UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014
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) | |
Registrant's telephone number, including area code (419) 893-5050
Securities registered pursuant to Section 12(b) of the Act: Common Shares
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No ý
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
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 aggregate market value of the registrant's voting stock which may be voted by persons other than affiliates of the registrant was $1,367.9 million as of June 30, 2014, computed by reference to the last sales price for such stock on that date as reported on the Nasdaq Global Select Market.
The registrant had approximately 28.8 million common shares outstanding, no par value, at February 17, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 8, 2015, are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K. The Proxy Statement will be filed with the Commission on or about March 16, 2015.
THE ANDERSONS, INC.
Table of Contents
Page No. | |
PART I. | |
Item 1. Business | |
Item 1A. Risk Factors | |
Item 2. Properties | |
Item 3. Legal Proceedings | |
Item 4. Mine Safety | |
PART II. | |
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters | |
Item 6. Selected Financial Data | |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 7A. Quantitative and Qualitative Disclosures about Market Risk | |
Item 8. Financial Statements and Supplementary Data | |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures | |
Item 9A. Controls and Procedures | |
PART III. | |
Item 10. Directors and Executive Officers of the Registrant | |
Item 11. Executive Compensation | |
Item 12. Security Ownership of Certain Beneficial Owners and Management | |
Item 13. Certain Relationships and Related Transactions | |
Item 14. Principal Accountant Fees and Services | |
PART IV. | |
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K | |
Signatures | |
Exhibits | |
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Part I.
Item 1. Business
Company Overview
The Andersons, Inc. (the "Company") is a diversified company rooted in agriculture. Founded in Maumee, Ohio in 1947, the Company conducts business across North America in the grain, ethanol, plant nutrient and rail sectors. The Company also produces turf and cob products and has a consumer retailing presence.
Segment Descriptions
The Company's operations are classified into six reportable business segments: Grain, Ethanol, Rail, Plant Nutrient, Turf & Specialty, and Retail. Each of these segments is organized based upon the nature of products and services offered. See Note 7 to the Consolidated Financial Statements in Item 8 for information regarding business segments.
Grain Group
The Grain business primarily operates grain elevators in various states in the U.S. Corn Belt. Income is earned on grain bought and sold or “put thru” the elevator, grain that is purchased and conditioned for resale, and space income. Space income consists of appreciation or depreciation in the basis value of grain held and represents the difference between the cash price of a commodity in one of the Company's facilities and an exchange traded futures price (“basis”); appreciation or depreciation between the future exchange contract months (“spread”); and grain stored for others upon which storage fees are earned. The Grain business also offers a number of unique grain marketing, risk management and corn origination services to its customers and affiliated ethanol facilities for which it collects fees.
The Company has a lease and marketing agreement with Cargill, Incorporated (“Cargill”) for Cargill's Maumee and Toledo, Ohio grain handling and storage facilities. As part of the agreement, Cargill is given the marketing rights to grain in the Cargill-owned facilities as well as the adjacent Company-owned facilities in Maumee and Toledo. The lease of the Cargill-owned facilities covers approximately 5%, or 8.9 million bushels, of the Company's total storage space.
Grain prices are not predetermined, so sales are negotiated by the Company's merchandising staff. The principal grains sold by the Company are corn, soybeans and wheat. Approximately 90% of the grain bushels sold by the Company in 2014 were purchased by U.S. grain processors and feeders, and approximately 10% were exported. Most of the Company's exported grain sales are done through intermediaries while some grain is shipped directly to foreign countries, mainly Canada. Most grain shipments from our facilities are by rail or boat. Rail shipments are made primarily to grain processors and feeders with some rail shipments made to exporters on the Gulf of Mexico or east coast. Boat shipments are from the Port of Toledo. In addition, grain is transported via truck for direct ship transactions where customers sell grain to the Company but have it delivered directly to the end user.
The Company's grain operations rely principally on forward purchase contracts with producers, dealers and commercial elevators to ensure an adequate supply of grain to the Company's facilities throughout the year. The Company makes grain purchases at prices referenced to the Chicago Mercantile Exchange (“the CME”).
The Company competes in the sale of grain with other public and private grain brokers, elevator operators and farmer owned cooperative elevators. Some of the Company's competitors are also its customers. Competition is based primarily on price, service and reliability. Because the Company generally buys in smaller lots, its competition for the purchase of grain is generally local or regional in scope, although there are some large national and international companies that maintain regional grain purchase and storage facilities. Significant portions of grain bushels purchased and sold are done so using forward contracts.
The grain handling business is seasonal in nature in that the largest portion of the principal grains are harvested and delivered from the farm and commercial elevators in July, October and November although a significant portion of the principal grains are bought, sold and handled throughout the year.
Fixed price purchase and sale commitments as well as grain held in inventory expose the Company to risks related to adverse changes in market prices. The Company attempts to manage these risks by entering into exchange-traded futures and option contracts with the CME. The contracts are economic hedges of price risk, but are not designated or accounted for as hedging
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instruments. The CME is a regulated commodity futures exchange that maintains futures markets for the grains merchandised by the Company. Futures prices are determined by worldwide supply and demand.
The Company's grain risk management practices are designed to reduce the risk of changing commodity prices. In that regard, such practices also limit potential gains from further changes in market prices. The Company has policies that provide key controls over its risk management practices. These policies include a description of the objectives of the programs and review of position limits by key management outside of the trading function on a daily basis along with other internal controls. The Company monitors current market conditions and may expand or reduce the purchasing program in response to changes in those conditions. In addition, the Company monitors its counterparties on a regular basis for credit worthiness, defaults and non-delivery.
Purchases of grain can be made the day the grain is delivered to a terminal or via a forward contract made prior to actual delivery. Sales of grain generally are made by contract for delivery in a future period. When the Company purchases grain at a fixed price or at a price where a component of the purchase price is fixed via reference to a futures price on the CME, it also enters into an offsetting sale of a futures contract on the CME. Similarly, when the Company sells grain at a fixed price, the sale is offset with the purchase of a futures contract on the CME. At the close of business each day, inventory and open purchase and sale contracts as well as open futures and option positions are marked-to-market. Gains and losses in the value of the Company's ownership positions due to changing market prices are netted with, and generally offset in the income statement by, losses and gains in the value of the Company's futures positions.
When a futures contract is entered into, an initial margin deposit must be sent to the CME. The amount of the margin deposit is set by the CME and varies by commodity. If the market price of a futures contract moves in a direction that is adverse to the Company's position, an additional margin deposit, called a maintenance margin, is required by the CME. Subsequent price changes could require additional maintenance margin deposits or result in the return of maintenance margin deposits by the CME. Significant increases in market prices, such as those that occur when grain supplies are affected by unfavorable weather conditions and/or when increases in demand occur, can have an effect on the Company's liquidity and, as a result, require it to maintain appropriate short-term lines of credit. The Company may utilize CME option contracts to limit its exposure to potential required margin deposits in the event of a rapidly rising market.
The Company owns 40% of the equity in Lansing Trade Group LLC (“LTG”). LTG is largely focused on the movement of physical commodities, including grain and ethanol and is exposed to the some of the same risks as the Company's grain and ethanol businesses. LTG also trades in commodities that the Company's grain and ethanol businesses do not trade in, some of which are not exchange traded. This investment provides the Company with further opportunity to diversify and complement its income through activity outside of its traditional product and geographic regions. This investment is accounted for under the equity method. The Company, along with LTG, also established joint ventures and purchased a grain and food-bean handler and agronomy input provider with 12 locations across Ontario and Minnesota. These investments are accounted for under the equity method. The Company periodically enters into transactions with these joint ventures as disclosed in Note 8 of Item 8.
Ethanol Group
The Ethanol Group has ownership interests in four Limited Liability Companies (“the ethanol LLCs” or “LLCs”). Each of the LLCs owns an ethanol plant that is operated by the Company's Ethanol Group. The plants are located in Iowa, Indiana, Michigan, and Ohio and have combined nameplate capacity of 330 million gallons of ethanol. The Group purchases and sells ethanol, offers facility operations, risk management, and ethanol and corn oil marketing services to the ethanol plants it invests in and operates.
The Company holds a majority interest (85%) in The Andersons Denison Ethanol LLC ("TADE"), which is a consolidated entity that was acquired on May 1, 2012. The Company holds a 53% interest in The Andersons Albion Ethanol LLC (“TAAE”) and a 38% interest in The Andersons Clymers Ethanol LLC (“TACE”). The Company holds a 50% interest in The Andersons Marathon Ethanol LLC (“TAME”) through its majority owned subsidiary The Andersons Ethanol Investment LLC (“TAEI”). A third party owns 34% of TAEI. All operating ethanol LLC investments, except TADE, are accounted for using the equity method of accounting.
The Company has a management agreement with each of the LLCs. As part of these agreements, the Ethanol Group runs the day-to-day operations of the plants and provides all administrative functions. The Company is compensated for these services based on a fixed cost plus an indexed annual increase determined by a consumer price index and is accounted for on a gross basis. Additionally, the Company has entered into agreements with each of the unconsolidated LLCs under which it has the exclusive right to act as supplier for 100% of the corn used by the LLCs in the production of ethanol. For this service, the Company receives a fee for each bushel of corn sold. The Company has entered into marketing agreements with each of the
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ethanol LLCs. Under the ethanol marketing agreements, the Company purchases 100% of the ethanol produced by TAAE, TACE and TADE and 50% of the ethanol produced by TAME at the same price it will resell the ethanol to external customers. The Ethanol Group receives a fee for each gallon of ethanol sold to external customers. Under the distillers dried grains ("DDG") and corn oil marketing agreements, the Company markets the DDG and corn oil and receives a fee on units sold.
Plant Nutrient Group
The Plant Nutrient Group is a leading manufacturer, distributor and retailer of agricultural and related plant nutrients, and pelleted lime and gypsum products in the U.S. Corn Belt, Florida and Puerto Rico. The Group provides warehousing, packaging and manufacturing services to basic nutrient producers and other distributors. The Group also manufactures and distributes a variety of industrial products throughout the U.S. and Puerto Rico including nitrogen reagents for air pollution control systems used in coal-fired power plants, and water treatment and dust abatement products.
In its plant nutrient businesses, the Company competes with regional and local cooperatives, wholesalers and retailers, predominantly publicly owned manufacturers and privately owned retailers, wholesalers and importers. Some of these competitors are also suppliers and have considerably larger resources than the Company. Competition in the nutrient business is based largely on depth of product offering, price, location and service. Sales and warehouse shipments of agricultural nutrients are heaviest in the spring and fall.
Wholesale Nutrients - The Wholesale Nutrients business manufactures, stores, and distributes dry and liquid agricultural nutrients, and pelleted lime and gypsum products annually. The major nutrient products sold by the business principally contain nitrogen, phosphate, potassium and sulfur.
Farm Centers - The Farm Centers offer a variety of essential crop nutrients, crop protection chemicals and seed products in addition to application and agronomic services to commercial and family farmers. Soil and tissue sampling along with global satellite assisted services provide for pinpointing crop or soil deficiencies and prescriptive agronomic advice is provided to farmers.
Rail Group
The Company's Rail Group leases, repairs, and sells various types of railcars, locomotives and barges. In addition, the Rail Group offers fleet management services to private railcar owners. The Rail Group is also an investor in the short-line railroad, Iowa Northern Railway Company (“IANR”).
The Company has a diversified fleet of car types (boxcars, gondolas, covered and open top hopper cars, tank cars and pressure differential cars), locomotives and barges serving a broad customer base. The Company operates in both the new and used car markets, allowing the Company to diversify its fleet both in terms of car types, industries and age of cars, as well as repairing and refurbishing used cars for specific markets and customers.
A significant portion of the railcars, locomotives and barges managed by the Company are included on the balance sheet as long-lived assets. The others are either in off-balance sheet operating leases (with the Company leasing assets from financial intermediaries and leasing those same assets to the end-users) or non-recourse arrangements (in which the Company is not subject to any lease arrangement related to the assets, but provides management services to the owner of the assets). The Company generally holds purchase options on most assets owned by financial intermediaries. We are under contract to provide maintenance services for many of the Rail Group assets that we own or manage. Refer to the Off-Balance Sheet Transactions section of Management's Discussion and Analysis for a breakdown of our railcar, locomotive and barge positions at December 31, 2014.
In the case of our off-balance sheet Rail Group assets, the Company's risk management philosophy is to match-fund the lease commitments where possible. Match-funding (in relation to lease transactions) means matching the terms of the financial intermediary funding arrangement with the lease terms of the customer where the Company is both lessee and sublessor. If the Company is unable to match-fund, it will attempt to get an early buyout provision within the funding arrangement to match the underlying customer lease. The Company does not attempt to match-fund lease commitments for Rail Group assets that are on our balance sheet.
Competition for marketing and fleet maintenance services is based primarily on price, service ability, and access to both used equipment and third-party financing. Repair facility competition is based primarily on price, quality and location.
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Turf & Specialty Group
The Turf & Specialty Group produces granular fertilizer and control products for the turf and ornamental markets. It also produces private label fertilizer and control products, and a variety of corncob-based products.
Cob Products - Corncob-based products are manufactured for a variety of uses including laboratory animal bedding and private-label cat litter, as well as absorbents, blast cleaners, carriers and polishers. The products are distributed throughout the United States and Canada and into Europe and Asia. The principal sources for corncobs are seed corn producers.
Turf Products - Proprietary professional turf care products are produced for the golf course and professional turf care markets, serving both U.S. and international customers. These products are sold both directly and through distributors to golf courses and lawn service applicators. The Company also produces and sells fertilizer and control products for “do-it-yourself” application, to mass merchandisers, small independent retailers and other lawn fertilizer manufacturers and performs contract manufacturing of fertilizer and control products.
The turf products industry is seasonal with the majority of sales occurring from early spring to early summer. Principal raw materials for the turf care products are nitrogen, phosphate and potash, which are purchased primarily from the Company's Plant Nutrient Group. Competition is based principally on merchandising ability, logistics, service, quality and technology.
The Company attempts to minimize the amount of finished goods inventory it must maintain for customers, however, because demand is highly seasonal and influenced by local weather conditions, it may be required to carry inventory that it has produced into the next season. Also, because a majority of the consumer and industrial businesses use private label packaging, the Company closely manages production to anticipated orders by product and customer.
