UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended 03/31/2021
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to .
Commission file number 000-20557
THE ANDERSONS, INC.
(Exact name of the registrant as specified in its charter)
| (State of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(419 ) 893-5050
(Telephone Number)
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of each class: | Trading Symbol | Name of each exchange on which registered: | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ý | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | ||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ý
The registrant had 33,231,852 common shares outstanding at April 23, 2021.
THE ANDERSONS, INC.
INDEX
| Page No. | |||||
| PART I. FINANCIAL INFORMATION | |||||
| PART II. OTHER INFORMATION | |||||
2
Part I. Financial Information
Item 1. Financial Statements
The Andersons, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)(In thousands)
| March 31, 2021 | December 31, 2020 | March 31, 2020 | |||||||||||||||
| Assets | |||||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | ||||||||||||||
| Accounts receivable, net | |||||||||||||||||
| Other current assets | |||||||||||||||||
| Total current assets | |||||||||||||||||
| Other assets: | |||||||||||||||||
| Goodwill | |||||||||||||||||
| Other intangible assets, net | |||||||||||||||||
| Right of use assets, net | |||||||||||||||||
| Other assets, net | |||||||||||||||||
| Total other assets | |||||||||||||||||
| Total assets | $ | $ | $ | ||||||||||||||
| Liabilities and equity | |||||||||||||||||
| Current liabilities: | |||||||||||||||||
| $ | $ | $ | |||||||||||||||
| Trade and other payables | |||||||||||||||||
| Customer prepayments and deferred revenue | |||||||||||||||||
| Accrued expenses and other current liabilities | |||||||||||||||||
| Total current liabilities | |||||||||||||||||
| Long-term lease liabilities | |||||||||||||||||
| Deferred income taxes | |||||||||||||||||
| Other long-term liabilities | |||||||||||||||||
| Total liabilities | |||||||||||||||||
| Shareholders’ equity: | |||||||||||||||||
Common shares, without par value ( | |||||||||||||||||
Preferred shares, without par value ( | |||||||||||||||||
| Additional paid-in-capital | |||||||||||||||||
Treasury shares, at cost ( | ( | ( | ( | ||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ( | ||||||||||||||
| Retained earnings | |||||||||||||||||
| Total shareholders’ equity of The Andersons, Inc. | |||||||||||||||||
| Noncontrolling interests | |||||||||||||||||
| Total equity | |||||||||||||||||
| Total liabilities and equity | $ | $ | $ | ||||||||||||||
See Notes to Condensed Consolidated Financial Statements
3
The Andersons, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)(In thousands, except per share data)
| Three months ended March 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| $ | $ | |||||||||||||
| Cost of sales and merchandising revenues | ||||||||||||||
| Gross profit | ||||||||||||||
| Operating, administrative and general expenses | ||||||||||||||
| Interest expense, net | ||||||||||||||
| Other income, net: | ||||||||||||||
| Equity in earnings of affiliates, net | ||||||||||||||
| Other income, net | ||||||||||||||
| Income (loss) before income taxes | ( | |||||||||||||
| Income tax provision (benefit) | ( | |||||||||||||
| Net income (loss) | ( | |||||||||||||
| Net loss attributable to the noncontrolling interests | ( | ( | ||||||||||||
| Net income (loss) attributable to The Andersons, Inc. | $ | $ | ( | |||||||||||
| Per common share: | ||||||||||||||
| $ | $ | ( | ||||||||||||
| $ | $ | ( | ||||||||||||
See Notes to Condensed Consolidated Financial Statements
4
The Andersons, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)(In thousands)
| Three months ended March 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Net income (loss) | $ | $ | ( | |||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||
| Change in unrecognized actuarial loss and prior service cost | ( | ( | ||||||||||||
| Foreign currency translation adjustments | ( | |||||||||||||
| Cash flow hedge activity | ( | |||||||||||||
| Other comprehensive income (loss) | ( | |||||||||||||
| Comprehensive income (loss) | ( | |||||||||||||
| Comprehensive loss attributable to the noncontrolling interests | ( | ( | ||||||||||||
| Comprehensive income (loss) attributable to The Andersons, Inc. | $ | $ | ( | |||||||||||
See Notes to Condensed Consolidated Financial Statements
5
The Andersons, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)(In thousands)
| Three months ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating Activities | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Bad debt (recovery) expense, net | ( | ||||||||||
| Equity in earnings of affiliates, net of dividends | ( | ( | |||||||||
| Gain on sales of Rail assets and related leases, net | ( | ( | |||||||||
| Stock-based compensation expense | |||||||||||
| Deferred federal income tax | ( | ||||||||||
| Inventory write down | |||||||||||
| Other | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | |||||||||||
| Commodity derivatives | ( | ||||||||||
| Other assets | ( | ||||||||||
| Payables and other accrued expenses | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Investing Activities | |||||||||||
| Purchases of Rail assets | ( | ( | |||||||||
| Proceeds from sale of Rail assets | |||||||||||
| Purchases of property, plant and equipment and capitalized software | ( | ( | |||||||||
| Proceeds from sale of assets | |||||||||||
| Purchase of investments | ( | ( | |||||||||
| Other | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing Activities | |||||||||||
| Net change in short-term borrowings | |||||||||||
| Proceeds from issuance of long-term debt | |||||||||||
| Payments of long-term debt | ( | ( | |||||||||
| Contributions from noncontrolling interest owner | |||||||||||
| Distributions to noncontrolling interest owner | ( | ||||||||||
| Payments of debt issuance costs | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Other | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rates on cash and cash equivalents | ( | ||||||||||
| Increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements
6
The Andersons, Inc.
Condensed Consolidated Statements of Equity
(Unaudited)(In thousands, except per share data)
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||
| Common Shares | Additional Paid-in Capital | Treasury Shares | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Noncontrolling Interests | Total | |||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Net income (loss) | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | |||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | ( | ( | |||||||||||||||||||||||||||||||||||||||
Stock awards, stock option exercises and other shares issued to employees and directors, net of income tax of $ | ( | ||||||||||||||||||||||||||||||||||||||||
Dividends declared ($ | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Restricted share award dividend equivalents | ( | ||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Net income (loss) | ( | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | |||||||||||||||||||||||||||||||||||||||||
Stock awards, stock option exercises and other shares issued to employees and directors, net of income tax of $ | ( | ( | |||||||||||||||||||||||||||||||||||||||
Dividends declared ($ | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Restricted share award dividend equivalents | ( | ||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
7
The Andersons, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation and Consolidation
These Condensed Consolidated Financial Statements include the accounts of The Andersons, Inc. and its wholly owned and controlled subsidiaries (the “Company”), its majority-owned subsidiaries and variable interest entities (“VIEs”) of which the Company is the primary beneficiary. The portion of these entities that is not owned by the Company is presented as noncontrolling interests. All intercompany accounts and transactions are eliminated in consolidation.
Investments in unconsolidated entities in which the Company has significant influence, but not control, are accounted for using the equity method of accounting.
In the opinion of management, all adjustments consisting of normal and recurring items considered necessary for the fair presentation of the results of operations, financial position, and cash flows for the periods indicated have been made. The results in these Condensed Consolidated Financial Statements are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021. An unaudited Condensed Consolidated Balance Sheet as of March 31, 2020 has been included as the Company operates in several seasonal industries.
