Andersons, Inc.: Form 10-Q for the period ended Mar 31, 2024

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 2023 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 2023 Form 10-K, have not materially changed through the first quarter of 2024.

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 and cost of 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 first quarter operating results were behind those of the prior year. Trade's grain asset locations received a substantial amount of insurance recoveries on damaged inventories and assets in the first quarter of the prior year. Otherwise, the results of the asset locations were relatively consistent year-over-year as domestic producers remain hesitant to forward sell due to lower commodity prices combined with limited basis appreciation to start the year. The merchandising business remained profitable but could not match a very strong first quarter in the prior year. An oversupply of commodities has shifted the global supply and demand balance, moving the market from an inverse to a carry and causing prices to weaken. While carry markets benefit the asset locations, reduced volatility and lower prices reduce opportunities for the merchandising business. In addition, given recent geopolitical unrest, we have intentionally and prudently pulled back on activity in certain regions.

Premium food and feed product lines produced stronger results in the first quarter, and recent acquisitions and growth capital investments continue to be accretive to this line of business.

With shifting fundamentals, our mix of assets and merchandising businesses provide a solid foundation for us to benefit from large crops and carry markets, with wheat income opportunities potentially returning to the market. Our assets are well-positioned for the grains to flow in due course. Domestic premium ingredient demand is also expected to stay solid and should continue to support recent capital growth investments.

Agricultural inventories on hand were 106.7 million and 99.6 million bushels at March 31, 2024 and March 31, 2023, 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 March 31, 2024, which is slightly lower than the 180 million bushels of capacity in the prior year after the divestiture of certain grain assets.

Renewables

The Renewables segment's first quarter operating results were significantly higher than the prior year as the Company recorded an $87.2 million impairment charge related to the ELEMENT ethanol plant in 2023. After considering the impact of the impairment charge, the Renewables segment still outperformed the prior year as ethanol crush margins improved year-over-year, further supported by favorable hedging positions. The Company's production facilities continued to operate efficiently in the quarter with record production and lower natural gas costs. Renewables diesel feedstocks volumes continue to grow albeit with compressed margins on industry fundamentals. Feed ingredient demand was also improved, however, values declined on lower corn prices. All four plants have now completed their semi-annual maintenance shutdowns and are operating at full capacity. The ethanol margin environment should remain favorable, specifically at the eastern production facilities as corn basis in the east remains well below levels in the west, as well as an expected increase in ethanol export volumes.

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 first quarter operating results improved from the prior year. During this seasonally slow period, the majority of the improvement was driven by increased volumes and margins in core agricultural product lines. Total segment volumes were up 12% when compared to the prior year with an overall increase in margins. Prior year margins were impacted by inventory write downs during a period of declining core fertilizer values. Spring applications remain behind both the prior year and the five-year average in our core geographic areas as wet and cold weather has caused delays. We expect strong demand through the s if planting conditions improve.

Storage capacity at our Ag Supply Chain and Specialty Liquids facilities, including leased storage, was approximately 458 thousand tons for dry nutrients and approximately 508 thousand tons for liquid nutrients at March 31, 2024, 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.

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, 2024, with the three months ended March 31, 2023, 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, 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 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, the most directly comparable amounts reported under GAAP.

Trade

Operating results for the Trade segment decreased by $33.4 million from the prior year. Sales and merchandising revenues decreased by $983.9 million, and cost of sales and merchandising revenues decreased by $945.0 million for a decreased gross profit impact of $38.9 million. The majority of the decrease in sales and merchandising revenues and cost of sales and merchandising revenues can be attributed to a decrease in volumes. Much of this decrease was intentional as management made a prudent decision to pull back on activity in certain regions due to the recent geopolitical unrest. A lesser impact in volumes was from delayed farmer engagement from lower commodity prices. Commodity prices have weakened due to the oversupply of commodities shifting the global supply and demand balance, as we have moved from an inverse to a carry market. Of the $38.9 million decrease in gross profit, $25.3 million was related to insurance recoveries recorded in the prior year within the asset-based business. This was followed by a $15.3 million decrease in the merchandising businesses as there were less trading opportunities in a less volatile commodity market.

Interest expense decreased by $6.2 million due to reduced short-term borrowings from lower commodity prices in addition to the business managing working capital usage in a higher interest rate environment.

Renewables

Operating results for Renewables increased by $53.9 million from the same period of prior year. Sales and merchandising revenues decreased by $182.5 million, and cost of sales and merchandising revenues decreased by $193.2 million compared to prior year. As a result, gross profit increased by $10.8 million. The decrease in both sales and merchandising revenues and cost of sales and merchandising revenues can be mainly attributed to lower ethanol and renewable diesel feedstocks values. The prior year results also include approximately $40 million of sales and merchandising revenues and cost of sales and merchandising revenues from the previously consolidated ELEMENT facility. There was a modest increase in volumes to the continued growth of our renewable diesel feedstock merchandising business, partially offset by the lack of ELEMENT activity in 2024. The gross profit associated with the ethanol plants was $15.3 million higher than the prior year from improved ethanol margins, favorable hedging positions, lower energy costs, and the removal of ELEMENT from consolidated results. This improvement at the plant level was partially offset by lower gross profit of $4.9 million from our third-party trading businesses as higher supply resulted in less volatility and fewer trading opportunities.

An asset impairment charge of $87.2 million related to ELEMENT was recorded in the prior year. As ELEMENT was a consolidated subsidiary of the Company at the time, the entire impairment charge is reflected in Asset impairment.

Interest expense decreased by $2.6 million from the prior year due to the deconsolidation of ELEMENT non-recourse debt.