Retail Group
The Company's Retail Group includes large retail stores operated as “The Andersons,” which are located in the Columbus and Toledo, Ohio markets. The retail concept is A Store Like No Other and the stores focus on providing significant product breadth with offerings in home improvement and other mass merchandise categories as well as specialty foods, wine and indoor and outdoor garden centers. Each store has 100,000 square feet or more of in-store display space plus 40,000 or more square feet of outdoor garden center space, and features do-it-yourself clinics, special promotions and varying merchandise displays. The Company also operates a specialty food store operated as “The Andersons Market”™ located in the Toledo, Ohio market area. The specialty food store concept has product offerings with a strong emphasis on “freshness” that features produce, deli and bakery items, fresh meats, specialty and conventional dry goods and wine. The majority of the Company's non-perishable merchandise is received at a distribution center located in Maumee, Ohio. The Company also operates a sales and service facility for outdoor power equipment near one of its retail stores.
The retail merchandising business is highly competitive. The Company competes with a variety of retail merchandisers, including grocery stores, home centers, department and hardware stores. Many of these competitors have substantially greater financial resources and purchasing power than the Company. The principal competitive factors are location, quality of product, price, service, reputation and breadth of selection. The Company's retail business is affected by seasonal factors with significant sales occurring in the spring and during the holiday season.
Employees
The Andersons offers a broad range of full-time and part-time career opportunities. Each position in the Company is important to our success, and we recognize the worth and dignity of every individual. We strive to treat each person with respect and utilize his or her unique talents. At December 31, 2014, the Company had 2,214 full-time and 1,131 part-time or seasonal employees.
Government Regulation
Grain sold by the Company must conform to official grade standards imposed under a federal system of grain grading and inspection administered by the United States Department of Agriculture (“USDA”).
The production levels, markets and prices of the grains that the Company merchandises are affected by United States government programs, which include acreage control and price support programs of the USDA. In regards to our investments in ethanol production facilities, the U.S. government has mandated a ten percent blend for motor fuel gasoline sold.
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The U.S. Food and Drug Administration (“FDA”) has developed bioterrorism prevention regulations for food facilities, which require that we register our grain operations with the FDA, provide prior notice of any imports of food or other agricultural commodities coming into the United States and maintain records to be made available upon request that identifies the immediate previous sources and immediate subsequent recipients of our grain commodities.
The Company, like other companies engaged in similar businesses, is subject to a multitude of federal, state and local environmental protection laws and regulations including, but not limited to, laws and regulations relating to air quality, water quality, pesticides and hazardous materials. The provisions of these various regulations could require modifications of certain of the Company's existing facilities and could restrict the expansion of future facilities or significantly increase the cost of their operations. Compliance with environmental laws and regulations did not materially affect our earnings or competitive position in 2014.
In addition, the Company continues to assess the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and has concluded that the Company is not a major swap dealer or major swap participant. New federal regulations, studies and reports addressing all of the major areas of the new law, including the regulation of swaps and derivatives, are in the process of being finalized and adopted and we will continue to monitor these developments.
Available Information
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available on our Company website soon after filing with the Securities and Exchange Commission. Our Company website is http://www.andersonsinc.com. The public may read and copy any materials the Company files with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These reports are also available at the SEC's website: http://www.sec.gov.
Item 1A. Risk Factors
Our operations are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in this Form 10-K and could have a material adverse impact on our financial results. These risks can be impacted by factors beyond our control as well as by errors and omissions on our part. The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained elsewhere in this Form 10-K.
Certain of our business segments are affected by the supply and demand of commodities, and are sensitive to factors outside of our control. Adverse price movements could negatively affect our profitability and results of operations.
Our Grain, Ethanol and Plant Nutrient businesses buy, sell and hold inventories of agricultural input and output commodities, some of which are readily traded on commodity futures exchanges. In addition, our Turf & Specialty business uses some of the same nutrient commodities sourced by the Plant Nutrient business as base raw materials in manufacturing turf products. Unfavorable weather conditions, both local and worldwide, as well as other factors beyond our control, can affect the supply and demand of these commodities and expose us to liquidity pressures to finance hedges in the grain business in rapidly rising markets. In our Plant Nutrient and Turf & Specialty businesses, changes in the supply and demand of these commodities can also affect the value of inventories that we hold, as well as the price of raw materials as we are unable to effectively hedge these commodities. Increased costs of inventory and prices of raw material would decrease our profit margins and adversely affect our results of operations.
Corn - The principal raw material the ethanol LLCs use to produce ethanol and co-products is corn. As a result, changes in the price of corn in the absence of a corresponding increase in petroleum based fuel prices will decrease ethanol margins thus adversely affecting financial results in the ethanol LLCs. At certain levels, corn prices may make ethanol uneconomical to produce for fuel markets. The price of corn is influenced by weather conditions and other factors affecting crop yields, shift in acreage allocated to corn versus other major crops and general economic and regulatory factors. These factors include government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply. The significance and relative effect of these factors on the price of corn is difficult to predict. Any event that tends to negatively affect the supply of corn, such as adverse weather or crop disease, could increase corn prices and potentially harm our share of the ethanol LLCs results. In addition, we may also have difficulty, from time to time, in physically sourcing corn on economical terms due to supply shortages. High costs or shortages could require us to suspend ethanol operations until corn is available on economical terms, which would have an adverse effect on operating results.
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Grains - While we attempt to manage the risk associated with commodity price changes for our grain inventory positions with derivative instruments, including purchase and sale contracts, we are unable to offset 100% of the price risk of each transaction due to timing, availability of futures and options contracts and third-party credit risk. Furthermore, there is a risk that the derivatives we employ will not be effective in offsetting all of the risks we are trying to manage. This can happen when the derivative and the underlying value of grain inventories and purchase and sale contracts are not perfectly matched. Our grain derivatives, for example, do not perfectly correlate with the basis component of our grain inventory and contracts. (Basis is defined as the difference between the cash price of a commodity and the corresponding exchange-traded futures price.) Differences can reflect time periods, locations or product forms. Although the basis component is smaller and generally less volatile than the futures component of our grain market price, basis moves on a large grain position can significantly impact the profitability of the Grain business.
Our futures, options and over-the-counter contracts are subject to margin calls. If there are large movements in the commodities market, we could be required to post significant levels of margin, which would impact our liquidity. There is no assurance that the efforts we have taken to mitigate the impact of the volatility of the prices of commodities upon which we rely will be successful and any sudden change in the price of these commodities could have an adverse effect on our business and results of operations.
Natural Gas - We rely on third parties for our supply of natural gas, which is consumed in the drying of wet grain, manufacturing of certain turf products, pelleted lime and gypsum, and manufacturing of ethanol within the LLCs. The prices for and availability of natural gas are subject to market conditions. These market conditions often are affected by factors beyond our control such as higher prices resulting from colder than average weather conditions and overall economic conditions. Significant disruptions in the supply of natural gas could impair the operations of the ethanol facilities. Furthermore, increases in natural gas prices or changes in our natural gas costs relative to natural gas costs paid by competitors may adversely affect future results of operations and financial position.
Gasoline and oil - In addition, we market ethanol as a fuel additive to reduce vehicle emissions from gasoline, as an octane enhancer to improve the octane rating of gasoline with which it is blended and as a substitute for petroleum based gasoline. As a result, ethanol prices will be influenced by the supply and demand for gasoline and oil and our future results of operations and financial position may be adversely affected if gasoline and oil demand or price changes.
Potash, phosphate and nitrogen - Raw materials used by the Plant Nutrient business include potash, phosphate and nitrogen, for which prices can be volatile driven by global and local supply and demand factors. Significant increases in the price of these commodities may result in lower customer demand and higher than optimal inventory levels. In contrast, reductions in the price of these commodities may create lower-of-cost-or-market inventory adjustments to inventories.
Some of our business segments operate in highly regulated industries. Changes in government regulations or trade association policies could adversely affect our results of operations.
Many of our business segments are subject to government regulation and regulation by certain private sector associations, compliance with which can impose significant costs on our business. Failure to comply with such regulations can result in additional costs, fines or criminal action.
A significant part of our operations is regulated by environmental laws and regulations, including those governing the labeling, use, storage, discharge and disposal of hazardous materials. Because we use and handle hazardous substances in our businesses, changes in environmental requirements or an unanticipated significant adverse environmental event could have an adverse effect on our business. We cannot assure that we have been, or will at all times be, in compliance with all environmental requirements, or that we will not incur costs or liabilities in connection with these requirements. Private parties, including current and former employees, could bring personal injury or other claims against us due to the presence of, or exposure to, hazardous substances used, stored or disposed of by us, or contained in our products. We are also exposed to residual risk because some of the facilities and land which we have acquired may have environmental liabilities arising from their prior use. In addition, changes to environmental regulations may require us to modify our existing plant and processing facilities and could significantly increase the cost of those operations.
Grain and Ethanol businesses - In our Grain and Ethanol businesses, agricultural production and trade flows can be affected by government programs and legislation. Production levels, markets and prices of the grains we merchandise can be affected by U.S. government programs, which include acreage controls and price support programs administered by the USDA and required levels of ethanol in gasoline through the Renewable Fuel Standards as administered by the EPA. Other examples of government policies that can have an impact on our business include tariffs, duties, subsidies, import and export restrictions
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and outright embargoes. Because a portion of our grain sales are to exporters, the imposition of export restrictions and other foreign countries' regulations could limit our sales opportunities.
The compliance burden and impact on our operations and profitability as a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations have imposed additional regulatory tasks which took effect in 2014, although the full burden of the Act is not yet fully-known as regulatory rule making is not yet completed. These efforts to change the regulation of financial markets may subject users of derivatives to extensive oversight and regulation by the Commodities Futures Trading Commission (CFTC). Such initiatives could impose significant additional costs on us, including operating and compliance costs, and could materially affect the availability, as well as the cost and terms, of certain transactions. New federal regulations have come into effect, while other anticipated regulations, studies and reports, including the regulation of swaps and derivatives, are still in the process of being finalized and adopted and we will continue to monitor these developments. Any of these matters could have an adverse effect on our business, financial condition, liquidity, results of operations and prospects.
Rail - Our Rail business is subject to regulation by the American Association of Railroads and the Federal Railroad Administration. These agencies regulate rail operations with respect to health and safety matters. New regulatory rulings could negatively impact financial results through higher maintenance costs or reduced economic value of railcar assets.
The Rail business is also subject to risks associated with the demands and restrictions of the Class I railroads, a group of rail companies owning a high percentage of the existing rail lines. These companies exercise a high degree of control over whether private railcars can be allowed on their lines and may reject certain railcars or require maintenance or improvements to the railcars. This presents risk and uncertainty for our Rail business and it can increase maintenance costs. In addition, a shift in the railroads' strategy to investing in new rail cars and improvements to existing railcars, instead of investing in locomotives and infrastructure, could adversely impact our business by causing increased competition and creating an oversupply of railcars. Our rail fleet consists of a range of railcar types (boxcars, gondolas, covered and open top hoppers, tank cars and pressure differential cars) and locomotives. However, a large concentration of a particular type of railcar could expose us to risk if demand were to decrease for that railcar type. Failure on our part to identify and assess risks and uncertainties such as these could negatively impact our business.
Similarly, our marine assets and operations are subject to rules and regulations relating to safety, citizenship, emissions, ballast discharges, and other environmental and operational matters enforced by various federal and state agencies, including the Maritime Administration of the U.S. Department of Transportation, the U.S. Coast Guard, and the U.S. Environmental Protection Agency (“EPA”). If we fail to comply with these rules and regulations, we could be prohibited from operating or leasing marine assets in the U.S. market, and under certain circumstances, could incur severe fines and penalties, including potential limitations on operations or forfeitures of assets.
Plant Nutrient and Turf & Specialty - Our Plant Nutrient and Turf & Specialty businesses manufacture certain agricultural nutrients and use potentially hazardous materials. All products containing pesticides, fungicides and herbicides must be registered with the EPA and state regulatory bodies before they can be sold. The inability to obtain or the cancellation of such registrations could have an adverse impact on our business. In the past, regulations governing the use and registration of these materials have required us to adjust the raw material content of our products and make formulation changes. Future regulatory changes may have similar consequences. Regulatory agencies, such as the EPA, may at any time reassess the safety of our products based on new scientific knowledge or other factors. If it were determined that any of our products were no longer considered to be safe, it could result in the amendment or withdrawal of existing approvals, which, in turn, could result in a loss of revenue, cause our inventory to become obsolete or give rise to potential lawsuits against us. Consequently, changes in existing and future government or trade association polices may restrict our ability to do business and cause our financial results to suffer.
We are required to carry significant amounts of inventory across all of our businesses. If a substantial portion of our inventory becomes damaged or obsolete, its value would decrease and our profit margins would suffer.
We are exposed to the risk of a decrease in the value of our inventories due to a variety of circumstances in all of our businesses. For example, within our Grain and Ethanol businesses, there is the risk that the quality of our grain inventory could deteriorate due to damage, moisture, insects, disease or foreign material. If the quality of our grain were to deteriorate below an acceptable level, the value of our inventory could decrease significantly. In our Plant Nutrient business, planted acreage, and consequently the volume of fertilizer and crop protection products applied, is partially dependent upon government programs and the producer's perception of demand. Technological advances in agriculture, such as genetically engineered seeds that resist disease and insects, or that meet certain nutritional requirements, could also affect the demand for our crop nutrients and crop protection products. Either of these factors could render some of our inventory obsolete or reduce its value. Within our rail
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repair business, major design improvements to loading, unloading and transporting of certain products can render existing (especially old) equipment obsolete. In addition, in our Turf & Specialty business, we build substantial amounts of inventory in advance of the season to prepare for customer demand. If we were to forecast our customer demand incorrectly, we could build up excess inventory which could cause the value of our inventory to decrease.
Our substantial indebtedness could negatively affect our financial condition, decrease our liquidity and impair our ability to operate the business.