The Condensed Consolidated Balance Sheet data at December 31, 2020 was derived from the audited Consolidated Financial Statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in The Andersons, Inc. Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).
Recently Adopted Accounting Pronouncements
Simplified Accounting for Income Taxes
2. Inventories
Major classes of inventories are presented below. Readily Marketable Inventories ("RMI") are agricultural commodity inventories such as corn, soybeans, wheat, and ethanol co-products, among others, carried at net realizable value which approximates fair value based on their commodity characteristics, widely available markets, and pricing mechanisms. The net realizable value of RMI is calculated as the fair value (spot price of the commodity in an exchange), less cost of disposal and transportation based on the local market. All other inventories are held at lower of cost or net realizable value.
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Grain and other agricultural products (a) | $ | $ | $ | ||||||||||||||
| Frac sand and propane (a) | |||||||||||||||||
| Ethanol and co-products (a) | |||||||||||||||||
| Plant nutrients and cob products | |||||||||||||||||
| Railcar repair parts | |||||||||||||||||
| Total Inventories | $ | $ | $ | ||||||||||||||
(a) Includes RMI of $942.4 million, $983.2 million and $712.3 million at March 31, 2021, December 31, 2020 and March 31, 2020, respectively.
8
3. Property, Plant and Equipment
The components of Property, plant and equipment, net are as follows:
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Land | $ | $ | $ | ||||||||||||||
| Land improvements and leasehold improvements | |||||||||||||||||
| Buildings and storage facilities | |||||||||||||||||
| Machinery and equipment | |||||||||||||||||
| Construction in progress | |||||||||||||||||
| Less: accumulated depreciation | |||||||||||||||||
| Property, plant and equipment, net | $ | $ | $ | ||||||||||||||
Depreciation expense on property, plant and equipment was $32.0 million and $31.0 million for the three months ended March 31, 2021 and 2020, respectively.
Rail Assets
The components of Rail assets leased to others are as follows:
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Rail assets leased to others | $ | $ | $ | ||||||||||||||
| Less: accumulated depreciation | |||||||||||||||||
| Rail assets, net | $ | $ | $ | ||||||||||||||
9
4. Debt
Short-term and long-term debt at March 31, 2021, December 31, 2020 and March 31, 2020 consisted of the following:
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Short-term debt – non-recourse | $ | $ | $ | ||||||||||||||
| Short-term debt – recourse | |||||||||||||||||
| Total short-term debt | $ | $ | $ | ||||||||||||||
| Current maturities of long-term debt – non-recourse | $ | $ | $ | ||||||||||||||
| Current maturities of long-term debt – recourse | |||||||||||||||||
| Total current maturities of long-term debt | $ | $ | $ | ||||||||||||||
| Long-term debt, less: current maturities – non-recourse | $ | $ | $ | ||||||||||||||
| Long-term debt, less: current maturities – recourse | |||||||||||||||||
| Total long-term debt, less: current maturities | $ | $ | $ | ||||||||||||||
On February 4, 2021, The Andersons, Inc. completed the second amendment to its credit agreement dated January 11, 2019. The amendment, which replaced an underwritten bridge loan received on January 21, 2021, provided for a short-term $250 million term note in which the entire stated principal is due on December 31, 2021. The term note bears interest at variable interest rates, which are based on LIBOR plus an applicable spread.
The total borrowing capacity of the Company's lines of credit at March 31, 2021 was $1,405.0 million of which the Company had a total of $635.8 million available for borrowing under its lines of credit. The Company's borrowing capacity is reduced by a combination of outstanding borrowings and letters of credit.
As of March 31, 2021, December 31, 2020 and March 31, 2020, the estimated fair value of long-term debt, including the current portion, was $977.8 million, $1,026.8 million and $1,113.0 million, respectively. The Company estimates the fair value of its long-term debt based upon the Company’s credit standing and current interest rates offered to the Company on similar bonds and rates currently available to the Company for long-term borrowings with similar terms and remaining maturities.
5. Derivatives
10
Most of these contracts meet the definition of derivatives. While the Company considers its commodity contracts to be effective economic hedges, the Company does not designate or account for its commodity contracts as hedges as defined under current accounting standards. The Company primarily accounts for its commodity derivatives at estimated fair value. The estimated fair value of the commodity derivative contracts that require the receipt or posting of cash collateral is recorded on a net basis (offset against cash collateral posted or received, also known as margin deposits) within commodity derivative assets or liabilities. Management determines fair value based on exchange-quoted prices and in the case of its forward purchase and sale contracts, estimated fair value is adjusted for differences in local markets and non-performance risk. For contracts for which physical delivery occurs, balance sheet classification is based on estimated delivery date. For futures, options and over-the-counter contracts in which physical delivery is not expected to occur but, rather, the contract is expected to be net settled, the Company classifies these contracts as current or noncurrent assets or liabilities, as appropriate, based on the Company’s expectations as to when such contracts will be settled.
Realized and unrealized gains and losses in the value of commodity contracts (whether due to changes in commodity prices, changes in performance or credit risk, or due to sale, maturity or extinguishment of the commodity contract) and commodity inventories are included in cost of sales and merchandising revenues.
Generally accepted accounting principles permit a party to a master netting arrangement to offset fair value amounts recognized for derivative instruments against the right to reclaim cash collateral or obligation to return cash collateral under the same master netting arrangement. The Company has master netting arrangements for its exchange traded futures and options contracts and certain over-the-counter contracts. When the Company enters into a future, option or an over-the-counter contract, an initial margin deposit may be required by the counterparty. The amount of the margin deposit varies by commodity. If the market price of a future, option or an over-the-counter contract moves in a direction that is adverse to the Company’s position, an additional margin deposit, called a maintenance margin, is required. The margin deposit assets and liabilities are included in short-term commodity derivative assets or liabilities, as appropriate, in the Condensed Consolidated Balance Sheets.
