The Andersons, Inc. — Q2 2016 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2016. The company operates Grain, Ethanol, Plant Nutrient, Rail and Retail businesses and notes that seasonal working-capital needs can make interim results unrepresentative of full-year performance.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $1,064.2 million | $1,187.7 million | $1,952.1 million | $2,105.9 million |
| Gross profit | $97.0 million | $108.2 million | $164.8 million | $191.5 million |
| Income (loss) before tax | $23.1 million | $50.4 million | $0.2 million | $55.4 million |
| Net income (loss) attributable to Andersons | $14.4 million | $31.1 million | $(0.3) million | $35.2 million |
| Diluted EPS | $0.51 | $1.09 | $(0.01) | $1.23 |
- Q2 revenue fell about 10% year over year; first-half revenue fell about 7%. Gross profit declined about 10% in Q2 and 14% in the first half. The reported Q2 gross margin was approximately 9.1%, broadly flat with the prior-year quarter; first-half gross margin was approximately 8.4%, versus 9.1%.
- Q2 operating, administrative and general expenses were $75.4 million, down from $83.7 million. Interest expense increased to $6.6 million from $4.0 million. Equity earnings of affiliates fell to $2.3 million from $16.2 million. First-half equity results were a loss of $4.6 million, compared with earnings of $19.5 million.
- First-half operating cash flow was a use of $194.4 million, versus a use of $59.4 million in 2015. Investing activities provided $14.9 million, compared with $178.1 million used in the prior-year period; financing activities provided $147.1 million.
- Cash and cash equivalents were $31.4 million at June 30. Working capital was $227.7 million. Total debt, including current maturities, was approximately $631.9 million. The company reported $630.9 million of remaining borrowing availability under $872.5 million of borrowing arrangements and compliance with financial covenants.
- Dividends declared were $0.155 per share in Q2, versus $0.14 a year earlier. First-half dividends declared were $0.31 per share, versus $0.28.
Material changes and segment results
- Grain: Reported a Q2 pretax loss of $13.0 million, versus income of $3.1 million. Lower space income and basis appreciation, and a $10.8 million decline in affiliate earnings—primarily from Lansing Trade Group losses on trading positions—drove the deterioration. Management said the outlook had improved after a good wheat harvest and expected higher industry inventories at harvest.
- Ethanol: Q2 pretax income attributable to Andersons was $6.2 million, down from $9.7 million. Management cited low ethanol prices, elevated corn basis costs and weaker by-product margins. Strong demand supported sales volumes, but production and feedstock costs pressured profitability.
- Plant Nutrient: Q2 pretax income rose to $23.5 million from $18.9 million. Higher volumes, acquired facilities and a greater mix of higher-margin products helped offset lower fertilizer prices. Results included a property-damage insurance settlement.
- Rail: Q2 pretax income declined to $6.6 million from $21.7 million, partly because the prior-year period included unusually high lease-settlement income. Utilization fell to 88.6% from 93.5%, while average lease rates were relatively flat.
- Retail: Q2 pretax income was $1.0 million, compared with $1.5 million; customer count declined 4%. First-half Retail reported a pretax loss of $1.1 million.
- The company sold eight Iowa grain and agronomy locations for $54.3 million cash in May, recognizing a nominal gain. It also redeemed its Iowa Northern Railway investment in Q1, receiving $13.5 million. No business acquisitions were completed in the first half of 2016.
Outlook, risks and unusual items
- Management projected a 32.6% effective tax rate for full-year 2016. The first-half rate was 189.6%, primarily because of a discrete state income tax charge; Q2’s rate was 33.2%.
- For 2016, management expected approximately $142 million of rail-related purchases and capitalized modifications, partly offset by about $118 million of asset-sale proceeds. Planned base-business capital spending, including IT and the new headquarters, was approximately $108.1 million.
- Management stated that liquidity should be adequate for operations, capital expenditures and dividends. Seasonal borrowing needs, variable interest rates, commodity-price movements and potential margin calls on futures positions could affect cash needs and profitability.
- The company uses off-balance-sheet rail leasing arrangements. Its new headquarters is subject to a 15-year build-to-suit lease; at June 30, it had recorded a $13.0 million long-term financing obligation and $1.5 million in other current liabilities for the facility.
- Management said current legal proceedings were unlikely to be material and that the estimated range of reasonably possible losses was not material. It cautioned that future litigation could have an adverse effect. The phased ERP implementation was ongoing; management reported disclosure controls effective and no material quarterly change in internal controls.
Key facts for investors to verify
- Whether Grain and Lansing Trade Group performance recovered, and whether management’s expected harvest-related improvement materialized.
- Whether Ethanol margins improved as crop conditions and corn basis normalized, and how affiliate-plant results developed.
- How seasonal working-capital needs, operating cash use, short-term borrowings and available credit changed after June 30.
- Whether Rail utilization and leasing profitability improved, and how planned fleet spending and dispositions compared with actual results.
- The realized costs and obligations of the headquarters build-to-suit lease, planned capital spending, and any material developments in litigation or other contingencies.