Other income, net increased from the prior year by $3.9 million as the Company recorded an additional $3.1 million gain in the first quarter of 2024 as the amount of cash distributed to the Company related to its receivables from ELEMENT exceeded management's estimate in the prior year.

Nutrient & Industrial

Operating results for the Nutrient & Industrial segment increased by $8.6 million when compared to the same period of the prior year. Sales and merchandising revenues increased $3.4 million, and cost of sales and merchandising revenues decreased by $5.1 million resulting in increased gross profit of $8.4 million. The increase in sales and merchandising revenues and decrease in cost of sales and merchandising revenues within the segment was mainly due to margin improvement, led by the Ag Supply Chain business, as volumes only modestly increased from the prior year. Gross profit in the Ag Supply Chain business increased by $10.3 million due to the more stable pricing environment in the current year. The prior year also includes an inventory write down. Gross profit within the Engineered Granules business decreased approximately $1.7 million from the prior year due to lower margins, specifically in turf markets, as volumes remained flat to the prior year.

Operating, administrative and general expenses increased $1.3 million from prior year due to higher bad debt expense in the current year and collections on reserved balances associated with the legacy Rail business in the prior year that did not recur.

Interest expense decreased $1.3 million from prior year due to lower working capital usage.

Income Taxes

For the three months ended March 31, 2024, the Company recorded income tax expense of $1.3 million. The Company's effective tax rate was 9.3% on income before taxes of $14.0 million. The difference between the 9.3% 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, stock-based compensation, and federal tax credits offset by state and local income taxes, nondeductible compensation, and other discrete tax items.

For the three months ended March 31, 2023, the Company recorded an income tax benefit of $5.9 million. The Company’s effective tax rate was 9.1% on a loss before income taxes of $65.0 million. The difference between the 9.1% effective tax rate and the U.S. federal statutory rate of 21.0% is primarily attributable to the tax impact of non-controlling interest, state and local 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 from ELEMENT operations, which included an $87.2 million impairment charge.

The Company’s subsidiary partnership returns are under federal tax examination by the Internal Revenue Service (“IRS”) for the tax years 2015 through 2021. 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 $13.1 million.

On December 20, 2021, the Organization for Economic Co-operation and Development ("OECD") issued Pillar Two model rules introducing a global minimum tax of 15% on large corporations. Although the U.S. has not yet adopted the Pillar Two model rules, several foreign countries enacted legislation in 2023 which closely follow OECD’s Pillar Two guidance to be effective January 1, 2024. The impact of Pillar Two legislation on the Company's 2024 effective tax rate is expected to be minimal. Management will continue to monitor Pillar Two legislation in our relevant jurisdictions to determine any changes to the Company's effective tax rate.

Liquidity and Capital Resources

Working Capital

At March 31, 2024, the Company had working capital of $1,130.6 million, an increase of $192.5 million from the prior year. This increase was attributable to changes in the following components of current assets and current liabilities:

(in thousands)

Current assets as of March 31, 2024, decreased $836.6 million in comparison to those as of March 31, 2023. This decrease was primarily related to the reduction of inventories and receivables which was partially offset by an increase in cash. The decreases in inventories and receivables can largely be attributed to the stabilization of agricultural commodity prices over the last year in comparison to historically high price levels of agricultural commodities, including fertilizer, in the same period of the prior year. The decreases in inventory and receivables 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 decreased $1,029.0 million from the prior year mainly due to the decreased utilization of the Company's short-term credit facility. The decreased use of the short-term credit facility is a result of the stabilization of commodity prices over the last year compared to the historically high 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 used cash of $239.6 million and $333.5 million in the first three months of 2024 and 2023, respectively. The amount of cash used in operating activities is consistent with expectations due to the seasonal cash outflows from the settlement of payables with producers that the Company typically experiences in the first quarter. When removing the significant changes in working capital and the significant amount of insurance recoveries received in 2023, the amount of cash provided by operating activities is ahead of the prior year.

Investing Activities

Investing activities used cash of $22.1 million through the first three months of 2024 compared to using cash of $19.8 million in the prior period. The prior year included approximately $2.9 million of additional net proceeds from the Company's exit of the Rail business which accounted for the variance from the prior year.

We expect to invest approximately $150 to $175 million in property, plant and equipment in 2024; approximately 50% of which will be to maintain current facilities.

Financing Activities

Financing activities used cash of $98.3 million and provided cash of $308.8 million for the three months ended March 31, 2024 and 2023, respectively. This increase in cash used from the prior year is solely due to the change in the Company's borrowings on its short-term credit facility. The Company had sufficient cash on hand in the first quarter of 2024 to cover the large amount of settled payables and other changes in working capital.

The Company paid $6.5 million in dividends in the first three months of 2024 compared to $6.3 million paid in the prior period. The Company paid dividends of $0.190 and $0.185 per common share in January of 2024 and 2023, respectively. On February 15, 2024, the Company declared a cash dividend of $0.190 per common share payable on April 22, 2024, to shareholders of record on April 1, 2024.

The Company is party to borrowing arrangements with a syndicate of banks that provide a total of $1,859.1 million in borrowing capacity. As of March 31, 2024, the Company had $1,845.6 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 March 31, 2024. In addition, certain of our long-term borrowings are collateralized by mortgages on various facilities.

The Company is typically in a significant net short-term borrowing position in the first two quarters of the year. The majority of these short-term borrowings bear interest at variable rates, an increase 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, 2024, 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, 2023. There were no material changes in market risk, specifically commodity and interest rate risk during the three months ended March 31, 2024.

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, 2024, 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 2024, 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 2023 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.