The Andersons, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results; financial amounts below are in millions unless stated otherwise. The company operates Grain, Ethanol, Plant Nutrient, Rail and Retail businesses. Retail operations closed in the second quarter of 2017.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $836.6 | $859.6 | $2,682.3 | $2,811.7 |
| Gross profit | $69.7 | $77.0 | $234.0 | $241.8 |
| Gross margin | 8.3% | 9.0% | 8.7% | 8.6% |
| Income (loss) before tax | $5.0 | $4.4 | $(19.6) | $4.6 |
| Net income (loss) attributable to Andersons | $2.5 | $1.7 | $(27.2) | $1.4 |
| Basic and diluted EPS | $0.09 | $0.06 | $(0.96) | $0.05 |
Q3 revenue fell 2.7% year over year, while attributable earnings increased, helped by other income that included gains on Retail property sales. Nine-month results included a $42.0 million Plant Nutrient goodwill impairment, which had no corresponding tax benefit. Nine-month operating cash flow was $60.7 million, versus $41.3 million in 2016. Investing activities used $64.9 million, compared with $4.8 million provided in the prior-year period; financing activities used $34.0 million. Cash declined $38.2 million from year-end to $24.5 million.
At September 30, working capital was $214.3 million. Total debt, including current maturities and short-term borrowing, was approximately $444.3 million. Total credit capacity was $820 million, with $718.5 million available; the company reported compliance with all debt covenants. Management said liquidity should be adequate for operations, capital spending and dividends. Dividends declared were $0.16 per share in Q3, versus $0.155 a year earlier.
Material changes and segment trends
- Grain: Nine-month pretax results improved to $4.5 million from a $28.6 million loss, supported by higher storage income and improved affiliate results. Q3 results also improved. Management cited strategic grain storage, stronger space income and improved risk-management and trading income.
- Ethanol: Q3 pretax results attributable to the company were $6.1 million, down from $9.5 million. Higher shipped volume was offset by weak ethanol and distillers grains margins, higher input costs and lower affiliate earnings.
- Plant Nutrient: Nine-month pretax loss was $27.1 million, compared with $18.0 million income in 2016, reflecting the goodwill impairment, lower gross profit and market pressure. Q3 also included a $2.2 million legal settlement reserve.
- Rail: Nine-month pretax income declined to $18.1 million from $22.7 million. Leasing gross profit weakened amid lower utilization and lease rates; car sales and repair activity partly offset the decline.
- Retail: The business closed during Q2. Nine-month pretax loss was $9.1 million, including $11.5 million of exit costs; Q3 benefited from $5.7 million in gains on two property sales. Liquidation was substantially complete, with $8.4 million of assets held for sale at quarter-end.
Outlook, risks and unusual items
- Management expected high ethanol production and inventories to continue pressuring ethanol margins; elevated vomitoxin levels were also weighing on distillers grains margins.
- Management expected low nutrient prices and oversupply to persist, pressuring Plant Nutrient margins into 2018. Rail lease rates were expected to remain under pressure into next year.
- The remaining $17.1 million of Wholesale goodwill was at increased risk of impairment. Management said weaker performance or forecasts, higher interest rates or cost of capital, greater working capital or capital investment, or relative underperformance could lead to further impairment in Q4.
- For 2017, the company expected approximately $175 million of railcar purchases and related lease/capitalized modification spending, with approximately $150 million expected to be funded through sales, dispositions or non-recourse debt. Base-business capital spending, including IT but excluding rail leasing, was expected to be approximately $56 million.
- Management projected a 227.8% full-year effective tax rate, primarily due to the non-deductible goodwill impairment and reduced railroad track maintenance tax credit benefits. The company highlighted seasonal borrowing needs, variable interest rates, commodity-price exposure and possible margin deposits. It reported no material quarterly change in market risk.
- A 2015 Plant Nutrient legal claim was settled in October 2017 at the $2.2 million reserve recorded in Q3. Management said other reasonably possible outstanding claim losses were not material; future litigation outcomes remain uncertain.
Key facts for investors to verify
- Whether the annual goodwill assessment results in additional Plant Nutrient impairment.
- Whether ethanol and nutrient margins recover, and whether Rail utilization and lease rates stabilize.
- Whether cash generation, seasonal borrowing and planned rail spending remain consistent with liquidity and covenant capacity.
- How Retail asset sales and the closure-related costs affect remaining results and cash flows.
- The 2017 effective tax-rate estimate and the continuing impact of the impairment and tax-credit changes.