The Andersons, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparative periods ended June 30, 2018. Unaudited. The company operates in Trade, Ethanol, Plant Nutrient, and Rail. Unless noted, amounts below are in U.S. dollars.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $2,325.0m | $911.4m | $4,301.8m | $1,547.1m |
| Gross profit | $160.7m | $90.5m | $270.4m | $154.2m |
| Gross margin | 6.9% | 9.9% | 6.3% | 10.0% |
| Net income attributable to Andersons | $29.9m | $21.5m | $15.9m | $19.8m |
| Diluted EPS | $0.91 | $0.76 | $0.48 | $0.70 |
- Q2 pretax income was $40.4m versus $29.2m; six-month pretax income was $20.8m versus $26.9m. Q2 net income rose, while six-month net income and EPS declined year over year.
- Six-month operating cash flow was negative $84.8m, compared with negative $43.9m. Investing cash use was $271.4m, including $147.7m for the acquisition, and financing provided $344.4m. Cash ended the period at $11.1m, down from $22.6m at year-end 2018.
- At June 30, working capital was $464.1m, up from $222.7m at June 30, 2018; current assets were $1,768.6m and current liabilities $1,304.6m.
- Debt reported on the balance sheet totaled approximately $1,499.8m, including short-term debt, current maturities, and long-term debt. Total line-of-credit capacity was $1,628.4m, with $1,006.1m available, subject to borrowing limitations. The company reported compliance with financial covenants.
Changes and business drivers
- Revenue growth largely reflects the January 1, 2019 acquisition of the remaining 67.5% of Lansing Trade Group (LTG), and consolidation of Thompsons Limited and related entities. Acquisition-related scale significantly increased Trade revenue and assets, so reported revenue growth is not directly comparable with underlying growth.
- Q2 Trade pretax results improved on stronger corn and wheat basis and merchandising opportunities, but acquisition-related expenses and higher interest costs also increased. Six-month Trade results were lower year over year.
- Ethanol remained profitable in Q2 despite weak margins; results were pressured by compressed industry margins and ethanol oversupply. Plant Nutrient benefited from better margins but faced lower volumes due to unusually wet weather. Rail improved with higher utilization and more cars on lease; Q2 utilization was 94.6%, versus 89.5% a year earlier.
- Q2 results included a $3.1m impairment charge for remaining Tennessee Trade facilities. Acquisition accounting remains preliminary: reported LTG goodwill was $129.8m in the preliminary allocation, and the filing says the valuation and working-capital adjustments were not final.
Outlook, risks, and contingencies
- No company-wide earnings or revenue guidance is provided. Management expects Trade to face second-half uncertainty from extreme weather and crop production in the Eastern Corn Belt; Ethanol margin pressure to continue amid rising corn basis; and Plant Nutrient margins to remain strong, while lawn business headwinds persist. Rail lease rates and utilization were thought to have likely peaked but expected to remain steady.
- Management expected the new bio-refinery to begin operating in Q3 2019. The company anticipated approximately $180m of 2019 base-business capital spending, excluding rail leasing activity, and up to $160m for railcars and related activity; rail purchases were expected to be partly funded by dispositions or non-recourse debt.
- Key exposures include commodity price and basis movements, variable interest rates, seasonal working-capital needs, and potential margin calls on futures. Management said available liquidity should fund operations, capital expenditures, and dividends in the foreseeable future.
- The company recorded a $5.0m reserve for a non-regulatory litigation claim related to penalties and fines paid by LTG in 2018. Management considered other reasonably possible claim losses not material and current defendant litigation unlikely to be material, while noting future claims could adversely affect results.
- Goodwill impairment was not triggered at quarter-end, but management noted that continued weakness could affect the annual assessment. The Thompsons agronomy-asset sale agreement was expected to close in September 2019; the company planned to retain its grain storage and food-processing facilities.
Investor verification priorities
- Check subsequent filings for final LTG purchase-price allocation, working-capital settlement, and acquisition contribution to earnings and cash flow.
- Monitor Trade and Plant Nutrient performance against weather-related crop and volume risks, and Ethanol margins against corn costs and market oversupply.
- Track debt, interest expense, seasonal borrowing, available credit, and commodity collateral requirements.
- Verify bio-refinery completion and start-up, capital spending, rail investment and funding, and the Thompsons agronomy-asset sale closing.
- Assess progress on goodwill impairment testing and resolution of the $5.0m litigation claim.