ANDE 2012.09.30 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 000-20557
 
 
THE ANDERSONS, INC.
(Exact name of the registrant as specified in its charter
 
 
OHIO
 
34-1562374
(State of incorporation
or organization)
 
(I.R.S. Employer
Identification No.)
480 W. Dussel Drive, Maumee, Ohio
 
43537
(Address of principal executive offices)
 
(Zip Code)
(419) 893-5050
(Telephone Number)
 
(Former name, former address and former fiscal year, if changed since last report.)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
ý
Accelerated Filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The registrant had approximately 18.6 million common shares outstanding, no par value, at October 31, 2012.

Table of Contents

THE ANDERSONS, INC.
INDEX
 
 
Page No.
PART I. FINANCIAL INFORMATION
 
 
PART II. OTHER INFORMATION
 


2
Table of Contents


Part I. Financial Information


Item 1. Financial Statements


The Andersons, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)(In thousands)
 
September 30,
2012
 
December 31,
2011
 
September 30,
2011
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
80,370

 
$
20,390

 
$
38,510

Restricted cash
160

 
18,651

 
11,920

Accounts receivable, net
199,158

 
167,640

 
158,757

Inventories (Note 2)
682,292

 
760,459

 
458,314

Commodity derivative assets – current
166,264

 
83,950

 
143,010

Deferred income taxes
20,627

 
21,483

 
17,233

Other current assets
41,568

 
34,649

 
41,559

Total current assets
1,190,439

 
1,107,222

 
869,303

Other assets:
 
 
 
 
 
Commodity derivative assets – noncurrent
7,047

 
2,289

 
3,907

Other assets, net
67,801

 
53,327

 
48,010

Equity method investments
190,057

 
199,061

 
189,118

 
264,905

 
254,677

 
241,035

Railcar assets leased to others, net (Note 3)
252,702

 
197,137

 
183,346

Property, plant and equipment, net (Note 3)
283,394

 
175,087

 
164,893

Total assets
$
1,991,440

 
$
1,734,123

 
$
1,458,577


3
Table of Contents

The Andersons, Inc.
Condensed Consolidated Balance Sheets (continued)
(Unaudited)(In thousands)
 
September 30,
2012
 
December 31,
2011
 
September 30,
2011
Liabilities and equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Borrowings under short-term line of credit
$
275,522

 
$
71,500

 
$
105,000

Accounts payable for grain
250,066

 
391,905

 
77,813

Other accounts payable
204,347

 
142,762

 
137,872

Customer prepayments and deferred revenue
77,278

 
79,557

 
82,785

Commodity derivative liabilities – current
43,589

 
15,874

 
55,354

Accrued expenses and other current liabilities
53,631

 
60,445

 
49,487

Current maturities of long-term debt (Note 10)
32,655

 
32,208

 
45,171

Total current liabilities
937,088

 
794,251

 
553,482

Other long-term liabilities
14,083

 
43,014

 
35,421

Commodity derivative liabilities – noncurrent
590

 
1,519

 
6,903

Employee benefit plan obligations
49,478

 
52,972

 
30,132

Long-term debt, less current maturities (Note 10)
312,404

 
238,885

 
235,729

Deferred income taxes
75,377

 
64,640

 
64,841

Total liabilities
1,389,020

 
1,195,281

 
926,508

Commitments and contingencies (Note 11)

 

 

Shareholders’ equity:
 
 
 
 
 
Common shares, without par value (42,000 shares authorized; 19,198 shares issued)
96

 
96

 
96

Preferred shares, without par value (1,000 shares authorized; none issued)
—

 
—

 
—

Additional paid-in-capital
180,998

 
179,463

 
178,173

Treasury shares at cost (557, 697 and 701 shares at 9/30/12, 12/31/11 and 9/30/11, respectively)
(12,541
)
 
(14,997
)
 
(14,814
)
Accumulated other comprehensive loss
(42,607
)
 
(43,090
)
 
(29,365
)
Retained earnings
458,627

 
402,523

 
383,606

Total shareholders’ equity of The Andersons, Inc.
584,573

 
523,995

 
517,696

Noncontrolling interests
17,847

 
14,847

 
14,373

Total equity
602,420

 
538,842

 
532,069

Total liabilities and equity
$
1,991,440

 
$
1,734,123

 
$
1,458,577

See Notes to Condensed Consolidated Financial Statements


4
Table of Contents

The Andersons, Inc.
Condensed Consolidated Statements of Income
(Unaudited)(In thousands, except per share data)
 
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
2012
 
2011
2012
 
2011
Sales and merchandising revenues
$
1,138,402

 
$
938,660

$
3,591,369

 
$
3,278,501

Cost of sales and merchandising revenues
1,060,086

 
873,696

3,324,533

 
3,012,080

Gross profit
78,316

 
64,964

266,836

 
266,421

Operating, administrative and general expenses
58,029

 
54,486

177,339

 
165,923

Interest expense
5,482

 
5,711

16,192

 
20,609

Other income:
 
 
 
 
 
 
Equity in earnings of affiliates
6,027

 
9,731

15,406

 
29,489

Other income, net
3,492

 
1,217

9,409

 
5,541

Income before income taxes
24,324

 
15,715

98,120

 
114,919

Income tax provision
9,133

 
4,484

36,730

 
40,265

Net income
15,191

 
11,231

61,390

 
74,654

Net income (loss) attributable to the noncontrolling interests
(1,693
)
 
306

(3,100
)
 
