ANDE 2013.09.30 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 000-20557
 
 
THE ANDERSONS, INC.
(Exact name of the registrant as specified in its charter
 
 
OHIO
 
34-1562374
(State of incorporation
or organization)
 
(I.R.S. Employer
Identification No.)
480 W. Dussel Drive, Maumee, Ohio
 
43537
(Address of principal executive offices)
 
(Zip Code)
(419) 893-5050
(Telephone Number)
 
(Former name, former address and former fiscal year, if changed since last report.)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
ý
Accelerated Filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The registrant had approximately 18.7 million  common shares outstanding, no par value, at October 31, 2013.


Table of Contents

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


2

Table of Contents


Part I. Financial Information


Item 1. Financial Statements


The Andersons, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)(In thousands)
 
September 30,
2013
 
December 31,
2012
 
September 30,
2012
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
134,441

 
$
138,218

 
$
80,370

Restricted cash
164

 
398

 
160

Accounts receivable, net
178,970

 
208,877

 
199,158

Inventories (Note 2)
429,017

 
776,677

 
682,292

Commodity derivative assets – current
105,390

 
103,105

 
166,264

Deferred income taxes
5,254

 
15,862

 
20,627

Other current assets
42,278

 
54,016

 
41,568

Total current assets
895,514

 
1,297,153

 
1,190,439

Other assets:
 
 
 
 
 
Commodity derivative assets – noncurrent
5

 
1,906

 
7,047

Goodwill
58,554

 
51,418

 
19,226

Other assets, net
52,177

 
53,711

 
48,575

Equity method investments
262,643

 
190,908

 
190,057

 
373,379

 
297,943

 
264,905

Railcar assets leased to others, net (Note 3)
233,024

 
228,330

 
252,702

Property, plant and equipment, net (Note 3)
380,374

 
358,878

 
283,394

Total assets
$
1,882,291

 
$
2,182,304

 
$
1,991,440


3

Table of Contents

The Andersons, Inc.
Condensed Consolidated Balance Sheets (continued)
(Unaudited)(In thousands)
 
September 30,
2013
 
December 31,
2012
 
September 30,
2012
Liabilities and equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Borrowings under short-term line of credit
$

 
$
24,219

 
$
275,522

Accounts payable for grain
241,575

 
582,653

 
250,066

Other accounts payable
200,664

 
165,201

 
204,347

Customer prepayments and deferred revenue
23,974

 
105,410

 
77,278

Commodity derivative liabilities – current
88,234

 
33,277

 
43,589

Accrued expenses and other current liabilities
63,900

 
66,902

 
53,631

Current maturities of long-term debt (Note 10)
44,232

 
15,145

 
32,655

Total current liabilities
662,579

 
992,807

 
937,088

Other long-term liabilities
17,129

 
18,406

 
14,083

Commodity derivative liabilities – noncurrent
9,636

 
1,134

 
590

Employee benefit plan obligations
49,768

 
53,131

 
49,478

Long-term debt, less current maturities (Note 10)
381,018

 
427,243

 
312,404

Deferred income taxes
91,869

 
78,138

 
75,377

Total liabilities
1,211,999

 
1,570,859

 
1,389,020

Commitments and contingencies (Note 11)

 

 

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

 
96

 
96

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

 

 

Additional paid-in-capital
183,273

 
181,627

 
180,998

Treasury shares at cost (456, 554 and 557 shares at 9/30/13, 12/31/12 and 9/30/12, respectively)
(11,327
)
 
(12,559
)
 
(12,541
)
Accumulated other comprehensive loss
(41,586
)
 
(45,379
)
 
(42,607
)
Retained earnings
520,848

 
470,628

 
458,627

Total shareholders’ equity of The Andersons, Inc.
651,304

 
594,413

 
584,573

Noncontrolling interests
18,988

 
17,032

 
17,847

Total equity
670,292

 
611,445

 
602,420

Total liabilities and equity
$
1,882,291

 
$
2,182,304

 
$
1,991,440

See Notes to Condensed Consolidated Financial Statements


4

Table of Contents

The Andersons, Inc.
Condensed Consolidated Statements of Income
(Unaudited)(In thousands, except per share data)
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2013
 
2012
 
2013
 
2012
Sales and merchandising revenues
$
1,181,374

 
$
1,138,402

 
$
4,020,308

 
$
3,591,369

Cost of sales and merchandising revenues
1,108,228

 
1,060,086

 
3,764,660

 
3,324,533

Gross profit
73,146

 
78,316

 
255,648

 
266,836

Operating, administrative and general expenses
69,193

 
58,029

 
192,665

 
177,339

Interest expense
5,348

 
5,482

 
16,607

 
16,192

Other income:
 
 
 
 
 
 
 
Equity in earnings of affiliates
22,177

 
6,027

 
39,991

 
15,406

Other income, net
7,605

 
3,492

 
11,623

 
9,409

Income before income taxes
28,387

 
24,324

 
97,990

 
98,120

Income tax provision
10,348

 
9,133

 
36,907

 
36,730

Net income
18,039

 
15,191

 
61,083

 
61,390

Net income (loss) attributable to the noncontrolling interests
878

 
(1,693
)
 
1,805

 
(3,100
)
Net income attributable to The Andersons, Inc.
$
17,161

 
$
16,884

 
$
59,278

 
$
64,490

Per common share:
 
 
 
 
 
 
 
Basic earnings attributable to The Andersons, Inc. common shareholders
$
0.92

 
$
0.91

 
$
3.17

 
$
3.47

Diluted earnings attributable to The Andersons, Inc. common shareholders
$
0.91

 
$
0.90

 
$
3.15

 
$
3.43

Dividends paid
$
0.16

 
$
0.15

 
$
0.48

 
$
0.45

See Notes to Condensed Consolidated Financial Statements


5

Table of Contents

The Andersons, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)(In thousands)
 
 
Three months ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
18,039

 
$
15,191

 
$
61,083

 
$
61,390

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Increase (decrease) in estimated fair value of investment in debt securities (net of income tax of $0, $0, ($187) and $1,126)

 

 
303

 
(1,884
)
Change in unrecognized actuarial loss and prior service cost (net of income tax of $232, $209, $1,157 and $1,343 - Note 1)
383

 
350

 
3,296

 
2,248

Cash flow hedge activity (net of income tax of $33, $25, $195 and $71)
56

 
41

 
194

 
119

Other comprehensive income (loss)
439

 
391

 
3,793

 
483

Comprehensive income
18,478

 
15,582

 
64,876

 
61,873

Comprehensive income (loss) attributable to the noncontrolling interests
878

 
(1,693
)
 
1,805

 
(3,100
)
Comprehensive income attributable to The Andersons, Inc.
$
17,600

 
$
17,275

 
$
63,071

 
$
64,973

See Notes to Condensed Consolidated Financial Statements


6

Table of Contents

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


 
Nine months ended
September 30,
 
2013
 
2012
Operating Activities
 
 
 
Net income
$
61,083

 
$
61,390

Adjustments to reconcile net income to cash used in operating activities:
 
 
 
Depreciation and amortization
41,635

 
35,330

Bad debt expense
700

 
1,118

Cash distributions (less than) in excess of income of unconsolidated affiliates
(22,486
)
 
8,984

Gains and amortization of deferred gains on sales of railcars and related leases
(17,376
)
 
(22,260
)
Excess tax benefit from share-based payment arrangement
(602
)
 
(39
)
Deferred income taxes
24,185

 
6,893

Stock based compensation expense
2,337

 
3,303

Other
3

 
(106
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
29,468

 
(31,522
)
Inventories
348,172

 
91,035

Commodity derivatives
63,074

 
(60,286
)
Other assets
(263
)
 
(4,211
)
Accounts payable for grain
(341,078
)
 
(141,839
)
Other accounts payable and accrued expenses
(59,891
)
 
13,483

Net cash provided by (used in) operating activities
128,961

 
(38,727
)
Investing Activities
 
 
 
Purchase of investments
(49,249
)
 
(19,996
)
Proceeds from redemption of investment

 
19,998

Acquisition of businesses, net of cash acquired
(11,148
)
 
(92,686
)
Purchases of railcars
(71,554
)
 
(102,853
)
Proceeds from sale of railcars
87,620

 
57,315

Purchases of property, plant and equipment
(31,355
)
 
(51,682
)
Proceeds from sale of property, plant and equipment
351

 
817

Proceeds from minority investor

 
6,100

Change in restricted cash
233

 
18,491

Net cash used in investing activities
(75,102
)
 
(164,496
)
Financing Activities
 
 
 
Net change in short-term borrowings
(24,219
)
 
204,022

Proceeds from issuance of long-term debt
53,794

 
125,076

Payments of long-term debt
(80,473
)
 
(58,820
)
Proceeds from sale of treasury shares to employees and directors
1,687

 
1,366

Payments of debt issuance costs
(46
)
 
(110
)
Dividends paid
(8,981
)
 
(8,370
)
Excess tax benefit from share-based payment arrangement
602

 
39

Net cash provided by (used in) financing activities
(57,636
)
 
263,203

Increase (decrease) in cash and cash equivalents
(3,777
)
 
59,980

Cash and cash equivalents at beginning of period
138,218

 
20,390

Cash and cash equivalents at end of period
$
134,441

 
$
80,370


7

Table of Contents

 
Nine months ended
September 30,
 
2013
 
2012
Supplemental disclosure of cash flow information
 
 
 
Capital project costs incurred but not yet paid
$
5,477

 
$
2,635

Purchase of capitalized software through seller-financing
$
10,477

 
$
6,102


See Notes to Condensed Consolidated Financial Statements

8

Table of Contents

The Andersons, Inc.
Condensed Consolidated Statements of Equity
(Unaudited)(In thousands, except per share data)
 
Common
Shares
 
Additional
Paid-in
Capital
 
Treasury
Shares
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Noncontrolling
Interests
 
Total
Balance at December 31, 2011
$
96

 
$
179,463

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

 
$
14,847

 
$
538,842

Net income (loss)
 
 
 
 
 
 
 
 
64,490

 
(3,100
)
 
61,390

Other comprehensive income
 
 
 
 
 
 
483

 
 
 
 
 
483

Proceeds received from minority investor
 
 
 
 
 
 
 
 
 
 
6,100

 
6,100

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

 
2,456

 
 
 
 
 
 
 
3,991

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

 
$
180,998

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

 
$
17,847

 
$
602,420

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
96

 
$
181,627

 
$
(12,559
)
 
$
(45,379
)
 
$
470,628

 
$
17,032

 
$
611,445

Net income
 
 
 
 
 
 
 
 
59,278

 
1,805

 
61,083

Other comprehensive income
 
 
 
 
 
 
3,793

 
 
 
 
 
3,793

Noncontrolling interest
 
 
 
 
 
 
 
 
 
 
151

 
151

Stock awards, stock option exercises and other shares issued to employees and directors, net of income tax of $1,201 (98 shares)
 
 
1,591

 
1,232

 
 
 
 
 
 
 
2,823

Dividends declared ($0.48 per common share)
 
 
 
 
 
 
 
 
(9,003
)
 
 
 
(9,003
)
Performance share unit dividend equivalents
 
 
55

 
 
 
 
 
(55
)
 
 
 

Balance at September 30, 2013
$
96

 
$
183,273

 
$
(11,327
)
 
$
(41,586
)
 
