The Andersons, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. All figures below are unaudited; dollar amounts are in millions unless stated otherwise. The company operates in Grain, Ethanol, Plant Nutrient, Rail and Retail, with results affected by agricultural commodity prices and seasonal working-capital needs.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $935.8 | $952.9 | $3,094.4 | $3,268.3 |
| Gross profit | $85.2 | $84.9 | $276.7 | $283.2 |
| Gross margin | 9.1% | 8.9% | 8.9% | 8.7% |
| Net income (loss) attributable to The Andersons | $(1.2) | $16.8 | $34.0 | $83.8 |
| Basic and diluted EPS | $(0.04) | $0.59 | $1.19 | $2.95 |
| Operating cash flow | Not presented by quarter | $57.8 | $102.3 |
Q3 operating, administrative and general expenses were $88.7 million, up from $76.7 million. Equity in affiliate earnings fell to $3.8 million from $23.9 million. For the first nine months, affiliate earnings declined to $23.3 million from $76.6 million. The filing emphasizes gross profit over revenue because commodity-price changes can move sales and cost of sales together.
Balance sheet, debt and liquidity
- At September 30, 2015, cash was $40.7 million, working capital was $183.1 million and total assets were $2.19 billion. Working capital was $74.2 million below September 30, 2014.
- Short-term debt was $82.8 million; current maturities of long-term debt were $27.0 million; long-term debt was $413.6 million. Total debt was approximately $523.4 million, compared with approximately $366.7 million a year earlier.
- Borrowing capacity under credit lines was $875.0 million, including $25.0 million of non-recourse Denison Ethanol debt; $657.9 million remained available. The company reported compliance with financial covenants.
- For the first nine months, investing activities used $212.4 million, principally including the Kay Flo acquisition and Rail Group asset purchases. Financing activities provided $80.6 million. Cash declined by $74.0 million from year-end 2014.
Material changes and management commentary
- Revenue declined 1.8% in Q3 and 5.3% year to date. Q3 attributable results shifted to a loss; nine-month attributable net income fell about 59% year over year.
- Grain: Q3 segment pretax income fell to $0.1 million from $12.4 million, reflecting weaker merchandising margins, weather-driven risk-management effects and lower affiliate earnings. Management described the outlook as cautious and noted potential pressure on corn yields, basis and storage income; a deterioration in forecasts could trigger grain goodwill impairment.
- Ethanol: Q3 segment pretax income attributable to the company was $5.9 million versus $21.3 million. Ethanol volumes rose, but average ethanol prices declined 26% in Q3 and 31% year to date; lower margins reduced affiliate earnings.
- Plant Nutrient: Q3 segment recorded an $11.1 million pretax loss versus a $3.0 million loss. Kay Flo added sales and costs, while weather-related weakness affected legacy volumes. A $2.0 million charge fully impaired goodwill in the cob reporting unit.
- Rail: Q3 segment pretax income rose to $11.9 million from $4.2 million, supported by stronger leasing, utilization and car-sale results. Fleet utilization was 91.6% versus 89.9% a year earlier.
Outlook, risks and unusual items
- The company acquired Kay Flo Industries in May 2015 for total fair-value consideration of approximately $125.5 million, funded with debt and cash. The purchase allocation remained preliminary; contingent consideration could range from zero to $24 million.
- The company planned to terminate its defined-benefit pension plan, with settlement expected in Q4 2015. At September 30, management estimated a one-time, noncash pretax charge of $54.4 million and additional funding of approximately $6.9 million, subject to market rates at settlement. These items were expected to affect the annual tax-rate estimate.
- Management forecast a 2015 effective tax rate of approximately 33.0%. It expected 2015 Rail Group purchases of railcars, barges and related assets of $129.2 million, partly offset by approximately $89.7 million of sales and dispositions; base-business capital spending was expected to be approximately $98.2 million.
- Management said liquidity should be adequate for operations, capital expenditures and dividends. Risks include seasonal borrowing and variable interest rates, commodity-price and margin-call exposure, weather-related operating impacts, and uncertainty in grain goodwill valuation. The company also disclosed off-balance-sheet Rail Group leasing arrangements.
- The EPA had requested information about possible historical contamination near the company’s Maumee River facility. No claim or finding had been asserted. The company said it was cooperating and considered reasonably possible litigation losses not material.
- New federal rail rules affect approximately 2,100 of the company’s tank cars; management had not determined how many would be modified, repurposed or retired. The company reported no material change in market risk during the quarter.
Important facts for investors to verify
- Whether pension-plan settlement occurred as expected, and the final charge, funding requirement and cash impact.
- Subsequent Grain and Ethanol margins, affiliate earnings and any changes in grain goodwill impairment assumptions.
- Kay Flo’s final purchase-price allocation, integration performance and any contingent-consideration obligations.
- Debt levels, seasonal peak borrowings, remaining credit availability and compliance with covenants.
- Rail fleet compliance decisions and capital spending, plus any developments in the EPA inquiry.