1,245

Net income attributable to The Andersons, Inc.
$
16,884

 
$
10,925

$
64,490

 
$
73,409

Per common share:
 
 
 
 
 
 
Basic earnings attributable to The Andersons, Inc. common shareholders
$
0.91

 
$
0.59

$
3.47

 
$
3.96

Diluted earnings attributable to The Andersons, Inc. common shareholders
$
0.90

 
$
0.59

$
3.43

 
$
3.92

Dividends paid
$
0.1500

 
$
0.1100

$
0.4500

 
$
0.3300

See Notes to Condensed Consolidated Financial Statements


5
Table of Contents

The Andersons, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)(In thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
15,191

 
$
11,231

 
$
61,390

 
$
74,654

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Decrease in estimated fair value of investment in debt securities (net of income tax of $1,126)
—

 
—

 
(1,884
)
 
—

Change in unrecognized actuarial loss and prior service cost (net of income tax of $209, $121, $1,343 and ($290))
350

 
203

 
2,248

 
(486
)
Cash flow hedge activity (net of income tax of $25, ($61), $71 and ($48))
41

 
(101
)
 
119

 
(80
)
Other comprehensive income (loss)
391

 
102

 
483

 
(566
)
Comprehensive income
15,582

 
11,333

 
61,873

 
74,088

Comprehensive (loss) income attributable to the noncontrolling interests
(1,693
)
 
306

 
(3,100
)
 
1,245

Comprehensive income attributable to The Andersons, Inc.
$
17,275

 
$
11,027

 
$
64,973

 
$
72,843

See Notes to Condensed Consolidated Financial Statements


6
Table of Contents

The Andersons, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)(In thousands)


 
Nine Months Ended
September 30,
 
2012
 
2011
Operating Activities
 
 
 
Net income
$
61,390

 
$
74,654

Adjustments to reconcile net income to cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
35,330

 
30,088

Bad debt expense
1,118

 
3,332

Cash distributions in excess of income of unconsolidated affiliates
8,984

 
(13,669
)
Gains on sales of railcars and related leases
(22,260
)
 
(7,664
)
Excess tax benefit from share-based payment arrangement
(39
)
 
(35
)
Deferred income taxes
6,893

 
1,662

Stock based compensation expense
3,303

 
2,758

Other
(106
)
 
(1
)
Changes in operating assets and liabilities:
 
 
 
Accounts and notes receivable
(31,522
)
 
(8,661
)
Inventories
91,035

 
188,649

Commodity derivatives
(60,286
)
 
118,494

Other assets
(4,211
)
 
(9,820
)
Accounts payable for grain
(141,839
)
 
(196,783
)
Other accounts payable and accrued expenses
13,483

 
39,011

Net cash (used in) provided by operating activities
(38,727
)
 
222,015

Investing Activities
 
 
 
Purchase of investments
(19,996
)
 
—

Proceeds from redemption of investment
19,998

 
—

Acquisition of businesses, net of cash acquired
(92,686
)
 
—

Purchases of railcars
(102,853
)
 
(38,439
)
Proceeds from sale of railcars
57,315

 
19,840

Purchases of property, plant and equipment
(51,682
)
 
(29,606
)
Proceeds from sale of property, plant and equipment
817

 
832

Investments in affiliates
—

 
(100
)
Change in restricted cash
18,491

 
214

Net cash used in investing activities
(170,596
)
 
(47,259
)
Financing Activities
 
 
 
Net change in short-term borrowings
204,022

 
(136,100
)
Proceeds from issuance of long-term debt
125,076

 
45,713

Payments of long-term debt
(58,820
)
 
(66,163
)
Proceeds from minority investor
6,100

 
—

Proceeds from sale of treasury shares to employees and directors
1,366

 
730

Payments of debt issuance costs
(110
)
 
(815
)
Purchase of treasury stock
—

 
(2,747
)
Dividends paid
(8,370
)
 
(6,118
)
Excess tax benefit from share-based payment arrangement
39

 
35

Net cash provided by (used in) financing activities
269,303

 
(165,465
)
Increase in cash and cash equivalents
59,980

 
9,291

Cash and cash equivalents at beginning of period
20,390

 
29,219

Cash and cash equivalents at end of period
$
80,370

 
$
38,510


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Table of Contents

 
Nine months ended
 September 30,
 
2012
 
2011
Supplemental disclosure of cash flow information
 
 
 
Acquisition of capitalized software under accounts payable
$2,635
 
—

Purchase of a productive asset through seller-financing
6,102

 
—


See Notes to Condensed Consolidated Financial Statements

8
Table of Contents

The Andersons, Inc.
Condensed Consolidated Statements of Equity
(Unaudited)(In thousands, except per share data)
 
Common
Shares
 
Additional
Paid-in
Capital
 
Treasury
Shares
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Noncontrolling
Interest
 
Total
Balance at December 31, 2010
$
96

 
$
177,875

 
$
(14,058
)
 
$
(28,799
)
 
$
316,317

 
$
13,128

 
$
464,559

Net income
 
 
 
 
 
 
 
 
73,409

 
1,245

 
74,654

Other comprehensive loss
 
 
 
 
 
 
(566
)
 
 
 
 
 
(566
)
Purchase of treasury shares (76 shares)
 
 
 
 
(2,747
)
 
 
 
 
 
 
 
(2,747
)
Stock awards, stock option exercises and other shares issued to employees and directors, net of income tax of $1,199 (137 shares)
 
 
298

 
1,991

 
 
 
 
 
 
 
2,289

Dividends declared ($0.33 per common share)
 
 
 
 
 
 
 
