Andersons Inc Deep Dive (August 2018)

In July, a client reached out to ask for more insight into the Q1 2018 rating for Andersons, Inc., an agribusiness, as part of their risk mitigation process on critical suppliers.

Andersons (Nasdaq: ANDE) was rated a 22 for TTM ending Q1 2018 (March 31, 2018), with a core health of 15. Since the initial analysis we carried out, the report has been updated for Q2 results, with an improvement of 7 points in the FHR score (29), while core health is at 14. We thought it might be illustrative to show how we deal with client requests for this type of help and to track the slight improvement in Andersons' profile since then.

The high level perspective on the rating

1. Looking at Section 2 of the FHR report, Andersons Inc has consistently had relatively poor core health (never above 50), that dropped to 15 in 2015 and has remained in that neighborhood ever since

2. This is mostly driven by profitability ratios, although cost structure ratios do play a part in bringing the Core Health down

3. With this level of core health, a company needs an extremely strong balance sheet to weather any shocks or storms that come its way. Essentially, the balance sheet is extremely important at this level of core health to determining the final FHR score

4. Instead of having sufficient resilience, Andersons has had consistently weak liquidity and earnings performance, with leverage ratios that fluctuate between weak and adequate

5. Thus, the FHR has hovered in the high risk region, higher (i.e. closer to 30 and above) in years where leverage is deemed adequate, and lower (i.e. mid-low 20s) in years where it is weak

6. This story remains consistent in Q2, where Leverage moves up to adequate, and FHR is closer to 30

Unpacking the details

• As mentioned, profitability metrics have a significant downward effect on the FHR.

• Revenue has been steadily decreasing since 2014 onwards. Most recently this can be attributed to the Grain Group, Plant Nutrient Group, and the closure of its Retail Group.

  

• Operating margins were negative in 2015, and have recently fluctuated around +/- 1%.

• Andersons is rated in the Primary industry, so we account for the cyclicality and low profit nature of agriculture, however this does not justify negative operating margins.

• The company has listed a series of abnormal items related to asset impairments and goodwill writedowns. When simulating the removel of these items, the company did not improve out of High Risk, so these items are not the cause of the company's concerns (rather, they are likely a consequence).

• Switching to the balance sheet, Andersons would need significant cash reserves to continue to pay obligations if operating and net profitability continues trending downward.

• Cash was almost halved between 2016 and 2017, and remained under 5% of current liabilities for Q1 2018.

• Coupled with this was a significant increase in debt. From 2017 to Q1 2018, debt almost doubled (corresponding score went from Adequate to Weak), giving a debt to total assets ratio of 40% and debt to revenue 27%.

• Looking at the Q2 update, we can see that the resilience indicators have improved across the board, which point to improvements in leverage and liquidity as the reasons for the FHR increase to 29.

• Cash almost doubled, and is now at 9% of current liabilities.

• Debt, while still about 30% higher than 2017 levels, decreased significantly, giving a debt to total asset ratio of 30% and debt to revenue of 19%. This is a more manageable level of debt for the core health position (with the corresponding score moving to Adequate) - however, it still remains quite high given the operating profile of Andersons

The bottom line

Andersons remains high risk, and Andersons will need to continue improving its core health and resilience, preferably at a faster rate than what we are seeing in early 2018.