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 including the ongoing economic impacts from the conflict inUkraine , 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 2021 Form 10-K and under Item 1A in this report. 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 2021 Form 10-K, have not materially changed through the second quarter of 2022. Executive Overview Our operations are organized, managed and classified into three reportable business segments: Trade, Renewables 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 the Rail segment being presented as discontinued operations, the Company has excluded Rail 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 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 during the quarter for impairment indicators. Management ultimately concluded that an impairment triggering event had not occurred. The Company believes that the share price is 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 ofJune 30, 2022 .The Andersons, Inc. | Q2 2022 Form 10-Q | 28 -------------------------------------------------------------------------------- Table of Contents Trade The Trade segment's second quarter operating results improved from the prior year as the segment entered the quarter with good ownership positions and, as expected, benefited from basis improvements. Wheat ownership in our grain terminal assets is now earning space income and we had very strong results from our Midwest truck grain merchandising business. Our food and specialty ingredients business also delivered strong results in the quarter, particularly in ourUK subsidiary, Feed Factors. Agricultural inventories on hand were 107.0 million and 85.8 million bushels atJune 30, 2022 andJune 30, 2021 , 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 184 million bushels atJune 30, 2022 compared to 202 million bushels atJune 30, 2021 . Current crop conditions vary by geography, but despite initial delays in planting, crop conditions are good in our key draw areas. Continued merchandising opportunities and strong elevation margins are also expected to continue through the remainder of the year as global stocks are not projected to recover quickly from the recent worldwide production shortfalls.
Renewables
The Renewables segment's second quarter operating results increased from the prior year due to higher production margins and yields. Also contributing to the increased results was$24.4 million of positive mark-to-market impact; nearly$18 million of which are reversals of prior losses. This compared to positive mark-to-market impacts of$13.5 million in the second quarter of 2021. The ethanol facilities received$17.6 million of USDA Biofuels Producer COVID relief funds, of which,$8.9 million is included in pre-tax income attributable to the Company. Higher export demand has helped keep ethanol prices firm, despite lower than anticipated seasonal domestic demand being impacted by the overall high gasoline prices. High corn costs for ethanol production in the western US may negatively impact ethanol production there, while the Company's eastern corn belt production facilities are better positioned for corn supply.
Ethanol and related co-products volumes for the three and six months ended
Three months ended June 30, Six months ended June 30,
(in thousands) 2022 2021 2022 2021
Ethanol (gallons shipped) 196,536 186,396 391,547 358,608
E-85 (gallons shipped) 10,600 11,914 17,315 19,805
Corn oil (pounds shipped) 122,223 56,760 232,544 104,708
DDG (tons shipped)* 450 454 950 931
* DDG tons shipped converts wet tons to a dry ton equivalent amount.
Plant Nutrient
The Plant Nutrient segment's second quarter operating results increased from the prior period. Tons sold across all product lines were down period over period, however, the lower volumes were more than offset by significant margin increases from well-positioned inventory. The most significant margin improvements came from the Ag Supply Chain and Specialty Liquids product lines. While we have seen some lowering of base nutrient prices, continued strong global demand and disruption should keep prices higher than historical averages. Strong farm income may drive purchasing decisions while overall price levels could cause customers to delay fertilizer purchases. Storage capacity at our Ag Supply Chain and Specialty Liquids facilities, including leased storage, was approximately 448 thousand tons for dry nutrients and approximately 511 thousand tons for liquid nutrients atJune 30, 2022 , which is similar to the prior year. The Andersons, Inc. | Q2 2022 Form 10-Q | 29 -------------------------------------------------------------------------------- Table of Contents Tons of product sold for the three and six months endedJune 30, 2022 and 2021 were as follows: Three months ended June 30, Six months ended June 30, (in thousands) 2022 2021 2022 2021 Ag Supply Chain 492 661 649
1,008
Specialty Liquids 98 133 190 233 Engineered Granules 121 165 228 323 Total tons 711 959 1,067 1,564 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.
