The Andersons, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless noted. The company operates in seasonal agriculture-related businesses, including Grain, Ethanol, Plant Nutrient, Rail, Turf & Specialty, and Retail. Dollar amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Sales and merchandising revenue | $1,137.1 | $1,001.7 |
| Gross profit | $85.9 | $78.7 |
| Gross margin | 7.6% | 7.9% |
| Income before taxes | $28.0 | $27.2 |
| Net income attributable to The Andersons | $18.4 | $17.3 |
| Diluted earnings per share | $0.98 | $0.93 |
| Interest expense | $5.3 | $7.3 |
| Cash used in operating activities | $(187.0) | $(221.8) |
- Revenue rose 13.5% and gross profit rose 9.1%, while gross margin narrowed about 0.3 percentage points. Higher revenue mainly reflected pricing and volume changes across the businesses.
- Q1 cash use from operations is seasonal, reflecting grain payments and working-capital needs. Cash and cash equivalents were $31.9 at March 31, 2012; restricted cash was $18.8.
- Working capital was $283.1, down $26.5 from March 31, 2011. The company attributed the decline chiefly to lower commodity-derivative assets; current liabilities also declined, notably short-term borrowings.
- Short-term line-of-credit borrowings were $365.0. Long-term debt, including current maturities, was $250.8; total stated borrowing capacity was $850, with $449.9 available at quarter-end. The company said it was in compliance with debt covenants and had adequate capacity for funding needs.
- Shareholders’ equity was $542.7. The quarterly dividend was $0.15 per common share, compared with $0.11 in Q1 2011.
Material changes and segment performance
- Grain: Operating income increased to $19.4 from $15.1, helped by improved margins, lower bad-debt expense, and lower interest expense. Grain inventory was 75.7 million bushels, versus 72.7 million a year earlier.
- Ethanol: Operating income fell to $0.1 from $3.6. Lower industry margins and a mark-to-market hedge loss weighed on results; equity earnings from ethanol investments also declined, turning to a loss. Management cited increased production, weaker demand and declining exports.
- Plant Nutrient: Operating income rose to $5.8 from $5.1 as warm, dry weather supported early application and higher volume. Expenses included a $0.5 asset impairment charge.
- Rail: Operating income increased to $8.0 from $3.5. Higher lease rates, car sales and repair activity supported gross profit; railcar sale and related-lease gains were $6.3 versus $4.8.
- Turf & Specialty: Operating income declined to $2.2 from $3.3, reflecting weaker lawn-fertilizer pricing and margins amid higher raw-material costs.
- Retail: Operating loss was $2.7 versus $2.7. Mild winter weather reduced winter business; customer counts and average sale per customer also declined.
- Corporate expenses not allocated to segments increased $3.3, mainly due to stock compensation and benefit-related expenses.
Outlook, risks and notable items
- Management anticipated a 2012 effective tax rate of about 36.0%; the Q1 rate was 36.6% (36.1% in Q1 2011). No comprehensive full-year earnings guidance is provided in the supplied filing text.
- Management expected significant nutrient demand through Q2, based on anticipated U.S. corn acreage of 96 million acres, while noting uncertainty from future corn prices. Crop yields and weather during planting and growing seasons were identified as important to Grain and future results.
- Ethanol forward margins were described as break-even to negative, with uncontracted future production and inputs exposing inventory to market volatility. Management viewed Q4 prospects more positively if a record corn crop materialized.
- Expected 2012 spending included about $59 million for base-business property, plant and equipment and $100 million for railcars, locomotives and related items, partly offset by expected rail-asset sale proceeds of $97 million. These are expectations, not guaranteed outcomes.
- On January 31, the company acquired New Eezy Gro for approximately $16.8 million. On May 1, after quarter-end, it completed a $68 million purchase of an ethanol facility and adjacent grain terminal in Denison, Iowa, plus a working-capital adjustment not yet determined. The company owned 85% of the new entity and expected to consolidate its results beginning in Q2.
- Commodity-price and interest-rate exposure remain relevant; the company noted that higher rates could affect profitability given seasonal variable-rate borrowing, and adverse commodity-price movements may require additional margin deposits. It reported no material change in market risk during the quarter.
- The company was cooperating with an EPA information request concerning possible hazardous-material leaching near its Maumee River property; no claim or finding had been asserted. The estimated range of reasonably possible losses on outstanding claims was described as not significant, though some matters could not be estimated.
- A $3.2 million trial verdict in a civil suit remained under appeal by both parties; no income had been recorded because the final amount and collectibility were uncertain. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether the expected nutrient demand and crop outlook were borne out, particularly given weather and commodity-price changes.
- How ethanol margins, hedge valuations and the ethanol investments’ results developed after Q1.
- Actual working-capital needs, seasonal borrowings, available credit and margin-call requirements.
- The final purchase-price allocation and subsequent contribution from New Eezy Gro and the Denison facility, including the Denison working-capital adjustment.
- Progress and any financial implications of the EPA inquiry, pending litigation and the appealed civil verdict.