Andersons, Inc. — Q1 2020 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. The company operates in Trade, Ethanol, Plant Nutrient, and Rail. Commodity merchandising revenue is high-volume and price-sensitive, so revenue changes alone may not indicate changes in underlying performance. Results also reflect the 2019 merger of ethanol operations into TAMH, which affects comparability.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Sales and merchandising revenue | $1,853.1 million | $1,976.8 million, down 6.3% |
| Gross profit / gross margin | $63.1 million / 3.4% | $109.7 million / 5.5% |
| Net loss | $51.1 million | $14.1 million |
| Net loss attributable to Andersons | $37.7 million; $1.15 per diluted share | $14.0 million; $0.43 per diluted share |
| Net interest expense | $15.6 million | $15.9 million |
| Cash used in operating activities | $228.4 million | $122.0 million |
| Cash used in investing activities | $30.4 million | $205.8 million |
| Cash provided by financing activities | $223.6 million | $336.1 million |
Balance sheet and liquidity at March 31, 2020: Cash and restricted cash were $19.7 million; working capital was $436.4 million. Total debt, including short-term debt and current maturities, was approximately $1.461 billion, compared with $1.226 billion at December 31, 2019. The company reported $1.006 billion available under credit lines with $1.684 billion total capacity, and stated it complied with financial covenants. Total assets were $3.753 billion and total equity was $1.114 billion. Q1 operating cash use reflected seasonal working-capital needs as well as the loss; payables and accrued expenses decreased substantially during the quarter.
Material changes and segment performance
- Ethanol: Segment loss before tax, net of noncontrolling interests, was $24.0 million versus income of $3.0 million. COVID-related demand declines and negative margins drove the deterioration. Ethanol revenue and cost of sales also increased with TAMH consolidation, limiting direct comparison.
- Trade: Segment pretax loss, net of noncontrolling interests, narrowed to $10.0 million from $17.9 million. Corn-basis depreciation, weaker frac sand conditions, and approximately $3.4 million of additional credit reserves tied to ethanol customers weighed on results; stronger food and specialty ingredients partly offset these pressures.
- Plant Nutrient: Segment pretax loss narrowed to $1.2 million from $3.9 million, helped by improved Engineered Granules performance and lower expenses.
- Rail: Segment pretax income fell to $1.0 million from $4.3 million. Lower car sales, leasing revenue, renewal rates, and utilization contributed; utilization declined to 89.0% from 95.7%.
- Consolidated revenue declined, while gross profit fell more sharply. Other income was $4.8 million versus a $1.5 million loss in Q1 2019.
Outlook, risks, and unusual items
- Management said COVID-19 materially affected demand for gasoline, ethanol, and corn and made the future impact on the business highly uncertain. Ethanol plants were idled for extended maintenance shutdowns to preserve cash and protect employees; management expected ethanol headwinds to persist while demand remained weak.
- Management expected pressure on Trade’s Eastern assets until the 2020 corn harvest, while anticipating a large crop could support storage income later in 2020 and into 2021. Plant Nutrient’s near-term outlook was described as positive, subject to weather, crop mix, corn prices, and customers’ ability to purchase products. Rail faced expected continued pressure on utilization, lease rates, and repair demand.
- The company recorded a $10.6 million inventory write-down related to lower ethanol prices and COVID-related demand declines, and increased credit reserves for affected customers. An interim impairment review of Ethanol goodwill and other assets found no impairment; management cautioned that fair value is sensitive to future volume, margins, interest rates, and macroeconomic conditions.
- The CARES Act generated a recorded $6.6 million tax benefit associated with expected net operating loss carrybacks. The quarterly income tax benefit was $1.5 million, with a 2.8% effective rate; nondeductible losses attributable to noncontrolling interests limited the benefit.
- Management expected COVID-19 to pressure operating cash flow but believed liquidity would be adequate for operations, capital spending, and debt service. Planned 2020 spending was approximately $87 million for base-business capital projects and up to $31 million for railcars and related activity.
- Management said pending legal matters were not expected to result in material losses beyond recorded amounts. A $5.0 million reserve for a non-regulatory litigation claim had been recorded in Q1 2019. No material changes to market-risk disclosures were reported.
Most important facts for investors to verify
- Whether ethanol demand and margins recover, and whether further plant idling or asset impairment becomes necessary.
- Whether liquidity remains adequate as seasonal cash use, COVID-related operating pressures, and debt balances evolve; monitor borrowing availability and covenant compliance.
- Whether Trade customer credit losses and corn-basis exposure increase, and whether the expected 2020 crop supports storage income.
- Whether Rail utilization, lease rates, and repair demand stabilize from depressed levels.
- How TAMH consolidation and segment reorganizations affect year-over-year comparability, including reported volume and earnings.