If cash on hand is insufficient to pay our obligations or margin calls as they come due at a time when we are unable to draw on our credit facility, it could have an adverse effect on our ability to conduct our business. Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future. Our ability to generate cash is dependent on various factors. These factors include general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Certain of our long-term borrowings include provisions that require minimum levels of working capital and equity, and impose limitations on additional debt. Our ability to satisfy these provisions can be affected by events beyond our control, such as the demand for and the fluctuating price of grain. Although we are and have been in compliance with these provisions, noncompliance could result in default and acceleration of long-term debt payments.
We face increasing competition and pricing pressure from other companies in our industries. If we are unable to compete effectively with these companies, our sales and profit margins would decrease, and our earnings and cash flows would be adversely affected.
The markets for our products in each of our business segments are highly competitive. While we have substantial operations in our region, some of our competitors are significantly larger, compete in wider markets, have greater purchasing power, and have considerably larger financial resources. We also may enter into new markets where our brand is not recognized and in which we do not have an established customer base. Competitive pressures in all of our businesses could affect the price of, and customer demand for, our products, thereby negatively impacting our profit margins and resulting in a loss of market share.
Our grain and ethanol businesses use derivative contracts to reduce volatility in the commodity markets. Non-performance by the counter-parties to those contracts could adversely affect our future results of operations and financial position.
A significant amount of our grain and ethanol purchases and sales are done through forward contracting. In addition, the Company uses exchange traded and to a lesser degree over-the-counter contracts to reduce volatility in changing commodity prices. A significant adverse change in commodity prices could cause a counter-party to one or more of our derivative contracts to not perform on their obligation.
We rely on a limited number of suppliers for certain of our raw materials and other products and the loss of one or several of these suppliers could increase our costs and have a material adverse effect on any one of our business segments.
We rely on a limited number of suppliers for certain of our raw materials and other products. If we were unable to obtain these raw materials and products from our current vendors, or if there were significant increases in our supplier's prices, it could significantly increase our costs and reduce our profit margins.
Our investments in limited liability companies and equity method investments are subject to risks beyond our control.
We currently have investments in numerous limited liability companies. By operating a business through this arrangement, we do not have control over operating decisions as we would if we owned the business outright. Specifically, we cannot act on major business initiatives without the consent of the other investors, who may not always be in agreement with our ideas.
The Company may not be able to effectively integrate future businesses it acquires.
We continuously look for opportunities to enhance our existing businesses through strategic acquisitions. The process of integrating an acquired business into our existing business and operations may result in unforeseen operating difficulties and expenditures as well as require a significant amount of management resources. There is also the risk that our due diligence efforts may not uncover significant business flaws or hidden liabilities. In addition, we may not realize the anticipated benefits of an acquisition and they may not generate the anticipated financial results. Additional risks may include the inability to effectively integrate the operations, products, technologies and personnel of the acquired companies. The inability to maintain uniform standards, controls, procedures and policies would also negatively impact operations.
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Our business involves considerable safety risks. Significant unexpected costs and liabilities would have an adverse effect on our profitability and overall financial position.
Due to the nature of some of the businesses in which we operate, we are exposed to significant operational hazards such as grain dust explosions, fires, malfunction of equipment, abnormal pressures, blowouts, pipeline and tank ruptures, chemical spills or run-off, transportation accidents and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. If grain dust were to explode at one of our elevators or if one of our pieces of equipment were to fail or malfunction due to an accident or improper maintenance, it could put our employees and others at serious risk.
The Company's information technology systems may impose limitations or failures, or may face external threats, which may affect the Company's ability to conduct its business.
The Company's information technology systems, some of which are dependent on services provided by third parties, provide critical data connectivity, information and services for internal and external users. These interactions include, but are not limited to, ordering and managing materials from suppliers, converting raw materials to finished products, inventory management, shipping products to customers, processing transactions, summarizing and reporting results of operations, complying with regulatory, legal or tax requirements, human resources and other processes necessary to manage the business. The Company has put in place business continuity plans for its critical systems. However, if the Company's information technology systems are damaged, or cease to function properly due to any number of causes, such as catastrophic events or power outages, and the Company's business continuity plans do not effectively recover on a timely basis, the Company may suffer interruptions in the ability to manage its operations, which may adversely impact the Company's revenues and operating results. Our security measures may also be breached due to employee error, malfeasance, or otherwise. In addition, although the systems has been refreshed periodically, portions of the infrastructure are outdated and may not be adequate to support new business processes, accounting for new transactions, or implementation of new accounting standards if requirements are complex or materially different than what is currently in place.
Additionally, outside parties may attempt to destroy critical information, or fraudulently induce employees, third-party service providers, or users to disclose sensitive information in order to gain access to our data or our users' data. As a response, the Company requires user names and passwords in order to access its information technology systems. The Company also uses encryption and authentication technologies designed to secure the transmission and storage of data and prevent access to Company data or accounts. On an annual basis, these technologies and processes that relate to credit card information are reviewed by a third-party Payment Card Industry qualified security assessor. As with all companies, these security measures are subject to third-party security breaches, employee error, malfeasance, faulty password management, or other irregularities. We cannot assure our ability to prevent, repel or mitigate the effects of such an attack by outside parties. The Company relies on third parties to maintain and process certain information which could be subject to breach or unauthorized access to Company or employee information. Any such breach or unauthorized access could result in an inability to perform critical functions, significant legal and financial exposure, damage to our reputation, and a loss of confidence in the security of our services that could potentially have an adverse effect on our business.
Unauthorized disclosure of sensitive or confidential customer information could harm the Company's business and standing with our customers.
The protection of our customer, employee and Company data is critical to us. The Company relies on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information, such as payment card and personal information. Despite the security measures the Company has in place, its facilities and systems, and those of its third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information, whether by the Company or its vendors, could damage our reputation, expose us to risk of litigation and liability, disrupt our operations and harm our business.
The Company's design and implementation of a new Enterprise Resource Planning system could face significant difficulties.
In early 2012, the Company began the design and implementation of a new Enterprise Resource Planning system, requiring significant capital and human resources to deploy. The system will be more expensive and take longer to fully implement than originally planned, including increased capital investment, higher fees and expenses of third parties, delayed deployment scheduling, and more on-going maintenance expense once implemented. The ultimate costs and schedules are not yet known. If for any reason this implementation is not successful, the Company could be required to expense rather than capitalize related
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amounts. Beyond cost and scheduling, potential flaws in the implementation of an ERP system may pose risks to the Company's ability to operate successfully and efficiently. These risks include, without limitation, inefficient use of employees, distractions to the Company's core businesses, adverse customer reactions, loss of key information, delays in decision making, as well as unforeseen additional costs due to the inability to integrate vital information processes.
Item 2. Properties
The Company's principal agriculture, rail, retail and other properties are described below.
Agriculture Facilities
Agricultural Fertilizer | |||||||||
(in thousands) | Grain Storage | Dry Storage | Liquid Storage | ||||||
Location | (bushels) | (tons) | (tons) | ||||||
Florida | — | 3 | 22 | ||||||
Illinois | 13,389 | 58 | 11 | ||||||
Indiana | 24,635 | 148 | 139 | ||||||
Iowa | 20,346 | 10 | 22 | ||||||
Michigan | 34,394 | 70 | 47 | ||||||
Minnesota | — | — | 52 | ||||||
Nebraska | 13,107 | — | — | ||||||
Ohio | 41,623 | 189 | 64 | ||||||
Puerto Rico | — | — | 10 | ||||||
Tennessee | 13,378 | — | — | ||||||
Texas | 1,547 | — | — | ||||||
Wisconsin | — | 29 | 77 | ||||||
162,419 | 507 | 444 | |||||||
The grain facilities are mostly concrete and steel tanks, with some flat storage, which is primarily cover-on-first temporary storage. The Company also owns grain inspection buildings and dryers, maintenance buildings and truck scales and dumps. Approximately 89% of the total storage capacity is owned, while the remaining 11% of the total capacity is leased from third parties.
The Plant Nutrient Group's wholesale nutrient and farm center properties consist mainly of fertilizer warehouse and formulation and packaging facilities for dry and liquid fertilizers. The Company owns 98% of the dry and liquid storage facilities.
Retail Store Properties
Name | Location | Square Feet | ||
Maumee Store | Maumee, OH | 166,000 | ||
Toledo Store | Toledo, OH | 162,000 | ||
Sawmill Store | Columbus, OH | 169,000 | ||
Brice Store | Columbus, OH | 159,000 | ||
The Andersons Market (1) | Sylvania, OH | 30,000 | ||
Distribution Center (1) | Maumee, OH | 245,000 | ||
(1) Facility leased
The leases for the retail store and distribution center are operating leases with several renewal options and provide for minimum aggregate annual lease payments approximating $1.3 million for 2015. In addition, the Company owns a service and sales facility for outdoor power equipment adjacent to its Maumee, Ohio retail store.
Other Properties
The Company owns an ethanol facility in Denison, Iowa with a nameplate capacity of 55 million gallons.. The Company owns lawn fertilizer production facilities in Maumee, Ohio, Bowling Green, Ohio, Montgomery, Alabama, and Mocksville, North
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Carolina. It also owns a corncob processing and storage facility in Delphi, Indiana and two cob facilities located in Central Illinois. The Company leases a lawn fertilizer warehouse facility in Toledo, Ohio. The Company operates 19 railcar repair facilities and one fabrication shop throughout the country, primarily in the Midwest, South, and West.
The Company also owns an auto service center that is leased to its former venture partner. The Company's administrative office building is leased under a net lease expiring in 2016. The Company currently has an option to purchase 55 acres of land to be used for a new administrative office building. The Company owns approximately 2,029 acres of land on which the above properties and facilities are located and approximately 411 acres of farmland and land held for sale or future use.
The Company believes that its properties are adequate for its business, well maintained and utilized, suitable for their intended uses and adequately insured.
Item 3. Legal Proceedings
The Company has received, and is cooperating fully with, a request for information from the United States Environmental Protection Agency (“U.S. EPA”) regarding the history of its grain and fertilizer facility along the Maumee River in Toledo, Ohio. The U.S. EPA is investigating the possible introduction into the Maumee River of hazardous materials potentially leaching from rouge piles deposited along the riverfront by glass manufacturing operations that existed in the area prior to the Company's initial acquisition of the land in 1960. The Company has on several prior occasions cooperated with local, state and federal regulators to install or improve drainage systems to contain storm water runoff and sewer discharges along its riverfront property to minimize the potential for such leaching. Other area land owners and the successor to the original glass making operations have also been contacted by the U.S. EPA for information. No claim or finding has been asserted thus far.
The Company is also currently subject to various claims and suits arising in the ordinary course of business, which include environmental issues, employment claims, contractual disputes, and defensive counter claims. The Company accrues liabilities where litigation losses are deemed probable and estimable. The Company believes it is unlikely that the results of its current legal proceedings, even if unfavorable, will be materially different from what it currently has accrued. There can be no assurance, however, that any claims or suits arising in the future, whether taken individually or in the aggregate, will not have a material adverse effect on our financial condition or results of operations.
Item 4. Mine Safety
Not applicable.
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Executive Officers of the Registrant
The information is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K. The executive officers of The Andersons, Inc., their positions and ages (as of March 2, 2015) are presented in the table below.
Name | Position | Age | Year Assumed |
Dennis J. Addis | President, Grain Group President, Plant Nutrient Group | 62 | 2012 2000 |
Daniel T. Anderson | President, Retail Group President, Retail Group and Vice President, Corporate Operations Services President, Retail Group | 59 | 2015 2009 1996 |
Michael J. Anderson | Chairman and Chief Executive Officer | 63 | 1999 |
Naran U. Burchinow | Vice President, General Counsel and Secretary | 61 | 2005 |
James C. Burmeister | Vice President, Finance and Treasurer Vice President of Finance, Roofing and Asphalt Business (Owens-Corning) Vice President, Internal Audit (Owens-Corning) Vice President, Finance Operations (Owens-Corning) | 47 | 2015 2013 2011 2008 |
Arthur D. DePompei | Vice President, Human Resources | 61 | 2008 |
John Granato | Chief Financial Officer Principal - Finance & Operations (Global Infrastructure Partners) | 49 | 2012 2009 |
Neill McKinstray | President, Ethanol Group Vice President & General Manager, Ethanol Division | 62 | 2012 2005 |
Harold M. Reed | Chief Operating Officer President, Grain & Ethanol Group | 58 | 2012 2000 |
Anne G. Rex | Vice President, Corporate Controller Assistant Controller | 50 | 2012 2002 |
Rasesh H. Shah | President, Rail Group | 60 | 1999 |
Tamara S. Sparks | Vice President, Corporate Business /Financial Analysis Internal Audit Manager | 46 | 2007 1999 |
Thomas L. Waggoner | Vice President, Marketing and Operations Services President, Turf & Specialty Group | 60 | 2015 2005 |
William J. Wolf | President, Plant Nutrient Group Vice President of Supply & Merchandising, Plant Nutrient Group | 57 | 2012 2008 |
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Part II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The Common Shares of The Andersons, Inc. trade on the Nasdaq Global Select Market under the symbol “ANDE.” On February 18, 2014, the Company effected a three-for-two stock split to its outstanding shares as of January 21, 2014. All share, dividend and per share information set forth in this 10-K has been retroactively adjusted to reflect the stock split. On February 6, 2015, the closing price for the Company's Common Shares was $47.25 per share.
Shareholders
At February 17, 2015, there were approximately 28.8 million common shares outstanding, 1,357 shareholders of record and approximately 13,888 shareholders for whom security firms acted as nominees.
The following table sets forth the high and low bid prices for the Company's Common Shares, retroactively effected for the stock split, for the four fiscal quarters in each of 2014 and 2013.
2014 | 2013 | ||||||
High | Low | High | Low | ||||
Quarter Ended | |||||||
March 31 | $59.26 | $51.63 | $35.68 | $28.79 | |||
June 30 | $64.50 | $45.18 | $36.67 | $33.55 | |||
September 30 | $69.38 | $52.47 | $47.11 | $35.72 | |||
December 31 | $63.73 | $50.15 | $61.55 | $45.72 | |||
The Company's transfer agent and registrar is Computershare Investor Services, LLC, 2 North LaSalle Street, Chicago, IL 60602. Telephone: 312-588-4991.
