Andersons, Inc.: Form 10-Q for the period ended Sep 30, 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, geopolitical risk, 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 third 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.

Trade

The Trade segment’s third quarter operating results, although significantly lower than the prior year, nonetheless reflect solid underlying merchandising and grain asset fundamentals with aggregate results for most of the Trade product lines comparable to the strong third quarter of 2022. The asset-based business benefited from another solid Louisiana harvest and good space income after a large soft wheat harvest. Underlying merchandising fundamentals were also solid during the quarter but were negatively impacted by a currency loss in Egypt. While the company typically transacts in U.S. dollars, given the unusual currency liquidity challenges being experienced by customers in Egypt, the Company accepted a lower exchange rate for product that had been delivered and related receivables were revalued. In the premium ingredient businesses, volumes increased because of recent growth investments and acquisitions.

The majority of the Trade business remains focused on domestic grain flows and is less impacted by slowdowns in U.S. exports. With the large and ongoing U.S. harvest, our assets are well-positioned to accumulate, condition and store large quantities of grain. In this harvest, we expect drying income due to receipts of higher moisture corn. We are also receiving increased storage rates including variable storage rates in wheat. With increased domestic supply, the merchandising focus will continue to be on serving customers and opportunistic arbitrage.

Agricultural inventories on hand were 91.4 million and 103.1 million bushels at September 30, 2023 and September 30, 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 169 million bushels at September 30, 2023, which slightly lower than the 185 million bushels of capacity in the prior year after the divestiture of certain grain assets in the current year.

Renewables

The Renewables segment's third quarter operating results were significantly higher than the prior year with the continued rally in ethanol crush margins, co-product values and lower operating costs from the prior year. Results from the merchandising businesses, including renewable diesel feedstocks, exceeded third quarter 2022 results by nearly $5 million. Three of the Company's four ethanol plants completed their semi-annual maintenance shutdowns in the third quarter and the fourth plant was completed shortly thereafter. Board crush values remain historically high into the fourth quarter. Corn harvest in the eastern corn belt ethanol production draw areas is somewhat delayed but not expected to impact ethanol operations.

Ethanol and related co-products volumes 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 third quarter operating results improved from the prior year. During this seasonally slow period, the segment experienced an increase in margins that were partially offset by the decrease in volumes of 6% from the prior year. A specialty liquid plant was adversely impacted by a rail line outage which was the main contributing factor of the volume shortfall when compared to the prior year. Gross profit improved by $4 million and reflects these higher margins partially offset by the volume decrease from the same period of the prior year.

Storage capacity at our Ag Supply Chain and Specialty Liquids facilities, including leased storage, was approximately 457 thousand tons for dry nutrients and approximately 512 thousand tons for liquid nutrients at September 30, 2023, which is similar to the prior year.

Tons of product sold 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. Prior year volumes have been reclassified for the three and nine months ended September 30, 2022, to conform with current year presentation as the product mix in certain facilities has evolved.

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.

Operating Results

The following discussion focuses on the operating results as shown in the Condensed Consolidated Statements of Operations and includes a separate discussion by segment. Additional segment information is included herein in Note 12, Segment Information.

Comparison of the three months ended September 30, 2023, with the three months ended September 30, 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 as 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 measure reported under GAAP.

Trade

Operating results for the Trade segment decreased by $32.6 million from the same period of the prior year. Sales and merchandising revenues decreased by $601.5 million and cost of sales and merchandising revenues decreased by $563.1 million that resulted in decreased gross profit of $38.4 million. The vast majority of the decrease in sales and merchandising revenues and cost of sales and merchandising revenues is attributable to sharp commodity price decreases from the prior year as the war in Ukraine created uncertainty around global supply which drove commodity prices higher in 2022. The main driver of the decrease in gross profit was from the international merchandising business in the Middle East and North Africa as results came in $31.6 million lower than the prior year from fewer merchandising opportunities and a currency loss, both related to the currency liquidity issues in Egypt. While the Company's practice is to transact in U.S. dollars, given the unusual currency liquidity issues facing our customers in Egypt, the Company accepted a lower exchange rate for product that had been delivered, which resulted in $19.2 million of foreign currency losses during the quarter.

