The Andersons, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; filed November 12, 2013. The company operates in seasonal agribusiness, ethanol, rail, specialty products and retail markets. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,181.4 | $1,138.4 | $4,020.3 | $3,591.4 |
| Gross profit | $73.1 | $78.3 | $255.6 | $266.8 |
| Gross margin | 6.2% | 6.9% | 6.4% | 7.4% |
| Income before taxes | $28.4 | $24.3 | $98.0 | $98.1 |
| Net income attributable to The Andersons | $17.2 | $16.9 | $59.3 | $64.5 |
| Diluted EPS | $0.91 | $0.90 | $3.15 | $3.43 |
- Q3 revenue rose 3.8%, but gross profit fell 6.6%; attributable net income increased 1.6%. The quarter benefited from stronger affiliate earnings, particularly in ethanol and Lansing Trade Group (LTG).
- Year-to-date revenue grew 11.9%, while gross profit declined 4.2% and attributable net income fell 8.1%. Diluted EPS declined from $3.43 to $3.15.
- Operating cash flow was $129.0, versus cash used of $38.7 in the prior-year period. Inventory reductions were a significant source of cash.
- At September 30, cash was $134.4 and working capital was $232.9. Total debt, including current maturities, was $425.3; short-term line borrowings were zero. Available borrowing capacity was $847.5, and the company reported compliance with debt covenants.
- Capital spending on property, plant and equipment was $31.4 year to date. Railcar purchases were $71.6, partly offset by $87.6 of railcar sale proceeds. Dividends paid were $9.0, or $0.48 per share year to date.
Material changes and segment results
- Ethanol: Q3 segment pretax income improved to $10.9 from a $0.9 loss, primarily on stronger ethanol margins and affiliate earnings. Nine-month pretax income attributable to the company was $24.0, compared with a $2.9 loss.
- Grain: Q3 pretax income increased to $14.3 from $10.8. Nine-month pretax income fell to $24.7 from $45.5, reflecting lower space income and higher operating expenses, partly related to growth and acquisitions.
- Plant Nutrient: Q3 recorded a $1.6 pretax loss versus $0.8 income; year-to-date pretax income fell to $21.0 from $34.5. Management cited delayed harvest, lower sales volume and weaker nutrient margins.
- Rail: Q3 pretax income declined to $12.4 from $19.1, mainly because of lower car-sale volume and gains. Nine-month pretax income increased to $36.6 from $34.3, supported by leasing and other income.
- Retail: The segment remained loss-making, with a nine-month pretax loss of $3.7 versus $3.1. Lower traffic and closure of the Woodville store weighed on sales.
- On July 31, the company and LTG acquired Thompsons Limited through 50%-owned joint ventures; the company contributed $48 million in cash. In August, it acquired Mile Rail for $7.8 million. The company also cited a possible approximately $3 million share of a gain at LTG related to contributed assets, subject to valuation.
Outlook, risks and unusual items
- Management expected post-harvest grain inventories to support space income into 2014. It expected delayed fertilizer demand to shift into Q4 as harvest progressed.
- Management warned that higher ethanol production and stocks, alongside seasonally weaker gasoline demand, could create negative ethanol margins in Q4, despite some forward production and inputs contracted at positive margins.
- The company projected a 2013 effective tax rate of 37.2%, compared with 37.1% in 2012. It stated liquidity should be adequate for operations, capital spending and dividends over the next 12 months.
- Commodity prices and derivatives, seasonal working-capital needs, variable interest rates, and potential margin calls remain key exposures. Management reported no material change in market risk during the quarter.
- Q3 other income included a $3.5 million gain from an early lease termination; Rail also reported $4.3 million of income from settling two nonperforming railcar leases. The filing does not clarify whether these amounts overlap.
- The company recorded a $1.4 million deferred-tax correction related to retiree health care and Medicare Part D accounting; management said the effect on previously reported statements was immaterial.
- The EPA requested information about possible historical contamination near the company’s Maumee River facility. No claim or finding had been asserted. The company said reasonably possible losses on outstanding claims were not material.
- Disclosure controls were deemed ineffective because a previously identified material weakness in journal-entry controls had not been fully remediated. Management described remediation efforts, including entry review and access restrictions.
Important facts for investors to verify
- Whether fourth-quarter ethanol margins and fertilizer sales developed as management expected.
- How sustainable affiliate earnings are, particularly contributions from LTG and ethanol investments.
- Progress in remediating the material weakness and whether subsequent filings report effective controls.
- The outcome of the Thompsons valuation and any resulting gain, and the performance of the new acquisitions.
- Any developments in the EPA inquiry, litigation, rail lease settlements, or other potentially nonrecurring items.
- Seasonal borrowing, commodity-margin requirements, variable-rate debt exposure and actual 2013 cash flow and capital spending.