The Andersons, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; comparisons are with the corresponding 2019 periods unless noted. The company operates in Trade, Ethanol, Plant Nutrient and Rail. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales and merchandising revenues | $1,922.2 | $1,982.8 | $5,665.5 | $6,284.6 |
| Gross profit | $101.8 | $109.1 | $271.2 | $379.5 |
| Gross margin | 5.3% | 5.5% | 4.8% | 6.0% |
| Income (loss) before tax | $(2.5) | $(13.1) | $(47.2) | $7.7 |
| Income tax benefit | $4.7 | $7.2 | $18.4 | $1.7 |
| Net income (loss) attributable to Andersons | $(1.1) | $(4.2) | $(8.3) | $11.7 |
| Basic and diluted EPS | $(0.03) | $(0.13) | $(0.25) | $0.36 basic; $0.35 diluted |
- Q3 gross profit declined about 7%; lower Trade and Rail gross profit more than offset improved Ethanol and Plant Nutrient results. Lower operating expenses and interest expense helped narrow the attributable net loss.
- Nine-month gross profit fell about 29%, and the company moved from prior-year attributable net income to a loss. Ethanol’s pretax result was particularly weak, reflecting pandemic-related demand and margin pressure.
- Operating cash flow was $195.8 million for the nine months, compared with $319.6 million in 2019. Investing used $70.2 million, versus $334.9 million, largely reflecting the prior-year LTG acquisition and lower 2020 capital spending. Financing used $166.4 million, compared with $12.3 million provided in 2019.
Balance sheet and liquidity
- At September 30, 2020, cash and cash equivalents were $13.7 million; working capital was $443.7 million, up $20.4 million from September 30, 2019.
- Total debt, including short-term debt and current maturities, was approximately $1.084 billion, down from approximately $1.226 billion at December 31, 2019. The company reported $1.359 billion of available borrowing capacity under its credit lines, including $250.1 million non-recourse capacity, and was in compliance with financial covenants.
- Total assets were $3.412 billion and total equity was $1.137 billion at quarter-end. Inventories were $754.6 million, down from $1.171 billion at year-end 2019, reflecting seasonal and working-capital movements.
- Dividends paid during the first nine months totaled $17.2 million. The company declared a $0.175-per-share dividend payable October 22, 2020.
Segment developments and outlook
- Trade: Q3 segment pretax income attributable to the company was $5.9 million, compared with a $2.1 million loss. Strong corn and soybean merchandising, integration benefits and cost savings helped; food and specialty ingredients faced lower volume and higher freight. Management expected stronger merchandising but weaker asset-storage income over the next four quarters, as inverted futures markets could reduce storage opportunities.
- Ethanol: Q3 segment pretax income attributable to the company was $1.1 million, versus a $0.6 million loss. Improved crush margins and trading helped, partly offset by non-cash mark-to-market charges. Nine-month segment pretax loss attributable to the company was $22.0 million. Plants resumed operations in Q2 after extended maintenance shutdowns. Management said the near-term outlook remained uncertain and dependent on gasoline demand relative to ethanol supply.
- Plant Nutrient: Q3 segment pretax loss narrowed to $5.4 million from $7.4 million, while nine-month pretax income rose to $12.8 million from $4.5 million. Management expected a strong finish to 2020 and modest 2021 improvement, assuming continued higher commodity prices and another strong planting season.
- Rail: Q3 segment pretax loss was $0.1 million, compared with $3.1 million income. Leasing rates and fleet utilization weakened; utilization fell to 87.0% from 89.2%. Management expected pandemic-related railcar and repair-market headwinds to persist until the economy normalizes.
The filing provides no consolidated earnings or revenue guidance. Management said the pandemic’s future effects remained highly uncertain. COVID-19 reduced demand for gasoline, ethanol and corn, contributed to lower rail loadings and idling of nearly one-third of the North American railcar fleet, and could affect commodity prices, transportation, facilities, exports and seasonal patterns. Management believed available liquidity would support operations, capital expenditures and debt service.
Material items, risks and contingencies
- The company recorded a $10.9 million inventory valuation charge for lower ethanol prices and pandemic-related demand weakness, mostly in Q1.
- The CARES Act generated a recorded $14.8 million tax benefit from net operating loss carrybacks. The nine-month income tax benefit was $18.4 million; the effective rate was affected by noncontrolling interests and other tax factors.
- Severance related to departing executives and key employees was $3.2 million in Q3 and $5.6 million for the first nine months.
- A non-regulatory litigation claim concerns penalties and fines paid by a formerly unconsolidated subsidiary in 2018. The company said it believes it has defenses, but a loss above the accrued amount is possible; the excess, net of an acquisition-related indemnity, could not be determined. Management said other reasonably possible claims were not material.
- On October 23, 2020, the company amended its credit agreement to add a $150 million term loan maturing in 2026, replacing a subsidiary credit facility. Debt prepayment led to about $2.8 million of existing hedge losses being reclassified into earnings and about $0.3 million of debt issuance cost write-offs.
- Management concluded no goodwill or other impairment-triggering event existed at September 30, despite market capitalization being below shareholders’ equity; adverse conditions or changed operating assumptions could prompt future impairment review.
Important facts for investors to verify
- Whether ethanol demand and crush margins recover, and how COVID-19 affects plant operations and market prices.
- Whether Trade merchandising gains offset weaker storage income and volatile commodity basis and futures markets.
- Whether Rail utilization, lease rates, renewals and repair demand improve from pandemic-affected levels.
- Cash generation, seasonal working-capital needs, available borrowing capacity, covenant compliance and debt reduction progress.
- The eventual outcome and potential financial exposure from the disclosed litigation claim, and the earnings impact of the October 2020 debt refinancing and hedge reclassification.