Operating, administrative and general expenses increased by $5.9 million. The increase from the prior year is related to an additional $4.4 million of costs from new merchandising locations and $3.3 million of incremental insurance expenses, partially offset by lower incentive compensation.

Interest expense decreased by $4.3 million due to reduced short-term borrowings from lower commodity prices in addition to the business managing working capital usage in the higher interest rate environment in 2023.

Other income, net increased by $7.4 million from the same quarter of 2022. This increase was a result of a $5.6 million gain on the sale of a Nebraska grain asset in combination with $2.2 million of additional interest income related to increased cash on hand in the current year.

Renewables

Operating results for the Renewables segment increased by $17.9 million from the same period last year. Sales and merchandising revenues increased by $53.2 million and cost of sales and merchandising revenues increased by $24.8 million compared to prior year results. As a result, gross profit increased by $28.4 million compared to 2022 results. The increase in both sales and merchandising revenues and cost of sales and merchandising revenues can be attributed to increased third-party trading volumes mainly in renewable diesel feedstocks as the merchandising businesses continue to grow along with increased production from the TAMH plants. Partially offsetting the increase in both sales and merchandising revenues and cost of sales and merchandising revenues was the ELEMENT deconsolidation in the second quarter, as the current year has no activity and the prior year included approximately $60 million in each caption. The increase to gross profit in the current period results reflect a $22.7 million margin improvement at the ethanol plants, primarily from improved ethanol margins and decreased natural gas prices along with a $6.3 million improvement in the Company's ethanol and co-product merchandising businesses.

Operating, administrative and general expenses increased by $1.3 million from the prior year, of which, the majority was due to higher professional services fees.

Interest expense decreased by $1.6 million from the prior year due to lower working capital levels as a result of the ELEMENT deconsolidation.

Other income, net increased from the prior year by $2.5 million primarily due to $2.2 million in USDA Biofuel Producer Program proceeds received in the third quarter of 2023.

Nutrient & Industrial

Operating results for the Nutrient & Industrial segment increased by $3.2 million compared to the same period in the prior year. Sales and merchandising revenues decreased by $35.3 million and cost of sales and merchandising revenues decreased by $39.3 million resulting in an $3.9 million increase in gross profit. The decrease in sales and merchandising revenues and cost of sales and merchandising revenues was due to fertilizer prices decreasing approximately 40% from the prior year as volumes decreased modestly from same period of prior year. The increase in gross profit was mainly driven by a $4.6 million increase in margins, primarily on core agriculture products, offset by the small decrease in volumes.

Other

Results for the quarter improved by $1.9 million compared to the same period in the prior year. The improvement in results was primarily driven by a $4.8 million revaluation gain of a cost method investment which was partially offset by higher benefits claims in the current year.

Income Taxes

For the three months ended September 30, 2023, the Company recorded income tax expense from continuing operations of $7.9 million. The Company's effective tax rate was 20.5% on income before taxes from continuing operations of $38.4 million. The difference between the 20.5% effective tax rate and the U.S. federal statutory tax rate of 21% is primarily attributable to the tax impact of non-controlling interest offset by state and local income taxes, nondeductible compensation and other discrete tax adjustments.

For the three months ended September 30, 2022, the Company recorded income tax expense from continuing operations of $9.8 million. The Company's effective tax rate was 28.3% on income from continuing operations of $34.7 million. The difference between the effective tax rate of 28.3% and the U.S. federal statutory tax rate of 21.0% is due to the tax impact of non-controlling interest and state and local taxes.

