Business context and reporting period
The Andersons, Inc. (Nasdaq: ANDE) filed this Form 10-K for the fiscal year ended December 31, 2016. The diversified company operates Grain, Ethanol, Plant Nutrient, Rail and Retail businesses, with significant commodity and seasonal exposure.
Financial performance and position
- Revenue: $3.925 billion, down 6.5% from $4.198 billion in 2015. Gross profit was $345.5 million, down 8.1%; gross margin was approximately 8.8%, compared with 9.0%.
- Profit: Net income attributable to Andersons was $11.6 million, or $0.41 per diluted share, versus a $13.1 million loss, or $(0.46) per share, in 2015. The effective tax rate was 32.3%.
- Cash flow: Operating cash flow was $39.6 million, compared with $154.1 million in 2015. Cash and cash equivalents at year-end were $62.6 million.
- Liquidity: Working capital was $258.4 million, up from $241.5 million. The company reported $779.6 million available under its borrowing arrangements at year-end; peak short-term borrowings during 2016 were $412.0 million.
- Debt and equity: Long-term debt, excluding current maturities, was $397.1 million; current maturities were $47.5 million and short-term debt was $29.0 million. Total equity was $790.7 million. The company was in compliance with debt covenants.
- Capital returns and spending: Dividends declared were $0.625 per share for 2016. Capital expenditures were $77.7 million. Management expected approximately $105 million of conventional capital spending in 2017, plus $158 million for rail assets, partly offset by an estimated $133 million of related sales or financings.
Material changes versus 2015
- 2016 returned to a modest profit from a 2015 loss. The comparison is affected by 2015 charges of $56.2 million for goodwill impairment and $51.4 million for pension settlement; no goodwill impairment or pension settlement charge was recorded in 2016.
- Equity in affiliate earnings fell to $9.7 million from $31.9 million, principally reflecting a $9.9 million share of losses at Lansing Trade Group and weaker grain-affiliate results.
- Segment pretax results were mixed: Grain recorded a $15.7 million loss (2015: $9.4 million loss); Ethanol income declined to $24.7 million from $28.5 million; Plant Nutrient income improved to $14.2 million from $0.1 million; Rail income fell to $32.4 million from $50.7 million; and Retail recorded an $8.8 million loss.
- Investing cash outflow decreased to $28.2 million from $238.5 million, largely because the prior year included the $128.5 million Kay Flo acquisition. In 2016, the company sold eight Iowa grain and agronomy locations for $54.3 million.
- Fourth-quarter 2016 revenue was $1.113 billion and net income attributable to the company was $10.1 million, compared with $1.183 billion of revenue and a $47.0 million net loss in fourth-quarter 2015.
Outlook, commentary, risks and unusual items
- The company announced in January 2017 that it would close all Retail operations in the first half of 2017. It recorded $6.5 million of 2016 asset impairments and estimated additional severance and shutdown costs of $9 million to $14 million; proceeds and timing from property dispositions were uncertain.
- The Albion ethanol facility expansion, intended to double capacity, was expected to be completed on time and on budget in the first half of 2017. Management cited ample corn supply and improved gasoline and DDG demand as potential support for ethanol margins.
- Management expected 2017 combined corn and soybean acreage in its operating regions to range from flat to a small increase, assuming trend yields. It also reported modest early-2017 improvement in fertilizer shipments, conditional on planting-season expectations.
- Key risks include volatile commodity prices and basis exposure, margin calls and liquidity needs, weather and crop conditions, ethanol input/output margin swings, railcar utilization and storage costs, interest-rate exposure, counterparty performance, regulation and environmental liabilities. Commodity derivatives are treated as economic risk-management instruments but are not designated for hedge accounting.
- Other notable items: a $2.3 million impairment followed the closure of a cob facility; Rail utilization averaged 87.8%, down 4.6 percentage points; and the company’s ERP project had experienced higher costs and delays than initially planned. Management believed liquidity would be adequate for operations, capital spending and dividends in the foreseeable future.
Important facts for investors to verify
- Whether the Retail closure is completed within the stated timetable and whether shutdown costs and asset-sale proceeds align with estimates.
- Whether operating cash flow recovers after its sharp decline, and how working-capital movements and seasonal borrowing needs develop.
- Whether Grain affiliate performance, particularly Lansing Trade Group, and Grain segment profitability improve.
- Whether the Albion expansion meets its schedule and budget and delivers expected production and margins.
- Whether Rail utilization and leasing economics stabilize, and whether planned rail-asset spending is matched by the expected sales or financing.
- How the ERP implementation and adoption of new lease and revenue accounting standards affect costs, reported assets and liabilities.