Business context and reporting period
The Andersons, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019. Its four segments are Trade, Ethanol, Plant Nutrient and Rail. The year’s results are not directly comparable with 2018: Andersons acquired the remaining 67.5% of Lansing Trade Group (LTG) effective January 1, 2019, and consolidated its ethanol joint venture TAMH beginning October 1, 2019. Revenue also reflects accounting presentation changes, including 2018 revenue reported net for certain grain origination transactions.
Financial performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Sales and merchandising revenue | $8.170 billion | $3.045 billion |
| Gross profit | $517.9 million | $302.0 million |
| Net income attributable to Andersons | $18.3 million | $41.5 million |
| Diluted EPS | $0.55 | $1.46 |
| Operating cash flow | $348.6 million provided | $35.5 million used |
| Working capital at year-end | $505.4 million | $189.8 million |
| Cash and cash equivalents at year-end | $54.9 million | $22.6 million |
Gross margin was approximately 6.3% of revenue in 2019 versus 9.9% in 2018; attributable net margin was approximately 0.2% versus 1.4%. The revenue increase principally reflects acquired and newly consolidated operations, rather than comparable organic growth.
For Q4 2019, revenue was $1.886 billion, gross profit $138.4 million, net income $5.7 million, net income attributable to Andersons $6.6 million and diluted EPS $0.20. Q4 2018 figures were $812.7 million, $94.0 million, $23.7 million, $23.8 million and $0.83, respectively.
Debt, liquidity and investment
At December 31, 2019, short-term debt was $147.0 million; current maturities of long-term debt were $62.9 million; and long-term debt excluding current maturities was $1.016 billion. The long-term balance included $693.8 million recourse and $331.0 million non-recourse debt. The company reported $1.305 billion available under its borrowing arrangements and said it was in compliance with debt covenants. Debt and interest expense increased substantially following acquisitions and higher borrowings.
Operating cash flow improved from a use of $35.5 million to a source of $348.6 million, primarily reflecting working-capital changes and greater activity following the LTG acquisition. Investing activities used $325.0 million; capital spending was approximately $161.0 million. Management expected approximately $150.0 million of conventional property, plant and equipment spending in 2020. Dividends paid in 2019 were $22.1 million; the quarterly rate was raised to $0.175 per share payable in January 2020.
Material changes and unusual items
- LTG acquisition consideration was $328.9 million, including $171.1 million cash, $127.8 million in shares and $30.0 million of holdbacks and other accrued liabilities. It materially expanded Trade revenue, assets and debt.
- The October TAMH merger gave Andersons 50.1% ownership and Marathon 49.9%; consolidation began October 1. The transaction generated a $35.2 million net gain from remeasurement of equity-method investments, a material non-recurring earnings item.
- Asset impairment charges rose to $41.2 million from $6.3 million, including $34.8 million related to the frac sand business and $3.7 million related to Tennessee grain assets. An additional $5.0 million impairment was recorded against an equity-method investment.
- Income before tax declined to $28.1 million from $53.2 million; interest expense rose to $59.7 million from $27.8 million. The effective tax rate was 46.4%, versus 22.5%, primarily reflecting an acquisition-related permanent tax item, partly offset by $6.5 million of R&D tax credits.
Outlook, management commentary and risks
- Management expected continued Ethanol margin pressure in 2020 from ethanol oversupply and high corn basis in the Eastern Corn Belt.
- Plant Nutrient expected a challenging margin environment and emphasized sales growth and working-capital management. 2019 results were affected by a wet spring, compressed planting season and nonrecurring specialty nutrient contracts from the prior year.
- Rail management expected continued pressure on new and renewing lease rates, while anticipating utilization above 90%. 2019 Rail earnings were lower amid reduced lease rates, weaker railcar loading and customer defaults, particularly in sand and ethanol.
- Trade benefited from LTG merchandising activity but faced weak grain-storage income from adverse weather and significant frac sand impairment. Management cited originations, risk-management services and food ingredients as areas of focus.
- Key risks include commodity price and basis movements, margin calls and liquidity needs, weather and crop conditions, ethanol and fertilizer margins, counterparty defaults, interest rates, regulation, environmental exposures, acquisition integration and rail demand. The filing also identified the then-emerging coronavirus outbreak as a potential source of economic and demand uncertainty.
- Ordinary-course litigation was not expected to be materially adverse based on amounts accrued; a $5.0 million reserve was recorded in the LTG acquisition opening balance sheet for a litigation claim relating to prior trading activity. Unrecognized tax benefits were $22.4 million, principally related to R&D credits.
Important facts for investors to verify
- Separate acquisition-driven revenue and balance-sheet growth from underlying segment performance; review pro forma results and the accounting effects of consolidation.
- Assess earnings excluding the $35.2 million remeasurement gain, alongside impairment charges, higher interest expense and the elevated effective tax rate.
- Review whether operating cash flow and working capital remain sustainable given seasonal inventory, commodity margin requirements and acquisition-related debt.
- Track frac sand asset performance, ethanol margins and corn basis, Plant Nutrient volumes and margins, and Rail lease rates, utilization and customer credit quality.
- Confirm 2020 capital spending, debt availability and covenant headroom, and monitor tax uncertainty and the disclosed litigation contingency.