The Andersons, Inc. — Q1 2018 Form 10-Q
Business context and reporting period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. The company operates in Grain, Ethanol, Plant Nutrient, and Rail. The business is seasonal, and management cautions that quarterly results are not necessarily indicative of the full year.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Sales and merchandising revenue | $635.7 million | $852.0 million |
| Gross profit | $63.7 million | $76.5 million |
| Gross margin | 10.0% | 9.0% |
| Operating, administrative and general expenses | $64.3 million | $81.5 million |
| Income (loss) before income taxes | $(2.3) million | $(5.6) million |
| Net loss attributable to The Andersons | $(1.7) million; $(0.06) per share | $(3.1) million; $(0.11) per share |
| Operating cash flow | $(378.7) million | $(229.2) million |
| Cash and cash equivalents, March 31 | $31.5 million | $29.6 million |
Reported revenue fell 25%, while gross profit declined about 17%; the margin improved. The revenue comparison is affected by adoption of ASC 606, which changed certain Grain transactions from gross to net presentation. Under the prior revenue rules, Q1 2018 revenue would have been $799.9 million and gross profit $63.2 million; the accounting change had an immaterial effect on net loss and no effect on earnings per share.
Cash use from operations rose primarily with increases in receivables, inventories, and commodity derivatives. Investing activities used $44.3 million, including $29.4 million for property, equipment, and software. Financing provided $419.6 million, largely reflecting increased short-term borrowing.
Financial position and liquidity
- At March 31, total assets were $2.36 billion and total equity was $822.8 million.
- Working capital was $213.9 million, down from $228.5 million at March 31, 2017. Current assets were $1.14 billion and current liabilities $924.0 million.
- Total short- and long-term debt, including current maturities, was approximately $941.8 million, compared with $677.1 million a year earlier. Short-term debt was $489.0 million versus $255.0 million.
- The company reported $338.3 million available under its borrowing lines and compliance with financial covenants. Peak short-term borrowing to date was $541 million on March 14, 2018.
- Seasonal working-capital needs, variable-rate borrowing, and potentially significant cash margin deposits on commodity futures can affect liquidity. Commodity collateral posted was $54.8 million at quarter-end, versus $1.4 million at December 31, 2017.
Material changes and segment results
- Grain: Pre-tax loss narrowed to $0.03 million from $5.1 million. Management cited stronger risk-management income, basis appreciation, and improved affiliate results.
- Ethanol: Results attributable to the company improved modestly to $1.8 million from $1.7 million. Ethanol shipments rose 16%, but lower average ethanol selling prices reduced gross profit; affiliate earnings improved.
- Plant Nutrient: Pre-tax income declined to $1.1 million from $6.7 million. Lower farm-center volumes and a depressed nutrient market were partly offset by lawn-product growth and lower expenses.
- Rail: Pre-tax income declined to $4.0 million from $6.1 million. Utilization rose to 87.9% from 83.6%, but certification costs, accounting-related depreciation, and the absence of prior-year lease-settlement income weighed on results.
- Other: The loss narrowed to $8.9 million from $15.0 million, principally because the Retail business was closed in 2017 and related expenses did not recur.
Commodity-derivative losses included in cost of sales were $25.2 million, versus gains of $27.0 million in Q1 2017. Q1 2017 also included a $4.7 million gain on the sale of Florida farm centers; the prior-year period included $7.8 million of Retail exit charges.
Outlook, risks, and unusual items
- Management expects Plant Nutrient volume and margin pressures to remain a challenge through the rest of 2018. Grain plans to focus on originations, risk management, and food ingredients; Rail plans to manage fleet age, leasing, and scrap opportunities.
- The company began construction of a 70-million-gallon-per-year bio-refinery, expected to be operational in 2019. Approximately $150 million of design-and-build obligations remained at March 31; the filing states $14.9 million had been prepaid. Management expected 2018 capital spending of about $60 million for the base business, excluding rail leasing activity, and $145 million for railcars and related activity, with about $125 million expected to be funded through sales, dispositions, or non-recourse debt.
- The company sold its Humboldt, Kenton, and Dyer, Tennessee grain elevators on April 2 for $19.5 million plus working capital. Related assets were classified as held for sale at quarter-end.
- Revenue recognition adoption reduced opening retained earnings by $8.4 million and added Rail Group assets and related financing obligations. The company was still evaluating certain Tax Act effects, including its accounting policy for GILTI.
- Management said current defendant litigation was unlikely to be material based on amounts accrued, but future claims could adversely affect results. The company identified no material quarterly change in commodity or interest-rate market risks and said disclosure controls were effective.
Important facts for investors to verify
- How much of the reported revenue decline reflects ASC 606 presentation changes versus underlying volumes, prices, and business mix.
- Whether working-capital outflows, seasonal borrowing, commodity-margin requirements, and variable interest costs remain manageable.
- Progress, remaining commitments, funding, and projected operating economics for the bio-refinery and planned capital expenditures.
- Whether Plant Nutrient market and margin pressures persist, and whether Rail utilization and fleet investments translate into improved earnings.
- Final tax-reform accounting and any subsequent changes in litigation, asset-sale proceeds, or other contingencies.