Andersons, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Amounts below are in millions of dollars unless otherwise noted. The company operates in Grain, Ethanol, Plant Nutrient, and Rail; its Retail business closed in 2017.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $685.6 | $836.6 | $2,232.7 | $2,682.3 |
| Gross profit | $53.9 | $69.7 | $208.0 | $234.0 |
| Gross margin | 7.9% | 8.3% | 9.3% | 8.7% |
| Net income (loss) attributable to Andersons | $(2.1) | $2.5 | $17.7 | $(27.2) |
| Diluted EPS | $(0.07) | $0.09 | $0.62 | $(0.96) |
Q3 pre-tax loss was $3.6 million, versus $5.0 million of pre-tax income a year earlier. Nine-month pre-tax income was $23.2 million, compared with a $19.6 million loss. Prior-year results included a $42.0 million Plant Nutrient goodwill impairment.
Operating cash flow for the first nine months was $28.8 million, down from $60.7 million. Investing used $115.9 million, including increased capital spending on the bio-refinery; financing provided $69.0 million. Cash declined by $18.1 million from year-end 2017 to $16.8 million.
At September 30, 2018, working capital was $187.6 million, versus $214.3 million a year earlier; current assets were $878.3 million and current liabilities $690.7 million. Total debt was approximately $585.0 million, including $132.0 million short-term debt, versus approximately $444.3 million a year earlier. The company reported $823.1 million available under its borrowing lines and compliance with financial covenants.
Material changes and operating trends
- Grain: Q3 pre-tax loss was $8.6 million, versus $2.6 million income. Management attributed the deterioration mainly to lower basis levels and adverse mark-to-market changes on grain inventory, which it expected to substantially rebound before year-end. Nine-month results were also affected by $1.6 million of impairment charges; affiliate earnings improved.
- Ethanol: Q3 segment pre-tax income attributable to Andersons was $9.1 million, up from $6.1 million. Higher yields and shipped ethanol volumes, improved co-product sales, and better affiliate results contributed. Nine-month ethanol shipments rose 11%.
- Plant Nutrient: Q3 segment loss was $8.0 million, approximately flat year over year, with lower sales volume and specialty nutrient margin compression. Nine-month segment income improved to $8.2 million from a $27.1 million loss, largely because the prior period included the $42.0 million goodwill impairment.
- Rail: Q3 segment pre-tax income was $5.7 million, versus $6.1 million. Higher utilization helped, but renewal lease rates remained lower than expiring rates. Utilization increased to 92.0% from 85.8%. Nine-month segment income declined to $10.6 million from $18.1 million, including $4.7 million of impairment for idle, out-of-favor cars.
Outlook, risks, and unusual items
- Management expected Grain to benefit from filling remaining storage capacity at attractive prices and potential basis appreciation in Q4; this is forward-looking and depends on market conditions.
- The new bio-refinery was under construction and expected to be operational in 2019; management later described a mid-2019 target. Remaining design/build obligations were approximately $105.9 million, including $10.5 million prepaid.
- For 2018, the company expected approximately $120 million of Rail Group railcar and related investment, with about $100 million expected to be funded by asset sales/dispositions or non-recourse debt. Base-business capital spending, excluding rail leasing activity, was expected to be about $60 million.
- On October 15, 2018, Andersons agreed to acquire the remaining approximately 67.5% of Lansing Trade Group for approximately $305 million, subject to closing adjustments, and assume about $166 million of long-term debt. Closing was expected in January 2019; funding was planned through cash, shares, and the existing credit line.
- ASC 606 adoption changed presentation, including net rather than gross reporting for certain Grain origination transactions and recognition of certain Rail assets and financing obligations. The company said the impact on net income and EPS was immaterial. For comparison, Q3 revenue under prior guidance would have been $858.8 million and nine-month revenue $2,755.4 million; reported revenue is therefore not directly comparable without considering the accounting change.
- Q3 included a $3.9 million gain on sale of an investment and a $1.2 million increase in value of another investment. Tax accounting under the 2017 Tax Act remained incomplete; further adjustments could be recorded in Q4.
- Key exposures include seasonal working-capital needs, commodity price and margin-call risk, variable interest rates, and pressure on Rail lease renewal rates. The company stated liquidity should be adequate for operations, capital expenditures, and dividends. It reported no material change in market risk during the quarter.
- Legal claims arise in the ordinary course; management considered currently accrued matters unlikely to have a material adverse effect, while noting future claims could do so. Disclosure controls were reported effective as of September 30, 2018.
Important facts for investors to verify
- Whether Grain basis and inventory mark-to-market losses rebounded as management anticipated, and how commodity positions and collateral needs evolved.
- Liquidity, seasonal borrowing peaks, debt costs, covenant headroom, and financing for the bio-refinery and planned Lansing acquisition.
- Acquisition closing terms, final consideration and share issuance, assumed debt, and subsequent consolidated results of Lansing and Thompsons.
- Bio-refinery construction spending, schedule, and operational start; actual 2018 capital expenditures versus guidance.
- Ongoing Plant Nutrient margin performance and Rail utilization, renewal rates, and impairment or asset-sale developments.
- Final Tax Act accounting and the effects of ASC 606 and the forthcoming lease-accounting standard on reported balance-sheet debt and comparability.