Dividends
The Company has declared and paid consecutive quarterly dividends since the end of 1996, its first year of trading on the Nasdaq market. Dividends paid from January 2013 to January 2015, retroactively effected for the stock split, are as follows:
Payment Date | Amount | |
1/23/2013 | $0.1067 | |
4/22/2013 | $0.1067 | |
7/22/2013 | $0.1067 | |
10/22/2013 | $0.1067 | |
1/23/2014 | $0.1100 | |
4/22/2014 | $0.1100 | |
7/22/2014 | $0.1100 | |
10/22/2014 | $0.1100 | |
1/23/2015 | $0.1400 | |
While the Company's objective is to pay a quarterly cash dividend, dividends are subject to Board of Director approval.
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Equity Plans
The following table gives information as of December 31, 2014 about the Company's Common Shares that may be issued upon the exercise of options under all of its existing equity compensation plans.
Equity Compensation Plan Information | |||||||
Plan category | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||
Equity compensation plans approved by security holders | 556,505 (1) | $ | 35.34 | 1,996,939 (2) | |||
Equity compensation plans not approved by security holders | — | — | — | ||||
(1) | This number includes 51,579 Share Only Share Appreciation Rights (“SOSARs”), 329,391 performance share units and 175,535 restricted shares outstanding under The Andersons, Inc. 2005 Long-Term Performance Compensation Plan. This number does not include any shares related to the Employee Share Purchase Plan. The Employee Share Purchase Plan allows employees to purchase common shares at the lower of the market value on the beginning or end of the calendar year through payroll withholdings. These purchases are completed as of December 31. |
(2) | This number includes 247,869 Common Shares available to be purchased under the Employee Share Purchase Plan. This number does not include 519,017 outstanding shares under The Andersons, Inc. 20015 Long-term Performance Compensation Plan that will not be issued |
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In 1996, the Company's Board of Directors began approving the repurchase of shares of common stock for use in employee, officer and director stock purchase and stock compensation plans, which reached 4.2 million authorized shares in 2001. The Company purchased 3.1 million shares under this repurchase program. The original resolution was superseded by the Board in October 2007 with a resolution authorizing the repurchase of 1.5 million shares of common stock. The Company repurchased 0.3 million shares under this repurchase program. This resolution was superseded by the Board in October 2014, with a resolution authorizing the repurchase of shares at a value not to exceed $50.0 million. In December 2014, the Company repurchased approximately 17 thousand shares.
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Performance Graph
The graph below compares the total shareholder return on the Corporation's Common Shares to the cumulative total return for the Nasdaq U.S. Index and a Peer Group Index. The indices reflect the year-end market value of an investment in the stock of each company in the index, including additional shares assumed to have been acquired with cash dividends, if any. The Peer Group Index, weighted for market capitalization, includes the following companies:
Agrium, Inc. | Lowe's Companies, Inc. |
Archer-Daniels-Midland Co. | The Greenbrier Companies, Inc. |
GATX Corp. | The Scott's Miracle-Gro Company |
Ingredion Incorporated | |
The graph assumes a $100 investment in The Andersons, Inc. Common Shares on December 31, 2009 and also assumes investments of $100 in each of the Nasdaq U.S. and Peer Group indices, respectively, on December 31 of the first year of the graph. The value of these investments as of the following calendar year-ends is shown in the table below the graph.
Base Period | Cumulative Returns | |||||||||||||||||
December 31, 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||
The Andersons, Inc. | $ | 100.00 | $ | 142.29 | $ | 172.86 | $ | 172.32 | $ | 361.97 | $ | 326.27 | ||||||
NASDAQ U.S. | 100.00 | 118.02 | 117.04 | 137.47 | 192.62 | 221.02 | ||||||||||||
Peer Group Index | 100.00 | 114.49 | 111.05 | 141.27 | 191.67 | 248.28 | ||||||||||||
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Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data of the Company. The data for each of the five years in the period ended December 31, 2014 are derived from the Consolidated Financial Statements of the Company. The data presented below should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations,” included in Item 7, and the Consolidated Financial Statements and notes thereto included in Item 8.
(in thousands, except for per share and ratios and other data) | For the years ended December 31, | ||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
Operating results | |||||||||||||||||||
Sales and merchandising revenues (a) | $ | 4,540,071 | $ | 5,604,574 | $ | 5,272,010 | $ | 4,576,331 | $ | 3,393,791 | |||||||||
Gross profit | 397,139 | 365,225 | 358,005 | 352,852 | 281,679 | ||||||||||||||
Equity in earnings of affiliates | 96,523 | 68,705 | 16,487 | 41,450 | 26,007 | ||||||||||||||
Other income, net (b) | 31,125 | 14,876 | 14,725 | 7,922 | 11,652 | ||||||||||||||
Net income | 122,645 | 95,702 | 75,565 | 96,825 | 64,881 | ||||||||||||||
Net income attributable to The Andersons, Inc. | 109,726 | 89,939 | 79,480 | 95,106 | 64,662 | ||||||||||||||
Financial position | ||||||||||||||
Total assets | 2,364,692 | 2,273,556 | 2,182,304 | 1,734,123 | 1,699,390 | |||||||||
Working capital | 226,741 | 229,451 | 304,346 | 312,971 | 301,815 | |||||||||
Long-term debt (c) | 298,638 | 371,150 | 407,176 | 238,088 | 263,675 | |||||||||
Long-term debt, non-recourse (c) | — | 4,063 | 20,067 | 797 | 13,150 | |||||||||
Total equity | 824,049 | 724,421 | 611,445 | 538,842 | 464,559 | |||||||||
Cash flows / liquidity | ||||||||||||||
Cash flows from (used in) operations | (10,071 | ) | 337,188 | 328,482 | 290,265 | (239,285 | ) | |||||||
Depreciation and amortization | 62,005 | 55,307 | 48,977 | 40,837 | 38,913 | |||||||||
Cash invested in acquisitions (d) | (20,037 | ) | (15,252 | ) | (220,257 | ) | (2,365 | ) | (39,293 | ) | ||||
Investment in affiliates (e) | (238 | ) | (49,251 | ) | — | (121 | ) | (395 | ) | |||||
Investments in property, plant and equipment | (59,675 | ) | (46,786 | ) | (69,274 | ) | (44,162 | ) | (30,897 | ) | ||||
Net proceeds from (investment in) Rail Group assets (f) | (57,968 | ) | 4,648 | (20,397 | ) | (33,763 | ) | 1,748 | ||||||
EBITDA (g) | 254,992 | 219,917 | 195,180 | 212,252 | 162,702 | |||||||||
Per share data (h) | ||||||||||||||
Net income - basic | 3.85 | 3.20 | 2.85 | 3.42 | 2.34 | |||||||||
Net income - diluted | 3.84 | 3.18 | 2.82 | 3.39 | 2.32 | |||||||||
Dividends paid | 0.4700 | 0.4300 | 0.4000 | 0.2933 | 0.2383 | |||||||||
Year-end market value | 53.14 | 59.45 | 28.60 | 29.11 | 24.23 | |||||||||
Ratios and other data | ||||||||||||||
Net income attributable to The Andersons, Inc. return on beginning equity attributable to The Andersons, Inc. | 15.6 | % | 15.1 | % | 15.2 | % | 21.1 | % | 16.4 | % | ||||
Funded long-term debt to equity ratio (i) | 0.4-to-1 | 0.5-to-1 | 0.7-to-1 | 0.4-to-1 | 0.6-to-1 | |||||||||
Weighted average shares outstanding (000's) | 28,367 | 27,986 | 27,784 | 27,686 | 27,534 | |||||||||
Effective tax rate | 33.4 | % | 36.0 | % | 37.1 | % | 34.5 | % | 37.7 | % | ||||
(a) Includes sales of $1,064.4 million in 2014, $1,333.2 million in 2013, $1,359.4 million in 2012, $1,385.4 million in 2011, $982.2 million in 2010 pursuant to marketing and origination agreements between the Company and the unconsolidated ethanol LLCs.
(b) Includes $17.1 million for the gain on partial share redemption of the LTG investment in 2014.
(c) Excludes current portion of long-term debt. The increase in non-recourse debt in 2012 is related to the debt held by TADE.
(d) During 2012, the Company acquired the assets of Green Plains Grain, TADE, Mt. Pulaski and 100% of the stock of New Eezy Gro.
(e) During 2013, the Company and LTG established 50/50 joint ventures to acquire 100% of the stock of Thompsons Limited and its related U.S. operating company.
(f) Represents the net of purchases of Rail Group assets offset by proceeds on sales of Rail Group assets.
(g) Earnings before interest, taxes, depreciation and amortization, or EBITDA, is a non-GAAP measure. It is one of the measures the Company uses to evaluate its liquidity. The Company believes that EBITDA provides additional information important to investors and others in determining its ability to meet debt service obligations. EBITDA does not represent and should not be considered as an alternative to net income or cash flow from operations as determined by generally accepted accounting principles. EBITDA does not necessarily indicate
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whether cash flow will be sufficient to meet cash requirements for debt service obligations or otherwise. Because EBITDA, as determined by the Company, excludes some, but not all, items that affect net income, it may not be comparable to EBITDA or similarly titled measures used by other companies.
(h) Earnings per share are calculated based on Income attributable to The Andersons, Inc, retroactively adjusted to consider the three-for-two stock split.
(i) Calculated by dividing long-term debt by total year-end equity as stated under “Financial position.”
The following table sets forth (1) our calculation of EBITDA and (2) a reconciliation of EBITDA to our net cash flow provided by (used in) operations.
For the years ended December 31, | |||||||||||||||||||
(in thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||
Net income attributable to The Andersons, Inc. | $ | 109,726 | $ | 89,939 | $ | 79,480 | $ | 95,106 | $ | 64,662 | |||||||||
Add: | |||||||||||||||||||
Provision for income taxes | 61,501 | 53,811 | 44,568 | 51,053 | 39,262 | ||||||||||||||
Interest expense | 21,760 | 20,860 | 22,155 | 25,256 | 19,865 | ||||||||||||||
Depreciation and amortization | 62,005 | 55,307 | 48,977 | 40,837 | 38,913 | ||||||||||||||
EBITDA | 254,992 | 219,917 | 195,180 | 212,252 | 162,702 | ||||||||||||||
Add/(subtract): | |||||||||||||||||||
Provision for income taxes | (61,501 | ) | (53,811 | ) | (44,568 | ) | (51,053 | ) | (39,262 | ) | |||||||||
Interest expense | (21,760 | ) | (20,860 | ) | (22,155 | ) | (25,256 | ) | (19,865 | ) | |||||||||
Realized gains on Rail Group assets and related leases | (15,830 | ) | (19,366 | ) | (23,665 | ) | (8,417 | ) | (7,771 | ) | |||||||||
Gain on sale of investments in affiliates | (17,055 | ) | — | — | — | — | |||||||||||||
Deferred income taxes | 21,815 | 40,374 | 16,503 | 5,473 | 12,205 | ||||||||||||||
Excess tax benefit from share-based payment arrangement | (1,806 | ) | (1,001 | ) | (162 | ) | (307 | ) | (876 | ) | |||||||||
Equity in earnings of unconsolidated affiliates, net of distributions received | 28,749 | (50,953 | ) | 8,134 | (23,591 | ) | (17,594 | ) | |||||||||||
Noncontrolling interest in income (loss) of affiliates | 12,919 | 5,763 | (3,915 | ) | 1,719 | 219 | |||||||||||||
Changes in working capital and other | (210,594 | ) | 217,125 | 203,130 | 179,445 | (329,043 | ) | ||||||||||||
Net cash provided by (used in) operations | $ | (10,071 | ) | $ | 337,188 | $ | 328,482 | $ | 290,265 | $ | (239,285 | ) | |||||||
The Company has included its Computation of Earnings to Fixed Charges in Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K as Exhibit 12.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
The following “Management's Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements which relate to future events or future financial performance and involve known and unknown risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by these forward-looking statements. You are urged to carefully consider these risks and factors, including those listed under Item 1A, “Risk Factors.” In some cases, you can identify forward-looking statements by terminology such as “may,” “anticipates,” “believes,” “estimates,” “predicts,” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. These forward-looking statements relate only to events as of the date on which the statements are made and the Company undertakes no obligation, other than any imposed by law, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Executive Overview
Our operations are organized, managed and classified into six reportable business segments: Grain, Ethanol, Plant Nutrient, Rail, Turf & Specialty and Retail. Each of these segments is based on the nature of products and services offered.
The agricultural commodity-based business is one in which changes in selling prices generally move in relationship to changes in purchase prices. Therefore, increases or decreases in prices of the agricultural commodities that the business deals in will have a relatively equal impact on sales and cost of sales and a much less significant impact on gross profit. As a result, changes in sales for the period may not necessarily be indicative of the overall performance of the business and more focus should be placed on changes to merchandising revenues and service income.
Grain Group
The Grain Group completed several acquisitions during the fourth quarter of 2014, the most significant was Auburn Bean and Grain, which included six grain and four agronomy assets. The six grain locations will provide additional storage capacity of approximately 18.1 million bushels, enhancing our presence in Michigan, which is one of our core states. The agronomy assets will provide additional storage capacity of 16.0 thousand tons of dry and 3.7 million gallons of liquid nutrient and will be part of our Plant Nutrient Group. We also acquired two San Antonio, Texas-based, food grade grain companies as we continue to expand our food grade corn business.
During the first quarter of 2014, we entered into an agreement with LTG for a partial share redemption of our investment in LTG. The transaction lowered our ownership stake in the company and resulted in a pre-tax gain of $17.1 million, net of deal costs.
Total grain storage capacity is approximately 162 million bushels as of December 31, 2014 compared to 139 million bushels at December 31, 2013. Grain inventories on hand at December 31, 2014 were 109.5 million bushels, of which 3.1 million bushels were stored for others. This compares to 96.9 million bushels on hand at December 31, 2013, of which 13.3 million bushels were stored for others.
Excluding the LTG gain noted above, 2014 results were adversely impacted by a number of one-time items primarily related to asset write-downs and impairments. The harvest was protracted in a number of states in which the Company does business, primarily due to weather conditions. As such space income improved over the prior year, but it was offset by higher expenses, lower margin on grain sales and lower trading profits. Further, the Iowa market has proved to be extremely competitive, reducing our ability to earn space income and leading to lower volumes and lower margins on volumes we do receive. Nearly 467 million bushels were shipped by our grain facilities during the year, an increase of 1%. The slight increase in volume primarily relates to the addition of the acquired locations in the fourth quarter of 2014.
