Andersons, Inc.: Form 10-Q for the period ended Mar 31, 2023

Forward Looking Statements

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements which relate to future events or future financial performance and involve known and unknown risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by these forward-looking statements. Such factors include, but are not limited to, the effects of economic, weather and agricultural conditions, regulatory conditions, competition globally and in the markets the Company serves, the ongoing economic impacts from the war in Ukraine, fluctuations in cost and availability of commodities, the effectiveness of the Company's internal control over financial reporting and the unpredictability of existing and possible future litigation. However, it is not possible to predict or identify all such factors. The reader is urged to carefully consider these risks and others, including those risk factors listed under Item 1A of the 2022 Form 10-K. In some cases, the reader can identify forward-looking statements by terminology such as may, anticipates, believes, estimates, predicts, or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. These forward-looking statements relate only to events as of the date on which the statements are made and the Company undertakes no obligation, other than any imposed by law, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although management believes that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Critical Accounting Policies and Estimates

Our critical accounting policies and critical accounting estimates, as described in our 2022 Form 10-K, have not materially changed through the first quarter of 2023.

Executive Overview

Our operations are organized, managed and classified into three reportable business segments: Trade, Renewables and Nutrient & Industrial. Each of these segments is generally based on the nature of products and services offered and aligns with the management structure.

The agricultural commodity-based business is one in which changes in selling prices generally move in relationship to changes in purchase prices. Therefore, increases or decreases in prices of the agricultural commodities that the business deals in will have a relatively equal impact on Sales and merchandising revenues and Cost of sales and merchandising revenues and a much less significant impact on Gross profit. As a result, changes in Sales and merchandising revenues between periods may not necessarily be indicative of the overall performance of the business and greater emphasis should be placed on changes in Gross profit.

The Company has considered the potential impact that the book value of the Company’s total shareholders’ equity briefly exceeded the Company’s market capitalization at the beginning of the first quarter for impairment indicators. Management ultimately concluded that an impairment triggering event had not occurred. The Company believes that the January share price was not an accurate reflection of its current value as conditions are currently strong in the agriculture space with a positive long-term outlook. Management believes that the market’s impact on the Company’s equity value does not actually reflect the impact of these external factors on the Company. As a result of prior period tests, reviews of current operating results and other relevant market factors, the Company concluded that no impairment trigger existed as of March 31, 2023.

Trade

The Trade segment’s first quarter operating results improved from the prior year as the segment benefited from good elevation margins in its assets, and strong merchandising results across the portfolio. Its well-positioned animal feed ingredients and organic food and specialty inventories also generated good margins, particularly in its newly acquired ingredients business based in Canada. All three lines of business within the segment exceeded the first quarter of prior year, which was negatively impacted by significant domestic basis depreciation as a result of the war in Ukraine.

Agricultural inventories on hand were 99.6 million and 188.9 million bushels at March 31, 2023 and March 31, 2022, respectively. These bushels consist of inventory held at company-owned or leased facilities, transload inventory, in-transit inventory, and third-party held inventory. Total Trade storage space capacity at company-owned or leased facilities, including temporary pile storage, was approximately 180 million bushels at March 31, 2023, which was comparable to the prior year.

As the spring planting season gets underway in the Midwest, commodity prices have moderated from the highs of last spring but stocks remain relatively low from a historical perspective. With a balanced portfolio of merchandising and grain assets, the Company is well-positioned to optimize both volatility and crop dislocation as well as a potential shift with larger production and carry markets.

Renewables

The Renewables segment's first quarter operating results decreased from the prior year as the Company took an impairment charge on the ELEMENT joint venture, which was placed into receivership following the end of the quarter. Ethanol crush margins were challenged moving into the year, but rallied late in the quarter during the spring maintenance season, as driving demand has picked up and corn prices have moderated. The merchandising businesses including renewable diesel feedstocks continue to deliver solid results, but were impacted by lower values, partially due to delays in renewable diesel plant startups.

Our eastern corn belt production facilities remain well-positioned for corn supply and ethanol crush margins have strengthened further after the close of the quarter. Renewable diesel production capacity should continue to increase leading to further demand and growth in our feedstock merchandising business.

Ethanol and related co-products volumes for the three months ended March 31, 2023 and 2022 were as follows:

(in thousands)

(a) Includes corn oil, soybean oil, and other fats, oils, and greases.

