Business context and reporting period
The Andersons, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2023. Its reportable segments are Trade, Renewables, and Nutrient & Industrial. Because commodity price changes can move sales and cost of sales together, management says gross profit is generally more informative than revenue for assessing performance.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Sales and merchandising revenue | $4.020 billion | $4.451 billion | $7.901 billion | $8.429 billion |
| Gross profit | $221.9 million | $230.8 million | $369.9 million | $350.4 million |
| Income before tax, continuing operations | $104.4 million | $118.2 million | $39.4 million | $128.8 million |
| Net income attributable to Andersons | $55.0 million | $79.8 million | $40.3 million | $85.3 million |
| Diluted EPS, continuing operations | $1.61 | $2.34 | $1.18 | $2.52 |
Q2 revenue declined about 10% year over year, while gross profit fell about 4%. First-half revenue declined about 6%, while gross profit increased about 6%. First-half pretax income and attributable earnings were substantially lower, principally reflecting the $87.2 million ELEMENT impairment recorded in Q1 2023.
Gross margin was approximately 5.5% in Q2 2023 versus 5.2% a year earlier, and 4.7% for the first half versus 4.2%. These derived ratios should be interpreted in light of the company’s commodity merchandising model. Q2 effective tax rate was 20.8%; the first-half rate was 40.2%, affected by noncontrolling interests and other tax factors.
Segments and operating drivers
- Trade: Q2 pretax income was $5.0 million versus $23.7 million. Lower elevation margins and premium-ingredients results weighed on gross profit; higher operating costs included bad debt, fire cleanup, and insurance expenses. First-half pretax income improved to $44.4 million from $27.3 million, including $16.1 million of inventory insurance recoveries.
- Renewables: Q2 segment pretax income was $66.6 million versus $67.8 million. Management cited stronger ethanol crush margins and co-product values, partly offset by unfavorable mark-to-market movements and the absence of prior-year program proceeds. First-half segment pretax loss was $15.9 million, including the ELEMENT impairment, versus income of $73.7 million a year earlier.
- Nutrient & Industrial: Q2 pretax income increased to $42.6 million from $38.3 million, as higher volumes offset lower fertilizer prices and margin compression. First-half pretax income declined to $32.1 million from $49.1 million.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was $207.4 million, compared with cash use of $721.8 million in 2022, largely reflecting lower working-capital needs as commodity prices normalized. Investing cash use was $71.7 million; financing cash use was $155.0 million.
- Cash was $96.3 million at June 30, 2023. Working capital was $1.144 billion, up $160.0 million from June 30, 2022.
- Total reported debt, including current maturities, was approximately $706.8 million at June 30, 2023, versus $875.2 million at December 31, 2022. The company entered an $100 million eight-year variable-rate term loan in April; about half refinanced current maturities, with the remainder intended to reduce line borrowings.
- Credit lines totaled $1.869 billion, with $1.741 billion available at quarter-end. The company reported compliance with financial covenants and stated that liquidity should be adequate for operations, capital spending, and debt service. Standby letters of credit were $25.8 million.
- First-half capital expenditures were $75.0 million. Management expects 2023 property, plant, and equipment investment of $125 million to $150 million, split evenly between growth and maintenance.
Material changes, outlook, and risks
- ELEMENT: After an $87.2 million Q1 impairment, ELEMENT entered receivership on April 18 and was deconsolidated when the receiver took control. The company recorded a $6.5 million net pretax gain on deconsolidation after fully reserving $11.6 million of receivables and loans. ELEMENT is being marketed for sale; Andersons retained an investment, but reported no equity-method losses after deconsolidation because the investment was in a negative position.
- Management described Trade as well-positioned, while noting geopolitical and Black Sea shipment uncertainty and commodity-market volatility. Renewables margins were described as strong but volatile. Nutrient & Industrial’s second-half volumes depend on fall conditions and market dynamics. No specific earnings guidance was provided.
- Key exposures include commodity prices, weather and agricultural conditions, interest rates on variable-rate borrowing, and cash margin requirements on derivatives. Management reported no material change in market risk during the first half.
- The company said current legal proceedings were unlikely to result in a material loss, while acknowledging litigation outcomes are uncertain. IRS examinations of subsidiary partnership returns for 2015–2018 and a Mexican tax examination for 2015 could be resolved within 12 months; resolution could reduce tax expense by $2.9 million to $8.1 million.
- After quarter-end, the company acquired ACJ International for $41.4 million: $24.4 million paid at closing, with the remainder estimated to be paid over three years subject to earn-out provisions.
Important facts for investors to verify
- How much of first-half earnings weakness is attributable to the ELEMENT impairment and deconsolidation, and how the facility sale or continued losses may affect results.
- Whether operating cash generation remains strong after normalizing for working-capital movements, inventory insurance recoveries, and commodity-price changes.
- Renewables margin and mark-to-market trends, and whether Nutrient & Industrial demand and margins hold up in the second half.
- Variable-rate debt exposure, borrowing availability, covenant headroom, and the planned $125 million–$150 million capital spending program.
- The final ACJ earn-out payments and the outcomes of the pending tax examinations.