 
(6,120
)
 
 
 
(6,120
)
Balance at September 30, 2011
$
96

 
$
178,173

 
$
(14,814
)
 
$
(29,365
)
 
$
383,606

 
$
14,373

 
$
532,069

Balance at December 31, 2011
$
96

 
$
179,463

 
$
(14,997
)
 
$
(43,090
)
 
$
402,523

 
$
14,847

 
$
538,842

Net income
 
 
 
 
 
 
 
 
64,490

 
(3,100
)
 
61,390

Other comprehensive income
 
 
 
 
 
 
483

 
 
 
 
 
483

Proceeds received from minority investor
 
 
 
 
 
 
 
 
 
 
6,100

 
6,100

Stock awards, stock option exercises and other shares issued to employees and directors, net of income tax of $678 (139 shares)
 
 
1,535

 
2,456

 
 
 
 
 
 
 
3,991

Dividends declared ($0.45 per common share)
 
 
 
 
 
 
 
 
(8,386
)
 
 
 
(8,386
)
Balance at September 30, 2012
$
96

 
$
180,998

 
$
(12,541
)
 
$
(42,607
)
 
$
458,627

 
$
17,847

 
$
602,420

See Notes to Condensed Consolidated Financial Statements


9
Table of Contents

The Andersons, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

1. Basis of Presentation and Consolidation
These Consolidated Financial Statements include the accounts of The Andersons, Inc. and its wholly owned and controlled subsidiaries (the “Company”). All significant intercompany accounts and transactions are eliminated in consolidation.
Investments in unconsolidated entities in which the Company has significant influence, but not control, are accounted for using the equity method of accounting.
In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair statement of the results of operations for the periods indicated, have been made. Operating results for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012.
The year-end Condensed Consolidated Balance Sheet data at December 31, 2011 was derived from audited Consolidated Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. A Condensed Consolidated Balance Sheet as of September 30, 2011 has been included as the Company operates in several seasonal industries.
The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in The Andersons, Inc. Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”).
New Accounting Standards

In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Disclosures about Offsetting Assets and Liabilities (Topic 210). The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The disclosures required by the amendments are required to be applied retrospectively for all comparative periods presented. The adoption of this amended guidance will require expanded disclosure in the notes to the Company's Consolidated Financial Statements but will not impact financial results.
In July 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The revised standard allows an entity the option to first assess qualitatively whether it is more likely than not (that is, a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired, thus necessitating that it perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. An entity can choose to perform the qualitative assessment on none, some, or all of its indefinite-lived intangible assets. Moreover, an entity can bypass the qualitative assessment and perform the quantitative impairment test for any indefinite-lived intangible in any period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Adoption of this guidance will not impact the Company's Consolidated Financial Statements or disclosures.

2. Inventories
Major classes of inventories are as follows:
 

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Table of Contents

(in thousands)
September 30,
2012
 
December 31,
2011
 
September 30,
2011
Grain
$
504,484

 
$
570,337

 
$
248,447

Ethanol and by-products
17,277

 
5,461

 
4,799

Agricultural fertilizer and supplies
101,896

 
118,716

 
151,099

Lawn and garden fertilizer and corncob products
24,709

 
37,001

 
22,794

Retail merchandise
30,767

 
25,612

 
28,386

Railcar repair parts
2,852

 
3,063

 
2,434

Other
307

 
269

 
355

 
$
682,292

 
$
760,459

 
$
458,314



3. Property, Plant and Equipment
The components of property, plant and equipment are as follows:
 
(in thousands)
September 30,
2012
 
December 31,
2011
 
September 30,
2011
Land
$
19,699

 
$
17,655

 
$
15,402

Land improvements and leasehold improvements
59,375

 
47,958

 
45,753

Buildings and storage facilities
178,354

 
150,461

 
144,834

Machinery and equipment
257,926

 
191,833

 
188,552

Software
12,632

 
10,861

 
10,873

Construction in progress
28,582

 
13,006

 
17,323

 
556,568

 
431,774

 
422,737

Less accumulated depreciation and amortization
273,174

 
256,687

 
257,844

 
$
283,394

 
$
175,087

 
$
164,893

Depreciation expense on property, plant and equipment amounted to $19.3 million, $20.4 million and $15.0 million for the year-to-date periods ended September 30, 2012, December 31, 2011, and September 30, 2011, respectively.
Railcars
The components of Railcar assets leased to others are as follows:
 
(in thousands)
September 30,
2012
 
December 31,
2011
 
September 30,
2011
Railcar assets leased to others
$
335,037

 
$
272,883

 
$
256,219

Less accumulated depreciation
82,335

 
75,746

 
72,873

 
$
252,702

 
$
197,137

 
$
183,346

Depreciation expense on railcar assets leased to others amounted to $11.9 million, $13.8 million and $10.2 million for the year-to-date periods ended September 30, 2012, December 31, 2011 and September 30, 2011, respectively.

4. Derivatives
The Company’s operating results are affected by changes to commodity prices. The Grain and Ethanol businesses have established position limits (the amount of a commodity, either owned or contracted for, that does not have an offsetting derivative contract to lock in the price). To reduce the exposure to market price risk on commodities owned and forward grain and ethanol purchase and sale contracts, the Company enters into exchange traded commodity futures and options contracts and over the counter forward and option contracts with various counterparties. The exchange traded contracts are primarily transacted via the regulated Chicago Mercantile Exchange. The Company’s forward purchase and sales contracts are for physical delivery of the commodity in a future period. Contracts to purchase commodities from producers generally relate to the current or future crop years for delivery periods quoted by regulated commodity exchanges. Contracts for the sale of commodities to processors or other commercial consumers generally do not extend beyond one year.