The following table presents at March 31, 2021, December 31, 2020 and March 31, 2020, a summary of the estimated fair value of the Company’s commodity derivative instruments that require cash collateral and the associated cash posted/received as collateral. The net asset or liability positions of these derivatives (net of their cash collateral) are determined on a counterparty-by-counterparty basis and are included within current or non-current commodity derivative assets (or liabilities) on the Condensed Consolidated Balance Sheets:
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Cash collateral paid | $ | $ | $ | ||||||||||||||
| Fair value of derivatives | ( | ( | |||||||||||||||
| Net derivative asset position | $ | $ | $ | ||||||||||||||
The following table presents, on a gross basis, current and non-current commodity derivative assets and liabilities:
| March 31, 2021 | |||||||||||||||||||||||||||||
| (in thousands) | Commodity Derivative Assets - Current | Commodity Derivative Assets - Noncurrent | Commodity Derivative Liabilities - Current | Commodity Derivative Liabilities - Noncurrent | Total | ||||||||||||||||||||||||
| Commodity derivative assets | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Commodity derivative liabilities | ( | ( | ( | ( | ( | ||||||||||||||||||||||||
| Cash collateral paid | |||||||||||||||||||||||||||||
| Balance sheet line item totals | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
11
| December 31, 2020 | |||||||||||||||||||||||||||||
| (in thousands) | Commodity Derivative Assets - Current | Commodity Derivative Assets - Noncurrent | Commodity Derivative Liabilities - Current | Commodity Derivative Liabilities - Noncurrent | Total | ||||||||||||||||||||||||
| Commodity derivative assets | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Commodity derivative liabilities | ( | ( | ( | ( | ( | ||||||||||||||||||||||||
| Cash collateral paid | |||||||||||||||||||||||||||||
| Balance sheet line item totals | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| March 31, 2020 | |||||||||||||||||||||||||||||
| (in thousands) | Commodity Derivative Assets - Current | Commodity Derivative Assets - Noncurrent | Commodity Derivative Liabilities - Current | Commodity Derivative Liabilities - Noncurrent | Total | ||||||||||||||||||||||||
| Commodity derivative assets | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Commodity derivative liabilities | ( | ( | ( | ( | ( | ||||||||||||||||||||||||
| Cash collateral paid | |||||||||||||||||||||||||||||
| Balance sheet line item totals | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
The net pre-tax gains and losses on commodity derivatives not designated as hedging instruments included in the Company’s Condensed Consolidated Statements of Operations and the line item in which they are located for the three months ended March 31, 2021 and 2020 are as follows:
| Three months ended March 31, | ||||||||||||||
| (in thousands) | 2021 | 2020 | ||||||||||||
| Gains (losses) on commodity derivatives included in cost of sales and merchandising revenues | $ | $ | ||||||||||||
12
The Company had the following volume of commodity derivative contracts outstanding (on a gross basis) at March 31, 2021, December 31, 2020 and March 31, 2020:
| March 31, 2021 | |||||||||||||||||||||||
| (in thousands) | Number of Bushels | Number of Gallons | Number of Pounds | Number of Tons | |||||||||||||||||||
| Non-exchange traded: | |||||||||||||||||||||||
| Corn | |||||||||||||||||||||||
| Soybeans | |||||||||||||||||||||||
| Wheat | |||||||||||||||||||||||
| Oats | |||||||||||||||||||||||
| Ethanol | |||||||||||||||||||||||
| Corn oil | |||||||||||||||||||||||
| Soybean Oil | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Subtotal | |||||||||||||||||||||||
| Exchange traded: | |||||||||||||||||||||||
| Corn | |||||||||||||||||||||||
| Soybeans | |||||||||||||||||||||||
| Wheat | |||||||||||||||||||||||
| Oats | |||||||||||||||||||||||
| Ethanol | |||||||||||||||||||||||
| Propane | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Subtotal | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| (in thousands) | Number of Bushels | Number of Gallons | Number of Pounds | Number of Tons | |||||||||||||||||||
| Non-exchange traded: | |||||||||||||||||||||||
| Corn | |||||||||||||||||||||||
| Soybeans | |||||||||||||||||||||||
| Wheat | |||||||||||||||||||||||
| Oats | |||||||||||||||||||||||
| Ethanol | |||||||||||||||||||||||
| Corn oil | |||||||||||||||||||||||
| Soybean oil | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Subtotal | |||||||||||||||||||||||
| Exchange traded: | |||||||||||||||||||||||
| Corn | |||||||||||||||||||||||
| Soybeans | |||||||||||||||||||||||
| Wheat | |||||||||||||||||||||||
| Oats | |||||||||||||||||||||||
| Ethanol | |||||||||||||||||||||||
| Propane | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Subtotal | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
13
| March 31, 2020 | |||||||||||||||||||||||
| (in thousands) | Number of Bushels | Number of Gallons | Number of Pounds | Number of Tons | |||||||||||||||||||
| Non-exchange traded: | |||||||||||||||||||||||
| Corn | |||||||||||||||||||||||
| Soybeans | |||||||||||||||||||||||
| Wheat | |||||||||||||||||||||||
| Oats | |||||||||||||||||||||||
| Ethanol | |||||||||||||||||||||||
| Corn oil | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Subtotal | |||||||||||||||||||||||
| Exchange traded: | |||||||||||||||||||||||
| Corn | |||||||||||||||||||||||
| Soybeans | |||||||||||||||||||||||
| Wheat | |||||||||||||||||||||||
| Oats | |||||||||||||||||||||||
| Ethanol | |||||||||||||||||||||||
| Propane | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Subtotal | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
Interest Rate and Other Derivatives
The Company’s objectives for using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The gains or losses on the derivatives designated as hedging instruments are recorded in Other Comprehensive Income (Loss) and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
At March 31, 2021, December 31, 2020 and March 31, 2020, the Company had recorded the following amounts for the fair value of the Company's other derivatives:
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||
| Interest rate contracts included in Accrued expenses and other current liabilities | $ | ( | $ | ( | $ | ||||||||||||
| Interest rate contracts included in Other long-term liabilities | ( | ( | ( | ||||||||||||||
| Foreign currency contracts included in Other current assets | |||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||
| Interest rate contracts included in Other current assets | $ | $ | $ | ||||||||||||||
| Interest rate contracts included in Accrued expenses and other current liabilities | ( | ( | ( | ||||||||||||||
| Interest rate contracts included in Other long-term liabilities | ( | ( | ( | ||||||||||||||
14
The recording of derivatives gains and losses and the financial statement line in which they are located are as follows:
| Three months ended March 31, | ||||||||||||||
| (in thousands) | 2021 | 2020 | ||||||||||||
| Derivatives not designated as hedging instruments | ||||||||||||||
| Interest rate derivative gains (losses) included in Interest income (expense), net | $ | $ | ( | |||||||||||
| Derivatives designated as hedging instruments | ||||||||||||||
| Interest rate derivative losses included in Other comprehensive income (loss) | $ | ( | $ | ( | ||||||||||
| Interest rate derivatives losses included in Interest income (expense), net | ( | ( | ||||||||||||
Outstanding interest rate derivatives, as of March 31, 2021, are as follows:
| Interest Rate Hedging Instrument | Year Entered | Year of Maturity | Initial Notional Amount (in millions) | Description | Interest Rate | |||||||||||||||||||||||||||
| Long-term | ||||||||||||||||||||||||||||||||
| Swap | 2014 | 2023 | $ | Interest rate component of debt - not accounted for as a hedge | ||||||||||||||||||||||||||||
| Collar | 2016 | 2021 | $ | Interest rate component of debt - not accounted for as a hedge | ||||||||||||||||||||||||||||
| Swap | 2017 | 2022 | $ | Interest rate component of debt - accounted for as a hedge | ||||||||||||||||||||||||||||
| Swap | 2018 | 2023 | $ | Interest rate component of debt - accounted for as a hedge | ||||||||||||||||||||||||||||
| Swap | 2018 | 2025 | $ | Interest rate component of debt - accounted for as a hedge | ||||||||||||||||||||||||||||
| Swap | 2019 | 2025 | $ | Interest rate component of debt - accounted for as a hedge | ||||||||||||||||||||||||||||
| Swap | 2019 | 2025 | $ | Interest rate component of debt - accounted for as a hedge | ||||||||||||||||||||||||||||
| Swap | 2019 | 2025 | $ | Interest rate component of debt - accounted for as a hedge | ||||||||||||||||||||||||||||
| Swap | 2020 | 2023 | $ | Interest rate component of debt - accounted for as a hedge | ||||||||||||||||||||||||||||
| Swap | 2020 | 2023 | $ | Interest rate component of debt - accounted for as a hedge | ||||||||||||||||||||||||||||
| Swap | 2020 | 2030 | $ | Interest rate component of debt - accounted for as a hedge | ||||||||||||||||||||||||||||
| Swap | 2020 | 2030 | $ | Interest rate component of debt - accounted for as a hedge | ||||||||||||||||||||||||||||
6. Revenue
Many of the Company’s revenues are generated from contracts that are outside the scope of ASC 606 and thus are accounted for under other accounting standards. Specifically, many of the Company's Trade and Ethanol sales contracts are derivatives under ASC 815, Derivatives and Hedging and the Rail leasing revenue is accounted for under ASC 842, Leases. The breakdown of revenues between ASC 606 and other standards are as follows:
| Three months ended March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Revenues under ASC 606 | $ | $ | |||||||||
| Revenues under ASC 815 | |||||||||||
| Revenues under ASC 842 | |||||||||||
| Total Revenues | $ | $ | |||||||||
The Company's revenues under ASC 842 are as follows:
| Three months ended March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Operating lease revenue | $ | $ | |||||||||
| Sales-type lease revenue | |||||||||||
| Variable lease revenue | |||||||||||
| Total revenues | $ | $ | |||||||||
15
The remainder of this note applies only to those revenues that are accounted for under ASC 606.