Corn acres to be planted in 2015 are estimated to be 88 to 89 million acres, which is down two to three percent from 2014. Soybean acres to be planted are estimated to be approximately 85 million acres, which is similar to or slightly higher than 2014. Assuming trend yields in the areas the Company does business, this should create a good base for the Company's Grain Group in 2015. In 2015, our Grain Group will also continue its focus on integrating recent acquisitions, continued implementation of the new ERP system and enhancing risk management and grain marketing services.
Ethanol Group
The Ethanol Group was able to perform at record levels in 2014 due to strong margins realized by the ethanol LLCs. While the average price of ethanol decreased over the prior year, a significant drop in corn prices allowed the spread between corn and
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ethanol prices to remain in strong positive correlation as ethanol export demand remained high. Early 2015 ethanol margins are well below 2014 margins, and are expected to average lower for the full year. However, we believe margins will improve through 2015. Factors impacting current margins include lower crude price, greater ethanol production and marginally rising ethanol stocks. Higher gasoline demand, improved demand and prices for DDG in relation to corn price, an ample corn supply, and the potential for improved export demand as the year progresses could contribute to improved ethanol margins later in the year.
Volumes shipped for the year ended December 31, 2014 and 2013 were as follows:
Twelve months ended December 31, | |||||
(in thousands) | 2014 | 2013 | |||
Ethanol (gallons shipped) | 293,410 | 288,134 | |||
E-85 (gallons shipped) | 27,482 | 23,719 | |||
Corn Oil (pounds shipped) | 85,480 | 85,100 | |||
DDG (tons shipped) | 166 | 174 | |||
The above table shows only shipped volumes that flow through the Company's sales revenues. Total ethanol and DDG production by the unconsolidated LLCs are higher, however, the portion of this volume that is sold directly to their customers is excluded here.
Plant Nutrient Group
While the Plant Nutrient Group experienced a slight increase in volumes for the year, the fourth quarter of 2014 saw a significantly lower volume compared to 2013 due to a late harvest, weather challenges, and logistical issues. If there is normal spring weather, we expect some of this volume to shift into the first half of 2015. Looking ahead, the anticipated acres to be planted creates a good environment for us to participate in as well.
As noted above, the Auburn Bean and Grain acquisition provided four additional agronomy locations, with increased dry and liquid nutrient capacity. Total storage capacity at our wholesale nutrient and farm center facilities was approximately 507 thousand tons for dry nutrients and approximately 444 thousand tons for liquid nutrients at December 31, 2014.
Fertilizer tons shipped (including sales and service tons) for the year ended December 31, 2014 and 2013 were as follows:
(in thousands) | Twelve months ended December 31, | ||||
2014 | 2013 | ||||
Sales tons | 1,717 | 1,690 | |||
Service tons | 251 | 248 | |||
Total tons | 1,968 | 1,938 | |||
As announced during the fourth quarter of 2014, the Plant Nutrient Group will merge with the Turf & Specialty Group in 2015. We believe this merger will allow the groups to operate under a common strategy to better service our customers, boost growth opportunities and improve profitability.
Rail Group
The Rail Group experienced improved results from its base leasing business in 2014. Rail Group assets under management (owned, leased or managed for financial institutions in non-recourse arrangements) at December 31, 2014 were 22,716 compared to 22,700 at December 31, 2013. The average utilization rate (Rail Group assets under management that are in lease service, exclusive of those managed for third-party investors) is 89.5% for the year ended December 31, 2014 which is nearly 3.4% higher than prior year.
For the year ended December 31, 2014, Rail had gains on sales of Rail Group assets and related leases in the amount of $15.8 million compared to $19.4 million of gains on sales of Rail Group assets and related leases for the year ended December 31, 2013.
A focus of the Group in 2015 will be to strategically grow the rail fleet and continue to look for opportunities to open new repair facilities and other adjacent businesses. We also anticipate future repair business related to potential mandated modifications in the tank car industry.
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Turf & Specialty Group
The Turf & Specialty Group had disappointing results in 2014. The turf business was negatively impacted early in the year by poor weather conditions that led to both production down-time and product delivery issues. The Cob business had significantly higher expenses this year as it invested in both electrical and operational improvements at certain locations and saw declining sales in both the fracking and cat litter product lines. However, we finished 2014 stronger than 2013 with much of improvement coming from the addition of the Mocksville, North Carolina facility which was acquired at the end of 2013. The Group has strategically built its inventories and is well-positioned to meet the demand in Spring of 2015.
Retail Group
The retail industry is highly competitive. Our stores compete with a variety of retail merchandisers, including home centers, department and hardware stores, as well as local and national grocers. The Retail Group continues to work on new departments and products and reduce costs to maximize the profitability.
Other
Our “Other” represents corporate functions that provide support and services to the operating segments. The results contained within this group include expenses and benefits not allocated back to the operating segments, including our ERP project.
Operating Results
The following discussion focuses on the operating results as shown in the Consolidated Statements of Income with a separate discussion by segment. Additional segment information is included in Note 7 to the Company's Consolidated Financial Statements in Item 8.
Year ended December 31, | |||||||||||
(in thousands) | 2014 | 2013 | 2012 | ||||||||
Sales and merchandising revenues | $ | 4,540,071 | $ | 5,604,574 | $ | 5,272,010 | |||||
Cost of sales and merchandising revenues | 4,142,932 | 5,239,349 | 4,914,005 | ||||||||
Gross profit | 397,139 | 365,225 | 358,005 | ||||||||
Operating, administrative and general expenses | 318,881 | 278,433 | 246,929 | ||||||||
Interest expense | 21,760 | 20,860 | 22,155 | ||||||||
Equity in earnings of affiliates | 96,523 | 68,705 | 16,487 | ||||||||
Other income, net | 31,125 | 14,876 | 14,725 | ||||||||
Income before income taxes | 184,146 | 149,513 | 120,133 | ||||||||
Income (loss) attributable to noncontrolling interests | 12,919 | 5,763 | (3,915 | ) | |||||||
Operating income | $ | 171,227 | $ | 143,750 | $ | 124,048 | |||||
Comparison of 2014 with 2013
Grain Group
Year ended December 31, | |||||||
(in thousands) | 2014 | 2013 | |||||
Sales and merchandising revenues | $ | 2,682,038 | $ | 3,617,943 | |||
Cost of sales and merchandising revenues | 2,550,909 | 3,499,426 | |||||
Gross profit | 131,129 | 118,517 | |||||
Operating, administrative and general expenses | 113,311 | 97,398 | |||||
Interest expense | 8,785 | 9,567 | |||||
Equity in earnings of affiliates | 27,643 | 33,122 | |||||
Other income, net | 21,450 | 2,120 | |||||
Income before income taxes | 58,126 | 46,794 | |||||
Loss attributable to noncontrolling interests | (10 | ) | (11 | ) | |||
Operating income | $ | 58,136 | $ | 46,805 | |||
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Operating results for the Grain Group increased $11.3 million compared to full year 2013 results. Sales and merchandising revenues decreased $936 million over 2013 and are almost entirely a result of a decrease in commodity prices. Total bushels shipped increased by one percent, but average commodity prices decreased almost 30 percent, including corn prices down 34 percent and soybean prices down 16 percent during the year. Cost of sales and merchandising revenues decreased $949 million following the decrease in average commodity prices. Gross profit increased $12.6 million due to increased space income. Most of the increase relates to wheat, but corn and beans also contributed to the increase.
Operating expenses were $15.9 million higher than 2013. Approximately half of the increase in operating expenses relates to labor and benefit costs, including growth and incentive compensation expense. A significant portion of the remaining increase relates to the three acquisitions completed in the fourth quarter and approximately $6.6 million of one-time items, primarily asset write-downs and impairments. Equity in earnings of affiliates decreased $5.5 million due to a decreased ownership percentage of the investment in LTG and lower 2014 operating results of LTG. This decrease was partially offset by an additional $5.0 million in earnings from our Thompsons Limited investment. Other income increased $19.3 million, of which is almost entirely due to the gain recognized from the partial share redemption in our investment of LTG.
Ethanol Group
Year ended December 31, | |||||||
(in thousands) | 2014 | 2013 | |||||
Sales and merchandising revenues | $ | 765,939 | $ | 831,965 | |||
Cost of sales and merchandising revenues | 717,882 | 799,453 | |||||
Gross profit | 48,057 | 32,512 | |||||
Operating, administrative and general expenses | 11,719 | 11,082 | |||||
Interest expense | 255 | 1,038 | |||||
Equity in earnings of affiliates | 68,880 | 35,583 | |||||
Other income, net | 223 | 399 | |||||
Income before income taxes | 105,186 | 56,374 | |||||
Income attributable to noncontrolling interests | 12,929 | 5,774 | |||||
Operating income | $ | 92,257 | $ | 50,600 | |||
Operating results for the Ethanol Group increased $41.7 million compared to full year 2013 results. Sales and merchandising and service fee revenues decreased $66 million, with 60 percent of the decrease related to ethanol sales. While ethanol gallons sold increased almost two percent, average ethanol prices decreased eight percent. DDG volumes remained flat but average price per ton decreased greater than 25 percent compared to the prior year. Cost of sales and merchandising revenues decreased $82 million following the decrease in average corn, ethanol, and DDG prices. Gross profit increased $15.5 million and is attributed to the increase in ethanol demand and the prices of ethanol and DDG relative to corn prices which contributed to more favorable margins.
Equity in earnings of affiliates increased $33.3 million from prior year and represents income from investments in three unconsolidated ethanol LLCs. Throughout the year, the ethanol facilities' performance improved due to higher ethanol margins resulting from the decreased corn costs and higher demand for ethanol. The increase in income attributable to noncontrolling interests increased due to stronger earnings at the ethanol facilities that have noncontrolling interest owners.
Plant Nutrient Group
Year ended December 31, | |||||||
(in thousands) | 2014 | 2013 | |||||
Sales and merchandising revenues | $ | 668,124 | $ | 708,654 | |||
Cost of sales and merchandising revenues | 580,505 | 621,972 | |||||
Gross profit | 87,619 | 86,682 | |||||
Operating, administrative and general expenses | 63,300 | 57,188 | |||||
Interest expense | 3,736 | 3,312 | |||||
Other income, net | 3,262 | 1,093 | |||||
Operating income | $ | 23,845 | $ | 27,275 | |||
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Operating results for the Plant Nutrient Group decreased $3.4 million compared to full year 2013 results. Sales and merchandising revenues decreased $40.5 million due to a nine percent decrease in the average price per ton sold, which followed the price of nutrients in the market. Volumes were up less than two percent during the year, having little impact on the change in revenues. Cost of sales and merchandising revenues decreased $41.5 million, also primarily due to lower costs per ton sold, comparable with the selling price decrease and reflective of the market. This resulted in a marginal increase in gross profit for the year.
Operating expenses increased $6.1 million from the prior year, due to increases in labor expense and additional depreciation from the current year acquisition and other recent capital projects. Other income increased $2.2 million in 2014 and is due to the settlement of a legal claim during the third quarter of 2014.
Rail Group
Year ended December 31, | |||||||
(in thousands) | 2014 | 2013 | |||||
Sales and merchandising revenues | $ | 148,954 | $ | 164,794 | |||
Cost of sales and merchandising revenues | 89,192 | 105,930 | |||||
Gross profit | 59,762 | 58,864 | |||||
Operating, administrative and general expenses | 24,164 | 18,201 | |||||
Interest expense | 7,247 | 5,544 | |||||
Other income, net | 3,094 | 7,666 | |||||
Operating income | $ | 31,445 | $ | 42,785 | |||
Operating results for the Rail Group decreased $11.3 million compared to the full year 2013 results. Sales and merchandising revenues decreased $15.8 million. The decrease was driven by a decrease in car sales of $23.0 million, offset by a repairs and fabrication sales increase of $3.3 million and leasing revenues increase of $3.5 million. Cost of sales and merchandising revenues decreased $16.7 million, primarily as a result of lower car sales. As a result, Rail gross profit increased only slightly over the prior year.
Operating expenses increased by $6.0 million from prior year mainly due to higher labor and benefits costs, depreciation, and maintenance expense from recent expansion in the repair business. This increase includes $3.2 million of additional freight and maintenance expense incurred to move idle railcars into service. Interest expense increased $1.7 million due to the increase in financing costs for our increase in railcars owned. Other income decreased $4.6 million due to income from the settlement of two nonperforming railcar leases in 2013.
Turf & Specialty Group
Year ended December 31, | |||||||
(in thousands) | 2014 | 2013 | |||||
Sales and merchandising revenues | $ | 134,209 | $ | 140,512 | |||
Cost of sales and merchandising revenues | 104,889 | 111,223 | |||||
Gross profit | 29,320 | 29,289 | |||||
Operating, administrative and general expenses | 28,219 | 23,998 | |||||
Interest expense | 1,542 | 1,237 | |||||
Other income, net | 1,110 | 690 | |||||
Operating income | $ | 669 | $ | 4,744 | |||
Operating results for the Turf & Specialty Group decreased $4.1 million compared to full year 2013 results. Sales and merchandising revenues decreased $6.3 million due to a two percent decrease in volume and a four percent decrease in average price per ton in the lawn fertilizer business. Cost of sales and merchandising revenues also decreased $6.3 million due to a six percent decrease in average cost per ton in the lawn fertilizer business. Despite the decreases in volume and price, gross profit remained flat due to favorable product mix.
Operating expenses increased $4.2 million due to an increase in labor and benefit costs, and depreciation expense due to the impact of a full year of activity from the December 2013 acquisition.
