THE ANDERSONS, INC. 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 on our business from the COVID-19 pandemic and the pace of recovery from the pandemic, economic and political conditions, globally and in the markets we serve, fluctuations in cost and availability of commodities, weather and agricultural conditions, governmental regulations, the effectiveness of our 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 2020 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 2020 Form 10-K, have not materially changed through the third quarter of 2021. Executive Overview Our operations are organized, managed and classified into three reportable business segments: Trade, Ethanol and Plant Nutrient. Each of these segments is generally based on the nature of products and services offered and aligns with the management structure. Due to theRail Group segment being presented as discontinued operations, the Company has excluded it from the following discussions of financial condition and results of operations. 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 cost of sales and a much less significant impact on gross profit. As a result, changes in sales between periods may not necessarily be indicative of the overall performance of the business and more focus should be placed on changes in gross profit. The Company has considered the potential impact of the book value of the Company's total shareholders' equity exceeding the Company's market capitalization at various points during the year for impairment indicators. The Company believes that the share price at those points were not an accurate reflection of its current value. The long-term outlook remains positive for agricultural commodities due to market volatility driven by scarcity of supply and strong demand. Management believes that the market's impact on the Company's equity value does not accurately 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, management ultimately concluded that, while the Company's shareholders equity exceeded the market capitalization for certain portions of the period, that no impairment trigger existed as ofSeptember 30, 2021 . However, adverse market conditions or alternative management decisions on operations may result in future impairment considerations.
Trade
The Trade Group's third quarter results improved substantially over the prior year as the Group continues to benefit from the demand-driven agriculture rally. Commodity price volatility and market dislocations created merchandising opportunities for the Group to be well positioned across our broad portfolio of commodities. This demand driven rally created an inversion in the futures market for the majority of the agricultural commodities stored by the Group's asset business, resulting in strong elevation margins earlier in the year and less traditional storage income. The Group also benefited by strong elevation margins in our early harvest draw areas while starting to see storage income opportunities return to the wheat and corn markets.The Andersons, Inc. | Q3 2021 Form 10-Q | 25
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Agricultural inventories on hand at
We expect continued merchandising opportunities into harvest as scarcity of supply is impacting overall prices. Crop conditions in the majority of the Group's draw area are excellent and the business is expecting to benefit from a large harvest. As the volume of grain in store is expected to remain at levels below recent years for some time, high prices and strong elevation margins are expected to continue into 2022.
Ethanol
The Ethanol Group's third quarter income from operations were down despite higher revenues as compared to the prior year largely driven by higher corn basis levels. The 2021 results reflect improvement in crush margins, overall ethanol demand and higher ethanol trading results. The Group also benefited from increased co-product values. Spot ethanol crush margins have continued to improve from the prior year as gasoline demand has returned to pre-pandemic levels and overall industry stocks remain low. Co-product values continue to support our overall margins as new renewable diesel demand continues to drive high corn oil values.
Ethanol and related co-products volumes for the three and nine months ended
Three months ended September 30, Nine months ended September 30,
(in thousands) 2021 2020 2021 2020
Ethanol (gallons shipped) 184,655 169,409 538,955 436,282
E-85 (gallons shipped) 12,977 7,455 32,781 20,955
Corn oil (pounds shipped) 79,756 33,257 188,974 83,519
DDG (tons shipped)* 570 536 1,544 1,384
* DDG tons shipped converts wet tons to a dry ton equivalent amount.