(b) DDG tons shipped converts wet tons to a dry ton equivalent amount.

Nutrient & Industrial

The Nutrient & Industrial segment's first quarter operating results decreased from the record prior year results. Nutrient prices continued to decline during the quarter which led customers to delay purchases in the current year. In contrast, nutrient prices rose to historical levels after the onset of the war in Ukraine in 2022 leading to record first quarter results in the segment. With strong farmer income and planted acres anticipated to be high, second quarter volumes are expected to improve, but some of the margin decline is not likely to be recovered.

Storage capacity at our Ag Supply Chain and Specialty Liquids facilities, including leased storage, was approximately 447 thousand tons for dry nutrients and approximately 512 thousand tons for liquid nutrients at March 31, 2023, which is similar to the prior year.

Tons of product sold for the three months ended March 31, 2023 and 2022 were as follows:

(in thousands)

In the table above, Ag Supply Chain represents facilities principally engaged in the wholesale distribution and retail sale and application of primary agricultural nutrients such as bulk nitrogen, phosphorus, and potassium. Specialty Liquid locations produce and sell a variety of low-salt liquid starter fertilizers, micronutrients for agricultural use, and specialty products for use in various industrial processes. Engineered Granules include a variety of corncob-based products and facilities that primarily manufacture granulated dry products for use in specialty turf and agricultural applications.

Other

Our “Other” activities include corporate income and expense and cost for functions that provide support and services to the operating segments. The results include expenses and benefits not allocated to the operating segments and other elimination and consolidation adjustments.

Comparison of the three months ended March 31, 2023 with the three months ended March 31, 2022 including a reconciliation of GAAP to non-GAAP measures:

(in thousands)

(in thousands)

The Company uses Income (loss) before income taxes attributable to the Company from continuing operations, a non-GAAP financial measure as defined by the Securities and Exchange Commission, to evaluate the Company’s financial performance. This performance measure is not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures. Management believes that Income (loss) before income taxes attributable to the Company from continuing operations is a useful measure of the Company’s performance because it provides investors additional information about the Company's operations allowing evaluation of underlying business performance and period-to-period comparability. This measure is not intended to replace or be an alternative to Income (loss) before income taxes from continuing operations, the most directly comparable amounts reported under GAAP.

Trade

Operating results for the Trade segment increased by $35.7 million from the prior year. Sales and merchandising revenues decreased by $206.9 million and cost of sales and merchandising revenues decreased by $256.5 million for an increased gross profit impact of $49.6 million. The decrease in sales and merchandising revenues and cost of sales and merchandising revenues can be equally attributed to decreases in both commodity prices and volumes, as the war in Ukraine resulted in sharp price increases in the prior year and the rising interest rate environment in the current year has led to closer monitoring of working capital levels resulting in lower volumes of commodities traded. The $49.6 million increase in gross profit was mainly related to the performance of both the assets and merchandising businesses. The asset-based business contributed approximately $24 million to gross profit as it recorded approximately $17 million worth of insurance proceeds and receivables during the quarter from a fire at a Michigan grain asset in December of 2022, combined with the basis depreciation triggered by the war in Ukraine in the prior year that did not recur in 2023. The merchandising business contributed approximately $20 million to gross profit as well-positioned inventories generated strong margins.

Operating, administrative and general expenses increased by $12.4 million from the same period of prior year. The increase from the prior year is primarily related to approximately $6.2 million of higher labor, benefits and incentives, with about half from business growth and half from wage inflation. Trade also incurred an additional $3.5 million in insurable clean-up costs in the current quarter related to a fire at a Michigan grain asset.

Interest expense increased by $3.6 million due to rising interest rates on the Company's short-term line of credit compared to the prior year.

Other income, net increased by $2.2 million from the same period of 2022. The increase was primarily attributable to foreign currency losses of $1.6 million that did not recur in 2023.

Renewables

Operating results for Renewables decreased by $43.7 million from the same period of prior year. Sales and merchandising revenues increased by $156.3 million and cost of sales and merchandising revenues increased by $155.7 million compared to prior year. As a result, gross profit was comparable to the prior year. The vast majority of the increase to sales and merchandising revenues and cost of sales and merchandising revenues is the result of increased ethanol and renewable feedstock volumes as the price of these commodities were consistent with the prior period. Although gross profit remained consistent from the prior period, the ethanol plants and third-party merchandising businesses performed slightly lower than prior year from weaker ethanol crush margins and higher input costs which was offset by an improvement of unrealized mark-to-market adjustments from the prior year.