Disaggregation of revenue
The following tables disaggregate revenues under ASC 606 by major product/service line for the three months ended March 31, 2021 and 2020, respectively:
| Three months ended March 31, 2021 | |||||||||||||||||||||||||||||
| (in thousands) | Trade | Ethanol | Plant Nutrient | Rail | Total | ||||||||||||||||||||||||
| Specialty nutrients | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Primary nutrients | |||||||||||||||||||||||||||||
| Service | |||||||||||||||||||||||||||||
| Products and co-products | |||||||||||||||||||||||||||||
| Frac sand and propane | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Three months ended March 31, 2020 | |||||||||||||||||||||||||||||
| (in thousands) | Trade | Ethanol | Plant Nutrient | Rail | Total | ||||||||||||||||||||||||
| Specialty nutrients | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Primary nutrients | |||||||||||||||||||||||||||||
| Service | |||||||||||||||||||||||||||||
| Products and co-products | |||||||||||||||||||||||||||||
| Frac sand and propane | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Approximately 3
Contract balances
7. Income Taxes
On a quarterly basis, the Company estimates the effective tax rate expected to be applicable for the full year and makes changes, if necessary, based on new information or events. The estimated annual effective tax rate is forecasted based on actual historical information and forward-looking estimates and is used to provide for income taxes in interim reporting periods. The Company also recognizes the tax impact of certain unusual or infrequently occurring items, such as the effects of changes in tax laws or rates and impacts from settlements with tax authorities, discretely in the quarter in which they occur.
For the three months ended March 31, 2021, the Company recorded an income tax expense of $5.7 million at an effective income tax rate of 30.2 %. The annual effective tax rate differs from the statutory U.S. Federal tax rate due to the impacts of state and local taxes, as well as, foreign earnings and non-deductible compensation. For the three months ended March 31,
16
8. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in of accumulated other comprehensive income (loss) attributable to the Company for the three months ended March 31, 2021 and 2020:
| Three months ended March 31, | ||||||||||||||
| (in thousands) | 2021 | 2020 | ||||||||||||
| Currency Translation Adjustment | ||||||||||||||
| Beginning balance | $ | $ | ||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | |||||||||||||
| Tax effect | ||||||||||||||
| Other comprehensive income (loss), net of tax | ( | |||||||||||||
| Ending balance | $ | $ | ( | |||||||||||
| Hedging Adjustment | ||||||||||||||
| Beginning balance | $ | ( | $ | ( | ||||||||||
| Other comprehensive income (loss) before reclassifications | ( | |||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss)(a) | ||||||||||||||
| Tax effect | ( | ( | ||||||||||||
| Other comprehensive income (loss), net of tax | ( | |||||||||||||
| Ending balance | $ | ( | $ | ( | ||||||||||
| Pension and Other Postretirement Adjustment | ||||||||||||||
| Beginning balance | $ | $ | ||||||||||||
| Other comprehensive income (loss) before reclassifications | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss)(b) | ( | ( | ||||||||||||
| Tax effect | ||||||||||||||
| Other comprehensive income (loss), net of tax | ( | ( | ||||||||||||
| Ending balance | $ | ( | $ | |||||||||||
| Investments in Convertible Preferred Securities Adjustment | ||||||||||||||
| Beginning balance | $ | $ | ||||||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||
| Ending balance | $ | $ | ||||||||||||
| Total AOCI Ending Balance | $ | ( | $ | ( | ||||||||||
(a) Amounts reclassified from gain (loss) on cash flow hedges are reclassified from AOCI to income when the hedged item affects earnings and is recognized in Interest expense, net. See Note 5 for additional information.
(b) This accumulated other comprehensive loss component is included in the computation of net periodic benefit cost recorded in Operating, administrative and general expenses.
17
9. Earnings Per Share
| (in thousands, except per common share data) | Three months ended March 31, | |||||||||||||
| 2021 | 2020 | |||||||||||||
| Numerator: | ||||||||||||||
| Net income (loss) available to The Andersons Inc. common shareholders | $ | $ | ( | |||||||||||
| Denominator: | ||||||||||||||
| Weighted average shares outstanding – basic | ||||||||||||||
| Effect of dilutive awards | ||||||||||||||
| Weighted average shares outstanding – diluted | ||||||||||||||
| Earnings (loss) per share | ||||||||||||||
| Basic | $ | $ | ( | |||||||||||
| Diluted | $ | $ | ( | |||||||||||
There were 110 thousand antidilutive awards for the three months ended March 31, 2021, and all awards were antidilutive for the three months ended March 31, 2020 as the Company incurred a net loss.
10. Fair Value Measurements
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at March 31, 2021, December 31, 2020 and March 31, 2020:
| (in thousands) | March 31, 2021 | ||||||||||||||||||||||
| Assets (liabilities) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
Commodity derivatives, net (a) | $ | $ | $ | $ | |||||||||||||||||||
Provisionally priced contracts (b) | ( | ( | |||||||||||||||||||||
Convertible preferred securities (c) | |||||||||||||||||||||||
Other assets and liabilities (d) | ( | ( | |||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| (in thousands) | December 31, 2020 | ||||||||||||||||||||||
| Assets (liabilities) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
Commodity derivatives, net (a) | $ | $ | $ | $ | |||||||||||||||||||
Provisionally priced contracts (b) | ( | ( | |||||||||||||||||||||
Convertible preferred securities (c) | |||||||||||||||||||||||
Other assets and liabilities (d) | ( | ( | |||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| (in thousands) | March 31, 2020 | ||||||||||||||||||||||
| Assets (liabilities) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
Commodity derivatives, net (a) | $ | $ | $ | $ | |||||||||||||||||||
Provisionally priced contracts (b) | ( | ( | ( | ||||||||||||||||||||
Convertible preferred securities (c) | |||||||||||||||||||||||
Other assets and liabilities (d) | ( | ( | |||||||||||||||||||||
| Total | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
(a)Includes associated cash posted/received as collateral
(b)Included in "Provisionally priced contracts" are those instruments based only on underlying futures values (Level 1) and delayed price contracts (Level 2)
(c)Recorded in “Other assets, net” on the Company’s Consolidated Balance Sheets related to certain available for sale securities.
