ANDE

Business Context and Reporting Period

Company: The Andersons, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: An entrepreneurial company with diversified interests in agriculture and transportation. Operations are divided into five segments: Grain & Ethanol Group, Rail Group, Plant Nutrient Group, Turf & Specialty Group, and Retail Group. The company manages grain risk, bulk handling, transportation, and logistics, with significant investments in ethanol production facilities and railcar leasing.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total sales decreased 13% to $3.03 billion, driven by lower commodity prices in the Grain & Ethanol and Plant Nutrient segments, despite volume increases in some areas.
• Profitability Improvement: Net income attributable to shareholders increased 17% to $38.4 million. This was primarily due to the absence of the $97.2 million lower-of-cost-or-market inventory write-down recorded in the Plant Nutrient Group in 2008.
• Segment Performance:
  • Grain & Ethanol: Operating income increased $7.8 million to $51.4 million, aided by improved margins in ethanol joint ventures and reduced interest expense.
  • Rail Group: Operating results turned to a loss of $1.0 million (vs. $19.8 million profit in 2008) due to a significant drop in railcar utilization (78.1% vs. 92.5%) and decreased sales of railcars.
  • Plant Nutrient: Operating income rebounded to $11.3 million (vs. $12.3 million loss in 2008) as fertilizer prices stabilized and inventory write-downs ceased.
  • Retail: Operating loss widened to $2.8 million due to a weak economy and the closure of the Lima, Ohio store.
• Acquisition: Acquired the Fertilizer Division of Hartung Brothers, Inc. for $30.5 million in August 2009.

Guidance, Outlook, and Risks

• Outlook: Management expects a slow recovery in the rail industry. The company plans to continue refining its retail concept and focus on expense control. Capital spending for 2010 is projected at approximately $55 million for property, plant, and equipment, plus $75 million for railcar purchases.
• Liquidity: The company maintains a $490 million short-term credit facility and $85 million in long-term lines of credit. No borrowings were outstanding on the short-term line at year-end, with $560.9 million available.
• Key Risks:
  • Commodity Price Volatility: Exposure to grain, ethanol, and fertilizer prices; reliance on derivative contracts for hedging.
  • Rail Industry Cyclicality: Low utilization rates and reduced demand for railcars due to the economic downturn.
  • Regulatory Changes: Dependence on federal ethanol incentives (blenders' credit) and potential changes in environmental regulations.
  • Weather: Agricultural operations are highly dependent on weather conditions affecting crop yields and fertilizer application.

Investor Verification Checklist

• Inventory Valuation: Verify the methodology for grain inventory marking-to-market and the absence of further lower-of-cost-or-market write-downs in the Plant Nutrient segment.
• Rail Utilization: Monitor the recovery of railcar utilization rates and the impact of idle storage costs on the Rail Group's profitability.
• Debt Covenants: Confirm continued compliance with debt covenants, specifically minimum working capital and equity levels, given the company's substantial indebtedness.
• Ethanol Margins: Assess the spread between corn and ethanol prices and the impact of natural gas costs on the profitability of ethanol joint ventures.
• Legal Proceedings: Review the status of the U.S. EPA investigation regarding hazardous materials at the Toledo, Ohio facility.