Operating, administrative and general expenses increased by $1.0 million from the prior year as a result of increased labor expenses and higher contracted services costs.

An asset impairment charge of $87.2 million related to the ELEMENT ethanol plant in Colwich, Kansas was recorded in the current year. As ELEMENT is a consolidated subsidiary of the Company, the entire impairment charge is represented in Asset impairment. The portion of the charge attributable to the noncontrolling interest is approximately $44.4 million which is captured in Loss before income taxes attributable to the noncontrolling interests within the Condensed Consolidated Statements of Operations.

Interest expense increased by $1.3 million due to rising interest rates on the Company's short-term line of credit compared to the prior year.

Nutrient & Industrial

Operating results for the Nutrient & Industrial segment decreased by $21.2 million compared to record results in the same period of the prior year. Sales and merchandising revenues decreased $46.1 million and cost of sales and merchandising revenues decreased by $24.4 million resulting in decreased gross profit of $21.7 million. The decrease in sales and merchandising revenues and cost of sales and merchandising revenues was mainly due to the reset of fertilizer prices from the record high prices resulting from an already tight supply market and exaggerated by the war in Ukraine in the first quarter of 2022. In addition to a decrease in fertilizer prices of almost 60%, volumes are also down approximately 10% as customers continue to be patient making purchases in a market of falling prices and wet weather through the first quarter of 2023. Gross profit decreased year-over-year by approximately $16.8 million due to margin decreases and $4.9 million from decreases in sales volumes.

Operating, administrative and general expenses decreased by $1.2 million mainly due to reduced incentive compensation when compared to the record first quarter results in the prior year.

Interest expense increased by $0.7 million due to due to rising interest rates on the Company's short-term line of credit compared to the prior year.

Other

Other expenses increased by $1.6 million from the same period last year. The increase in expenses was primarily driven by $1.2 million of higher health insurance claims from the Company's self-funded medical insurance plan in the current year.

Income Taxes

For the three months ended March 31, 2023, the Company recorded an income tax benefit from continuing operations of $5.9 million. The Company's effective tax rate was 9.1% on a loss before taxes from continuing operations of $65.0 million. The difference between the 9.1% effective tax rate and the U.S. federal statutory tax rate of 21% is primarily attributable to the tax impact of noncontrolling interest, state and local income taxes and nondeductible compensation. During the three months ended March 31, 2023, a discrete income tax benefit of $12.0 million was recorded on a loss before income taxes of $94.7 million related to the impairment charge associated with ELEMENT and current year operations as the Company is unable to reliably estimate an ordinary loss for the year due to debt and operational constraints at ELEMENT.

For the three months ended March 31, 2022, the Company recorded income tax expense from continuing operations of $4.1 million. The Company's effective tax rate was 38.7% on income from continuing operations of $10.6 million. The effective tax rate differs from the U.S. federal statutory tax rate of 21.0% due to the tax impact of certain discrete derivatives and hedging activities, state and local income taxes, and nondeductible compensation offset by the effect of noncontrolling interest and Federal Research and Development Credits.

The Company’s subsidiary partnership returns are under federal tax examination by the Internal Revenue Service (“IRS”) for the tax years 2015 through 2018, respectively. The Company’s subsidiary is under federal tax examination by the Mexican tax authorities for tax year 2015. The IRS and Mexican tax authorities’ examinations could potentially be resolved within the next 12 months. The resolution of these examinations could change our unrecognized tax benefits and favorably impact income tax expense by a range of $3.5 million to $8.7 million.

Liquidity and Capital Resources

Working Capital

At March 31, 2023, the Company had working capital from continuing operations of $938.2 million, an increase of $70.3 million from the prior year. This increase was attributable to changes in the following components of current assets from continuing operations and current liabilities from continuing operations:

(in thousands)

Current assets from continuing operations as of March 31, 2023 decreased $870.0 million in comparison to those as of March 31, 2022. This decrease was noted mainly in inventories and current commodity derivative assets. The decreases in those accounts can largely be attributed to the stabilization of agricultural commodity prices in the current year in comparison to the significant increases in the prices of agricultural commodities, including fertilizer, that the Company transacts in the ordinary course of business in the same period of the prior year.

