The Andersons, Inc. — Q1 2013 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2013. The company operates in grain, ethanol, plant nutrients, rail, turf and specialty products, and retail. Its agricultural businesses are seasonal, and commodity-price changes can increase both revenue and cost of sales without a comparable change in gross profit.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Sales and merchandising revenue | $1,272.0 million | $1,137.1 million |
| Gross profit | $79.3 million | $85.9 million |
| Gross margin | 6.2% | 7.6% |
| Income before taxes | $21.4 million | $28.0 million |
| Net income attributable to The Andersons | $12.6 million | $18.4 million |
| Diluted EPS | $0.67 | $0.98 |
| Cash used in operating activities | $336.0 million | $187.0 million |
Revenue rose about 12%, while gross profit fell about 8% and attributable net income fell about 32%. Higher operating expenses and interest expense also weighed on results. Equity in earnings of affiliates increased to $7.8 million from $4.3 million. Commodity-derivative gains included in revenue were $36.4 million, compared with a $3.7 million loss in Q1 2012.
Cash flow and liquidity: Operating cash use reflected seasonal working-capital movements, including a $398.7 million decrease in grain accounts payable. Investing activities used $17.8 million; financing activities provided $273.9 million, mainly from increased short-term borrowing. Cash and cash equivalents were $58.3 million at quarter end, down from $138.2 million at year-end 2012. Working capital was $283.0 million. The company reported $525.8 million available under borrowing lines with $878.1 million total capacity, and compliance with debt covenants.
Debt: Short-term line borrowings were $292.1 million; current maturities of long-term debt were $43.1 million; and long-term debt was $412.7 million. These amounts total approximately $747.9 million of reported borrowings and debt. The company noted that seasonal borrowing needs and variable interest rates could affect profitability.
Material changes and segment results
- Grain: Operating income declined to $8.3 million from $19.4 million. Higher shipped volumes and prices increased revenue, but lower wheat basis appreciation and higher costs reduced gross profit. The Green Plains acquisition contributed about $4.4 million of gross profit.
- Ethanol: Operating income improved to $2.5 million from $0.1 million, helped by the 2012 Denison acquisition, hedge mark-to-market gains, and service fees. Unconsolidated ethanol investments remained loss-making amid low ethanol demand and high corn costs.
- Plant Nutrient: Recorded a $0.6 million operating loss versus $5.8 million income. Fertilizer tons sold were 29% lower, largely due to colder, wetter weather and delayed application timing.
- Rail: Operating income increased to $14.6 million from $8.0 million, supported by leasing and railcar sales. Gains on railcar sales and related leases were $9.3 million versus $6.3 million.
- Turf & Specialty: Operating income rose to $4.0 million from $2.2 million, with contribution from the Mt. Pulaski acquisition and operating efficiencies.
- Retail: Operating loss widened to $3.2 million from $2.7 million. Woodville store inventory liquidation pressured gross profit.
Outlook, risks and unusual items
- The filing gives no specific full-year earnings guidance. Management anticipated corn acreage of about 96 million acres, but said planting progress and growing-season weather would be important to Grain performance later in 2013 and into 2014. Cooler, wetter spring weather delayed fertilizer demand; management expected stronger demand in Q2 if planting proceeded.
- Management said some ethanol production and inputs were contracted for much of Q2 at positive margins, while warning that tight corn supplies could hurt Q2 and Q3 gross profit. The 2012 drought was expected to continue affecting grain operations through fewer owned bushels and lower space income.
- Expected 2013 capital spending was approximately $82.1 million for the base business and $149 million for railcars, locomotives and related items, partly offset by anticipated rail asset-sale proceeds of $121 million. Management expected a 39.9% annual effective tax rate, versus 37.1% in 2012.
- A $1.4 million deferred-tax correction related to retiree health-care and Medicare Part D subsidy accounting for 2009–2012 was recorded in Q1 2013. The company said the prior-period impact and expected full-year 2013 impact were immaterial.
- A material weakness in journal-entry controls identified at year-end 2012 had not been fully remediated by March 31, 2013. Management described plans to improve journal-entry review and access controls. The filing’s controls discussion says the related conclusion applied “as of March 31, 2012”; this date appears inconsistent with the reporting period and should be checked against the filed document.
- The company was responding to an EPA information request concerning possible hazardous-material leaching from historic industrial “rouge piles” near its Toledo facility. No claim or finding had been asserted. Management considered material loss from current litigation unlikely; reasonably possible losses were described as not material.
- Weather, commodity prices, margin requirements, variable-rate debt, seasonal working capital, and ethanol demand were among the risks discussed. The filing reported no material quarterly change in commodity or interest-rate market risk.
Important facts for investors to verify
- Whether the journal-entry control material weakness has since been remediated, and confirm the inconsistent date in the controls discussion.
- How seasonal cash needs, grain payables, derivative margin calls, and borrowing levels evolve; reported operating cash use was approximately $336 million.
- Whether planting conditions and the expected fertilizer-demand recovery materialized, and how the drought continued to affect grain operations.
- Whether ethanol margins improved despite high corn costs and weak demand, and whether rail performance and asset-sale plans were sustained.
- Any developments in the EPA inquiry, litigation, or other environmental contingencies.
- Actual versus forecast 2013 capital spending, rail asset-sale proceeds, and effective tax rate.