11
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All of these contracts are considered derivatives. While the Company considers its commodity contracts to be effective economic hedges, the Company does not designate or account for its commodity contracts as hedges as defined under current accounting standards. The Company accounts for its commodity derivatives at estimated fair value, the same method it uses to value its grain inventory. The estimated fair value of the commodity derivative contracts that require the receipt or posting of cash collateral is recorded on a net basis (offset against cash collateral posted or received, also known as margin deposits) within commodity derivative assets or liabilities. Management determines fair value based on exchange-quoted prices and in the case of its forward purchase and sale contracts, estimated fair value is adjusted for differences in local markets and non-performance risk. For contracts for which physical delivery occurs, balance sheet classification is based on estimated delivery date. For futures, options and over-the-counter contracts in which physical delivery is not expected to occur but, rather, the contract is expected to be net settled, the Company classifies these contracts as current or noncurrent assets or liabilities, as appropriate, based on the Company’s expectations as to when such contracts will be settled.
Realized and unrealized gains and losses in the value of commodity contracts (whether due to changes in commodity prices, changes in performance or credit risk, or due to sale, maturity or extinguishment of the commodity contract) and grain inventories are included in sales and merchandising revenues.
Generally accepted accounting principles permit a party to a master netting arrangement to offset fair value amounts recognized for derivative instruments against the right to reclaim cash collateral or obligation to return cash collateral under the same master netting arrangement. The Company has master netting arrangements for its exchange traded futures and options contracts and certain over-the-counter contracts. When the Company enters into a futures, options or an over-the-counter contract, an initial margin deposit may be required by the counterparty. The amount of the margin deposit varies by commodity. If the market price of a future, option or an over-the-counter contract moves in a direction that is adverse to the Company’s position, an additional margin deposit, called a maintenance margin, is required. The Company nets, by counterparty, its futures and over-the-counter positions against the cash collateral provided or received. The margin deposit assets and liabilities are included in short-term commodity derivative assets or liabilities, as appropriate, in the Consolidated Balance Sheets.
The following table presents at September 30, 2012, December 31, 2011 and September 30, 2011, a summary of the estimated fair value of the Company’s commodity derivative instruments that require cash collateral and the associated cash posted/received as collateral. The net asset or liability positions of these derivatives (net of their cash collateral) are determined on a counterparty-by-counterparty basis and are included within short-term commodity derivative assets (or liabilities) on the Condensed Consolidated Balance Sheets:
 
 
September 30, 2012
 
December 31, 2011
 
September 30, 2011
(in thousands)
Net
derivative
asset
position
 
Net
derivative
liability
position
 
Net
derivative
asset
position
 
Net
derivative
liability
position
 
Net
derivative
asset
position
 
Net
derivative
liability
position
Collateral paid (received)
$
88,246

 
$
—

 
$
66,870

 
$
—

 
$
(60,247
)
 
$
—

Fair value of derivatives
(73,424
)
 
—

 
(20,480
)
 
—

 
139,882

 
—

Balance at end of period
$
14,822

 
$
—

 
$
46,390

 
$
—

 
$
79,635

 
$
—

Certain of our contracts allow the Company to post items other than cash as collateral. Grain inventory posted as collateral on our derivative contracts are recorded in Inventories on the Condensed Consolidated Balance Sheets and the fair value of such inventory was $0.0 million, $1.0 million, and $89.3 million as of September 30, 2012, December 31, 2011, and September 30, 2011, respectively. Grain receivables posted as collateral on our derivative contracts recorded in Accounts receivable, net on the Condensed Consolidated Balance Sheets and the fair value of such inventory was $2.3 million as of September 30, 2012.

The gains included in the Company’s Condensed Consolidated Statements of Income and the line items in which they are located for the three and nine months ended September 30, 2012 and 2011 are as follows:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Gains (losses) on commodity derivatives included in sales and merchandising revenues
$
(51,318
)
 
$
16,076

 
$
(67,875
)
 
$
119,743

At September 30, 2012, the Company had the following volume of commodity derivative contracts outstanding (on a gross

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basis):
 
Commodity
Number of bushels
(in thousands)
 
Number of gallons
(in thousands)
 
Number of pounds
(in thousands)
 
Number of tons
(in thousands)
Non-exchange traded:
 
 
 
 
 
 
 
Corn
228,370

 
—

 
—

 
—

Soybeans
40,473

 
—

 
—

 
—

Wheat
10,683

 
—

 
—

 
—

Oats
15,656

 
—

 
—

 
—

Ethanol
—

 
76,641

 
—

 
—

Corn oil
—

 
—

 
36,579

 
—

Other
—

 
—

 
—

 
90

Subtotal
295,182

 
76,641

 
36,579

 
90

Exchange traded:
 
 
 
 
 
 
 
Corn
109,430

 
—

 
—

 
—

Soybeans
30,825

 
—

 
—

 
—

Wheat
45,380

 
—

 
—

 
—

Oats
4,590

 
—

 
—

 
—

Ethanol
—

 
924

 
—

 
—

Other
—

 
—

 
—

 
3

Subtotal
190,225

 
924

 
—

 
3

Total
485,407

 
77,565

 
36,579

 
93


5. Earnings Per Share
Unvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of earnings per share pursuant to the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. The Company’s nonvested restricted stock is considered a participating security since the share-based awards contain a non-forfeitable right to dividends irrespective of whether the awards ultimately vest.