The Andersons, Inc. | Q2 2022 Form 10-Q | 30 -------------------------------------------------------------------------------- Table of Contents 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 June 30, 2022
(in thousands) Trade Renewables Plant Nutrient Other Total
Sales and merchandising revenues $ 3,097,767 $
882,567
822,679 401,324 - 4,219,776
Gross profit 101,994 59,888 68,959 - 230,841
Operating, administrative and general expenses 62,977 8,590 29,591 11,401 112,559
Interest expense (income), net 13,300 2,012 1,923 (314) 16,921
Equity in earnings (losses) of affiliates, net (6,034) - - - (6,034)
Other income (expense), net 3,983 18,490 866 (513) 22,826
Income (loss) before income taxes from
continuing operations $ 23,666 $
67,776
- 21,856 - - 21,856
Non-GAAP Income (loss) before income taxes
attributable to the Company from continuing
operations $ 23,666 $ 45,920 $ 38,311 $ (11,600) $ 96,297
Three months ended June 30, 2021
(in thousands) Trade Renewables Plant Nutrient Other Total
Sales and merchandising revenues $ 2,297,869 $
616,527
581,811 270,549 - 3,072,398
Gross profit 77,831 34,716 50,860 - 163,407
Operating, administrative and general expenses 61,514 6,577 26,568 10,901 105,560
Interest expense (income), net 7,452 2,021 1,146 (559) 10,060
Equity in earnings (losses) of affiliates, net 845 - - - 845
Other income (expense), net 4,067 38 849 116 5,070
Income (loss) before income taxes from
continuing operations $ 13,777 $
26,156
- 2,625 - - 2,625
Non-GAAP Income (loss) before income taxes
attributable to the Company from continuing
operations $ 13,777 $ 23,531 $ 23,995 $ (10,226) $ 51,077
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.
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Trade
Operating results for the Trade segment increased by $9.9 million compared to
the results of the same period last year. Sales and merchandising revenues
increased by $799.9 million and cost of sales and merchandising revenues
increased by $775.7 million for a favorable net gross profit impact of $24.2
million . The increase to sales and cost of sales is the result of increased
commodity prices and volumes. Much of the volume increase is related to the
opening of the international merchandising office in the second half of prior
year. The increase in gross profit was driven by a strong performance in our
domestic assets, particularly around our core footprint in the eastern grain
belt, along with well-positioned inventory in our in our feed ingredients
business that led to strong margins.
Operating, administrative and general expenses increased by $1.5 million . The
increase from the prior year is primarily related to higher labor costs as a
result of new locations opened in the second half of 2021.
Interest expense increased by $5.8 million due to both higher borrowings and
interest rates on the Company's short-term line of credit compared to the prior
year.
Equity in earnings of affiliates decreased by $6.9 million mainly as a result of
an impairment of one of the Company's equity method investments of approximately
$4.5 million .
Renewables
Operating results for the Renewables segment increased by $22.4 million from the
same period last year. Sales and merchandising revenues increased by $266.0
million and cost of sales and merchandising revenues increased by $240.9 million
compared to prior year results. As a result, gross profit increased by $25.2
million compared to 2021 results. Most of the increase to sales and cost of
sales is the result of increased corn and ethanol commodity prices. The increase
to gross profit in the current period results reflect stronger production
margins and yields. Included in pre-tax income in the quarter is $24.4 million
of positive mark-to-market impact of which nearly $18 million are reversals of
prior mark-to-market losses. This compared to positive mark-to-market impacts of
$13.5 million in the second quarter of 2021.
Operating, administrative and general expenses increased by
Other income increased by$18.5 million , and almost all of the increase from the prior year was a result of the proceeds received as a part of the USDA Biofuel Producer Relief Program that was enacted as a part of the CARES Act, of which approximately half of these proceeds were attributable to the noncontrolling interest. Plant Nutrient Operating results for the Plant Nutrient segment increased by$14.3 million compared to the same period in the prior year. Sales and merchandising revenues increased by$148.9 million and cost of sales and merchandising revenues increased by$130.8 million resulting in an$18.1 million increase in gross profit. The increase in gross profit was driven by very strong margins across the Ag Supply Chain and Specialty Liquids product lines due to strong grower income and well-positioned fertilizer inventory despite lower volumes sold.