Current liabilities from continuing operations decreased $940.3 million from the prior year mainly due to the decreased utilization of the Company's short-term revolving credit line. The decreased use of the short-term revolving credit line is due to the stabilization of commodity prices in the year compared to the severe increase in commodity prices in the same period of the prior year, as well as a strategic focus on managing short-term debt in light of the rising interest rate environment.

Sources and Uses of Cash

(in thousands)

Operating Activities

Our operating activities used cash of $333.5 million and $1,075.0 million in the first three months of 2023 and 2022, respectively. The decrease in cash used was primarily due to the decreased working capital needs quarter over quarter driven by significant increases in agricultural commodity prices in the prior year. When the changes in operating assets and liabilities are removed, along with approximately $17.4 million in insurance proceeds and receivables for damaged inventory from a fire at a Michigan grain asset in December of 2022, cash provided by operating activities was consistent with the prior period.

Investing Activities

Investing activities used cash of $19.8 million through the first three months of 2023 compared to $24.9 million in the prior period. Although spending for the purchases of property, plant and equipment increased by approximately $5 million, cash used in investing activities decreased from the prior year as the proceeds from the sale of legacy Rail assets, insurance proceeds and the proceeds from the sale of an investment were more than enough to offset the increased spending in property, plant and equipment.

We expect to invest approximately $125 million in property, plant and equipment in 2023, with spending split evenly between growth projects and maintaining our current facilities.

Financing Activities

Financing activities provided cash of $308.8 million and $919.8 million for the three months ended March 31, 2023 and 2022, respectively. This decrease from the prior year was due to the significant increase in agricultural commodity prices in the prior period and the related need for short-term borrowings. Agricultural commodity prices have decreased in the current year and the Company is operating in a much more stable pricing environment in 2023 which is putting much less pressure on the Company's short-term borrowings.

The Company is party to borrowing arrangements with a syndicate of banks that provide a total of $1,991.8 million in borrowing capacity. Of the total capacity, $341.7 million is non-recourse to the Company. As of March 31, 2023, the Company had $1,294.9 million available for borrowing with $220.8 million of that total being non-recourse to the Company.

The Company paid $6.3 million in dividends in the first three months of 2023 compared to $6.1 million paid in the prior period. The Company paid dividends of $0.185 and $0.18 per common share in January of 2023 and 2022, respectively. On February 17, 2023, the Company declared a cash dividend of $0.185 per common share payable on April 24, 2023, to shareholders of record on April 3, 2023.

Certain of our long-term borrowings include covenants that, among other things, impose minimum levels of working capital and a minimum ratio of owner's equity. The Company has concluded that in relation to the $62.8 million non-recourse credit agreement associated with the ELEMENT operations, that ELEMENT was out of compliance with its working capital covenant as of January 31, 2023, and is also out of compliance with an owner's equity ratio covenant as of March 31, 2023. Additionally, ELEMENT did not make a required debt payment in February 2023, subsequently received a default notice from the lender on February 17, 2023, and was ultimately placed into receivership on April 18, 2023. As such, the Company continues to classify the total $62.8 million of non-recourse debt under the ELEMENT credit agreement as a current maturity of long-term debt as of March 31, 2023. The Company is in compliance with all other covenants as of March 31, 2023. In addition, certain of our long-term borrowings are collateralized by first mortgages on various facilities. Our non-recourse long-term debt that is currently classified in Current maturities of long-term debt in the Condensed Consolidated Balance Sheets as described above, is collateralized by ELEMENT plant assets.

Because the Company is a significant borrower of short-term debt in peak seasons and the majority of this is variable rate debt, increases in interest rates could have a significant impact on our profitability. In addition, periods of high grain prices and/or unfavorable market conditions could require us to make additional margin deposits on our exchange traded futures contracts. Conversely, in periods of declining prices, the Company could receive a return of cash.

Management believes the Company's sources of liquidity will be adequate to fund operations, capital expenditures and service indebtedness.

At March 31, 2023, the Company had standby letters of credit outstanding of $38.6 million.

For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2022. There were no material changes in market risk, specifically commodity and interest rate risk during the three months ended March 31, 2023.

Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of March 31, 2023 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the first quarter of 2023, identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in Part I, Item 1A of the 2022 Form 10-K under the heading “Risk Factors,” any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price. The information presented below updates, and should be read in conjunction with, the risk factors in Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.