The Andersons, Inc. — Q2 2011 Form 10-Q
Business context and period. This unaudited filing covers the three and six months ended June 30, 2011, with comparisons to 2010. The company operates Grain, Ethanol, Rail, Plant Nutrient, Turf & Specialty, and Retail businesses. Results are seasonal, and management cautions that interim results are not necessarily indicative of full-year results. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $1,338.2 | $811.0 | $2,339.8 | $1,533.0 |
| Gross profit | $122.8 | $87.6 | $201.5 | $146.1 |
| Gross margin | 9.2% | 10.8% | 8.6% | 9.5% |
| Income before taxes | $72.0 | $40.3 | $99.2 | $62.4 |
| Net income attributable to The Andersons | $45.2 | $25.2 | $62.5 | $37.4 |
| Diluted earnings per share | $2.42 | $1.36 | $3.34 | $2.02 |
- Q2 operating, administrative and general expenses were $57.7 million versus $51.1 million; interest expense was $7.6 million versus $4.7 million. Equity in affiliate earnings increased to $12.5 million from $6.7 million.
- Six-month operating cash flow was $63.2 million, down from $105.2 million. Investing used $27.4 million and financing used $46.5 million; cash and cash equivalents fell $10.6 million to $18.6 million.
- At June 30, working capital was $352.7 million. Current assets were $977.0 million and current liabilities $624.3 million. Total debt was approximately $500.3 million, including $194.2 million drawn on short-term lines; long-term debt was $306.1 million including current maturities. Total debt was about $542.4 million at December 31, 2010.
- Total credit capacity under lines of credit was approximately $1.1 billion, with $880.0 million available at June 30. Peak short-term borrowing to date was $601.5 million on April 26. The company reported compliance with debt covenants.
- Dividends paid were $0.11 per share in Q2, compared with $0.09 a year earlier. A further $0.11 dividend was declared for payment in July.
Material changes and segment trends
- Revenue rose sharply, primarily reflecting higher commodity prices and volumes rather than a comparable increase in underlying margins. Management notes that commodity price changes generally affect sales and cost of sales similarly; sales alone may not indicate business performance.
- Grain earnings improved substantially: Q2 operating income was $36.5 million versus $13.4 million, and six-month income was $51.6 million versus $25.6 million. Increased wheat volume and unusually strong basis appreciation and space income were key drivers. The company does not expect the large basis appreciation to continue in the second half. Grain commodity derivative gains included in revenue were $102.6 million in Q2 and $103.9 million for six months.
- Plant Nutrient Q2 operating income increased to $24.1 million from $19.0 million, helped by price escalation and wider margins. Six-month income increased to $29.2 million from $19.7 million, despite a 10% volume decline.
- Rail Q2 operating income rose to $2.8 million from $0.1 million, supported by leasing and car sales. Fleet utilization increased to 84.7% from 71.0% a year earlier; management expects rail-traffic improvement to slow in the rest of 2011.
- Ethanol Q2 operating income increased to $8.8 million from $6.2 million, but six-month income declined to $12.4 million from $14.8 million, partly due to lower affiliate earnings. Retail Q2 income edged down to $1.9 million from $2.1 million; Turf & Specialty Q2 income declined to $1.8 million from $2.5 million.
- Beginning in 2011, Grain & Ethanol reporting was separated into Grain and Ethanol segments; prior-period segment figures were reclassified.
Outlook, risks, contingencies, and unusual items
- Management anticipates a 2011 effective tax rate of 36.3%. The reported rate was 36.1% for both Q2 and the first six months of 2011.
- Ethanol management expected positive Q3 margins, while warning that higher corn costs and planned September shutdowns would pressure results. Advance corn purchases at favorable basis were expected to help margins.
- Management expected 2011 to be a strong year for Plant Nutrient, citing demand, planted acreage, tight supplies, and price trends, but warned that adverse Q3 or Q4 weather could reduce sales and gross profit. Grain’s outlook also faces crop-condition and commodity-market uncertainty.
- Expected 2011 capital spending was approximately $70 million for property, plant and equipment. The company also expected $90 million of railcar, locomotive and related spending, offset by approximately $75 million of railcar sales and dispositions.
- Commodity prices and derivatives can create volatility and require margin deposits; variable-rate short-term borrowing exposes earnings to higher interest rates. At June 30, grain inventory pledged as derivative collateral was valued at $78.2 million. Derivatives are carried at fair value, with gains and losses recorded in revenue.
- The company disclosed off-balance-sheet rail leasing and non-recourse arrangements. It reported 6,020 railcars leased from financial intermediaries and 2,073 railcars in non-recourse arrangements.
- An EPA information request concerns possible historical contamination at a Toledo riverfront facility; no claim or finding had been asserted. The company said current legal proceedings were not expected to be material, while noting future claims could be adverse.
- A $2.9 million civil-suit verdict was received in Q2, but no income was recorded because reconsideration, appeal, final amount, and collectability remained uncertain.
- Disclosure controls were assessed as effective, with no material change in internal controls reported. Management said there were no material changes to the risk factors in the 2010 Form 10-K.
Important facts for investors to verify
- How much of Grain’s strong earnings and reported revenue reflected commodity derivative gains and unusually favorable basis appreciation, and whether those gains recur.
- Whether operating cash flow, cash balances, and seasonal borrowing remain adequate as working-capital needs and margin requirements fluctuate.
- Progress against expected capital spending, railcar purchases and dispositions, and the stated credit availability and debt-covenant compliance.
- Whether ethanol margins remain positive after higher corn costs and planned facility shutdowns, and whether Plant Nutrient demand and margins withstand weather or supply changes.
- Developments in the Toledo EPA inquiry and the civil-suit verdict, including any change in exposure, collectability, or recognized income.