$
520,848

 
$
18,988

 
$
670,292

See Notes to Condensed Consolidated Financial Statements


9

Table of Contents

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


1. Basis of Presentation and Consolidation
These Consolidated Financial Statements include the accounts of The Andersons, Inc. and its wholly owned and controlled subsidiaries (the “Company”). All significant intercompany accounts and transactions are eliminated in consolidation.
Investments in unconsolidated entities in which the Company has significant influence, but not control, are accounted for using the equity method of accounting.
In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair statement of the results of operations for the periods indicated, have been made. Operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013.
The year-end Condensed Consolidated Balance Sheet data at December 31, 2012 was derived from audited Consolidated Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. A Condensed Consolidated Balance Sheet as of September 30, 2012 has been included as the Company operates in several seasonal industries.
The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in The Andersons, Inc. Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”).
Reclassifications Out of Other Comprehensive Income
In accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, information about reclassification adjustments from accumulated other comprehensive income to net income in the current periods are presented below.
Changes in Accumulated Other Comprehensive Loss by Component (a)
 
 
 
For the three months ended September 30, 2013
 
For the nine months ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses on Cash Flow Hedges
 
Investment in Debt Securities
 
Defined Benefit Plan Items
 
Total
 
Losses on Cash Flow Hedges
 
Investment in Debt Securities
 
Defined Benefit Plan Items
 
Total
Beginning Balance
 
$
(764
)
 
$
2,872

 
$
(44,133
)
 
$
(42,025
)
 
$
(902
)
 
$
2,569

 
$
(47,046
)
 
$
(45,379
)
 
Other comprehensive income before reclassifications
 
56

 

 
468

 
524

 
194

 
303

 
3,551

 
4,048

 
Amounts reclassified from accumulated other comprehensive income
 

 

 
(85
)
 
(85
)
 

 

 
(255
)
 
(255
)
Net current-period other comprehensive income
 
56

 

 
383

 
439

 
194

 
303

 
3,296

 
3,793

Ending balance
 
$
(708
)
 
$
2,872

 
$
(43,750
)
 
$
(41,586
)
 
$
(708
)
 
$
2,872

 
$
(43,750
)
 
$
(41,586
)
(a) All amounts are net of tax. Amounts in parentheses indicates debits

10

Table of Contents

Reclassifications Out of Accumulated Other Comprehensive Income (a)
 
 
For the three months ended September 30, 2013
 
For the nine months ended September 30, 2013
 
 
 
 
 
 
 
 
 
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item in the Statement Where Net Income Is Presented
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item in the Statement Where Net Income Is Presented
Defined Benefit Plan Items
 
 
 
 
 
 
 
 
     Amortization of prior-service cost
 
$
(136
)
 
(b)
 
$
(408
)
 
(b)
 
 
(136
)
 
Total before tax
 
(408
)
 
Total before tax
 
 
51

 
Tax expense
 
153

 
Tax expense
 
 
$
(85
)
 
Net of tax
 
$
(255
)
 
Net of tax
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(85
)
 
Net of tax
 
$
(255
)
 
Net of tax
(a) Amounts in parentheses indicate debits to profit/loss
(b) This accumulated other comprehensive income component is included in the computation of net periodic pension cost (see Note 6. Employee Benefit Plans footnote for additional details).

2. Inventories
Major classes of inventories are as follows:
 
(in thousands)
September 30,
2013
 
December 31,
2012
 
September 30,
2012
Grain
$
264,104

 
$
586,983

 
$
504,484

Ethanol and by-products
11,178

 
22,927

 
17,277

Agricultural fertilizer and supplies
94,035

 
100,175

 
101,896

Lawn and garden fertilizer and corncob products
29,364

 
37,292

 
24,709

Retail merchandise
25,716

 
25,368

 
30,767

Railcar repair parts
4,421

 
3,764

 
2,852

Other
199

 
168

 
307

 
$
429,017

 
$
776,677

 
$
682,292


3. Property, Plant and Equipment
The components of property, plant and equipment are as follows:
 
(in thousands)
September 30,
2013
 
December 31,
2012
 
September 30,
2012
Land
$
23,348

 
$
22,258

 
$
19,699

Land improvements and leasehold improvements
67,262

 
63,013

 
59,375

Buildings and storage facilities
224,913

 
214,919

 
178,354

Machinery and equipment
299,874

 
287,896

 
257,926

Software
13,558

 
12,901

 
12,632

Construction in progress
54,713

 
34,965

 
28,582

 
683,668

 
635,952

 
556,568

Less accumulated depreciation and amortization
303,294

 
277,074

 
273,174

 
$
380,374

 
$
358,878

 
$
283,394

Depreciation expense on property, plant and equipment amounted to $27.9 million, $27.4 million and $19.3 million for the year-to-date periods ended September 30, 2013December 31, 2012, and September 30, 2012, respectively.

11

Table of Contents

Railcars
The components of Railcar assets leased to others are as follows:
 
(in thousands)
September 30,
2013
 
December 31,
2012
 
September 30,
2012
Railcar assets leased to others
$
309,360

 
$
310,614

 
$
335,037

Less accumulated depreciation
76,336

 
82,284

 
82,335

 
$
233,024

 
$
228,330

 
$
252,702

Depreciation expense on railcar assets leased to others amounted to $11.1 million, $15.9 million and $11.9 million for the year-to-date periods ended September 30, 2013December 31, 2012 and September 30, 2012, respectively.

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

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




12

Table of Contents

The following table presents at September 30, 2013December 31, 2012 and September 30, 2012, a summary of the estimated fair value of the Company’s commodity derivative instruments that require cash collateral and the associated cash posted/received as collateral. The net asset or liability positions of these derivatives (net of their cash collateral) are determined on a counterparty-by-counterparty basis and are included within short-term commodity derivative assets (or liabilities) on the Condensed Consolidated Balance Sheets:
 
 
September 30, 2013
 
December 31, 2012
 
September 30, 2012
(in thousands)
Net
derivative
asset
position
 
Net
derivative
liability
position
 
Net
derivative
asset
position
 
Net
derivative
liability
position
 
Net
derivative
asset
position
 
Net
derivative
liability
position
Collateral paid (received)
$
27,101

 
$

 
$
(13,772
)
 
$

 
$
88,246

 
$

Fair value of derivatives
38,352

 

 
61,247

 

 
(73,424
)
 

Balance at end of period
$
65,453

 
$

 
$
47,475

 
$

 
$
14,822

 
$

Certain of our contracts allow the Company to post items other than cash as collateral. Grain inventory posted as collateral on our derivative contracts are recorded in Inventories on the Condensed Consolidated Balance Sheets and the fair value of such inventory was $0.0 million, $7.7 million, and $0.0 million as of September 30, 2013December 31, 2012, and September 30, 2012, respectively.

The following table presents, on a gross basis, current and noncurrent commodity derivative assets and liabilities:
 
September 30, 2013
(in thousands)
Commodity derivative assets - current
 
Commodity derivative assets - noncurrent
 
Commodity derivative liabilities - current
 
Commodity derivative liabilities - noncurrent
 
Total
Commodity derivative assets
$
89,540

 
$
5

 
$
2,933

 
$
41

 
$
92,519

Commodity derivative liabilities
(11,251
)
 

 
(91,167
)
 
(9,677
)
 
(112,095
)
Cash collateral
27,101

 

 

 

 
27,101

Balance sheet line item totals
$
105,390

 
$
5

 
$
(88,234
)
 
$
(9,636
)
 
$
7,525


 
December 31, 2012
(in thousands)
Commodity derivative assets - current
 
Commodity derivative assets - noncurrent
 
Commodity derivative liabilities - current
 
Commodity derivative liabilities - noncurrent
 
Total
Commodity derivative assets
$
137,119

 
$
2,059

 
$
5,233

 
$
130

 
$
144,541

Commodity derivative liabilities
(20,242
)
 
(153
)
 
(38,510
)
 
(1,264
)
 
(60,169
)
Cash collateral
(13,772
)
 

 

 

 
(13,772
)
Balance sheet line item totals
$
103,105

 
$
1,906

 
$
(33,277
)
 
$
(1,134
)
 
$
70,600


 
September 30, 2012
(in thousands)
Commodity derivative assets - current
 
Commodity derivative assets - noncurrent
 
Commodity derivative liabilities - current
 
Commodity derivative liabilities - noncurrent
 
Total
Commodity derivative assets
$
194,771

 
$
7,383

 
$
3,558

 
$
38

 
$
205,750

Commodity derivative liabilities
(116,753
)
 
(336
)
 
(47,147
)
 
(628
)
 
(164,864
)
Cash collateral
88,246

 

 

 

 
88,246

Balance sheet line item totals
$
166,264

 
$
7,047

 
$
(43,589
)
 
$
(590
)
 
$
129,132




13

Table of Contents

The gains included in the Company’s Condensed Consolidated Statements of Income and the line items in which they are located for the three and nine months ended September 30, 2013 and 2012 are as follows:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
2013
 
2012
 
2013
 
2012
Gains (losses) on commodity derivatives included in sales and merchandising revenues
$
30,894

 
$
(51,318
)
 
$
99,896

 
$
(67,875
)
At September 30, 2013, the Company had the following volume of commodity derivative contracts outstanding (on a gross basis):
 
Commodity
Number of bushels
(in thousands)
 
Number of gallons
(in thousands)
 
Number of pounds
(in thousands)
 
Number of tons
(in thousands)
Non-exchange traded:
 
 
 
 
 
 
 
Corn
214,500

 

 

 

Soybeans
46,325

 

 

 

Wheat
8,450

 

 

 

Oats
14,555

 

 

 

Ethanol

 
144,339

 

 

Corn oil

 

 
12,921

 

Other
255

 

 

 
88

Subtotal
284,085

 
144,339

 
12,921

 
88

Exchange traded:
 
 
 
 
 
 
 
Corn
92,120

 

 

 

Soybeans
19,110

 

 

 

Wheat
30,725

 

 

 

Oats
3,890

 

 

 

Ethanol

 
15,540

 

 

Other

 

 

 
1

Subtotal
145,845

 
15,540

 

 
1

Total
429,930

 
159,879

 
12,921

 
89



14

Table of Contents

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

(in thousands, except per common share data)
Three months ended
September 30,
 
Nine months ended
September 30,
2013
 
2012
 
2013
 
2012
Net income attributable to The Andersons, Inc.
$
17,161

 
$
16,884

 
$
59,278

 
$
64,490

Less: Distributed and undistributed earnings allocated to nonvested restricted stock
56

 
95

 
210

 
309

Earnings available to common shareholders
$
17,105

 
$
16,789

 
$
59,068

 
$
64,181

Earnings per share – basic:
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
18,673

 
18,534

 
18,648

 
18,516

Earnings per common share – basic
$
0.92

 
$
0.91

 
$
3.17

 
$
3.47

Earnings per share – diluted:
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
18,673

 
18,534

 
18,648

 
18,516

Effect of dilutive awards
150

 
114

 
125

 
171

Weighted average shares outstanding – diluted
18,823

 
18,648

 
18,773

 
18,687

Earnings per common share – diluted
$
0.91

 
$
0.90

 
$
3.15

 
$
3.43

There were no antidilutive stock-based awards outstanding at September 30, 2013 or 2012.

