The Andersons, Inc. — Q2 2013 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2013. The Andersons operates Grain, Ethanol, Plant Nutrient, Rail, Turf & Specialty, and Retail businesses. Management cautions that commodity-linked revenue can rise or fall with purchase prices without a comparable effect on gross profit; revenue and cost of sales should therefore be read alongside margins and service income.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales and merchandising revenues | $1,567.0 million | $1,315.8 million | $2,838.9 million | $2,453.0 million |
| Gross profit | $103.2 million | $102.7 million | $182.5 million | $188.5 million |
| Gross margin | 6.6% | 7.8% | 6.4% | 7.7% |
| Net income attributable to Andersons | $29.5 million | $29.2 million | $42.1 million | $47.6 million |
| Diluted EPS | $1.57 | $1.56 | $2.24 | $2.54 |
| Equity in earnings of affiliates | $10.0 million | $5.1 million | $17.8 million | $9.4 million |
Q2 pretax income was $48.2 million versus $45.8 million; first-half pretax income was $69.6 million versus $73.8 million. Interest expense was $4.9 million in Q2 and $11.3 million for the first half. The reported effective tax rate was 36.3% for Q2 and 38.2% year to date.
- Cash flow: Operating activities used $59.7 million in the first half, compared with $134.1 million used in the prior-year period. Investing activities used $25.9 million; financing provided $23.3 million. Cash declined $62.3 million from year-end to $75.9 million.
- Liquidity: Working capital was $308.9 million at June 30, versus $256.4 million a year earlier; current assets were $907.3 million and current liabilities $598.3 million.
- Debt and borrowing capacity: Short-term borrowings were $50.0 million; current maturities of long-term debt were $45.1 million and long-term debt was $409.0 million. The company reported $771.9 million available under borrowing lines and compliance with covenants.
- Capital spending: First-half railcar purchases were $56.9 million, partly offset by $53.2 million in railcar sale proceeds. Management expected 2013 base-business capital spending of about $72.5 million and railcar-related purchases, leases and modifications of about $100 million, partly offset by about $85 million of railcar dispositions.
Material changes versus the prior comparable period
- For the first half, revenue increased 15.7%, while gross profit fell 3.2% and Andersons-attributable net income fell 11.5%. Higher affiliate earnings and improved Ethanol and Rail results partly offset weaker Grain and Plant Nutrient performance.
- Grain first-half pretax income declined to $10.4 million from $34.7 million, primarily reflecting lower space income and basis appreciation, higher operating expenses, and foreign-exchange losses. Newly acquired facilities contributed to higher sales and costs.
- Ethanol first-half pretax income attributable to Andersons improved to $13.1 million from a $2.0 million loss, with better ethanol margins and stronger affiliate results. Rail pretax income rose to $24.3 million from $15.2 million. Plant Nutrient pretax income declined to $22.7 million from $33.8 million, mainly due to lower margins and sales volumes.
- At June 30, 2013, inventory was $444.5 million, down from $597.1 million a year earlier, and short-term line borrowings were $50.0 million versus $309.6 million. The company attributed the lower inventory largely to fewer owned bushels in beans and wheat.
- On July 31, 2013, after quarter-end, Andersons and Lansing Trade Group jointly acquired Thompsons Limited for $145 million plus a working-capital adjustment; each holds 50%.
Outlook, risks, contingencies and unusual items
- Management estimated a 2013 annual effective tax rate of 38.5%, compared with 37.1% for 2012. No consolidated earnings guidance was provided in the filing.
- Management reported some future ethanol production and required inputs contracted at positive margins, but noted possible negative third-quarter margins due to limited corn availability. Crop prospects remained weather-dependent: spring and early-summer wet conditions delayed planting, and soybean yields depended on August and September weather. A later harvest could also weigh on early third-quarter nutrient applications.
- Commodity prices and derivatives expose results and liquidity to market movements and margin calls. The company said market risks had not materially changed during the quarter. It also noted that variable-rate seasonal borrowing makes profitability sensitive to interest-rate increases and stated that liquidity should be adequate for operations, capital expenditures and dividends over the next 12 months.
- The company recorded a $1.4 million deferred tax expense in Q1 to correct prior-period accounting related to retiree health-care-plan other comprehensive income and the Medicare Part D subsidy; management said the prior-period error was immaterial.
- The EPA requested information about the history of a Toledo grain and fertilizer facility while investigating possible hazardous-material leaching from legacy glass-manufacturing waste. No claim or finding had been asserted. Management considered reasonably possible losses on outstanding claims not material and said current litigation was unlikely to be material, while noting future matters could have an adverse effect.
- Controls: Disclosure controls and procedures were deemed ineffective at June 30, 2013 because a previously reported material weakness in journal-entry controls and segregation of duties had not been fully remediated. Management described remediation steps, including journal-entry review and tighter system access controls.
- Rail operations use off-balance-sheet leasing and non-recourse arrangements. At June 30, 4,310 railcars were leased from financial intermediaries and 3,809 were in non-recourse arrangements.
Important facts for investors to verify
- Whether Grain’s lower basis-related income and Plant Nutrient’s margin pressure persist, and whether crop and harvest conditions affect volumes and margins.
- Whether improved Ethanol and Rail results are sustainable, including the impact of corn availability, ethanol pricing, lease rates and railcar sales.
- Cash conversion and seasonal working-capital needs, including the cash requirements for planned investment and the post-quarter Thompsons acquisition.
- Progress in remediating the journal-entry material weakness and restoring effective disclosure controls.
- Developments in the EPA inquiry, other litigation, commodity-related collateral demands, and interest-rate exposure.