Plant Nutrient
The Plant Nutrient Group's third quarter results were relatively comparable to the prior year period. Tons sold across the Group's product lines were down slightly period over period, however, the lower volumes were offset by improved margins in the Ag Supply Chain and Specialty Liquids product lines. The improved margins reflect demand from strong grower income and well-positioned fertilizer inventory. Engineered Granules maintained strong demand but contended against rising input costs and a tight labor market. We expect demand to remain strong across all product lines which, along with ongoing tight supplies, should provide continued opportunities for the group. Storage capacity at our Ag Supply Chain and Specialty Liquids facilities, including leased storage, was approximately 450 thousand tons for dry nutrients and approximately 509 thousand tons for liquid nutrients atSeptember 30, 2021 , compared to approximately 477 thousand tons for dry nutrients and approximately 509 thousand tons for liquid nutrients atSeptember 30, 2020 .The Andersons, Inc. | Q3 2021 Form 10-Q | 26
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Tons of product sold for the three and nine months endedSeptember 30, 2021 and 2020 were as follows: Three months ended September 30, Nine months ended September 30, (in thousands) 2021 2020 2021 2020 Ag Supply Chain 253 273 1,261 1,178 Specialty Liquids 71 64 304 257 Engineered Granules 60 59 383 331 Total tons 384 396 1,948 1,766 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.
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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
Three months ended September 30, 2021
(in thousands) Trade Ethanol Plant Nutrient Other Total
Sales and merchandising revenues $ 2,242,131 $
614,637
608,886 124,168 - 2,876,989
Gross profit 98,196 5,751 17,888 - 121,835
Operating, administrative and general expenses 67,590 10,014 22,883 9,788 110,275
Interest expense (income), net 5,243 1,658 1,146 752 8,799
Equity in earnings (losses) of affiliates, net (250) - - - (250)
Other income, net 16,886 683 309 (4,072) 13,806
Income (loss) before income taxes from
continuing operations $ 41,999 $
(5,238)
- (1,602) - - (1,602)
Non-GAAP Income (loss) before income taxes
attributable to the Company from continuing
operations $ 41,999 $ (3,636) $ (5,832) $ (14,612) $ 17,919
Three months ended September 30, 2020
(in thousands) Trade Ethanol Plant Nutrient Other Total
Sales and merchandising revenues $ 1,432,922 $
349,957
338,788 86,211 - 1,792,349
Gross profit 65,572 11,169 16,496 - 93,237
Operating, administrative and general expenses 58,385 5,650 21,175 7,400 92,610
Interest expense (income), net 4,380 1,651 1,287 (465) 6,853
Equity in earnings (losses) of affiliates, net 20 - - - 20
Other income (expense), net 3,114 553 579 (400) 3,846
Income (loss) before income taxes from
continuing operations $ 5,941 $
4,421
- 3,273 - - 3,273
Non-GAAP Income (loss) before income taxes
attributable to the Company from continuing
operations $ 5,941 $ 1,148 $ (5,387) $ (7,335) $ (5,633)
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 alternatives to
Income (loss) before income taxes from continuing operations, the most directly
comparable amounts reported under GAAP.
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Trade
Operating results for theTrade Group increased by$36.1 million compared to the results of the same period last year. Sales and merchandising revenues increased by$809.2 million and cost of sales and merchandising revenues increased by$776.6 million for a favorable net gross profit impact of$32.6 million . Most of the increase to sales and cost of sales is the result of increased commodity prices. The net increase in gross profit was driven by our traditional asset locations which were significantly better than the prior year due to strong elevation margins in our early harvest draw areas. The group also had improved merchandising results as geographic dislocations created volatility that allowed traders to identify arbitrage opportunities.
Operating, administrative and general expenses increased by
Interest expense increased by
Other income increased by
Ethanol
Operating results for theEthanol Group declined by$4.8 million from the same period last year. Sales and merchandising revenues increased by$264.7 million and cost of sales and merchandising revenues increased by$270.1 million compared to prior year results. As a result gross profit decreased by$5.4 million compared to 2020 results. Most of the increase to sales and cost of sales is the result of increased corn and ethanol commodity prices. The decrease to gross profit in the current period results reflect higher corn basis levels offset in part by higher co-product sales and third-party trading revenues. Operating, administrative and general expenses increased by$4.4 million from the increase in labor and incentive compensation costs from increased production and improved full year operating results, respectively.