6. Employee Benefit Plans
Included as charges against income for the three and nine months ended September 30, 2013 and 2012 are the following amounts for pension and postretirement benefit plans maintained by the Company:
 
 
Pension Benefits
(in thousands)
Three months ended
September 30,
 
Nine months ended
September 30,
2013
 
2012
 
2013
 
2012
Service cost
$

 
$

 
$

 
$

Interest cost
1,057

 
1,124

 
3,171

 
3,372

Expected return on plan assets
(1,751
)
 
(1,536
)
 
(5,254
)
 
(4,609
)
Recognized net actuarial loss
382

 
374

 
1,147

 
1,123

Benefit income
$
(312
)
 
$
(38
)
 
$
(936
)
 
$
(114
)
 
 
Postretirement Benefits
(in thousands)
Three months ended
September 30,
 
Nine months ended
September 30,
2013
 
2012
 
2013
 
2012
Service cost
$
210

 
$
188

 
$
631

 
$
564

Interest cost
342

 
329

 
1,025

 
989

Amortization of prior service cost
(136
)
 
(135
)
 
(408
)
 
(407
)
Recognized net actuarial loss
368

 
320

 
1,105

 
960

Benefit cost
$
784

 
$
702

 
$
2,353

 
$
2,106




15

Table of Contents

7. Segment Information
The Company’s operations include six reportable business segments that are distinguished primarily on the basis of products and services offered. The Grain business includes grain merchandising, the operation of terminal grain elevator facilities and the investments in Lansing Trade Group, LLC (“LTG”) and the Thompsons Limited joint ventures. The Ethanol business purchases and sells ethanol and also manages the ethanol production facilities organized as limited liability companies, one of which is consolidated and three of which are investments accounted for under the equity method, and various service contracts for these investments. Rail operations include the leasing, marketing and fleet management of railcars and locomotives, railcar repair and metal fabrication. The Plant Nutrient business manufactures and distributes agricultural inputs, primarily fertilizer, to dealers and farmers. Turf & Specialty operations include the production and distribution of turf care and corncob-based products. The Retail business operates large retail stores, a specialty food market, a distribution center and a lawn and garden equipment sales and service facility. Included in “Other” are the corporate level amounts not attributable to an operating segment.
The segment information below includes the allocation of expenses shared by one or more operating segments. Although management believes such allocations are reasonable, the operating information does not necessarily reflect how such data might appear if the segments were operated as separate businesses. Inter-segment sales are made at prices comparable to normal, unaffiliated customer sales.
During the first quarter, approximately $28 million of assets specific to the agronomy business that was included in the purchase of certain assets of Green Plains Grain Company, LLC in the fourth quarter of 2012 were reclassified from the Grain segment to the Plant Nutrient segment. Corresponding items of segment information have been reclassified to conform to current year presentation.
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2013
 
2012
 
2013
 
2012
(in thousands)
 
 
 
 
 
 
 
Revenues from external customers
 
 
 
 
 
 
 
Grain
$
765,833

 
$
677,484

 
$
2,493,678

 
$
2,096,256

Ethanol
213,384

 
209,634

 
634,933

 
528,062

Plant Nutrient
95,681

 
135,144

 
537,922

 
619,301

Rail
47,523

 
59,703

 
132,488

 
127,608

Turf & Specialty
27,624

 
21,509

 
117,955

 
110,481

Retail
31,329

 
34,928

 
103,332

 
109,661

Total
$
1,181,374

 
$
1,138,402

 
$
4,020,308

 
$
3,591,369

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
2013
 
2012
 
2013
 
2012
Inter-segment sales
 
 
 
 
 
 
 
Grain
$

 
$

 
$
333

 
$
1

Plant Nutrient
4,243

 
3,481

 
15,955

 
11,898

Rail
109

 
105

 
318

 
516

Turf & Specialty
516

 
521

 
1,869

 
1,994

Total
$
4,868

 
$
4,107

 
$
18,475

 
$
14,409

 

16

Table of Contents

 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
2013
 
2012
 
2013
 
2012
Interest expense (income)
 
 
 
 
 
 
 
Grain
$
1,391

 
$
3,465

 
$
7,714

 
$
9,404

Ethanol
289

 
284

 
895

 
493

Plant Nutrient
746

 
725

 
2,461

 
2,067

Rail
1,220

 
1,229

 
4,162

 
3,563

Turf & Specialty
203

 
238

 
951

 
906

Retail
152

 
217

 
519

 
570

Other
1,347

 
(676
)
 
(95
)
 
(811
)
Total
$
5,348

 
$
5,482

 
$
16,607

 
$
16,192


 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
2013
 
2012
 
2013
 
2012
Equity in earnings (loss) of affiliates
 
 
 
 
 
 
 
Grain
$
12,003

 
$
9,249

 
$
24,940

 
$
22,706

Ethanol
10,174

 
(3,224
)
 
15,051

 
(7,305
)
Plant Nutrient

 
2

 

 
5

Total
$
22,177

 
$
6,027

 
$
39,991

 
$
15,406

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
2013
 
2012
 
2013
 
2012
Other income (expense), net
 
 
 
 
 
 
 
Grain
$
1,216

 
$
526

 
$
1,438

 
$
1,842

Ethanol
35

 
1

 
465

 
37

Plant Nutrient
320

 
523

 
459

 
1,651

Rail
5,031

 
1,695

 
6,679

 
3,295

Turf & Specialty
135

 
181

 
585

 
671

Retail
102

 
117

 
316

 
396

Other
766

 
449

 
1,681

 
1,517

Total
$
7,605

 
$
3,492

 
$
11,623

 
$
9,409

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
2013
 
2012
 
2013
 
2012
Income (loss) before income taxes
 
 
 
 
 
 
 
Grain
$
14,323

 
$
10,807

 
$
24,675

 
$
45,519

Ethanol
10,904

 
(936
)
 
23,984

 
(2,920
)
Plant Nutrient
(1,643
)
 
759

 
21,035

 
34,540

Rail
12,360

 
19,071

 
36,614

 
34,288

Turf & Specialty
(83
)
 
(1,571
)
 
6,113

 
3,384

Retail
(2,043
)
 
(1,769
)
 
(3,673
)
 
(3,090
)
Other
(6,309
)
 
(344
)
 
(12,563
)
 
(10,501
)
Noncontrolling interests
878

 
(1,693
)
 
1,805

 
(3,100
)
Total
$
28,387

 
$
24,324

 
$
97,990

 
$
98,120



17

Table of Contents

(in thousands)
September 30, 2013
 
December 31, 2012
 
September 30, 2012
Identifiable assets
 
 
 
 
 
Grain
$
784,869

 
$
1,076,986

 
$
942,629

Ethanol
207,530

 
206,975

 
214,858

Plant Nutrient
258,772

 
257,980

 
268,982

Rail
294,528

 
289,467

 
309,847

Turf & Specialty
71,600

 
82,683

 
55,638

Retail
51,465

 
51,772

 
56,795

Other
213,527

 
216,441

 
142,691

Total
$
1,882,291

 
$
2,182,304

 
$
1,991,440


8. Related Party Transactions
Equity Method Investments
The Company, directly or indirectly, holds investments in companies that are accounted for under the equity method. The Company’s equity in these entities is presented at cost plus its accumulated proportional share of income or loss, less any distributions it has received.
On July 31, 2013, the Company, along with Lansing Trade Group, LLC established joint ventures that acquired 100% of the stock of Thompsons Limited, including its investment in the related U.S. operating company, for a purchase price of $152 million, which includes an adjustment for excess working capital. The purchase price includes $48 million cash paid by the Company, $40 million cash paid by LTG, and $64 million of external debt at Thompsons Limited. As part of the purchase LTG also contributed a Canadian branch of its business to Thompsons Limited. LTG is currently performing a valuation of its contributed business, which could potentially result in a gain for book purposes to be recorded in the fourth quarter by LTG. While the valuation is still being performed, the Company's portion of the gain could be approximately $3 million. Each Company owns 50% of the investment. Thompsons Limited is a grain and food-grade bean handler and agronomy input provider, headquartered in Blenheim, Ontario, and operates 12 locations across Ontario and Minnesota.
The following table presents the Company’s investment balance in each of its equity method investees by entity:
 
(in thousands)
September 30, 2013
 
December 31, 2012
 
September 30, 2012
The Andersons Albion Ethanol LLC
$
35,643

 
$
30,227

 
$
30,625

The Andersons Clymers Ethanol LLC
37,695

 
33,119

 
34,962

The Andersons Marathon Ethanol LLC
37,844

 
32,996

 
36,153

Lansing Trade Group, LLC
100,071

 
92,094

 
86,007

Thompsons Limited (a)
47,477

 

 

Other
3,913

 
2,472

 
2,310

Total
$
262,643

 
$
190,908

 
$
190,057

 (a) Thompsons Limited and related U.S. operating company held by joint ventures
The Company holds a majority interest (66%) in The Andersons Ethanol Investment LLC (“TAEI”). This consolidated entity holds a 50% interest in The Andersons Marathon Ethanol LLC (“TAME”). The noncontrolling interest in TAEI is attributed 34% of the gains and losses of TAME recorded by the Company.






18

Table of Contents

The following table summarizes income (losses) earned from the Company’s equity method investments by entity:
 
 
% ownership at
September 30, 2013
 
Three months ended
September 30,
Nine months ended
September 30,
(in thousands)
 
 
2013
 
2012
 
2013
 
2012
The Andersons Albion Ethanol LLC
50%
 
$
3,711

 
$
(622
)
 
$
5,627

 
$
(204
)
The Andersons Clymers Ethanol LLC
38%
 
3,437

 
(972
)
 
4,576

 
(1,985
)
The Andersons Marathon Ethanol LLC
50%
 
3,026

 
(1,629
)
 
4,848

 
(5,116
)
Lansing Trade Group, LLC
49% (a)
 
12,391

 
9,187

 
25,255

 
22,347

Thompsons Limited (b)
50%
 
(722
)
 

 
(722
)
 

Other
5%-23%
 
334

 
63

 
407

 
364

Total
 
 
$
22,177

 
$
6,027

 
$
39,991

 
$
15,406

 (a) This does not consider restricted management units which once vested will reduce the ownership percentage by approximately 2%.
 (b) Thompsons Limited and related U.S. operating company held by joint ventures

Total distributions received from unconsolidated affiliates were $4.1 million and $17.5 million for the three and nine months ended September 30, 2013, respectively.
The Company does not hold a majority of the outstanding shares of LTG. All major operating decisions of LTG are made by LTG’s Board of Directors and the Company does not have a majority of the board seats. In addition, based on the terms of the operating agreement between LTG and its owners, the minority shareholders have substantive participating rights that allow them to effectively participate in the decisions made in the ordinary course of business that are significant to LTG. Due to these factors, the Company does not have control over LTG and therefore accounts for this investment under the equity method.
The Company does not hold a majority of the outstanding shares of Thompsons Limited joint ventures. All major operating decisions of these joint ventures are made by their Board of Directors and the Company does not have a majority of the board seats. Due to these factors, the Company does not have control over these joint ventures and therefore accounts for these investments under the equity method.
In the third quarter of 2013, LTG qualified as a significant subsidiary of the Company under the income test. The following table presents the required summarized unaudited financial information of this investment for the three and nine months ended September 30, 2013 and 2012:
(in thousands)
Three months ended
September 30,
 
Nine months ended
September 30,
2013
 
2012
 
2013
 
2012
Sales
$
2,206,433

 
$
1,680,170

 
$
6,828,076

 
$
4,874,347

Gross profit
64,095

 
50,412

 
143,608

 
126,330

Income before income taxes
27,321

 
20,108

 
54,122

 
49,014

Net income
25,496

 
18,545

 
52,490

 
47,486

Net income attributable to LTG
25,211

 
17,927

 
51,823

 
44,518

Investment in Debt Securities
The Company owns 100% of the cumulative convertible preferred shares of Iowa Northern Railway Corporation (“IANR”), which operates a short-line railroad in Iowa. As a result of this investment, the Company has a 49.9% voting interest in IANR, with the remaining 50.1% voting interest held by the common shareholders. The preferred shares have certain rights associated with them, including voting, dividends, liquidation, redemption and conversion. Dividends accrue to the Company at a rate of 14% annually whether or not declared by IANR and are cumulative in nature. The Company can convert its preferred shares into common shares of IANR at any time, but the shares cannot be redeemed until May 2015. This investment is accounted for as “available-for-sale” debt securities in accordance with ASC 320 and is carried at estimated fair value in “Other noncurrent assets” on the Company’s Condensed Consolidated Balance Sheet. The estimated fair value of the Company’s investment in IANR as of September 30, 2013 was $17.7 million.

