Andersons, Inc. — Q2 2018 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2018. Andersons operates Grain, Ethanol, Plant Nutrient and Rail businesses; results are seasonal, and management cautions that commodity-driven revenue changes may not reflect changes in underlying performance. Retail operations closed in 2017.
Financial performance
Amounts below are in millions of dollars except per-share data. Q2 comparisons are affected by adoption of ASC 606, which changed certain Grain transactions from gross to net presentation without a material effect on earnings.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales and merchandising revenue | $911.4 | $993.7 | $1,547.1 | $1,845.7 |
| Gross profit | $90.5 | $87.8 | $154.2 | $164.3 |
| Income (loss) before tax | $29.2 | $(19.1) | $26.9 | $(24.6) |
| Net income (loss) attributable to Andersons | $21.5 | $(26.7) | $19.8 | $(29.7) |
| Basic and diluted EPS | $0.76 | $(0.94) | $0.70 | $(1.05) |
| Interest expense | $7.8 | $6.0 | $14.8 | $12.1 |
- Q2 gross profit rose $2.6 million despite lower reported revenue; six-month gross profit declined $10.1 million. Revenue is not directly comparable because ASC 606 reduced reported revenue and cost of sales by $183.1 million in Q2 and $345.0 million for the first half. On the prior accounting basis, 2018 revenue would have been $1,096.7 million for Q2 and $1,896.6 million for the first half.
- Q2 asset impairment charges were $6.3 million: $1.6 million in Grain and $4.7 million in Rail. Prior-year Q2 and first-half results included a $42.0 million Plant Nutrient goodwill impairment.
- Operating cash flow was a use of $43.9 million in the first half, versus a use of $45.2 million a year earlier. Investing cash outflow was $46.4 million; financing provided $114.1 million. Cash ended the period at $58.6 million.
- At June 30, current assets were $879.4 million and current liabilities $656.7 million, giving working capital of $222.7 million. Total debt was approximately $634.3 million, including $185.0 million short-term debt. Credit facilities totaled $950.0 million, with $642.1 million available. The company reported compliance with financial covenants.
- Declared dividends were $0.165 per share in Q2; first-half dividends declared were $0.33 per share.
Changes and segment results
- Grain: Q2 pretax income improved to $9.9 million from $6.9 million, supported by stronger merchandising margins and increased earnings from affiliates, particularly Lansing Trade Group. The first-half increase was $8.0 million.
- Ethanol: Q2 pretax income attributable to Andersons was $6.1 million versus $4.7 million. Higher shipped volumes and affiliate earnings helped; first-half gross profit nevertheless declined as average ethanol selling prices fell.
- Plant Nutrient: Q2 pretax income was $15.1 million versus a prior-year loss of $25.8 million, largely because the prior period included the $42.0 million goodwill impairment. Current-quarter gross profit fell $2.8 million as primary and specialty nutrient margins compressed. First-half gross profit declined $6.3 million.
- Rail: Q2 pretax income fell to $0.9 million from $5.9 million, mainly reflecting the $4.7 million impairment to scrap about 550 idle cars and higher interest expense. Utilization improved to 89.5% from 84.4%.
- Equity-method earnings increased to $9.8 million in Q2 from $6.4 million, and to $13.4 million for the first half from $4.5 million.
Outlook, risks and unusual items
- No quantified company-wide earnings guidance is provided. Management expects Plant Nutrient wholesale volume and margin pressures to remain a challenge through the rest of 2018. Grain plans to pursue opportunities from market volatility; Rail cited stronger GDP growth as a potential support while noting tank-car certification costs and fewer certain car-sale gains. Management expects the new bio-refinery to be completed and operational in 2019.
- The bio-refinery construction had approximately $129.2 million of remaining contractual obligations at June 30, including $12.9 million prepaid. The company expected 2018 Rail Group asset purchases and related lease investment of $145 million, with about $125 million expected to be funded through asset sales/dispositions or non-recourse debt; base-business capital spending was estimated at about $60 million.
- Seasonal borrowing needs, variable interest rates, commodity-price movements and possible margin deposits can affect liquidity and earnings. Management said available liquidity should fund operations, capital spending and dividends in the foreseeable future.
- ASC 606 adoption reduced opening retained earnings by $8.4 million and recorded Rail assets and related financing obligations; management said the impact on 2018 net income, EPS and operating cash flow was immaterial. Adoption of the new lease standard was expected to bring certain rail and other lease assets and liabilities onto the balance sheet beginning in 2019; the impact was still being evaluated.
- The company had not finalized certain Tax Act accounting, including its GILTI accounting policy. The filing gives inconsistent Q2 effective tax rates: the tax note reports 26.6%, while MD&A reports 23.6%; the reported tax provision and pretax income imply approximately 26.6%.
- Management reported current legal proceedings were not expected to be material, while noting future claims could adversely affect results. Disclosure controls were assessed as effective; ERP implementation was ongoing. The company reported no material change in market risk during the quarter.
- Subsequent events: a July agreement to sell a convertible preferred investment was expected to generate a pretax gain of about $3.9 million; an August amendment increased Railcar Leasing’s credit facility to $200 million.
Important facts for investors to verify
- How reported revenue and margins trend on a comparable basis after ASC 606’s gross-to-net presentation changes.
- Whether Plant Nutrient margin pressure persists and whether Grain and affiliate earnings remain strong.
- Progress, total funding needs and remaining commitments for the bio-refinery, alongside planned Rail and base-business capital spending.
- Seasonal borrowing, available facility capacity, variable-rate exposure and any required commodity margin deposits.
- Final Tax Act estimates and the effective-tax-rate discrepancy in the filing; also monitor the expected balance-sheet effect of ASC 842 lease adoption.
- Execution of the Rail car-scrapping plan, utilization gains and the impact of impairment and certification costs.