The Andersons, Inc. — 2019 Third-Quarter Form 10-Q
Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2019. The company operates in Trade, Ethanol, Plant Nutrient and Rail. Results are materially affected by the January 2019 acquisition of the remaining 67.5% of Lansing Trade Group (LTG), which expanded and changed the consolidated business; revenue comparisons are therefore not directly like-for-like.
Financial performance and position
| Metric | Third quarter 2019 | Third quarter 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,982.8 million | $685.6 million | $6,284.6 million | $2,232.7 million |
| Gross profit | $109.1 million | $53.9 million | $379.5 million | $208.0 million |
| Gross margin | 5.5% | 7.9% | 6.0% | 9.3% |
| Net income (loss) attributable to Andersons | $(4.2) million | $(2.1) million | $11.7 million | $17.7 million |
| Diluted earnings (loss) per share | $(0.13) | $(0.07) | $0.35 | $0.62 |
| Interest expense | $14.0 million | $5.2 million | $45.6 million | $20.0 million |
For the quarter, the pretax loss was $13.1 million; a $7.2 million tax benefit reduced the net loss. For the nine-month period, pretax income was $7.7 million and the income tax benefit was $1.7 million. The 2019 nine-month results include a $3.1 million asset impairment charge.
- Cash flow: Operating activities provided $319.6 million in the first nine months, versus $28.8 million in 2018, primarily reflecting working-capital movements and increased activity following the LTG acquisition. Investing activities used $334.9 million, including $149.6 million for the acquisition; financing activities provided $12.3 million. Cash, cash equivalents and restricted cash ended at $21.3 million, including $9.0 million restricted as collateral.
- Liquidity: Working capital was $423.3 million, compared with $187.6 million at September 30, 2018. Current assets were $1,488.8 million and current liabilities $1,065.5 million. The company reported $1,207.7 million available under its borrowing arrangements and compliance with financial covenants.
- Debt: Short-term debt, current maturities and long-term debt totaled approximately $1,173.3 million, excluding lease liabilities, compared with approximately $584.9 million at September 30, 2018. The increase reflects LTG financing and other borrowings. Long-term debt fair value was $1,046.1 million.
- Balance sheet: Total assets were $3,284.5 million and total equity was $1,011.4 million at September 30, 2019. Inventory was $741.1 million, up from $490.3 million a year earlier, substantially reflecting the acquired business and greater activity.
Material changes and segment results
- Revenue growth primarily reflects LTG and Thompsons consolidation, rather than comparable organic growth. Management cautions that commodity price movements can greatly affect revenue and cost of sales without a similar effect on gross profit.
- Trade: Third-quarter attributable pretax loss was $2.0 million, an improvement of $7.9 million year over year, with stronger merchandising income from LTG partly offset by higher expenses and interest.
- Ethanol: Third-quarter attributable pretax income was $0.9 million, down from $10.4 million. Compressed industry margins and lower earnings from equity-method ethanol affiliates weighed on results.
- Plant Nutrient: Third-quarter pretax loss was $7.4 million, a modest improvement. Nine-month results declined from the prior year amid adverse weather, lower volumes and higher carrying costs.
- Rail: Third-quarter pretax income was $3.1 million, down from $5.7 million, mainly due to fewer railcar sales and weaker leasing conditions. Utilization was 89.2%, or 93.2% excluding railcars purchased near quarter-end.
- The company issued 4.4 million shares as part of the $328.9 million LTG acquisition consideration. Acquisition accounting, including goodwill allocation, remained preliminary.
Outlook, risks and unusual items
- No consolidated earnings or revenue guidance was provided. Management expects Trade headwinds to persist into the fourth quarter and 2020 from uncertainty around Eastern Corn Belt crop production after extreme planting-season weather. Ethanol margin headwinds were expected to ease somewhat in the fourth quarter, while higher corn basis remained a challenge.
- Management expected Rail utilization to remain above 90% and leased cars to increase, while noting weaker loading in frac sand and ethanol markets and lower lease renewal rates. The Plant Nutrient business benefited from weather-delayed volumes shifting into the third quarter.
- Management performed impairment testing after the company’s market capitalization fell below book equity. No goodwill or other tested long-lived asset impairment was recorded; however, two Trade reporting units had fair value cushions below 10%, and management said valuations are sensitive to interest rates, volumes, margins and broader conditions. Frac-sand assets were also tested after adverse industry changes; no impairment was recorded, but further deterioration could trigger future charges.
- The company recorded a $5.0 million reserve for a non-regulatory litigation claim related to penalties and fines paid by LTG in 2018. Management said other reasonably possible claim losses were not material and considered current defendant litigation unlikely to be material, while noting future claims could have adverse effects.
- Variable-rate borrowing creates interest-rate exposure; commodity price movements may also require additional margin deposits. Management said hedging mitigates some rate risk and liquidity should be adequate for operations, capital expenditures and dividends. Purchase commitments totaled $2,724.9 million, largely commodity purchases, and are offset in part by forward sales and risk-management contracts.
- Management expected up to $111 million of railcar-related purchases and approximately $128 million of base-business capital spending for 2019. Subsequent events include an October 1 ethanol-entity merger with Marathon (Andersons to own 50.1% and consolidate the venture), a $70 million term note and $130 million revolver for the venture, and planned or completed asset sales expected to produce a $2.9 million fourth-quarter pretax gain on the Bay City farm-center sale.
Important facts for investors to verify
- How much of reported growth and future earnings reflects LTG acquisition effects, and what are the fully integrated operating costs and returns?
- Whether the higher debt load, variable rates and seasonal working-capital needs remain manageable; confirm covenant headroom and borrowing availability.
- Whether Trade and Ethanol margins recover, and how weather, crop conditions, commodity basis and required margin collateral affect cash flow.
- Whether Rail utilization and leasing improve as management expects, and whether impairment-sensitive goodwill and frac-sand assets retain value.
- The final LTG purchase-price allocation, the financial impact of the Marathon ethanol merger and asset dispositions, and the outcome of the $5.0 million litigation matter.