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Retail Group
Year ended December 31, | |||||||
(in thousands) | 2014 | 2013 | |||||
Sales and merchandising revenues | $ | 140,807 | $ | 140,706 | |||
Cost of sales and merchandising revenues | 99,555 | 101,345 | |||||
Gross profit | 41,252 | 39,361 | |||||
Operating, administrative and general expenses | 42,161 | 46,707 | |||||
Interest expense | 666 | 689 | |||||
Other income, net | 955 | 501 | |||||
Operating loss | $ | (620 | ) | $ | (7,534 | ) | |
The operating results for the Retail Group improved $6.9 million compared to full year 2013 results. Sales and merchandising revenues remained flat, while cost of sales and merchandising revenues decreased $1.8 million due to favorable product mix. Despite lower volumes, gross profit increased $1.9 million primarily due to stronger margins realized in the workwear, deli, and seafood departments.
Operating expenses for the Group decreased $4.5 million due to lower costs attributable to the closing of the Woodville store in 2013 and the asset impairment charges in the amount of $3.9 million in the fourth quarter of 2013.
Other
Year ended December 31, | |||||||
(in thousands) | 2014 | 2013 | |||||
Sales and merchandising revenues | $ | — | $ | — | |||
Cost of sales and merchandising revenues | — | — | |||||
Gross profit | — | — | |||||
Operating, administrative and general expenses | 36,007 | 23,859 | |||||
Interest expense (income) | (471 | ) | (527 | ) | |||
Equity in earnings of affiliates | — | — | |||||
Other income, net | 1,031 | 2,407 | |||||
Operating loss | $ | (34,505 | ) | $ | (20,925 | ) | |
The net corporate operating loss (costs not allocated back to the business units) increased $13.6 million to a loss of $34.5 million for 2014. Within operating expenses, the most significant increase was spending on the implementation of an ERP system, as the first phase of implementation began in the second quarter of 2014. As such, much of the post-implementation spend in the current year is expense in nature, while the prior year spend was dedicated to software development and was capital in nature. Stock compensation expense was higher in 2014 due to the 2013 grants not being granted until the fourth quarter. Labor and benefit costs were also higher in 2014 due to increased headcount.
Income Taxes
Income tax expense of $61.5 million was provided at 33.4%. In 2013, income tax expense of $53.8 million was provided at 36.0%. The decrease in the effective tax rate was due primarily to a $1.9 million increase in 2014 tax benefits related to the Domestic Production Activities Deduction, a $2.5 million increase in tax benefits related to income attributable to the noncontrolling interests that did not impact income tax expense, and the $1.4 million tax charge recorded in the first quarter of 2013 with respect to the accounting for the other comprehensive income portion of the Company’s retiree health care plan liability and the Medicare Part D subsidy.
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Comparison of 2013 with 2012
Grain Group
Year ended December 31, | |||||||
(in thousands) | 2013 | 2012 | |||||
Sales and merchandising revenues | $ | 3,617,943 | $ | 3,293,632 | |||
Cost of sales and merchandising revenues | 3,499,426 | 3,176,452 | |||||
Gross profit | 118,517 | 117,180 | |||||
Operating, administrative and general expenses | 97,398 | 73,037 | |||||
Interest expense | 9,567 | 12,174 | |||||
Equity in earnings of affiliates | 33,122 | 29,080 | |||||
Other income, net | 2,120 | 2,548 | |||||
Income before income taxes | 46,794 | 63,597 | |||||
Loss attributable to noncontrolling interests | (11 | ) | — | ||||
Operating income | $ | 46,805 | $ | 63,597 | |||
Operating results for the Grain Group decreased $16.8 million compared to full year 2012 results. Sales and merchandising revenues increased $324.3 million over 2012 as a result of an increase in bushels shipped for all commodities (including newly acquired facilities) and was partially offset by a decrease in the average price per bushel sold for corn, wheat and soybeans. Cost of sales and merchandising revenues increased $323 million due to the higher volume of sales and merchandising revenues. Gross profit increased $1.3 million due to high volumes, partially offset by the reduced space income in 2013 as compared to the prior year.
Operating expenses were $24.4 million higher than 2012. A large portion of the increase is higher labor and benefits related to organizational growth (including previously mentioned acquired facilities), depreciation expense due to increased capital investment, and utilities expense due to a wet harvest that required additional drying. Interest expense decreased $2.6 million due to fewer ownership bushels and lower grain prices resulting in lower inventory values. Equity in earnings of affiliates increased $4.0 million due to the continued strong performance of LTG and five months of income from the Thompsons Limited joint venture. Other income did not fluctuate significantly from prior year.
Ethanol Group
Year ended December 31, | |||||||
(in thousands) | 2013 | 2012 | |||||
Sales and merchandising revenues | $ | 831,965 | $ | 742,929 | |||
Cost of sales and merchandising revenues | 799,453 | 728,256 | |||||
Gross profit | 32,512 | 14,673 | |||||
Operating, administrative and general expenses | 11,082 | 9,004 | |||||
Interest expense | 1,038 | 759 | |||||
Equity in earnings (loss) of affiliates | 35,583 | (12,598 | ) | ||||
Other income, net | 399 | 53 | |||||
Income (loss) before income taxes | 56,374 | (7,635 | ) | ||||
Income (loss) attributable to noncontrolling interests | 5,774 | (3,915 | ) | ||||
Operating income (loss) | $ | 50,600 | $ | (3,720 | ) | ||
Operating results for the Ethanol Group improved $54.3 million from the full year 2012 results to operating income of $50.6 million. Sales and merchandising and service fee revenues increased $89 million due to an increase in both volume of ethanol gallons shipped (including a full year of the Denison, Iowa plant acquired in May 2012) as well as the higher average price per gallon of ethanol sold. Ethanol co-product (corn oil and DDG) sales also contributed to the significant increase in revenues over the prior year. The increase in cost of sales primarily relates to the increase in volume as corn costs were down considerably during 2013. The increase in gross profit is mostly attributable to improvement in Denison's margins from declining corn costs and higher ethanol demand and price.
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Operating expenses increased $2.1 million primarily due to higher labor related expenses, including performance incentives and a full year of Denison plant expenses. Equity in earnings of affiliates increased $48.2 million from prior year and represents income from investments in three unconsolidated ethanol LLCs. Throughout the year, the LLCs performance improved due to higher ethanol margins resulting from the decreased corn costs and higher demand for ethanol. Income attributable to noncontrolling interests was impacted in a similar manner. There were no significant changes in interest expense or other income.
Plant Nutrient Group
Year ended December 31, | |||||||
(in thousands) | 2013 | 2012 | |||||
Sales and merchandising revenues | $ | 708,654 | $ | 797,033 | |||
Cost of sales and merchandising revenues | 621,972 | 698,781 | |||||
Gross profit | 86,682 | 98,252 | |||||
Operating, administrative and general expenses | 57,188 | 58,088 | |||||
Interest expense | 3,312 | 2,832 | |||||
Equity in earnings of affiliates | — | 5 | |||||
Other income, net | 1,093 | 1,917 | |||||
Operating income | $ | 27,275 | $ | 39,254 | |||
Operating results for the Plant Nutrient Group were $12.0 million lower than 2012 results. Sales were $88.4 million lower due to a decrease in both the average price per ton sold and volume for the year in the wholesale nutrient business. Cost of sales and merchandising revenues decreased $76.8 million due primarily to lower product cost. Gross profit decreased $11.6 million as a result of lower margin per ton sold as well as the decline in volume year over year.
Operating expenses were slightly lower in 2013 primarily due to lower performance incentive expense. Other income was higher in 2012 due to gains recognized on assets that were involuntarily converted. There were no significant changes in equity in earnings of affiliates and interest expense.
Rail Group
Year ended December 31, | |||||||
(in thousands) | 2013 | 2012 | |||||
Sales and merchandising revenues | $ | 164,794 | $ | 156,426 | |||
Cost of sales and merchandising revenues | 105,930 | 99,697 | |||||
Gross profit | 58,864 | 56,729 | |||||
Operating, administrative and general expenses | 18,201 | 16,217 | |||||
Interest expense | 5,544 | 4,807 | |||||
Other income, net | 7,666 | 7,136 | |||||
Operating income | $ | 42,785 | $ | 42,841 | |||
Operating results for the Rail Group were relatively consistent year over year. Revenues related to car sales increased $1.0 million, repairs and fabrication increased $3.9 million and leasing revenues increased $3.5 million. The increase in leasing revenues is attributable to higher lease rates, as well as having more cars in service, while the remaining increases were driven by higher volume of activity. Cost of sales and merchandising revenues increased $6.2 million as a result of higher volume of activity. Rail gross profit increased $2.1 million compared to prior year primarily due to higher gross profit in the leasing business which is attributed to favorable lease rates.
Operating expenses increased by $2.0 million from prior year mainly due to higher labor and benefits related to growth and higher performance incentives. Interest expense was higher due to a greater amount of car financings and debt related to the new blast and paint facility opened in 2013. Other income was slightly higher in 2013 due to income from the settlement of two nonperforming railcar leases.
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Turf & Specialty Group
Year ended December 31, | |||||||
(in thousands) | 2013 | 2012 | |||||
Sales and merchandising revenues | $ | 140,512 | $ | 131,026 | |||
Cost of sales and merchandising revenues | 111,223 | 104,000 | |||||
Gross profit | 29,289 | 27,026 | |||||
Operating, administrative and general expenses | 23,998 | 24,361 | |||||
Interest expense | 1,237 | 1,233 | |||||
Other income, net | 690 | 784 | |||||
Operating income | $ | 4,744 | $ | 2,216 | |||
Operating results for the Turf & Specialty Group increased $2.5 million compared to its 2012 results. Sales increased $9.5 million and is due to an increase in sales within the cob business year over year. This increase is primarily attributable to the acquisition of Mt. Pulaski in the fourth quarter of 2012 which more than doubled the Group's cob supply. For the total Group, volume increased over 15% and was partially offset by a decrease in the average price per ton sold. Cost of sales and merchandising revenues increased $7.2 million due to volume as the average cost per ton was lower year over year. Gross profit increased $2.3 million due to favorable product mix.
Operating expenses decreased as a result of continuous improvement efforts that led to greater process efficiencies. Interest expense and other income were fairly stable year over year.
Retail Group
Year ended December 31, | |||||||
(in thousands) | 2013 | 2012 | |||||
Sales and merchandising revenues | $ | 140,706 | $ | 150,964 | |||
Cost of sales and merchandising revenues | 101,345 | 106,819 | |||||
Gross profit | 39,361 | 44,145 | |||||
Operating, administrative and general expenses | 46,707 | 47,874 | |||||
Interest expense | 689 | 776 | |||||
Other income, net | 501 | 554 | |||||
Operating loss | $ | (7,534 | ) | $ | (3,951 | ) | |
The operating loss for the Retail Group was $7.5 million compared to its 2012 loss of $4.0 million. Sales decreased $10.3 million from 2012 due to a decline in both the average sale per customer and customer count, as well as closure of the Woodville store in the first quarter of 2013. Cost of sales decreased $5.5 million due to lower sales volume. As a result of the lower store traffic, gross profit decreased $4.8 million.
Operating expenses for the Group decreased $1.2 million and is primarily due to lower labor and benefits, partly attributable to the closing of the Woodville store. The Group also incurred asset impairment charges in the amount of $3.9 million in the fourth quarter of 2013. There were no significant changes in interest expense or other income.
Other
Year ended December 31, | |||||||
(in thousands) | 2013 | 2012 | |||||
Sales and merchandising revenues | $ | — | $ | — | |||
Cost of sales and merchandising revenues | — | — | |||||
Gross profit | — | — | |||||
Operating, administrative and general expenses | 23,859 | 18,348 | |||||
Interest income | (527 | ) | (426 | ) | |||
Equity in earnings of affiliates | — | — | |||||
Other income, net | 2,407 | 1,733 | |||||
Operating loss | $ | (20,925 | ) | $ | (16,189 | ) | |
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The net corporate operating loss (costs not allocated back to the business units) increased $4.7 million to a loss of $20.9 million for 2013. Operating expenses were higher due to an increase in labor and benefits related expenses (including incentive compensation), community giving, and ongoing expenses incurred related to the phased implementation of an enterprise resource planning system. Other income was higher in 2013 due to earnings on deferred compensation plan assets. Interest income did not change significantly year over year.
Income Taxes
Income tax expense of $53.8 million was provided at 36.0%. In 2012, income tax expense of $44.6 million was provided at 37.1%. The decrease in the effective tax rate was due primarily to a $0.9 million decrease in state and local income taxes and a $3.4 million tax decrease due to income attributable to the noncontrolling interests that did not impact income tax expense. These were partially offset by a $1.4 million tax charge recorded in the first quarter with respect to the accounting for the other comprehensive income portion of the Company’s retiree health care plan liability and the Medicare Part D subsidy.
Liquidity and Capital Resources
Working Capital
At December 31, 2014, the Company had working capital of $226.7 million, a decrease of $2.7 million from the prior year. This decrease was attributable to changes in the following components of current assets and current liabilities:
(in thousands) | December 31, 2014 | December 31, 2013 | Variance | ||||||||
Current Assets: | |||||||||||
Cash and cash equivalents | $ | 114,704 | $ | 309,085 | $ | (194,381 | ) | ||||
Restricted cash | 429 | 408 | 21 | ||||||||
Accounts receivables, net | 183,059 | 173,930 | 9,129 | ||||||||
Inventories | 795,655 | 614,923 | 180,732 | ||||||||
Commodity derivative assets – current | 92,771 | 71,319 | 21,452 | ||||||||
Deferred income taxes | 7,337 | 4,931 | 2,406 | ||||||||
Other current assets | 60,492 | 47,188 | 13,304 | ||||||||
Total current assets | 1,254,447 | 1,221,784 | 32,663 | ||||||||
Current Liabilities: | |||||||||||
Short-term debt | 2,166 | — | 2,166 | ||||||||
Accounts payable for grain | 535,974 | 592,183 | (56,209 | ) | |||||||
Other accounts payable | 170,849 | 154,599 | 16,250 | ||||||||
Customer prepayments and deferred revenue | 99,617 | 59,304 | 40,313 | ||||||||
Commodity derivative liabilities – current | 64,075 | 63,954 | 121 | ||||||||
Accrued expenses and other current liabilities | 78,610 | 70,295 | 8,315 | ||||||||
Current maturities of long-term debt | 76,415 | 51,998 | 24,417 | ||||||||
Total current liabilities | 1,027,706 | 992,333 | 35,373 | ||||||||
Working capital | $ | 226,741 | $ | 229,451 | $ | (2,710 | ) | ||||
In comparison to the prior year, current assets slightly increased primarily as a result of higher inventory levels, commodity derivative assets, and other assets, offset by a significant decrease in cash. Much of the decrease in cash relates to a high level of cash margin calls at the end of 2014, fourth quarter Rail Group asset purchases, and lower levels of hold pay (grain we have purchased but not yet paid for). See the discussion below on additional sources and uses of cash for an understanding of the change in cash from prior year. Despite lower commodity prices, inventory increased $138 million in the Grain group due to the inventory added as part of the acquisitions, along with more bean and wheat bushels in inventory at the end of 2014. The Plant Nutrient group's inventory increased $31 million due to higher average inventory costs and increased inventory on hand, along with the inventory added for the agronomy portion of the fourth quarter acquisition. Commodity derivative assets and liabilities have increased and reflect the customer net asset or liability based on the value of forward contracts as compared to market prices at the end of the period. Other current assets increased primarily due to higher advanced inventory purchases for our wholesale nutrient business.
