The Andersons, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also provides unaudited fourth-quarter results. The Andersons is a diversified agricultural and services company with six reportable segments: Grain, Ethanol, Plant Nutrient, Rail, Turf & Specialty, and Retail.
Financial performance
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Sales and merchandising revenues | $4,576.3 million | $3,393.8 million | +34.9% |
| Gross profit | $352.9 million | $281.7 million | +25.3% |
| Gross margin | 7.7% | 8.3% | Down 0.6 percentage points |
| Income before income taxes | $147.9 million | $104.1 million | +42.0% |
| Net income attributable to The Andersons | $95.1 million | $64.7 million | +47.1% |
| Diluted EPS | $5.09 | $3.48 | +46.3% |
| Cash from operations | $290.3 million | $(239.3) million | Improved $529.6 million |
| Capital expenditures | $44.2 million | $30.9 million | +$13.3 million |
Revenue growth reflected higher commodity prices and higher sales volumes in some segments, as well as acquisitions. Management cautions that commodity-price changes can inflate both sales and cost of sales without proportionate gross-profit growth.
Balance sheet and liquidity at December 31
- Total assets were $1.734 billion, versus $1.699 billion a year earlier; total equity was $538.8 million, up from $464.6 million.
- Working capital was $313.0 million, compared with $301.8 million. Cash and cash equivalents were $20.4 million; inventory was $760.5 million.
- Short-term line borrowings were $71.5 million, down from $241.1 million. Long-term debt, including current maturities, was approximately $270.1 million; non-recourse long-term debt was $0.8 million.
- The amended credit facility provided $735 million in short-term capacity and $115 million in long-term capacity. The company reported $743.4 million available under its lines at year-end and compliance with debt covenants.
- Operating cash flow benefited materially from working-capital movements, including changes in commodity derivatives and grain payables. It should not be assumed to represent a recurring earnings-based cash generation level.
Material changes and segment performance
- Grain: Segment income before tax rose to $87.3 million from $64.4 million. Higher wheat basis appreciation and spread gains contributed; revenues also benefited from higher grain prices and the B4 Grain acquisition.
- Ethanol: Segment income before tax increased to $23.3 million from $17.0 million, principally from higher equity earnings in the ethanol joint ventures. Revenue rose largely because the average ethanol price per gallon increased 41%, while volume was relatively unchanged.
- Plant Nutrient: Segment income before tax rose to $38.3 million from $30.1 million. Higher average selling prices lifted revenue, but volume fell 14.7%, with wet weather limiting field application.
- Rail: Segment income before tax increased to $9.8 million from $0.1 million. Higher utilization and lease rates helped; gross profit included $8.4 million of railcar and related lease gains.
- Turf & Specialty: Segment income before tax decreased to $2.0 million from $3.4 million, primarily as higher raw-material costs pressured margins.
- Retail: The segment reported a $1.5 million loss before tax, an improvement from a $2.5 million loss. Average customer ticket rose 6.5%, while customer counts fell nearly 2%.
- Quarterly results were uneven. In Q4 2011, revenue was $1.298 billion versus $1.154 billion in Q4 2010, while net income attributable to the company was $21.7 million versus $25.8 million; diluted EPS was $1.17 versus $1.39.
Outlook, risks, and unusual items
- Management expected 2012 Plant Nutrient volume to be strong, citing favorable early-2012 weather, expected increases in planted acres, and strong grain prices. Rail traffic in early 2012 was expected to increase slightly over 2011. No consolidated earnings or revenue guidance was provided.
- Management noted that forward ethanol margins were negative at the time of the filing and that little future production or required input was contracted, leaving ethanol inventory exposed to volatility in corn, DDG, and ethanol prices.
- The company expected approximately $123 million of 2012 property, plant and equipment spending, including ERP-related spending. It also estimated $90 million in railcar purchases and capitalized modifications, with related sales or financings of $96.4 million.
- Significant risks include commodity-price and basis movements, margin calls and liquidity needs, weather and crop yields, ethanol economics and the expiration of federal blender incentives after 2011, interest-rate exposure, inventory impairment, counterparty credit risk, regulation and environmental liabilities, and competition.
- Other disclosed exposures include off-balance-sheet railcar operating leases, with $51.0 million of future lease payments for railcars leased from financial intermediaries, and $1.4507 billion of purchase commitments, primarily grain and ethanol purchases. These commitments are associated with ordinary-course operations and related forward sales and derivatives.
- The company recorded a $3.1 million lower-of-cost-or-market inventory and contract adjustment and $1.7 million of asset impairment charges in 2011. It also reported $8.4 million of railcar-related gains. Commodity-derivative gains included in revenue were $131.2 million in 2011, compared with losses of $53.9 million in 2010.
- The EPA was investigating the possible historical leaching of hazardous material from former glass-manufacturing waste along the company’s Maumee River property. The company said no claim or finding had been asserted; the possible loss range was not estimable. It also reported ordinary-course litigation and an appealed $3.2 million trial verdict for which no income had been recorded.
- The company completed the $3.0 million purchase of Immokalee Farmers Supply in October 2011 and announced the $15.5 million purchase of New Eezy Gro, plus working capital, in January 2012. ERP implementation began in early 2012 and carries execution, cost, and operational risks.
Important facts for investors to verify
- Whether 2011 cash generation is sustainable: operating cash flow was strongly influenced by working-capital movements and commodity derivative balances.
- The drivers and repeatability of earnings growth, particularly Grain basis and spread gains, derivative gains, ethanol affiliate earnings, and Rail’s asset-sale gains.
- Current liquidity needs and borrowing availability under the credit facility, especially during seasonal peaks or periods of rising commodity prices and margin calls.
- Whether the expected 2012 Plant Nutrient recovery and railcar utilization outlook materialized, and how the New Eezy Gro acquisition and ERP project affected results and capital needs.
- Updates to ethanol margins, the effect of discontinued federal blender incentives, and any changes in the EPA inquiry or other environmental and legal contingencies.