19

Table of Contents

Based on the Company’s assessment, IANR is considered a variable interest entity (“VIE”). Since the Company does not possess the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, it is not considered to be the primary beneficiary of IANR and therefore does not consolidate IANR. The decisions that most significantly impact the economic performance of IANR are made by IANR’s Board of Directors. The Board of Directors has five directors; two directors from the Company, two directors from the common shareholders and one independent director who is elected by unanimous decision of the other four directors. The vote of four of the five directors is required for all key decisions.
The Company’s current maximum exposure to loss related to IANR is $23.0 million, which represents the Company’s investment at fair value plus unpaid accrued dividends to date of $5.3 million. The Company does not have any obligation or commitments to provide additional financial support to IANR.
Related Party Transactions
In the ordinary course of business, the Company will enter into related party transactions with each of the investments described above, along with other related parties. The following table sets forth the related party transactions entered into for the time periods presented:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
2013
 
2012
 
2013
 
2012
Sales revenues
$
316,154

 
$
234,258

 
$
985,618

 
$
654,308

Service fee revenues (a)
5,746

 
5,329

 
17,360

 
16,201

Purchases of product
190,009

 
173,519

 
535,068

 
467,841

Lease income (b)
1,590

 
1,695

 
4,661

 
5,428

Labor and benefits reimbursement (c)
2,682

 
3,192

 
7,948

 
8,943

Other expenses (d)
325

 
279

 
1,078

 
615

Accounts receivable at September 30 (e)
19,736

 
27,548

 
 
 
 
Accounts payable at September 30 (f)
16,163

 
18,474

 
 
 
 
 
(a)
Service fee revenues include management fee, corn origination fee, ethanol and DDG marketing fees, and other commissions.
(b)
Lease income includes the lease of the Company’s Albion, Michigan and Clymers, Indiana grain facilities as well as certain railcars to the various ethanol LLCs and IANR.
(c)
The Company provides all operational labor to the unconsolidated ethanol LLCs and charges them an amount equal to the Company’s costs of the related services.
(d)
Other expenses include payments to IANR for repair facility rent and use of their railroad reporting mark, payment to LTG for the lease of railcars and other various expenses.
(e)
Accounts receivable represents amounts due from related parties for sales of corn, leasing revenue and service fees.
(f)
Accounts payable represents amounts due to related parties for purchases of ethanol.

For the quarters ended September 30, 2013 and 2012, revenues recognized for the sale of ethanol that the Company purchased from the unconsolidated ethanol LLCs were $155.9 million and $192.8 million, respectively. For the nine months ended September 30, 2013 and 2012, revenues recognized for the sale of ethanol that the Company purchased from the unconsolidated ethanol LLCs were $464.5 million and $489.0 million, respectively. For the quarters ended September 30, 2013 and 2012, revenues recognized for the sale of corn to the unconsolidated ethanol LLCs under these agreements were $179.1 million and $143.4 million, respectively. For the nine months ended September 30, 2013 and 2012, revenues recognized for the sale of corn to the unconsolidated ethanol LLCs were $584.3 million and $487.8 million, respectively.
From time to time, the Company enters into derivative contracts with certain of its related parties for the purchase and sale of corn and ethanol, for similar price risk mitigation purposes and on similar terms as the purchase and sale derivative contracts it enters into with unrelated parties. The fair value of derivative contract assets with related parties for the periods ended September 30, 2013December 31, 2012 and September 30, 2012 was $14.2 million, $3.2 million, and $1.7 million, respectively. The fair value of derivative contract liabilities with related parties for the periods ended September 30, 2013, December 31, 2012 and September 30, 2012 was $3.3 million, $0.3 million, and $4.5 million, respectively.



20

Table of Contents

9. Fair Value Measurements
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at September 30, 2013, December 31, 2012 and September 30, 2012:
 
(in thousands)
September 30, 2013
Assets (liabilities)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
90,093

 
$

 
$

 
$
90,093

Restricted cash
164

 

 

 
164

Commodity derivatives, net (c)
62,560

 
(55,035
)
 

 
7,525

Convertible preferred securities (b)

 

 
17,710

 
17,710

Other assets and liabilities (a)
9,539

 
(1,045
)
 

 
8,494

Total
$
162,356

 
$
(56,080
)
 
$
17,710

 
$
123,986

 
(in thousands)
December 31, 2012
Assets (liabilities)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
78,674

 
$

 
$

 
$
78,674

Restricted cash
398

 

 

 
398

Commodity derivatives, net (c)
46,966

 
23,634

 

 
70,600

Convertible preferred securities (b)

 

 
17,220

 
17,220

Other assets and liabilities (a)
7,813

 
(2,109
)
 

 
5,704

Total
$
133,851

 
$
21,525

 
$
17,220

 
$
172,596

 
(in thousands)
September 30, 2012
Assets (liabilities)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
39,904

 
$

 
$

 
$
39,904

Restricted cash
160

 

 

 
160

Commodity derivatives, net (c)
15,619

 
113,513

 

 
129,132

Convertible preferred securities (b)

 

 
17,350

 
17,350

Other assets and liabilities (a)
7,515

 
(1,966
)
 

 
5,549

Total
$
63,198

 
$
111,547

 
$
17,350

 
$
192,095

 
(a)
Included in other assets and liabilities are interest rate and foreign currency derivatives, swaptions and deferred compensation assets.
(b)
Recorded in “Other noncurrent assets” on the Company’s Condensed Consolidated Balance Sheets.
(c)
Includes associated cash posted/received as collateral

Level 1 commodity derivatives reflect the fair value of the exchanged-traded futures and options contracts that the Company holds, net of the cash collateral that the Company has in its margin account.

The majority of the Company’s assets and liabilities measured at fair value are based on the market approach valuation technique. With the market approach, fair value is derived using prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The Company’s net commodity derivatives primarily consist of futures or options contracts via regulated exchanges and contracts with producers or customers under which the future settlement date and bushels (or gallons in the case of ethanol contracts) of commodities to be delivered (primarily wheat, corn, soybeans and ethanol) are fixed and under which the price may or may not be fixed. Depending on the specifics of the individual contracts, the fair value is derived from the futures or options prices on the CME or the New York Mercantile Exchange for similar commodities and delivery dates as well as observable quotes for local basis adjustments (the difference, which is attributable to local market conditions, between the quoted futures price and the local cash price). Because “basis” for a particular commodity and location typically has multiple quoted prices from other agribusinesses in the same geographical vicinity and is used as a common pricing mechanism in the

21

Table of Contents

Agribusiness industry, we have concluded that “basis” is a “Level 2” fair value input for purposes of the fair value disclosure requirements related to our commodity derivatives. Although nonperformance risk, both of the Company and the counterparty, is present in each of these commodity contracts and is a component of the estimated fair values, based on the Company’s historical experience with its producers and customers and the Company’s knowledge of their businesses, the Company does not view nonperformance risk to be a significant input to fair value for the majority of these commodity contracts.
The Company’s convertible preferred securities are measured at fair value using a combination of the income approach on a quarterly basis and the market approach on an annual basis. Specifically, the income approach incorporates the use of the Discounted Cash Flow method, whereas the Market Approach incorporates the use of the Guideline Public Company method. Application of the Discounted Cash Flow method requires estimating the annual cash flows that the business enterprise is expected to generate in the future. The assumptions input into this method are estimated annual cash flows for a specified estimation period, the discount rate, and the terminal value at the end of the estimation period. In the Guideline Public Company method, valuation multiples, including total invested capital, are calculated based on financial statements and stock price data from selected guideline publicly traded companies. On an annual basis, a comparative analysis is then performed for factors including, but not limited to size, profitability and growth to determine fair value.
A reconciliation of beginning and ending balances for the Company’s fair value measurements using Level 3 inputs is as follows:
 
 
2013

2012
(in thousands)
Interest
rate
derivatives
and
swaptions

Convertible
preferred
securities

Commodity
derivatives,
net

Interest
rate
derivatives
and
swaptions

Convertible
preferred
securities

Commodity
derivatives,
net
Asset (liability) at December 31,
$

 
$
17,220

 
$

 
$
(2,178
)
 
$
20,360

 
$
2,467

Unrealized gains included in other comprehensive income

 
490

 

 

 

 

Transfers to level 2

 

 

 
2,178

 

 
(2,467
)
Asset at March 31,
$

 
$
17,710

 
$

 
$

 
$
20,360

 
$

Unrealized losses included in other comprehensive income

 

 

 

 
(3,010
)
 

Asset at June 30,
$

 
$
17,710

 
$

 
$

 
$
17,350

 
$

Unrealized gains (losses) included in other comprehensive income

 

 

 

 

 

Asset at September 30,
$

 
$
17,710

 
$

 
$

 
$
17,350

 
$


The following table summarizes information about the Company's Level 3 fair value measurements as of September 30, 2013:
Quantitative Information about Level 3 Fair Value Measurements
 
 
 
 
 
 
 
Range
 
 
(in thousands)
Fair Value as of September 30, 2013
 
Valuation Method
 
Unobservable Input
 
Low
 
High
 
Weighted Average
Convertible Preferred Securities
$
17,710

 
Market Approach
 
EBITDA Multiples
 
5.50

 
7.00

 
6.60

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Approach
 
Discount Rate
 
17.0
%
 
17.0
%
 
17.0
%












22

Table of Contents

Fair Value of Financial Instruments
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 for similar types of borrowing arrangements. As such, the Company has concluded that the fair value of long-term debt is considered “Level 2” in the fair value hierarchy.
 
(in thousands)
September 30,
2013

December 31,
2012
Fair value of long-term debt
$
428,726

 
$
459,397

Fair value in excess of carrying value
3,476

 
17,009

The fair value of the Company’s cash equivalents, accounts receivable and accounts payable approximate their carrying value as they are close to maturity.

10. Debt
The Company is party to borrowing arrangements with a syndicate of banks. See Note 10 in the Company’s 2012 Form 10-K for a complete description of these arrangements. Total borrowing capacity for the Company under all lines of credit is currently at $878.1 million, including $28.1 million non-recourse debt of The Andersons Denison Ethanol LLC ("TADE"). At September 30, 2013, the Company had a total of $847.5 million available for borrowing under its lines of credit. The Company was in compliance with all financial and non-financial covenants as of September 30, 2013.
The Company’s short-term and long-term debt at September 30, 2013December 31, 2012 and September 30, 2012 consisted of the following:
 
(in thousands)
September 30,
2013
 
December 31,
2012
 
September 30,
2012
Borrowings under short-term line of credit – nonrecourse
$

 
$
4,219

 
$
522

Borrowings under short-term line of credit – recourse

 
20,000

 
275,000

Total borrowings under short-term line of credit
$

 
$
24,219

 
$
275,522

Current maturities of long-term debt – nonrecourse
$
3,277

 
$
2,496

 
$
1,716

Current maturities of long-term debt – recourse
40,955

 
12,649

 
30,939

Total current maturities of long-term debt
$
44,232

 
$
15,145

 
$
32,655

Long-term debt, less current maturities – nonrecourse
$
8,223

 
$
20,067

 
$
25,686

Long-term debt, less current maturities – recourse
372,795

 
407,176

 
286,718

Total long-term debt, less current maturities
$
381,018

 
$
427,243

 
$
312,404


11. Commitments and Contingencies
The Company is party to litigation, or threats thereof, both as defendant and plaintiff with some regularity, although individual cases that are material in size occur infrequently. As a defendant, the Company establishes reserves for claimed amounts that are considered probable, and capable of estimation. If those cases are resolved for lesser amounts, the excess reserves are taken into income and, conversely, if those cases are resolved for larger than the amount the Company has accrued, the Company records additional expense. The Company believes it is unlikely that the results of its current legal proceedings for which it is the defendant, even if unfavorable, will be material. As a plaintiff, amounts that are collected can also result in sudden, non-recurring income. Litigation results depend upon a variety of factors, including the availability of evidence, the credibility of witnesses, the performance of counsel, the state of the law, and the impressions of judges and jurors, any of which can be critical in importance, yet difficult, if not impossible, to predict. Consequently, cases currently pending, or future matters, may result in unexpected, and non-recurring losses, or income, from time to time. Finally, litigation results are often subject to judicial reconsideration, appeal and further negotiation by the parties, and as a result, the final impact of a particular judicial decision may be unknown for some time, or may result in continued reserves to account for the potential of such post-verdict actions. In the third quarter, the Company recorded a $3.5 million gain in other income related to the settlement of an early lease termination.
The estimated range of loss for all outstanding claims that are considered reasonably possible of occurring is not material. 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 our grain and fertilizer facility along the Maumee River in Toledo,

23

Table of Contents

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 our 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 our 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.