Operating, administrative and general expenses increased by
Interest expense increased by
Other
Operating results for the quarter declined by$1.4 million compared to the same period in the prior year. 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.The Andersons, Inc. | Q2 2022 Form 10-Q | 32 -------------------------------------------------------------------------------- Table of Contents Income Taxes For the three months endedJune 30, 2022 , the Company recorded income tax expense from continuing operations of$15.8 million . The Company's effective tax rate was 13.3% on income before taxes from continuing operations of$118.2 million . The difference between the 13.3% effective tax rate and theU.S. federal statutory tax rate of 21% is primarily attributable 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. For the three months endedJune 30, 2021 , the Company recorded income tax expense from continuing operations of$9.7 million at an effective tax rate of 18.0%. The difference between the 18.0% effective tax rate and theU.S. federal statutory tax rate of 21% is due to the tax impact of certain discrete derivatives and hedging activities offset by state and local taxes and nondeductible compensation.The Andersons, Inc. | Q2 2022 Form 10-Q | 33 -------------------------------------------------------------------------------- Table of Contents Operating Results
Comparison of the six months ended
Six months ended June 30, 2022
(in thousands) Trade Renewables Plant Nutrient Other Total
Sales and merchandising revenues $ 6,182,448 $
1,565,798
1,490,719 574,641 - 8,078,195
Gross profit 169,613 75,079 105,684 - 350,376
Operating, administrative and general expenses 122,520 16,480 54,916 20,630 214,546
Interest expense (income), net 21,487 3,779 3,384 (870) 27,780
Equity in earnings (losses) of affiliates, net (6,278) - - - (6,278)
Other income (expense), net 8,007 18,918 1,670 (1,607) 26,988
Income (loss) before income taxes from
continuing operations $ 27,335 $
73,738
- 22,303 - - 22,303
Non-GAAP Income (loss) before income taxes
attributable to the Company from continuing
operations $ 27,335 $ 51,435 $ 49,054 $ (21,367) $ 106,457
Six months ended June 30, 2021
(in thousands) Trade Renewables Plant Nutrient Other Total
Sales and merchandising revenues $ 4,280,377 $
1,059,486
1,016,287 407,400 - 5,553,676
Gross profit 150,388 43,199 83,261 - 276,848
Operating, administrative and general expenses 118,445 13,233 49,967 20,913 202,558
Interest expense (income), net 14,503 4,094 2,212 (760) 20,049
Equity in earnings (losses) of affiliates, net 2,639 - - - 2,639
Other income (expense), net 7,553 1,365 1,436 584 10,938
Income (loss) before income taxes from
continuing operations $ 27,632 $
27,237
- 780 - - 780
Non-GAAP Income (loss) before income taxes
attributable to the Company from continuing
operations $ 27,632 $ 26,457 $ 32,518 $ (19,569) $ 67,038
Trade
Operating results for the Trade segment were consistent with the same period of
prior year. Sales and merchandising revenues increased by $1,902.1 million and
cost of sales and merchandising revenues increased by $1,882.8 million for an
increased gross profit impact of $19.2 million . Most of the increase to sales
and merchandising revenues and cost of sales and merchandising revenues was a
result of increased commodity prices and volumes. Much of the volume increase is
related to the opening of the international merchandising office in the second
half of prior year. The increase in gross profit was driven by a strong
elevation margins in our domestic assets, along with well-positioned inventories
in our feed ingredients business that led to strong margins. These factors were
partially offset by the exceptional propane merchandising results from the
unseasonably frigid weather experienced by the central U.S. in the first quarter
of the prior year that did not recur in the current period.
Operating, administrative and general expenses increased by $4.1 million . The
increase from the prior year is primarily related to higher labor costs as a
result of new locations opened in the second half of 2021.
Interest expense increased by $7.0 million due to both higher borrowings and
interest rates on the Company's short-term line of credit compared to the prior
year.
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Equity in earnings of affiliates decreased by $8.9 million mainly as a result of
an impairment of one of the Company's equity method investments of approximately
$4.5 million combined with favorable results from the same equity method
investment in the prior year that didn't recur in 2022.
Renewables
Operating results for Renewables increased by$25.0 million from the same period last year. Sales and merchandising revenues increased by$506.3 million and cost of sales and merchandising revenues increased by$474.4 million compared to prior year. As a result, gross profit increased by$31.9 million compared to 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 commodity prices. The net increase to gross profit in the current period results reflect improved board crush margins and yields across the ethanol plants, improved co-product values and strong merchandising margins. Unrealized mark-to-market adjustments improved approximately$3.7 million from the prior year.
Operating, administrative and general expenses increased by
Other income increased by$17.6 million and almost all of the increase from the prior year was a result of the proceeds received as a part of the USDA Biofuel Producer Relief Program that was enacted as a part of the CARES Act, of which approximately half of these proceeds were attributable to the noncontrolling interest. Plant Nutrient Operating results for the Plant Nutrient segment increased by$16.5 million compared to the same period in the prior year. Sales and merchandising revenues increased$189.7 million and cost of sales and merchandising revenues increased by$167.2 million resulting in increased gross profit of$22.4 million . Both sales and merchandising revenues and cost of sales and merchandising revenues were higher due to higher fertilizer prices from the prior year. Gross profit improved year-over-year due to strong margins from well-positioned inventory in a tight supply market. The most significant margin improvements came from Ag Supply Chain and Specialty Liquids product lines.
Operating, administrative and general expenses increased by
Interest expense increased by
Other
Operating results declined by$1.8 million from the same period last year. The decrease in other income, net from the prior year was due to interest received on a tax refund as a result of the CARES Act that did not recur in current year.