Plant Nutrient
Operating results for thePlant Nutrient Group declined by$0.4 million compared to the same period in the prior year. Sales and merchandising revenues increased by$39.3 million and cost of sales and merchandising revenues increased by$38.0 million resulting in a$1.3 million increase in gross profit. The increase in gross profit was driven by improved margins across the Ag Supply Chain and Specialty Liquids product lines due to strong grower income and well positioned fertilizer inventory despite slightly lower volumes sold. Partially offsetting this increase were lower results in our Engineered Granules business from rising input costs and a tight labor market.
Operating, administrative and general expenses increased by
Interest expense decreased by
Other
Operating results for the third quarter declined by$7.3 million compared to the same period in 2020. The increase in operating losses was primarily driven by higher operating, administrative and general expenses due to increased variable incentive-based compensation as a result of improved company-wide performance year over year as well as stranded costs from the sale of ourRail Leasing business.The Andersons, Inc. | Q3 2021 Form 10-Q | 29
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Income Taxes
For the three months endedSeptember 30, 2021 , the Company recorded an income tax expense from continuing operations of$4.0 million at an effective rate of 24.7%. For the three months endedSeptember 30, 2020 , the Company recorded an income tax benefit from continuing operations of$4.1 million at an effective tax rate of 175.8%. The change in effective tax rate for the three months endedSeptember 30, 2021 as compared to the same period last year was primarily attributed to additional tax benefits from net operating loss carry backs as a result of the CARES Act in the prior year, offset by the portion of income owned by noncontrolling interests that do not result in a tax expense.
Comparison of the nine months ended
Nine months ended September 30, 2021
(in thousands) Trade Ethanol Plant Nutrient Other Total
Sales and merchandising revenues $ 6,522,508 $
1,674,123
1,625,173 531,568 - 8,430,665
Gross profit 248,584 48,950 101,149 - 398,683
Operating, administrative and general expenses 186,035 23,247 72,850 30,701 312,833
Interest expense (income), net 19,746 5,752 3,358 (8) 28,848
Equity in earnings (losses) of affiliates, net 2,389 - - - 2,389
Other income (expense), net 24,439 2,048 1,745 (3,489) 24,743
Income (loss) before income taxes from
continuing operations $ 69,631 $
21,999
- (822) - - (822)
Non-GAAP Income (loss) before income taxes
attributable to the Company from continuing
operations $ 69,631 $ 22,821 $ 26,686 $ (34,182) $ 84,956
Nine months ended September 30, 2020
(in thousands) Trade Ethanol Plant Nutrient Other Total
Sales and merchandising revenues $ 4,162,130 $
886,742
907,571 431,820 - 5,314,101
Gross profit 187,420 (20,829) 75,625 - 242,216
Operating, administrative and general expenses 181,539 17,271 59,197 19,356 277,363
Interest expense (income), net 16,624 5,908 4,535 (1,116) 25,951
Equity in earnings (losses) of affiliates, net 228 - - - 228
Other income (expense), net 6,865 1,465 935 889 10,154
Income (loss) before income taxes from
continuing operations $ (3,650) $
(42,543)
- (20,583) - - (20,583)
Non-GAAP Income (loss) before income taxes
attributable to the Company from continuing
operations $ (3,650) $ (21,960) $ 12,828 $ (17,351) $ (30,133)
Trade
Operating results for the Trade Group increased by $73.3 million compared to the
results of the same period last year. Sales and merchandising revenues increased
by $2,360.4 million and cost of sales and merchandising revenues increased by
$2,299.2 million for an increased gross profit impact of $61.2 million . Most of
the increase to sales and cost of sales is the result of increased commodity
prices. The net increase in gross profit was driven by improved merchandising
results as geographic dislocations created volatility that allowed traders to
identify arbitrage opportunities. Additionally, our traditional asset locations
which were significantly better than the prior year due to strong elevation
margins in our early harvest draw areas.
