The Andersons, Inc. — Q1 2011 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2011, compared with Q1 2010. The Andersons operates in grain, ethanol, rail, plant nutrients, turf and specialty products, and retail. Its businesses are seasonal and exposed to commodity prices; management cautions that first-quarter results are not necessarily indicative of full-year results. Dollar amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Sales and merchandising revenues | $1,001.7 | $722.0 | +38.7% |
| Gross profit | $78.7 | $58.6 | +34.4% |
| Gross margin | 7.9% | 8.1% | Down about 0.3 percentage point |
| Income before income taxes | $27.2 | $22.1 | +23.2% |
| Net income attributable to Andersons | $17.3 | $12.3 | +40.7% |
| Basic / diluted EPS | $0.93 / $0.93 | $0.67 / $0.66 | Higher |
| Cash used in operating activities | $221.8 | $63.5 | Greater use of $158.2 |
- Operating, administrative and general expenses were $53.7 million, up from $45.4 million; interest expense rose to $7.3 million from $4.6 million. Equity earnings of affiliates fell to $7.2 million from $9.9 million.
- Cash and cash equivalents were $22.3 million at March 31, down from $74.5 million a year earlier. Working capital was $309.6 million, versus $301.5 million a year earlier; current assets were $1,274.4 million and current liabilities $964.8 million.
- Short-term line-of-credit borrowings were $460.0 million. Long-term debt, including current maturities, totaled $306.0 million, for total borrowings of about $766.0 million. The company reported $614.2 million of remaining borrowing availability under its lines of credit and compliance with debt covenants.
- Investing activities used $6.0 million. Q1 purchases of property, plant and equipment were $4.2 million; railcar purchases were $10.8 million, partly offset by $9.2 million in railcar-sale proceeds. Management expected 2011 base-business capital spending of about $70 million and railcar-related spending of $90 million, offset by expected railcar-sale proceeds of $75 million.
Material changes and segment performance
- Revenue growth largely reflected higher commodity prices and increased activity; higher reported sales do not necessarily mean higher underlying profitability in commodity merchandising.
- Grain: segment operating income rose to $15.1 million from $12.2 million. Grain sales increased primarily from higher prices and acquisitions; increased inventory funding and margin requirements drove higher interest expense.
- Ethanol: segment operating income declined to $3.6 million from $8.5 million, mainly as equity earnings from the ethanol investments fell. Management cited weaker ethanol margins, although first-quarter results were better than expected.
- Rail: segment operating income increased to $3.5 million from $1.0 million, helped by higher car-sale margins. Fleet utilization rose to 82.4% from 70.0%, while managed railcars and locomotives declined to 22,236 from 23,362 year over year.
- Plant Nutrient: segment operating income increased to $5.1 million from $0.7 million, with higher prices and gross profit. Turf & Specialty improved to $3.3 million from $2.7 million. Retail continued to report an operating loss, $2.7 million versus $2.8 million.
- The company began reporting Grain and Ethanol separately rather than together; comparative segment information was restated. LTG remained equity-method accounted for despite Andersons owning 51%, because the company said it lacked control.
Outlook, risks and unusual items
- Management expected strong 2011 Plant Nutrient volumes and potentially strong margins, but warned that adverse weather could reduce sales and margins and create lower-of-cost-or-market exposure. Grain results depend significantly on Midwest planting and growing conditions; management also highlighted volatile corn and ethanol prices and possible adverse effects from weather on future ethanol margins.
- Management expected a 2011 effective tax rate of 36.4%; Q1 2011 tax provision was $9.8 million, or 36.1%, compared with 42.7% in Q1 2010. The prior-year rate included a $1.5 million tax charge related to health-care legislation.
- Seasonal working-capital needs and high grain and fertilizer prices contributed to operating cash outflow and increased short-term borrowing. Management said available credit was adequate, but noted that high prices or unfavorable markets can require additional futures margin deposits; variable-rate short-term debt also exposes earnings to rising rates.
- Commodity derivatives are carried at fair value, and related gains and losses are included in sales and merchandising revenues. Commodity-derivative gains were $1.3 million in Q1 2011 versus $44.7 million in Q1 2010. The company described its contracts as economic hedges but did not designate them as accounting hedges.
- A disputed matter could produce significant gains over the next 12 months, but the company said neither the likelihood nor amount could be predicted or assured. Separately, the EPA requested information about a Toledo facility and possible historic contamination from earlier glass-manufacturing operations; no claim or finding had been asserted. The company considered unfavorable outcomes in its current litigation unlikely to be material.
- Management reported effective disclosure controls and no material change in internal controls or market-risk disclosures during the quarter. No material changes to the risk factors in the 2010 Form 10-K were reported.
Important facts for investors to verify
- Whether seasonal inventory, receivables and margin-collateral needs continue to pressure operating cash flow and short-term borrowings.
- Whether commodity price movements, crop conditions and input costs support or weaken Grain, Plant Nutrient and Ethanol margins.
- Whether ethanol-investment earnings recover, given the Q1 decline in equity earnings from the ethanol LLCs.
- Whether planned capital expenditures and railcar purchases and dispositions track management’s estimates, and whether rail utilization remains elevated.
- Any developments in the EPA information request or disputed litigation matter, including the uncertain potential for material gains.