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Current liabilities increased primarily as a result of higher customer prepayments and deferred revenue, other accounts payable, and current maturities of debt, offset by lower accounts payable for grain. The increase in customer prepayments and deferred revenue relates primarily to Grain, including an increase of $27 million for prepayment of inventory contracted for future delivery. Plant Nutrient had an increase of $13 million in customer prepayments due to a late harvest shifting sales into early 2015. The increase in other accounts payable is due to higher non-grain inventory balances previously mentioned. Current maturities of long-term debt increased due to the scheduled timing of payments of certain notes that are due within the next year. Offsetting this increase is a decrease in grain payables and is attributed to lower commodity prices and the lower level of hold pay mentioned previously.
Sources and Uses of Cash
Operating Activities and Liquidity
Our operating activities used cash of $10.1 million in 2014 compared to cash provided by operations of $337.2 million in 2013. The significant change in operating cash flows in 2014 relates primarily to the changes in working capital, including inventory, commodity derivatives and accounts payable for grain, discussed above.
In 2014, the Company paid income taxes, net of refunds received, of $36.8 million compared to $5.3 million in 2013. The Company makes quarterly estimated tax payments based on year to date annualized taxable income. The increase in income taxes paid in 2014 from 2013 is primarily due to increased current income tax expense and reduced overpayments when compared to the prior year.
Investing Activities
Investing activities used $89.7 million in 2014 compared to $106.3 million used in 2013. The decrease in cash used for investing activities is driven by a decrease in cash paid (net of cash acquired) for acquisitions and investments, as well as significant amounts of investing proceeds from return of capital transactions. A large portion of the 2014 spending relates to purchases of Rail Group assets in the amount of $90.1 million. Purchases of Rail Group assets was only partially offset in the current year by proceeds from the sale of Rail Group assets in the amount of $32.1 million. Capital spending for 2014 on property, plant and equipment includes: Grain - $21.0 million; Ethanol - $2.3 million; Plant Nutrient - $18.4 million; Rail - $2.3 million; Turf & Specialty - $6.1 million; Retail - $1.2 million and $8.4 million in corporate / enterprise resource planning project spending.
We expect to spend approximately $120 million in 2015 on conventional property, plant and equipment which includes estimated 2015 capital spending for the project to replace current technology with an enterprise resource planning system and beginning construction on a new corporate headquarters building. An additional $132 million is estimated to be spent on the purchase and capitalized modifications of railcars and barges with related sales or financings of $107 million.
Financing Arrangements
Net cash used in financing activities was $94.6 million in 2014, compared to $60.1 million in 2013. The increase in cash used in 2014 was primarily driven by distributions made to noncontrolling interest owners and a decrease in proceeds from issuance of long-term debt.
We have significant amounts of committed short-term lines of credit available to finance working capital, primarily inventories, margin calls on commodity contracts and accounts receivable. We are party to a borrowing arrangement with a syndicate of banks that provides a total of $878.1 million in borrowing capacity, including $28.1 million in non-recourse debt of The Andersons Denison Ethanol LLC. Of that total, we had $847.0 million remaining available for borrowing at December 31, 2014. Peak short-term borrowings to date were $270.6 million on April 2, 2014. Typically, the Company's highest borrowing occurs in the spring due to seasonal inventory requirements in the fertilizer and retail businesses.
We paid $12.5 million in dividends in 2014 compared to $12.0 million in 2013. We paid $0.1100 per common share for the dividends paid in January, April, July and October 2014, and $0.1067 per common share for the dividends paid in January, April, July and October 2013. On December 17, 2014, we declared a cash dividend of $0.1400 per common share, payable on January 23, 2015 to shareholders of record on January 2, 2015.
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Proceeds from the sale of treasury shares to employees and directors were $1.5 million and $1.9 million for 2014 and 2013, respectively. During 2014, we issued approximately 156 thousand shares and share units to employees and directors under our equity-based compensation plans.
Certain of our long-term borrowings include covenants that, among other things, impose minimum levels of equity and limitations on additional debt. We are in compliance with all such covenants as of December 31, 2014. In addition, certain of our long-term borrowings are collateralized by first mortgages on various facilities or are collateralized by railcar assets. Our non-recourse long-term debt is collateralized ethanol plant assets.
Because we are a significant consumer of short-term debt in peak seasons and the majority of this is variable rate debt, increases in interest rates could have a significant impact on our profitability. In addition, periods of high grain prices and / or unfavorable market conditions could require us to make additional margin deposits on our exchange traded futures contracts. Conversely, in periods of declining prices, we receive a return of cash.
We believe our sources of liquidity will be adequate to fund our operations, capital expenditures and payments of dividends in the foreseen future.
Sources and Uses of Cash 2013 compared to 2012
Operating Activities and Liquidity
Our operating activities provided cash of $337.2 million in 2013 compared to cash provided by operations of $328.5 million in 2012. The significant amount of operating cash flows in 2013 relates primarily to the changes in working capital discussed above along with strong earnings.
In 2013, the Company paid income taxes, net of refunds received, of $5.3 million compared to $36.3 million in 2012. The Company makes quarterly estimated tax payments based on year to date annualized taxable income. The decrease in income taxes paid in 2013 from 2012 is primarily due to decreased current income tax expense and overpayments related to 2012 taxes that were applied to 2013 estimated tax payments or were refunded in 2013.
Investing Activities
Investing activities used $106.3 million in 2013 compared to $290.6 million used in 2012. There were significant additions to property, plant and equipment and business acquisitions in 2012 compared to 2013. In total, we spent approximately $205 million less on business acquisitions (net of cash acquired) in 2013. A large portion of the 2013 spending relates to purchases of railcars in the amount of $92.6 million. Purchases of railcars was more than offset by proceeds from the sale of railcars in the amount of $97.2 million. Another large portion of the 2013 spend was for the investment of $49.3 million, in the joint venture entities that purchased Thompsons Limited and its related U.S. operating company. Capital spending for 2013 on property, plant and equipment includes: Grain - $8.5 million; Ethanol - $4.1 million; Plant Nutrient - $17.1 million; Rail - $4.1 million; Turf & Specialty - $6.6 million; Retail - $2.9 million and $3.5 million in corporate / enterprise resource planning project spending.
The change in restricted cash was minimal in 2013. In 2012, restricted cash decreased as a result of reimbursement of spending related to an industrial development revenue bond.
Financing Arrangements
Net cash used in financing activities was $60.1 million in 2013, compared to $79.9 million of cash provided by financing activities in 2012. The cash used in 2013 was primarily driven by payments of long-term debt during the year partially offset by proceeds from issuance of long-term debt. This is in contrast to the 2012 activity where there were significant proceeds from issuance of long-term debt, much of it relating to acquisitions during the year. There was also a significant change in short-term borrowings as there was no balance outstanding on our short-term line of credit at year end compared to $24.2 million last year.
We have significant amounts of committed short-term lines of credit available to finance working capital, primarily inventories, margin calls on commodity contracts and accounts receivable. We are party to a borrowing arrangement with a syndicate of banks that provides a total of $878.1 million in borrowing capacity, including $28.1 million in non-recourse debt of The Andersons Denison Ethanol LLC. Of that total, we had $847.7 million remaining available for borrowing at December 31, 2013. Peak short-term borrowings to date were $315.0 million on January 22, 2013. Typically, the Company's highest borrowing occurs in the spring due to seasonal inventory requirements in the fertilizer and retail businesses.
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We paid $12.0 million in dividends in 2013 compared to $11.2 million in 2012. We paid $0.1000 per common share for the dividends paid in January, April, July and October 2012, and $0.1067 per common share for the dividends paid in January, April, July and October 2013. The dividends paid in January 2014 were $0.1100 per common share.
Proceeds from the sale of treasury shares to employees and directors were $1.9 million and $1.3 million for 2013 and 2012, respectively. During 2013, we issued approximately 111 thousand shares and share units to employees and directors under our equity-based compensation plans.
Contractual Obligations
Future payments due under contractual obligations at December 31, 2014 are as follows:
Payments Due by Period | |||||||||||||||||||
(in thousands) | Less than 1 year | 1-3 years | 3-5 years | After 5 years | Total | ||||||||||||||
Long-term debt | $ | 76,064 | $ | 75,042 | $ | 68,831 | $ | 153,310 | $ | 373,247 | |||||||||
Interest obligations (a) | 14,875 | 27,428 | 16,161 | 26,820 | 85,284 | ||||||||||||||
Operating leases (b) | 19,937 | 30,059 | 14,378 | 10,100 | 74,474 | ||||||||||||||
Purchase commitments (c) | 1,297,992 | 103,817 | 39 | — | 1,401,848 | ||||||||||||||
Other long-term liabilities (d) | 1,274 | 2,777 | 3,084 | 9,068 | 16,203 | ||||||||||||||
Total contractual cash obligations | $ | 1,410,142 | $ | 239,123 | $ | 102,493 | $ | 199,298 | $ | 1,951,056 | |||||||||
(a) Future interest obligations are calculated based on interest rates in effect as of December 31, 2014 for the Company's variable rate debt and do not include any assumptions on expected borrowings, if any, under the short-term line of credit.
(b) Approximately 83% of the operating lease commitments above relate to Rail Group assets that the Company leases from financial intermediaries. See “Off-Balance Sheet Transactions” below.
(c) Includes the amounts related to purchase obligations in the Company's operating units, including $1,070 million for the purchase of grain from producers and $204 million for the purchase of ethanol from the ethanol joint ventures. There are also forward grain and ethanol sales contracts to consumers and traders and the net of these forward contracts are offset by exchange-traded futures and options contracts or over-the-counter contracts. See the narrative description of businesses for the Grain and Ethanol Groups in Item 1 of this Annual Report on Form 10-K for further discussion.
(d) Other long-term liabilities include estimated obligations under our retiree healthcare programs. Obligations under the retiree healthcare programs are not fixed commitments and will vary depending on various factors, including the level of participant utilization and inflation. Our estimates of postretirement payments through 2019 have considered recent payment trends and actuarial assumptions. We have not included pension contributions but see Note 6 for discussion of pension termination.
At December 31, 2014, we had standby letters of credit outstanding of $30.7 million, as well as $0.4 million that was outstanding on a non-recourse basis.
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Off-Balance Sheet Transactions
Our Rail Group utilizes leasing arrangements that provide off-balance sheet financing for its activities. We lease assets from financial intermediaries through sale-leaseback transactions, the majority of which involve operating leasebacks. Rail Group assets we own or lease from a financial intermediary are generally leased to a customer under an operating lease. We also arrange non-recourse lease transactions under which we sell assets to a financial intermediary, and assign the related operating lease to the financial intermediary on a non-recourse basis. In such arrangements, we generally provide ongoing maintenance and management services for the financial intermediary, and receive a fee for such services. On most of the assets, we hold an option to purchase the assets at the end of the lease.
The following table describes our Rail Group asset positions at December 31, 2014.
Method of Control | Financial Statement | Units | ||
Owned-railcars available for sale | On balance sheet – current | 23 | ||
Owned-railcar assets leased to others | On balance sheet – non-current | 15,494 | ||
Railcars leased from financial intermediaries | Off balance sheet | 3,754 | ||
Railcars – non-recourse arrangements | Off balance sheet | 3,380 | ||
Total Railcars | 22,651 | |||
Locomotive assets leased to others | On balance sheet – non-current | 41 | ||
Locomotives leased from financial intermediaries | Off balance sheet | 4 | ||
Total Locomotives | 45 | |||
Barge assets leased to others | On balance sheet – non-current | 5 | ||
Barge assets leased from financial intermediaries | Off balance sheet | 15 | ||
Total Barges | 20 | |||
In addition, we manage approximately 376 railcars for third-party customers or owners for which we receive a fee.
We have future lease payment commitments aggregating $62.0 million for the Rail Group assets we lease from financial intermediaries under various operating leases. Remaining lease terms vary with none exceeding fifteen years. We utilize non-recourse arrangements where possible in order to minimize credit risk. Refer to Note 11 to the Company's Consolidated Financial Statements in Item 8 for more information on our leasing activities.
Critical Accounting Estimates
The process of preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Management evaluates these estimates and assumptions on an ongoing basis. Estimates and assumptions are based on historical experience and management's knowledge and understanding of current facts and circumstances. Actual results, under conditions and circumstances different from those assumed, may change from estimates.
Certain of our accounting estimates are considered critical, as they are important to the depiction of the Company's financial statements and / or require significant or complex judgment by management. There are other items within our financial statements that require estimation, however, they are not deemed critical as defined above. Note 1 to the Consolidated Financial Statements in Item 8 describes our significant accounting policies which should be read in conjunction with our critical accounting estimates.
Management believes that the accounting for grain inventories and commodity derivative contracts, including adjustments for counterparty risk, and impairment of long-lived assets and equity method investments involve significant estimates and assumptions in the preparation of the Consolidated Financial Statements.
