The Andersons, Inc. — Q1 2015 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2015, compared with Q1 2014. The company operates Grain, Ethanol, Plant Nutrient, Rail and Retail businesses; results are seasonal and commodity-price sensitive. Management cautions that sales can move with commodity prices and may not indicate underlying performance as well as merchandising revenues and service income.
Financial results and liquidity
- Revenue and gross profit: Sales and merchandising revenues were $950.1 million, down 5.3% from $1,003.3 million. Gross profit increased to $83.3 million from $76.8 million; gross margin was approximately 8.8% versus 7.6%.
- Profit: Operating, administrative and general expenses rose to $78.6 million from $71.0 million. Income before taxes fell to $5.0 million from $39.9 million; net income attributable to The Andersons was $4.1 million, or $0.14 per diluted share, versus $22.7 million, or $0.80 per share. The 2015 effective tax rate was 21.7%, including a $0.6 million nonrecurring tax benefit; management forecast a 35.1% full-year rate.
- Cash flow: Operating activities used $286.7 million, versus $498.6 million used in Q1 2014. Investing activities used $17.5 million, compared with $37.3 million provided. Financing activities provided $243.9 million. Cash declined $60.2 million during the quarter to $54.5 million.
- Debt and liquidity: At March 31, short-term debt was $311.7 million; current maturities of long-term debt were $19.0 million and long-term debt was $323.3 million. Working capital was $223.0 million. Total borrowing capacity was $878.1 million, with $538.6 million available; the company reported compliance with financial covenants. Seasonal borrowing and margin-call timing affected short-term debt and cash.
- Other metrics: Total assets were $2.29 billion and shareholders’ equity was $797.9 million. The company repurchased approximately 631,000 shares for $27.8 million and declared a $0.14-per-share dividend.
Changes and segment performance
- Grain income before taxes fell to $0.7 million from $11.3 million, despite higher gross profit; the prior-year period included a $17.1 million gain from a partial Lansing Trade Group investment redemption. Grain storage capacity increased to approximately 162 million bushels following the Auburn Bean and Grain acquisition.
- Ethanol income before taxes declined to $5.1 million from $23.1 million, primarily on significantly lower margins and lower equity earnings from unconsolidated plants. Average ethanol prices fell 28%; shipped ethanol volume rose 4%.
- Plant Nutrient income before taxes was $0.4 million versus a $0.04 million loss. Management cited weather-delayed planting and lower fertilizer volume; margins were broadly consistent with the prior year.
- Rail income before taxes decreased to $10.3 million from $15.0 million, mainly from fewer railcar sales. Leasing utilization improved to 91.8% from 88.4%, while gains on rail asset sales and related leases were $4.5 million versus $10.8 million.
- Retail’s pretax loss narrowed to $2.2 million from $2.3 million. “Other” pretax loss widened to $9.4 million from $7.2 million, including higher unallocated ERP expenses and interest costs.
Outlook, risks and unusual items
- Management described the Grain outlook as conservative, citing time needed to address western-region performance and rebuild storage utilization. Corn acres were expected to be down approximately 2% year over year.
- Ethanol margins improved entering Q2; management cited low corn prices, stronger gasoline demand and improving export demand as supportive, while expecting results below 2014 record levels. Plant Nutrient sales could shift into Q2, but weather, logistics and fewer planted corn acres could weigh on results.
- For 2015, management expected approximately $125 million of Rail asset purchases, partly offset by $79–$100 million of asset sale proceeds, and approximately $117 million of base-business capital spending. It said liquidity should be adequate for operations, capital expenditures and dividends.
- Approximately 1,700 tank cars may be affected by new federal rail-safety standards for flammable liquids; the company was evaluating the impact. Variable-rate seasonal borrowing exposes earnings to rising interest rates, and commodity-market movements may require additional margin deposits.
- The company was pursuing termination of its defined-benefit pension plan. Based on year-end 2014 estimates, termination could produce a one-time noncash pretax charge of $64.6 million and require an estimated $10.3 million contribution; actual effects depend on settlement conditions and rates.
- The EPA requested information about possible contamination near the company’s Toledo, Ohio riverfront facility. No claim or finding had been asserted. Management said reasonably possible losses on outstanding claims were not material and believed current litigation was unlikely to have a material effect.
- Commodity derivative gains included in revenue were $67.8 million, versus losses of $53.7 million in Q1 2014. Equity earnings from affiliates fell to $3.3 million from $20.5 million, and the prior-year period also benefited from the investment-redemption gain. These items materially affect year-over-year comparability.
Important facts for investors to verify
- Whether Q2 planting activity, weather and fertilizer logistics recover enough to support Plant Nutrient results.
- Whether ethanol margins and affiliate earnings improve, and how commodity derivative gains or losses affect reported revenue and profit.
- Rail leasing utilization, railcar sales and the financial implications of the new tank-car standards.
- The eventual pension-plan settlement charge, required funding and timing of termination.
- Liquidity and borrowing needs through the seasonal peak, capital-spending plans, and any developments in the EPA inquiry.