The Andersons, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; filed August 8, 2022. The company operates in Trade, Renewables and Plant Nutrient. Rail is presented as discontinued operations following divestitures. Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Sales and merchandising revenue | $4,450.6 | $3,235.8 | $8,428.6 | $5,830.5 |
| Gross profit | $230.8 | $163.4 | $350.4 | $276.8 |
| Gross margin | 5.2% | 5.1% | 4.2% | 4.7% |
| Income from continuing operations | $102.4 | $44.0 | $108.9 | $53.8 |
| Net income attributable to The Andersons | $79.8 | $43.5 | $85.3 | $58.6 |
| Diluted EPS attributable to common shareholders | $2.32 | $1.30 | $2.48 | $1.74 |
Q2 pre-tax income from continuing operations rose to $118.2 million from $53.7 million; first-half pre-tax income was $128.8 million versus $67.8 million. Q2 net income included a $0.7 million loss from discontinued operations; the first-half discontinued-operations loss was $1.3 million. Reported revenue growth largely reflects higher commodity prices and volumes; management cautions that revenue changes may not indicate underlying performance, for which gross profit is more informative.
- Cash flow: First-half operating cash use was $721.8 million, versus $245.5 million used in the prior-year period, primarily reflecting working-capital requirements. Investing cash use was $30.1 million; financing provided $622.1 million. Cash declined $130.4 million to $86.0 million.
- Liquidity and debt: Working capital from continuing operations was $984.0 million, compared with $540.4 million a year earlier. Short-term debt was $1,161.4 million; current maturities of long-term debt were $54.0 million and long-term debt was $563.4 million. Total line capacity was $2,501.7 million, with $1,315.2 million available. The company reported compliance with financial covenants.
- Other measures: Q2 and first-half effective tax rates were 13.3% and 15.4%, respectively. First-half capital expenditures and capitalized software purchases were $43.5 million.
Material changes and management commentary
- Trade: Q2 segment pre-tax income increased to $23.7 million from $13.8 million, supported by basis improvements, strong domestic merchandising and feed-ingredient margins. Higher borrowing costs and an approximately $4.5 million impairment of an equity-method investment were offsets. First-half segment pre-tax income was broadly flat year over year.
- Renewables: Q2 segment pre-tax income rose to $67.8 million from $26.2 million, reflecting stronger production margins and yields, plus $24.4 million of positive mark-to-market impact (nearly $18 million reversed prior losses) and USDA relief proceeds. Of $17.6 million in Biofuel Producer COVID relief funds received by facilities, $8.9 million was included in pre-tax income attributable to the company. Higher export demand supported ethanol prices, while high gasoline prices weighed on domestic seasonal demand.
- Plant Nutrient: Q2 segment pre-tax income increased to $38.3 million from $24.0 million. Lower sales volumes were more than offset by strong margins from well-positioned fertilizer inventory. Management noted that high prices could lead customers to delay purchases.
- First-half results also benefited from strong Renewables and Plant Nutrient performance. The company said elevated global demand and supply disruption could support nutrient prices, while Trade merchandising opportunities and elevation margins were expected to continue through the rest of 2022.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expected approximately $100 million of 2022 capital investment in property, plant and equipment for continuing operations and considered liquidity sufficient for operations, capital expenditures and debt service.
- The company is exposed to commodity-price and interest-rate movements. It uses derivatives to manage commodity exposures, but commodity derivative fair-value changes are generally recorded in earnings rather than hedge accounting. Management warned that variable-rate short-term borrowing makes rising interest rates a profitability risk, and volatile grain prices can increase required margin deposits.
- Russia’s invasion of Ukraine may disrupt grain and fertilizer supply and logistics, increase price volatility and input costs, and affect the company’s grain origination activity and counterparties. The potential impact remained uncertain.
- During Q2, the company settled an EPA matter concerning alleged recordkeeping and reporting violations at ethanol facilities for approximately $1.7 million. It also recorded an approximately $4.5 million impairment of an equity-method investment and sold remaining Frac Sand assets for $8.4 million, generating a $3.7 million pre-tax gain.
- On July 8, 2022, the company completed the sale of the remaining Rail Repair assets and certain liabilities for $55.1 million, with an estimated pre-tax gain of approximately $30 million. This is a subsequent event, not Q2 reported income.
- Management said no impairment-triggering event existed at June 30 despite the company’s book equity briefly exceeding its market capitalization during the quarter. It considered current agriculture-sector conditions strong and the long-term outlook positive.
- Management believed current defendant litigation was unlikely to be material, but noted one claim could result in a loss exceeding the accrued amount; the potential excess, net of an acquisition-related indemnity, was not believed material. Management also cautioned that litigation outcomes are inherently uncertain.
Important facts for investors to verify
- How much of Renewables’ Q2 improvement is sustainable, given mark-to-market reversals and COVID relief proceeds.
- Whether elevated commodity prices, working-capital demands and short-term borrowing persist, and the resulting effect of variable interest rates on earnings and liquidity.
- The timing and accounting for the estimated $30 million Rail Repair sale gain and the remaining Rail divestiture-related assets or liabilities.
- Developments in Ukraine-related supply, logistics and counterparty risks, and changes in fertilizer demand or customer purchasing behavior.
- Potential outcomes of the disclosed litigation claim and any further impairment indicators affecting investments or other assets.