Comparison of the nine months ended September 30, 2023, with the nine months ended September 30, 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 as 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 decreased by $15.6 million from the prior year. Sales and merchandising revenues decreased by $1,209.3 million and cost of sales and merchandising revenues decreased by $1,199.2 million for a decreased gross profit impact of $10.1 million. The vast majority of the decrease in sales and merchandising revenues and cost of sales and merchandising revenues is attributable to sharp commodity price decreases from the prior year as the war in Ukraine created uncertainty around global supply which drove commodity prices higher in 2022. The main cause of the $10.1 million decrease in gross profit was the merchandising business which is $16.6 million behind the same period of the prior year, with $35.8 million of the decline in the international merchandising business. This decrease is driven from less merchandising opportunities and the currency loss in the third quarter discussed above, both related to currency liquidity issues in Egypt. The asset-based business partially offset the gross profit shortfall in the segment by approximately $9.3 million as it recorded $16.1 million worth of inventory insurance recoveries, which were partially offset by lower elevation margins when compared to very strong prior year.

Operating, administrative and general expenses increased by $24.5 million from the same period of prior year. The main drivers of the increase include an additional $9.0 million of expense from new merchandising locations, $6.8 million in insurable clean-up costs in the current quarter related to a fire at a Michigan grain asset, $5.3 million of increased insurance expenses and $2.5 million in additional bad debt expense.

Interest expense decreased by $3.0 million due to reduced short-term borrowings from lower commodity prices in addition to the business managing working capital usage in the higher interest rate environment in 2023.

Other income, net increased by $16.0 million from the same period of 2022. The increase was due to favorable changes in foreign currency of $8.1 million, improved results from equity method investments of approximately $4.0 million and an additional $2.2 million of interest income in the current year.

Renewables

Operating results for Renewables decreased by $32.7 million from the same period of prior year. Sales and merchandising revenues increased by $204.7 million and cost of sales and merchandising revenues increased by $167.3 million compared to prior year. As a result, gross profit increased by $37.4 million to the prior year. The increase in both sales and merchandising revenues and cost of sales and merchandising revenues can be attributed to increased third-party trading volumes mainly in renewable diesel feedstocks as the merchandising businesses continue to grow. This increase was partially offset from the tapering down of operations at the ELEMENT facility and the ultimate deconsolidation of the entity that occurred in April of 2023 resulting in a reduction of both sales and merchandising revenues and cost of sales and merchandising revenues from the prior period of approximately $120 million. The gross profit associated with the ethanol plants was $46.6 million higher than the prior year from improved ethanol crush margins, lower energy costs and increased co-product values and volumes. This improvement at the plant level was partially offset by $7.1 million less unrealized mark-to-market gains when compared to the prior year.

An asset impairment charge of $87.2 million related to the ELEMENT joint venture in Colwich, Kansas was recorded in the current year. As ELEMENT was a consolidated subsidiary of the Company at the time, the entire impairment charge is represented in Asset impairment.

Interest expense decreased by $0.7 million from the prior year due to lower working capital levels as a result of the ELEMENT deconsolidation.

Other income, net decreased from the prior year by $8.1 million due to $17.6 million in proceeds received in the prior year as a part of the USDA Biofuel Producer Program that was enacted as a part of the CARES Act. In 2023, the Company recorded a $6.5 million gain on the deconsolidation of the ELEMENT joint venture and received an additional $2.2 million from the USDA Biofuel Producer Program.

Nutrient & Industrial

Operating results for the Nutrient & Industrial segment decreased by $13.8 million when compared to the same period of prior year. Sales and merchandising revenues decreased $106.1 million and cost of sales and merchandising revenues decreased by $92.4 million resulting in decreased gross profit of $13.8 million. The decrease in sales and merchandising revenues and cost of sales and merchandising revenues was mainly due to the reset of record high fertilizer prices in the same period of 2022 that were a result of tight supply market exaggerated by the war in Ukraine. Fertilizer prices decreased approximately 43% from the prior year which were partially offset by an increase in tons sold of 6% when compared to the first nine months of the prior year. Gross profit decreased from the prior year by approximately $17.9 million from lower margins, partially offset by an increase of $4.2 million related to higher volumes in 2023.

Other

Other expenses decreased from the prior period by $2.1 million from a $4.8 million revaluation gain of a cost method investment that was partially offset by higher benefit claims in the current year.

