The Andersons, Inc. — Q2 2017 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2017. The Andersons operates in Grain, Ethanol, Plant Nutrient, Rail, and Retail. Its businesses are seasonal, and management cautions that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $993.7 million | $1,064.2 million | $1,845.7 million | $1,952.1 million |
| Gross profit | $87.8 million | $97.0 million | $164.3 million | $164.8 million |
| Gross margin | 8.8% | 9.1% | 8.9% | 8.4% |
| Net income (loss) | $(26.7) million | $15.4 million | $(29.8) million | $(0.2) million |
| Diluted EPS | $(0.94) | $0.51 | $(1.05) | $(0.01) |
Key drivers and changes. Q2 included a $42.0 million noncash goodwill impairment in the Plant Nutrient segment; without a corresponding tax benefit, this materially affected reported earnings and tax rates. The Plant Nutrient segment also faced depressed prices, compressed margins, lower volumes, and weak farm income. Grain improved substantially on higher storage income and better affiliate results. Ethanol revenue and volumes rose, but Q2 margins and affiliate earnings weakened amid high industry production and stocks and lower DDG margins. Rail earnings declined, reflecting lower utilization and leasing results. Retail closed its remaining stores during Q2; first-half exit charges totaled $11.3 million.
Cash, debt, and liquidity
- Cash and cash equivalents were $18.9 million at June 30, 2017, down from $31.4 million a year earlier.
- Operating cash flow was a use of $45.2 million for the first half, compared with a use of $194.4 million in 2016. Investing used $64.2 million; financing provided $65.7 million.
- Working capital was $194.9 million, versus $227.7 million at June 30, 2016.
- Short-term debt was $124.0 million; current maturities of long-term debt were $62.5 million; long-term debt excluding current maturities was $354.1 million. Total reported debt was approximately $540.5 million.
- Borrowing capacity was $820.0 million, with $633.5 million available at quarter-end. The company reported compliance with financial covenants and said liquidity should be adequate for operations, capital expenditures, and dividends.
- First-half dividends paid were $9.0 million. A $0.16-per-share dividend was declared for payment in July 2017.
Outlook, risks, and unusual items
- Management expected depressed Plant Nutrient market conditions to continue during 2017. The wholesale nutrient reporting unit’s fair value equaled its carrying value after impairment; $17.8 million of goodwill remained at risk of further impairment if performance or assumptions deteriorate.
- Rail management expected utilization to continue recovering modestly and lease rates to remain steady through year-end, with increased harvest demand in Q4. The railcar market remained oversupplied and lease rates under pressure.
- For 2017, the company expected approximately $145 million in railcar, barge, and related lease spending, partly offset by about $120 million in asset sale proceeds, plus approximately $70 million in base-business capital spending.
- Management estimated a 99.2% 2017 annual effective tax rate, primarily reflecting the nondeductible goodwill impairment.
- Commodity prices and derivatives, seasonal borrowing needs, and variable interest rates can affect results and liquidity. Management reported no material change in market risk during the quarter.
- The company disclosed ordinary-course litigation and claims; it said the estimated range of reasonably possible losses was not material and current defendant proceedings were unlikely to be material, while noting future claims could have an adverse effect.
- Retail liquidation was substantially complete at June 30; $10.0 million of property was classified as held for sale. A Florida farm-center sale generated a $4.7 million gain in Q1.
Important facts for investors to verify
- How much of the reported loss and elevated tax rate reflects the $42.0 million goodwill impairment, and what are the assumptions behind the remaining $17.8 million wholesale nutrient goodwill valuation?
- Whether Plant Nutrient demand, pricing, and margins stabilize, and whether further impairment or exit-related costs arise.
- Whether Grain’s improved storage income and planned second-half grain sales persist, and how commodity-price movements affect derivative positions and working capital.
- Whether Rail utilization and lease rates recover as management expected, alongside planned fleet investment and asset dispositions.
- Whether cash generation, seasonal borrowing, and capital spending remain consistent with available liquidity and covenant compliance.