The Andersons, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The Andersons operates in Trade, Ethanol, Plant Nutrient, and Rail. Results include the January 1 acquisition of the remaining 67.5% of Lansing Trade Group (LTG), which also brought Thompsons Limited and related entities into consolidation; therefore, year-over-year comparisons are substantially affected by the change in consolidation scope and business mix.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Sales and merchandising revenues | $1,976.8 million | $635.7 million |
| Gross profit | $109.7 million | $63.7 million |
| Gross margin | 5.5% | 10.0% |
| Operating, administrative and general expenses | $113.3 million | $64.3 million |
| Interest expense | $15.9 million | $7.0 million |
| Net loss attributable to The Andersons | $14.0 million; $(0.43) per share | $1.7 million; $(0.06) per share |
| Cash used in operating activities | $122.0 million | $378.7 million |
Revenue expansion largely reflects the LTG acquisition and commodity-trading activity; the company cautions that commodity price movements can increase sales and cost of sales without a similar effect on gross profit. The lower reported gross-margin percentage also reflects the changed business mix.
Cash flow: Investing activities used $205.8 million, including $147.3 million for the acquisition and $44.7 million in property, equipment and software purchases. Financing activities provided $336.1 million. Cash ended the quarter at $30.0 million, versus $22.6 million at year-end 2018.
Balance sheet and liquidity: At March 31, current assets were $1.887 billion and current liabilities $1.446 billion, producing working capital of $440.3 million. Total debt, including short-term debt and current maturities, was approximately $1.472 billion. The company reported $1.029 billion available under its borrowing lines and compliance with financial covenants. Debt and working-capital levels reflect seasonality as well as the acquisition.
Material changes and segment results
- LTG acquisition: Total consideration was $323.9 million, comprising $169.2 million cash, $123.1 million in shares, and $31.5 million in purchase-price holdback or other accrued liabilities. The preliminary allocation includes $113.6 million of goodwill and $116.2 million of intangible assets. The allocation and working-capital adjustment remained subject to finalization.
- Trade: Pretax loss was $17.5 million versus $1.2 million. Management cited difficult market conditions, heavy-rain impacts in Nebraska, acquisition and transaction costs, purchase-accounting effects, and higher interest expense. It plans to focus on integration and synergies.
- Ethanol: Pretax income was $2.4 million versus $2.8 million. Lower industry margins weighed on results; management cited improved plant efficiency and yields and value from the acquired trading team.
- Plant Nutrient: Pretax loss was $3.9 million versus income of $1.1 million. Wet weather delayed sales, and primary and specialty nutrient volumes declined 13% and 10%, respectively. Management described the outlook as challenged.
- Rail: Pretax income was $4.3 million versus $4.0 million. Higher lease income, utilization and repair activity were partly offset by fewer railcar sales and higher expenses. Utilization rose to 95.7% from 87.9%; management said lease rates and utilization likely reached a peak but should remain steady.
The company adopted the new lease standard in Q1, recognizing $85.8 million of operating right-of-use assets and $85.5 million of operating lease liabilities. The quarter also included a $3.5 million pretax loss on derecognition of its prior LTG and Thompsons investments, primarily related to foreign-currency translation, and a $5.0 million reserve for an outstanding litigation claim.
Outlook, risks and unusual disclosures
- The new bio-refinery remained on schedule to begin operations early in Q3 2019. The company expected to contribute about $70 million toward its construction in 2019; remaining construction obligations were approximately $39.7 million at quarter-end.
- For 2019, management expected approximately $160 million of railcar purchases, leases and modifications, with about $135 million expected to be funded through dispositions or non-recourse debt. Base-business capital spending, excluding rail activity and including IT, was expected to be approximately $54 million.
- Management said liquidity should be sufficient for operations, capital expenditures and dividends in the foreseeable future. No numerical full-year earnings guidance is provided in the filing text.
- Key exposures include seasonal working-capital needs, weather-related agricultural demand, commodity-price and derivative-margin requirements, and variable-rate borrowing. The company noted that higher interest rates could materially affect profitability, with some exposure mitigated by hedges.
- The $5.0 million litigation reserve relates to a claim connected with penalties and fines LTG paid in 2018 to settle matters focused on certain trading activity. Management considered other reasonably possible claim losses immaterial and current defendant litigation unlikely to be material, but noted outcomes remain uncertain.
- The filing reports a correction to the May 6 earnings-release revenue and cost figures: a $102.6 million intercompany-elimination correction reduced each amount, with no gross-profit impact. The 10-Q reports revenue of $1,976.8 million and cost of sales of $1,867.1 million.
Important facts for investors to verify
- Track final LTG purchase accounting, working-capital adjustments, integration costs, and the realization of expected synergies.
- Assess the drivers and sustainability of Trade profitability, including commodity-market conditions and the scale of derivative positions.
- Monitor Plant Nutrient sales recovery after weather-related delays and the effect of seasonal inventory on borrowing needs.
- Confirm the bio-refinery’s startup timing, remaining construction spending, and subsequent operating performance.
- Review debt levels, available borrowing capacity, interest-rate hedges, covenant compliance, and cash-flow seasonality.
- Follow resolution of the LTG-related litigation claim and any changes to the recorded reserve.
- Reconcile the earnings-release correction with reported revenue and cost figures; the correction did not affect gross profit, according to the filing.