The Andersons, Inc. — Q1 2014 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. The company operates Grain, Ethanol, Plant Nutrient, Rail, Turf & Specialty, and Retail businesses. Management cautions that results are seasonal and the quarter is not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Sales and merchandising revenue | $1,003.3 million | $1,272.0 million |
| Gross profit | $76.8 million | $79.3 million |
| Gross margin | 7.7% | 6.2% |
| Operating, administrative and general expenses | $71.0 million | $62.0 million |
| Income before income taxes | $39.9 million | $21.4 million |
| Net income attributable to The Andersons | $22.7 million | $12.6 million |
| Diluted EPS | $0.80 | $0.45 |
| Operating cash flow | $(498.6) million | $(336.0) million |
Revenue fell about 21%, primarily as lower grain prices reduced reported sales and related costs. Management notes that commodity-price movements can materially change revenue without a comparable effect on gross profit. Earnings improved despite slightly lower gross profit, helped by stronger ethanol affiliate earnings and a $17.1 million pretax gain on the partial redemption of the company’s LTG investment. Commodity derivatives recorded a $53.7 million loss in sales and merchandising revenue, versus a $36.4 million gain in Q1 2013.
Liquidity, debt and cash flow
- Cash and cash equivalents were $43.7 million at March 31, down from $309.1 million at December 31, 2013. Working capital was $246.6 million; current assets were $1,138.5 million and current liabilities $891.9 million.
- Cash used in operations was $498.6 million, chiefly reflecting seasonal working-capital movements, including inventory growth and payments to grain suppliers. Investing activities provided $37.3 million, including railcar-sale proceeds and proceeds from the LTG investment redemption; financing activities provided $196.0 million, including $226.1 million of short-term borrowing.
- Total reported debt, including short-term borrowings and current maturities, was approximately $623.0 million, versus $747.9 million at March 31, 2013 and $427.2 million at December 31, 2013. The increase from year-end reflects seasonal short-term borrowing. The company reported covenant compliance.
- The amended bank agreement provides $850 million of borrowing capacity; total capacity including $28.1 million of non-recourse debt is reported as $878.1 million. The filing gives differing available-borrowing figures: $621.6 million in Note 10 and $594.0 million in MD&A.
Material changes and segment results
- Ethanol: Segment pretax income attributable to the company rose to $19.8 million from $2.5 million, mainly on much higher earnings from unconsolidated ethanol investments as margins improved.
- Grain: Pretax income rose to $11.3 million from $8.3 million, including the LTG redemption gain. Excluding the higher other income, underlying gross profit declined, reflecting lower basis appreciation and wheat inventory.
- Rail: Pretax income increased to $15.0 million from $14.6 million. Higher car sales and leasing margins lifted gross profit; operating expenses also rose.
- Plant Nutrient: Pretax loss widened to $1.4 million from $0.6 million. Weather delayed fertilizer demand, which management expects largely to shift into Q2.
- Turf & Specialty: Pretax income declined to $1.4 million from $4.0 million, mainly due to lower-margin sales mix and increased labor, acquisition-related and weather costs.
- Retail: Pretax loss narrowed to $2.3 million from $3.2 million, supported by stronger margins and lower expenses despite lower customer counts.
Outlook, risks and unusual items
- Management expects an effective tax rate of approximately 34.4% for 2014. It forecasts about $94 million of base-business capital spending and $110 million for railcars, locomotives, leases and modifications, partly offset by approximately $85 million of railcar-sale proceeds.
- Management reported positive margins locked in for a majority of planned ethanol production in Q2 and Q3. Grain space-income opportunities improved slightly in Q2, but depend on the progress of a somewhat delayed crop. Fertilizer volumes were expected to shift toward Q2.
- Management believes liquidity will fund operations, capital expenditures and dividends for the next 12 months. Risks include seasonal working-capital needs, commodity-price and margin-call volatility, variable-rate borrowing costs, weather, and business and market conditions. The company says market-risk conditions did not materially change during the quarter.
- The EPA requested information about possible hazardous-material leaching at the company’s Maumee River facility in Toledo; no claim or finding had been asserted. The company is cooperating. Management considers current legal proceedings unlikely to be material, while noting future claims may pose risk.
- The LTG redemption reduced the company’s fully diluted ownership from approximately 47.5% to 39.2%. The filing also notes higher expected corporate expenses as the first stage of an ERP implementation begins.
Important facts for investors to verify
- Reconcile the two different figures reported for available borrowing capacity and assess seasonal liquidity needs after the sharp Q1 cash decline and operating cash outflow.
- Separate recurring earnings from the $17.1 million LTG redemption gain and evaluate sustainability of ethanol affiliate earnings and margins.
- Review commodity derivative exposure and valuation effects, including the Q1 derivative loss and related collateral requirements.
- Monitor weather-driven shifts in fertilizer demand, crop progress and grain storage economics, along with Rail and Turf & Specialty expense trends.
- Track the EPA inquiry, variable-rate debt exposure, planned capital spending and ERP implementation costs.