12. Business Acquisitions

On August 5, 2013, the Company completed the purchase of substantially all of the assets of Mile Rail, LLC and a sister entity for a purchase price of $7.8 million. The operations consist of a railcar repair and cleaning facility headquartered in Kansas City, Missouri, with 2 satellite locations in Nebraska and Indiana.
The purchase price allocation is preliminary, pending completion of the full valuation report; however, significant changes are not anticipated. The summarized preliminary purchase price allocation is as follows:
(in thousands)
 
Inventory
$
512

Other assets
14

Intangible assets
650

Goodwill
4,167

Property, plant and equipment
2,605

Other liabilities
(144
)
Total purchase price
$
7,804

The goodwill recognized as a result of the Mile Rail acquisition is $4.2 million, which is fully deductible for tax purposes, and is included in the Rail segment. The goodwill relates to geography that is complimentary to the Rail Group's existing repair network and from its additional connections to several U.S. Class I railroads, from which we anticipate future growth and capacity to generate gross profit.
Details of the intangible assets acquired are as follows:
 
(in thousands)
Fair
Value
 
Useful
Life
Customer relationships
$
400

 
5 years
Noncompete agreement
250

 
5 years
Total identifiable intangible assets
$
650

 
5 years *
*weighted average number of years

Prior Year Business Acquisitions

On December 3, 2012, the Company completed the purchase of a majority of the grain and agronomy assets of Green Plains Grain Company ("GPG"), a subsidiary of Green Plains Renewable Energy, Inc. for a purchase price of $120.2 million, which included a $3.3 million payable to the acquiree that was outstanding as of December 31, 2012 and paid in January 2013. The various facilities located in Iowa and Tennessee have a combined grain storage capacity of more than 32.0 million bushels and 12,000 tons of nutrient storage.
During the first quarter of 2013, the purchase price allocation for Green Plains Grain Company, which was acquired in the fourth quarter of 2012 was finalized. The measurement period adjustments to the purchase price allocation are the result of additional information obtained since the filing of our Form 10-K for the year ended December 31, 2012. Due to these revision of estimates, (i) property, plant and equipment decreased $135 thousand, (ii) intangible assets decreased $2.6 million due to a change in forecasted cash flows specific to the agronomy assets, (iii) other liabilities and noncontrolling interests increased $235 thousand to reflect the noncontrolling interest in the acquisition and (iv) goodwill increased $3 million as an offset to the above-mentioned changes related to certain entities acquired.


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Table of Contents

The summarized final purchase price allocation is as follows:

(in thousands)
 
Accounts receivable
$
19,174

Inventory
121,983

Property, plant and equipment
57,828

Intangible assets
4,600

Goodwill
33,175

Commodity derivatives
4,701

Other assets
1,775

Accounts payable
(91,001
)
Debt assumed
(29,632
)
Other liabilities and noncontrolling interests
(2,371
)
Total purchase price
$
120,232


The goodwill recognized as a result of the GPG acquisition is $33.2 million, for which the full amount is deductible for tax purposes, and is included in the Grain reportable segment. The goodwill relates to the value of a fully functional business consisting of a successful management team and an experienced and talented work force.
Details of the intangible assets acquired are as follows:
 
(in thousands)
Fair
Value
 
Useful
Life
Supplier relationships
$
4,600

 
3 to 5 years
Total identifiable intangible assets
$
4,600

 
4 years *
*weighted average number of years

On January 31, 2012, the Company purchased 100% of the stock of New Eezy Gro, Inc. (“NEG”) for a purchase price of $16.8 million. New Eezy Gro is a manufacturer and wholesale marketer of specialty agricultural nutrients and industrial products.

The summarized purchase price allocation is as follows:

(in thousands)
 
Current assets
$
5,106

Intangible assets
9,600

Goodwill
6,681

Property, plant and equipment
3,586

Current liabilities
(3,784
)
Deferred tax liability, net
(4,412
)
Total purchase price
$
16,777


The goodwill recognized as a result of the NEG acquisition is $6.7 million and is included in the Plant Nutrient segment. The goodwill relates to the value of proprietary products and processes as well as an assembled workforce.










25

Table of Contents

Details of the intangible assets acquired are as follows:
(in thousands)
Fair Value

 
Useful Life
Trademarks
$
1,200

 
10 years
Customer list
5,500

 
10 years
Technology
2,100

 
5 years
Noncompete agreement
800

 
7 years
Total identifiable intangible assets
$
9,600

 
9 years *
*weighted average number of years
On May 1, 2012, the Company and its subsidiary, TADE completed the purchase of certain assets of an ethanol production facility in Denison, Iowa for a purchase price of $77.4 million. Previously owned by Amaizing Energy Denison LLC and Amaizing Energy Holding Company, LLC, the operations consist of a 55 million gallon capacity ethanol facility with an adjacent 2.7 million bushel grain terminal, with direct access to two Class 1 railroads in Iowa. TADE has been organized to provide investment opportunity for the Company and potential outside investors. The Company owns the grain terminal, manages TADE, and provides grain origination, risk management, and DDG and ethanol marketing services. The Company currently owns a controlling interest of 85% of TADE, and therefore includes TADE's results of operations in its consolidated financial statements. The fair value of the noncontrolling interest in TADE purchased by the minority investor at the acquisition date was $6.1 million.
The summarized purchase price allocation is as follows:
 
(in thousands)
 
Grain elevator
$
14,285

Inventory
10,087

Intangible assets
2,373

Other current assets
962

Property, plant and equipment
49,693

Total purchase price
$
77,400

Details of the intangible assets acquired are as follows:
 
(in thousands)
Fair
Value
 
Useful
Life
Lease intangibles
$
2,123

 
10 months to 5 years
Noncompete agreement
250

 
2 years
Total identifiable intangible assets
$
2,373

 
3 years *
*weighted average number of years

On October 30, 2012, the Company completed the purchase of substantially all of the assets of Mt. Pulaski Products for a purchase price of $10.7 million. The operations consist of several corncob processing facilities in central Illinois.
The summarized purchase price allocation is as follows:
(in thousands)
 
Inventory
$
3,757

Intangible assets
1,000

Goodwill
1,985

Property, plant and equipment
3,941

Total purchase price
$
10,683


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Table of Contents

The goodwill recognized as a result of the Mt. Pulaski acquisition is $2.0 million, for which the full amount is deductible for tax purposes, and is included in the Turf & Specialty segment. The goodwill relates to expected synergies from combining operations as well as an assembled workforce.
Details of the intangible assets acquired are as follows:

(in thousands)
Fair
Value
 
Useful
Life
Trademark
$
300

 
Indefinite
Customer list
600

 
10 years
Noncompete agreement
100

 
7 years
Total identifiable intangible assets
$
1,000

 
10 years *
*weighted average number of years

13. Income Taxes

For the three months ended September 30, 2013, the income tax effective rate was 36.5%. For the three months ended September 30, 2012, the income tax effective rate was 37.6%. The decrease in the effective rate was due primarily to income attributable to the noncontrolling interest that did not increase taxes and the Company’s share of Thompsons Limited foreign joint venture earnings considered indefinitely reinvested outside the U.S. This was offset by the tax impact of costs associated with the Thompsons Limited acquisition for which there is no tax benefit.

For the nine months ended September 30, 2013, the income tax effective rate was 37.7%. For the nine months ended September 30, 2012, the income tax effective rate was 37.4%. The increase in the effective rate was due primarily to a correction made 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 and the tax effects of costs associated with the Thompsons Limited acquisition for which there is no tax benefit. Offsetting these increases is income attributable to the noncontrolling interest that did not increase taxes and the Company’s share of Thompsons Limited foreign joint venture earnings considered indefinitely reinvested outside the U.S.
The Company's 2013 income tax provision includes deferred tax expense of $1.4 million due to a correction of other comprehensive income related to the portion of the Company's retiree health care plan liability and the Medicare Part D subsidy. The correction related to the years 2009 through 2012 and was recorded during the first quarter of 2013. The impact of this error on amounts previously reported was determined to be immaterial to the Consolidated Financial Statements. As a result of the correction of the error, deferred income tax expense for the nine months ended September 30, 2013 increased and accumulated other comprehensive loss decreased by $1.4 million.

Item 2. 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 others, including those risk factors listed under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”). 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.

Critical Accounting Policies and Estimates
Our critical accounting policies and critical accounting estimates, as described in our 2012 Form 10-K, have not materially changed during the first three quarters of 2013.


27

Table of Contents

Executive Overview
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 Business
Our Grain business operates grain elevators in various states in the U.S. Corn Belt. In addition to storage, merchandising and grain trading, Grain performs marketing, risk management, and corn origination services to its customers and affiliated ethanol production facilities. Grain is a significant investor in Lansing Trade Group, LLC (“LTG”), an established commodity trading, grain handling and merchandising business with operations throughout the country and with global trading/merchandising offices.
Grain inventories on hand at September 30, 2013 were 46.8 million bushels, of which 4.7 million bushels were stored for others. This compares to 55.0 million bushels on hand at September 30, 2012, of which 0.9 million bushels were stored for others.
The unusually cool, wet summer produced record corn crops in the eastern corn belt and better than expected soy bean yields as well. According to the U.S. Department of Agriculture's Crop Progress Report, an average of 68% of corn has been harvested in states where we have grain facilities, which is behind prior year and ahead of the five year average. Soybeans are 90% harvested in states where we have grain facilities, which is ahead of both prior year and the five year average. Next year's winter wheat crop is approximately 96% planted in our primary region. As we look to the fourth quarter, post-harvest inventories are expected to be at levels which are anticipated to have a favorable impact on space income into 2014.
On July 31, 2013, we, along with Lansing Trade Group, LLC established joint ventures that acquired 100% of the stock of Thompsons Limited, including its investment in the related U.S. operating company, for a purchase price of $152 million, which includes an adjustment for excess working capital. The purchase price includes $48 million cash paid by us, $40 million cash paid by LTG, and $64 million of external debt at Thompsons Limited. As part of the purchase LTG also contributed a Canadian branch of its business to Thompsons Limited. LTG is currently performing a valuation of its contributed business, which could potentially result in a gain for book purposes to be recorded in the fourth quarter by LTG. While the valuation is still being performed, our portion of the gain could be approximately $3 million. Each Company owns 50% of the investment. Thompsons Limited is a grain and food-grade bean handler and agronomy input provider, headquartered in Blenheim, Ontario, and operates 12 locations across Ontario and Minnesota.
Ethanol Business
Our Ethanol business holds investments in four ethanol production facilities organized as separate limited liability companies, three of which are accounted for under the equity method (the "unconsolidated ethanol LLCs") and one that is consolidated. The Andersons Denison Ethanol LLC ("TADE"). The Ethanol business purchases and sells ethanol, offers facility operations, risk management, and ethanol, corn oil and distillers dried grains (“DDG”) marketing to the ethanol plants in which it invests in and operates, as well as third parties.
Ethanol and co-product demand continued to be strong during the third quarter, which had a favorable impact on ethanol prices and overall margins. Earnings realized from our ethanol LLC investments were positive for the quarter and nine months ended September 30, 2013. At this time, we have some future production and required inputs under contract at positive margins, although the potential still exists for negative margins in the fourth quarter due to an expected increase in ethanol industry production and stocks as well as a seasonal decline in gasoline demand.
Ethanol volumes shipped for the three and nine months ended September 30, 2013 and 2012 were as follows:
(in thousands)
Three months ended
September 30,
 