(d)Included in other assets and liabilities are assets held by the Company to fund deferred compensation plans and foreign exchange derivative contracts (Level 1), as well as, interest rate derivatives (Level 2).
18
Level 1 commodity derivatives reflect the fair value of the exchanged-traded futures and options contracts that the Company holds, net of the cash collateral, that the Company has in its margin account.
The majority of the Company’s assets and liabilities measured at fair value are based on the market approach valuation technique. With the market approach, fair value is derived using prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The Company’s net commodity derivatives primarily consist of futures or options contracts via regulated exchanges and contracts with producers or customers under which the future settlement date and bushels (or gallons in the case of ethanol contracts) of commodities to be delivered (primarily wheat, corn, soybeans and ethanol) are fixed and under which the price may or may not be fixed. Depending on the specifics of the individual contracts, the fair value is derived from the futures or options prices quoted on various exchanges for similar commodities and delivery dates as well as observable quotes for local basis adjustments (the difference, which is attributable to local market conditions, between the quoted futures price and the local cash price). Because “basis” for a particular commodity and location typically has multiple quoted prices from other agribusinesses in the same geographical vicinity and is used as a common pricing mechanism in the agribusiness industry, the Company has concluded that “basis” is typically a Level 2 fair value input for purposes of the fair value disclosure requirements related to our commodity derivatives, depending on the specific commodity. Although nonperformance risk, both of the Company and the counterparty, is present in each of these commodity contracts and is a component of the estimated fair values, based on the Company’s historical experience with its producers and customers and the Company’s knowledge of their businesses, the Company does not view nonperformance risk to be a significant input to fair value for these commodity contracts.
These fair value disclosures exclude RMI which consists of agricultural commodity inventories measured at net realizable value. The net realizable value used to measure the Company’s agricultural commodity inventories is the fair value (spot price of the commodity in an exchange), less cost of disposal and transportation based on the local market. This valuation would generally be considered Level 2. The amount of RMI is disclosed in Note 2. Changes in the net realizable value of commodity inventories are recognized as a component of cost of sales and merchandising revenues.
Provisionally priced contract liabilities are those for which the Company has taken ownership and possession of grain, but the final purchase price has not been established. In the case of payables where the unpriced portion of the contract is limited to the futures price of the underlying commodity or the Company has delivered provisionally priced grain and a subsequent payable or receivable is set up for any future changes in the grain price, quoted exchange prices are used and the liability is deemed to be Level 1 in the fair value hierarchy. For all other unpriced contracts which include variable futures and basis components, the amounts recorded for delayed price contracts are determined on the basis of local grain market prices at the balance sheet date and, as such, are deemed to be Level 2 in the fair value hierarchy.
The convertible preferred securities are interests in several early-stage enterprises that may be in various forms, such as convertible debt or preferred equity securities.
A reconciliation of beginning and ending balances for the Company’s fair value measurements using Level 3 inputs is as follows:
| Convertible Preferred Securities | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Assets at January 1, | $ | $ | |||||||||
| Additional investments | |||||||||||
| Assets at March 31, | $ | $ | |||||||||
19
The following tables summarize quantitative information about the Company's Level 3 fair value measurements as of March 31, 2021, December 31, 2020 and March 31, 2020:
| Quantitative Information about Recurring Level 3 Fair Value Measurements | |||||||||||||||||||||||||||||||||||
| Fair Value as of | |||||||||||||||||||||||||||||||||||
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | Valuation Method | Unobservable Input | Weighted Average | |||||||||||||||||||||||||||||
Convertible preferred securities (a) | $ | $ | $ | Implied based on market prices | N/A | N/A | |||||||||||||||||||||||||||||
(a) The Company considers observable price changes and other additional market data available to estimate fair value, including additional capital raising, internal valuation models, progress towards key business milestones, and other relevant market data points.
There were no non-recurring fair value measurements as of March 31, 2021, December 31, 2020 and March 31, 2020.
The fair value of the Company’s cash equivalents, accounts receivable and accounts payable approximate their carrying value as they are close to maturity.
11. Related Parties
In the ordinary course of business, and on an arm's length basis, the Company will enter into related party transactions with the minority shareholders of the Company's ethanol operations and several equity method investments that the Company holds, along with other related parties.
The following table sets forth the related party transactions entered into for the time periods presented:
| Three months ended March 31, | ||||||||||||||
| (in thousands) | 2021 | 2020 | ||||||||||||
| Sales revenues | $ | $ | ||||||||||||
| Purchases of product and capital assets | ||||||||||||||
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
Accounts receivable (a) | $ | $ | $ | ||||||||||||||
Accounts payable (b) | |||||||||||||||||
(a) Accounts receivable represents amounts due from related parties for the sale of ethanol and other various items.
(b) Accounts payable represents amounts due to related parties for purchases of ethanol equipment and other various items.
12. Segment Information
The Company’s operations include four reportable business segments that are distinguished primarily on the basis of products and services offered as well as the structure of management. The Trade business includes commodity merchandising and the operation of terminal grain elevator facilities. The Ethanol business produces ethanol and co-products through its five co-owned and fully consolidated ethanol production facilities as well as purchases and sells ethanol and ethanol co-products. The Plant Nutrient business manufactures and distributes agricultural inputs, primarily fertilizer, to dealers and farmers, along with turf care and corncob-based products. Rail operations include the leasing, marketing and fleet management of railcars and other assets, railcar repair and metal fabrication. The Other category includes other corporate level costs not attributable to an operating segment and intercompany eliminations between the segments.
20
| Three months ended March 31, | ||||||||||||||
| (in thousands) | 2021 | 2020 | ||||||||||||
| Revenues from external customers | ||||||||||||||
| Trade | $ | $ | ||||||||||||
| Ethanol | ||||||||||||||
| Plant Nutrient | ||||||||||||||
| Rail | ||||||||||||||
| Total | $ | $ | ||||||||||||
| Three months ended March 31, | ||||||||||||||
| (in thousands) | 2021 | 2020 | ||||||||||||
| Income (loss) before income taxes attributable to the Company | ||||||||||||||
| Trade | $ | $ | ( | |||||||||||
| Ethanol | ( | |||||||||||||
| Plant Nutrient | ( | |||||||||||||
| Rail | ||||||||||||||
| Other | ( | ( | ||||||||||||
| Income (loss) before income taxes attributable to the Company | ( | |||||||||||||
| Income (loss) attributable to noncontrolling interests | ( | ( | ||||||||||||
| Income (loss) before income taxes | $ | $ | ( | |||||||||||
13. Commitments and Contingencies
Litigation activities
The Company is party to litigation, or threats thereof, both as defendant and plaintiff with some regularity, although individual cases that are material in size occur infrequently. As a defendant, the Company establishes reserves for claimed amounts that are considered probable and capable of estimation. If those cases are resolved for lesser amounts, the excess reserves are taken into income and, conversely, if those cases are resolved for larger than the amount the Company has accrued, the Company records additional expense. The Company believes it is unlikely that the results of its current legal proceedings for which it is the defendant, even if unfavorable, will be material. As a plaintiff, amounts that are collected can also result in sudden, non-recurring income.
