The Andersons, Inc. — Q2 2010 Form 10-Q
Business context and period. Unaudited quarterly report for the three and six months ended June 30, 2010, covering Grain & Ethanol, Rail, Plant Nutrient, Turf & Specialty, and Retail operations. The company cautions that seasonal interim results are not necessarily indicative of full-year results.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $811.0 | $811.0 | $1,533.0 | $1,508.3 |
| Gross profit | $87.6 | $73.3 | $146.1 | $134.7 |
| Gross margin | 10.8% | 9.0% | 9.5% | 8.9% |
| Income before taxes | $40.3 | $25.0 | $62.4 | $31.7 |
| Net income attributable to Andersons | $25.2 | $15.9 | $37.4 | $20.9 |
| Diluted EPS | $1.36 | $0.87 | $2.02 | $1.14 |
| Operating cash flow | Not separately presented | Not separately presented | $105.2 | $131.3 |
- Q2 revenue was essentially flat year over year; first-half revenue grew 1.6%. Gross profit rose 19% in Q2 and 8% in the first half.
- First-half interest expense fell to $9.3 million from $10.9 million. Equity-method earnings swung to $16.6 million from a $2.9 million loss, materially supporting earnings growth.
- First-half cash from operations declined $26.1 million year over year, despite higher net income, with working-capital movements contributing to operating cash flow.
- At June 30, cash was $204.3 million and working capital was $299.3 million. Total debt, including current maturities, was approximately $305.7 million, down from $319.0 million at December 31, 2009 and $349.8 million a year earlier.
- The company reported no short-term line borrowings at quarter-end. Its borrowing capacity was $475 million, with $460 million available after standby letters of credit. Current and long-term debt maturities were $24.0 million and $281.7 million, respectively.
Material changes and segment trends
- Grain & Ethanol: First-half segment operating income rose to $40.3 million from $14.7 million. Higher basis and space income, improved ethanol-investment earnings, and lower interest expense helped; management said the basis appreciation was not expected to continue in the second half.
- Plant Nutrient: First-half operating income increased to $19.7 million from $12.4 million, supported by volume and lower cost per ton. Q2 volume rose 37%, partly reflecting late spring planting.
- Rail: First-half operating income decreased to $1.1 million from $1.5 million. Rail leasing gross profit fell sharply amid weaker utilization and higher storage costs; the company scrapped about 1,100 cars in the first half and recorded a $3.6 million gain on railcar scrapping for the period.
- Turf & Specialty: First-half operating income declined to $5.2 million from $6.1 million, primarily as operating expenses increased and competition remained intense for non-patented products.
- Retail: First-half results moved to a $0.7 million operating loss from $0.2 million income. Lower sales included the effect of the Lima, Ohio store closure; same-store customer counts fell 6%.
Outlook, risks, and unusual items
- Management anticipated a 2010 effective tax rate of 38.2%; the first-half rate was 39.0%. A one-time $1.5 million tax expense adjustment related to health-care legislation contributed to the higher rate.
- The ethanol LLCs had locked in a significant portion of remaining 2010 sales, and some 2011 sales, at profitable margins, but management expected margins below first-half levels.
- Railcar utilization was 71.0% in Q2, versus 80.6% a year earlier, although it improved 1% from Q1. Management said prolonged weakness could be needed before railcar impairment became likely, and it continued assessing cars for storage or scrapping.
- Planned 2010 base-business capital spending was approximately $39 million; $15.2 million had been spent through June. Railcar, locomotive, lease, and modification spending was expected to be $75 million, offset by anticipated sale and disposition proceeds of $77.5 million.
- The company paid $13.1 million for convertible preferred shares of Iowa Northern Railway (IANR). The shares accrue cumulative dividends at 14% annually. IANR is treated as a variable-interest entity but is not consolidated; the company stated its maximum exposure was $13.3 million and it had no obligation to provide further support.
- A May 2010 acquisition of two O’Malley Grain facilities had a purchase price of $7.8 million, including $1.2 million of goodwill.
- A court returned a verdict of approximately $10.2 million for the company in a grain-contract dispute. Collection was ongoing and the filing cautions that collectability is not assured; potential gains from disputed matters are uncertain.
- Environmental matters include an early-stage EPA information request concerning a Maumee River facility and an Illinois complaint alleging contaminated storm-water runoff. The company said it did not expect likely cleanup costs or fines in the Illinois matter to be material.
- The company was in compliance with debt covenants. It reported no material change in market-risk disclosures, no material change in internal controls, and effective disclosure controls as of June 30.
Most important facts for investors to verify
- Whether unusually strong equity-method earnings, commodity gains, and basis income are repeatable; commodity-derivative gains included in first-half revenue were $52.3 million.
- Progress in rail utilization, leasing profitability, storage costs, and any further railcar scrapping or impairment assessment.
- Realization and timing of the $10.2 million litigation verdict, and developments in the environmental matters.
- Debt maturity and refinancing requirements, including the planned September 2010 call of $17.2 million of higher-rate debentures, which was not included in reported current maturities.
- IANR’s performance, preferred-dividend accruals, valuation, and the company’s exposure under the investment.