Nine months ended
September 30,
 
2013
 
2012
 
2013
 
2012
Ethanol (gallons shipped)
70,271

 
70,396

 
209,986

 
195,841

E-85 (gallons shipped)
7,875

 
4,590

 
18,223

 
13,831

Corn Oil (pounds shipped)
22,736

 
16,455

 
61,592

 
40,011

DDG (tons shipped)
257

 
243

 
781

 
729


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Table of Contents

Plant Nutrient Business
Our Plant Nutrient business 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 Plant Nutrient Group provides warehousing, packaging and manufacturing services to basic manufacturers and other distributors. The business 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, water treatment products, and de-icers and anti-icers for airport runways, roadways, and other commercial applications. The major nutrient products sold by the business principally contain nitrogen, phosphate, potassium and sulfur.

Storage capacity at our wholesale nutrient and farm center facilities was approximately 470,000 tons for dry nutrients and approximately 398,000 tons for liquid nutrients at September 30, 2013.
Fertilizer tons sold (including sales and service tons) for the three and nine months ended September 30, 2013 were 0.3 million tons and 1.4 million tons, respectively, compared to the three and nine months ended September 30, 2012 of 0.4 million tons and 1.6 million tons. Volume for the period was lower than anticipated due to harvest occurring later this year compared to the prior year, which proved to be unfavorable for early third quarter nutrient application. Given good fall weather and crop yields this sales volume should move into the fourth quarter as harvest is now in progress.
Rail Business
Our Rail business buys, sells, leases, rebuilds and repairs various types of used railcars and rail equipment. The business also provides fleet management services to fleet owners. Rail has a diversified fleet of car types (covered and open top hoppers, boxcars, gondolas, tank cars and pressure differential cars) and locomotives.
In the third quarter, Rail had gains on sales of railcars and related leases in the amount of $2.2 million compared to $13.5 million in the prior year. Railcars and locomotives under management (owned, leased or managed for financial institutions in non-recourse arrangements) at September 30, 2013 were 22,651 compared to 23,384 at September 30, 2012. The average utilization rate (railcars and locomotives under management that are in lease services, exclusive of railcars managed for third party investors) has increased slightly from 84.3% to 86.2% for the quarters ended September 30, 2012 and 2013.

On August 5, 2013, the Company completed the purchase of substantially all of the assets of Mile Rail, LLC and a sister entity for a purchase price of $7.8 million. The operations consist of a railcar repair and cleaning facility headquartered in Kansas City, Missouri and two satellite locations in Nebraska and Indiana. The acquired assets give the Rail Group additional connections to several U.S. Class I railroads, from which we anticipate future growth and capacity to generate gross profit.
The Rail Group continues to effectively manage its fleet and look for potential opportunities in the repair business.
Turf & Specialty Business
Turf & Specialty is one of a very limited number of processors of corncob-based products in the United States. Corncob-based products are manufactured for a variety of uses including laboratory animal bedding, private-label cat litter, as well as absorbents, blast cleaners, carriers and polishers. Corncob-based products are sold throughout the year. Turf & Specialty also produces granular fertilizer products for the professional lawn care and golf course markets. It also sells consumer fertilizer and weed and turf pest 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 weed and turf pest control products. These products are distributed throughout the United States and Canada and into Europe and Asia. The turf products industry is highly seasonal, with the majority of sales occurring from early spring to early summer.
Retail Business
Our Retail business includes large retail stores operated as “The Andersons” and a specialty food market operated as “The Andersons Market”. It also operates a sales and service facility for outdoor power equipment. The retail concept is More for Your Home ® and the conventional retail 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.
The retail business 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 to maximize the profitability.



29

Table of Contents

Other
Our “Other” business segment represents corporate functions that provide support and services to the operating segments. The results contained within this segment include expenses and benefits not allocated back to the operating segments, including implementation expenses for our ERP project.
Operating Results
The following discussion focuses on the operating results as shown in the Condensed Consolidated Statements of Income with a separate discussion by segment. Additional segment information is included in the Notes to the Condensed Consolidated Financial Statements herein in Note 7. Segment Information.
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
2013
 
2012
 
2013
 
2012
Sales and merchandising revenues
$
1,181,374

 
$
1,138,402

 
$
4,020,308

 
$
3,591,369

Cost of sales and merchandising revenues
1,108,228

 
1,060,086

 
3,764,660

 
3,324,533

Gross profit
73,146

 
78,316

 
255,648

 
266,836

Operating, administrative and general expenses
69,193

 
58,029

 
192,665

 
177,339

Interest expense
5,348

 
5,482

 
16,607

 
16,192

Equity in earnings of affiliates
22,177

 
6,027

 
39,991

 
15,406

Other income, net
7,605

 
3,492

 
11,623

 
9,409

Income before income taxes
28,387

 
24,324

 
97,990

 
98,120

Income (loss) attributable to noncontrolling interests
878

 
(1,693
)
 
1,805

 
(3,100
)
Income before income taxes attributable to The Andersons, Inc.
$
27,509

 
$
26,017

 
$
96,185

 
$
101,220

Comparison of the three months ended September 30, 2013 with the three months ended September 30, 2012:
Grain Group
 
 
Three months ended
September 30,
(in thousands)
2013
 
2012
Sales and merchandising revenues
$
765,833

 
$
677,484

Cost of sales and merchandising revenues
738,828

 
656,318

Gross profit
27,005

 
21,166

Operating, administrative and general expenses
24,518

 
16,669

Interest expense
1,391

 
3,465

Equity in earnings of affiliates
12,003

 
9,249

Other income (expense), net
1,216

 
526

Income before income taxes
14,315

 
10,807

Loss attributable to noncontrolling interest
(8
)
 

Income before income taxes attributable to The Andersons, Inc.
$
14,323


$
10,807


Operating results for the Grain Group have improved $3.5 million compared to the results of the same period last year. Sales and merchandising revenues increased $88.3 million and is primarily the result of an increase in the volume of bushels shipped (including newly acquired facilities) for corn and wheat and was partially offset by a decrease in the average price per bushel sold. Cost of sales and merchandising revenues increased $82.5 million compared to the third quarter of 2012 and was also driven by higher volume. Gross profit is up $5.8 million over the third quarter of September 2012 and is primarily a result of margin recognized on a higher number of bushels sold. The business acquisition in the fourth quarter of 2012 added approximately $136.3 million of revenues and $2.9 million of gross profit in the third quarter.

Operating expenses increased $7.8 million compared to the same period in 2012 with over half of the increase attributable to the new locations acquired in the fourth quarter of last year. The remaining increases are due to higher employee related expenses as well as depreciation expense due to recent acquisitions and other growth projects. Interest expense is lower

30

Table of Contents

compared to the same period in 2012 due to having fewer bushels in inventory and lower commodity prices resulting in lower inventory values. Equity in earnings of affiliates increased $2.8 million over the same period in 2012, primarily due to the performance of the investment in LTG. Other income is higher in the current year due to certain foreign exchange gains recognized during the quarter.
Ethanol Group
 
Three months ended
September 30,
(in thousands)
2013
 
2012
Sales and merchandising and service fee revenues
$
213,384

 
$
209,634

Cost of sales and merchandising revenues
208,649

 
205,788

Gross profit
4,735

 
3,846

Operating, administrative and general expenses
2,865

 
2,968

Interest expense
289

 
284

Equity in earnings (loss) of affiliates
10,174

 
(3,224
)
Other income, net
35

 
1

Income (loss) before income taxes
11,790

 
(2,629
)
Income (loss) attributable to noncontrolling interests
886

 
(1,693
)
Income (loss) before income taxes attributable to The Andersons, Inc.
$
10,904

 
$
(936
)

Operating results for the Ethanol Group improved $11.8 million over the results of the same period last year. Sales and merchandising and service fee revenues increased $3.7 million and is primarily due to an increase in the average price per gallon of ethanol sold, partially offset by a decrease in gallons sold for the quarter. Sales of corn oil, an ethanol co-product, also contributed to the increase over the third quarter of 2012. The increase in cost of sales is consistent with higher sales and merchandising and service fee revenues. The increase in gross profit quarter over quarter is attributed to the increase in ethanol demand and the price of ethanol which contributed to more favorable margins, in addition to mark to market gains on certain hedges.

Operating expenses were comparable to the same period last year. There were no significant changes in interest expense and other income. Equity in earnings of affiliates improved $13.4 million and relates to improved earnings from our unconsolidated ethanol LLC investments. The ethanol plants' performance was favorably impacted by higher ethanol margins resulting from declining corn costs and higher demand for ethanol.
Plant Nutrient Group
 
Three months ended
September 30,
(in thousands)
2013
 
2012
Sales and merchandising revenues
$
95,681

 
$
135,144

Cost of sales and merchandising revenues
82,128

 
119,847

Gross profit
13,553

 
15,297

Operating, administrative and general expenses
14,770

 
14,338

Interest expense
746

 
725

Equity in earnings of affiliates

 
2

Other income, net
320

 
523

Income (loss) before income taxes
$
(1,643
)
 
$
759


Operating results for the Plant Nutrient Group decreased $2.4 million from the same period last year. During the first quarter, certain agronomy assets from the Green Plains Grain Company business acquisition completed in the fourth quarter of 2012, were reclassified from the Grain segment to the Plant Nutrient segment. The impact on third quarter 2013 operating results of the Plant Nutrient Group was a loss of $0.5 million. Sales and merchandising revenues decreased $39.5 million due to a decrease in both volume and average price per ton sold. The decreases in cost of sales and merchandising revenues and gross profit was also driven by lower sales volume due to a later harvest compared to prior year. In addition, margins for most

31

Table of Contents

nutrients are lower due to the market being flat with little price appreciation, and the reluctance of our dealer and farmer customers to purchase products ahead of need.

Operating expenses were comparable to the same period in 2012. There were no significant changes in interest expense, equity in earnings of affiliates, or other income.
Rail Group
 
Three months ended
September 30,
(in thousands)
2013
 
2012
Sales and merchandising revenues
$
47,523

 
$
59,703

Cost of sales and merchandising revenues
34,523

 
36,811

Gross profit
13,000

 
22,892

Operating, administrative and general expenses
4,451

 
4,287

Interest expense
1,220

 
1,229

Other income, net
5,031

 
1,695

Income before income taxes
$
12,360

 
$
19,071


Operating results for the Rail Group declined by $6.7 million compared to the results from the same period last year. The decrease in revenues was driven by a $13.5 million decrease in car sales, partially offset by an increase in leasing revenues of $0.8 million and sales in the repair facilities of $0.5 million. The decrease in car sales was due to lower volume and the increase in leasing revenues is primarily attributed to favorable lease rates. Cost of sales and merchandising revenues decreased $2.3 million compared to the same period last year primarily as a result of lower volume of car sales.