(in thousands except per common share data)
Three months ended
September 30,
 
Nine months ended
September 30,
2012
 
2011
 
2012
 
2011
Net income attributable to The Andersons, Inc.
$
16,884

 
$
10,925

 
$
64,490

 
$
73,409

Less: Distributed and undistributed earnings allocated to nonvested restricted stock
95

 
44

 
309

 
283

Earnings available to common shareholders
$
16,789

 
$
10,881

 
$
64,181

 
$
73,126

Earnings per share – basic:
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
18,534

 
18,469

 
18,516

 
18,469

Earnings per common share – basic
$
0.91

 
$
0.59

 
$
3.47

 
$
3.96

Earnings per share – diluted:
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
18,534

 
18,469

 
18,516

 
18,469

Effect of dilutive awards
114

 
118

 
171

 
166

Weighted average shares outstanding – diluted
18,648

 
18,587

 
18,687

 
18,635

Earnings per common share – diluted
$
0.90

 
$
0.59

 
$
3.43

 
$
3.92

There were no antidilutive stock-based awards outstanding at September 30, 2012 or 2011.




13
Table of Contents


6. Employee Benefit Plans
Included as charges against income for the three and nine months ended September 30, 2012 and 2011 are the following amounts for pension and postretirement benefit plans maintained by the Company:
 
 
Pension Benefits
 
Pension Benefits
(in thousands)
Three months ended
September 30,
 
Nine months ended
September 30,
2012
 
2011
 
2012
 
2011
Service cost
$
—

 
$
—

 
$
—

 
$
—

Interest cost
1,124

 
1,145

 
3,372

 
3,434

Expected return on plan assets
(1,536
)
 
(1,559
)
 
(4,609
)
 
(4,677
)
Recognized net actuarial loss
374

 
235

 
1,123

 
705

Benefit cost (income)
$
(38
)
 
$
(179
)
 
$
(114
)
 
$
(538
)
 
 
Postretirement Benefits
 
Postretirement Benefits
(in thousands)
Three months ended
September 30,
 
Nine months ended
September 30,
2012
 
2011
 
2012
 
2011
Service cost
$
188

 
$
139

 
$
564

 
$
416

Interest cost
329

 
321

 
989

 
964

Amortization of prior service cost
(135
)
 
(136
)
 
(407
)
 
(407
)
Recognized net actuarial loss
320

 
225

 
960

 
676

Benefit cost
$
702

 
$
549

 
$
2,106

 
$
1,649


7. Segment Information
The Company’s operations include six reportable business segments that are distinguished primarily on the basis of products and services offered. The Grain business includes grain merchandising, the operation of terminal grain elevator facilities and the investment in Lansing Trade Group, LLC (“LTG”). The Ethanol business purchases and sells ethanol and also manages the ethanol production facilities organized as limited liability companies that are consolidated or are investments accounted for under the equity method (“ethanol LLCs”) and various service contracts for these investments. Rail operations include the leasing, marketing and fleet management of railcars and locomotives, railcar repair and metal fabrication. The Plant Nutrient business manufactures and distributes agricultural inputs, primarily fertilizer, to dealers and farmers. Turf & Specialty operations include the production and distribution of turf care and corncob-based products. The Retail business operates large retail stores, a specialty food market, a distribution center and a lawn and garden equipment sales and service shop. Included in “Other” are the corporate level amounts not attributable to an operating segment.
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2012
 
2011
 
2012
 
2011
(in thousands)
 
 
 
 
 
 
 
Revenues from external customers
 
 
 
 
 
 
 
Grain
$
677,484

 
$
538,723

 
$
2,096,256

 
$
1,973,820

Ethanol
209,634

 
179,331

 
528,062

 
476,783

Plant Nutrient
135,144

 
137,637

 
619,301

 
521,109

Rail
59,703

 
24,067

 
127,608

 
82,478

Turf & Specialty
21,509

 
23,051

 
110,481

 
111,872

Retail
34,928

 
35,851

 
109,661

 
112,439

Other
—

 
—

 
—

 
—

Total
$
1,138,402

 
$
938,660

 
$
3,591,369

 
$
3,278,501

 

14
Table of Contents

 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Inter-segment sales
 
 
 
 
 
 
 
Grain
$
—

 
$
1

 
$
1

 
$
3

Ethanol
—

 
—

 
—

 
—

Plant Nutrient
3,481

 
4,224

 
11,898

 
12,830

Rail
105

 
111

 
516

 
486

Turf & Specialty
521

 
317

 
1,994

 
1,649

Retail
—

 
—

 
—

 
—

Other
—

 
—

 
—

 
—

Total
$
4,107

 
$
4,653

 
$
14,409

 
$
14,968

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Interest expense (income)
 
 
 
 
 
 
 
Grain
$
3,465

 
$
2,674

 
$
9,404

 
$
11,373

Ethanol
284

 
194

 
493

 
880

Plant Nutrient
725

 
940

 
2,067

 
2,756

Rail
1,229

 
1,614

 
3,563

 
4,572

Turf & Specialty
238

 
273

 
906

 
1,094

Retail
217

 
238

 
570

 
705

Other
(676
)
 
(222
)
 
(811
)
 
(771
)
Total
$
5,482

 
$
5,711

 
$
16,192

 
$
20,609


 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Equity in earnings (loss) of affiliates
 
 
 
 
 
 
 
Grain
$
9,249

 
$
6,459

 
$
22,706

 
$
18,117

Ethanol
(3,224
)
 
3,270

 
(7,305
)
 