Litigation results depend upon a variety of factors, including the availability of evidence, the credibility of witnesses, the performance of counsel, the state of the law, and the impressions of judges and jurors, any of which can be critical in importance, yet difficult, if not impossible, to predict. Consequently, cases currently pending, or future matters, may result in unexpected, and non-recurring losses, or income, from time to time. Finally, litigation results are often subject to judicial reconsideration, appeal and further negotiation by the parties, and as a result, the final impact of a particular judicial decision may be unknown for some time or may result in continued reserves to account for the potential of such post-verdict actions.
Specifically, the Company is party to a non-regulatory litigation claim, which is in response to penalties and fines paid to regulatory entities by a previously unconsolidated subsidiary in 2018 for the settlement of matters which focused on certain trading activity. While the Company believes it has meritorious defenses against the suit, the ultimate resolution of the matter could result in a loss in excess of the amount accrued. Given the preliminary status of the claim, the Company does not believe the excess, net of the acquisition-related indemnity, is determinable.
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 our Annual Report on Form 10-K for the year ended December 31, 2020 (“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 first quarter of 2021.
Executive Overview
Our operations are organized, managed and classified into four reportable business segments: Trade, Ethanol, Plant Nutrient, and Rail. 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 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 for impairment indicators. The Company continues to believe that the share price is not an accurate reflection of its current value. The long-term outlook remains positive for agricultural commodities due to market volatility driven by crop supply shortages and export demand from China increasing to pre-pandemic levels. 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 a majority of the period, that no impairment trigger existed as of March 31, 2021. However, adverse market conditions or alternative management decisions on operations may result in future impairment considerations.
Trade
The Trade Group’s first quarter results improved substantially over the prior year as the Group saw the benefits of a demand-driven agriculture rally. Commodity price volatility and market dislocations created merchandising opportunities for the Group to be well positioned and execute on many commodities in both the domestic and export markets. This demand driven rally has created an inversion in the futures market for the majority of the agricultural commodities stored by the Group's asset business. However, traditional space income through the old crop carryout has been accelerated and replaced by strong elevation margins and merchandising results. The Group’s propane business added significant volume both through a new terminal location and due to the late winter causing widespread cold temperatures. Finally, the business continued to benefit from synergies and other cost-cutting efforts.
22
Agricultural inventories on hand at March 31, 2021 were 124.9 million bushels, of which 1.6 million bushels were stored for others. These amounts compare to 128.8 million bushels on hand at March 31, 2020, of which 3.9 million bushels were stored for others. Total Trade storage space capacity, including temporary pile storage, was approximately 202 million bushels at March 31, 2021 compared to 205 million bushels at March 31, 2020.
While the 2020 corn and soybean harvest were smaller and drier than originally anticipated, this combined with improving export demand, especially from China, has led to a significant increase in basis, strong elevation margins and considerable volatility. These factors should continue to create volatility and market dislocations which should present good merchandising opportunities into the future.
Nearby futures prices have rallied, creating an inverse in corn, soybean and wheat futures markets. While 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 at least until next harvest.
Ethanol
The Ethanol Group's first quarter results were profitable, and a substantial improvement compared to the prior year. The Group's prior year results were significantly impacted by COVID-19 as negative crush margins and weak demand plagued the ethanol industry. The 2021 results reflect a considerable improvement in crush margins, overall ethanol demand and higher ethanol trading results. The Group also benefited from increased co-product values, including high protein and traditional DDG products, as well as corn and other vegetable oils.
Spot ethanol crush margins have continued to improve from the prior year and rising corn and soybean meal prices continue to support feed product values. While there is a level of uncertainty that persists regarding a tighter corn balance sheet and how quickly the ethanol industry as a whole will recover from COVID-19, recently, the group has observed rebounding driving demand and a higher export program which should provide some tailwind to the Group.
Ethanol and related co-products volumes for the three months ended March 31, 2021 and 2020 were as follows:
| Three months ended March 31, | ||||||||||||||
| (in thousands) | 2021 | 2020 | ||||||||||||
| Ethanol (gallons shipped) | 172,212 | 147,345 | ||||||||||||
| E-85 (gallons shipped) | 7,890 | 9,093 | ||||||||||||
| Corn oil (pounds shipped) | 47,947 | 29,294 | ||||||||||||
| DDG (tons shipped)* | 442 | 536 | ||||||||||||
* DDG tons shipped converts wet tons to a dry ton equivalent amount.
Plant Nutrient
The Plant Nutrient Group's first quarter results were considerably improved compared to the prior year period. The improvement was largely driven by increased volumes and improved margins in all major lines of business and reflect demand from favorable early spring weather, strong grower income and well-positioned fertilizer inventory.
We expect our Plant Nutrient business to build on another strong year. The group's near-term outlook is positive, anticipating a strong planting season, higher fertilizer prices and strong demand across many other product lines.
Storage capacity at our Ag Supply Chain and Specialty Liquids facilities, including leased storage, was approximately 463 thousand tons for dry nutrients and approximately 509 thousand tons for liquid nutrients at March 31, 2021, compared to approximately 486 thousand tons for dry nutrients and approximately 515 thousand tons for liquid nutrients at March 31, 2020.
23
Tons of product sold for the three months ended March 31, 2021 and 2020 were as follows:
| Three months ended March 31, | ||||||||||||||
| (in thousands) | 2021 | 2020 | ||||||||||||
| Ag Supply Chain | 222 | 211 | ||||||||||||
| Specialty Liquids | 100 | 73 | ||||||||||||
| Engineered Granules | 157 | 121 | ||||||||||||
| Total tons | 479 | 405 | ||||||||||||
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 facilities primarily manufacture granulated dry products for use in specialty turf and agricultural applications and a variety of corncob-based products.
Rail
Rail results increased driven by the opportunistic sale of older railcars due to high scrap prices and a $1.6 million recovery of bad debt. The leasing business improved due to lower maintenance expenses and bad debt recoveries despite slightly decreased utilization rates. Average utilization rates decreased from 89.0 percent in the first quarter of 2020 to 88.0 percent in the first quarter of 2021 as the Group had fewer cars on lease from the sand and ethanol market headwinds. Rail assets under management (owned, leased or managed for financial institutions in non-recourse arrangements) at March 31, 2021 were 22.4 thousand compared to 24.4 thousand at March 31, 2020.
The COVID-19 pandemic has caused a significant idling of the North American railcar fleet, with almost 25% of the fleet idle at March 31, 2021, and has continued to drive railcar loadings lower than pre-pandemic levels. While these conditions are showing signs of a slow recovery, lease rates are expected to stay relatively flat for much of the year.
