The Andersons, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. Unaudited interim results; the company operates in seasonal industries. Amounts below are in millions of dollars unless otherwise stated.
Business context and financial performance
The company operates in Grain, Ethanol, Plant Nutrient, Rail, Turf & Specialty, and Retail. Management cautions that commodity price changes can move sales and cost of sales together, so revenue changes alone may not indicate performance.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Sales and merchandising revenue | $1,312.1 | $1,567.0 | $2,315.4 | $2,838.9 |
| Gross profit | $121.5 | $103.2 | $198.3 | $182.5 |
| Gross margin | 9.3% | 6.6% | 8.6% | 6.4% |
| Operating, administrative and general expenses | $76.3 | $61.5 | $147.3 | $123.5 |
| Income before income taxes | $75.1 | $48.2 | $115.0 | $69.6 |
| Net income attributable to The Andersons, Inc. | $44.3 | $29.5 | $67.0 | $42.1 |
| Diluted earnings per share | $1.56 | $1.05 | $2.36 | $1.49 |
Cash flow and liquidity: Operating activities used $259.6 million in the first half, compared with $59.7 million used in the prior-year period, primarily reflecting seasonal working-capital requirements and payments to farmers. Cash and equivalents were $47.2 million at June 30, 2014, down from $309.1 million at December 31, 2013. Working capital was $252.0 million, versus $308.9 million at June 30, 2013. Investing activities provided $9.3 million; financing activities used $11.6 million.
Total debt, including short-term borrowings and current maturities, was approximately $416.6 million at June 30, 2014, compared with $427.2 million at December 31, 2013. The company reported $878.1 million of total borrowing capacity, with $820.1 million available, and compliance with debt covenants. It stated that liquidity should be adequate for operations, capital spending, and dividends for the next 12 months. The company expected 2014 base-business capital spending of approximately $78 million and railcar, locomotive, lease, and modification spending of $110 million, partly offset by anticipated rail asset sale proceeds of $85 million.
Material changes and management commentary
- Revenue fell, earnings rose. Lower grain and nutrient prices contributed to lower sales, while improved gross profit and affiliate earnings supported higher pretax income. Q2 revenue declined 16% year over year; first-half revenue declined 18%.
- Ethanol was a major earnings driver. Q2 equity earnings from affiliates rose to $32.2 million from $10.0 million; first-half equity earnings were $52.7 million versus $17.8 million. Management cited strong ethanol demand and margins as corn costs declined. About 75% of third-quarter and 33% of fourth-quarter exposure was hedged; remaining production margins were managed in the spot market.
- Grain results benefited from basis appreciation and a one-time gain. Grain recognized a $17.1 million pretax gain on the January partial redemption of its LTG investment, reducing its fully diluted interest from about 47.5% to 39.2%. The gain was $10.7 million after tax. Grain also reported higher Q2 gross profit, while first-half gross profit was slightly lower year over year.
- Other segment trends were mixed. Plant Nutrient earnings improved on higher volumes, partly reflecting weather-delayed demand. Rail first-half pretax income declined to $21.7 million from $24.3 million, including higher operating costs, despite stronger leasing margins. Turf & Specialty income declined; Retail’s first-half pretax loss narrowed.
- Operating expenses increased, including higher labor, benefits, incentive compensation, repair-business expansion costs, and ERP implementation expense. Management expected ERP expenses to increase through the rest of 2014 as implementation progressed.
Outlook, risks and contingencies
- Management expected the 2014 effective tax rate to be approximately 33.9%, compared with the actual 2013 rate of 36.0%.
- Management expected grain space income to continue improving through year-end, subject to new-crop progress and weather; favorable conditions could produce record corn and soybean yields. Plant Nutrient demand was expected to be good, barring rail or barge disruptions.
- Key exposures include commodity-price movements and margin calls, seasonal working-capital needs, variable-rate borrowing and interest rates, crop and weather conditions, and logistics. Management reported no material change in commodity or interest-rate market risk during the quarter.
- The company was responding to an EPA request for information concerning possible hazardous-material leaching near its Maumee River facility. No claim or finding had been asserted. Management said reasonably possible losses on outstanding claims were not material, while noting future litigation could have an adverse effect.
- The fair value of the company’s IANR preferred-share investment fell to $17.0 million from $25.7 million at year-end, due to lower forecast railroad traffic; the decline was recorded in other comprehensive income. The company reported maximum exposure to loss of $23.4 million, including accrued unpaid dividends.
Important facts for investors to verify
- Whether ethanol affiliate earnings and favorable margins persist, and how much future production remains exposed to spot-market margins.
- Whether the sharp first-half operating cash outflow reverses with seasonal working-capital patterns, and the timing and amount of expected tax payments.
- The sustainability of earnings excluding the $17.1 million LTG redemption gain, alongside the effect of the reduced LTG ownership stake.
- Execution, costs, and control implications of the phased ERP implementation, as well as planned capital spending and rail asset dispositions.
- Developments in the EPA inquiry, crop and logistics conditions, debt availability and covenants, and the IANR investment valuation.