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Operating, administrative and general expenses increased by$4.5 million . The increase from the prior year is primarily related to higher incentive compensation costs from improved operating results. Despite the expense increase, the Company continues to benefit from cost saving initiatives, much of which is headcount reduction, both from acquisition integration and in response to the COVID-19 pandemic.
Interest expense increased by
The increase in other income is largely driven by a gain on the sale of a grain asset location in the current year.
Ethanol
Operating results for theEthanol Group increased by$44.8 million from the same period last year. Sales and merchandising revenues increased by$787.4 million and cost of sales and merchandising revenues increased by$717.6 million compared to prior year. As a result, gross profit increased by$69.8 million compared to prior year. Most of the increase to sales and cost of sales is the result of increased commodity prices. The net increase to gross profit in the current period results reflect significantly improved crush margins, higher co-product sales from traditional and high-protein DDGs and corn oil and strong merchandising revenues. The prior year results were significantly impacted by COVID-19, resulting in a lack of demand and also included a$10.9 million inventory write down.
Operating, administrative and general expenses increased by
Plant Nutrient
Operating results for thePlant Nutrient Group increased by$13.9 million compared to the same period in the prior year. Sales and merchandising revenues increased$125.3 million and cost of sales and merchandising revenues increased by$99.7 million resulting in increased gross profit of$25.5 million . Gross profit improved year over year due to increases in volumes and margins across the breadth of product lines and reflects higher demand, strong grower income and well-positioned fertilizer inventory.
Operating, administrative and general expenses increased by
Interest expense decreased by
Other Operating results declined by$16.8 million from the same period last year. The increase in operating losses was primarily driven by increased variable incentive-based compensation in operating, administrative and general expenses due to improved company-wide performance year over year, as well as stranded costs from the sale of ourRail Leasing business.
Income Taxes
For the nine months endedSeptember 30, 2021 , the Company recorded an income tax expense from continuing operations of$18.1 million at an effective rate of 21.5%. For the nine months endedSeptember 30, 2020 , the Company recorded an income tax benefit from continuing operations of$18.6 million at an effective tax rate of 36.7%. The change in effective tax rate for the nine months endedSeptember 30, 2021 as compared to the same period last year primarily attributed to additional tax benefits from net operating loss carry backs as a result of the CARES Act in the prior year, offset by the favorable impact of the mark-to-market activity on the contracts within the ethanol segment and the portion of income owned by noncontrolling interests that do not result in a tax expense.The Andersons, Inc. | Q3 2021 Form 10-Q | 31
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Liquidity and Capital Resources
Working Capital AtSeptember 30, 2021 , the Company had working capital related to its continuing operation of$762.1 million . The following table presents changes in the components of current assets and current liabilities: September 30, September 30, (in thousands) 2021 2020 Variance Current Assets from Continuing Operations: Cash and cash equivalents$ 216,874 $ 13,693 $ 203,181 Accounts receivable, net 735,349 509,964 225,385 Inventories 1,017,804 747,588 270,216 Commodity derivative assets - current 409,647 140,065 269,582 Other current assets 92,159 83,807 8,352 Total current assets from continuing operations$ 2,471,833 $ 1,495,117 $ 976,716 Current Liabilities from Continuing Operations: Short-term debt 281,199 100,405 180,794 Trade and other payables 825,923 635,206 190,717 Customer prepayments and deferred revenue 147,225 47,906 99,319 Commodity derivative liabilities - current 78,702 79,159 (457) Current maturities of long-term debt 106,255 62,499 43,756 Accrued taxes 97,215 15,178 82,037 Accrued expenses and other current liabilities 173,215 128,187 45,028
Total current liabilities from continuing operations
$ 762,099