11,366

Plant Nutrient
2

 
2

 
5

 
6

Rail
—

 
—

 
—

 
—

Turf & Specialty
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

Other
—

 
—

 
—

 
—

Total
$
6,027

 
$
9,731

 
$
15,406

 
$
29,489

 

15
Table of Contents

 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Other income, net
 
 
 
 
 
 
 
Grain
$
526

 
$
652

 
$
1,842

 
$
1,754

Ethanol
1

 
38

 
37

 
133

Plant Nutrient
523

 
282

 
1,651

 
541

Rail
1,695

 
604

 
3,295

 
2,198

Turf & Specialty
181

 
167

 
671

 
716

Retail
117

 
130

 
396

 
430

Other
449

 
(656
)
 
1,517

 
(231
)
Total
$
3,492

 
$
1,217

 
$
9,409

 
$
5,541

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Income (loss) before income taxes
 
 
 
 
 
 
 
Grain
$
10,807

 
$
8,313

 
$
45,519

 
$
59,955

Ethanol
(936
)
 
4,443

 
(2,920
)
 
16,844

Plant Nutrient
759

 
6,622

 
34,540

 
35,813

Rail
19,071

 
1,123

 
34,288

 
7,432

Turf & Specialty
(1,571
)
 
(1,245
)
 
3,384

 
3,811

Retail
(1,769
)
 
(1,233
)
 
(3,090
)
 
(2,020
)
Other
(344
)
 
(2,614
)
 
(10,501
)
 
(8,161
)
Noncontrolling interests
(1,693
)
 
306

 
(3,100
)
 
1,245

Total
$
24,324

 
$
15,715

 
$
98,120

 
$
114,919


(in thousands)
September 30, 2012
 
December 31, 2011
 
September 30, 2011
Identifiable assets
 
 
 
 
 
Grain
$
942,629

 
$
883,395

 
$
651,645

Ethanol
214,858

 
148,975

 
84,666

Plant Nutrient
268,982

 
240,543

 
302,399

Rail
309,847

 
246,188

 
217,335

Turf & Specialty
55,638

 
69,487

 
54,165

Retail
56,795

 
52,018

 
54,971

Other
142,691

 
93,517

 
93,396

Total
$
1,991,440

 
$
1,734,123

 
$
1,458,577















16
Table of Contents

8. Related Party Transactions
Equity Method Investments
The Company, directly or indirectly, holds investments in companies that are accounted for under the equity method ("the ethanol LLCs). The Company’s equity in these entities is presented at cost plus its accumulated proportional share of income or loss, less any distributions it has received.
The following table presents the Company’s investment balance in each of its equity method investees by entity:
 
(in thousands)
September 30, 2012
 
December 31, 2011
 
September 30, 2011
The Andersons Albion Ethanol LLC
$
30,625

 
$
32,829

 
$
31,764

The Andersons Clymers Ethanol LLC
34,962

 
40,001

 
40,318

The Andersons Marathon Ethanol LLC
36,153

 
43,019

 
39,445

Lansing Trade Group, LLC
86,007

 
81,209

 
75,693

Other
2,310

 
2,003

 
1,898

Total
$
190,057

 
$
199,061

 
$
189,118

The Company holds a majority interest (66%) in The Andersons Ethanol Investment LLC (“TAEI”). This consolidated entity holds a 50% interest in The Andersons Marathon Ethanol LLC (“TAME”). The noncontrolling interest in TAEI is attributed 34% of the gains and losses of TAME recorded by the Company.
The following table summarizes income (losses) earned from the Company’s equity method investments by entity:
 
(in thousands)
% ownership at
September 30, 2012
(direct and indirect)
 
Three months ended
September 30,
Nine months ended
September 30,
 
 
 
2012
 
2011
 
2012
 
2011
The Andersons Albion Ethanol LLC
50%
 
$
(622
)
 
$
1,190

 
$
(204
)
 
$
3,720

The Andersons Clymers Ethanol LLC
38%
 
(972
)
 
211

 
(1,985
)
 
3,130

The Andersons Marathon Ethanol LLC
50%
 
(1,629
)
 
1,868

 
(5,116
)
 
4,516

Lansing Trade Group, LLC
51% *
 
9,187

 
6,518

 
22,347

 
18,030

Other
7%-33%
 
63

 
(56
)
 
364

 
93

Total
 
 
$
6,027

 
$
9,731

 
$
15,406

 
$
29,489


 *    This does not consider restricted management units which once vested will reduce the ownership percentage by approximately 2%.

Total distributions received from unconsolidated affiliates were $24.4 million for the first nine months of 2012.
While the Company holds a majority of the outstanding shares of LTG, all major operating decisions of LTG are made by LTG’s Board of Directors. The Company does not have a majority of the board seats. Based on the terms of the LTG operating agreement, the minority shareholders have substantive participating rights that allow them to effectively participate in the decisions made in the ordinary course of business that are significant to LTG. Due to these factors, the Company does not have control over LTG and therefore accounts for this investment under the equity method.
In the third quarter of 2012, LTG qualified as a significant subsidiary of the Company under the income test. The following table presents the required summarized unaudited financial information of this investment for the three and nine months ended September 30, 2012 and 2011.