Grain Inventories and Commodity Derivative Contracts
Grain inventories are stated at their net realizable value, which approximates fair value less disposal costs. The Company marks to market all forward purchase and sale contracts for grain and ethanol, over-the-counter grain and ethanol contracts, and exchange-traded futures and options contracts. The overall market for grain inventories is very liquid and active; market value is determined by reference to prices for identical commodities on the CME (adjusted primarily for transportation costs); and the
33
Company's grain inventories may be sold without significant additional processing. The Company uses forward purchase and sale contracts and both exchange traded and over-the-counter contracts (such as derivatives generally used by the International Swap Dealers Association). Management estimates fair value based on exchange-quoted prices, adjusted for differences in local markets, as well as counter-party non-performance risk in the case of forward and over-the-counter contracts. The amount of risk, and therefore the impact to the fair value of the contracts, varies by type of contract and type of counter-party. With the exception of specific customers thought to be at higher risk, the Company looks at the contracts in total, segregated by contract type, in its quarterly assessment of non-performance risk. For those customers that are thought to be at higher risk, the Company makes assumptions as to performance based on past history and facts about the current situation. Changes in fair value are recorded as a component of sales and merchandising revenues in the statement of income.
Impairment of Long-Lived Assets and Equity Method Investments
The Company's business segments are each highly capital intensive and require significant investment in facilities and / or Rail Group assets. Fixed assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. This is done by evaluating the recoverability based on undiscounted projected cash flows, excluding interest. If an asset group is considered impaired, the impairment loss to be recognized is measured as the amount by which the asset group's carrying amount exceeds its fair value.
We also annually review the balance of goodwill for impairment in the fourth quarter, using a combination of quantitative and qualitative analyses. Goodwill is tested for impairment at the reporting unit level, which is the operating segment or one level below the operating segment. The quantitative review for impairment take into account our estimates of future cash flows. Our estimates of future cash flows are based upon a number of assumptions including lease rates, lease terms, operating costs, life of the assets, potential disposition proceeds, budgets and long-range plans. Based on the strength of performance in certain groups with goodwill balances, a qualitative goodwill impairment assessment was performed for certain reporting units. Key factors considered in the qualitative assessment included, but were not limited to industry and market specific factors, the competitive environment, comparison of the prior-year actual results relative to budgeted performance, current financial performance, and managements forecast for future financial performance. These factors are discussed in more detail in Note 12, Goodwill and Intangible Assets.
In addition, the Company holds investments in limited liability companies that are accounted for using the equity method of accounting. The Company reviews its investments to determine whether there has been a decline in the estimated fair value of the investment that is below the Company's carrying value which is other than temporary. Other than consideration of past and current performance, these reviews take into account forecasted earnings which are based on management's estimates of future performance.
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Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The market risk inherent in the Company's market risk-sensitive instruments and positions is the potential loss arising from adverse changes in commodity prices and interest rates as discussed below.
Commodity Prices
The Company's daily net commodity position consists of inventories, related purchase and sale contracts and exchange-traded futures and over-the-counter contracts. The fair value of the position is a summation of the fair values calculated for each commodity by valuing each net position at quoted futures market prices. The Company has established controls to manage and limit risk exposure, which consists of daily review of position limits and effects of potential market prices moves on those positions.
A sensitivity analysis has been prepared to estimate the Company's exposure to market risk of its net commodity position. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in quoted market prices. The result of this analysis, which may differ from actual results, is as follows:
December 31, | |||||||
(in thousands) | 2014 | 2013 | |||||
Net commodity position | $ | (4,752 | ) | $ | (455 | ) | |
Market risk | (475 | ) | (46 | ) | |||
Interest Rates
The fair value of the Company's long-term debt is estimated using quoted market prices or discounted future cash flows based on the Company's current incremental borrowing rates and credit ratings for similar types of borrowing arrangements. Market risk, which is estimated as the potential increase in fair value resulting from a hypothetical one-half percent decrease in interest rates, is summarized below:
December 31, | |||||||
(in thousands) | 2014 | 2013 | |||||
Fair value of long-term debt, including current maturities | $ | 382,139 | $ | 426,246 | |||
Fair value in excess of carrying value | 7,086 | 2,494 | |||||
Market risk | 5,809 | 6,298 | |||||
Actual results may differ. The estimated fair value and market risk will vary from year to year depending on the total amount of long-term debt and the mix of variable and fixed rate debt.
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Item 8. Financial Statements and Supplementary Data
The Andersons, Inc.
Index to Financial Statements
Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP | |
Consolidated Statements of Income | |
Consolidated Statements of Comprehensive Income | |
Consolidated Balance Sheets | |
Consolidated Statements of Cash Flows | |
Consolidated Statements of Equity | |
Notes to Consolidated Financial Statements | |
Consolidated Financial Statements of Lansing Trade Group, LLC and Subsidiaries | |
Schedule II - Consolidated Valuation and Qualifying Accounts | |
36
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
of The Andersons, Inc.
In our opinion, based on our audits and the report of other auditors, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The Andersons, Inc. and its subsidiaries at December 31, 2014 and December 31, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We did not audit the financial statements of Lansing Trade Group, LLC, an entity in which The Andersons, Inc. accounts for under the equity method of accounting, for which The Andersons, Inc. financial statements reflects an investment of $78.7 million and $106 million as of December 31, 2014 and 2013, respectively, and equity in earnings of affiliates of $23.3 million, $31.2 million, and $28.6 million for the years ended December 31, 2014, 2013, and 2012, respectively. The consolidated financial statements of Lansing Trade Group, LLC were audited by other auditors whose report thereon has been furnished to us, and our opinion on the consolidated financial statements expressed herein, insofar as it relates to the amounts included for Lansing Trade Group, LLC, is based solely on the report of the other auditors. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits and the report of other auditors provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded six grain and four agronomy locations from its assessment of internal control over financial reporting as of December 31, 2014 because these assets were acquired by the Company in a purchase business combination in the fourth quarter of 2014. We have also excluded the six grain and four agronomy locations from our audit of internal control over financial reporting. These six grain and four agronomy locations are wholly owned, and their total assets and total revenues represent 6.7% and 1.0%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2014.
/s/ PricewaterhouseCoopers LLP
Toledo, Ohio
March 2, 2015
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The Andersons, Inc.
Consolidated Statements of Income
(In thousands, except per share data)
Year ended December 31, | |||||||||||
2014 | 2013 | 2012 | |||||||||
Sales and merchandising revenues | $ | 4,540,071 | $ | 5,604,574 | $ | 5,272,010 | |||||
Cost of sales and merchandising revenues | 4,142,932 | 5,239,349 | 4,914,005 | ||||||||
Gross profit | 397,139 | 365,225 | 358,005 | ||||||||
Operating, administrative and general expenses | 318,881 | 278,433 | 246,929 | ||||||||
Interest expense | 21,760 | 20,860 | 22,155 | ||||||||
Other income: | |||||||||||
Equity in earnings of affiliates, net | 96,523 | 68,705 | 16,487 | ||||||||
Other income, net | 31,125 | 14,876 | 14,725 | ||||||||
Income before income taxes | 184,146 | 149,513 | 120,133 | ||||||||
Income tax provision | 61,501 | 53,811 | 44,568 | ||||||||
Net income | 122,645 | 95,702 | 75,565 | ||||||||
Net income (loss) attributable to the noncontrolling interests | 12,919 | 5,763 | (3,915 | ) | |||||||
Net income attributable to The Andersons, Inc. | $ | 109,726 | $ | 89,939 | $ | 79,480 | |||||
Per common share: | |||||||||||
Basic earnings attributable to The Andersons, Inc. common shareholders | $ | 3.85 | $ | 3.20 | $ | 2.85 | |||||
Diluted earnings attributable to The Andersons, Inc. common shareholders | $ | 3.84 | $ | 3.18 | $ | 2.82 | |||||
Dividends paid | $ | 0.4700 | $ | 0.4300 | $ | 0.4000 | |||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
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The Andersons, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
Year ended December 31, | |||||||||||
2014 | 2013 | 2012 | |||||||||
Net income | $ | 122,645 | $ | 95,702 | $ | 75,565 | |||||
Other comprehensive income (loss), net of tax: | |||||||||||
Change in estimated fair value of investment in debt securities (net of income tax of $4,685, $(3,208) and $1,162) | (7,735 | ) | 5,292 | (1,978 | ) | ||||||
Change in unrecognized actuarial loss and prior service cost (net of income tax of $12,866, $(10,439) and $699) | (21,243 | ) | 18,641 | (563 | ) | ||||||
Foreign currency translation adjustments (net of income tax of $947) | (4,709 | ) | — | — | |||||||
Cash flow hedge activity (net of income tax of $(166), $(238) and $(66)) | 273 | 265 | 252 | ||||||||
Other comprehensive income (loss) | (33,414 | ) | 24,198 | (2,289 | ) | ||||||
Comprehensive income | 89,231 | 119,900 | 73,276 | ||||||||
Comprehensive income (loss) attributable to the noncontrolling interests | 12,919 | 5,763 | (3,915 | ) | |||||||
Comprehensive income attributable to The Andersons, Inc. | $ | 76,312 | $ | 114,137 | $ | 77,191 | |||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
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The Andersons, Inc. Consolidated Balance Sheets (In thousands) | |||||||
December 31, 2014 | December 31, 2013 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 114,704 | $ | 309,085 | |||
Restricted cash | 429 | 408 | |||||
Accounts receivable, less allowance for doubtful accounts of $4,644 in 2014; $4,992 in 2013 | 183,059 | 173,930 | |||||
Inventories (Note 2) | 795,655 | 614,923 | |||||
Commodity derivative assets – current | 92,771 | 71,319 | |||||
Deferred income taxes | 7,337 | 4,931 | |||||
Other current assets | 60,492 | 47,188 | |||||
Total current assets | 1,254,447 | 1,221,784 | |||||
Other assets: | |||||||
Commodity derivative assets – noncurrent | 507 | 246 | |||||
Goodwill | 72,365 | 58,554 | |||||
Other assets, net | 59,162 | 59,456 | |||||
Pension asset | — | 14,328 | |||||
Equity method investments | 226,857 | 291,109 | |||||
358,891 | 423,693 | ||||||
Rail Group assets leased to others, net (Note 3) | 297,747 | 240,621 | |||||
Property, plant and equipment, net (Note 3) | 453,607 | 387,458 | |||||
Total assets | $ | 2,364,692 | $ | 2,273,556 | |||
40
The Andersons, Inc. Consolidated Balance Sheets (continued) (In thousands) | |||||||
December 31, 2014 | December 31, 2013 | ||||||
Liabilities and equity | |||||||
Current liabilities: | |||||||
Short-term debt | $ | 2,166 | $ | — | |||
Accounts payable for grain | 535,974 | 592,183 | |||||
Other accounts payable | 170,849 | 154,599 | |||||
Customer prepayments and deferred revenue | 99,617 | 59,304 | |||||
Commodity derivative liabilities – current | 64,075 | 63,954 | |||||
Accrued expenses and other current liabilities | 78,610 | 70,295 | |||||
Current maturities of long-term debt (Note 10) | 76,415 | 51,998 | |||||
Total current liabilities | 1,027,706 | 992,333 | |||||
Other long-term liabilities | 15,507 | 15,386 | |||||
Commodity derivative liabilities – noncurrent | 3,318 | 6,644 | |||||
Employee benefit plan obligations | 59,308 | 39,477 | |||||
Long-term debt, less current maturities (Note 10) | 298,638 | 375,213 | |||||
Deferred income taxes | 136,166 | 120,082 | |||||
Total liabilities | 1,540,643 | 1,549,135 | |||||
Commitments and contingencies (Note 11) | |||||||
Shareholders’ equity: | |||||||
Common shares, without par value (42,000 shares authorized; 29,353 shares issued in 2014; 28,797 shares issued in 2013) | 96 | 96 | |||||
Preferred shares, without par value (1,000 shares authorized; none issued) | — | — | |||||
Additional paid-in-capital | 222,789 | 184,380 | |||||
Treasury shares, at cost (390 in 2014; 607 in 2013) | (9,743 | ) | (10,222 | ) | |||
Accumulated other comprehensive loss | (54,595 | ) | (21,181 | ) | |||
Retained earnings | 644,556 | 548,401 | |||||
Total shareholders’ equity of The Andersons, Inc. | 803,103 | 701,474 | |||||
Noncontrolling interests | 20,946 | 22,947 | |||||
Total equity | 824,049 | 724,421 | |||||
Total liabilities and equity | $ | 2,364,692 | $ | 2,273,556 | |||
The Notes to Consolidated Financial Statements are an integral part of these statements.
41
The Andersons, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31, | |||||||||||
2014 | 2013 | 2012 | |||||||||
Operating Activities | |||||||||||
Net income | $ | 122,645 | $ | 95,702 | 75,565 | ||||||
Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||
Depreciation and amortization | 62,005 | 55,307 | 48,977 | ||||||||
Bad debt expense | 1,183 | 1,187 | 1,129 | ||||||||
Cash distributions in excess of (less than) income of unconsolidated affiliates | 28,749 | (50,953 | ) | 8,134 | |||||||
Gain on sale of investments in affiliates | (17,055 | ) | — | — | |||||||
Gains on sales of Rail Group assets and related leases | (15,830 | ) | (19,366 | ) | (23,665 | ) | |||||
Loss (gain) on sales of property, plant and equipment | 2,079 | 633 | (234 | ) | |||||||
Excess tax benefit from share-based payment arrangement | (1,806 | ) | (1,001 | ) | (162 | ) | |||||
Deferred income taxes | 21,815 | 40,374 | 16,503 | ||||||||
Stock based compensation expense | 8,581 | 4,339 | 3,990 | ||||||||
Asset impairment charge | 3,090 | 4,439 | 531 | ||||||||
Other | (296 | ) | (135 | ) | (176 | ) | |||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable | (1,703 | ) | 35,446 | (21,737 | ) | ||||||
Inventories | (172,040 | ) | 162,443 | 122,428 | |||||||
Commodity derivatives | (27,652 | ) | 69,633 | 2,947 | |||||||
Other assets | (11,407 | ) | (4,926 | ) | (12,927 | ) | |||||
Accounts payable for grain | (56,208 | ) | 9,530 | 101,265 | |||||||
Other accounts payable and accrued expenses | 43,779 | (65,464 | ) | 5,914 | |||||||
Net cash (used in) provided by operating activities | (10,071 | ) | 337,188 | 328,482 | |||||||
Investing Activities | |||||||||||
Purchase of investments | |||||||||||