Business context and reporting period
The Andersons, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. Its five segments are Grain, Ethanol, Plant Nutrient, Rail, and Retail. Results are seasonal, and management cautions that interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $859.6 million | $909.1 million | $2,811.7 million | $3,015.0 million |
| Gross profit | $77.0 million | $85.2 million | $241.8 million | $276.7 million |
| Gross margin | 9.0% | 9.4% | 8.6% | 9.2% |
| Net income (loss) attributable to The Andersons | $1.7 million | $(1.2) million | $1.4 million | $34.0 million |
| Basic and diluted EPS | $0.06 | $(0.04) | $0.05 | $1.19 |
For Q3, operating, administrative and general expenses fell to $78.8 million from $88.7 million, while interest expense declined to $4.4 million from $6.1 million. Equity earnings from affiliates increased to $8.4 million from $3.8 million. For the nine-month period, interest expense rose to $18.0 million from $16.2 million, while equity earnings fell to $3.8 million from $23.3 million.
At September 30, cash and cash equivalents were $78.2 million; working capital was $230.9 million, versus $183.1 million a year earlier. Current assets were $783.3 million and current liabilities $552.4 million. Debt comprised $51.5 million of current maturities and $395.6 million of long-term debt, with no short-term borrowings; total reported debt was approximately $447.1 million. The company reported $809.9 million available under its borrowing arrangements and compliance with financial covenants.
Cash provided by operating activities for the first nine months was $41.3 million, versus $57.8 million in 2015. Investing activities provided $4.8 million, compared with $212.4 million used in 2015; financing activities used $31.7 million, versus $80.6 million provided in 2015. Cash increased by $14.4 million from year-end 2015 to $78.2 million.
Material changes and segment trends
- Q3 revenue declined 5.4% year over year and gross profit declined 9.6%. The company returned to a small attributable profit from a year-ago loss. Nine-month attributable earnings fell sharply from $34.0 million to $1.4 million.
- Grain: Q3 pretax results improved year over year, helped by trading income and lower expenses after Iowa asset divestitures. Nine-month results swung to a $28.6 million pretax loss from $4.0 million income, reflecting weak basis and space income and lower Lansing Trade Group affiliate earnings.
- Ethanol: Q3 results improved as lower corn and natural-gas costs supported margins at unconsolidated plants. Nine-month pretax earnings declined to $13.0 million from $20.8 million.
- Plant Nutrient: Q3 pretax loss narrowed to $7.2 million from $11.1 million, largely on lower expenses, but fertilizer price declines, weaker volumes, and margin pressure persisted. Nine-month pretax income increased to $18.0 million from $8.2 million, supported by lower input costs and a greater mix of specialty products.
- Rail: Q3 pretax income fell to $6.8 million from $11.9 million. Utilization dropped to 86.2% from 91.6%; nine-month results also declined, affected by lower leasing margins, fewer railcar sale gains, and unusually high prior-year lease settlements.
- Retail: Q3 and nine-month results weakened; management cited customer-count declines of 4% and 3%, respectively. The company announced closure of its specialty food concept store in Q4.
Outlook, risks, and unusual items
Management expected higher soybean and corn production in its core markets in Q4 versus the prior year, based on preliminary indications. It forecast a 30.7% effective tax rate for full-year 2016. Planned 2016 spending was approximately $99.8 million for railcars, barges, related leases, and modifications, partly offset by expected asset-sale proceeds of $73.9 million; base-business capital spending, including IT and the new headquarters, was expected to be approximately $106.4 million.
Management said liquidity should be adequate for operations, capital expenditures, and dividends in the foreseeable future. Key exposures include seasonal working-capital and borrowing needs, variable-rate interest expense, possible margin calls on commodity contracts, and commodity price and basis movements. The company warned that continued weakness in wholesale fertilizer could lead to goodwill impairment; $59.1 million of goodwill was associated with that reporting unit. Rail utilization also remained under pressure from improved railroad operating efficiency and lower demand for cars.
During 2016, the company sold eight Iowa grain and agronomy locations for $54.3 million cash, recognizing a nominal gain. It also received $13.5 million from redemption of its Iowa Northern Railway investment. The new headquarters was completed; at quarter-end, the build-to-suit financing obligation was $13.7 million long-term and $1.3 million current. Prior-year comparisons included a $23.1 million gain on Lansing Trade Group ownership transactions. Management said current reasonably possible litigation losses were not material and that disclosure controls were effective. It reported no material quarterly change in market risk.
Important facts for investors to verify
- Whether Grain’s weak nine-month performance and lower affiliate earnings improve, and how Q4 harvest conditions affect results.
- Whether fertilizer demand, margins, and the wholesale nutrient unit’s goodwill valuation stabilize.
- Whether Rail utilization and leasing margins recover, and how much of results depends on asset-sale gains or lease settlements.
- Seasonal borrowing, variable-rate debt exposure, commodity margin requirements, and actual availability under credit facilities.
- Actual full-year capital spending, rail asset dispositions, tax rate, and the effect of the specialty food store closure.