The Andersons, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2012. The Andersons operates in grain, ethanol, plant nutrients, rail, turf and specialty products, and retail. Its businesses are seasonal and exposed to commodity prices and weather.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales and merchandising revenue | $1,315.8 million | $1,338.2 million | $2,453.0 million | $2,339.8 million |
| Gross profit | $102.7 million | $122.8 million | $188.5 million | $201.5 million |
| Gross margin | 7.8% | 9.2% | 7.7% | 8.6% |
| Net income attributable to Andersons | $29.2 million | $45.2 million | $47.6 million | $62.5 million |
| Diluted EPS | $1.56 | $2.42 | $2.54 | $3.34 |
| Interest expense | $5.4 million | $7.6 million | $10.7 million | $14.9 million |
Cash flow and liquidity: Operating activities used $134.1 million in the first half, versus $63.2 million provided in the prior-year period. Investing activities used $172.4 million, including acquisitions and railcar and capital spending; financing activities provided $310.1 million. Cash and cash equivalents were $23.9 million at June 30. Working capital was $256.4 million, down $96.4 million from June 30, 2011.
Debt: Short-term borrowings were $309.6 million; current maturities of long-term debt were $29.6 million; and long-term debt was $317.6 million. Total reported debt was approximately $656.9 million. The company had $463.4 million available under borrowing lines with total capacity of $878.1 million. Short-term borrowing rose primarily to fund commodity margin calls as prices increased. The company reported compliance with applicable debt covenants.
Other metrics: The company paid dividends of $0.15 per share in Q2, compared with $0.11 a year earlier. Total assets were $1.795 billion and shareholders’ equity, including noncontrolling interests, was $589.2 million at June 30, 2012.
Material changes and segment results
- Q2 revenue declined 1.7% year over year, while first-half revenue rose 4.8%. Gross profit and net income attributable to the company fell in both comparisons.
- Grain: Q2 segment income fell to $15.3 million from $36.5 million, mainly because of lower basis appreciation and space income. First-half income was $34.7 million versus $51.6 million.
- Ethanol: Q2 segment loss was $2.1 million versus income of $8.8 million; first-half loss was $2.0 million versus income of $12.4 million. Lower ethanol margins, weaker affiliate results, and hedge mark-to-market effects weighed on performance.
- Plant Nutrient: Q2 segment income rose to $28.0 million from $24.1 million; first-half income increased to $33.8 million from $29.2 million, supported by higher prices, volume, and margins.
- Rail: Q2 segment income rose to $7.2 million from $2.8 million; first-half income increased to $15.2 million from $6.3 million, reflecting better lease rates, more cars in service, and repair activity.
- Retail: First-half segment loss widened to $1.3 million from $0.8 million, with lower customer traffic and sales.
- Equity earnings of affiliates fell to $5.1 million in Q2 from $12.5 million and to $9.4 million in the first half from $19.8 million, principally reflecting losses at three ethanol affiliates.
Outlook, risks, and notable items
- Management warned that hot, dry weather and drought had sharply reduced crop conditions in the company’s operating regions. It expected drought-related pressure on Grain space income through the rest of 2012 and into 2013, and cautioned that reduced yields and volatile input prices could hurt ethanol gross profit. Lower crop volumes may also affect future nutrient demand, although higher grain prices could support demand in the next crop cycle.
- The company expected a 2012 effective tax rate of approximately 36.5%. It planned about $120 million of base-business capital spending and about $100 million for railcars, locomotives, related leases, and modifications, partly offset by expected rail asset sale proceeds of $97 million.
- Acquisitions included New Eezy Gro, purchased in January for $16.8 million, and the Denison, Iowa ethanol facility, acquired through TADE in May for $77.8 million. The company owned 85% of TADE and consolidated it.
- Commodity-price changes can drive derivative margin requirements and borrowing needs; most commodity contracts are economic hedges but are not designated as accounting hedges. The company also cited variable-rate debt, weather, seasonality, and retail competition as risks. It reported no material change in market risk during the quarter.
- The company was cooperating with an EPA information request concerning possible historic contamination near its Maumee River facility; no claim or finding had been asserted. Management said the reasonably possible loss range for outstanding claims was not material, while noting some matters could not yet be estimated.
- Control weakness: Management concluded disclosure controls were ineffective at June 30 because controls over assessing retained risk in Rail non-recourse financing transactions were inadequate, constituting a material weakness. The filing said no interim financial-statement error resulted, but $4.3 million of operating income was recognized in Q3 rather than Q2; the timing did not change full-year income. Management described remediation steps, which remained subject to validation.
Important facts for investors to verify
- Whether drought, crop yields, and commodity-price volatility materially affect Grain, Ethanol, and Plant Nutrient results and margin requirements.
- Whether ethanol affiliate losses and margin pressures improve, and how TADE contributes after its acquisition.
- Whether Rail growth and planned investment generate returns sufficient to justify the added debt and capital spending.
- Whether management remediates and validates the material weakness, including the Q2-to-Q3 timing effect disclosed for $4.3 million of operating income.
- Developments in the EPA inquiry and other legal or environmental matters, and the company’s liquidity as seasonal working-capital and margin-call needs change.