.2 million of member equity. We believe cash generated by operating and investing activities, along with available borrowing capacity under our credit facilities, will be sufficient to support our operations for the foreseeable future. Our notes payable and long-term debt are subject to various restrictive requirements for maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with all our debt covenants and restrictions as ofNovember 30, 2021 . Based on our current fiscal 2022 projections, we expect continued covenant compliance. 34
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Working Capital
We measure working capital as current assets less current liabilities and believe this information is meaningful to investors as a measure of operational efficiency and short-term financial health. Working capital is not defined underU.S. generally accepted accounting principles ("U.S. GAAP") and may not be computed the same as similarly titled measures used by other companies. Working capital as ofNovember 30, 2021 , andAugust 31, 2021 , is as follows: November 30, 2021 August 31, 2021 Change (Dollars in thousands) Current assets$ 9,997,118 $ 7,998,951 $ 1,998,167 Less current liabilities 8,105,886 6,326,013 1,779,873 Working capital$ 1,891,232 $ 1,672,938 $ 218,294 As ofNovember 30, 2021 , working capital increased by$218.3 million compared withAugust 31, 2021 . Current asset balance changes increased working capital by$2.0 billion , primarily driven by increases in receivables and inventories, which were driven by higher commodity prices. Current liabilities balance changes decreased working capital by$1.8 billion , primarily due to increases in accounts payable and notes payable, which were also driven by higher commodity prices. We finance our working capital needs through committed and uncommitted lines of credit with domestic and international banks. We believe our current cash balances and available capacity on our committed and uncommitted lines of credit will provide adequate liquidity to meet our working capital needs.
Contractual Obligations
For information regarding our estimated contractual obligations, see the MD&A discussion included in Item 7 of Part II of our Annual Report on Form 10-K for the year endedAugust 31, 2021 .
Cash Flows
The following table presents summarized cash flow data for the three months
ended
Three Months Ended November 30,
2021 2020 Change
(Dollars in thousands)
Net cash used in operating activities $ (183,587) $ (673,453) $ 489,866
Net cash used in investing activities (52,196) (114,311) 62,115
Net cash provided by financing activities 156,002 808,891 (652,889)
Effect of exchange rate changes on cash and cash
equivalents (3,550) 2,324 (5,874)
(Decrease) increase in cash and cash equivalents and
restricted cash $ (83,331) $ 23,451 $ (106,782)
Cash flows from operating activities can fluctuate significantly from period
to period as a result of various factors, including seasonality and timing
differences associated with purchases, sales, taxes and other business
decisions. The $489.9 million decrease in cash used in operating activities
primarily reflects increased net income during the first quarter of fiscal 2022
compared to the same period of the prior year.
The
The
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Table of Contents
Preferred Stock
The following is a summary of our outstanding preferred stock as of
Net Proceeds Dividend Rate Dividend Payment
Nasdaq Symbol Issuance Date Shares Outstanding Redemption Value (a) (b) (c) Frequency Redeemable Beginning (d)
(Dollars in millions)
8% Cumulative Redeemable CHSCP (e) 12,272,003 $ 306.8 $ 311.2 8.00 % Quarterly 7/18/2023
Class B Cumulative
Redeemable, Series 1 CHSCO (f) 21,459,066 $ 536.5 $ 569.3 7.875 % Quarterly 9/26/2023
Class B Reset Rate
Cumulative Redeemable,
Series 2 CHSCN 3/11/2014 16,800,000 $ 420.0 $ 406.2 7.10 % Quarterly 3/31/2024
Class B Reset Rate
Cumulative Redeemable,
Series 3 CHSCM 9/15/2014 19,700,000 $ 492.5 $ 476.7 6.75 % Quarterly ClassB Cumulative Redeemable, Series 4 CHSCL1/21/2015 20,700,000 $ 517.5$ 501.0 7.50 % Quarterly1/21/2025 (a) Includes patron equities redeemed with preferred stock. (b) Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2, accumulates dividends at a rate of 7.10% per year untilMarch 31, 2024 , and then at a rate equal to the three-month LIBOR plus 4.298%, not to exceed 8.00% per annum, subsequent toMarch 31, 2024 . (c) Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3, accumulates dividends at a rate of 6.75% per year untilSeptember 30, 2024 , and then at a rate equal to the three-month LIBOR plus 4.155%, not to exceed 8.00% per annum, subsequent toSeptember 30, 2024 . (d) Preferred stock is redeemable for cash at our option, in whole or in part, at a per-share price equal to the per-share liquidation preference of$25.00 per share, plus all dividends accumulated and unpaid on that share to and including the date of redemption, beginning on the dates set forth in this column. (e) The 8% Cumulative Redeemable Preferred Stock was issued at various times from 2002 through 2010. (f) Shares of Class B Cumulative Redeemable Preferred Stock, Series 1, were issued onSeptember 26, 2013 ;August 25, 2014 ;March 31, 2016 ; andMarch 30, 2017 .
Critical Accounting Policies
Other than as described within the Significant Accounting Policies section of Note 1, Basis of Presentation and Significant Accounting Policies, to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, our critical accounting policies as presented in MD&A in our Annual Report on Form 10-K for the year endedAugust 31, 2021 , have not materially changed during the three months endedNovember 30, 2021 .
Recent Accounting Pronouncements
See Note 1, Basis of Presentation and Significant Accounting Policies, to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements that apply to us.
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