Andersons, Inc. — Q2 2020 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2020. Andersons operates in Trade, Ethanol, Plant Nutrient and Rail. COVID-19 disrupted demand across its markets; comparisons are also affected by the 2019 acquisition and 2020 consolidation of TAMH, its ethanol joint venture with Marathon.
Financial performance
Amounts below are in millions of dollars except per-share data. Revenue and earnings comparisons are year over year.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,890.2 | $2,325.0 | $3,743.3 | $4,301.8 |
| Gross profit | $106.3 | $160.7 | $169.4 | $270.4 |
| Gross margin | 5.6% | 6.9% | 4.5% | 6.3% |
| Income (loss) before tax | $7.8 | $40.4 | $(44.7) | $20.8 |
| Net income (loss) attributable to Andersons | $30.4 | $29.9 | $(7.2) | $15.9 |
| Basic EPS | $0.92 | $0.92 | $(0.22) | $0.49 |
- Quarterly result: Revenue fell 19% and gross profit fell 34%. Lower Trade margins and COVID-related ethanol disruption weighed on results. Q2 net income attributable to Andersons rose slightly despite lower pretax income, reflecting a $12.2 million income tax benefit and $10.4 million net loss attributable to noncontrolling interests.
- Year-to-date result: Revenue declined 13%; the company recorded a $44.7 million pretax loss, compared with $20.8 million pretax income a year earlier. The six-month net loss attributable to Andersons was $7.2 million. Ethanol’s six-month segment loss before tax, net of noncontrolling interests, was $23.1 million; Trade also reported a $9.6 million loss.
- Cash flow: Operating activities generated $145.5 million in the first half, versus $84.8 million used in 2019. The improvement was primarily due to working-capital movements, including a $537.0 million inventory reduction, partly offset by a $481.6 million decrease in payables and accrued expenses. Investing used $66.0 million; financing used $105.1 million. Cash, cash equivalents and restricted cash ended at $30.0 million, down $24.9 million from year-end.
- Liquidity and debt: Working capital was $471.4 million and the current ratio was approximately 1.5. Total short- and long-term debt, including current maturities, was approximately $1.14 billion at June 30, down from approximately $1.23 billion at December 31, 2019. Of $1.69 billion in credit-line capacity, $1.31 billion was available; $76.3 million of standby letters of credit was outstanding. The company reported compliance with financial covenants.
Material changes and management commentary
- COVID-19 and segment outlook: Reduced travel and economic activity depressed gasoline, ethanol and corn demand. Andersons temporarily idled ethanol plants for extended maintenance; all resumed operations in Q2 at about 50% of capacity as planned. Ethanol margins improved during the quarter, but the pandemic’s future effects remained uncertain.
- Trade: Q2 results were pressured by compressed margins, weaker basis appreciation and lower originations in the Eastern Corn Belt, as well as sand-market headwinds. Management expected a large 2020 corn harvest to support profitability later in 2020 and into 2021.
- Plant Nutrient: More normal planting conditions lifted Q2 volumes, but lower margins offset much of the benefit. Management described the near-term outlook as guarded, citing low corn prices and weaker industrial demand, balanced against cost reductions and Engineered Granules opportunities.
- Rail: Lower lease rates, utilization and car-sale income reduced results. Utilization fell to 88.3% from 94.6% a year earlier. Management said rail loadings and demand for leases and repairs were likely to remain pressured until economic activity normalized.
- Unusual items and comparability: The company recorded a $10.9 million inventory write-down related to lower ethanol prices and pandemic-related demand declines, $10.6 million of it in Q1. The CARES Act contributed to tax benefits, including a recorded $10.3 million benefit from analysis of net operating loss carrybacks. TAMH consolidation changed the presentation of ethanol revenue, expenses and noncontrolling interests; 2019 segment results were recast for a business reorganization. Andersons also recorded $2.3 million of restructuring severance costs in Other.
- Capital and impairment: Management planned approximately $100 million of 2020 base-business capital spending, plus up to $14.1 million for railcars and related activity. Although shareholders’ equity exceeded market capitalization, management said it found no impairment trigger at June 30; continued adverse conditions could prompt future impairment considerations.
- Risk and contingencies: The filing highlights uncertainty around COVID-19 effects on demand, operations, transport and seasonality; commodity-price exposure and potential margin deposits; and variable-rate borrowing exposure. The company said current legal proceedings were unlikely to cause a material loss, while noting litigation outcomes remain uncertain. A $5.0 million reserve for a non-regulatory litigation claim had been recorded in Q1 2019.
Most important facts for investors to verify
- Whether ethanol demand, production margins and plant utilization recover, and whether pandemic-related inventory charges or other operating effects recur.
- Whether Trade’s expected harvest benefit and Plant Nutrient’s volume/cost improvements offset weak margins, and whether Rail utilization and lease rates stabilize.
- How much of first-half operating cash flow reflects sustainable earnings versus seasonal working-capital movements, and whether available credit and covenant headroom remain adequate.
- The extent to which CARES Act tax benefits, noncontrolling interests and TAMH consolidation affect reported earnings and comparability; the filing reports $24.7 million of unrecognized tax benefits at June 30, 2020.
- Whether adverse market conditions create future impairment indicators or materially change the company’s capital-spending plans.