Business context and reporting period
The Andersons, Inc. filed this Form 10-K for the fiscal year ended December 31, 2020. The diversified agriculture and logistics company reports four segments: Trade, Ethanol, Plant Nutrient, and Rail. Comparisons below are with fiscal 2019; 2019 Ethanol results are not fully comparable because the company began consolidating the TAMH ethanol joint venture in October 2019.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Sales and merchandising revenue | $8.208 billion | $8.170 billion |
| Gross profit | $404.9 million | $517.9 million |
| Gross margin | 4.9% | 6.3% |
| Net income (loss) attributable to Andersons | $7.7 million | $18.3 million |
| Diluted earnings per share | $0.23 | $0.55 |
| Operating cash flow | $(74.4) million | $348.6 million |
| Capital expenditures | $77.1 million | $161.0 million |
Consolidated net loss was $14.2 million, compared with net income of $15.1 million in 2019; a $21.9 million net loss attributable to noncontrolling interests accounts for the difference between consolidated and Andersons-attributable results. The company reported a $24.5 million pretax loss, including noncontrolling interests. Its non-GAAP segment measure of pretax loss attributable to the company was $2.5 million, versus income of $31.4 million in 2019.
Working capital was $484.7 million, down $20.7 million year over year. Cash, cash equivalents and restricted cash totaled $29.1 million, down $25.8 million. Total debt, including short-term debt and current maturities, was approximately $1.396 billion, compared with $1.226 billion in 2019; this includes both recourse and non-recourse debt. The company reported $868.4 million of borrowing capacity available under its borrowing arrangements and said it was in compliance with debt covenants. Financing activities provided $136.3 million of cash, while investing activities used $86.8 million.
Segment pretax income (loss) attributable to the company: Trade $24.7 million (2019: loss of $17.3 million); Ethanol loss of $25.4 million (2019: income of $50.9 million); Plant Nutrient $16.0 million (2019: $9.2 million); Rail $2.6 million (2019: $15.1 million); and Other loss of $20.4 million (2019: $26.5 million).
Material changes versus 2019
- Revenue was broadly flat, but gross profit fell $113.0 million. Management noted that commodity price changes can raise or lower revenue and cost of sales together, so revenue alone may not indicate underlying performance.
- Ethanol results deteriorated sharply as pandemic-related reductions in driving and fuel demand drove margins negative for much of the year. The 2019 comparison also benefited from a $35.2 million gain on remeasurement of pre-existing equity-method investments in the TAMH merger.
- Trade results improved relative to 2019 reported results, which included $38.5 million of asset impairments and $8.0 million of acquisition-related costs. In 2020, weaker grain-asset and food/specialty-ingredient results were partly offset by stronger merchandising.
- Plant Nutrient improved with more favorable spring and fall planting conditions, higher volumes, cost reductions, and working-capital management. Product volume increased to 2.352 million tons from 2.055 million.
- Rail weakened as lease rates, utilization, rail loadings, and car sales declined, with defaults particularly in sand and ethanol markets. Utilization was 88.1%, down 4.3 percentage points, and managed assets fell to 23,232 from 24,884.
- Operating cash flow swung from positive $348.6 million to negative $74.4 million, mainly due to working-capital needs associated with higher commodity prices and lower operating results.
Outlook, risks, contingencies, and unusual items
- Management expected Trade merchandising to benefit from improved Eastern Corn Belt harvests, robust exports, stronger basis, and merchandising opportunities, while warning that inverse corn and soybean markets could reduce grain-storage income.
- For 2021, Ethanol faced continued margin pressure from oversupply, high corn prices, and potentially subdued oil and gasoline demand; higher coproduct values were a partial offset. Rail recovery could be slow, with lease rates expected to remain relatively flat until later in 2021. Plant Nutrient expected further improvement, conditional on higher commodity prices and another strong planting season.
- The company planned approximately $100 million to $125 million of 2021 capital spending, around 60% for maintenance. It targeted a long-term debt-to-EBITDA ratio below 2.5 times by the end of 2023.
- COVID-19 effects remained uncertain. Risks include fuel and ethanol demand, commodity-price volatility and margin calls, weather and crop conditions, supply-chain disruption, interest rates, counterparty defaults, regulation, environmental liabilities, rail demand, cybersecurity, and ERP implementation costs.
- 2020 included an $11.7 million inventory write-down related to lower ethanol market prices and $36.6 million of net commodity-derivative losses. A $10.3 million income-tax benefit included a $14.8 million benefit associated with the CARES Act.
- The company disclosed a non-regulatory litigation claim tied to penalties and fines paid by a previously unconsolidated subsidiary for 2018 trading activity. It believes it has defenses, but says any loss above accrued amounts, net of an acquisition-related indemnity, cannot currently be determined. Management considered other current proceedings unlikely to result in material liabilities beyond accruals.
- Management reported no goodwill impairment in 2020, but goodwill for Ethanol, Grain Storage and Merchandising, and Food and Specialty Ingredients was considered more exposed to future impairment if projected cash flows weakened or discount rates rose. The auditor identified goodwill valuation for the Grain Storage and Merchandising and Food and Specialty Ingredients reporting units as a critical audit matter.
- After year-end, the company arranged a $250 million short-term term note due December 31, 2021, disclosed in the subsequent-events note.
Important facts for investors to verify
- Review the cash-flow and working-capital reversal, including the effect of commodity prices, derivative collateral, and seasonal borrowing needs.
- Assess whether Ethanol margins and demand recover, and whether Rail utilization and lease rates stabilize.
- Track debt levels, variable-rate exposure, covenant headroom, available credit, and the repayment of the $250 million term note.
- Evaluate the durability of Trade and Plant Nutrient performance and the assumptions underlying management’s 2021 outlook and capital-spending plan.
- Monitor the trading-related litigation, tax audits and unrecognized tax benefits, and goodwill valuation headroom.