The Andersons, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2012. Financial statements are unaudited; amounts below are in millions of dollars except per-share data. The company operates Grain, Ethanol, Plant Nutrient, Rail, Turf & Specialty, and Retail businesses.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales and merchandising revenue | $1,138.4 | $938.7 | $3,591.4 | $3,278.5 |
| Gross profit | $78.3 | $65.0 | $266.8 | $266.4 |
| Gross margin | 6.9% | 6.9% | 7.4% | 8.1% |
| Net income attributable to The Andersons | $16.9 | $10.9 | $64.5 | $73.4 |
| Diluted earnings per share | $0.90 | $0.59 | $3.43 | $3.92 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(38.7) | $222.0 |
At September 30, cash and cash equivalents were $80.4 million. Current assets were $1,190.4 million and current liabilities $937.1 million, yielding working capital of $253.4 million and a current ratio of approximately 1.27. Total debt, including short-term borrowings and current maturities, was approximately $620.6 million, compared with $385.9 million at September 30, 2011. The company reported $517.4 million available under its borrowing lines, out of $878.1 million in total capacity.
Nine-month investing cash outflow was $170.6 million, including $92.7 million for acquisitions and $102.9 million of railcar purchases. Financing activities provided $269.3 million, principally reflecting increased short-term borrowing and long-term debt issuance.
Changes and operating results
- Q3 revenue increased about 21% year over year, while nine-month revenue increased about 10%. Q3 attributable net income and diluted EPS improved; nine-month attributable net income and EPS declined.
- Rail was a major source of Q3 improvement: segment income was $19.1 million versus $1.1 million, supported by higher railcar sales and leasing results. Results included $1.1 million of operating income recorded in Q3 rather than Q2 because of an error in retained-risk calculations for certain non-recourse transactions.
- Ethanol reported a Q3 segment loss of $0.9 million and a nine-month loss of $2.9 million, versus profits in the prior-year periods. Management cited drought-driven corn costs, weaker ethanol margins and demand, and losses at equity-method ethanol ventures. The Denison facility acquisition increased sales volume.
- Grain segment income rose in Q3 but declined for the nine-month period, with lower space income and basis appreciation weighing on year-to-date results. Plant Nutrient nine-month income was broadly steady; Retail losses widened, primarily amid lower store traffic.
Outlook, risks and unusual items
- Management said drought and poor crop yields were expected to continue affecting operations. It anticipated adverse Ethanol gross-profit effects from input-price volatility and limited corn availability. Grain post-harvest inventories were expected to weigh unfavorably on space income into 2013; management saw potential for nutrient demand in the next crop cycle.
- The company anticipated a 2012 effective tax rate of approximately 37.7%. It expected about $95 million of base-business capital spending in 2012 and planned approximately $150 million of rail-related purchases, partly offset by about $134 million of railcar sales and dispositions.
- Short-term borrowing increased substantially, partly to fund commodity-derivative margin calls amid rising prices. The company said it had adequate borrowing capacity and was in compliance with debt covenants. It noted that variable-rate debt and further margin requirements could affect cash needs and profitability.
- A material weakness in internal control over financial reporting related to review of retained risk in Rail non-recourse financing was not fully remediated at quarter-end. Management concluded disclosure controls were ineffective; remediation procedures had been enhanced but still required validation.
- The company incurred $0.4 million of Q3 severance charges in Turf & Specialty. It reported an EPA information request concerning possible historic contamination near its Toledo riverfront facility; no claim or finding had been asserted. An appellate court affirmed a $3.2 million judgment in the company’s favor after quarter-end, but no related income had been recorded at September 30.
- After quarter-end, the company completed a $7.0 million acquisition of Mt. Pulaski Products and signed a conditional agreement to acquire grain and agronomy assets for $95.5 million plus working capital, less assumed liabilities.
Important facts for investors to verify
- Whether the Rail control remediation is validated and whether any further accounting adjustments are needed for non-recourse transactions.
- How drought, harvest volumes, commodity prices, and derivative margin requirements affect earnings, working capital, and borrowing.
- Whether Ethanol margins and the performance of equity-method ethanol ventures recover, and the contribution from the Denison facility.
- Execution, financing, and expected returns of the acquisitions and planned capital and railcar spending.
- Developments in the EPA inquiry, other contingencies, and collection of the affirmed civil judgment.