Income Taxes
For the six months endedJune 30, 2022 , the Company recorded income tax expense from continuing operations of$19.9 million . The Company's effective tax rate was 15.4% on income before taxes from continuing operations of$128.8 million . The difference between the 15.4% effective tax rate and theU.S. federal statutory tax rate of 21% is primarily attributable 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. For the six months endedJune 30, 2021 , the Company recorded income tax expense from continuing operations of$14.0 million at an effective tax rate of 20.7%. The difference between the 20.7% effective tax rate and theU.S. federal statutory tax rate of 21% due to the tax impact of certain discrete derivatives and hedging activities offset by state and local taxes and nondeductible compensation.The Andersons, Inc. | Q2 2022 Form 10-Q | 35
-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources
Working Capital
AtJune 30, 2022 , the Company had working capital from continuing operations of$984.0 million , an increase of$443.6 million from the prior year. This increase was attributable to changes in the following components of current assets from continuing operations and current liabilities from continuing operations: (in thousands) June 30, 2022 June 30, 2021 Variance Current Assets from Continuing Operations: Cash and cash equivalents$ 86,035 $ 27,538 $ 58,497 Accounts receivable, net 1,141,167 702,869 438,298 Inventories 1,618,326 904,924 713,402 Commodity derivative assets - current 638,357 507,148 131,209 Other current assets 70,367 63,266 7,101
Total current assets from continuing operations
$ 2,205,745 $ 1,348,507 Current Liabilities from Continuing Operations: Short-term debt 1,161,428 757,271 404,157 Trade and other payables 772,996 543,503 229,493 Customer prepayments and deferred revenue 184,154 55,943 128,211 Commodity derivative liabilities - current 185,903 90,366 95,537 Current maturities of long-term debt 53,951 50,069 3,882 Accrued expenses and other current liabilities 211,830 168,221 43,609
Total current liabilities from continuing operations
$ 1,665,373 $ 904,889 Working Capital from Continuing Operations$ 983,990
Current assets from continuing operations as ofJune 30, 2022 increased$1,348.5 million in comparison to those as ofJune 30, 2021 . This increase was noted in mainly accounts receivable, inventories and current commodity derivative assets. The increases in those accounts can largely be attributed to the significant increases in the prices of agricultural commodities, including fertilizer, that the Company transacts in the ordinary course of business from the same period of the prior year. The Company also opened an international merchandising office in the third quarter of the prior year which is contributing to the increase in working capital as there is a substantial volume of commodities held in that business in 2022. Current liabilities from continuing operations increased$904.9 million across all financial statement line items when compared to the prior year. The increase in short-term debt is the result of higher working capital needs and driven by the significant increase in agricultural commodity prices from the prior year. The increase in trade and other payables, customer prepayments and deferred revenue, and current commodity derivative liabilities are also the result of increasing agricultural commodity prices. Sources and Uses of Cash Six Months Ended (in thousands) June 30, 2022 June 30, 2021
Net cash used in operating activities $ (721,799) $ (245,494)
Net cash used in investing activities (30,094) (23,474)
Net cash provided by financing activities 622,113 267,550
Operating Activities
Our operating activities used cash of $721.8 million and $245.5 million in the
first six months of 2022 and 2021, respectively. The increase in cash used was
primarily due to the increased working capital needs, as discussed above, driven
by significant increases in agricultural commodity prices and the new
international merchandising locations being included in the current year. When
the changes in operating assets and liabilities are removed, cash provided by
operating activities was slightly lower than prior year due to the timing of tax
refunds and credits in the first quarter of 2021.
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Investing Activities
Investing activities used cash of $30.1 million through the first six months of
2022 compared to cash used of $23.5 million in the prior period. The increase
from the prior period was a result of a modest increase in capital spending on
continuing operations from the prior year.
We expect to invest approximately
Financing Activities
Financing activities provided cash of$622.1 million and$267.6 million for the six months endedJune 30, 2022 and 2021, respectively. This increase from the prior year was due to the significant increase in agricultural commodity prices from the prior period and the related need for short-term borrowings. The Company's short-term debt balance of$1,161.4 million is closely aligned to the balance of readily marketable inventories of$1,214.4 million as ofJune 30, 2022 . The Company is party to borrowing arrangements with a syndicate of banks that provide a total of$2,501.7 million in borrowing capacity. Of the total capacity,$395.7 million is non-recourse to the Company. As ofJune 30, 2022 , the Company had$1,315.2 million available for borrowing with$277.5 million of that total being non-recourse to the Company. The Company paid$12.2 million in dividends in the first six months of 2022 compared to$11.7 million in the prior period. The Company paid dividends of$0.180 and$0.175 per common share in January and April of 2022 and 2021, respectively. OnJune 16, 2022 , the Company declared a cash dividend of$0.180 per common share payable onJuly 22, 2022 to shareholders of record onJuly 1, 2022 . 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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