Andersons, Inc. annual report, FY2010

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The Andersons, Inc. — 2010 Form 10-K Summary

Business context and reporting period

This annual report covers the fiscal year ended December 31, 2010; it is not a standalone fourth-quarter filing. The Andersons operates in grain and ethanol, rail, plant nutrients, turf and specialty products, and retail. Its operations span 16 U.S. states and Puerto Rico, with rail interests in Canada and Mexico.

Financial performance and position

  • Revenue: $3.394 billion, up 12.2% from $3.025 billion in 2009.
  • Gross profit: $281.7 million versus $255.5 million; gross margin was approximately 8.3% versus 8.4%.
  • Income: Income before taxes was $104.1 million, compared with $61.5 million. Net income attributable to The Andersons was $64.7 million, or $3.51 basic and $3.48 diluted per share, versus $38.4 million, or $2.10 and $2.08, respectively. The 2010 effective tax rate rose to 37.7% from 35.7%.
  • Segments: Grain & Ethanol income was $81.4 million (up from $51.4 million); Plant Nutrient income was $30.1 million (up from $11.3 million). Rail returned to a small profit of $0.1 million from a $1.0 million loss. Turf & Specialty income fell to $3.4 million from $4.7 million; Retail recorded a $2.5 million loss, slightly improved from $2.8 million.
  • Cash flow: Operating activities used $239.3 million, versus $180.2 million provided in 2009, primarily reflecting increased working capital from higher commodity prices, inventories and derivatives. Investing activities used $89.0 million; financing activities provided $211.6 million. Cash and cash equivalents declined to $29.2 million from $145.9 million.
  • Liquidity: Working capital was $301.8 million, down $5.9 million. The company had $241.1 million drawn on short-term lines and reported $760.8 million available at year-end. A January 2011 amendment increased Line A by $92 million; the filing describes total borrowing capacity of approximately $1.1 billion after that amendment.
  • Debt and equity: At year-end, short-term borrowing was $241.1 million; recourse long-term debt was $285.4 million including current maturities, and non-recourse long-term debt was $16.0 million including current maturities. Shareholders’ equity was $464.6 million. The company reported compliance with its debt covenants.
  • Quarterly context: Unaudited fourth-quarter 2010 sales were $1.154 billion and attributable net income was $25.8 million, compared with $916.0 million and $16.2 million in fourth-quarter 2009.

Material changes versus 2009

  • Grain & Ethanol revenue and income improved with higher grain volume, ethanol prices and volume, stronger basis and position income, and increased earnings from Lansing Trade Group. Ethanol LLC earnings declined, principally due to rising corn prices.
  • Plant Nutrient sales rose 26%, driven by a 31% increase in volume; management attributed stronger fourth-quarter volume to favorable fall application conditions and pipeline restocking.
  • Rail utilization averaged 73.6%, down from 78.1%, although it ended the year at 81.7%. Fleet size under management decreased to 22,475 from 23,804.
  • The company acquired O’Malley grain facilities for approximately $7.8 million and B4 Grain assets for approximately $35.1 million, increasing grain storage capacity to about 107 million bushels from 101 million. It also invested $13.1 million in convertible preferred securities of Iowa Northern Railway and Zephyr, with a 49.9% voting interest in IANR.
  • Working capital pressures were material: inventory increased to $647.2 million from $407.8 million, while current commodity derivative assets rose to $226.2 million from $24.3 million.

Outlook, commentary and risks

  • Management expected 2011 to be a good volume year for Plant Nutrients, with strong demand and potentially strong margins amid tight supplies and firm pricing. It anticipated continued rail recovery and said rail utilization had strengthened by year-end. No specific consolidated earnings or revenue guidance was provided.
  • Planned 2011 spending included approximately $74 million for conventional property, plant and equipment and $90 million for railcar purchases and capitalized modifications, with approximately $75 million of related sales or financing expected.
  • Key exposures include volatile grain, corn, ethanol, fertilizer and energy markets; imperfect hedges and counterparty risk; margin calls that can sharply increase funding needs; seasonal working capital; variable interest rates; and reliance on credit facilities.
  • Other material risks include environmental and industry regulation, railcar demand and utilization, inventory damage or obsolescence, acquisitions and joint-venture dependence, and safety and information-technology disruptions. The company noted that changes to ethanol incentives or mandates could affect processing margins.
  • Commodity derivative losses recognized in revenue were $53.9 million in 2010, compared with gains of $45.7 million in 2009; the company also marks grain inventories and related contracts to market, so this figure should not be viewed in isolation.
  • The EPA requested information about possible historic hazardous-material leaching near the company’s Toledo riverfront facility. The filing stated that no claim or finding had been asserted. The company also disclosed a separate dispute that could yield material gains, but said the outcome and amount could not be predicted.
  • Management and the independent auditor concluded internal control over financial reporting was effective as of year-end; the auditor issued an unqualified opinion on the consolidated financial statements.

Important facts for investors to verify

  • How much of the 2010 earnings improvement is repeatable, particularly the effects of grain merchandising, affiliate earnings and the $6.7 million reversal of bad-debt reserves following a collection settlement.
  • Whether operating cash flow and liquidity recover as commodity prices, inventories, derivative positions and margin requirements change; confirm post-amendment credit availability and covenant headroom.
  • Whether rail utilization and lease revenues continue to improve, and the financial effect of railcar scrapping, planned purchases and off-balance-sheet lease commitments.
  • Whether ethanol margins can withstand elevated corn costs and any changes to government incentives, blending mandates or market conditions.
  • Developments in the Toledo EPA inquiry, the separately disclosed dispute with potential gains, and any other litigation or environmental liabilities.