Current assets from continuing operations as ofSeptember 30, 2021 increased$976.7 million in comparison to those as ofSeptember 30, 2020 . This increase was noted in all working capital asset accounts. The increases in accounts receivable, current commodity derivative assets and inventory balances can largely be attributable to the significant increases in the prices of agricultural commodities, including fertilizer, that the Company transacts in the ordinary course of business. The significant increase in cash and cash equivalents is largely due to proceeds received during the third quarter of the current year from theRail Leasing business sale. See also the discussion below on additional sources and uses of cash for an understanding of the increase in cash from prior year. Current liabilities from continuing operations increased$641.2 million compared to the prior year primarily due to increases in short-term debt and trade and other payables. The increase in short-term debt is the result of higher working capital needs and driven by significant increases in the prices of agricultural commodities. The increase in trade and other payables is also the result of increasing agricultural commodity prices. The increase in accrued expenses is largely driven by the income tax payable associated with the significant taxable gain realized in conjunction with theRail Leasing business sale in the current year. The increase in current maturities of long-term debt is due to the shift of ELEMENT debt as it was determined that it was virtually certain that a covenant violation would occur in the future.The Andersons, Inc. | Q3 2021 Form 10-Q | 32
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Sources and Uses of Cash
Nine Months Ended
September 30, September 30,
(in thousands) 2021 2020
Net cash provided by operating activities $ 119,067 $ 195,791
Net cash provided by (used in) investing activities 519,523 (70,159)
Net cash used in financing activities (450,647) (166,427)
Operating Activities
Our operating activities provided cash of $119.1 million and $195.8 million in
the first nine months of 2021 and 2020, respectively. The decrease in cash
provided was primarily due to a result in the change of working capital, as
discussed above, driven by significant increases in agricultural commodity
prices. However, when you remove the impact from changes in working capital,
cash provided by operating activities was much stronger than the prior period
due to favorable operating results.
Investing Activities
Investing activities provided cash of $519.5 million through the first nine
months of 2021 compared to cash used of $70.2 million in the prior year. The
significant increase from the prior year was a result of proceeds received for
the sale of the Rail Leasing business as well as a grain asset location within
the Trade segment. Additional contributing factors to the increase were higher
proceeds from sales of assets and railcars in the normal course of business,
fewer purchased railcars and the continued strategic use of capital spending to
enhance overall liquidity and cash management.
We expect to invest approximately $85 million in property, plant and equipment
in 2021 related to continuing operations.
Financing Activities
Financing activities used cash of $450.6 million and $166.4 million for the nine
months ended September 30, 2021 and 2020, respectively. This change from the
prior year was largely due to the Company's continued strategic effort to pay
down debt which was accelerated with proceeds from the Rail Leasing sale.
The Company is party to borrowing arrangements with a syndicate of banks that
provide a total of $1,297.5 million in borrowings. Of the total capacity, $397.5
million is non-recourse to the Company. As of September 30, 2021 , the Company
had $1,169.9 million available for borrowing with $160.1 million of that total
being non-recourse to the Company.
The Company paid $17.5 million in dividends in the first nine months of 2021
compared to $17.2 million in the prior year. The Company paid $0.175 per common
share for the dividends paid in January, April and July of 2021 and 2020. On
August 20, 2021 , the Company declared a cash dividend of $0.175 per common share
payable on October 22, 2021 to shareholders of record on October 1, 2021 .
Certain of our long-term borrowings include covenants that, among other things,
impose minimum levels of equity and limitations on additional debt. The Company
has concluded that in relation to the $70 million non-recourse credit agreement
associated with the ELEMENT operations, is virtually certain to violate a debt
service coverage ratio covenant at December 31, 2021 , if it does not otherwise
obtain a waiver. ELEMENT plans to work with the lending party to do so, however,
in the meantime has classified this debt as a current maturity of long-term debt
as of September 30, 2021 . The Company is in compliance with all other covenants
as of September 30, 2021 . In addition, certain of our long-term borrowings are
collateralized by first mortgages on various facilities. Our non-recourse
long-term debt is collateralized by ethanol 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 our sources of liquidity will be adequate to fund our
operations, capital expenditures and service our indebtedness.
At
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