The Andersons, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The Andersons operates in Grain, Ethanol, Plant Nutrient, Rail and Retail. Results are seasonal, and management cautions that first-quarter performance is not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Sales and merchandising revenue | $887.9 million | $918.2 million |
| Gross profit / gross margin | $67.8 million / 7.6% | $83.3 million / 9.1% |
| Operating, administrative and general expenses | $79.9 million | $78.6 million |
| Income (loss) before tax | $(22.9) million | $5.0 million |
| Net income (loss) attributable to The Andersons | $(14.7) million | $4.1 million |
| Diluted EPS | $(0.52) | $0.14 |
| Operating cash flow | $(267.9) million | $(286.7) million |
Revenue declined about 3%, while gross profit fell about 19%. The company recorded a $7.0 million loss from equity-method affiliates, versus $3.3 million of earnings in Q1 2015. Commodity-derivative losses included in cost of sales were $8.9 million, compared with $43.8 million of gains in the prior-year quarter. The filing notes that commodity-price changes can materially affect reported sales and costs, so gross profit is a more useful performance indicator than revenue alone.
Cash and cash equivalents were $46.3 million at March 31, down from $63.8 million at December 31, 2015. Working capital was $201.8 million, compared with $223.0 million at March 31, 2015. Total short- and long-term debt, including current maturities, was approximately $730.4 million at quarter-end. The company had $538.6 million available under borrowing lines with stated aggregate capacity of $873.7 million, including $23.7 million of non-recourse ethanol-company debt. It reported compliance with financial covenants.
Material changes and segment results
- Grain: Pre-tax loss of $17.4 million versus income of $0.7 million. Lower margins per bushel, limited storage income and basis appreciation, and weaker affiliate results—particularly at Lansing Trade Group—drove the deterioration.
- Ethanol: Pre-tax loss of $3.6 million versus income of $5.1 million. Lower ethanol prices and margins, lower sales volume, and weaker earnings from unconsolidated plants weighed on results.
- Plant Nutrient: Pre-tax income rose to $1.7 million from $0.4 million. Kay Flo acquisition-related facilities and higher volumes contributed, partly offset by higher costs and lower average fertilizer prices.
- Rail: Pre-tax income was $9.4 million versus $10.3 million. Lower car-sale activity reduced gross profit; other income included a $0.7 million gain on redemption of the Iowa Northern Railway investment. Fleet utilization was 91.5%, compared with 91.8%.
- Retail: Pre-tax loss narrowed slightly to $2.1 million from $2.2 million.
Q1 operating cash use is described as typical of the company’s seasonal working-capital needs ahead of spring planting. Financing activities provided $250.2 million, principally reflecting increased short-term borrowings and long-term debt proceeds. The company issued $75 million in senior notes with maturities in 2021, 2023 and 2026 and stated interest rates of 4.1%, 4.6% and 4.9%, respectively.
Outlook, risks and unusual items
- Management described the Grain outlook as cautious, citing rebuilding industry inventories and unfavorable Eastern Corn Belt conditions following the 2015 harvest. Ethanol profitability remained pressured by low selling prices and regional feedstock-cost differences; management expected the latter to ease after the next harvest in the second half of 2016.
- Management expected a 2016 effective tax rate of approximately 33%. It projected 2016 railcar, barge and related lease investment of $142.0 million, offset by approximately $118.0 million of sales and dispositions, and base-business capital spending of approximately $110.9 million, including IT and the new headquarters construction.
- Liquidity risks include seasonal borrowing needs, variable interest rates, and potential additional margin deposits during periods of high grain prices or adverse market movements. Management believed available liquidity would cover operations, capital expenditures and dividends in the foreseeable future.
- After quarter-end, the board approved the sale of eight Iowa grain and agronomy locations; the transaction closed May 2, 2016. The company also disclosed an internal investigation, begun after quarter-end, into potential quality-procedure irregularities affecting certain outbound rail shipments at a limited number of grain facilities. Management did not expect a material financial impact if substantiated.
- The company reported ordinary-course litigation and stated that reasonably possible losses were not material. It also recorded a $10.9 million build-to-suit financing obligation related to its new headquarters during construction. Disclosure controls were assessed as effective; the phased ERP implementation continued.
Important facts for investors to verify
- Whether Grain and Ethanol margins and equity-method affiliate performance recover, and whether the cautions described by management persist.
- Whether seasonal cash use, short-term borrowing and total debt remain manageable through the spring operating cycle; confirm covenant compliance and available borrowing capacity.
- Actual capital spending, rail-asset purchases and dispositions against management’s 2016 estimates.
- Findings and any consequences of the grain-facility shipment-quality investigation, plus the closing and financial effect of the Iowa location sale.
- The assumptions behind the approximately 33% annual tax-rate expectation and the impact of commodity, interest-rate and derivative movements.