Business context and reporting period
The Andersons, Inc. filed this Form 10-K for the fiscal year ended December 31, 2013. The diversified agriculture-rooted company reports six segments: Grain, Ethanol, Plant Nutrient, Rail, Turf & Specialty, and Retail. Dollar amounts below are U.S. dollars; financial results are annual, not quarterly.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Sales and merchandising revenues | $5.605 billion | $5.272 billion |
| Gross profit | $365.2 million | $358.0 million |
| Gross margin | 6.5% | 6.8% |
| Income before income taxes | $149.5 million | $120.1 million |
| Net income attributable to The Andersons | $89.9 million | $79.5 million |
| Diluted earnings per share | $3.18 | $2.82 |
| Operating cash flow | $337.2 million | $328.5 million |
| Cash and cash equivalents at year-end | $309.1 million | $138.2 million |
| Working capital at year-end | $229.5 million | $304.3 million |
| Total equity | $724.4 million | $611.4 million |
- Investing activities used $106.3 million; financing activities used $60.1 million. Capital expenditures were $46.8 million.
- Reported debt totaled approximately $427.2 million, including current maturities; $10.1 million was non-recourse debt. No borrowings were outstanding on the company’s main credit lines at year-end. The filing reports $847.7 million available under its borrowing arrangements, including non-recourse capacity.
- EBITDA was $219.9 million, a non-GAAP measure. The effective tax rate was 36.0%.
Material changes versus the prior comparable period
- Revenue rose 6.3% and gross profit rose 2.0%, while gross margin narrowed. Net income attributable to the company increased 13.2%; it remained below 2011’s $95.1 million.
- Equity in earnings of affiliates increased to $68.7 million from $16.5 million, principally reflecting a sharp recovery in earnings at unconsolidated ethanol ventures and continued contributions from Lansing Trade Group (LTG).
- Ethanol: segment operating income improved to $50.6 million from a $3.7 million loss, supported by lower corn costs and stronger ethanol margins.
- Grain: shipments increased 22% to about 462 million bushels, but segment operating income fell to $46.8 million from $63.6 million. Lower space income and weaker merchandising margins offset higher volumes.
- Plant Nutrient: operating income declined to $27.3 million from $39.3 million amid lower sales volume and margins. Rail was broadly flat at $42.8 million. Turf & Specialty improved to $4.7 million from $2.2 million. Retail operating loss widened to $7.5 million from $4.0 million.
- Cash increased substantially, while working capital fell by $74.9 million, largely reflecting lower inventory and derivative asset balances and changes in customer prepayments. Operating cash flow remained strong and included significant working-capital effects.
Outlook, risks, contingencies, and unusual items
- Management anticipated approximately 93 million U.S. corn acres in 2014 and said this could support Grain, Ethanol, and agricultural nutrient demand, subject to weather and other market conditions. Production and required inputs had been contracted for January 2014 at positive ethanol margins; management cautioned that market volatility could follow. No company-wide earnings guidance was provided.
- Planned 2014 spending was approximately $85 million for conventional property, plant, and equipment, plus an estimated $110 million for railcar purchases and capitalized modifications, partly offset by anticipated railcar sales or financing of $85 million.
- Commodity price, basis, weather, crop-yield, and counterparty risks can affect margins and require substantial margin deposits. The company warned that rapidly rising grain prices may pressure liquidity. It also faces variable-rate borrowing exposure, competitive pressure, regulatory and environmental risks, and risks from inventory damage or obsolescence.
- The enterprise resource planning system implementation was delayed and expected to cost more and take longer than originally planned; ultimate cost and schedule were not yet known. Management said the prior-year material weakness in journal-entry controls was remediated in 2013. Management and the auditor concluded internal control over financial reporting was effective at year-end.
- Retail recorded $3.9 million of asset impairment charges in 2013 and closed its Woodville, Ohio store. A $3.5 million gain from an early rail-lease termination was recorded in the third quarter.
- The company and LTG acquired a 50% interest in the Thompsons Limited joint ventures for a total purchase price of $152 million; the company contributed $48 million in cash. The Cargill grain-facility lease and marketing agreements were renewed in December 2013 for five years.
- After year-end, the company agreed to a $60 million partial redemption of its LTG investment, reducing its fully diluted interest to approximately 39.2%. It reported an estimated first-quarter 2014 book gain of approximately $17 million before tax ($11 million after tax).
- The U.S. EPA requested information about the history of the company’s Toledo, Ohio riverfront facility while investigating possible hazardous-material leaching from historic glass-manufacturing waste. No claim or finding had been asserted. The company said the reasonably possible loss range for outstanding claims was not material.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. A three-for-two stock split effective February 18, 2014 was reflected retrospectively in share and per-share data.
Important facts for investors to verify
- How much of the improvement in earnings is sustainable, given the large increase in affiliate earnings and the strong but potentially volatile ethanol margins?
- How did working-capital movements affect 2013 operating cash flow, and how much cash do equity-method affiliates distribute relative to reported earnings?
- What are the company’s debt maturities, covenant headroom, and committed liquidity needs, particularly during seasonal inventory and commodity-margin periods?
- Will planned 2014 capital and railcar spending proceed as expected, and what are the updated cost, schedule, and operational risks for the ERP implementation?
- What developments, if any, arise from the EPA inquiry, and can the Retail segment improve after store closure and impairment charges?
- Confirm the completed terms and accounting impact of the LTG redemption, including the reported first-quarter 2014 gain and reduced ownership interest.