The Andersons, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; filed November 9, 2011. Unaudited results. The company operates Grain, Ethanol, Rail, Plant Nutrient, Turf & Specialty, and Retail businesses, plus corporate functions.
Financial performance
Amounts below are in millions, except per-share data and ratios.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Sales and merchandising revenue | $938.7 | $706.8 | $3,278.5 | $2,239.8 |
| Gross profit | $65.0 | $53.1 | $266.4 | $199.2 |
| Gross margin | 6.9% | 7.5% | 8.1% | 8.9% |
| Operating income | $15.4 | $1.8 | $113.7 | $63.2 |
| Net income attributable to The Andersons | $10.9 | $1.4 | $73.4 | $38.8 |
| Diluted earnings per share | $0.59 | $0.08 | $3.92 | $2.09 |
- Q3 income before taxes was $15.7 million versus $0.8 million a year earlier. Nine-month income before taxes was $114.9 million versus $63.2 million.
- Interest expense increased to $5.7 million in Q3 from $4.6 million and to $20.6 million for nine months from $13.9 million. Equity-method earnings rose to $9.7 million in Q3 from a $1.1 million loss, and to $29.5 million for nine months from $15.5 million.
- Operating cash flow was $222.0 million for the first nine months, compared with cash used of $146.6 million in 2010. Investing cash use was $47.3 million; financing cash use was $165.5 million. Cash increased $9.3 million to $38.5 million.
- At September 30, working capital was $315.8 million and the current ratio was approximately 1.57. Total assets were $1.46 billion; shareholders’ equity was $532.1 million.
- Debt comprised $105.0 million of short-term line borrowings, $45.2 million of current long-term debt, and $235.7 million of long-term debt, or about $385.9 million in total. The company reported $989.2 million of borrowing capacity available under its lines of credit and compliance with debt covenants.
Changes and operating drivers
- Revenue rose sharply year over year, chiefly reflecting higher average commodity prices; management cautions that commodity price changes can lift both sales and cost of sales without a comparable increase in gross profit. Q3 and nine-month gross margins were lower than in the comparable periods.
- Grain operating income improved, supported by higher basis and space income and stronger earnings from Lansing Trade Group; management noted lower grain volumes in several crops. Grain reported $119.7 million of nine-month gains on commodity derivatives, included in revenue.
- Ethanol returned to segment operating profit in Q3. Management cited favorable corn basis secured ahead of the spot period and stronger earnings from ethanol affiliates.
- Rail operating income improved as railcar utilization increased to 85.1% in Q3 from 72.9%; management said rail traffic improved modestly, but the pace of improvement slowed.
- Plant Nutrient operating income increased substantially as higher selling prices and margins more than offset lower volumes. Turf & Specialty earnings declined, while Retail’s operating loss narrowed modestly.
- Q3 tax expense was $4.5 million, an effective rate of 28.5%; the nine-month rate was 35.0%. Management expected a 35.5% effective tax rate for full-year 2011.
Outlook, risks, and unusual items
- Management expected approximately $55 million of 2011 base-business capital spending and $55.4 million for railcars, locomotives, related leases, and modifications, partly offset by railcar sale proceeds. Spending through September included $29.6 million for property and equipment and $38.4 million for railcar purchases and related leases.
- Plant Nutrient had strong fourth-quarter volumes booked but depended on favorable weather for fall application. Grain described the regional harvest as ahead of the prior year but slightly behind the five-year average. Management said it was monitoring fertilizer prices and inventory exposure.
- Seasonality, commodity price and basis movements, derivative margin requirements, variable-rate borrowing costs, and working-capital demands can affect earnings and liquidity. Management said there had been no material change in market risks or previously disclosed risk factors.
- The company received a $2.9 million trial verdict in a civil suit; both parties appealed, and no income was recognized because the final amount and collectability remained uncertain.
- The EPA requested information about a Toledo facility and possible historical hazardous-material leaching from nearby former glass-making operations. No claim or finding had been asserted. The filing also describes ordinary-course litigation and contingencies.
- The company uses off-balance-sheet rail leasing and non-recourse arrangements. The filing lists 5,958 railcars leased from financial intermediaries and 1,922 railcars in non-recourse arrangements.
Investor verification priorities
- Review how much earnings growth came from recurring segment operations versus commodity derivative gains and equity-method affiliate earnings.
- Check cash-flow sustainability and the effect of seasonal working-capital and commodity-margin needs; Q3 cash generation benefited from large inventory and derivative movements.
- Confirm debt maturities, borrowing availability, variable-rate exposure, and the extent of rail-related off-balance-sheet commitments.
- Track grain and fertilizer volumes, commodity prices and basis, Rail utilization and traffic, and weather-sensitive Plant Nutrient demand against management’s commentary.
- Monitor the appealed civil verdict, the EPA information request, and other litigation for changes in exposure or recognition.