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 table presents a comparison of the three months ended March 31, 2021 with the three months ended March 31, 2020 including a reconciliation of GAAP to non-GAAP measures:
| Three months ended March 31, 2021 | |||||||||||||||||||||||||||||||||||
| (in thousands) | Trade | Ethanol | Plant Nutrient | Rail | Other | Total | |||||||||||||||||||||||||||||
| Sales and merchandising revenues | $ | 1,982,508 | $ | 442,959 | $ | 169,252 | $ | 41,010 | $ | — | $ | 2,635,729 | |||||||||||||||||||||||
| Cost of sales and merchandising revenues | 1,909,951 | 434,476 | 136,851 | 31,739 | — | 2,513,017 | |||||||||||||||||||||||||||||
| Gross profit | 72,557 | 8,483 | 32,401 | 9,271 | — | 122,712 | |||||||||||||||||||||||||||||
| Operating, administrative and general expenses | 56,931 | 6,656 | 23,399 | 2,874 | 10,012 | 99,872 | |||||||||||||||||||||||||||||
| Interest expense (income), net | 7,051 | 2,073 | 1,066 | 3,180 | (201) | 13,169 | |||||||||||||||||||||||||||||
| Equity in earnings (losses) of affiliates, net | 1,794 | — | — | — | — | 1,794 | |||||||||||||||||||||||||||||
| Other income (expense), net | 3,486 | 1,327 | 587 | 1,674 | 468 | 7,542 | |||||||||||||||||||||||||||||
| Income (loss) before income taxes | $ | 13,855 | $ | 1,081 | $ | 8,523 | $ | 4,891 | $ | (9,343) | $ | 19,007 | |||||||||||||||||||||||
| Income (loss) before income taxes attributable to the noncontrolling interests | — | (1,845) | — | — | — | (1,845) | |||||||||||||||||||||||||||||
| Non-GAAP Income (loss) before income taxes attributable to the Company | $ | 13,855 | $ | 2,926 | $ | 8,523 | $ | 4,891 | $ | (9,343) | $ | 20,852 | |||||||||||||||||||||||
| Three months ended March 31, 2020 | |||||||||||||||||||||||||||||||||||
| (in thousands) | Trade | Ethanol | Plant Nutrient | Rail | Other | Total | |||||||||||||||||||||||||||||
| Sales and merchandising revenues | $ | 1,378,040 | $ | 313,039 | $ | 124,913 | $ | 37,113 | $ | — | $ | 1,853,105 | |||||||||||||||||||||||
| Cost of sales and merchandising revenues | 1,315,574 | 342,438 | 104,549 | 27,414 | — | 1,789,975 | |||||||||||||||||||||||||||||
| Gross profit | 62,466 | (29,399) | 20,364 | 9,699 | — | 63,130 | |||||||||||||||||||||||||||||
| Operating, administrative and general expenses | 68,155 | 6,115 | 19,741 | 5,259 | 5,790 | 105,060 | |||||||||||||||||||||||||||||
| Interest expense (income), net | 7,188 | 2,357 | 1,785 | 4,483 | (226) | 15,587 | |||||||||||||||||||||||||||||
| Equity in earnings (losses) of affiliates, net | 129 | — | — | — | — | 129 | |||||||||||||||||||||||||||||
| Other income (expense), net | 2,765 | 446 | (30) | 1,050 | 582 | 4,813 | |||||||||||||||||||||||||||||
| Income (loss) before income taxes | $ | (9,983) | $ | (37,425) | $ | (1,192) | $ | 1,007 | $ | (4,982) | $ | (52,575) | |||||||||||||||||||||||
| Income (loss) before income taxes attributable to the noncontrolling interests | — | (13,449) | — | — | — | (13,449) | |||||||||||||||||||||||||||||
| Non-GAAP Income (loss) before income taxes attributable to the Company | $ | (9,983) | $ | (23,976) | $ | (1,192) | $ | 1,007 | $ | (4,982) | $ | (39,126) | |||||||||||||||||||||||
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 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, the most directly comparable amounts reported under GAAP.
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Trade
Operating results for the Trade Group increased by $23.8 million compared to the results of the same period last year. Sales and merchandising revenues increased by $604.5 million and cost of sales and merchandising revenues increased by $594.4 million for an increased gross profit impact of $10.1 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 primarily driven by improved merchandising results as weather and export demand created volatility that allowed traders to identify arbitrage opportunities from geographical dislocations. This increase was partially offset by a decrease in the Group's traditional assets, however, as inverted futures markets in several commodities provided less space income, replacing and accelerating the income with merchandising opportunities noted above.
Operating, administrative and general expenses decreased by $11.2 million. The decrease from the prior year is primarily related to the Company's cost saving initiatives, much of which is headcount reduction, both from acquisition integration and in response to the COVID-19 pandemic.
Interest expense decreased by $0.1 million due to the Company paying down long-term debt and declining interest rates despite the increase in short-term borrowings.
Ethanol
Operating results for the Ethanol Group increased by $26.9 million from the same period last year. Sales and merchandising revenues increased by $129.9 million and cost of sales and merchandising revenues increased by $92.0 million compared to prior year. As a result, gross profit increased by $37.9 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 coproduct sales from DDGs and corn oil and strong merchandising revenues. The prior year results were significantly impacted by COVID-19 and the group recorded a $10.4 million inventory write down and a $9.6 million mark to market loss.
Operating, administrative and general expenses increased by $0.5 million primarily due to higher labor and incentive compensation costs from improved operating results.
Plant Nutrient
Operating results for the Plant Nutrient Group increased by $9.7 million compared to the same period in the prior year. Sales and merchandising revenues increased $44.3 million and cost of sales and merchandising revenues increased by $32.3 million resulting in a gross profit increase of $12.0 million. Gross profit improved year over year due to increases in volumes and margins across the breadth of product lines and reflects higher spring demand, strong grower income and well positioned fertilizer inventory.
Operating, administrative and general expenses increased by $3.7 million due to increased incentive compensation from improved operating results and higher overhead costs compared to the prior year.
Interest expense decreased by $0.7 million from lower interest rates compared to the prior year.
Rail
Operating results increased by $3.9 million from the same period last year. Sales and merchandising revenues increased by $3.9 million driven by an increase of $6.6 million in car sales, most of which were scrap sale revenues which were partially offset by lower base leasing income due to fewer cars on lease and lower average lease rates. Cost of sales and merchandising increased by $4.3 million compared to the prior year driven by the book value of cars that were sold in the quarter. As a result, gross profit decreased by $0.4 million compared to the same period last year.
Operating, administrative and general expenses decreased by $2.4 million driven by a $1.6 million recovery of previously written off bad debt and overall lower expenses in the quarter.
Interest expense decreased by $1.3 million from lower borrowings and interest rates compared to the prior year.
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Other
Operating results declined by $4.4 million from the same period last year. The increase in operating losses was primarily driven by higher operating, administrative and general expenses largely driven by increased incentive-based compensation due to improved company-wide performance year over year.
Income Taxes
For the three months ended March 31, 2021, the Company recorded an income tax expense of $5.7 million at an effective rate of 30.2%. For the three months ended March 31, 2020, the Company recorded an income tax benefit of $1.5 million at an effective tax rate of 2.8%. The increase in effective tax rate for the three months ended March 31, 2021 as compared to the same period last year primarily attributed improved operating results in the current year, including additional nondeductible compensation and increased foreign tax expense, as well as the difference in nondeductible income related to our noncontrolling interests within the Ethanol group.
