The Andersons, Inc. — Form 10-Q summary
Reporting period: Three and nine months ended September 30, 2010. The company operates across grain and ethanol, rail, plant nutrients, turf and specialty products, and retail. Amounts below are in millions of dollars unless noted.
Financial performance and position
- Third quarter: Revenue was $706.8 million, up 17.6% year over year. Gross profit was $53.1 million, up 4.1%; gross margin was about 7.5%, versus 8.5%. Net income attributable to The Andersons was $1.4 million, or $0.08 per diluted share, compared with $1.3 million, or $0.07 per share.
- Nine months: Revenue was $2,239.8 million, up 6.2%. Gross profit was $199.2 million, up 7.3%; gross margin was about 8.9%, versus 8.8%. Net income attributable to The Andersons was $38.8 million, or $2.09 per diluted share, compared with $22.1 million, or $1.20.
- Cash flow: Operating activities used $146.6 million in the first nine months, versus providing $191.2 million in 2009. Investing activities used $40.4 million; financing activities provided $66.8 million. Cash fell to $25.7 million from $145.9 million at year-end 2009.
- Liquidity: Working capital was $273.2 million at September 30. The company had $101.4 million drawn on its $390 million short-term credit line and reported $273.9 million available after standby letters of credit. It also had a $115 million long-term credit facility with no borrowings outstanding.
- Debt and equity: Short-term borrowings, current maturities and long-term debt totaled approximately $389.7 million. Long-term debt alone was $264.3 million, down from $308.0 million at December 31, 2009. Total shareholders’ equity was $441.9 million.
- Dividends: Dividends paid were $0.09 per share in each of the second and third quarters of 2010; nine-month dividends were $0.2675 per share.
Material changes and operating drivers
- Third-quarter pretax income declined to $0.8 million from $2.3 million. Equity-method results shifted to a $1.1 million loss from $5.3 million in earnings, chiefly as the ethanol ventures reported weaker results. They had contracted much of their third-quarter ethanol sales at minimal margins and faced higher input and maintenance costs.
- For the first nine months, equity-method earnings rose to $15.5 million from $2.4 million, supporting the increase in year-to-date earnings. Grain and Ethanol Group results also benefited from improved affiliate earnings and higher gross profit.
- Plant Nutrient Group third-quarter revenue increased 83%, with volume up 60%; management attributed improvement to restocking, rising grain prices, early harvest and favorable application weather. The group cautioned that it was monitoring rising fertilizer prices and inventory exposure.
- Rail Group utilization averaged 72.9% in the quarter, down from 74.4% a year earlier, although it improved from the second quarter and reached 75.6% at September 30. Lower leasing utilization continued to weigh on leasing revenue and gross profit.
- Retail revenue declined, partly due to the closure of the Lima, Ohio store in late 2009. Same-store customer counts also fell. Turf and Specialty faced intense competition in non-patented products.
- Grain inventories were 68.1 million bushels, including 20.0 million stored for others, versus 41.6 million and 19.5 million, respectively, a year earlier.
Outlook, risks and unusual items
- The filing provides no specific earnings guidance. Management expected a 2010 effective tax rate of about 37.8% and forecast approximately $36 million of base-business capital spending for 2010. It also expected $23 million of railcar, locomotive and related spending, offset by railcar sale proceeds.
- Management said operating cash use reflected higher commodity prices and related margin calls, primarily in the third quarter. It cited adequate near-term funding capacity, while increasing credit availability ahead of seasonal borrowing needs and commodity-price volatility. Peak short-term borrowings through the filing date were $118.7 million.
- Commodity price movements can require substantial margin deposits; the company reported a daily maximum for margin calls of approximately $50 million. Variable-rate borrowing also exposes results to interest-rate increases. Management reported compliance with debt covenants at September 30.
- A $1.5 million one-time tax expense adjustment followed 2010 health-care legislation. The company also reported $2.2 million of railcar-return settlements, $0.8 million of asset-sale gains, and accrued dividend income from its Iowa Northern Railway investment. These items affect comparability.
- The company received a trial verdict of approximately $10.2 million in a grain-contract dispute; settlement discussions and collection actions were ongoing, and collectability was not assured. Management said material gains from certain disputes were reasonably possible but not predictable.
- Environmental matters include an early-stage EPA information request concerning a Toledo property, with no claim or finding asserted, and an Illinois complaint concerning alleged contaminated storm-water runoff and fish kills. The company did not expect related cleanup costs or fines to be material.
- Management said there were no material changes to previously disclosed risk factors or market-risk exposures. It cautioned that interim results may not indicate full-year results, particularly given seasonal operations.
Important facts for investors to verify
- Whether seasonal commodity margin requirements and working-capital needs remain within available borrowing capacity, and how operating cash flow recovers.
- Whether ethanol affiliate profitability improves after the third-quarter margin and cost pressures, and whether year-to-date affiliate earnings are sustainable.
- Whether railcar utilization and leasing economics continue to recover, and whether rail assets or off-balance-sheet leasing arrangements face added pressure.
- Whether fertilizer price movements, inventory positions and crop-season conditions affect Plant Nutrient results or create inventory valuation risk.
- Collection prospects for the $10.2 million grain-contract verdict, developments in the environmental matters, and any resulting material costs or gains.
- The effect of the one-time tax adjustment and other unusual items on comparisons, and confirmation of the expected annual tax rate and spending plans.