The Andersons, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results; amounts below are in millions of dollars unless noted. Results generally reflect continuing operations, with the Rail businesses classified as discontinued operations.
Business context and key results
The company operates in Trade, Ethanol and Plant Nutrient. Management cautions that agricultural commodity price changes can substantially increase reported sales and cost of sales without a comparable effect on gross profit.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $2,998.8 | $1,885.6 | $8,829.3 | $5,556.3 |
| Gross profit | $121.8 | $93.2 | $398.7 | $242.2 |
| Gross margin | 4.1% | 4.9% | 4.5% | 4.4% |
| Income (loss) from continuing operations before tax | $16.3 | $(2.4) | $84.1 | $(50.7) |
| Net income (loss) attributable to Andersons | $15.7 | $(1.1) | $74.3 | $(8.3) |
| Diluted EPS | $0.46 | $(0.03) | $2.21 | $(0.25) |
Q3 2021 income attributable to Andersons included $1.8 million from discontinued operations; nine-month income included $7.5 million. Gross margin is calculated as gross profit divided by revenue and should be interpreted in light of commodity-price-driven trading revenue.
Cash flow, liquidity and debt
- Operating cash flow was $119.1 million for the first nine months, versus $195.8 million in 2020. Management attributed the decline mainly to working-capital movements associated with higher commodity prices, while noting operating cash flow excluding working-capital changes was stronger.
- Investing activities provided $519.5 million, including $543.1 million of proceeds from the Rail Leasing sale; financing activities used $450.6 million, largely reflecting debt repayment. Cash rose to $216.9 million from $29.1 million at year-end 2020.
- Continuing-operations working capital was $762.1 million, up from $426.6 million at September 2020. The company reported $1,169.9 million available under $1,297.5 million of total credit capacity.
- At September 30, total short- and long-term debt, including current maturities, was approximately $930.3 million. The company reported $281.2 million short-term debt, $106.3 million current maturities and $542.8 million long-term debt.
- Management expects approximately $85 million of 2021 capital expenditure for continuing operations. It paid $17.5 million in dividends in the first nine months and declared a further $0.175-per-share dividend payable October 22, 2021.
Changes, segment performance and outlook
- Revenue and gross profit rose substantially year over year, driven in significant part by higher commodity prices and stronger trading conditions. Trade benefited from merchandising opportunities, geographic dislocations and strong elevation margins.
- For Q3, Trade income before tax attributable to the company was $42.0 million versus $5.9 million a year earlier. Ethanol was a $3.6 million loss versus $1.1 million income, with higher corn basis offsetting improved crush margins and co-product values. Plant Nutrient was a $5.8 million loss versus $5.4 million, as improved margins were offset by expenses and input-cost pressures.
- For the first nine months, Trade, Ethanol and Plant Nutrient each improved versus 2020. Management cited improved merchandising and elevation results, the recovery in ethanol demand and crush margins, and stronger fertilizer demand, volumes and margins.
- Management expected continued Trade merchandising opportunities into harvest and said high prices and strong elevation margins were expected to continue into 2022. It anticipated strong demand across Plant Nutrient product lines amid tight supplies. These are operating expectations; the filing provides no consolidated earnings or revenue guidance.
- On August 16, 2021, the company agreed to sell Rail Leasing assets for approximately $543.1 million in cash. It also announced plans to divest the remaining Rail businesses, including Rail Repair. Rail results are presented as discontinued operations for all periods; the sale contributed to debt reduction and cash growth, while stranded costs affected “Other” results.
Risks, contingencies and unusual items
- The company considered an ELEMENT subsidiary virtually certain to breach its debt-service coverage covenant at December 31, 2021. Its $70 million non-recourse debt was classified as current; absent a waiver or cure, the lender could accelerate debt or restrict further borrowing. The company said it was complying with its other financial covenants.
- Commodity-price volatility, margin calls on derivatives, variable-rate borrowing, weather and agricultural conditions, COVID-19 recovery, economic conditions and litigation may affect results. Management said no material changes had occurred in market risks or risk factors since the 2020 Form 10-K.
- Q3 included a $14.6 million gain from selling a Trade grain location in Champaign, Illinois. The Rail sale also generated significant cash proceeds; the filing does not provide a clear amount for any gain on the Rail Leasing sale.
- A claim related to trading activity at a previously unconsolidated subsidiary could result in a loss above the accrued amount, though management did not consider the excess net of an acquisition-related indemnity material. Management said other reasonably possible claim losses were not material and believed current defendant litigation was unlikely to be material.
- Disclosure controls were assessed as effective at September 30, 2021; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether ELEMENT obtains a covenant waiver or otherwise avoids the expected year-end breach, and the resulting debt classification and liquidity impact.
- Completion, proceeds and financial effects of the remaining Rail divestitures, including any continuing stranded costs.
- How much reported revenue and earnings growth reflects commodity prices and derivative mark-to-market effects versus sustainable underlying margins.
- Whether operating cash flow improves as commodity-related working-capital needs change, and whether planned capital spending remains near the stated estimate.
- Potential tax, legal and other consequences of the Rail sale and the trading-related litigation claim.