Rail gross profit decreased by $9.9 million compared to the third quarter of 2012. Gross profit on car sales decreased $11.3 million primarily as a result of lower volume of nonrecourse financing transactions. Gross profit in the leasing business increased $1.3 million and is attributed to improved lease rates, while gross profit in the repair facilities increased $0.1 million.

Operating expenses are comparable quarter over quarter. There were no significant changes in interest expense. Other income is higher in the third quarter of 2013 compared to the same period last year and relates primarily to income from the settlement of two nonperforming railcar leases in the amount of $4.3 million.
Turf & Specialty Group
 
Three months ended
September 30,
(in thousands)
2013
 
2012
Sales and merchandising revenues
$
27,624

 
$
21,509

Cost of sales and merchandising revenues
21,216

 
16,213

Gross profit
6,408

 
5,296

Operating, administrative and general expenses
6,423

 
6,810

Interest expense
203

 
238

Other income, net
135

 
181

Income before income taxes
$
(83
)
 
$
(1,571
)

Operating results for the Turf & Specialty Group improved $1.5 million for the third quarter of 2013 compared to results from the same period last year. Sales and merchandising revenues increased $6.1 million primarily due to a volume increase in the both the cob and lawn fertilizer businesses offset partially by a decrease in the average price per ton sold. The business acquired in the fourth quarter of 2012 impacted revenues in the amount of $2.5 million during the quarter. Consistent with the increase in revenues, cost of sales and merchandising revenues increased $5.0 million compared to the same period last year and was driven by the increase in volume as average cost per ton was lower than prior year. Gross profit increased $1.1 million due to volume increases.

There were no significant fluctuations in operating expenses, interest expense and other income quarter over quarter.

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Retail Group
 
Three months ended
September 30,
(in thousands)
2013
 
2012
Sales and merchandising revenues
$
31,329

 
$
34,928

Cost of sales and merchandising revenues
22,884

 
25,109

Gross profit
8,445

 
9,819

Operating, administrative and general expenses
10,438

 
11,488

Interest expense
152

 
217

Other income, net
102

 
117

Income before income taxes
$
(2,043
)
 
$
(1,769
)

Operating results for the Retail Group are comparable with the results of the same period last year. Sales and merchandising revenues decreased $3.6 million. The average sale per customer increased slightly but was not enough to offset the decrease in customer count quarter over quarter. Cost of sales and merchandising revenues decreased $2.2 million and gross profit decreased $1.4 million and was also driven by lower volume. The majority of these changes are due to the closure of the Woodville, Ohio store in the first quarter of 2013.

Operating expenses were $1.1 million lower than the comparable period last year primarily due to lower labor and benefits and advertising expenses due to the closure of the Woodville store in the first quarter of 2013. There were no significant changes in interest expense and other income quarter over quarter.
Other
 
Three months ended
September 30,
(in thousands)
2013
 
2012
Sales and merchandising revenues
$

 
$

Cost of sales and merchandising revenues

 

Gross profit

 

Operating, administrative and general expenses
5,728

 
1,469

Interest (income) expense
1,347

 
(676
)
Other income, net
766

 
449

Loss before income taxes
$
(6,309
)
 
$
(344
)

Net corporate operating loss not allocated to business segments produced a loss of $6.3 million for the quarter ended September 30, 2013. Operating expenses were higher in the third quarter of 2013 due to higher employee benefit related expenses and the ongoing expenses incurred related to the phased implementation of an enterprise resource planning system. Interest expense increased due to mark-to-market adjustments on interest rate derivative contracts.

The Company anticipates that its 2013 annual effective tax rate will be 37.2%. The Company’s actual 2012 effective tax rate was 37.1%. The higher effective rate for 2013 is due to a correction made 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, offset by income attributable to the noncontrolling interest that does not increase taxes.












33

Table of Contents

Comparison of the nine months ended September 30, 2013 with the nine months ended September 30, 2013:
Grain Group
 
Nine months ended
September 30,
(in thousands)
2013
 
2012
Sales and merchandising revenues
$
2,493,678

 
$
2,096,256

Cost of sales and merchandising revenues
2,419,731

 
2,016,049

Gross profit
73,947

 
80,207

Operating, administrative and general expenses
67,944

 
49,832

Interest expense
7,714

 
9,404

Equity in earnings of affiliates
24,940

 
22,706

Other income, net
1,438

 
1,842

Income before income taxes
24,667

 
45,519

Loss attributable to noncontrolling interest
(8
)
 

Income before income taxes attributable to The Andersons, Inc.
$
24,675

 
$
45,519


Operating results for the Grain Group decreased $20.8 million from the results of the same period last year. Sales and merchandising revenues increased $397.4 million and is primarily the result of an increase in the volume of bushels shipped (including newly acquired facilities) and was partially offset by a slight decrease in the average price per bushel sold for wheat. Cost of sales and merchandising revenues increased $403.7 million and is consistent with the increase in sales volume. Gross profit decreased $6.3 million from the first nine months of 2012 and relates primarily to a decrease in space income, and more specifically basis appreciation. Basis is defined as the difference between the cash price of a commodity in one of the Company's facilities and the nearest exchange traded futures price.

Operating expenses increased $18.1 million over the same period in 2012 due to an increase in labor related to organizational growth, depreciation expense due to increased capital investment, and professional service fees related to completion of the investment in Thompsons Limited. Interest expense is lower compared to the same period in 2012 due to having fewer bushels in inventory and lower commodity prices resulting in lower inventory values. Equity in earnings of affiliates increased $2.2 million over the same period in 2012 and relates to income from the investment in LTG. There were no significant changes in other income year over year.
Ethanol Group
 
Nine months ended
September 30,
(in thousands)
2013
 
2012
Sales and merchandising and service fee revenues
$
634,933

 
$
528,062

Cost of sales and merchandising revenues
615,744

 
519,518

Gross profit
19,189

 
8,544

Operating, administrative and general expenses
8,013

 
6,803

Interest expense
895

 
493

Equity in earnings (loss) of affiliates
15,051

 
(7,305
)
Other income, net
465

 
37

Income (loss) before income taxes
25,797

 
(6,020
)
Income (loss) attributable to noncontrolling interests
1,813

 
(3,100
)
Income (loss) before income taxes attributable to The Andersons, Inc.
$
23,984

 
$
(2,920
)

Operating results for the Ethanol Group increased $26.9 million over the results of the same period last year. Sales and merchandising and service fee revenues increased $106.9 million as a result of an increase in both volume (due to added volume from the Denison, Iowa plant acquired in May 2012) and average price per gallon sold, as well as higher sales of ethanol co-products. The increase in cost of sales primarily relates to higher volume of ethanol and co-products sold. Gross profit increased $10.6 million over the first nine months of 2012 due to improvements in margins from declining corn costs and

34

Table of Contents

higher ethanol demand and price. Ethanol service fee income has also contributed to the increase in gross profit as certain fees earned are based on a percentage of sales.

Operating expenses increased $1.2 million over the nine months ended September 30, 2012 primarily due to labor related expenses including performance incentives and the full nine months of Denison. Equity in earnings of affiliates increased $22.4 million over the same period in 2012 and relates to income from the investment in three ethanol LLCs. Interest expense and other income did not fluctuate significantly year over year.
Plant Nutrient Group
 
Nine months ended
September 30,
(in thousands)
2013
 
2012
Sales and merchandising revenues
$
537,922

 
$
619,301

Cost of sales and merchandising revenues
473,219

 
541,029

Gross profit
64,703

 
78,272

Operating, administrative and general expenses
41,666

 
43,321

Interest expense
2,461

 
2,067

Equity in earnings of affiliates

 
5

Other income, net
459

 
1,651

Income before income taxes
$
21,035

 
$
34,540


Operating results for the Plant Nutrient Group decreased $13.5 million from the same period last year. Sales and merchandising revenues decreased $81.4 million due to a decrease in both the average price per ton sold and volume in the wholesale nutrient business caused by a later harvest compared to prior year. Cost of sales and merchandising revenues decreased by $67.8 million driven by the decline in volume and the average cost per ton sold. Gross profit decreased $13.6 million primarily as a result of lower margin per ton sold as well as the decline in volume year over year.

Operating expenses decreased $1.7 million due to a decrease in labor and benefits, including performance incentives. 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
 
Nine months ended
September 30,
(in thousands)
2013
 
2012
Sales and merchandising revenues
$
132,488

 
$
127,608

Cost of sales and merchandising revenues
85,952

 
80,588

Gross profit
46,536

 
47,020

Operating, administrative and general expenses
12,439

 
12,464

Interest expense
4,162

 
3,563

Other income, net
6,679

 
3,295

Income before income taxes
$
36,614

 
$
34,288


Operating results for the Rail Group increased $2.3 million year over year. Leasing revenues increased $2.5 million, sales in the repair facilities increased $2.0 million and car sales increased $0.4 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 $5.4 million primarily as a result of the higher volume of car sales and repair facility activity.

Gross profit decreased by $0.5 million compared to the first nine months of 2012. Gross profit in the leasing business increased $5.7 million and is attributed to favorable lease rates compared to the same period last year. Gross profit on car sales decreased $6.2 million and is due to lower volume of non-recourse lease transactions. Changes in margin on car sales are expected as the sales mix varies between nonrecourse financing transactions, direct car sales, and scrapped/destroyed car sales.

35

Table of Contents


Interest expense increased $0.6 million from the same period last year due to a greater amount of borrowing. Operating expenses did not change significantly year over year. Other income is higher in 2013 due primarily to income from the settlement of two nonperforming railcar leases in the amount of $4.3 million.
Turf & Specialty Group
 
Nine months ended
September 30,
(in thousands)
2013
 
2012
Sales and merchandising revenues
$
117,955

 
$
110,481

Cost of sales and merchandising revenues
95,208

 
89,696

Gross profit
22,747

 
20,785

Operating, administrative and general expenses
16,268

 
17,166

Interest expense
951

 
906

Other income, net
585

 
671

Income before income taxes
$
6,113

 
$
3,384


Operating results for the Turf & Specialty Group improved $2.7 million over the results of the same period last year. Sales and merchandising revenues increased by $7.5 million and was driven by higher sales volume in the cob business, partially offset by a decrease in the average selling price and decreased volume in the lawn business partly offset by an increase in price. The impact of the acquisition of Mt. Pulaski in the fourth quarter of 2012 added approximately $7.8 million in year-to-date revenues. Cost of sales and merchandising revenues increased $5.5 million over the first nine months of 2012 due to the increase in volume as average cost per ton was lower than prior year. Gross profit increased $2.0 million due to favorable product mix.

Operating expenses were lower in the first nine months of 2013 compared to the same period last year despite the expenses added by Mt. Pulaski. There were charges incurred in the prior year related to insurance claims that did not occur in 2013, in addition to cost savings generated from process efficiencies and waste elimination initiatives that are now being realized. There were no significant changes in interest expense and other income.
Retail Group
 
Nine months ended
September 30,
(in thousands)
2013
 
2012
Sales and merchandising revenues
$
103,332

 
$
109,661

Cost of sales and merchandising revenues
74,806

 
77,653

Gross profit
28,526

 
32,008

Operating, administrative and general expenses
31,996

 
34,924

Interest expense
519

 
570

Other income, net
316

 
396

Loss before income taxes
$
(3,673
)
 
$
(3,090
)

The operating loss for the Retail Group has increased $0.6 million compared to the first nine months of 2012. Sales and merchandising revenues decreased $6.3 million due to a decrease in both customer counts and average sale per customer, as well as the closure of the Woodville store in the first quarter of 2013. Cost of sales and merchandising revenues was $2.8 million lower and gross profit decreased $3.5 million primarily as a result of lower store traffic.

