The Andersons, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The company operates in seasonal agricultural markets across Grain, Ethanol, Plant Nutrient, Rail and Retail. Management cautions that commodity price changes can move revenue and cost of sales together, so gross profit is more informative than revenue alone.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $1,208.5m | $1,312.1m | $2,158.6m | $2,315.4m |
| Gross profit | $108.2m | $121.5m | $191.5m | $198.3m |
| Gross margin | 8.9% | 9.3% | 8.9% | 8.6% |
| Income before taxes | $50.4m | $75.1m | $55.4m | $115.0m |
| Net income attributable to Andersons | $31.1m | $44.3m | $35.2m | $67.0m |
| Diluted EPS | $1.09 | $1.56 | $1.23 | $2.36 |
- Q2 revenue fell 7.9%; attributable net income and diluted EPS each fell about 30%. First-half revenue fell 6.8% and attributable net income fell about 47%.
- Operating, administrative and general expenses were $83.7m in Q2 and $162.3m for the first half, up from $76.3m and $147.3m, respectively. Equity-method earnings fell to $16.2m in Q2 and $19.5m in the first half, from $32.2m and $52.7m.
- Operating cash flow was negative $59.4m for the first half, compared with negative $259.6m a year earlier. Investing activities used $178.1m; financing provided $163.6m. Cash ended at $40.8m.
- At June 30, total debt was approximately $585.7m, versus $377.2m at December 31, 2014. Working capital was $212.2m, versus $252.0m at June 30, 2014. Credit facilities totaled $876.6m, with $602.2m available; the company reported compliance with financial covenants.
Material changes and operating drivers
- Grain: Q2 pretax income declined to $3.1m from $10.4m. Lower margin per bushel and higher expenses outweighed improved space income. First-half results also reflect the absence of a $17.1m gain on a 2014 partial Lansing Trade Group redemption.
- Ethanol: Q2 pretax income fell to $9.7m from $39.0m; first-half income fell to $14.9m from $62.1m. Lower ethanol prices and margins drove the decline, including sharply lower affiliate earnings. Production reached a second-quarter record, but ethanol margins remained below 2014 levels.
- Plant Nutrient: Q2 pretax income decreased to $18.9m from $27.0m, with weather-reduced volumes and acquisition-related costs. First-half income was $19.3m versus $27.0m.
- Rail: Q2 pretax income rose to $21.7m from $6.7m. Higher utilization and lease rates helped, and results included $10.6m of higher-than-normal lease settlements. Management also reported $4.7m of gains on railcar sales and related leases, versus $2.5m a year earlier.
- Retail: Q2 pretax income was $1.5m versus $1.6m; first-half results remained a loss of $0.7m.
Outlook, risks and unusual items
- Management forecast a 35.0% effective tax rate for 2015. No specific earnings guidance was provided.
- Management described the Grain outlook as cautious, citing western-region performance and lower storage utilization; heavy eastern Corn Belt rain could reduce corn harvest and pressure basis and storage income. Plant Nutrient volumes lost to weather were not expected to be fully recovered during 2015.
- For 2015, the company expected approximately $140m of Rail asset purchases, partly offset by about $100m of sales and dispositions, and approximately $112m of capital spending in the base business, including IT and a new headquarters project.
- The Kay Flo acquisition closed May 18 for estimated consideration of $125.2m. The purchase-price allocation was preliminary; contingent consideration could range from $0 to $24m. The acquisition added $45.5m of goodwill, stated as nondeductible for tax purposes.
- The company was pursuing termination of its defined-benefit pension plan. At June 30, the estimated potential one-time noncash pretax charge from accumulated losses was $56.7m, and estimated additional funding was $9.2m; both depend on conditions at settlement.
- Commodity price and margin-call exposure, seasonal borrowing needs and variable interest rates remain risks. Railcar safety rules announced in May 2015 may affect some tank cars; the company was evaluating the impact.
- The EPA requested information about possible historical contamination near the Maumee River facility. No claim or finding had been asserted. Management said reasonably possible loss estimates for outstanding claims were not material and believed current litigation was unlikely to be material.
- Management said liquidity should be adequate for operations, capital spending and dividends in the foreseeable future. Disclosure controls were assessed as effective at June 30, 2015.
Important facts for investors to verify
- Whether lower ethanol margins and affiliate earnings persist, and how commodity prices affect gross profit and working capital.
- Rail earnings’ reliance on the $10.6m lease settlement and the outlook for utilization, lease rates and railcar safety-rule costs.
- Final Kay Flo purchase accounting, acquisition performance and any contingent consideration payable.
- Timing and final cost of the pension-plan termination, including the estimated charge and funding requirement.
- Debt, seasonal borrowing and cash-flow trends relative to planned Rail purchases, capital spending, dividends and remaining share-repurchase authorization.
- Developments in the EPA inquiry, other litigation, and the company’s ongoing ERP implementation.