The Andersons, Inc. — 2017 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017, including fourth-quarter results. The Andersons is a diversified agriculture-focused company operating in Grain, Ethanol, Plant Nutrient, Rail and Retail. It closed its retail stores during 2017; three of the four retail properties had been sold by year-end.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Sales and merchandising revenues | $3,686.3 million | $3,924.8 million |
| Gross profit | $318.8 million; 8.7% margin | $345.5 million; 8.8% margin |
| Net income attributable to Andersons | $42.5 million | $11.6 million |
| Diluted earnings per share | $1.50 | $0.41 |
| EBITDA (non-GAAP) | $87.4 million | $123.9 million |
| Cash from operating activities | $75.3 million | $39.6 million |
| Working capital | $260.5 million | $258.4 million |
| Long-term debt, excluding current maturities | $418.3 million | $397.1 million |
| Cash and cash equivalents at year-end | $34.9 million | $62.6 million |
Revenue fell 6.1%; gross profit fell 7.7%. The company reported a pretax loss of $20.5 million, versus pretax income of $21.4 million in 2016, but net income attributable to the company increased. The difference was principally the $63.1 million income tax benefit, including a provisional $73.5 million net benefit from U.S. tax reform. A $59.1 million Plant Nutrient goodwill impairment and $10.9 million Grain asset impairment also weighed on pretax results.
Fourth-quarter revenue was $1,004.1 million versus $1,113.1 million in Q4 2016; gross profit was $84.8 million versus $103.7 million. Net income attributable to the company was $69.7 million, or $2.47 diluted EPS, compared with $10.1 million, or $0.36, in Q4 2016. The fourth-quarter result includes the tax benefit from U.S. tax reform.
Operating cash flow improved by $35.7 million year over year. Investing activities used $113.5 million, including $143.0 million of Rail asset purchases, partly offset by $36.9 million of Rail asset sale proceeds. Total current liabilities were $738.7 million against current assets of $999.2 million. The company reported $660.5 million of remaining availability under its borrowing arrangements at year-end and compliance with debt covenants. It paid $18.2 million in dividends in 2017; the declared quarterly dividend rose to $0.165 per share for the January 2018 payment.
Material changes and segment developments
- Grain: Pretax income improved to $12.8 million from a $15.7 million loss. Higher storage income and improved risk-management, trading and affiliate earnings helped, despite 24% fewer bushels sold. The company recorded $10.9 million of asset impairment and agreed in February 2018 to sell three Tennessee locations.
- Ethanol: Pretax income attributable to the company declined to $18.9 million from $24.7 million. Shipped ethanol volume rose 39%, but higher input costs and weak ethanol and distillers grains margins pressured results. Management expected high industry production and inventory levels to continue affecting margins in 2018.
- Plant Nutrient: The segment recorded a $45.1 million pretax loss, compared with $14.2 million of pretax income. Lower prices and competitive oversupply reduced gross profit, and a $59.1 million goodwill impairment eliminated goodwill in the Wholesale reporting unit. Management expected low prices and oversupply to persist.
- Rail: Pretax income declined to $24.8 million from $32.4 million. Lower lease utilization and average lease rates hurt leasing performance; utilization averaged 85.0%, down from 87.8%. Management expected higher tank-car recertification costs in 2018.
- Retail: All stores closed and liquidation was completed in 2017. Exit charges were $11.5 million; property and fixture sales generated gains.
Outlook, risks and unusual items
- No consolidated numerical earnings guidance is provided. Management estimated 2018 corn plantings of 87–90 million acres and soybean plantings of 89–92 million acres, and said normal weather could support grain storage and merchandising opportunities.
- Management estimated 2018 spending of about $65 million on conventional property, plant, equipment and ERP-related capital projects, plus $145 million for Rail assets and modifications, with approximately $120 million of related sales or financing.
- The $73.5 million tax-reform benefit was provisional; the company said further adjustments could be made no later than Q4 2018. The unusually high 2017 effective tax rate reflects tax reform and nondeductible goodwill impairment alongside a pretax loss.
- Commodity price, basis, weather, counterparty and margin-call risks can affect earnings and liquidity. Other disclosed risks include nutrient oversupply, ethanol input costs and margins, rail utilization and regulation, environmental liabilities, supplier concentration, indebtedness, and IT/ERP implementation.
- The company adopted the new revenue standard on January 1, 2018. It estimated 70%–80% of consolidated revenue would be outside ASC 606; certain grain origination activity would be presented net, reducing reported revenue and cost of sales without changing gross profit. Certain Rail financing transactions would cease to qualify as sales, with an estimated $43 million increase in financing liabilities and deferred tax liabilities, a $25 million increase in Rail net assets and an $18 million decrease in retained earnings at transition.
- Auditors issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Most important facts for investors to verify
- Reconcile the final audited 2017 earnings with the February 2018 earnings release: the filing reports full-year attributable net income of $42.5 million and diluted EPS of $1.50, versus $41.2 million and $1.46 in the release, citing an additional $1.3 million tax benefit recorded during finalization.
- Assess how much 2017 earnings depended on the tax-reform benefit, and monitor the final tax treatment of the provisional amounts.
- Track Plant Nutrient margins and whether the Wholesale business stabilizes after the goodwill write-off.
- Monitor Rail utilization, lease rates, planned asset spending, recertification costs and the accounting transition’s effects on reported revenue, liabilities and retained earnings.
- Evaluate seasonal borrowing and liquidity needs, including commodity margin calls, against available credit and planned capital expenditures.
- Confirm completion and proceeds from the Tennessee grain-location sale and disposition of remaining retail property.