Operating expenses decreased $2.9 million mainly as a result of lower labor and benefits and advertising, which is partly attributable to the closing of the Woodville store as mentioned above. There were no significant changes in interest expense and other income.


36

Table of Contents

Other
 
Nine months ended
September 30,
(in thousands)
2013
 
2012
Sales and merchandising revenues
$

 
$

Cost of sales and merchandising revenues

 

Gross profit

 

Operating, administrative and general expenses
14,339

 
12,829

Interest income
(95
)
 
(811
)
Other income, net
1,681

 
1,517

Loss before income taxes
$
(12,563
)
 
$
(10,501
)

The net corporate operating loss not allocated to business segments increased $2.1 million to a loss of $12.6 million for the year-to-date period ended September 30, 2013. Operating expenses were higher due to higher employee benefit related expenses and the ongoing expenses incurred related to the phased implementation of an enterprise resource planning system. Interest income decreased $0.7 million over the same period last year mainly due to mark-to-market adjustments on interest rate derivative contracts. Other income did not change significantly period over period.

The Company anticipates that its 2013 annual effective tax rate will be 37.2%. The Company’s actual 2012 effective tax rate was 37.1%. The higher effective rate for 2013 is due to a correction made 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, offset by income attributable to the noncontrolling interest that does not increase taxes.




37

Table of Contents

Liquidity and Capital Resources
Working Capital
At September 30, 2013, we had working capital of $232.9 million. The following table presents changes in the components of current assets and current liabilities:
 
(in thousands)
September 30, 2013
 
September 30, 2012
 
Variance
Current Assets:
 
 
 
 
 
Cash and cash equivalents
$
134,441

 
$
80,370

 
$
54,071

Restricted cash
164

 
160

 
4

Accounts receivables, net
178,970

 
199,158

 
(20,188
)
Inventories
429,017

 
682,292

 
(253,275
)
Commodity derivative assets – current
105,390

 
166,264

 
(60,874
)
Deferred income taxes
5,254

 
20,627

 
(15,373
)
Other current assets
42,278

 
41,568

 
710

Total current assets
895,514

 
1,190,439

 
(294,925
)
Current Liabilities:
 
 
 
 
 
Borrowing under short-term line of credit

 
275,522

 
(275,522
)
Accounts payable for grain
241,575

 
250,066

 
(8,491
)
Other accounts payable
200,664

 
204,347

 
(3,683
)
Customer prepayments and deferred revenue
23,974

 
77,278

 
(53,304
)
Commodity derivative liabilities – current
88,234

 
43,589

 
44,645

Accrued expenses and other current liabilities
63,900

 
53,631

 
10,269

Current maturities of long-term debt
44,232

 
32,655

 
11,577

Total current liabilities
662,579

 
937,088

 
(274,509
)
Working capital
$
232,935

 
$
253,351

 
$
(20,416
)
In comparison to September 30, 2012, current assets decreased primarily as a result of lower inventory levels driven by a decrease in ownership bushels in corn, beans, and wheat. See the discussion below on sources and uses of cash for an understanding of the change in cash from prior year. Accounts receivable is lower in the current year primarily related to the Plant Nutrient business which experienced a delay in fall fertilizer applications due to the late harvest as compared to the prior year. Commodity derivative assets have decreased and commodity derivative liabilities have increased as a result of a significant decreases in grain prices. The prices were higher in the prior year due to the drought and anticipation of a smaller crop, as opposed to anticipation of a very strong crop in the current year. The decrease in deferred income tax assets is due to a tax deduction that was taken during the second quarter related to the cash payment made to Cargill for the marketing agreement that settled in May 2013. Current liabilities decreased primarily due to lower borrowings on the short-term line of credit, which fluctuates with the funding of margin calls on commodity contracts and other working capital needs. Customer prepayments and deferred revenue have decreased significantly, a majority of which is due to the payout of a liability to Cargill for the marketing agreement that was settled in May 2013. These significant decreases were partially offset by increases in accrued expenses and current maturities of long-term debt. Higher accrued expenses and other current liabilities include accrued compensation related to performance incentives and accrued taxes. Current maturities increased primarily as a result of the timing of payments of the private placement debt.
Sources and Uses of Cash
Operating Activities
Our operating activities provided cash of $129.0 million in the first nine months of 2013 compared to net cash used in operating activities of $38.7 million in the first nine months of 2012.
Income tax payments were made in the third quarter in the amount of $0.5 million. We expect to make additional payments totaling approximately $0.1 million for the remainder of 2013.


38

Table of Contents

Investing Activities
Total capital spending for 2013 on property, plant and equipment in our base business, inclusive of information technology spending is expected to be approximately $77.7 million. In addition to spending on conventional property, plant and equipment, we expect to spend $100 million for the purchase of railcars, locomotives and related leases and capitalized modifications of railcars. We also expect to offset this amount by proceeds from the sales and dispositions of railcars of $101 million. Through September 30, 2013, we invested $71.6 million in the purchase of additional railcars, which is more than offset by proceeds from sales of railcars of $87.6 million.
Financing Activities
We have a significant amount 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 borrowings, which includes $28.1 million non-recourse debt of The Andersons Denison Ethanol LLC. Of that total, we had $847.5 million remaining available for borrowing at September 30, 2013. Peak short-term borrowings to date were $315.0 million on January 22, 2013. Typically, our highest borrowing occurs in the spring due to seasonal inventory requirements in our fertilizer and grain businesses.

We paid $0.15 per common share for the dividends paid in January, April, July and October 2012, and $0.16 per common share for the dividends paid in January, April and July 2013. On August 22, 2013, we declared a cash dividend of $0.16 per common share payable on October 22, 2013 to shareholders of record on October 1, 2013. During the first nine months, we granted approximately 500 shares to directors under our equity-based compensation plans. During the first nine months of 2012, we granted approximately 166 thousand shares 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 September 30, 2013. 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 by railcar and 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 through the next twelve months.
Off-Balance Sheet Transactions
Our Rail Group utilizes leasing arrangements that provide off-balance sheet financing for its activities. We lease railcars from financial intermediaries through sale-leaseback transactions, the majority of which involve operating sale leasebacks. Railcars 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 railcars or locomotives 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 railcar maintenance and management services for the financial intermediary, and receive a fee for such services. On most of the railcars and locomotives, we hold an option to purchase these assets at the end of the lease.












39

Table of Contents

The following table describes our railcar and locomotive positions at September 30, 2013:
 
Method of Control
Financial Statement
Units
Owned-railcars available for sale
On balance sheet – current
29

Owned-railcar assets leased to others
On balance sheet – non-current
14,988

Railcars leased from financial intermediaries
Off balance sheet
3,919

Railcars – non-recourse arrangements
Off balance sheet
3,620

Total Railcars
 
22,556

Locomotive assets leased to others
On balance sheet – non-current
52

Locomotives leased from financial intermediaries
Off balance sheet
4

Locomotives – non-recourse arrangements
Off balance sheet
39

Total Locomotives
 
95

In addition, we manage 357 railcars for third-party customers or owners for which we receive a fee.

40

Table of Contents


Item 3. Quantitative and Qualitative Disclosures about Market Risk
For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2012. There were no material changes in market risk, specifically commodity and interest rate risk during the quarter ended September 30, 2013.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer ("Certifying Officers"), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) of the Exchange Act, the Company carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report. As of December 31, 2012, we did not maintain adequate segregation of duties for multiple individuals who had access to create and post journal entries across substantially all of the Company. Specifically, our internal controls over journal entries were not designed effectively to provide reasonable assurance that the entries were appropriately recorded and reviewed for validity, accuracy and completeness for substantially all of the key accounts and disclosures. This control deficiency could result in a material misstatement of the consolidated financial statements that would not be prevented or detected on a timely basis. Accordingly, management determined that this control deficiency constituted a material weakness in internal control over financial reporting as of December 31, 2012, which was not fully remediated as of September 30, 2013.
Based on the foregoing, management concluded that the Company's disclosure controls and procedures were not effective as of September 30, 2013.
Plan for Remediation of Material Weakness
Management is making progress towards remediation of the material weakness described above:
1.
Implementing a sufficiently-designed control that is intended to ensure that all journal entries are reviewed by an appropriate person.
2.
Evaluating and modifying, as necessary, the access of our existing users to post journal entries and the journal entry types that each user is authorized to utilize.
3.
Enhancing information technology controls related to the future granting and on-going monitoring of our users' access to post journal entries.
4.
As applicable legacy information technology systems are replaced with our implementation of SAP (expected to occur in phases over the next several years), we plan on utilizing capabilities within SAP that will restrict the ability for an individual to create and post an entry without review.
 
Management believes the foregoing efforts will effectively remediate the material weakness. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine to take additional measures to address the control deficiency or determine to modify the remediation plan described above.
Changes in Internal Control over Financial Reporting
Other than the actions taken to continue remediation of the previously reported material weakness related to journal entries described above, there have been no changes in the Company's internal controls over financial reporting during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.


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Part II. Other Information

Item 1. Legal Proceedings
We have received, and are cooperating fully with, a request for information from the United States Environmental Protection Agency (“U.S. EPA”) regarding the history of our 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 our initial acquisition of the land in 1960. We have 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 our 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.
We are 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. We accrue liabilities where litigation losses are deemed probable and estimable. We believe it is unlikely that the results of our current legal proceedings, even if unfavorable, will be materially different from what we currently have 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 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-Q 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 significant factors known to us that could materially adversely affect our business, financial condition or operating results are described in the 2012 10-K (Item 1A).

Item 6. Exhibits
(a) Exhibits
 
 
 
 
No.
  
Description
 
 
12
  
Computation of Ratio of Earnings to Fixed Charges
 
 
31.1
  
Certification of the Chairman and Chief Executive Officer under Rule 13(a)-14(a)/15d-14(a)
 
 
31.2
  
Certification of the Chief Financial Officer under Rule 13(a)-14(a)/15d-14(a)
 
 
32.1
  
Certifications Pursuant to 18 U.S.C. Section 1350
 
 
 
101
 
Financial Statements from the interim report on Form 10-Q of The Andersons, Inc. for the period ended September 30, 2013, formatted in XBRL: (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Equity, (v) the Condensed Consolidated Statement of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.


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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
THE ANDERSONS, INC.
(Registrant)
 
 
Date: November 12, 2013
 
By /s/ Michael J. Anderson
 
 
Michael J. Anderson
 
 
Chairman and Chief Executive Officer (Principal Executive Officer)
 
 
Date: November 12, 2013
 
By /s/ John Granato
 
 
John Granato
 
 
Chief Financial Officer (Principal Financial Officer)
 
 


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Exhibit Index
The Andersons, Inc.
 
 
 
 
No.
  
Description
 
 
12
  
Computation of Ratio of Earnings to Fixed Charges
 
 
31.1
  
Certification of the Chairman and Chief Executive Officer under Rule 13(a)-14(a)/15d-14(a)
 
 
31.2
  
Certification of the Chief Financial Officer under Rule 13(a)-14(a)/15d-14(a)
 
 
32.1
  
Certifications Pursuant to 18 U.S.C. Section 1350
 
 
 
101
 
Financial Statements from the interim report on Form 10-Q of The Andersons, Inc. for the period ended September 30, 2013, formatted in XBRL: (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Equity, (v) the Condensed Consolidated Statement of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.


44