The Andersons, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited results; comparisons are with the corresponding 2013 periods. The company operates in seasonal, commodity-linked businesses, so revenue changes can largely reflect commodity prices rather than underlying performance.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Sales and merchandising revenues | $952.9 million | $1,181.4 million | $3,268.3 million | $4,020.3 million |
| Gross profit | $84.9 million | $73.1 million | $283.2 million | $255.6 million |
| Gross margin | 8.9% | 6.2% | 8.7% | 6.4% |
| Income before income taxes | $29.5 million | $28.4 million | $144.5 million | $98.0 million |
| Net income attributable to The Andersons | $16.8 million | $17.2 million | $83.8 million | $59.3 million |
| Diluted earnings per share | $0.59 | $0.61 | $2.95 | $2.10 |
- Quarterly revenue declined about 19%, principally reflecting lower grain prices and lower prices in other commodity businesses. Gross profit increased, but higher operating expenses limited the benefit; quarterly earnings attributable to the company dipped slightly.
- Nine-month revenue fell about 19%, while gross profit increased about 11%. Higher earnings from ethanol affiliates and a $17.1 million pretax gain on the partial redemption of the LTG investment were significant contributors to the year-over-year increase in pretax income.
- Interest expense was $4.3 million for Q3 and $16.4 million year to date. Dividends paid were $0.11 per common share in Q3 and $0.33 per share for the first nine months.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents were $326.9 million, working capital was $257.3 million, and current assets and liabilities were $1,048.9 million and $791.6 million, respectively.
- Total debt was approximately $366.7 million, including $76.8 million of current maturities and $289.4 million of long-term debt; short-term debt was $0.5 million. The company reported $847.1 million available under borrowing lines with $878.1 million total capacity and was in compliance with its covenants.
- For the first nine months, operating cash flow was $102.3 million, investing cash outflow was $12.6 million, and financing cash outflow was $71.9 million. Cash increased $17.9 million from year-end 2013.
- Management said liquidity should be adequate for operations, capital spending and dividends over the next 12 months. Peak short-term borrowings to date were $270.6 million on April 2, reflecting seasonal working-capital needs.
Segments and material developments
- Ethanol: Stronger margins and higher equity-method earnings drove substantial improvement. Management cited lower corn costs and strong ethanol demand; about 85% of fourth-quarter futures risk was hedged at September 30.
- Grain: Q3 gross profit improved with stronger space income and wheat basis appreciation, but lower LTG earnings and a $3.3 million customer-guarantee charge weighed on results. Late harvest conditions could strain logistics and delay shipments.
- Plant Nutrient: Q3 volumes rose, but weakening nutrient markets, uncertainty over 2015 corn acres and rail delays constrained sales. Management expected some delayed orders to shift to Q4 and anticipated demand supported by late harvest and nutrient depletion, subject to transportation interruptions.
- Rail: Q3 earnings fell amid fewer railcar sales and the absence of a prior-year $3.5 million gain on an early lease termination. Fleet utilization increased to 89.9% from 86.2% a year earlier.
- Turf & Specialty: Results weakened due to lower volumes and lost contract-manufacturing sales, alongside higher labor and depreciation costs. Retail: Results improved year over year, though the segment remained loss-making before tax.
- October 2014 subsequent events: The company acquired Auburn Bean and Grain for transactions valued at $39.5 million, separately purchased certain facilities for $20.4 million, and assumed approximately $11.5 million of long-term debt. It also acquired United Grain and Keller Grain assets for $7.2 million plus a working-capital adjustment. Purchase accounting was incomplete when the filing was issued.
- In October, the company began the preliminary process to terminate its defined-benefit pension plan, expected to be completed by the end of 2015. Settlement could require recognition in earnings of unamortized pension gains or losses.
Outlook, risks and unusual items
- Management projected a 2014 effective tax rate of approximately 34.2%. Planned 2014 capital spending was about $80 million for the base business and $72 million for railcars and related assets, partly offset by expected asset-sale proceeds of $45 million.
- Commodity price movements affect both sales and costs; the company uses futures, options and forward contracts, but does not designate these commodity contracts as accounting hedges. Derivative fair values and collateral requirements can affect reported results and cash needs.
- A customer default tied to DDG export issues led to a $3.3 million guarantee liability. The company also recorded a $2.3 million Plant Nutrient legal-settlement gain during Q3 and the $17.1 million LTG redemption gain year to date.
- The EPA requested information about possible historical contamination at the company’s Maumee River facility. No claim or finding had been asserted. The filing says reasonably possible losses on outstanding claims were not material; future litigation outcomes remain uncertain.
- Management reported effective disclosure controls as of September 30. ERP implementation began in Q2, changed some close and consolidation processes, and was expected to add expenses through year-end.
Important facts for investors to verify
- How much of the year-to-date earnings improvement is recurring versus attributable to the LTG redemption gain and unusually strong ethanol margins and affiliate earnings.
- Whether late harvest logistics, rail service constraints and fertilizer-market weakness affected Q4 shipments and demand as management anticipated.
- The terms, purchase accounting and financing effects of the October acquisitions, including the stock issued for Auburn Bean and Grain.
- The pension-plan termination timetable, potential settlement costs and earnings impact from recognizing accumulated pension items.
- Changes in commodity derivative positions, collateral needs, customer credit exposure and available borrowing capacity as seasonal working-capital requirements evolve.
- Developments in the EPA information request and any related environmental claims or liabilities.