17
Table of Contents

(in thousands)
Three months ended
September 30,
Nine months ended
September 30,
2012
 
2011
2012
 
2011
Sales
$
1,680,170

 
$
1,477,384

4,874,347

 
4,529,988

Gross profit
50,412

 
35,867

126,330

 
103,225

Income from continuing operations
20,108

 
13,925

49,014

 
39,584

Net income
18,545

 
12,918

47,486

 
37,144

Net income attributable to LTG
17,927

 
12,864

44,518

 
35,114


Investment in Debt Securities
The Company owns 100% of the cumulative convertible preferred shares of Iowa Northern Railway Corporation (“IANR”), which operates a short-line railroad in Iowa. As a result of this investment, the Company has a 49.9% voting interest in IANR, with the remaining 50.1% voting interest held by the common shareholders. The preferred shares have certain rights associated with them, including voting, dividends, liquidation, redemption and conversion. Dividends accrue to the Company at a rate of 14% annually whether or not declared by IANR and are cumulative in nature. The Company can convert its preferred shares into common shares of IANR at any time, but the shares cannot be redeemed until May 2015. This investment is accounted for as “available-for-sale” debt securities in accordance with ASC 320 and is carried at estimated fair value in “Other noncurrent assets” on the Company’s Condensed Consolidated Balance Sheet. The estimated fair value of the Company’s investment in IANR as of September 30, 2012 was $17.4 million.
Based on the Company’s assessment, IANR is considered a variable interest entity (“VIE”). Since the Company does not possess the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, it is not considered to be the primary beneficiary of IANR and therefore does not consolidate IANR. The decisions that most significantly impact the economic performance of IANR are made by IANR’s Board of Directors. The Board of Directors has five directors; two directors from the Company, two directors from the common shareholders and one independent director who is elected by unanimous decision of the other four directors. The vote of four of the five directors is required for all key decisions.
The Company’s current maximum exposure to loss related to IANR is $20.9 million, which represents the Company’s investment at fair value plus unpaid accrued dividends to date of $3.5 million. The Company does not have any obligation or commitments to provide additional financial support to IANR.
Related Party Transactions
In the ordinary course of business, the Company will enter into related party transactions with each of the investments described above, along with other related parties. The following table sets forth the related party transactions entered into for the time periods presented:
 
(in thousands)
Three months ended
September 30,
 
Nine months ended
September 30,
 
2012
 
2011
 
2012
 
2011
Sales revenues
$
234,258

 
$
177,515

 
$
654,308

 
$
594,351

Service fee revenues (a)
5,329

 
5,755

 
16,201

 
16,774

Purchases of product
173,519

 
175,210

 
467,841

 
463,989

Lease income (b)
1,695

 
1,445

 
5,428

 
4,112

Labor and benefits reimbursement (c)
3,192

 
2,730

 
8,943

 
8,114

Other expenses (d)
279

 
59

 
615

 
104

Accounts receivable at September 30 (e)
27,548

 
8,615

 


 


Accounts payable at September 30 (f)
18,474

 
18,857

 


 


 
(a)
Service fee revenues include management fee, corn origination fee, ethanol and DDG marketing fees, and other commissions.
(b)
Lease income includes the lease of the Company’s Albion, Michigan and Clymers, Indiana grain facilities as well as certain railcars to the various ethanol LLCs and IANR.

18
Table of Contents

(c)
The Company provides all operational labor to the ethanol LLCs and charges them an amount equal to the Company’s costs of the related services.
(d)
Other expenses include payments to IANR for repair shop rent and use of their railroad reporting mark, payment to LTG for the lease of railcars and other various expenses.
(e)
Accounts receivable represents amounts due from related parties for sales of corn, leasing revenue and service fees.
(f)
Accounts payable represents amounts due to related parties for purchases of ethanol.

For the quarters ended September 30, 2012 and 2011, revenues recognized for the sale of ethanol that the Company purchased from the ethanol LLCs were $192.8 million and $180.8 million, respectively. For the nine months ended September 30, 2012 and 2011, revenues recognized for the sale of ethanol that the Company purchased from the ethanol LLCs were $489.0 million and $507.5 million, respectively. For the quarters ended September 30, 2012 and 2011, revenues recognized for the sale of corn to the ethanol LLCs under these agreements were $143.4 million and $147.0 million, respectively. For the nine months ended September 30, 2012 and 2011, revenues recognized for the sale of corn to the ethanol LLCs were $487.8 million and $488.1 million, respectively.
From time to time, the Company enters into derivative contracts with certain of its related parties, including the ethanol LLCs and LTG, for the purchase and sale of corn and ethanol, for similar price risk mitigation purposes and on similar terms as the purchase and sale derivative contracts it enters into with unrelated parties. The fair value of derivative contracts with related parties was a gross asset for the periods ended September 30, 2012, December 31, 2011 and September 30, 2011 of $1.7 million, $0.6 million, and $4.9 million, respectively. The fair value of derivative contracts with related parties was a gross liability for the periods ended September 30, 2012, December 31, 2011 and September 30, 2011 of $4.5 million, $1.9 million, and $1.9 million, respectively.