Liquidity and Capital Resources
Working Capital
At March 31, 2021, the Company had working capital of $518.8 million. The following table presents changes in the components of current assets and current liabilities:
| (in thousands) | March 31, 2021 | March 31, 2020 | Variance | ||||||||||||||
| Current Assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 35,393 | $ | 19,693 | $ | 15,700 | |||||||||||
| Accounts receivable, net | 699,725 | 539,671 | 160,054 | ||||||||||||||
| Inventories | 1,295,061 | 1,028,076 | 266,985 | ||||||||||||||
| Commodity derivative assets – current | 317,939 | 149,070 | 168,869 | ||||||||||||||
| Other current assets | 88,771 | 85,372 | 3,399 | ||||||||||||||
| Total current assets | $ | 2,436,889 | $ | 1,821,882 | $ | 615,007 | |||||||||||
| Current Liabilities: | |||||||||||||||||
| Short-term debt | 915,205 | 392,450 | 522,755 | ||||||||||||||
| Trade and other payables | 538,691 | 553,416 | (14,725) | ||||||||||||||
| Customer prepayments and deferred revenue | 163,935 | 121,148 | 42,787 | ||||||||||||||
| Commodity derivative liabilities – current | 91,448 | 90,491 | 957 | ||||||||||||||
| Current maturities of long-term debt | 49,937 | 80,758 | (30,821) | ||||||||||||||
| Accrued expenses and other current liabilities | 158,900 | 147,225 | 11,675 | ||||||||||||||
| Total current liabilities | $ | 1,918,116 | $ | 1,385,488 | $ | 532,628 | |||||||||||
| Working Capital | $ | 518,773 | $ | 436,394 | $ | 82,379 | |||||||||||
Current assets as of March 31, 2021 increased $615.0 million in comparison to those as of March 31, 2020. This increase was noted in all areas. 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 that the Company transacts in the ordinary course of business. 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 increased $532.6 million compared to the prior year primarily due to increases in short-term debt and trade and customer prepayments and deferred revenue. The increase in short-term debt is the result of higher working capital needs driven by significant increases in the prices of agricultural commodities. Short-term borrowings, while typically at a seasonal high in the spring, are further supporting an unusual price run-up in our core commodities. As we liquidate these commodities in advance of harvest, we expect a reduction to the level of short-term borrowing. The increase in current liabilities was slightly offset by reductions in current maturities of long-term debt and trade and other payables.
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Sources and Uses of Cash
| Three Months Ended | ||||||||||||||
| (in thousands) | March 31, 2021 | March 31, 2020 | ||||||||||||
| Net cash used in operating activities | $ | (445,727) | $ | (228,430) | ||||||||||
| Net cash used in investing activities | (15,730) | (30,416) | ||||||||||||
| Net cash provided by financing activities | 467,762 | 223,577 | ||||||||||||
Operating Activities
Our operating activities used cash of $445.7 million and $228.4 million in the first three months of 2021 and 2020, respectively. The increase in cash used was primarily due to a result in the change of working capital, as discussed above, driven by significant increases in agricultural commodity prices. The cash used for operating activities was slightly offset by higher operating results as compared to the prior period, however.
Investing Activities
Investing activities used cash of $15.7 million through the first three months of 2021 compared to cash used of $30.4 million in the prior year. The decrease from the prior year was a result of fewer purchased railcars and the continued strategic use of capital spending to enhance overall liquidity and cash management.
We expect to invest approximately $100 million in property, plant and equipment in 2021; approximately 60% of which will be to maintain facilities.
Financing Activities
Financing activities provided cash of $467.8 million and $223.6 million for the three months ended March 31, 2021 and 2020, respectively. This change from the prior year was largely due to a significant increase in short term borrowings to cover working capital needs as the prices of agricultural commodities continue to rise.
The Company is party to borrowing arrangements with a syndicate of banks that provide a total of $1,405.0 million in borrowings. Of the total capacity, $214.0 million is non-recourse to the Company. As of March 31, 2021, the Company had $635.8 million available for borrowing with $78.6 million of that total being non-recourse to the Company.
The Company paid $5.8 million in dividends in the first three months of 2021 compared to $5.7 million in the prior year. The Company paid $0.175 per common share for the dividends paid in January of 2021 and 2020. On February 19, 2021, the Company declared a cash dividend of $0.175 per common share payable on April 21, 2021 to shareholders of record on April 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 is in compliance with all such covenants as of March 31, 2021. In addition, certain of our long-term borrowings are collateralized by first mortgages on various facilities or are collateralized by railcar assets. Our non-recourse long-term debt is collateralized by ethanol plant assets and railcar 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 March 31, 2021, the Company had standby letters of credit outstanding of $25.5 million.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2020. There were no material changes in market risk, specifically commodity and interest rate risk during the three months ended March 31, 2021.
Item 4. Controls and Procedures
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, 2021 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 2021, 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.
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Part II. Other Information
Item 1. Legal Proceedings
The Company is subject to legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. Except as described in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in Note 13, “Commitments and Contingencies,” in the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss greater than a recorded accrual, concerning loss contingencies for asserted legal and other claims.
The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts above management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected.
Item 1A. Risk Factors
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 2020 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. There have been no material changes to the Company’s risk factors since the 2020 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
January 2021 | 70,427 | $ | 24.51 | — | ||||||||||||||||||||||
February 2021 | — | — | — | |||||||||||||||||||||||
March 2021 | 3,710 | 25.06 | — | |||||||||||||||||||||||
| Total | 74,137 | $ | 24.54 | — | — | |||||||||||||||||||||
(1) During the three months ended March 31, 2021, the Company acquired shares of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.
(2) No shares were purchased as part of publicly announced plans or programs.
Item 4. Mine Safety Disclosure
The Company is committed to protecting the occupational health and well-being of each of our employees. Safety is one of our core values and as an organization strive to ensure that safety is the first priority for all employees. Our internal objective is to achieve zero injuries and incidents across the Company by focusing on proactively identifying needed prevention activities, establishing standards and evaluating performance to mitigate any potential loss to people, equipment, production and the environment. The Company has implemented employee training that is geared toward maintaining a high level of awareness and knowledge of safety and health issues in the work environment. Management believes that through these policies the Company has developed an effective safety management system.
Under the Dodd-Frank Act, each operator of a coal or other mine is required to include certain mine safety results within its periodic reports filed with the SEC. As required by the reporting requirements included in §1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K, the required mine safety results regarding certain mining safety and health matters for each of our mine locations that are covered under the scope of the Dodd-Frank Act are included in Exhibit 95.1 of Item 6. Exhibits of this Quarterly Report on Form 10-Q.
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Item 6. Exhibits
| Exhibit Number | Description | |||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 95.1* | ||||||||
| 101** | Inline XBRL Document Set for the Condensed Consolidated Financial Statements and accompanying notes in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q. | |||||||
| 104** | Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set. | |||||||
* Filed herewith | ||||||||
** Furnished herewith | ||||||||
Items 3 and 5 are not applicable and have been omitted
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| THE ANDERSONS, INC. | ||||||||
| Date: May 5, 2021 | /s/ Patrick E. Bowe | |||||||
| Patrick E. Bowe | ||||||||
| Chief Executive Officer | ||||||||
| Date: May 5, 2021 | /s/ Brian A. Valentine | |||||||
| Brian A. Valentine | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
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