The Andersons, Inc. — 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015. The Andersons is a diversified agriculture-focused company operating Grain, Ethanol, Plant Nutrient, Rail and Retail businesses across North America. Comparisons are with fiscal 2014 unless otherwise noted.
Key financial results
| Metric | 2015 | 2014 |
|---|---|---|
| Sales and merchandising revenues | $4.198 billion | $4.540 billion |
| Gross profit | $375.8 million | $397.1 million |
| Gross margin | 9.0% | 8.7% |
| Net income (loss) attributable to The Andersons | $(13.1) million | $109.7 million |
| Basic and diluted EPS | $(0.46) | $3.85 and $3.84 |
| Cash from (used in) operating activities | $154.1 million | $(10.1) million |
| Cash and cash equivalents at year-end | $63.8 million | $114.7 million |
| Working capital | $241.5 million | $226.7 million |
| Long-term debt, excluding current maturities | $436.2 million | $298.6 million |
| Total equity | $783.7 million | $824.0 million |
| EBITDA, company-defined non-GAAP measure | $85.2 million | $255.0 million |
Revenue declined 7.5%, largely reflecting lower commodity prices; management cautions that sales can move with commodity prices and may not indicate underlying performance. The effective tax rate was 2.1%, versus 33.4% in 2014. Reported earnings included a $51.4 million pre-tax pension settlement charge and $56.2 million of goodwill impairment charges. Gross profit was lower despite a slightly higher gross margin.
Material changes and segment performance
- Grain: Segment income before taxes fell to a loss of $9.5 million from income of $58.1 million. Excessive Eastern Corn Belt rains, constrained producer deliveries, lower space income and adverse risk-management effects weighed on results. The company recorded a $46.4 million goodwill impairment.
- Ethanol: Segment income before taxes decreased to $28.5 million from $105.2 million. Lower ethanol and DDG prices compressed margins, and equity earnings from unconsolidated ethanol ventures fell materially. Ethanol shipments rose about 2.6%, while average ethanol prices fell 27%.
- Plant Nutrient: Segment income before taxes was $0.1 million, down from $24.5 million. Kay Flo acquisition-related sales and costs increased, while weather reduced fertilizer application rates. The segment recorded $9.7 million of goodwill impairment.
- Rail: Segment income before taxes improved to $50.7 million from $31.4 million, supported by higher leasing and repair revenue and increased lease-settlement activity. Fleet utilization averaged 92.4%, up 2.9 percentage points.
- Retail: The segment recorded a $0.5 million loss before taxes, modestly improved from a $0.6 million loss. Customer count and margins declined, partly offset by cost control and higher sales per customer.
- The Plant Nutrient and Turf & Specialty groups were combined into one reportable segment in 2015; prior periods were recast. The company acquired Kay Flo for total consideration of approximately $129.4 million and purchased two Virginia grain facilities.
Fourth-quarter 2015 net loss attributable to the company was $47.0 million, or $1.68 per share, compared with net income of $25.9 million, or $0.89 per share, in fourth-quarter 2014. Fourth-quarter results included significant pension and impairment charges.
Cash, debt and liquidity
- Operating cash flow improved to $154.1 million, primarily reflecting working-capital movements, including lower inventory; operating results were weaker. Investing activities used $238.5 million, including $128.5 million for Kay Flo and $115.0 million of rail-asset purchases, partly offset by rail-asset sale proceeds.
- Financing activities provided $33.4 million. Long-term debt, excluding current maturities, rose to $436.2 million; short-term debt was $17.0 million and current maturities of long-term debt were $27.8 million. The funded long-term debt-to-equity ratio was 0.6-to-1, compared with 0.4-to-1.
- The company reported $721.7 million of remaining availability under its borrowing arrangements at year-end and said it was in compliance with debt covenants. It stated that liquidity should be adequate for operations, capital expenditures and dividends in the foreseeable future.
- Dividends declared were $0.575 per share for 2015, up from $0.47. The company completed a $50 million share-repurchase authorization during 2015.
Outlook, risks and unusual items
- Management said estimated 2016 corn and soybean acreage was slightly above 2015 levels and could provide a good Grain Group base, assuming trend yields. It cited potentially improving ethanol margins from stronger gasoline demand, better DDG demand and ample corn supply, while noting commodity-price uncertainty.
- For 2016, management expected approximately $122 million in conventional property, plant and equipment spending, including ERP work and completion of a new headquarters, plus approximately $140 million for railcars and barges, with related sales or financings estimated at $116 million.
- The company highlighted commodity price and basis risk, hedge-margin calls and liquidity needs, ethanol feedstock and fuel-price volatility, weather and regional concentration, counterparty risk, debt and variable interest rates, regulatory and environmental exposure, competition, and rail-asset demand and regulation. It also warned that its ERP implementation is taking longer and costing more than originally planned.
- The U.S. EPA requested information about the company’s Toledo riverfront grain and fertilizer facility in connection with possible historical contamination from glass-manufacturing residue. The filing says no claim or finding had been asserted. Management considered other pending litigation unlikely to produce a material result beyond recorded accruals.
- The company recognized a $23.1 million pre-tax gain from LTG equity transactions and reduced its LTG ownership to approximately 31%. It also disclosed a $2.8 million share of a prior-period accounting-error correction at LTG. LTG revised 2013 and 2014 financial statements for errors management judged immaterial to those prior statements; the cumulative correction reduced LTG’s previously reported year-end 2014 equity by $6.3 million.
- Auditors issued an unqualified opinion on the company’s financial statements and internal controls. The control assessment excluded the Kay Flo locations acquired in 2015, representing about 8% of year-end assets and 1% of annual revenue.
Important facts for investors to verify
- How much of the 2015 loss reflects one-time pension and goodwill charges, and whether grain and ethanol profitability can recover without similar gains from LTG or rail settlements.
- The assumptions behind the $56.2 million goodwill impairment and the effect of continuing commodity-market weakness on remaining goodwill and equity-method investments.
- Cash-flow sustainability after 2015’s favorable working-capital contribution, given lower cash balances, acquisition spending, rail investment and planned 2016 capital expenditures.
- Debt maturities, borrowing availability, covenant headroom and exposure to variable rates and commodity margin calls.
- Progress and final cost of the ERP system and headquarters projects, and integration and performance of Kay Flo.
- Developments in the EPA inquiry, the IANR preferred investment redemption, and any further information on LTG’s accounting correction.