9. Fair Value Measurements
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at September 30, 2012, December 31, 2011 and September 30, 2011:
 
(in thousands)
September 30, 2012
Assets (liabilities)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
39,904

 
$
—

 
$
—

 
$
39,904

Restricted cash
160

 
—

 
—

 
160

Commodity derivatives, net
15,619

 
113,513

 
—

 
129,132

Convertible preferred securities (b)
—

 
—

 
17,350

 
17,350

Other assets and liabilities (a)
7,515

 
(1,966
)
 
—

 
5,549

Total
$
63,198

 
$
111,547

 
$
17,350

 
$
192,095

 
(in thousands)
December 31, 2011
Assets (liabilities)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
183

 
$
—

 
$
—

 
$
183

Restricted cash
18,651

 
—

 
—

 
18,651

Commodity derivatives, net
43,503

 
22,876

 
2,467

 
68,846

Convertible preferred securities (b)
—

 
—

 
20,360

 
20,360

Other assets and liabilities (a)
6,224

 
—

 
(2,178
)
 
4,046

Total
$
68,561

 
$
22,876

 
$
20,649

 
$
112,086

 

19
Table of Contents

(in thousands)
September 30, 2011
Assets (liabilities)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
21,481

 
$
—

 
$
—

 
$
21,481

Restricted cash
11,920

 
—

 
—

 
11,920

Commodity derivatives, net
84,365

 
(2,988
)
 
3,283

 
84,660

Convertible preferred securities (b)
—

 
—

 
15,790

 
15,790

Other assets and liabilities (a)
5,748

 
—

 
(2,238
)
 
3,510

Total
$
123,514

 
$
(2,988
)
 
$
16,835

 
$
137,361

 
(a)
Included in other assets and liabilities is interest rate and foreign currency derivatives, swaptions and deferred compensation assets.
(b)
Recorded in “Other noncurrent assets” on the Company’s Condensed Consolidated Balance Sheets.

The majority of the Company’s assets and liabilities measured at fair value are based on the market approach valuation technique. With the market approach, fair value is derived using prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The Company’s net commodity derivatives primarily consist of futures or options contracts via regulated exchanges and contracts with producers or customers under which the future settlement date and bushels (or gallons in the case of ethanol contracts) of commodities to be delivered (primarily wheat, corn, soybeans and ethanol) are fixed and under which the price may or may not be fixed. Depending on the specifics of the individual contracts, the fair value is derived from the futures or options prices on the CME or the New York Mercantile Exchange for similar commodities and delivery dates as well as observable quotes for local basis adjustments (the difference, which is attributable to local market conditions, between the quoted futures price and the local cash price). Because “basis” for a particular commodity and location typically has multiple quoted prices from other agribusinesses in the same geographical vicinity and is used as a common pricing mechanism in the Agribusiness industry, we have concluded that “basis” is a “Level 2” fair value input for purposes of the fair value disclosure requirements related to our commodity derivatives. Although nonperformance risk, both of the Company and the counterparty, is present in each of these commodity contracts and is a component of the estimated fair values, based on the Company’s historical experience with its producers and customers and the Company’s knowledge of their businesses, the Company does not view nonperformance risk to be a significant input to fair value for the majority of these commodity contracts.
The Company’s convertible preferred securities are measured at fair value using a combination of the income approach on a quarterly basis and the market approach on an annual basis. Specifically, the income approach incorporates the use of the Discounted Cash Flow method, whereas the Market Approach incorporates the use of the Guideline Public Company method. Application of the Discounted Cash Flow method requires estimating the annual cash flows that the business enterprise is expected to generate in the future. The assumptions input into this method are estimated annual cash flows for a specified estimation period, the discount rate, and the terminal value at the end of the estimation period. In the Guideline Public Company method, valuation multiples, including total invested capital, are calculated based on financial statements and stock price data from selected guideline publicly traded companies. On an annual basis, a comparative analysis is then performed for factors including, but not limited to size, profitability and growth to determine fair value.
A reconciliation of beginning and ending balances for the Company’s fair value measurements using Level 3 inputs is as follows:
 

20
Table of Contents

 
2012

2011
(in thousands)
Interest
rate
derivatives
and
swaptions

Convertible
preferred
securities

Commodity
derivatives,
net

Interest
rate
derivatives
and
swaptions

Convertible
preferred
securities

Commodity
derivatives,
net
Asset (liability) at December 31,
$
(2,178
)
 
$
20,360

 
$
2,467

 
$
(2,156
)
 
$
15,790

 
$
12,406

Gains (losses) included in earnings:

 

 

 

 

 

New contracts
—

 
—

 
—

 
—

 
—

 
442

Change in market prices
—

 
—

 
—

 
(2
)
 
—

 
1,877

Settled contracts
—

 
—

 
—

 
—

 
—

 
(2,242
)
Unrealized gains (losses) included in other comprehensive income
—

 
—

 
—

 
149

 
—

 
—

New contracts entered into
—

 
—

 
—

 
507

 
—

 
—

Transfers to level 2
2,178

 
—

 
(2,467
)
 
—

 
—

 
—

Transfers from level 2
—

 
—

 
—

 
—

 
—

 
2,500

Asset (liability) at March 31,
$
—

 
$
20,360

 
$
—

 
$
(1,502
)
 
$
15,790

 
$
14,983

Gains (losses) included in earnings:


 


 


 


 


 


       New contracts
—

 
—

 
—

 
—

 
—

 
(290
)
       Change in market prices
—

 
—

 
—

 
(310
)
 
—

 
(5,179
)
       Settled contracts
—

 
—

 
—

 
—

 
—

 
(929
)
Unrealized gains (losses) included in other comprehensive income
—

 
(3,010
)
 
—

 
(120
)
 
—

 
—

New contracts entered into
—

 
—

 
—

 
49

 
—

 
—

Transfers from level 2
—

 
—

 
—

 
—

 
—

 
209

Asset (liability) at June 30,
$
—

 
$
17,350

 
$
—

 
$
(1,883
)
 
$
15,790

 
$
8,794

Gains (losses) included in earnings:
 
 
 
 
 
 
 
 
 
 
 
       New contracts
—

 
—

 
—

 
—

 
—

 
(43
)
       Change in market prices
—

 
—

 
—

 
(234