Income Taxes

For the nine months ended September 30, 2023, the Company recorded an income tax expense from continuing operations of $23.7 million. The Company's effective tax rate was 30.5% on income before taxes from continuing operations of $77.8 million. The difference between the 30.5% effective tax rate and the U.S. federal statutory tax rate of 21.0% is primarily attributable to the tax impact of non-controlling interest, state and local income taxes, nondeductible compensation and other discrete tax adjustments. Other discrete tax items include a net income tax benefit of $10.6 million, recorded on a net loss before taxes of $88.8 million related to the current year operations, impairment charge, and gain on deconsolidation associated with ELEMENT.

For the nine months ended September 30, 2022, the Company recorded income tax expense from continuing operations of $29.7 million. The Company’s effective tax rate was 18.2% on income before income taxes from continuing operations of $163.5 million. The difference between the 18.2% effective tax rate and the U.S. federal statutory rate of 21.0% is due to the tax impact of non-controlling interest as well as certain discrete derivatives and hedging activities offset by state and local income taxes and nondeductible compensation.

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 $2.9 million to $8.1 million.

Liquidity and Capital Resources

Working Capital

At September 30, 2023, the Company had working capital from continuing operations of $1,119.5 million, an increase of $174.7 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 September 30, 2023 decreased $738.1 million in comparison to those as of September 30, 2022. This decrease was primarily related to the reduction of inventories and current commodity derivative assets which was partially offset by a sharp increase in cash. The decreases in inventories and derivatives 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, in the same period of the prior year. The decreases in inventory and derivatives also had a direct impact on cash as the Company was not deploying the cash to hold working capital as it had done in the previous year.

Current liabilities from continuing operations decreased $912.9 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 a result of 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 the use of short-term debt to fund working capital in light of the rising interest rate environment.

Sources and Uses of Cash

(in thousands)

Operating Activities

Operating activities provided cash of $696.1 million and used cash of $153.4 million in the first nine months of 2023 and 2022, respectively. The increase in cash provided was primarily due to the decreased working capital needs driven by significant decreases in agricultural commodity prices and bushels on hand when compared to the same period in the prior year. When removing the significant changes in operating assets and liabilities and $12.1 million of unrealized currency losses in Egypt, cash from operations was consistent with the same period of the prior year.

Investing Activities

Investing activities used cash of $117.3 million through the first nine months of 2023 compared to providing cash of $2.9 million in the prior period. The increase in spending from the prior year was due to increased purchases of property, plant and equipment of approximately $36.5 million from increased investments across all segments in addition to $24.3 million cash used in a business acquisition. The prior year also included approximately $62.7 million of additional net proceeds from the Company's exit of the Rail business.

We expect to invest approximately $125 million to $150 million in property, plant and equipment in 2023, with spending split evenly between growth projects and maintenance.

Financing Activities

Financing activities used cash of $275.8 million and provided cash of $75.5 million for the nine months ended September 30, 2023 and 2022, respectively. This increase in cash used from the prior year was due to repayments made in the current year driven by the significant increase in agricultural commodity prices in the prior period and the related need for short-term borrowings. As agricultural commodity prices have decreased in the current year and the Company is operating in a more stable pricing environment, more repayments and less borrowings occurred on the Company's short-term credit facilities.

The Company paid $18.8 million in dividends in the first nine months of 2023 compared to $18.3 million paid in the prior period. The Company paid dividends of $0.185 and $0.18 per common share in January, April, and July of 2023 and 2022, respectively. On August 17, 2023, the Company declared a cash dividend of $0.185 per common share payable on October 20, 2023, to shareholders of record on October 2, 2023.

The Company is party to borrowing arrangements with a syndicate of banks that provide a total of $1,858.5 million in borrowing capacity. As of September 30, 2023, the Company had $1,841.4 million available for borrowing.

Certain of our long-term borrowings include covenants that, among other things, impose minimum levels of working capital and various debt leverage ratios. The Company is in compliance with all covenants as of September 30, 2023. In addition, certain of our long-term borrowings are collateralized by first mortgages on various facilities.

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 September 30, 2023, the Company had standby letters of credit outstanding of $3.3 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 nine months ended September 30, 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 September 30, 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 third 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.